Cadbury plc: An overview

1. Introduction

Cadbury Plc has constantly been in the spotlight since August this year when its share price rose by more than 200 pence when Kraft placed its hostile takeover bid worth $17 billion. Since then other rivals such as Hershey, Ferrero and Nestle have also made interest for acquisition of the company. It is probably happening due to the facts that Cadbury Plc has been facing liquidity problems that prohibited rapid expansion, while at the same time having exceptionally strong presence in emerging markets and having strong brands.

Cadbury Plc operates in a very competitive confectionery market characterised by fast-changing consumer attitudes and values. Hence the need for a strategic perspective on marketing never lessens. Moreover, (Financial Times, 2009) the confectionery industry is struggling in the recession as consumers seek out cheaper foods limiting discretionary spending on confectionery. These cheaper alternatives, coupled with the “derisory” takeover bid from Kraft foods, has caused a deep cloud of uncertainty to linger on Cadbury Plc’s future, further compounding the need for a strategic perspective on marketing.

2. Business Strategy

Business strategy can be defined as the direction and scope of the business over the long-term,which achieves advantage for the organisation through its arrangement of resources within a suitably challenging environment, to satisfy the needs of the market and fulfil stakeholder expectations (Brassington et al., 2006). Strategy can exist at different levels in a business entity:

Corporate strategy – concerns the allocation of resources within the organisation to achieve the business direction and scope specified within corporate objectives. It helps to control and coordinate the different areas of the organisation such as finance, marketing, research and development etc. Quite often corporate strategy is explicitly envisioned in a “mission statement”. (Creating Brands People Love, 2009) For example Cadbury Plc’s vision is to be the biggest and the best confectionery company in the world.

Competitive strategy (business unit strategy) – determines how a business competes successfully, in a particular market with particular regard to the relative positioning of competitors. Marketing strategy – defines target markets, what direction to be taken for a defensible competitive position, compatible with overall corporate strategy within those markets.

The strategic management process comprises three main components as shown in Figure 2 below: Strategy Implementation is often the hardest part in the strategic management process. However, this report only concentrates on strategy analysis and choice.

3. Strategic analysis

Strategic analysis involves the analysis of the business’ strength, position and understanding the preponderant external factors that may influence that position. The methods below were used to assist in a strategic analysis for Cadbury Plc:

• FiveForces Theory – a technique for identifying the forces which affect the level of competition in an industry developed by Michael Porter.
• Analysis of the Human Resources.
• Corporate and Operational issues.
• International Export Dimension.
• Swot Analysis.

3.1. The Five Forces Analysis

• Lindt & Sprungli SpA
• Fujiya Co., Ltd.
• HARIBO GmbH & Co KG
• Hsu Fu Chi International Limited
• Kraft Foods Inc
• Lotte Confectionery Co Ltd
• Nestlé SA
• Perfetti Van Melle SpA
• The Hershey Company
• Tootsie Roll Industries Inc
• Mars Inc

In pursuing an advantage over its rivals, Cadbury Plc has in the past adopted such tactics as:

• Changing prices to gain a temporary advantage (docstoc website). For example, a price reduction by three rupees for a mini Perk – a Cadbury Plc’s brand in India helped Perk penetrate the rural market increasing Cadbury Plc’s market share in India by 1% with a further 10% rise in overall chocolate sales.
• Improving product features – Cadbury Plc’s brand, Dairy Milk, is the world’s most famous brand name and the company’s leading chocolate bar by revenue. The company has used this to its advantage by creating new Dairy Milk varieties such as Wispa and Fruit & Nut.
• Creative use of channels of distribution – various outlets such as supermarkets, vending machines and convenient stores have been effectively utilised by Cadbury Plc and its rivals. Consequently, creative advertising has been the key factor in increasing market share. (Adbrands website) Advertising Age estimated global advertising expenditure by Cadbury Plc to be in the region of $425m in 2007, making it the world’s 83rd largest advertiser in advertising expenditure.

Threat of substitutes – in Porter’s, model substitutes refer to any products in other industries with lower prices or better performance parameters for the same purpose. According to confectionery news website, a growing trend towards healthy products by consumers has resulted in a drop in the value of the overall UK confectionery. Consequently, dark chocolate which is perceived to have great health benefits, has had an increase in popularity. As a matter of fact, in 2008 Cadbury Plc re-launched its Bourneville brand (dark chocolate) to counter this imminent threat and capitalise on the popularity of dark chocolate.

Consumer power – this is the impact that buyers pose on a production industry. The magnitude of the impact can be due to several factors. A big factor in the confectionery industry is that of a well educated consumer perception of the product. (The Epoch Times)This was so evident when consumer pressure resulted to Cadbury New Zealand backing down from an initiative to substitute cocoa butter to vegetable fat and palm oil. The latter would have increased palm oil production and the associated growth in plantations could lead to extensive destruction of plantations in Indonesia and Malaysia. Moreover, the consumers were not only unhappy with the product’s new taste and texture, but also the weight of each bar had significantly reduced.

Supplier power – suppliers refer to the entity that provides the industry with the raw materials. Powerful suppliers can exert an influence on the production industry by selling raw materials at a higher price to capture some of the industry’s profit.

Barriers/threat to entry – as a firm operating in the free enterprise world, any firm should be free to enter and exit the market. However, industries exhibit some features that protect high profit firms thus inhibiting the entry of new rivals. Barriers may arise from the:

Government – which can develop and implement policies in relation to several macroeconomic influences, in turn affecting markets and organisations such as Cadbury Plc. Cadbury Plc have to operate according to the rules and regulations stated by the governments. Their products have to conform to the safety laws, for example, manufacturing processes in Cadbury Plc are subject to pollution controls.

The government implicates Fiscal policy, which involves altering government expenditure/taxation. For Cadbury Plc to see an increase in profits in the future, they will want the government to implicate expansionary fiscal policy whereby the government would raise government expenditure, leading to an increase in aggregate demand or by cutting taxes, which would leave consumers with more money to spend on products such as those made by Cadbury Plc; in turn raising aggregate demand and therefore profits (Advisors in Fiscal Policy).

The government could however introduce Contractionary Fiscal policy which would see aggregate demand be reduced by cutting governments expenditure or by raising taxes and hence reducing consumer’s expenditure. For Cadbury Plc to increase their profits, they will be against the government introducing Contractionary Fiscal policy.

The Government also provide Cadbury Plc with incentives to open new factories and other work opportunities where there is a high unemployment rate.

Patents and propriety knowledge – ideas that provide competitive advantage are treated as private property when patented. Hence others cannot use them, which creates a barrier for entry.

Cadbury Plc is strongly positioned due to a large product patent basis and their heavy investment in their research and development department.

Expensive capital – potential entrants are reluctant to commit to acquiring highly specialised expensive machinery. As a matter of fact, even though Cadbury Plc being one of the largest confectionery companies in the world, it is facing liquidity problems hindering their expansion into new regions (Data Monitor – Cadbury PLC, 2009).

3.2. Human Resource

The biggest human resource issue facing Cadbury Plc today is the loss of job security amongst many of their employers. As demonstrated in Maslow’s hierarchy of needs, a popular and accepted motivational theory, job security is an important factor in the motivating and well-being of a firm’s employees (Mottershead et al., 2006).

With respectable newspapers and other informative media (The Guardian, Wall Street Journal, BBC etc.) predicting large job losses in Cadbury Plc should a potential takeover succeed, many employees are currently fearing for their jobs and this may affect their performance (Rohwedder, 2009; No Author, 2009; Clark, 2009).

Cadbury Plc union leaders have met with Kraft (a US based business bidding to takeover Cadbury Plc) in order to protect Cadbury Plc employees and ensure that their employees’ jobs are still secure should Kraft’s proposed bid be accepted. However, this action in itself demonstrates the amount of scepticism that exists within many Cadbury Plc employees and highlights the lack of job security with many of the workers. This cynicism may be due to the fact that employees are unable to understand how Kraft can make their potential quoted savings without a significant loss of jobs (No Author, 2009; Griffin, 2009).

The loss of job security may not only affect factory workers but may also affect managers and employees in higher positions within Cadbury Plc. During a takeover there is a lot of restructuring within all companies involved and many jobs tend to be lost as companies find that roles overlap. These job losses occur at all levels of employability and there tends to be a period where the company has a very high employee turnover level.

Although Kraft is the strongest bidder for Cadbury Plc, Hershey and Ferrero (an Italian based business) have recently released independent statements revealing their interest in a potential takeover of Cadbury Plc. However as both businesses are significantly smaller than Kraft, sources close to both firms have revealed that Hershey and Ferrero have been in talks about a potential joint bid for Cadbury Plc. Although, Cadbury Plc union leaders remain steadfast in their belief that the best option for Cadbury Plc’s many employees is for Cadbury Plc to remain an independent company (Clark, 2009).

As we enter a more technological era, the ever constant fear for factory workers is the fear that they will be replaced by computers. This is a smaller human resource issue facing Cadbury Plc; however it is ever present and therefore is an issue that must be consistently paid attention to and addressed.

At a recent visit, to the Bourneville site of Cadbury Plc, students were able to visit both the modern factory and the older one. At the older factory, it was clear to the students that more human interaction with the product existed. While in the modern factory students saw that a lot of the human interaction had been replaced with faster and more efficient equipment.

It is important that the human resource department in Cadbury Plc address the above issues as the motivation and overall well-being of the employees will affect the company’s performance in the long term. As Cadbury Plc’s is the biggest confectionary company in the world (Cadbury plc, 2009) they stand to lose a lot.

3.3. Corporate and Operational Issues

With different businesses attempting to takeover Cadbury Plc, there are a lot of different factors that will affect the way Cadbury Plc is viewed as a corporation and in turn how they operate should a potential takeover succeed.

One of the main selling points for Cadbury Plc in Britain and Ireland, who account for 24% (Cadbury plc, 2009) of their revenue, is the fact that Cadbury Plc began and has remained a British business (up until today) and therefore it lends an authenticity to the brand that most competitors do not have.

British favourites, such as Cadbury Dairy Milk, may begin to lose out to competitors should Kraft’s proposed takeover succeed. This is because a lot of the public in the United Kingdom do not support the proposed takeover and some MPs have even gone as far as requesting a motion that ensures that Cadbury Plc remains in British hands (No Author, 2009; Rohwedder, 2009).

Cadbury Plc have also had negative publicity towards the takeover with Felicity Loudon who is a descendant of John Cadbury (the founder), publicly stating that Cadbury Plc is a “brand that is synonymous with Britain” and should the Kraft takeover succeed it will “become a commercial wasteland”. These are strong words and may dissuade people from buying the once popular Cadbury brand (Rohwedder, 2009; No Author, 2009).

As a result of the negative publicity potential takeovers have received, Cadbury Plc will be forced to use a different marketing strategy should a takeover bid be accepted as some of the British authenticity that Cadbury Plc as a brand previously had will be lost in the takeover. Cadbury Plc must be prepared to face losses in the UK market as customers may choose not to buy Cadbury Plc brands due to the takeover and the potential loss of jobs at Cadbury Plc UK sites. However, if Cadbury Plc is able to launch a successful marketing strategy, then they may be able to limit the loss caused by a takeover.

3.4. International Export Dimension

As a leading global confectionary company with an outstanding portfolio of chocolate, gum and candy brands, Cadbury Plc employ approximately 45,000 people and has direct operations in over 60 countries, selling their products everywhere around the world

The company operates its business through four different business segments namely Britain, Ireland, Middle East and Africa (BIMA), Americas, Europe and Asia Pacific. Britain and Ireland are the largest business unit in the group. The company’s main markets in Middle East and Africa include South Africa, Namibia, Kenya, Egypt, Lebanon, Morocco, Nigeria and Ghana.

The company’s American business comprises of the three largest confectionary markets in the world, US, Canada and Mexico. This also extends through Central America and the Caribbean and it also has operations in South American countries which include countries like Brazil, Argentina, Peru, etc. With a market share of almost 20%, the company is the leading player in South America.

In Europe, the company operates in majority of Western Europe, Scandinavia, Turkey and Russia. The company’s biggest European operating unit is in France. The Company’s Asian businesses are concentrated in India, China, Malaysia and Thailand. In the Pacific regions, the company’s operations are mainly located in Australia, New Zealand and Japan. Cadbury Plc has a leading position in Australia with an overall 30% market share. (Data Monitor – Cadbury PLC, 2009)

In each of the four different segments, marketing is very important element in promoting the product and is done different to each other due to the products being sold in those areas. For example, Perk is a Cadbury’s product which is sold in India. The product is aimed at the youth. Marketing for this product is done in a way so it appeals to the Indian community. This includes advertisements which are shown their national language, Hindi and is normally performed by high prolific people of India like actors and actresses of Bollywood (Indian Cinema).

3.5. SWOT Analysis

Strengths

The main strength of Cadbury Plc is that they have a very good reputation and have a widely recognised brand name which has led them to become the world’s number one confectionary company having bought Adams (the owner of chewing gum brands including Trident and Stride) in 2003. They have unrivalled strength and breadth of participation. It is the market leader in the global confectionery sector with a market share of 10.5%. Cadbury Plc has a diversified product base as the company offers chocolate, gums and candy products; the company is well diversified in terms of revenue generation from all its operating regions. Cadbury Plc should aim to balance the share of revenue from its operating regions to gain global dominance (See Figure 4, Figure 5 and Figure 6). (Cadbury PLC- Our Strengths).

This shows the market share of chocolate between Cadbury Plc and their rivals. Cadbury Plc is currently number one, with Mars/Wrigley a very close second. (Cadbury PLC- Purple b&i, 2009)

It is clear that the main source of Cadbury Plc’s revenue comes from their chocolate and cocoa beverages. However, it is clearly profitable to the company that they have diversified into other markets. (Cadbury PLC- Creating brands people love, 2009)

Weaknesses

However, Cadbury Plc has a weak liquidity position. At the year ending December 31, 2008, Cadbury Plc’s current assets were $2,635 million compared to the current liabilities of $3,388 million. This could negatively impact the operational efficiency and growth initiatives. Another weakness is the company’s employee efficiency, i.e. the total revenue per employee. It is considerably lower than rival companies such as Hershey, and Chocolade Fabriken Lindt & Sprungli (Lindt). The low revenues per employee indicate relatively lower employee productivity. This can be solved by offering incentives to employees, i.e. bonuses for high productivity.

Opportunities

Due to the increasing awareness of dark chocolate and its health benefits, there is a fast-growing market in many parts of the world; combined with ethical concerns, the demand for organic and fair-trade chocolate have increased. Cadbury Plc has numerous amounts of premium chocolate products across the world so an increase in the customer preference for premium products would increase sales. Cadbury Plc can also look to increase sales and their presence in the US confectionary market; it is already well positioned to capture the growing demand for the confectionary in the region.

Recently, people are becoming more conscious about their health which consequently results in a drop in sales for Cadbury Plc dairy products. This is a growing concern for the company and an issue that must be addressed. Cadbury Plc could possibly invest in a low calorie snack range which could boost sales dramatically.

Threats

The rising cost of many of Cadbury Plc’s raw materials (especially cocoa and peanuts) could cause a serious impact on the company’s profitability. Prices are expected to continue rising in the near future for cocoa because the International Cocoa Organisation (ICCO) reduced its estimate by 0.1 million tons whilst the demand for cocoa is increasing. At present, Cadbury Plc imports its cocoa products directly from third party suppliers so perhaps investing in their own cocoa farm would be beneficial in the long run.

The confectionary market is highly fragmented with increasing competition. Many large businesses have merged together to gain more market share intensifying competition. Therefore Cadbury Plc would be under pressure to change prices of products, reducing its margins. Rising labour costs will dramatically cut into Cadbury Plc’s profit margin because a majority of their employees are from the US and Europe. Minimum wage has increased significantly in both the US and the UK. Cadbury Plc needs to attract and retain efficient employees in all segments of its business to become even more successful. (Data Monitor – Cadbury PLC, 2009)

Looking at the data collected from the questionnaires, it is apparent that Cadbury products are easily accessible to the public (shown in Figure 12) so Cadbury Plc should look to keep this up. However, a large number of people do not know that Trident and Halls are part of Cadbury Plc. Figure 11 shows that members of the public would be more willing to buy Trident and Halls product due to the fact that it is part of a well represented company. More than half of the general public thought that Cadbury products were well priced, with mainly students thinking that Cadbury Plc overprice their products. Cadbury Plc should look into the possibility of issuing discount cards to students as this may encourage them to buy more Cadbury products.

Figure 4 and 6 shows the share of revenue between Cadbury products and their global sites respectively. It is clear that chocolate and cocoa beverages are their main source of finance. Cadbury Plc need to concentrate on areas such as Asia and the Middle East as the share of revenue is 6% and 7% respectively. Cadbury Plc could sell their sites in those regions and concentrate on Europe, North America, Britain and Ireland, as these areas generate a combined total of 66% of Cadbury Plc’s share of revenue. Figure 7 (in the appendix) shows that Cadbury Plc has had the biggest share movements over the past year compared to their main rivals.

This shows the share of revenue across the world. Britain and Ireland current generate the most revenue followed by North America and then Europe. (Cadbury PLC – Creating brands people love, 2009)

4. Business philosophy

Cadbury’s Schweppes adopted a Managing for Value philosophy in 1997. They are committed to using their assets to exploit growth opportunities and to drive value creation. The main goal of Cadbury Plc is to consistently produce major shareholder returns. They support this by two other commercial goals: to profitably and significantly increase the global confectionary share and to secure and to grow the regional beverages share.

Cadbury Plc had a strategic review of Europe Beverages its partner company, the conclusion being in the best interest of the shareholders to investigate the sale of the Europe Beverages business. The board decided Europe Beverages did not have a high enough potential growth and returns. The board also realised that the money made from the sale could help reduce the company’s debts therefore on the 1st September 2005, Cadbury Plc announced they were selling the Europe Beverages group.

Cadbury Plc currently possesses nine Board Members consisting of two Executive Directors and seven Non-Executive Directors. The Board of Directors are responsible for the overall management and performance of the company, and the approval of the long-term objectives and commercial strategy. They also delegate day-to-day management to the Chief Executive’s Committee (CEC). The CEC reports to the Board and are accountable for the day-to-day management of the operations and implementation of strategy. Driving high level performance of growth, efficiency and capability programmes are The CEC’s responsibility to the Board. (Cadbury PLC- Our Management)

Cadbury Plc also adopts a policy of democratic management. All members of staff are made to work together as a team for the good of the company. Decisions are reached amongst the various groups by first taking into account everyone’s inputs, ideas and suggestions. This style of management works for Cadbury Plc because the workers feel as though they have power in decision making and therefore are more free and able to make suggestions that they feel could just alter the business this motivates workers and makes them feel more engaged with the company.

5. Branding

Cadbury Plc as an organisation has developed a strong image for the Cadbury corporate name to act as a shelter for all its product brands. Branding is the creation of a three-dimensional character for a product, defined in terms of name, packaging, colours, symbols etc. Tthat helps to differentiate it from its competitors and helps the customer to develop a relationship with the product. As a result Cadbury Plc products benefit from both the affection that consumers hold for the corporate name and from the individual character developed for its products such as Cadburys Flake, Cadburys Hot Chocolate and Cadburys Dairy Milk (Principles of Marketing).

Aspiring competitors of Cadbury Plc aim to build a strong brand. For example supermarket own-label products are packaged and branded in similar fashion to Cadburys; this has posed a threat to Cadbury Plc as often the supermarket own-label products are cheaper than Cadbury Plc products and, in today’s economic instability, this could lead to them becoming more popular and therefore lead to a reduction in sales for Cadbury Plc. There is also a possibility that Cadbury Plc could become complacent with their branding and not seek to improve on it which could therefore lead to consumers becoming bored with the product or maybe even consumer’s needs could change which could lead to Cadbury Plc falling behind in the market.

For Cadbury Plc their brand name is well known, but due to the reasons stated above their name is not enough to ensure that they remain the main brand in the industry. To stay on top of the market Cadbury Plc should constantly research into their brand name and look to invest money into improving the brand image to keep up with today’s changing times.

To compete with the lower priced supermarket own-label brands, Cadbury Plc may have to reduce their prices. However the problem for Cadbury Plc is that if they reduce their prices then that could be associated with deterioration in quality. One way Cadbury Plc could lower their prices to compete with its competitors without damaging the brand is to offer discounts on bulk purchases for example a pack of 5 Bounty chocolate bars for £1.25 which equates to 25p each whereas the single Bounty bar would be sold at 45p each. The consumer recognises that the lower price is due to bulk buying and does not associate it with the brand quality.

6. Strategic Choice

Involves identifying the strategic options, evaluating and selecting strategic options.

6.1. Possible strategies to consider and current business issues

Recent bid from Kraft Foods Inc and possible new bids from Hershey Co, Nestle SA and Ferrero SpA have made the situation Cadbury Plc is facing today exceptionally complex and adds multiple choices of possible takeovers and mergers to strategies generally needed to consider.

Kraft taking over CadburyPlc

An offer worth $17 billion and placed by Kraft would provide Cadbury Plc with consequent advantages and disadvantages. For instance, recently Kraft stated that the ‘takeover would increase scale in developing markets and create a company with about $50 billion in revenue … [it] would achieve at least $625 million of cost savings annually by the end of the third year’ (Bloomberg), whereas conversely Lord Mandelson cautioned that Kraft would be facing ‘huge opposition from the local population … and from the British government’ (Telegraph). Furthermore, this could lead to job cuts in Bourneville, therefore UK‘is likely to seek guarantees from Kraft on decision-making and employment’ (FT). Recently, Kraft Food Inc has now taken the takeover offer for Cadbury Plc straight to shareholders. Kraft offered a mixture of cash and shares for each Cadbury Plc share. This offer included 300 pence in cash and 0.2589 new Kraft shares for each Cadbury Plc share.

Alternative take-overs/mergers from Hershey, Nestle and Ferrero

Hershey, Nestle and Ferrero have made interest in acquiring Cadbury Plc. Accepting offers from any of the mentioned companies would be more advantageous than to accept Kraft’s bid, since these are more confectionary marked oriented and hence are concerned with similar issues Cadbury Plc is facing. For example, Hershey, the largest U.S. chocolate maker, has ‘about 14 percent of its $5.13 billionrevenueoutside its home market in 2008′, whereas Cadbury Plc has 22 percent of sales coming from outsideNorth America (Bloomberg). This merge could lead to strongest and biggest global confectionary company. Nestle, the world’s biggest food company, could stand in and ‘buy back the U.S. rights to Kit Kat and Rolo brands from Hershey, giving Hershey the power to fund a combination with Cadbury … another option would be for Nestle to acquire Cadbury’s gum unit … and then sell the chocolate division to Hershey orFerrero SpA’ (Bloomberg).Expand emerging markets (India, South America, Middle East, and Africa)

According to Todd Stitzer, CEO of Cadbury Plc; the company has the largest business of any of competitors in emerging markets that already contribute for more than a third of revenues. Cadbury Plc has already created strong foundations such as distribution systems and consumer relationships in these countries. For example, the company has experienced over 20% annual growth for the last three years in India (Creating Brands People Love, 2009). Expand developed markets (Europe, North America, Australia)

Although these markets are considerably saturated, according to Cadbury Plc there still is much untapped potential (Creating Brands People Love, 2009). Expansion here is based on mostly new developed products and innovations in advertising.

Concentrate more on luxury and natural products

Since consumer awareness, such as healthy lifestyle, fair trade issues etc., is rising, more consumer attention is made on natural and luxury products. Recent takeover of Green and Black’s, The Natural Confectionery Co and Fair-trade certification proves the importance. New relevant takeovers could improve the share of the growing market.

Invest more in development and innovations

In order to expand, especially in the developed markets; science and development play great part. Making new products sometimes is the only way to expand in such regions, because of high market saturation.

Move factories to countries with less expensive workforce

Since factories are mostly based in western countries, high and rising wages play major role for small margin, therefore moving to countries with less expensive workforce could be beneficial (for instance, in Europe, moving from UK and France to Eastern European countries and the Baltic States, In Northern America, moving from USA to Mexico), however, there would be strong opposition from western governments and unions that happened during recent factory move from UK to Poland. (Daily Mail)

6.2. Future Business Environ

 

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