Dear EconPals,
Later than expected, but here:
1. Read the article below
2. Recap what you learnt from Thursday's lesson
3. Write a press release from Cadbury workers explaining why they are opposed to the merger. This should explain their viewpoint and be written using key terms and linkages
The press release should be approximately HALF A SIDE. Yes, you read right : half a side, that's a massive reduction - from one and a half sides to half a side! Oh My OMGS!
It is likely that you are now thinking "Mr Jeffery is an outstanding teacher."....... HOLD ONTO THAT THOUGHT until Thursday 13th January 11.40pm.
The article:
On Monday September 7th 2009 Kraft announced that it wanted to buy Cadbury. It offered 300p in cash plus Kraft shares to value each Cadbury share at 745p. As the shares had traded at 568p the previous Friday, this was offering Cadbury shareholders a quick, fat (30+%) profit. It could mean the end of the 150 years of independence of one of Britain’s favourite companies.
Kraft Foods is the world’s second biggest food company, having built up a huge portfolio of brands – largely by buying up other companies. Its biggest shareholder is the world’s most successful investor, the American multi-billionaire Warren Buffet. It started up in America over 100 years ago and quickly became known nationally for its cheese. Later it bought huge businesses such as Nabisco and Suchard (chocolate). Among its global brands are Maxwell House coffee, DairyLea cheese, Toblerone chocolate, Ritz crackers, Capri-Sun and Oreo cookies.
Why did Kraft want Cadbury?
Part of the answer can be seen at a glance in the graph. Kraft is massive, but has been struggling to achieve the profit performance expected from an owner of big brands. When you look into its brand portfolio, it is clear that there are plenty of reliable old brands, but very few bright new prospects. Within Cadbury there are also many long-established brands, but its chewing gum business (Trident) is regarded as having huge worldwide growth potential. Cadbury’s – like Kraft itself – has strong global brands. Trident gum is huge in South America – and Cadbury’s Dairy Milk is probably the world’s most widely-sold brand. Both Trident and Cadbury’s Dairy Milk use the same branding and logos worldwide.
The biggest single reason is even more strategic, though. Kraft generates nearly 80% of its profit in America. The biggest areas for future growth will be China, India plus other developing countries – yet Kraft is stuck at home. Cadbury, by contrast, generates only 30% of its income in Britain. In India, for example, Cadbury is a major brand. The company believes the market for chocolate in India could grow fivefold in the next few years. In the first half of 2009, 69% of Cadbury’s sales growth came from ‘emerging markets’. Kraft wants this global growth potential. Kraft/Cadbury will have strong positions in the confectionery markets of all the ‘BRIC’ economies – Brazil, Russia, India and China.
Kraft buying Cadbury will make it match Mars/Wrigley as the world’s biggest confectionery business. But Kraft is so big that the arrival of Cadbury will leave 80% of the Kraft business unaffected. The Directors will have to find more new ideas to solve its corporate problems.
Is the takeover a good idea?
For Cadbury shareholders the attractions were clear. On September 4th their shares were worth 568p each. After the September 7th announcement the shares shot up to 780p. Eventually a takeover was agreed in January 2010 at an effective price of 840p per share (500p in cash). Cadbury shareholders have much to thank Kraft for.
Most Cadbury staff saw things differently. They were strongly against a bid from a company with a very different background from Cadbury’s long history of ethical business. (Cadbury set up cocoa production in Ghana to avoid slave workers in the Ivory Coast and recently became the first major chocolate brand to be 100% Fairtrade.) Yet not all workers agreed. In recent years Cadbury has upset its staff by closing UK factories and re-opening in Poland. There was also a dispute early in 2009 about pay – with Cadbury wanting to hold staff to a below-average pay rise. With Kraft claiming that the takeover is about growth – some Cadbury staff are open-minded about their new owners.
For customers the downside seems relatively small. Kraft has 4.5% of the world market for confectionery; Cadbury holds 10.3%. Together they will match Mars with 14.8% to become joint world leaders. Yet these market share figures are relatively low. In specific countries the position is different. In Britain Cadbury’s alone has close to 33% of the chocolate market, so Kraft’s additional 5% could raise concerns about monopoly power.
Conclusion
Takeover bids are often used by firms that feel they can’t break out from their current position. Buying a business with such strong brands as Cadbury must seem an obvious move to Kraft and its shareholders. Yet, with amazing regularity, takeovers turn out to be a disappointment. This is usually because the workplace cultures that have grown up within each business cannot easily work together. A big American food group is to buy a more entrepreneurial British chocolate company. There are many reasons why this might prove a bit of a flop. The theory of business strategy often proves easier than the practice of managing people effectively.
