Cadbury on track to deliver confectionery growth

Related tags Cadbury Cadbury plc Cadbury adams Cadbury schweppes

Cadbury Schweppes is well on the way to delivering growth at its
European confectionery unit, despite an increasingly gloomy outlook
for the packaged food sector as a whole, according to investment
bank Goldman Sachs.

Cadbury recently embarked upon a four-year restructuring programme, partly a result of the acquisition of the Adams sugar confectionery business in 2002, and investors were this week treated to an update on the progress the company has made over the last 12 months.

The company focused in particular on the confectionery operations in Europe, Middle East and Africa (EMEA), which account for 33 per cent of total sales and, according to GS analyst Mark Lynch, the prognosis was good.

So far, Cadbury has completed the separation of its supply chain operations from the marketing units in the EMEA region, reduced the number of commercial units from 34 to 36, fully integrated Adams and closed or announced the closure of, eight factories - all of which puts it well on track to deliver £100 million in cost savings from the region by 2007.

But while these achievements were "pleasing"​, Lynch said that better opportunities for growth were likely as a result of Cadbury's ongoing commitment to innovation.

"It is our belief that the most successful companies in the food industry are those that are good at innovation,"​ the analyst said in a briefing. "Cadbury leads across 18 of the potential 60 confectionery country categories in the EMEA region; in comparison, the nearest competitor, Wrigley, leads in eight markets."

This increasingly strong position had been helped by a change to the company's approach to product innovation, GS said.

For example, Cadbury is now expecting 15 per cent of group sales to come from new products and other "innovation activity"​ delivered to the market over the last three years; by the end of the current year, this figure should be near 10 per cent, Cadbury said.

Innovation is also playing a much more central role in the day-to-day running of the company, with a new leadership focusing solely on NPD. New products - which often sell at a premium to established brands - can also help improve the product/price mix, of particular importance in today's deflationary environment.

The success of innovative products already launched on the market was also highlighted: for example, new product development in the gum market helped Cadbury recapture market share lost to Wrigley in France and Spain.

Despite the increasing levels of innovation, Cadbury is also keen to focus on a select number of brands - Masterbrands, as it calls them. Lynch was slightly wary of this approach - after all, he pointed out, it had failed to work for Unilever, whose Path to Growth programme had been a major disappointment - but stressed that it was different enough from Unilever's approach to be more likely of success.

These Masterbrands, such as Dairy Milk, Maynards, Bassets, Trebor and Halls (which together account for 60 per cent of UK turnover), also include Cadbury itself, which is increasingly being used as an umbrella brand for a variety of products, particularly ones which target different consumption occasions. "If the strategy can provide brand leverage and is backed up by innovation, we believe the approach could be successful,"​ Lynch said.

There is one dark cloud on the horizon, however: the tough trading conditions currently affecting the European food sector. Lynch said that Cadbury had admitted that times were hard, with margins under pressure from the rising power of the discount chains and the trend towards lower pricing at mainstream retailers, but that it had also stressed that confectionery prices had remained buoyant compared to many other food products.

The low penetration of own label in the confectionery sector, and the fact that more than half of all UK confectionery sales come from outside the multiple grocery channel, have helped protect Cadbury and other sweet makers from many of these factors, allowing them to maintain prices. Premium products such functional confectionery in particular have performed well, the company said.

"The acquisition of Adams, combined with the restructuring of the European confectionery and US beverage operations, was a strategic win for the company,"​ said Lynch. "These moves should help Cadbury perform well against its peers in the increasingly tough trading conditions that we are currently seeing."

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