Elliot Wilson says there are synergies between the takeover protagonists — but it will be sad to see the British chocolate maker swallowed by a bloated US conglomerate
When consumer goods giant Kraft tabled a £10.2 billion bid for Cadbury two weeks ago, the outcry was immediate and heartfelt. Here was an American monster buying an iconic British household name, one of our very last independent, home-grown, corporate crown jewels.
Some of the resentment was understandable. Cadbury’s heritage is part of our national psyche. Founded 185 years ago by John Cadbury, a Quaker tea-and-coffee trader, the firm’s aims were as much to do with social improvement as with profit. Moreover, Cadbury seemed to be a great survivor. Britain has long shed the last of its major indigenous carmakers and seen other business titans such as BT reduced to a shadow of their former selves. Cadbury rose above the industrial turmoil of the 1970s, and rode out the mergers-and-acquisitions boom of the past two decades. Unflappable, apparently untouchable, it just carried on making everything from Dairy Milk chocolate bars to Bassett’s Jelly Babies.
Then came Kraft, America’s largest food-and-drinks firm with $42 billion in annual sales and the financial backing of Citigroup and Deutsche Bank. The hostile nature of the bid took the British public by surprise, but raised few eyebrows in the City. Most bankers in London had been expecting something like this either from Kraft or from Hershey, America’s largest confectioner, ever since what was then Cadbury Schweppes spun off its soft drinks division in 2008. That process made a renamed Cadbury plc more streamlined — and more attractive as a bid target for anyone with enough finance in hand.
Cadbury’s reaction was rapid and well rehearsed. On 9 November, chairman Roger Carr rejected Kraft’s ‘derisory’ offer, adding that it did not ‘come close’ to reflecting true value, especially since Cadbury’s fortunes were waxing even while Kraft’s were waning. The US firm had just rolled out surprisingly weak third-quarter results. New York investors fled the stock, cutting the value of Kraft’s equity-heavy Cadbury bid to £9.8 billion.
Cadbury even dipped into its own gene pool in an attempt to discredit the takeover. One of the firm’s loudest defenders has been the interior decorator Felicity Loudon, granddaughter of Sir Egbert Cadbury, who ran the business in the 1950s. Ms Loudon, aghast at the thought of the family heirloom falling into the hands of what she imperiously refers to as ‘an American plastic cheese company’, plays the trump card of corporate nationalism. In one widely disseminated quote, she queried why the Kraft bid could not be dismissed ‘for totally patriotic reasons’. In another, she registered her disgust that Cadbury might wind up being owned by a firm that ‘makes something you put on your hamburger’.
Yet look more closely at both companies — Cadbury in its model village of Bourneville on the edge of Birmingham, Kraft in Chicago’s northern suburbs — and you see more than a few similarities. To be sure, Cadbury has long been viewed as a mainstay of UK plc. But the globalisation of investment has muddied its true ownership, just as it has with other British multinationals such as Vodafone and GlaxoSmithKline. Fully 40 per cent of Cadbury’s shares are owned by investors on the other side of the Atlantic. One of them is Nelson Peltz, a US billionaire and corporate activist who controls 3 per cent each of both Cadbury and Kraft. Even Cadbury’s chief executive, Todd Stitzer, a naturalised British citizen, is an all-American boy by birth, trained at Harvard Law School before he joined Cadbury North America in 1983.
Ms Loudon’s dismissal of Kraft as a maker of plastic cheese is accurate — it patented processed cheese in 1915, and still makes Dairylea and Philadelphia — but disingenuous. By implication, Kraft is a lesser firm because it churns out mass-market and nutritionally dubious products. This may indeed be true, yet Cadbury cannot claim to be distinctively upmarket — or, these days, Quakerishly high-minded in its business approach. The very urge to avoid takeover has forced Cadbury in recent years to adopt a series of new guises.
In 1969, the firm merged with Schweppes to built a beverage empire that included US brand icons Dr Pepper and Snapple before the division was demerged last year. In 2003, Cadbury bought Adams chewing gum, also in the US, for £2.5 billion. Later it shed its European division for £1.65 billion to a consortium headed by the private equity firm Blackstone.
To be sure, Kraft churns out billions of units of Ritz crackers, Oscar Mayer hot dogs, and Oreo biscuits — cheap staples of every American larder. Yet it is no upstart. Its roots stretch back to 1903, when Canadian entrepreneur James L. Kraft founded his cheese business in Chicago. For its part, Cadbury is hardly upholding its Quaker traditions by rolling out new versions of Dentyne, Trident or Bubblicious — chewing-gum brands that now constitute a huge wad of the firm’s £5.4 billion annual sales. And if we’re talking nutrition, let’s not forget that quintessential product of the 1970s, Cadbury’s Smash, an instant mashed potato that was later sold to Premier Foods.
Cadbury’s image has also taken a pummelling over its decision to dispense with several British plants, notably the Somerdale chocolate factory near Bristol. Some 500 jobs will be lost there next year when production shifts to Poland — part of Stitzer’s ‘Vision into Action’ plan, formed in 2007 with the aim of boosting organic revenue growth and operating margins. Yet the ever-quotable Ms Loudon declares that Cadbury remains an example of ‘caring employers looking after their loyal workforce’.
Spotting a way to cosy up to Cadbury shareholders and the British media, Kraft announced it would cancel the closure of Somerdale, and even ramp up production there. Few, however, were convinced by Kraft’s sudden benevolence, and with good reason. When Kraft, in 1993, bought another iconic British confectioner, Terry’s, maker of the Chocolate Orange, it promised not to abandon the firm’s landmark York headquarters, which had been in continual operation since 1767. Yet by 2005 the building had been sold to developers, with production shifted to low-cost facilities in, inevitably, Poland.
Indeed it would be naive to harbour any great expectation for Kraft’s future strategy. Rob Frankel, a California-based branding expert and author of The Revenge of Brand X, sees Kraft merely as a maker of ‘mediocre merchandise for mass consumption’, and counsels any company, anywhere, to be wary of a US-led takeover. ‘American managers usually destroy rather than improve any foreign brand they acquire,’ he says. ‘Most US firms also have a total disregard for any manners, customers, relationships — everything that has been created to build up that foreign brand’s relationship with the customer.’
Frankel also stresses that Kraft’s interest in its British prey is more about distribution networks than product lines. In other words, Kraft sees Cadbury less as a thriving marque with a venerable history that can be sustained and developed, and more as a conduit through which to pipe Kraft brands into new markets. ‘When you look at a company the size of Kraft, all that matters is distribution. The company’s management will say that it’s all about the products, but in reality it’s all about who controls space on the grocery shelf, the hardest-fought area of real estate anywhere in the world.’
Cultural issues aside, few observers have voiced financial concerns about the takeover. Kraft is borrowing heavily to finance it &
#8212; perhaps worrisome for a firm already $19 billion in debt and riding perilously close to its investment-grade corporate rating — but the fit with Cadbury, at least in a global sense, could hardly be better.
Kraft is a giant American firm with a small but growing presence in continental Europe and China. Outside the UK and Ireland, Cadbury in turn is strongest in former British territories — in Africa, Australasia and India. Kraft is particularly desperate to tap into the fast-growing Indian market for cheap-and-cheerful consumer goods.
‘If you took a blank sheet of paper and asked which two fast-moving consumer-goods companies would make the best global fit, at any level, you would choose Cadbury and Kraft,’ says Martin Dolan, a consumer analyst at UK brokerage Execution Limited. Ultimately, any cultural squeamishness over the sale of a flagship company is almost always trumped by financial heft. Take another York-based confectionery firm, Rowntree Mackintosh, which was absorbed by Nestlé of Switzerland in 1988. Or for that matter, the sale in 2008 of Anheuser-Busch, US owner of the iconic Budweiser brand, to the Belgian-Brazilian brewing giant InBev.
The best that Cadbury — a firm one quarter the size of Kraft — can do is to play hardball on price, and hope that shares in the US firm, which will struggle to increase the cash portion of its offer, continue to slide. ‘Cadbury needs to get on the front foot aggressively,’ says Dolan. ‘Between now and January, Cadbury will have to come up with a very strong defence document. I think they want to retain their independence, but it’s doubtful if they can succeed.’ If not, early next year, two centuries of Bourneville tradition will be placed in the hands of a plodding American conglomerate that made history by inventing processed cheese and sending fizzy drinks to the Moon in Apollo 11.
At some level, you can’t but feel a pang of fear for one of Britain’s most venerable corporate brands. Kraft may propel Cadbury upward, using its own distribution networks in the Americas and East Asia to bring Liquorice Allsorts to a new global audience. But most likely Cadbury will end up emasculated and forgotten, as Kraft reduces the British firm to its own cultural level. Rob Frankel, the American branding expert, concludes: ‘US managers usually just want to acquire a foreign channel so that they can continue doing business the way they’ve always done it. When you couple that with the average American manager’s almost total lack of brand awareness or intuition — well, it doesn’t bode very well at all.’