After a series of acquisitions conducted throughout 2002 and at the beginning of 2003 (Dandy, Kent and Adams) Cadbury Schweppes is now in a position where restructuring its food business is a must. The company announced it is planning to cut 10% of its workforce (5,500 employees worldwide) over the coming three years across its business units.
Cadbury claims some of the savings will be used to promote products in regions where it does not hold a leading position. What are these regions? What are the products the company will promote? Euromonitor offers a perspective on its confectionery business.
Market and position review
In 2002, Cadbury ranked fourth in the global confectionery market, based on strong sales stemming from Western and Eastern Europe, Africa & the Middle East as well as Australasia. Cadbury enjoys double digit percentage shares in each of these regions. Asia-Pacific, and both Latin and North America are thus obvious targets for the company, where its market shares orbit a meagre 2% in value terms. Moreover Euromonitor forecasts firm value growth for confectionery in Latin America and Asia-Pacific between 2003 and 2008. But are these two regions the only targets for Cadbury?
The company’s range of products covers all three confectionery sectors namely chocolate confectionery, sugar confectionery and gum, each offering something different to its diverse portfolio. Chocolate confectionery cannot boast a healthy image, but does benefit from a large indulgence factor. Companies market premium products in an attempt to fuel value sales but volumes remain generally stable. Sugar confectionery is cheap and profit margins are low, which force companies into the production of high volumes, including the production of private label.
Gum on the other hand, is the only sector that has shown higher value than volume growth between 1998 and 2003. The sector is also expected to do so over the next five years, a fact that has formed the basis of Cadbury’s recent acquisition strategy. This stems largely from functional gum which allows manufacturers to add value through product development. In a context where multiple grocers continue to put pressure on prices, functional gum offers attractive profit margins. Moreover, the production of gum requires advanced technology that belongs to just a few companies located in Asia, America, Europe and North Africa, and these companies have prevented multiple grocers from introducing private label alternatives.
In Western Europe, gum offers the greatest potential with retail sales expected to outstrip growth in chocolate and sugar confectionery by at least three times. Here competition is limited to Perfetti van Melle and Wrigley, and Cadbury’s newly strengthened gum portfolio including brands such as Stimorol, Hollywood, Trident, V6 as well as Clorets and Chiclets, is now able to mount an effective challenge. In fact the acquisition of Adams sees it go into number two spot from a much lower base just a couple of years ago.
In Eastern Europe, where the health trend has yet to reach Western levels, chocolate confectionery continues to drive growth. Cadbury is expected to develop its sales further while implementing its cost saving programme. Ultimately profit margins are expected to rise.
The biggest obstacle in North America is the agreement linking Cadbury with Hershey for the distribution of chocolate confectionery. Cadbury might opt to focus purely on gum. The dominance of Wrigley makes this a uniquely tough environment, but the acquisition of second player Adams now provides a solid platform on which to mount a sustained challenge.
Gum is forecast to outperform both chocolate and sugar confectionery in Latin America and Adams leading position in the region provides Cadbury with an instant foothold. In Asia Pacific, all sectors are expected to perform equally well and shares are up for grabs for companies investing wisely.
The new horizon
The restructuring is part of a longer-term strategy being implemented to challenge its rivals and especially the world’s biggest confectionery player, Mars Inc. Having identified the underlying changes taking place in the market, with consumer preferences shifting from traditional confectionery (chocolate and sugar) towards modern trends (functional food and other healthy food), Cadbury embarked on a programme of acquiring key gum companies.
The next step will see the closure of factories, likely to take place all over the world and already started in Manchester and Chesterfield, UK but also in Australia where Cadbury operates 16 plants. Expected savings will be diverted to supporting key brands in its portfolio in order to become the world’s number one confectionery company.
Reactions on the stock market have not all been positive for Cadbury, with its shares losing value as analysts still think the recent acquisitions were too expensive. Cadbury aims to achieve its objectives by cutting costs and generating sufficient cash from its key brands for continued support and investment.