harvard business case cadbury & schweppes

CAPTURING CONFECTIONERY

CADBURY SCHWEPPES

UNG PAULMBA INSTITUTE

OUTLINE

• Introduction

• SWOT

• PLC

• Porter’s Five Forces Analysis

• BCG Matrix

• Ansoff’s Matrix

• Financial Ratios

• Recommendations

INTRODUCTION

• Formed by a merger in 1969

• Between a chocolate company and a beverage company.

• £4,960 billion of sales in 2001

• Now it wants is to acquire Adams which is positioned in the gum business.

ISSUES

• Should Cadbury Schweppes buy Adams for $ 4 billions?

• Is their strategy sound enough to create value?

• Do they have the necessary experienced manager to success in the integration of Adams?

SWOT (CADBURY SCHWEPPES)

• 3rd largest beverage company in the world

• 4th largest confectionary companies in the world

• Wide range of products sold over 200 countries

• Already own two gums brand : Hollywood & Dandy

• Strong experience in brands’ acquisitions

• Huge manufacturing and bottling plants (98 factories)

SWOT (ADAMS)

• Facilities configured to take advantage of economies of scale

• Strong mind-set: “Think global, act local”

• Pioneer in the sugar-free gums

• Present in more than 70 countries

• The leading gum brand with Trident

• 116 leadership positions in 33 countries

SWOT (CADBURY AND ADAMS)

• Both Cadbury & Adams faced, since 1999, a decrease in their operating margin

• Cadbury has the lowest P/E ratio of this peer group

• Most of Cadbury production facilities are in Europe, Americas, UK.

• Adams’ sugared gums know a deterioration higher than the market's competitors ones

• Adams needed 24 to 36 months to bring innovations developed in R&D to the market

• Factory costs are 4% higher than its competitors

SWOT (CADBURY TO BUY ADAMS)

• Take possession of the large pattern and knowledge of Adams

• Reach the Latin American market thanks to the well implanted Adams products there

• Take control of the sugar free gum market which has an important margin and market growth (7%)

• Geographic and product range are complementary

• Strong cultural fit between the two company

SWOT (CADBURY & ADAMS)

• Both face really strong competitors

• Inherent risk in the acquisition of a company with huge financial targets to justify the price

• Potential risk of failure in the bid (25% chance to win)

• Adams Brazil had gone from a high margin to a break-even operation

• Cadbury might not have anyone to represent Adams

• Bid is overvalued

• If they lose the bid possibility of being destroyed by the leader-to-come

• Capital cost is higher for gums (6-7% of revenue) than for chocolate (3-4%)

PLC CURVE Adams' sugar gum

Adams' free sugar gum

PORTER’S FIVE FORCES (ADAMS)

• RIVALRY AMONG COMPETITION

- Low switching cost

- Wrigley strong leader

- Fragmented market

HIGH PRESSURE


• THREAT OF NEW ENTRANTS

- Necessary knowledge and experience- Expenses in R&D are high- Cost of entry is high ( Production facility cost $120M )- Gum is High margin

MEDIUM PRESSURE

• THREAT OF SUBSTITUTES

- Wide range of product such as candy, chocolate…

- But not real substitute


LOW PRESSURE

• Bargaining power of suppliers

- Sugar is not a standard commodity, difficult to purchase with all the policy (quota…)

- Sugar substitute much easier to purchase


MEDIUM PRESSURE

• Bargaining power of buyers

• Wide range of product

• Consumers have the choice

• Switching cost is non-existent


HIGH PRESSURE

THEREFORE THE PORTER’S FIVE FORCES IS:

MEDIUM PRESSURE

BCG MATRIX (CS)

ANSOFF’S MATRIX

FINANCIAL RATIOS

1997 1998 1999 2000 2001D/E

0.36253164556962

0.257476635514019

0.137957317073171

0.1723044397463

0.459000942507069

0.03

0.08

0.13

0.18

0.23

0.28

0.33

0.38

0.43

0.48

D/E

Axis Title

UK Interest rate

• D/E

D/E increase but below 0.5

Good health company

Leverage increase

• Interest

Interest decrease

Leverage increase

- ROE

ROE Increase

ROE 2001= Net income/Equity= 18%

good return on investment

• ROA

Net income/assets= 7.7%

VALUE CREATED (%OF PURCHASE PRICE)

4.0 4.1 4.2 4.3 4.4 4.50%

5%

10%

15%

20%

25%

30%

35%

40%

45%

39% 36% 33% 29% 27% 24%

Value created

THE BID

Pro• Will catch Wrigley in the gum

segment• Distribution channel

opportunities• Cultural Fit • Good relationship with Pfizer• Adams has the same cost

structure than the typical confectionery company

Con• Lack of experience in C-S

management team• Do not succeed with their

existing brands• Adams products have no

margin improvement• U.S market is declining

RECOMMENDATIONS• Buy Adams for $4 billion

• The strategy is sound but the team leadership may not be enough experienced to succeed in this acquisition.

• Unique opportunity to be a market leader

• Finance the acquisition with debt:

Tax benefit

Lower floatation costs

Gives a posit signal to the market

CS is a strong cash generating business

CS is a healthy company

• Keep innovating

• 17 December 2002 : Cadbury Schweppes became the biggest confectionery business in the world.

• March 2008: Demerger between Schweppes and Cadbury Cost £1,2 billion

• February 2010 : Kraft acquired Cadbury

CADBURY SCHWEPPES SINCE 2002

harvard business case cadbury & schweppes

Documents