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October 21, 2009

INSIGHT: Cadbury shrugs off sticky volumes

Cadbury, the UK confectionery giant, today (21 October) played down concerns over falling sales volumes after beating revenue forecasts and raising its margin target for 2009.

Cadbury, the UK confectionery giant, today (21 October) played down concerns over falling sales volumes after beating revenue forecasts and raising its margin target for 2009.

Amid a 7% rise in third-quarter revenues and the lifting of its annual forecast on margins, the Creme Egg and Trident gum maker also revealed that sales volumes had dipped 3% in the three months to the end of September.

Cadbury’s turnover beat forecasts, prompting some analysts to cheer an “impressive” performance from the company.

However, not all industry watchers were convinced by the group’s figures. ING senior equity analyst Marco Gulpers and Investec analyst Martin Deboo both questioned the “sustainability” of Cadbury’s pricing strategy – and cited the cut in advertising and promotional spending as a factor in the group’s improved margins.

The company said “price mix benefits” of 10% had driven the 7% rise in sales and revealed that marketing costs as a percentage of revenue had dropped by 80 basis points.

“I think Cadbury is somewhat dressing up the bride and we wonder whether recent performance is sustainable. We believe price/mix is unsustainably high at 10% and further volume impact might be the result,” Gulpers told just-food. “The cutting of A&P to sales for full-year of circa 60 basis points makes the margin uplift less exciting in our view.”

Cadbury’s shares, after rising in early trading, were broadly flat this afternoon, inching up 0.06% on the day to 799p at 16:11 BST.

Deboo agreed that Cadbury’s improved full-year guidance was “attributable to a marketing saving ahead of our expectations and … a substantial price/mix component”.

“It feels to us like the pure price component will be substantial. If this proves to be the case, it will continue to stimulate questions about the sustainability of Cadbury’s pricing strategy,” Deboo said.

“For Cadbury to maintain their independence, they are going to need to convince the market that their improved full-year 2009 earnings momentum is more than just a flash in the pan and is indicative of what can be delivered in full-year 2010 earnings and beyond. For us the critical question remains the sustainability of the price/volume/A&P equation.”

However, Cadbury CEO Todd Stitzer and CFO Andrew Bonfield said the company’s fall in volumes could be explained to how volumes were measured and to moves to cut the number of lines the group makes.

“Just to be clear on the volume point, our volume declines partially reflect the impact of higher prices, and partially the impact of innovation-driven size reductions and SKU rationalisation,” Stitzer said. “The real volume decline is not that significant in our view.”

Bonfield said Cadbury’s measurement of volumes on a “pure tonnage basis” has an impact on “reported volumes”.

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