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Kraft: Competition heating up? - Views on News from Equitymaster
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  • Sep 10, 2009

    Kraft: Competition heating up?

    We all are familiar with Cadbury through their Dairy Milk, Perk and five star chocolates and Bournvita. However, many of us may not be familiar with Kraft Foods (Kraft). Kraft headquartered in US and founded in 1903 by James L. Kraft is the world's second largest processed foods company after Nestle. The company has a portfolio of biscuits, milk products, ready-to-drink beverages and snacks foods. Kraft Foods has a proven track record of successfully completing and integrating strategic combinations to build iconic brands and multi-national businesses, including the acquisitions of Danone's biscuit business in 2007 and Nabisco in 2000. In 2008, Warren Buffet acquired an 8% stake in this company.

    Cadbury bid
    Recently, Kraft bid for Cadbury at GBP10 bn which translates to 745 pence per share. The bid was rejected by Cadbury's as it felt that Kraft had not valued the company sufficiently. However, the market believes that Cadbury would be a great fit for Kraft as this acquisition would add more high-margin products, such as chocolate and chewing gum, to its portfolio. The market also believes that at the right price, shareholders of Kraft will benefit from this acquisition for many years. At this point, there are rumours of Hershey and Nestle are putting up a joint bid for Cadbury while Kraft is working on its follow-up bid. The market believes that the fair price should be closer to 850 pence per share.

    What does a possible takeover of Cadbury by Kraft mean for India?
    Kraft has stated that one of the reasons for this acquisition is to have scale in developed markets like India. Naturally, it can be argued that a new entrant will find it easy to capture market share in India by riding on the modern retail band wagon. However, in our opinion this may not be a cake walk. Modern retail makes up only 10% of the market as of now and is already very competitive with a large number of players vying for shelf space. The market for biscuits is rules by Britannia, Parle and ITC, for milk products Amul and Nestle, snack food by Pepsi and Haldiram, ready-to-drink beverages by HUL, Pepsi, Coke, Tata Tea and Nestle with a number of local players also present in all these categories. While the strategy of the company would be to piggy ride on Cadbury's distribution network, it will have to invest heavily to make any sort of dent in the market. We have witnessed in the recent past the kind of investments ITC had to make when it launched Sunfeast biscuits in spite of being an established player in India. While it is wrong to assume that Kraft will not be able to establish itself in India, as it has deep pockets and has shown the ability to establish itself in new markets using innovative promotion, we for now would like to follow the bidding war which promises to heat up.



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    2 Responses to "Kraft: Competition heating up?"

    niraj kumar

    Sep 16, 2009

    company should enter in the indian market with acquisition policy which wii give to upper hand to start the buisness in INDIA.come up with the core product and which is also use frequently in india.use also aggresive advertisement policy.



    Sep 10, 2009

    They may look at Agrotech foods with just a market cap of 500 crore..Kraft can easily acquire shares in the company

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