Today's and Future Business Strategy of Cadbury from Three Different Perspectives - Case Study Example

Business Report: Cadbury Plc. Executive Summary This report evaluates the business strategy ofCadbury from three different perspectives that include assessment of competitive landscape in which the company operates; evaluation of the financial position, and review of its current corporate strategy. Each area of investigation is supported by the critical evaluation of factors and strategies carried out by the company. The company has been strategically successful company for many years and its recent takeover by Kraft where it has created certain uncertainties about the company’s brand and product portfolio on the other hand it will surely provide opportunities for Cadbury for further expand its business and achieve organic growth opted in its strategies. The report not only evaluates company’s present situation but also makes useful findings regarding the company’s future and put forth recommendations for the company to remain a successful entity. Table of Contents Executive Summary 2 Table of Contents 3 1. Introduction 4 2. Company Profile 4 3. PESTLE Analysis 5 3.1 Political 5 3.2 Economical 5 3.3 Social 5 3.4 Technological 6 3.5 Legal 6 3.6 Environmental 6 4. Competitive Environment 7 4.1 Porter’s Five Forces Model 7 4.2 SWOT Analysis 9 5. Financial Performance Evaluation 10 5.1 Liquidity 10 5.2 Solvency 11 5.3 Profitability 12 6. Cadbury’s Corporate Strategy 12 7. Recommendations 13 List of References 18 Appendix I: Financial Ratio Analysis 19 Business Report: Cadbury Submitted to: Board of Directors Cadbury From: Management Consultant Sub: Business Report on Cadbury Plc. Date: August 13, 2010 1. Introduction This business report has been furnished in order to provide a critical assessment of the business environment in which Cadbury is operating and identify the recent changes that have occurred in the company’s business that has led to change in its ownership which of course has implications for its current business strategy and also future growth prospects. The report utilizes different business models to provide a summative report on the company’s ability to remain as a success in the packaged food industry. This analysis is also supported by financial ratio analysis that provides useful insight into the company’s financial performance and assists in evaluating why changes in the company’s business and strategy are imminent. Finally, recommendations are made for the next years of operations in light with the present corporate strategy of the company. 2. Company Profile Cadbury has remained a British iconic company for almost 183 years before it was sold to a US company Kraft. The company was established in 1824 by Quaker John Cadbury and later merged with a Swiss counterpart to form Cadbury Schweppes in 1969. Over the years the company had developed product lines into candy and non-alcoholic drinks market. However, as the company focused more on its confectionaries business it decided to sell off its seven famous drink brands that were once important part of the company’s business. Strategically the company has remained a successful business however in the recent years the company has gone through a tough period of hostile takeover bid by Kraft that has generated uncertainties regarding various business segments and units of Cadbury. 3. PESTLE Analysis The PESTLE analysis of the global confectionary industry is carried out in the following that highlights the external factors contributing to Cadbury’s business strategy: 3.1 Political Since Cadbury operations spread throughout countries across the globe and its products are sold in almost every continent the company is therefore affected the political situation worldwide. Any change in the government and its policies can affect the company’s business. Furthermore, governments’ intervention in the form of promoting awareness amongst public to reduce consumption of confectionaries over health issues could also influence company’s business. 3.2 Economical Like all other businesses Cadbury is also affected by the current financial crisis and recessionary conditions prevailing in the major markets. Under recession the consumer spending is cut back on discretionary items such as those delivered by Cadbury as they save more and alter their buying trends by seeking out products they are comparatively lower in price. Furthermore, disruptions in the credit market could lead to a situation where the company is not able to maintain uninterrupted relationship with suppliers, customers, and creditors (Cadbury 2008). 3.3 Social Cadbury’s sales are very much dependent upon the customs and consumer behaviour in different countries. Changes in consumer demand and preference for its products could have severe impact on the company’s business. Other factors such as spending patterns and ageing population in certain countries could also affect sale of confectionaries. As the company utilizes resources in underdeveloped countries such as Ghana for its cocoa cultivation there is an increased corporate social responsibility to invest back into such economies for maintaining a balance in the eco-system. Increasing pressures from local bodies and governments could lead to difficulties for the company (Asuming-Brempong, et al. 2008). Moreover, the takeover of the company by Kraft has raised concerns amongst labour unions as this could lead to redundancy of work force that could stir up civil motion against the company. 3.4 Technological The company relies heavily on its information systems that support its value chain stretching over countries. These information systems not only provide day to day information but also help the company to connect different components of the business. Any failure of these information systems can have devastating impact on the firm’s ability to make successful strategic decisions (Cadbury 2008). 3.5 Legal Any change in food content and quality regulations by EU can affect Cadbury’s business as it major sales are in Europe. Case of another contamination similar to the previous case of discovery of Salmonella Montevideo in Cadbury’s products that lead to withdrawal of company’s seven brands from the market (Carroll 2009) and mishandling of the information disclosure by its management could have profound impact on the company’s business and could lead to a litigation case against the company. Due to the company’s business in different countries it is subject to their laws regarding composition of products, production, distribution, intellectual property, and sale that could affect the company’s activities. 3.6 Environmental Issues related to the impact of the business on its environment could be important for Cadbury (Cadbury 2007). These issues could include those related to the use of energy, emission of CO2 and recycling of plastic products used for packaging. Changes in international laws regarding these issues would require due consideration and investment by the company that could affect its financial position (Cadbury 2008). 4. Competitive Environment Before the takeover by Kraft, Cadbury held very strong position in both confectionary and chocolate markets. Since Kraft has promised to continue the business and brands of Cadbury in their respective markets therefore the following analysis is based on an independent view of Cadbury’s business. The competitive landscape in these global markets is marked with the presence of major companies including Mars Wrigley Nestlé, Hershey, and Kraft. All of the five companies shared almost 50% amongst themselves of their respective markets and continue to be dominating forces for other existing companies or new entrants (Cadbury 2008). Cadbury is also the market leader in the UK packaged food market that owns a market share of 4.3% (DataMonitor 2008) and generated £1,269m in sales during 2008 (Cadbury 2008). The packaged food market is characterized by sales that are high in volume and low on profit margins. Major sales are made to food retailers that have strong positions in the retailing sector and therefore close relationships are required to be maintained with them. Quality is yet another important determinant of the ability to face up the competitive pressures on the business. Cadbury being an international entity operates in several countries and it is therefore faced with market challenges that are unique to those particular markets and presently are very strong. The evaluation of the external environment in which Cadbury is operating and assessment of the company’s ability to be able to meet challenges imposed on its business is made through implementation of various business models including Porter’s Five Forces and SWOT Analysis. 4.1 Porter’s Five Forces Model Porter’s Five Forces Model is implemented to critical assess the elements of the business environment that have continual effect Cadbury’s business: 4.1.1 Suppliers Powers The confectionary manufacturers source their raw materials from a diverse suppliers’ base. This makes the suppliers’ power weak however in case of Cadbury most of its resources are drawn from specific sources overseas such Ghana and Tasmania that makes it dependent upon them for continuing supply of raw materials. 4.1.2 Buyers Power The confectionary market offers a wide range of products to consumers that are differentiated on the basis of their quality, taste and branding. Consumer preferences are very much influenced by brand loyalty and therefore buyers power remain weak (Data Monitor 2008). However, increased health cautiousness surely affects consumers’ preferences amongst available products. 4.1.3 Threat of New Entrants Barriers to entry into confectionary market are relatively low. However, they are based on innovation, high capital investment and effective marketing as the existing companies operating in the industry are very well positioned to counter any new threats (Cadbury 2008). Also the new entrants are faced with difficulties for establishing relationships with participants to support their value chains (Data Monitor 2008). 4.1.4 Threats of Substitutes One of the major threats is the presence of private labels that are offering highly rich content in their products and are able to promote much healthier image for their products. In addition to this, substitutes such as savory snacks, fresh fruit, and similar items do also pose threat to the confectionaries market. Thus, the overall threat of substitutes is moderate. 4.1.5 Degree of Rivalry The degree of rivalry amongst the major companies is very high that is driven by extensive marketing and price war. The switching cost for consumers is none therefore the outcome of rivalry could result in change of preferences and customs easily. Branding is therefore important for companies to invest in and promote amongst masses (Data Monitor 2008). 4.2 SWOT Analysis In light of the findings of PESTLE and Porter’s Five Forces Model the SWOT analysis hereby provides internal and external evaluation of Cadbury’s position suggesting possible track for future business growth: 4.2.1 Strengths Cadbury has a strong brand portfolio and product lines that continue to remain popular amongst consumers for many decades. Cadbury operates in over 60 countries and has a turnover of more than £5bn (Cadbury 2008). Cadbury has a staggering 10.5% share of global confectionary market, 28.9% share in gum market and 7.2% share in candy market worldwide. Cadbury has been highly successful in emerging markets such as Russia, India and China with more 11% of the market share and average growth of 12% over past 5 years (Cadbury 2008). Despite of health and social concerns over use of confectionaries and slow down in the economies worldwide the company has been able to post a growth in sale of its products by 5% in 2009 in its 20 top global markets of confectionaries (Cadbury 2009). 4.2.2 Weaknesses Lack of business diversification due to company’s concentration in confectionaries market could be considered as its weakness (Cadbury 2008). The company has a weak position in the US that is considered to be one of the largest markets for confectionaries. Too much reliance on third parties for outsourcing of its business functions could harm its intellectual property rights and lead to infringement of contracts. Dependence on suppliers in other countries could be considered as a major weakness of the company. 4.2.3 Opportunities Continuing growth in global confectionary market and well positioning of the company in major markets could help the grab more business and achieve higher returns to shareholders. Strong growth figures and accumulation of wealth in emerging markets continue to provide further growth opportunities for the business. Evolvement of new and healthier product formulae could overcome criticisms over health and safety issues that could add value to the business. 4.2.4 Threats Continuing recessionary conditions and high inflation in major markets of Cadbury the business could be negatively affected. Concentrated competition in the confectionary market and price war between major players such as Hershey and Nestlé could actually lower profit margins of Cadbury as well. With Kraft taking over Cadbury there is a growing concern regarding the possibility of the failure of acquisition that could affect company’s business and sustainability (Aziz 2010). Threats of changing business environment through acquisitions and mergers could increase the competitive pressures on the company. Rising costs of raw materials such as chocolate could make the prices of Cadbury’s products uncompetitive. Further contamination of company’s products due to the use of certain raw materials could have negative impact on the company’s business and reputation. 5. Financial Performance Evaluation Appendix I attached to this report provides values for various important financial ratios that form the basis for critical evaluation of the company’s financial position based on the financial figures reported in 2008. 5.1 Liquidity The ratios calculated under this category of ratios suggests overall weaker liquidity position of the company. This is reflective from the current ratio value being less than 1 in both 2008 and 2007 (Cadbury Plc 2008). This is mainly due to more than proportion decrease in current liabilities of the company as compared to its current assets. Major declines are observed in inventory, trade receivables and short term borrowings. The quick ratio of the company which ignores inventory of £767mn (2008) and £821mn (2007) that is considered as illiquid at time of liquidation suggests a value of 0.55 in 2008 which improved from 0.39 in 2007 that is still lower than 1 and could be considered as poor indication of company’s liquidity position. Moreover, the company’s liabilities falling due within one year are £2,417mn that could have problems for the company. The receivable turnover is quite weak 5.05 in 2008 however up from 3.93 in 2007 that is due to increase of £685mn in revenue and sharp decline in accounts receivables. This resulted in higher number of days for collection which improved from 92 days in 2007 to 72 days in 2008. The company’s inventory position also indicates weaknesses as the company is only able to convert 6 times its inventory into sales in 2008 compared to 5 times in 2007. This value resulted from high operating costs despite of decline in inventory value. The company is holding inventory for longer periods suggesting 58 days in 2008 and 70 days in 2007. 5.2 Solvency The debt to equity ratio suggests that the company has total liabilities which are 1.52 times its total equity. The company is debt ridden with high short term terms failing due within 1 year that makes it vulnerable to the changes in interest rates and its ability to pay off its principal obligations. Although net borrowing decreased and further cash is expected because of America Beverages demerger the company’s weak solvency position suggests further cut back of its finance commitments. The company is generating sufficient amount of profit before finance and tax to meet its interest obligations as times interest earned ratio which was only 3.25 in 2007 has improved significantly to almost 8 times in 2008 (Cadbury Plc 2008). This is due to increase of £167mn in profit before financing and taxation and sharp decline in company’s borrowing. This suggests the company will have no problems for paying its current interest payments. 5.3 Profitability The profitability ratios calculated suggest that the company is operating at very low profit margins which could affect its profitability position in the years to come as the industry faces challenges of economic downturn. The gross margin of the company is only 7.21% in 2008 as compared to 5.92% in 2007 due to high operating and restructuring costs. The net profit margin is only 6.80% in 2008 and 8.66% in 2007 despite of increase in sales that is mainly due to currency exchange gains. However, the company’s assets are efficiently utilized implying a high asset turnover of 60.53% in 2008 and 41.44% in 2007. This is due to reduction in inventory and trade receivables and higher sales mainly from emerging economies including India, China, Venezuela & Russia. Comparatively the ROA is very low only 4.11% in 2008 and 3.59% in 2007 suggesting low profit margins as the company is only operating at 6.80% net margin. Similarly ROE which showed little improvement over the year remains low at 10.39% in 2008 as compared to 9.78% in 2007. The EPS of the company showed good improvement from just 7.0p in 2007 to 22.8p in 2008 (Cadbury Plc 2008). The overall company’s profitability position remains weak in both years. 6. Cadbury’s Corporate Strategy Cadbury’s corporate strategy could be evaluated on the basis of its vision that is to become the biggest and the best confectionary company. This vision is translated into practice by the company but adopting a business approach that is aimed at expanding total demand for its products, protecting its current market share and finally seeking expansion. Due to the takeover by Kraft a new conglomerate has been formed that has the power to achieve these objectives. Upon evaluation of the company’s business position it is clear that presently the company has to focus more on the generation of profits to cover the value of takeover bid by its parent company. This is in support of the argument that the company has a weak profitability position as reflected in the ratio analysis and this is the reasons that the company has set a goal of increasing its trading margin to mid teens in the coming years. From the examination of the company’s annual report it is clear that the company has two major strategies for its business that are restructuring of its business through internal changes, demergers and acquisitions in different markets and also focusing on the core business activities in the confectionary market. Firstly, in light of the continued expansion in the global confectionary market and corporate parenting approach Cadbury has simplified its corporate structure to make the decision process quicker and responsiveness to the changing business requirements. As the company’s liquidity position became weak reflected from the liquidity ratios in the previous section it opted to generate cash from selling off its non feasible beverages SBU and adopted category focused approach to ensure that all three categories have strong position in their respective markets. This allowed the company to ensure that corporate parenting provides ways of bringing its SBUs together to achieve corporate objectives. The company has a well directed strategy to expand its operations in the emerging markets of India, Russia, Thailand, Venezuela, South Africa etc. through acquisitions of third party businesses. This approach is in line with the competitive analysis carried out in this report and reflects company’s approach to portfolio management that has resulted in high growth rates and sales as reflected by profitability ratios. At the core of these strategies the company has been highly successful in utilizing its resources specially its brand name and product quality that has been appreciated over the years by consumers and has allowed the company to achieve organic growth. Furthermore, to keep shareholders’ interest intact in the company the company has adopted an approach of progressive increase in the dividends by maintaining high medium term payout ratio. Keeping a strong position in the communities it operates the company also has a strategy that underlines investment in HR development, continuation of sustainable production and balance within ecosystems from which it extracts its resources. 7. Recommendations Based on the evaluation of various aspects of the business certain important recommendations can be put forth for next 2 years of operations with the help of implementation of Balanced Scorecard. The balance scorecard has been developed on the basis of Vision in Plan (VIP) set out by Cadbury for its business. Various objectives related to financial, customer, internal business process, and learning and growth (Kaplan and Norton 1992) and respective targets have been identified in this balanced scorecard along with the initiatives that the company has already undertaken. Balanced Scorecard VISION THE BIGGEST AND THE BESTCONFECTIONARY COMPANY Financial Objectives Measures Targets Initiatives Organic revenue growth Focusing strategies on companys core business and seeking newer opportunities in new markets and expansion in the US 4%–6% pa Improving business focus, innovation and brand development to meet the challenges of current financial crisis. Total confectionery share gain High market share in three categories of market: chocolate, candy and gum Continuous growth Gaining opportunities in emerging markets. Establishing partnerships and acquiring businesses. Trading margins Restructuring and improvement of underlying business Mid-teens by end 2011 Demerger of America Beverages Strong dividend growth High payout ratio Medium term payout ratio of 40-50% Progressive dividend policy adopted Improve solvency Reduce companys gearing level   Demerger with America Beverages reduced net borrowing Efficient Balance Sheet Improve interest cover Reduction in net borrowing and lower interest commitments Times interest covered improved from only 3.25 in 2007 to almost 8 in 2008 Growth in ROIC Restructuring and improvement of business and other activities Continuous growth Cost reduction by reducing the number of SKUs by 10%. Managing working capital. Customer Objectives Measures Targets Initiatives Realize optimal pricing Tough competitive forces causing reduction in trading margins Establish prices which allow the company not to achieve growth but also mid teens trading margins Avoid price wars however maintain a responsiveness pricing strategy Customer partnerships Relationships with retailers and end consumers Improve retailer relationship to ensure that products receive due attention from customers Invest in the community to promote good corporate image and affiliation with the brands company offers. Consumer preferred brands & products Focus on advantaged brands and products in different regions Remove low return brands and products and focus more on successful items Sell off the beverages business and removal of brands that have faced problems in consumer market. Category focus Three identified categories of chocolate, gum and candy Ensure each category is well focused in company’s strategies Focusing on each category and improving product / brand offerings by the company Creating brands people love Brand loyalty and consumer preference over other products Innovation in product development Customize flavor, products and brands and marketing activities to meet demands of local markets Internal Business Processes Objectives Measures Targets Initiatives Simply Company Structure Remove regional structures to simplify the corporate and reporting structure Smooth flow of business decisions and operations Elimination of regional structure to operate as seven business units Reduce carbon, water use & packaging Companys commitment to Corporate Social Responsibility Assist economies with development and maintenance of eco balance. Reduction in CO2 emissions by 11% in 2011. Further reduction water consumption. Purple Goes Green, Cadbury Cocoa Partnership and Ghana Mapping Sustainable Production Programs. 33% reduction in water consumption since 2006 Operate a category-led business Three identified categories of chocolate, gum and candy Develop and implement strategies and teams for each category Focusing on each category and improving product / brand offerings by the company Decision making and speed of execution Better responsiveness to the changing business environment Centralize business functions to allow efficient decision making Simplification of corporate structure Leverage partnerships Improvement in HR development and growth Increase commitment and quality of output and offer equal opportunities Connect different business functions through objective oriented approach to the business. Learning and Growth Objectives Measures Targets Initiatives Talent, diversity & inclusiveness Improve the quality of output Increase commitment, motivation and skills of employees Professional development programs and trainings and maintenance of balance in the work force. Partnerships and acquisitions Expansions in untapped markets through partnerships and acquisitions of other businesses Organic growth of 4%-6% per annum Acquiring businesses in emerging markets and entering into partnerships with companies in developed markets. Performance driven, Values led Improve the role of business in the society Responsible consumption of resources, ethical commitment, and professional development of individuals Involvement with local bodies and governments to promote more responsible image of the company. The information gathered in the balanced scorecard assists in developing the following recommendations for Cadbury that is a subsidiary of Kraft for its next two years of operations: 1. The company must continue its long established vision of achieving high levels of organic growth by focusing on its core activities. This would allow the company to retain a sustainable premium in its pricing as compared to other companies such as Hershey and Nestlé that are presently going through price wars aimed at each other. 2. The company must be careful in relations to its acquisitions and partnerships and also regarding outsourcing of its business functions as indicated in this report because of the obvious difficulties of antitrust issues and infringement of products that could affect company’s business as there have instances in China where international companies have faced problems with managing their relationships with third parties. 3. Since threat of substitutes and competitive products is high in the confectionary industry the company needs to direct further investment into its innovation process so that more focused approach can be implemented by taking account in local tastes for boosting sales in newer markets. 4. As the company has become subsidiary of Kraft therefore it has a good opportunity to develop strategies for the US market where it has presently a weak position. This could be through channelling resources through Kraft’s network in the country and marketing that promotes Cadbury in an American way. 5. The company must reduce its operational overheads and net borrowing that are resulting in lower net income. This is reflected in the ratio analysis carried out in this report. 6. The company must continue to search for resources that could be sustained for long term production. For this the company must invest in cultivation programs and develop technologies that could speed up the growing phase. List of References Asuming-Brempong, S. et al., 2008. Mapping Sustainable Production in Ghanaian Cocoa. Ghana: Institute of Development Studies and the University of Ghana. Aziz, O.B., 2010. Cadbury Dairy Milk Silk Presentation. [Online] Available at: [Accessed 14 August 2010]. Cadbury, 2007. Purple Goes Green. [Online] Available at: [Accessed 14 August 2010]. Cadbury, 2008. Annual Report 2008. Uxbridge: Cadbury Plc. Cadbury, 2008. Form 20-F. Uxbridge: Cadbury Plc. Cadbury, 2009. Kraft Foods approach to Cadbury plc. [Online] Available at: [Accessed 14 August 2010]. Carroll, C., 2009. Defying a Reputational Crisis – Cadburys Salmonella Scare: Why are Customers Willing to Forgive and Forget? Corporate Reputation Review, pp.64-82. Data Monitor, 2008. Confectionery in Europe. New York: Data Monitor. Kaplan, R. & Norton, D., 1992. The Balanced Scorecard: Measures that drive performance. Harvard Business Review, p.77–80. Appendix I: Financial Ratio Analysis 2008 2007 Liquidity Ratios Current Ratio Current Assets / Current Liabilities 0.78 0.56 Quick Ratio Current Assets - Inventory / Current Liabilities 0.55 0.39 Net Working Capital Current Assets - Current Liabilities - 753.00 - 2,014.00 Net Working Capital Turnover Ratio Net Revenue / Net Working Capital - 7.15 - 2.33 Receivables Turnover Net Revenue/Accounts Receivables 5.05 3.93 Average Collection Period 365/Receivables Turnover 72.34 92.98 Inventory Turnover Cost of Sales/Inventory 6.26 5.19 Average Inventory Period 365/Inventory Turnover 58.29 70.38 Solvency Ratios Debt to Equity Ratio Total Liabilities / Total Equity 1.52 1.72 Times Interest Earned Ratio (Interest Coverage Ratio) EBIT / Interest Paid 7.96 3.25 Profitability Ratios Gross Profit Margin Gross Profit / Net Revenue 7.21% 5.92% Net Profit Margin Net Profit / Net Revenue 6.80% 8.66% Asset Turnover Net Revenue / Total Assets 60.53% 41.44% Return on Equity Net Profit / Total Equity 10.39% 9.78% Return on Assets Net Profit / Total Assets 4.11% 3.59% Earnings Per Share Net Profit Attributable to Common Shareholders / Number of Outstanding Shares 22.8p 7.0p Read More