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June 19, 2007

Cadbury hopes confectionery focus will sweeten business

As bleak as the idea of axing 15% of a company’s workforce might appear, this morning’s announcement of a major restructuring at Cadbury Schweppes could ultimately be good news for its presence in the global confectionery market. Dean Best reports.

As bleak as the idea of axing 15% of a company’s workforce might appear, this morning’s announcement of a major restructuring at Cadbury Schweppes could ultimately be good news for its presence in the global confectionery market. Dean Best reports.

Rumours over Cadbury Schweppes’ plans for its confectionery business had swirled around the industry for months and, despite the speculation, this morning’s (19 June) announcement still raised eyebrows.

Those rumours had abounded ever since Cadbury said in March that it would separate its confectionery business from its drinks operations in the US.

Over the last few days, the talk was that Cadbury, the world’s largest confectioner, would cull around 5,000 jobs, approximately 10% of its workforce as part of a reorganisation to drive growth and boost earnings. However, Cadbury is to cull 15% of its workforce – or about 7,800 jobs – as part of a sweeping cost-cutting drive that it hopes will reshape the business.

The company, which will be renamed Cadbury plc once it sheds the US drinks interests, wants to streamline its supply chain, revive its businesses in certain emerging markets and scale back its huge range of products and line extensions.

CEO Todd Stitzer said Cadbury had a lot of work to do in stripping out costs from the business. “There are many areas where we can and must do better in this regard,” he told reporters in London. “We remain cost-disadvantaged; our margins are below our FMCG peers and are significantly below our confectionery peers.”

The moves, Stitzer and the rest of the Cadbury management hopes, will enable it to focus more resources on its core brands and improve margins as the company concentrates more on driving growth in faster-growing categories and developing markets.

On paper, Cadbury has much to do to overhaul the business, work which will induce a restructuring charge of some GBP450m (US$892.7m). However, with Cadbury hinting that a sale of its US drinks business is “more likely” than a demerger, the company could soon be armed with a war-chest with which to help invest behind its core brands and, significantly, make targeted acquisitions.

Stizer estimated that, as a pure confectionery player, Cadbury would have a war chest of GBP500m-1bn with which to make “bolt-on acquisitions”. Stizer said: “The opportunity is significant; the global confectionery market remains highly fragmented,” adding that the eight largest confectionery groups account for only 50% of global sales.

Industry watchers have speculated that Cadbury could bid for Hershey once it sheds its drinks business. Cadbury made a move for the US confectionery group in 2002 but the bid collapsed.

Stitzer refused to comment directly on Hershey but reiterated that Cadbury would look at smaller acquisition targets. “We are focusing on organic revenue growth, cost reductions and targeted bolt-on acquisitions. It’s a strategy that’s fared us well in the last three years and that’s what we’re going to focus on now.”

Cadbury’s plans comes as Hershey itself goes through something of a transformation. The company has embarked on a streamlining programme that will axe 1,500 jobs and cut its production lines by a third, freeing up more cash, the company hopes, to breathe fresh life into its brands.

Hershey is also looking to reduce its dependency on a stagnant US chocolate market, where sales are growing at only 2% a year. The company has signed deals this year with local groups in India and China to, it hopes, give it access to growing demand for confectionery products.

However, no matter how much work Cadbury has to do and no matter how much it still needs to convince some in the industry that it can thrive as a pure confectionery player, the UK company has an advantage over Hershey and some of its other peers in terms of its international presence.

Emerging markets account for one third of Cadbury’s revenues and, despite its recent problems in markets like Nigeria, it looks to be the best placed among its peers to benefit from its early moves into developing markets.

Even in the last two weeks, Cadbury has demonstrated its hunger to bolster its presence in key categories around the world. Cadbury has bought a gum business in Turkey, has snapped up a confectionery company and has placed a bid to acquire a functional candy business in Japan.

Cadbury’s plans are radical and the company will be hoping it can provide the jump in margins that it and some of its shareholders are hoping for. Those with raised eyebrows today will be watching closely in the months ahead.

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