Cadbury Chocolate - Company Analysis - Research Proposal Example

Cadbury Chocolate – Company Analysis Executive Summary Cadbury Chocolate Company has been a world famous company and has been able to achieve a high market position over the years. The company’s competition is quite vast and together with the five other main companies, a total of 40% of the market share is held. Cadbury has built a brand image which has been growing stronger each year for last almost 200 years. The financials of the company show a different image of the company. Although the company is making significant profits and is in line with the industry limits, Cadbury faces a high level of issues due to low liquidity and low levels of cash availability. Also the company’s capital employed and the overall return on capital is relatively quite low and is much lower than the industry average. The company has also shown a lacking in terms of the efficiency, and the days in collection as well as the average collection period are 51.29 and 59.06 days respectively which are way above the industry average of 37.68 and 35.37 days. The strategic planning of the company is currently working out to be the best for the brand and brand image. Also the takeover that the company has just faced has also helped to some extent with the growth of the company as well. Cadbury holds a very high place in the competitive market and has been able to meet up to the competition very effectively and efficiently. Table of Contents Executive Summary 0 Table of Contents 1 Introduction 2 Competitive Analysis 2 Porter’s Five Force Analysis: 3 Financial Analysis 5 Liquidity: 6 Profitability: 6 Introduction Cadbury Chocolates has been in the industry for almost 200 years. The company has built its name and brand across the world and has been recognized to be one of the largest chocolate selling companies around the world. Cadbury has built a brand name and image where almost all people across the world are aware of the brand (Cadbury, 2010). Cadbury has a product for all strata of society. The company provides chocolates of different range, styles and also has a chocolate for all occasions. The company is clearly the market leaders and hence also faces a high level of competition as well. This paper aims at conducting the competitive analysis of the company, followed by a financial analysis. The paper will highlight the current strategies adopted by the company followed by recommendations to the company based of the analysis. The next section will deal with the competitive analysis of Cadbury. Competitive Analysis Cadbury’s chocolate division has been extremely successful over the years and the market share is based on the regional strengths. The company currently holds a strong position in the UK, Ireland, Australia, New Zealand, South Africa and India (CadburyInvestors, 2010). The company faces major competition from several brands. The company faces competition from both local as well as international companies and together with the five major confectionery companies, own as much as 40% of the total chocolate market. The top five companies that are major producers of chocolate apart from Cadbury include, Mars – Wrigley, Nestle, Hershey, Kraft and Ferrero. These also form the major competition for the company as well. The figure below provides a clear view of the break – up of the market share and also provides a clear idea of the competition faced by Cadbury (CadburyInvestors, 2010). Our Competition (CadburyInvestors, 2010) Porter’s Five Force Analysis: Considering the porter’s five force analysis and the as seen above the major competitors of Cadbury include a few of the largest confectionary manufacturers. It is important to note that each of these companies do have a certain level of market share (CadburyInvestors, 2010). The company faces a high level of threat from the competitors. Considering the products and services of these companies, it is important to note that each of these companies have a wide range of products which form competition for the others in the industry. Cadbury has developed a brand image and recognition where the company has been the main focus of a number of competitors and there is a nonstop demand for the company. The competition faced has been tried to be reduced and the aim has been to try and merge as many companies together to reduce the competition. It is to be noted that with the takeover of Cadbury by Kraft, the competition within the industry has reduced to a great extent and the company is now faced with competition from companies like Nestle, Hershey, Mars – Wrigley and Ferrero (CadburyInvestors, 2010). The company has opted for the take over with Kraft and this has been with a simple intension. In terms of the threat of new entries, the company does not face a very high level of threat as the major players in the market take up a total of 40% of the markets. The new entries into the markets become a part of the 60% of the rest of the market, hence the threat if low and limited. The company has currently works in an industry where the threat of substitutes can be considered to medium to high as the food industry is one where the overall substitutes are high and hence the overall threat is also high. The diagram below provides a basic view of the level of threat faced by the company based on the above discussion and the overall study. Porter’s Five Force Analysis As explained by the chairman of Cadbury, Roger Carr, “We believe the offer represents good value for Cadbury shareholders and are pleased with the commitment that Kraft Foods has made to our heritage, values and people throughout the world. We will now work with the Kraft Foods' management to ensure the continued success and growth of the business for the benefit of our customers, consumers and employees” (London Evening, 2010). It is hence clear that the company currently faces high levels of competition from the various companies as well. The following section will provide a deep analysis of the company’s financial performance and will provide a ratio analysis for Cadbury. This will help in gaining a detailed understanding of the company and the overall financial situation of the company as well. Also, a brief of the competitor’s financials will also be discussed. This will help gain an insight into the current position of the company in the markets. Financial Analysis In order to better understand the financial performance and position of the company, it is essential to conduct a financial ratio analysis. The financial statements published by Cadbury Plc for the fiscal year 2008 are considered for the analysis. The ratio analysis for Cadbury is conducted to analyze the financial position of the company based on its liquidity, profitability, efficiency and capital structure (Clayman, Fridson, & Troughton, 2008). The ratios are also compared with that of the industry average ratios (or the peer meridian) of the competitors of Cadbury in order to provide a clear view of the financial position of Cadbury when compared to the industry in which it operates (Infinancials, 2010). The industry average is computed as the average of the ratios of the leading competitors of Cadbury including, Nestle, Unilever, Hershey Corporation and Associated British Foods. Liquidity: The liquidity ratios indicate the amount of cash (or liquid assets) available at the company’s disposal. The current ratio of the company is the ratio of the current assets to the current liabilities (Brigham, Houston, 2009). It indicates the liquidity position of the firm and its ability to cover the current liabilities with the liquid assets (Clayman, Fridson, & Troughton, 2008). The quick ratio is computed as the ratio of the ready cash assets (current assets – inventories – prepaid expenses) to the current liabilities. The liquidity ratios for Cadbury Plc are computed as follows: Ratio Cadbury Industry Average Quick Ratio 37.99% 59.07% Current Ratio 77.78% 85.32% It is evident that the company has a weak liquidity position. Only 37% of the current liabilities can be met with the cash in hand. This is well below the industry average and indicates that the cash position of Cadbury has to be improved (Samuels, Wilkes and Brayshaw, 2000). Profitability: The profitability of a company can be analyzed using the profit margin ratios, return on capital employed and the return on common equity. i. Profit Margin: The profit margin is the measure of the company’s ability to earn profit from the generated revenue (Emery, Finnerty and Stowe, 2007). This is a very important and crucial ratio as this depicts the earning capacity of the company. The net profit margin of a company is computed as: Net Profit Margin = (Net Income / Net Sales) * 100 Ratio Cadbury Industry Average Net Profit Margin 6.76% 6.59% The profit margin of Cadbury is at par with the industry standards indicating that the company is generating significant profits. However, it is important to note that the most significant competitors such as Nestle and Unilever have recorded 15.41 % and 11.37 % in the year 2008 respectively. Hence Cadbury has to focus on optimizing the operations in order to cut down costs and maximising profits (Brigham, Ehrhardt, 2010). ii. Return on Capital Employed (ROCE) and Return on Equity (ROE): ROCE measures the income generating ability of the capital employed by the shareholders (Emery, Finnerty and Stowe, 2007). This ratio is of high importance as it indicates the rate of return obtained by investing the capital in the business. The return on capital employed is computed as Return on Capital Employed = (Net Income / Capital Employed) * 100 ROE measures the income that is available for the common stakeholders. It is measured as the ratio of net income to the average common stakeholder’s equity. This ratio is a crucial measure for the potential investors indicating the estimated they would obtain by investing in the common equities of the company. Return on Common Stakeholder’s Equity = (Net Income / Average Common Stakeholder’s Equity) * 100 Ratio Cadbury Industry Average ROCE 7.59% 10.30% ROE 9.47% 12.62% It is evident from the calculations that the return on capital employed and return on equity are much lesser than the industry average (Infinancials, 2010). Cadbury has to improve its returns if it has to sustain the investor base, especially when the competitors such as Nestle have recorded an ROE of 35 %. Efficiency: The efficiency of the company’s operations is analyzed using the average collection period and the days in inventory ratios (Bringham, 2008). The time period (no. of days) taken to collect the receivables is a crucial measure that illustrates the company’s ability to collect the debts. It is computed as Average Collection Period = (Average (net) Receivables) / Net Sales) * 365 The time period (no. of days) spent by goods in the inventory indicates the ability of a firm to convert its inventory into sale. The days in inventory is measured as Days in Inventory = (Average Inventory / Cost of goods sold) * 365 Ratio Cadbury Industry Average Avg. Collection Period 59.06 35.37 Days in Inventory 51.29 37.68 Cadbury Plc has an average collection period of 59 days whereas the industry norm is just 35 days. This longer collection period contributes to the low liquidity position of the company. Moreover it takes 51 days to convert the inventory to sales whereas other companies in the sector are able to do the same in 38 days. Hence the company has to focus on shortening the collection period by making the necessary changes to its credits policy, and also improve the demand and sales forecast in order to effectively move the inventory to sales. Capital Structure: The capital structure of a company can be analysed based on two major ratios: Debt to Assets Ratio = Debt / (Debt + Equity) This ratio reveals the solvency and the capital structure of the company. It is used as an indicator for the leveraging in terms of the debt and also provides for a better understanding of the amount owned and the amount owed (Emery, Finnerty and Stowe, 2007). This gives a view of the amount the company can use for borrowing. Debt to Equity Ratio = Debt / Equity This ratio on the other hand provides details to the extent the company are willing to fund operations with debt instead of equity. These ratios for Cadbury Plc are computed as follows: Ratio Cadbury Industry Average Debt to Assets 26.81% 29.50% Debt to Equity 67.72% 66.00% The industry average and Cadbury Plc have a very low debt to assets. The debt to total assets ratio is an indication of the company’s long term growth capacity and its ability to generate more capital through debts. Similarly the debt to equity ratio is also equal to the industry standards. Current Strategic Direction: Cadbury has been known for the strategic direction that the company has adopted over the years. However as discussed earlier, the company has now been taken over by Kraft Foods and the company’s strategic direction is now in the hands of Kraft (Clark, 2010). Over the years, Cadbury has been able to develop excellent strategies and strategic decisions which have helped the company grow and expand. The company has always shown excellence in everything that they do. The company has been able to perform well and has acted responsibly not only in the decision making within the company but also in terms of the growth and endurance of the company and value of the shareholders (Cadbury Report, 2009). The company has exhibited high levels of ethical sense and also has brought out the importance of being good and responsible in terms of the society and environment where it performs. The company has been recognized to be very focused on the CSR strategies and have developed the Five Pillars of CSR, i.e. marketing, food and consumer trends, environment, health and safety, ethical sourcing and procurement, employment standards and community investments and human rights (Cadbury CSR, 2010). Based on an understanding of the company and after having researched the various products of the company, it is clear that the main strategic direction of the company has always been based on innovation and freshness of ideas. Cadbury has been in the markets for almost 200 years and the company has been able to understand the market needs and work innovatively towards providing the customers with their needs and requirements. The growth strategy of the company has always been very innovative and the initiatives taken by the company in a number of cases have been surprising and much unpredicted (Stanford and Helyar, 2010). Considering the case of the recent strategic decision of accepting the Kraft’s takeover, it is clear that there is a major issue regarding the growth strategy and the takeovers. There are definitely a number of positive aspects of the takeover and there is clearly something that is present for both companies in this takeover process. The two companies are giants in the industry and together the two will be able to achieve a major part of the market share and will be able to reach out to a wider range of customers worldwide. As clearly explained by the Chairman of Cadbury “We believe the offer represents good value for Cadbury shareholders... and will now work with the Kraft Foods' management to ensure the continued success and growth of the business” (BBC News, 2010). The growth strategy and the endless attempts and dedication to work and improve the overall working of the company have become the key strategy that the company adopts to improve the overall brand. Innovation and initiatives are the two basic ideas of strategy that the company adopts. It is also important to note that from the start, the company has worked towards developing products with a difference (Fernandez, 2010). One of the first steps taken by the company and John Cadbury a Quaker was the store that was opened for selling tea, coffee and hot chocolate to provide an alternative for alcohol. The thinking and strategies are completely innovation based. Other ideas include, “Dairy Milk brand introduced in 1905, with Milk Tray coming 10 years later merged with rival confectioner J.S. Fry & Sons in 1919, Merged with Schweppes drinks business in 1969. Its drinks arm was spun off in 2008, Employs about 45,000 people in 60 countries, Cadbury brands include: Dairy Milk, Flake, Crunchie, Chocolate Buttons and Milk Tray” (BBC News, 2010). Also along with the focus of providing excellent products and services, includes the total focus on the corporate social responsibility of the company. As explained by the CEO of Cadbury, Todd Stitzer, “We recognise that if we are serious about tackling climate change, we need to be 'absolutely' committed. This means re-thinking the way we do business, embedding sustainability into every decision we take.  Not only will this have a strong social and environmental impact but also a positive economic impact too in the longer term. However, we realise we cannot minimize the environmental impact of the manufacturing industry alone. We need to work with our people, our peers and partners in our supply chain to reduce the size of our collective carbon footprint - acting as a united force for good” (Cadbury – Purple Goes Green, 2010). Hence it is clear that the company along with working on the growth strategy also has a major focus on the corporate social responsibility. The company has not been only business oriented with no care about the environment it operates within. Hence the combined efforts of growth initiatives and good corporate social responsibility are the basic high level strategies adopted by the company. Strategic Direction Recommendations and Conclusions: Based on the above discussion and after having researched the company, it is clear that there are a number of possible improvements and strategic direction decisions that the company can adopt to be able to gain a better presence in the market and to sustain its brand image even after the takeover. The paper will provide a detailed explanation of the possible objectives that the company can set for itself over the two years and is represented in the balanced scorecard as below (Cadbury FinScoreCard, 2010): Perspective Objectives Measurements Targets 2010 2011 Financial - To succeed financially how to prepare the shareholders * Improve Liquidity Position * Improve the quick ratio to 50% 50% 60% * Shorten the Cash collection Period * The company should reduce the average cash collection period by 20 days 48 days 38 days * Reduce the days spent by the goods in the inventory * The company should reduce the days in inventory by 15 days 43 days 36 days * Optimize the performance so that they are in par with industry standards * Return on Capital Employed should increase to 11% 10% 11% Customer - How to appear to the customers to be able to achieve the vision * The company needs to be able to cater to the needs of the customers even after the takeover, i.e. Customer Retention * Use of different measurements like the Customer Retention % will prove to be helpful 75% 75% * Continued Customer Service * This can be measured using the survey data and information 85% 88% * Customer Experience and Relations * Percentage of customers visiting the Cadbury Chocolate World Increase by 10% Increase by 25% Internal Processes - The business processes that need to be improved to satisfy the shareholders *Excellent Quality of Products and Services * No Negative feedbacks and complaints 90% 92% * Optimal Costs and better overall quality. The company needs to concentrate on ensuring that the customers receive the best quality however need to be based on the optimal costs * This can be got by the percentage of sales. The measurement will be most useful and accurate as the impact of the quality has a direct impact on the sales of the firm as well. Hence this will help ensure that the sales are in line with the n 66% 70% * Resource Utilization * Productivity Indicator and overall performance of the employees 77% 80% Learning and Growth - How to sustain the changes and achieve the vision based on the change and improvements * The company can incorporate the better learning and training processes to meet the requirements along with the Kraft Company * Cadbury can work along with Kraft to ensure the employees’ performance is improved. The measurement will be the number of skilled employees, removal of unnecessary positions and improvement of the job description and job roles Improved percentage of 50% Improved percentage of 60% * Performance appraisal process * Increased productivity and staff morale Efficiency levels by 10% Efficiency levels by 15% Bibliography BBC News, 2010, ‘Cadbury agrees Kraft takeover bid’, 19th January 2010, Accessed on 27th May 2010, Retrieved from http://news.bbc.co.uk/2/hi/8467007.stm Brigham, E.F., Ehrhardt, M.C., 2010, ‘Financial Management: Theory & Practice’, South-Western College Pub Brigham, E.F., Houston, J.F., 2009, ‘Fundamentals of Financial Management’, 6th February 2009, South-Western College Pub Bringham, E.F., 2008, ‘Financial Management: Theory and Practice 12th Edition’, South Western College Burke, L. and Wilks, C., 2007, Management Accounting – Decision Management, 4th edn, CIMA Publishing Cadbury – Purple Goes Green, 2010, ‘Purple Goes Green’, Accessed on 27th May 2010, Retrieved from http://www.cadbury.com/ourresponsibilities/purplegoesgreen/Pages/PurpleGoesGreen.aspx Cadbury CSR, 2010, ‘CSR vision and strategy’, Accessed on 23rd May 2010, Retrieved from http://www.cadbury.com/ourresponsibilities/overview/Pages/csrvisionandstrategy.aspx Cadbury FinScoreCard, 2010, ‘Our Financial Scorecard’, Accessed on 24th May 2010, Retrieved from http://www.cadburyinvestors.com/cadbury_ir/siteware/inc_vision/scorecard/ Cadbury Report, 2009, ‘Cadbury Reports Record 2008 Results Strong Growth in Sales, Margins and Earnings’, Accessed on 25th May 2010, 25th February 2009, Retrieved from http://www.cadburyinvestors.com/cadbury_ir/press_releases/2009press/2009-02-25/ Cadbury, 2010, ‘Home’, Accessed on 25th May 2010, Retrieved from http://www.cadbury.co.uk/ CadburyInvestors, 2010, ‘Our Competition’, Accessed on 25th May 2010, Retrieved from http://www.cadburyinvestors.com/cadbury_ir/overview/marketplace/our_competition/ Clark, A., 2010, Chocolate, chewing gum and corner shops: why Kraft can't resist Cadbury, 19th January 2010, Accessed on 21st May 2010, Retrieved from http://www.guardian.co.uk/business/2010/jan/19/kraft-cadbury-reasons-for-deal Connolly, M., 2006, International Business Finance, Routledge Publications, December 2006 Duane D. Stanford and John Helyar, 2010, Hershey May Lose Market Share as Cadbury Slips Away (Update2), 20th January 2010, Accessed on 27th May 2010, Retrieved from http://www.bloomberg.com/apps/news?pid=20601109&sid=a07HPrCdtFFQ Emery, R.D., Finnerty, J.D. and Stowe, J.D., 2007, Corporate Financial Management, 3rd Edition, Prentice Hall 2007 Fernandez, J., 2010, ‘Cadbury loses its strategic clout to Kraft's European HQ’, 28th April 2010, Accessed on 22nd May 2010, Retrieved from http://www.marketingweek.co.uk/news/cadbury-loses-its-strategic-clout-to-krafts-european-hq/3012759.article Infinancials, 2010, ‘Infinancials.com’, Accessed on 23rd May 2010, Retrieved from http://www.infinancials.com/ London Evening, 2010, ‘Kraft to take over Cadbury for £11.5bn’, 19th January 2010, Retrieved from http://www.thisislondon.co.uk/standard-business/article-23796813-kraft-to-take-over-cadbury-for-pound-117bn.do Samuels, J. M., Wilkes, F. M. and Brayshaw, R. E., 2000, Management of Company Finance, 6th edn, Thomson Learning, London Read More