Strategic Management in Cadbury Plc - Research Paper Example

CADBURY PLC: A STUDY OF STRATEGIC MANAGEMENT Introduction Cadbury Plc is today at the crossroads. Although basically still under the control of the Cadbury family, the company that has survived many challenges through the years, and has aggressively embarked on acquisition strategies in the past. These corporate strategic moves have pushed it to a position of competing with other leading companies in the industry. Mainly because of its good performance amid a turbulent economic environment, it has attracted the attention of other players who want take advantage of its inherent strengths. A hostile takeover bid from a bigger company threatens to upset its own strategic plans. This study will attempt to study the company, particularly its financial situation and performance , the competitive environment it is in, its present business strategy. An attempt will be made to suggest possible strategic moves that the company’s management might find useful to consider. Company background Cadbury PLC (formerly Cadbury Schweppes PLC) was founded by John Cadbury in Birmingham, England, in 1824 to manufacture and distribute cocoa products, as part of retail operations. After years of struggle and transfer of ownership to his brothers, and later to the next generation, by 1866 the cocoa processing method was so improved that the Cadbury brothers were able to market their own lines of chocolate candy and to compete effectively against the French in the British market. After expanding to sites outside of Birmingham, Cadbury in 1881 began to export to Australia, New Zealand, and other countries. The business incorporated as Cadbury Brothers Ltd just before the turn of the century. Cadbury Dairy Milk, the perennial mainstay of the company up to the present, was introduced during the first decade of the twentieth century. Innovations in production technology after World War I enabled the company to reduce cost, efficiently produce its products for the mass market, and to open plants overseas through acquired subsidiaries – in Australia, Canada, South Africa, and India. By 1962, Cadbury controlled more than half of the British market for candy. In January 1969, Cadbury merged with Schweppes, a diversified beverage manufacturer and distributor, with the latter company as the surviving entity. The chairman of the merged business was Wilkinson from Schweppes, while deputy chairman was Adrian Cadbury. Cadbury Schweppes engaged in diversification activities that included alcoholic beverages, with minor successes. In 1974, the Cadbury executive took over the helm of the business and quickly tried to gain a foothold in the lucrative U.S. Market. Through the acquisition of US confectioner, the company was able to obtain a 10 percent share of the US candy market. Cadbury Schweppes continued with its acquisition binge in the 1980s, gaining majority or full control of its franchises in France and Spain; acquiring a General Foods subsidiary in Australia, and ending its franchise contract with PepsiCo in 1985 in order to become the franchisee of its dominant competitor CocaCola in Britain. During that decade the company focused mainly on the US market which was dominated by CocaCola and PepsiCo, where it had a mere 1 percent share of the market. This it did, first by acquiring a domestic manufacturer of carbonated drinks which was selling to the US, and later by buying RJR Nabisco’s Canada Dry and Sunkist businesses to improve its competitive position. This resulted in Cadbury Schweppe increasing its market share to more than 5 percent in the US market. Canada Dry was subsequently sold to CocaCola as part of a scheme, involving two other companies, to acquire another soft drink company, Forstmann Little & Co. After the stockmarket crash in 1987, Cadbury Schweppes became the subject of a potential takeover attempt by a company, General Cinema, because of its strong financial performance in the midst of a the depressed share market. This fact failed to deter the company from continuing with its acquisition moves. It sold its US franchise operations to Hershey to take advantage of the latter’s domestic distribution network and acquired another soft drink company from Procter & Gamble. In 1979, the company decided to refocus on its core businesses buy spinning off its domestic beverage and foods division and concentrating on the confectionary business, with emphasis on improving its market share in the US. This strategy was designed to achieve leadership in some foreign markets through either acquisitions or joint ventures. . Cadbury Schweppes has presence in many foreign markets but had not yet so far achieved dominance in any one of them. The confectionery industry and competition Both domestic and international marketing requires a study of the demographic profiles and trends, age distribution of target markets, patterns of income distribution, and disposable income, among other variables. Also, large companies are able to obtain better production efficiency and economies of scale, and they are therefore able to offer lower prices to consumers, or they can offer product differentiation that can raise brand value and higher prices that consumers are willing to accept. A wide and efficient distribution network will help improve sales considerably, and companies that have entered a specific market early has an advantage. New entrants can usually make use of established distribution networks through joint ventures or mergers with the local companies. The global confectionery industry is dominated by four multinationals: Nestle S.A., Mars, Inc., and Wm Wrigleys Jr. Company. Before the split-off Cadbury Schweppes, the company competed in the beverage against giants CocaCola Co. and PepsiCo, as well as Mars, Inc. The decision to focus on confectionery has altered the competitive environment for Cadbury Plc. Cadbury has 10 percent share in the world candy market, making it the leading confectionary business in the world. Recently, however, with the merger of Mars Inc. and Wrigleys, the combined company may have challenged that leadership. Cadbury is sworn to put up a good fight to ensure that it can regain and maintain the lead. On the chewing gum side of the business, it is second to Wrigleys, through its offering of well-known product line which includes Bubbas, Clorets, and Trident. If the takeover/merger plan of Kraft succeeds, the competitive environment for Cadbury will be radically altered. The outcome on the business side would depend on the kinds and extent of synergy that would result from the combination of the two companies. The corporate and business strategies of Cadbury will have to set aside because of the massive change in both the internal and external environments. Financial analysis a) Ratio analysis For the purpose of this study, we have obtained and analyzed the company’s financial data derived from the Reuters website and computed for the period of 3 years from 2006 to 2008, which should give a fair picture of its financial policies and practices. Five categories of ratio analysis were used, ratios that pertain to liquidity, solvency, activity (or efficiency) . profitability, and the market. The table below shows the relevant ratios: Table 1 FINANCIAL RATIOS – CADBURY PLC Ratio Formula 2008 2007 2006 I. PROFITABILITY RATIOS Return on total assets Profits after taxes/Total assets 4.3 3.6 11.4 Return on net worth Profits after taxes/Net worth 17.3 9.7 31.7 Operating profit margin Net profit before interest and taxes/ Sales 7.2 5.9 12.2 Net profit margin Profits after taxes/ Sales 6.7 8.6 15.7 II. LIQUIDITY RATIOS Current ratio Current assets/ Current liabilities 0.77 0.56 0.71 Quick (acid-test) ratio Current assets net of inventory/ Current liabilities 0.55 0.39 0.5 III. LEVERAGE RATIOS Debt to assets Total debt/ Total assets 0.6 0.63 0.64 Debt to equity Total debt/ Total net worth 0.5 0.58 0.56 Long-term debt to equity Long-term debt/Total net worth 0.56 0.53 0.29 Times interest earned Profit before interest & taxes/ Total interest charges 2.58x 3.78x 6.4x IV. ACTIVITY RATIOS Inventory turnover Sales/ Inventory of finished goods 7.01 5.7 10.2 Fixed asset turnover Sales/ Fixed assets 3.05 2.47 4.46 Total assets turnover Sales/ Total assets 0.61 0.41 0.73 Accounts receivable turnover Sales/ Accounts receivable 4.89 4.29 4.14 Average collection period Accounts receivable/Ave daily sales 74.7 88.3 55 V. MARKET RATIOS Earnings per share Net income/Share price 0.23 0.3 0.88 Price-earnings ratio Share price/ Earnings per share 4.4 3.3 1.14 Dividend payout ratio Dividend per share/EPS 0.16 0.24 0.22 Dividend yield Dividend per share/ Share price 0.69 0.8 0.25 The liquidity ratios. The company’s current assets is way below the benchmark figure of 2:1 during all the years under examination: These were 0.77:1, 0.56: 1, and 0.71:1, respectively, for 2008, 2007, and 2006. All the figures for the three years show current ratios below 1, which indicate negative working capital in the negative territory. This means that the claims of short-term creditors cannot be satisfied by the conversion of current assets into liquid form. The more stringent test of the acid-test ratio reinforces this fact. Leverage ratios. Total liabilities represent about two-thirds of all assets every year during the three-year period. This would normally be a high-risk financing strategy. In terms of capital structure, long-term debt exceeded owner’s equity during the last two years. Because of the high gearing practices of Cadbury Plc, the interest coverage, particularly during the last year, shows a high level of interest rate payments relative to net income. Activity ratios. The activity ratios indicate how efficient the company’s management has been in managing the assets of the business. The level of accounts receivable has been high in all years, with the average collection period registering at 70 days or over on the average. An improvement of collection efficiency is apparently needed, so that more cash can be made available to finance operations. The turnover ratios also show relatively low figures. This should indicate the need to generate higher sales volumes and low inventory, perhaps by considering the application of the just-in-time (JIT) system used some modern companies. Profitability ratios. The return on stockholders’ equity shows variability, but 17.3 percent return in 2008 is remarkable because of the onset of the global recession during that year. The high return of 31.7 percent in 2006 is due to extraordinary income arising from the discontinuance of operations of some of its businesses. The net profit margin, a ratio based on the revenue figures, shows relatively good and stable profit performance. Market ratios. The company shows a reliable and steady record of paying dividends out of its earnings. This should be reflected in a relatively high prices of the company’s stock. The company’s strategic plan The world confectionery market is huge, estimated at $150 billion and steadily growing at 5 percent. The market is brand-led and impulse driven. As one of the world’s biggest, Cadbury operates in over 60 countries, has over 10 percent overall market share, and a broad market penetration in emerging markets where its growth in the past 5 years has been 12 percent. leadership positions in nearly half of the world’s largest markets. Goal for emerging markets is double digit annual growth. An integrated confectionery model and an outstanding portfolio of brands, plus a clear strategy would, the management believes, enable the company to outstrip competition. The long-term strategic goal is to be the world’s biggest and best confectionery company. Reliance on brand loyalty, a high level of impulse sales and limited private label penetration mean that confectionery is also a profitable market for companies, such as Cadbury, with strong brands and effective routes to market, .and geographic exposure in the highest return areas and reducing the complexity which is evident in many parts of our business. The company also ;banks on its history of resilience in economic downturns and on a “strong balance sheet and secure financing. The company’s business model is strongly cash generative, and returning partt of that cash to its shareholders is an important part of our long-term strategy. The company will continue to recycle capital from low-growth and non-core businesses into organic investment and acquisitions with a greater potential for higher growth and returns as appropriate The “Vision into Action” strategy is a cost-reduction strategy that would enable the company to achieve a mid-teen return on revenues by 2011. This involved restructuring and examining the supply chain particularly, and it will cause a closure of some manufacturing sites and employees worldwide The company is confident that it can deliver a superior performance, supported by clear opportunities for the following reasons: - the global confectionery category has been growing solidly; - the strength and breadth of the company’s market positions, across different geographies and categories help it to capture growth and deliver high returns; - the unexploited potential of the business is significant; and - the company has the strategy and management to deliver against its plans. Cadbury and its present environment In Septermber 2009 Kraft Foods offered to buy Cadbury for GBP 10 billion in a hostile takeover bid. Subsequently, the European Commission gave clearance to Kraft Foods to proceed with the proposed takeover of Cadbury, on condition that Cadbury’s Polish and Romanian chocolate businesses be sold. It would ensure that no anti-trust rule is violated. According to Dow Jones news, Kraft was preparing to increase the cash component of its offer as a sweetener, without however increasing the total offer amount. This cash would be derived from the sale of Kraft’s US and Canadian pizza business to Nestle S.A. The latter company has not expressed intention nto participate in the takeover bid. The offer to Cadbury shareholders to tender their shares to Kraft would be open from January 5, 2010 to February 2, 2010. Possible resistance to lthe Kraft bid from workers and UK lawmakers would be based on the projection that it would result in job losses and pay cuts as Kraft would likely try to meet its obligations for massive borrowings needed to finance the takeover. Cadbury was expected to reject the offer, calling it “derisory.” Nestle’s decision not to get involved was based on its confidence that even with the possible combination of Kraft and Cadbury, it would still be able to dominate the market, considering its large size. It would , however, be open to considering smaller deals. Cadbury has publicly rejected Kraft’s advances on a series of occasions. Cadbury will publish the first of its response documents to the proposed Kraft Foods containing more detailed financial information on the company’s performance in 2009. This would give shareholders better information on how to react to Kraft’s bid. Last early part of December 2009, Cadbury and Hershey held talks about a possible friendly bid that would be recommended by its board. The Hershey Trust, the controlling stockholder, has pushed for a rival bid that would be offer better terms than kraft’s. Also, Italian chocolate maker Ferrero SpA had expressed interest. Demerger of Americas Beverages On May 8, 2008, the Cadbury Shweppes demerger was finalized after 14 months after the announcement of the demerger plan. The split-off meant that the confectionary unit would be separated and assumed by Cadbury Plc, whereas the beverage unit would be handled by the Dr Pepper Snapple Group. The separation of the two businesses would, to quote CEO Todd Stitzer, “enable two outstanding management teams to focus on generating further revenue growth, increasing margin, and enhancing returns for their respective shareowners. The Balanced Scorecard The Balanced Scorecard (BSC) was developed in 1992 as a performance management that differs from other performance measurement systems in that it considers both financial and non-financial measures that are linked to the critical success factors of the firm. It helps management to focus on all - and not just some -- critical success factors. It also keeps short-term operating performance in alignment with the long-term business strategy. Performance is measured along several perspectives, namely, a financial perspective, a customer perspective, an internal business process perspective, and a learning and growth perspective and thus enables one to capture both the lagging and leading performance indicators, which can yield a more balanced view of company performance. The diagram below illustrates the BSC. While this illustration contains complex elements, we may use the general categories for the purpose of applying the concept to the Cadbury situation. Firstly, the company considers the customer perspective in formulating its strategy through continuous improvement of quality and in its distribution networks. It has invested considerable amounts for improving the brand image of its confectionery products. The internal business perspective is demonstrated by its operational efficiencies and incentives to enhance worker performance. Innovation and learning are essential for any company that wants to survive and prevail in an extremely competitive environment. The financial perspective is proven by the profitable results year after year, and the use of gearing (leverage) to improve profitability. Where the after-tax cost of debt is lower than the expected returns on the shareholders’ investments, the high gearing ratio can be justified, provided that the company is not vulnerable to both unique and systemic risks. The confectionery industry is relatively immune to such risks, assuming good management. Conclusion Cadbury Plc believes that it can continue to implement its business model and strategic plan in the midst the economic crisis. This no doubt due to the fact that the confectionery business is an impulse-led, brand-driven low consumer-budget market which is not affected by the business cycles. In fact, confectioneries may be conceivably immune to economic recession or depression because people consume candies, gums, and chocolates whether they are happy or sad. The demand can therefore be regarded as relatively inelastic. The claim of the management that the company has a strong balance sheet is refuted by the financial reports. High leveraging can, however, be forgiven if the company has stable markets, has good management, and not sbject to systemic risks. One would be hard put to recommend strategy changes to a company that has demonstrated competence in negotiating deals and in promoting its markets. Our recommendation would therefore be for the management to resist vigorously the hostile takeover bid of Kraft or any other company so that it can implement its vision for the next 10 years or so. This can be done by effectively educating its shareholders on the disadvantages of the proposed merger. It would also be a good idea for the company to justify its risky balance sheet and to take appropriate steps to improve it. Bibliography Financial statements, Cadbury Plc. Viewed 7 January 2010 http://uk.reuters.com/business/quotes/incomeStatement?stmtType=BAL&perType=ANN&symbol=CBRY.L Brealey, RA, Myers, SC, Marcus, AJ. 1999 Fundamentals of Corporate Finance (2nd ed.). Hill, CWL & Jones, GR 2004, Strategic management: An integrated approach, 6th edn., Houghton Mifflin Co., Boston, MA Thompson Jr., AA & Strickland III, AJ 2001, Crafting and executing strategy, 12th edn., McGraw Hill Irwin, NY Articles on Kraft’s takeover bid. Viewed 10 January 2010 http://www.ausfoodnews.com.au/2010/01/11/nestle-confident-its-confectionery-business-could-compete-with-a-cadbury-kraft-combo.html http://www.just-food.com/article.aspx?id=109346&lk=s http://www.ausfoodnews.com.au/2008/05/08/cadbury-schweppes-completes-demerger.html Read More