House of Commons Business, Innovation and Skills Committee Is Kraft working for Cadbury? Sixth Report of Session 2010–12 Report, together with formal minutes, oral and written evidence Ordered by the House of Commons to be printed 12 May 2011 HC 871 Published on 23 May 2011 by authority of the House of Commons London: The Stationery Office Limited £13.50 Business, Innovation and Skills Committee The Business, Innovation and Skills Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Business, Innovation and Skills. Current membership Mr Adrian Bailey MP (Labour, West Bromwich West) (Chair) Mr Brian Binley MP (Conservative, Northampton South) Paul Blomfield MP (Labour, Sheffield Central) Katy Clark MP (Labour, North Ayrshire and Arran) Rebecca Harris MP (Conservative, Castle Point) Margot James MP (Conservative, Stourbridge) Dan Jarvis MP (Barnsley Central) Simon Kirby MP (Conservative, Brighton Kemptown) Ian Murray MP (Labour, Edinburgh South) Mr David Ward MP (Liberal Democrat, Bradford East) Nadhim Zahawi MP (Conservative, Stratford-upon-Avon) The following members were also members of the Committee during the parliament. Luciana Berger MP (Labour, Liverpool, Wavertree) Jack Dromey MP (Labour, Birmingham, Erdington) Gregg McClymont MP (Labour, Cumbernauld, Kilsyth and Kirkintilloch East) Nicky Morgan MP (Conservative, Loughborough) Chi Onwurah MP (Labour, Newcastle upon Tyne Central) Rachel Reeves MP (Labour, Leeds West) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/bis. A list of Reports of the Committee in the present Parliament is at the back of this volume. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are James Davies (Clerk), Charlotte Pochin (Second Clerk), Louise Whitley (Inquiry Manager), Neil Caulfield (Inquiry Manager), Frances Allingham (Senior Committee Assistant), Jennifer Kelly (Committee Assistant). Contacts All correspondence should be addressed to the Clerk of the Business, Innovation and Skills Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5777; the Committee’s email address is [email protected]. Is Kraft working for Cadbury? 1 Contents Report Page Summary 3 1 Introduction 5 Background 5 2 Kraft representation before the Committee 8 3 The Takeover Panel decision 11 The Panel’s decision 11 Changes to the Takeover Code 15 4 Kraft’s undertakings on Cadbury manufacturing, R&D and brands 16 Introduction 16 Current status 16 5 Kraft’s undertakings on pay and conditions and on community matters 19 Somerdale 19 Pay and conditions in general 20 Community and other matters 21 6 Concluding comments 22 Conclusions and recommendations 23 Annex 26 Email communications with Kraft 26 Formal Minutes 27 Witnesses 28 List of printed written evidence 28 List of Reports from the Committee during the current Parliament 29 Is Kraft working for Cadbury? 3 Summary Kraft’s acquisition of Cadbury some 14 months ago prompted an inquiry by our predecessor committee during which Kraft gave a number of important undertakings in relation to preserving Cadbury brands, manufacturing, jobs and other matters. Most notably, Kraft undertook that there would be no further compulsory redundancies among manufacturing employees and no additional manufacturing facilities closures, in each case for at least two years. The particular circumstances of the acquisition—notably the reversal of position on whether Kraft could keep open Cadbury’s Somerdale factory—ultimately gave rise to a review of the Takeover Code and a statement of public criticism of Kraft by the Takeover Panel in relation to Kraft’s intentions for Somerdale. At the mid-term of Kraft’s two-year commitments on jobs and manufacturing, which apply until March 2012, we invited Kraft to give evidence on its compliance with those and the other undertakings. In advance of that session, Kraft provided a progress report. While encouraging in many aspects, Kraft’s progress report steered somewhat away from certain sensitive issues such as headquarters relocations and pay and conditions. In a repeat of our predecessors’ experience, Irene Rosenfeld, the Chief Executive Officer and Chairman of Kraft, refused to give evidence despite repeated requests from us that she should appear. Neither that refusal to attend, nor the manner of it, reflected well on Kraft, nor did Kraft’s persistence in failing to acknowledge the seriousness of the Takeover Panel criticism—criticism which by its gravity would alone have merited Ms Rosenfeld’s appearance before us, as a committee of public scrutiny. That sorry episode overshadowed what could have been a positive discussion on the future of Cadbury under Kraft’s ownership. In its correspondence with the Committee Kraft in our view steered close to a contempt of the House. We trust that that will not be repeated. More positively, it would appear from the evidence given to us that Kraft is currently honouring the undertakings given to our predecessor committee and is committed to investment in Cadbury. We were especially encouraged by continued investment in Bournville and recruitment into research. Given the particular responsibility Kraft has to Cadbury employees following the Somerdale episode, we trust that this approach to investment will continue. It would also assist considerably in rehabilitating Kraft’s reputation if the savings planned from integration synergies were used to support further investment for growth and accommodate the results of that growth in terms of recruitment needs. We remain concerned on two issues. First, while Kraft’s commitment to manage the Cadbury brands for the UK may have been observed insofar as the UK retains a significant marketing function, it would seem that the strategic decisions on brands are being made in Kraft’s European headquarters in Zurich. We hope Kraft will refrain from further transfer of marketing responsibility to Zurich given its oft-stated public commitment to Cadbury’s brand heritage. 4 Is Kraft working for Cadbury? Our other concern covers the programme of harmonisation of pay and conditions which Kraft chose to announce to us in oral evidence, apparently in advance of any union involvement. We trust that Kraft will fully engage with the union, and that the harmonisation programme will fully respect Kraft’s non-time limited undertaking to respect Cadbury’s existing employee terms and conditions. A positive outcome of Kraft’s takeover of Cadbury was that it instigated a review of the Takeover Code by the Takeover Panel and our predecessor Committee’s Report played a significant role in highlighting the need for such a review. The Government is also conducting a review of takeovers and corporate responsibility. We trust that it will use this Report and our predecessor Committee’s Report as a valuable case study when it comes to formulating policy in this area. Is Kraft working for Cadbury? 5 1 Introduction Background 1. In February 2010, Kraft acquired Cadbury for a purchase price of £11.5 billion. The acquisition was controversial for two reasons. Firstly, a long-established and highly respected British company was to be the subject of a hostile takeover by an American corporation which had previously been criticised for its takeover of another UK company, Terry’s of York. The second reason was that, in what appeared to be a re-run of the Terry’s story on a considerably shorter timescale, Kraft initially indicated that it would reverse Cadbury’s decision to close the historic Somerdale factory, but then a week after the takeover reversed that decision. 2. In the early part of 2010, our predecessor Committee conducted an inquiry into the circumstances of the takeover. That Committee’s Report considered the decision to close the Somerdale plant along with Kraft’s overall plans with regard to Cadbury jobs, employment conditions, factories, brands, strategic growth, research and social responsibility. In the course of the inquiry Kraft gave a number of undertakings, including most notably a commitment that there would be no further compulsory redundancies among manufacturing employees and no additional manufacturing facilities closures, in each case for at least two years.1 The other undertakings were broadly as follows: x To preserve the identity of the Cadbury brand and the company,2 and to manage the brands, the assets and the people out of the UK;3 x To continue to base Cadbury marketing and sales in the UK;4 x To continue to produce, in the UK, Cadbury’s Dairy Milk5 and Cadbury’s other products in UK production at takeover;6 x To maintain existing staff terms and conditions;7 x That existing pension arrangements would be honoured;8 x To engage in genuine union consultation;9 x That R&D facilities would be maintained;10 1 Q 297, 16 March 2010 2 Qq 174 and 176, ibid. 3 Q 175, ibid. 4 Q 215, ibid. 5 Qq 177 and 179, ibid. 6 Q 182, ibid. But this was qualified by the proviso that there were no plans to move production as of March 2010. 7 The bid materials said: “[W]e confirm that the existing contractual employment rights, including pension rights, of all employees of Cadbury would be fully safeguarded.” See also Q 321, ibid. 8 Q 322, ibid. 9 Qq 305 and 324, ibid.