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Reasons and implications of the Cadbury Kraft merger

Paper Type: Free Essay Subject: Marketing
Wordcount: 3297 words Published: 1st Jan 2015

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The Cadbury-Kraft deal had been one of the most talked deals, particularly because both these companies were food giants in their own markets and the deal has created a global powerhouse in snacks, confectionery and quick meals. Post-merger, Kraft is the world’s largest confectionery producer with annual revenues of around $50 billion. Also the deal is one of the biggest deals to have occurred after the financial crisis.

Pre-Merger History of Kraft and Cadbury

Kraft Foods

Established in: 1903 by James L. Kraft

Headquarters: Northfield, Illinois

Mission & Vision: “Helping People Around the World Eat and Live Better”

Major Markets: North America

Revenue: $38,754 in 2009 (excluding Cadbury)

Brief History of Major Mergers &Acquisitions

The Kraft Foods since its inception in 1903 has grown through mergers and acquisitions.

1903: The Company was founded by James L. Kraft

1916: The Company made its first acquisition – a cheese company from Canada

1924: The Company was renamed as Kraft Cheese Company

1928: The Company acquired Phenix Cheese Corporation

1980: Merger with Dart Industries

1988: Philip Morris Companies acquired Kraft

1989: Merger with Philip Morris’s General Foods

1995: Name changed to present name, Kraft Foods

2000: Merger with Nabisco Holdings

2010: Kraft acquired Cadbury

Reporting Segments and Acquisition Rationale

Kraft Foods has a good strong-hold in North America and hence the reportable segments there are subdivided as per the product categories. However, the company follows a country-led model in Central Europe as well as the Developing markets. This is mainly because the company hasn’t been able to exploit these markets to a great extent and the acquisition of Cadbury is expected to help the company provide an easy entry and help Kraft Foods in directly tapping these highly profitable markets where Cadbury is the market leader in most segments. The break-up of Kraft Foods operating income from the 3 segments over the years is given below:

From the above figures, it is clearly evident that Kraft Foods has its major sales in the US and hence is making acquisitions like Cadbury lately to exploit the European and Developing Markets.


Established in: 1924 by John Cadbury

Headquarters: Uxbridge, London, United Kingdom

Mission &Vision: “Working together to create brands people love”

Major Markets: Europe and Asia

Revenue: $9363 in 2009

Brief History of Major Mergers & Acquisitions

1924: The Company was founded by John Cadbury

1969: Merger with Schweppes

2007: Demerger of Cadbury Schweppes

2010: Kraft Foods acquired Cadbury

Rationale behind the Acquisition

With the U.S. business getting stagnant, Kraft wanted to move overseas for growth

Europe stands out prominently in Kraft’s growth plans

The acquisition will give Kraft access to Europe and emerging markets like India

Kraft has excellent name, excellent shelf space in retail chains and some of the most popular brands like Oreos

Addition of Cadbury to Kraft will give the company a broader reach around the world

Cadbury’s brands will benefit from the Kraft Foods global scope, scale and array of proprietary technologies and processes

The deal will help in improvements in operational efficiency, manufacturing and supply chain leading to cost savings to the tune of $675 million

Thus Kraft Foods wanted to make its imprints felt in the European markets through the acquisition of Cadbury. Kraft Foods has also proposed strategies to expand in the emerging markets like Brazil, Russia, China and the Southeast Asia, admitting that failure to expand in these markets could lead to their growth rates being negatively affected.


As per the published sources from Kraft Foods’ management, we tried to identify the reasons behind Kraft’s interest in the merger.

The Kraft Foods believed that the strategic and financial rationale for the merger was compelling.

Benefits of the merger from Kraft’s perspective

• They believed that the transaction would create a company with revenues of approximately $50 billion

• The new entity would be a global powerhouse in confectionery, snacks, and quick meals, and it would have a prodigious portfolio including leading brands from all around the world

• The combined business would be well diversified geographically, and it would have leading positions &significantscale in important developing markets namely India, China, Brazil, and Russia

• The merger would provide a strong foothold in instant-consumption channels in not only developed markets but also the developing ones, expanding the reach and margin potential of the combined business

• There would be potential for the synergy of revenues over a period of time from investments in marketing, distribution and product development. Moreover, there was substantial opportunity to realizeannual pre-tax cost savings of more than $625 million.

Kraft expected to achieve this through an increase in operational efficiencies over and above thecurrent programs to improve the performance at Kraft Foods and Cadbury (includingCadbury’s Vision into Action (“VIA”) program). Kraft Foods expected that it would achieve thesethese cost savings by the end of the third year of the merger.

Acquisitions are something which is not new to Kraft Foods. In fact, Diversification through Mergers, Acquisitions and Divestitures is the major corporate growth policy followed by Kraft Foods.

The strategies of the company clearly indicate its eagerness to tap the emerging markets as part of its long-term growth strategy. Also the company has had a history of growing through mergers and acquisitions, some notable ones mentioned below:

Kraft’s proposal about the merger was all about growth. Kraft was eager to build upon Cadbury’s iconicbrands and a strong British heritage by providing increased investment and innovation. Both Kraft and Cadbury had built their brands by focusing on quality, innovation and marketing. Kraft believed that due to the importance of scale in the food industry, the next stage in Cadbury’s development would be challenging.

Moreover the Cadbury’s brands were highlycomplementary to Kraft’s portfolio and thus Cadbury would also benefit from Kraft Foods’ scope and scale at the global level.

The extensive combined global network of Kraft and Cadbury would create opportunities for the growth of the employees of both the firms across all the areas of combined entity. The best practices and facilities in the fields of sales & marketing and distribution and manufacturing, of both the companies could be utilized to augment the world class facilities of Kraft and Cadbury.

Formation of Culture [1] 

Organization’s history (company’s life cycle)

Characteristics of the Organization (size, complexity etc.)

Owners and stakeholders (in exerting influence)

Environment (Technological, Social, Political and Judicial)

There are various types of culture like mercenary, networked, communal and fragmented. [2] 


Culture Type

Characteristic/ Traits




Sociability- Shared Values

Importance of deep friendships

Passion for the business

Friendly atmosphere at work

Value attached to work









Rewards to employees

Effectiveness and Performance

Importance of hard work

Attempts to eliminate competition








Managing work on own or alone

Maintaining lesser links at office

Having Goals outside the company



Creating strong networks within company

Inclination to participate in events

Desire to help others and colleagues

Ability to connect and make friends






Kraft- Implications

Cadbury- Implications

Brand has been strengthened

Rich heritage has been somewhat damaged

More efficient control over organization

Change in work culture has led to staff issues

Goals are more aligned to company’s vision

Association with Kraft has diluted brand value

Higher revenue owing to the higher levels of performance

Performance and moral has been seen to go down

Processes and procedures have been better aligned to create efficiencies

Issues with trust over management and owners

Goodwill and increased reputation

Uncertainty over the rights and benefits that might not be available under US laws

Impact of the Cultural Change on Cadbury

There would be some de-motivation amongst the staff which may lead to low morale, and thus reduce the productivity of the company, thus decreasing the profit

There is also a risk of resignation due to change of process, e.g. technology

There might be lack of trust which would lead to weak loyalty, and thus reduce open communication amongst the staff

There might be an increase in conflictswhich would lead to stress and increased emotion

There might be feelings of insecurity and uncertainty of future amongst the employees

This may also lead to a risk of diminishing Cadbury’s brand


Confectionery is the 4th largest segment in the packaged foods industry worth $1800 bn. The remarkable point is that although developed markets represent around 60% of the total revenues and the emerging markets represent 40%, the annual growth rate has been around 3% in developed markets whereas the same figure stands at 10% per annum for emerging economies.

Due to this reason, confectionary turns out to be a very attractive option to exploit, especially in the emerging economies. Moreover this sector is highly fragmented and the top 5 players account for only 42% of the market. The break-up is:

Chocolates – Top 5 companies account for 50%

Gum – Wrigley & Cadbury account for 60%

Candy – Top 5 companies account for 25%.

In the Gum market, Cadbury occupies the no. 2 position and in Candy market, its number one worldwide. Cadbury has been especially substantial in the emerging markets, which account for 33% of its revenues and 60% of its revenue growth, and thus these markets are the key focus of Cadbury. The following comparative chart shows the strength of Cadbury:


Concentrating Resources: Convergence and Focus

The major concern for Kraft is thatits share in the developing markets had been continuously declining even when the same developing markets had been growing in double digits. Thus this merger allowed Kraft to utilize the Cadbury’s market to improve the market position.

Focus: The main objective of Kraft was to create a global powerhouse in the food industry specially FMCG like snacks and confectionary. Moreover, this deal would help in creating cost savings, and also reduce procurement, the spending on marketing and research and development costs.

Accumulating Resources: Extracting and Borrowing

Most of the sales of Kraft Foodsin 2008 & 2009 have been contributed by the consumer sectors, biscuits (snacks). In the previous years,this has been further strengthened by the acquisition of LU Biscuits. The confectionery segment has been consistently contributing more than 10% to the net revenues. But, this sector tends to be the lowest one contributing greater than 10% to the net revenues of Kraft Foods, and the contribution has dropped from 12% to 11% in 2009. Thus, this is one of those areas which Kraft Foods would like to work upon in order to increase its market share. Kraft Foods has also proposed strategies for expanding in the emerging markets like Russia, Brazil, China and the Southeast Asia, and admitting that the failure to expand in these markets could lead to their growth rates being negatively affected.

The merger has increased Kraft’s share in the global confectionary market to almost 15%, and thus it has almost come at par with the global leader Mars, Inc.

Complementing Resources: Blending and Balancing

Kraft Foods has a strong foothold in North America and thus the reportable segments are subdivided as per the product categories. However, Kraft follows a country-led model in Central Europe as well as the developing markets. This is mainly due to the fact that the company has not been able to exploit these markets to a great extent and the acquisition of Cadbury is expected to help the company provide an easy entry and help Kraft Foods in directly tapping these highly profitable markets where Cadbury is the market leader in most segments.

Since the deal is quite recent, the firm needs to look after the other 2 aspects, namely:

Conserving Resources: Recycling, Co-opting, and Shielding and

Recovering Resources: Expediting Success

Emerging markets has been an important area of focus for both Kraft and Cadbury for a number of years. About 38.3% of Cadbury’s sales are from developing countries. The same number is about 20% for Kraft. [3] However, Kraft has a lead in most markets over Cadbury, with $1.2 billion revenue from Brazil in 2008 compared to $400 million for Cadbury. There are similar trends in China and Russia as well.


Immediately after the merger, Kraft announced a new leadership team. Kraft’s managing director Andreas Fehr was given the responsibility of the combined travel-retail organization, and had the responsibility of driving the growth of Cadbury and Kraft Foods.

The new team assigned roles for senior managers in Europe, Middle East and Asia Pacific and other marketing and business support roles.

Post Merger analysis of Cadbury Kraft

As a standalone company, meaning without Cadbury, Kraft was and is a big force. After all, it has an excellent name, excellent shelf space in retail chains and many of its products such as Oreos and Mac & Cheese are a must have in many households, particularly in North America.

But the addition of Cadbury does have the potential to be a sizable positive for the company and its present shareholders. The reason: Cadbury is a major player in candy and gum and its addition to the Kraft arsenal will allow the combined company to have an even a broader reach around the world.

Also, when two companies of this size embrace there is a big chance to generate cost savings. Expect to hear more about that in the short term. In the release, the company indicated that the deal could add about a nickel to earnings in 2011.

Another attractive feature is that from an earnings standpoint, in all three of the last reported quarters the company has exceeded Wall Street’s expectations. This too is a positive and could draw additional attention to the shares. In its fourth quarter Kraft is expected to earn 44 cents per share, and there could be upside to that number. Management will likely be doing everything it can to make sure that positive news keeps coming, knowing that its under the spotlight due to the combination. Post merger or acquisition, the companies involved seek for synergies and savings. Having paid £11.5bn for Cadbury, Kraft is hoping to save more than £430m annually, mostly by integrating the companies IT systems and infrastructure. Both Kraft and Cadbury rely on systems provided by SAP an ERP company. SAP also is responsible for financial planning and human resources systems, called ERP Financials and ERP Human Capital Management.

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Kraft has planned that it will slash $550 million (£379 million) directly from operational costs after its £11.5 billion acquisition of Cadbury last year. Out of $675 million (£430 million) total savings from the merger, including marketing and sales savings, some $300 million will come from day to day operations. An additional $250 million costs will be cut from “general and administrative” expenses.

Kraft improved all of its SAP systems in fy 2008. Cadbury, on the other hand, has had a annoying time with SAP for a long time. Before demerging from Schweppes, Cadbury described that concern with its SAP implementation had impacted on concert and contributed to its £12m deficit. It seems to have been fixed out since. Kraft expects to spend £827m integrating the two firms’ production, management and IT systems and a large part of that will perhaps go to SAP, or one of its incorporation specialists.

Savings through diversification

Second alternative for many companies is to integrate at a lower level where there are savings to be made by eliminating repetition. Kraft, isn’t big in chocolate but it does own Terry’s so it might make business sense for them to create a “chocolate division”. Even if they retain all the Cadbury, Fry’s, Green & Black’s and Terry’s manufacturing sites open, integrating the IT will generate “back office” savings in things such as purchasing, sales, marketing and HR, and, of course, it simplifies any future validation of production.

Customer-facing IT is another important issue. Corporations that operate in the business-to-business sphere generally prefer a single corporate identity; which makes them look bigger, more imperative-looking fish in their particular pool. In the retail world things are altered, people paying premium for Green & Black’s chocolate probably don’t want to be reminded of some of Kraft’s bargain basement snacks so the brands will very likely remain separate.

Either way, the IT integration work can be considerable. New large corporate websites emphasising the new “superbrand” are needed in the first instance, with new email addresses for staff acquired from the taken-over company. Where brands are kept apart for marketing reasons, their websites may need moving to new servers and at some level they will link to the group site. Decisions have to be made about how this is all structured.

The Future: What needs to be done?

Provide a consistent brand message to customers, suppliers and shareholders (website, email addresses, consolidated corporate directory)

Go for the low-hanging fruit, merge divisions, consolidate procurement, and provide consolidated finance, HR and other business information


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