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Cadbury: Sweet taste of success - Views on News from Equitymaster
 
 
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  • Oct 13, 2001

    Cadbury: Sweet taste of success

    Cadbury India has come a very long way since 1948 when it first set up shop in India. In fact, in the last decade the company’s sales have grown at a healthy CAGR (compounded growth) of 17% (FY01: Rs 5.7 bn). Net profit growth during the same period has been nearly 26% (FY01: Rs 523 m). However, the real spurt in the company’s performance has come in the last five years.

    The journey...
    (Rs m) FY91 FY95 FY96 FY01
    Sales 1,223 1,449 2,501 5,711
    Net Profit 53 95 197 523
    NPM 4.3% 6.6% 7.9% 9.2%
    It is since FY96 that the company has really grown. In that fiscal Cadbury launched its ‘Kuch Khaas Hai Hum Sabhi Mein’ ad campaign. The campaign aimed to change the Indian consumer mindset for chocolates from merely an impulse item meant for kids to ‘snack food’ for all age groups. This was the first time Cadbury’s chocolate campaign targeted all age groups; consequently, expanding the Indian chocolate market. As a result, sales CAGR growth during this period has been over 31% and net profits have grown at nearly 41%.

    CAGR growth in last decade
    Sales 16.7%
    Net Profit 25.7%
    CAGR growth in last 5 years
    Sales 31.6%
    Net Profit 40.7%

    Though Cadbury India’s growth trajectory would make a lot of investors happy, the good thing is that its management has been proactive and does not seem to be sitting on its past laurels. Realising that urban per capita consumption of chocolates in India is only 0.2 kg per year as compared to 8.7 kg per year in UK, the management has constantly endeavored to expand the Indian chocolate market.

    Post the ‘Kuch Khaas Hai’ campaign, the management think tank decided to elevate Cadbury chocolates from a ‘snack food’ to ‘something sweet’. The company’s ‘Khaane Walon Ko’ campaign in FY99 basically endeavored to take on the traditional sweet marts and convert ‘mithai’ consumers to chocolates. The idea was to appeal to the Indian sweet tooth and gain acceptance as a ‘sweet’ gift during family celebrations and festivals.

    It is this proactive quality of the management that has enabled Cadbury India’s continued dominance of the Indian chocolate market with nearly 70% market share despite the onslaught by several international players like Nestle and Mars. In fact, the Cadbury name has become a synonym for chocolates in India.

    Cadbury has not only proved strong on the advertising front but has also been very agile to the competition’s moves. In fact, when Nestle was slated to enter the chocolate scene in India during the mid-nineties with ‘Kit Kat’, Cadbury preempted the move by launching a similar wafer based chocolate ‘Perk’. It was wise move that took the heat away from its mother brand ‘Cadbury’s Dairy Milk’ (CDM). One must remember that CDM is the largest chocolate brand in India. The brand registered a growth of 20% in the year 2000.

    In its most recent move to expand the market the company has launched a new brand ‘Temptations’ in the premium chocolate segment covering five flavours. With this the company aims to capture an additional 5% share of the overall chocolate market and the brand is expected to account for about 5%-10% of Cadbury’s revenues in the coming years. Among its other initiatives, Cadbury re-launched some of its key brands including ‘Gems’, ‘5 Star’, ‘Nutties’ and ‘Perk’. The company has also introduced smaller and more affordable packs for these brands. The company is driving for topline growth through higher volumes. Cadbury's 'price point strategy' that was aimed at expanding its product reach to the lower income bracket population has paid off well.

    Another major factor that has supported the company’s high growth is its distribution network. In the year 2000, it added 50,000 new outlets taking the total tally to 300,000 outlets. On the operating cost front, its ‘Managing For Value’ program has been successfully implemented. This has helped the company in reducing its raw material, factory and administrative costs resulting in higher profit margins.

    Segment Major Brands Market Share
    Chocolate confectionery Dairy Milk, 5 Star, Perk, Picnic, Nutties, Gems,
    Milk Treat, Temptations, Break, Relish
    70%
    Sugar confectionery Googly, Frutus, Gollum 4%-6%
    Food drinks Bournvita 13%

    This has been the chocolate story. However, Cadbury also derives over 20% of its revenues from the health beverage market through its ‘Bournvita’ brand. Bournvita controls 13% of the Rs 13 bn health beverage market. The market share of the company has more or less been stagnant in this segment. The brand has been relaunched quite a few times in the last decade but to no avail. The management has relaunched Bournvita yet again in a bid to increase its share.

    Another area for Cadbury’s is confectionery. In this segment it has four brands, which include ‘Googly’, ‘Frutus’, ‘Gollum’ and ‘éclairs’. Though ‘éclairs’ is a highly successful brand, Cadbury’s forays into sugar-based confectionery have not been too successful. In the past, the company has had to discontinue its ‘Mocka’ sugar confectionery owing to unviable realisations and response. However, the ‘Googly’ continues to be steady. Cadbury has time and again said that it would improve its presence in the sugar confectionery pie, considering that its parent is No. 4 in the global confectionery market. However, so far the realisations have not appealed to the company. But the management has said recently that it is looking to acquire local brands and then build on them. This seems like a sound strategy considering Cadbury’s past experience with launching new confectionery brand.

    Signs of slowdown?
    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Net Sales 1,071 1,185 10.7% 2,464 2,684 8.9%
    Other Income 4 22 434.1% 21 41 90.6%
    Expenditure 909 1,010 11.2% 2,099 2,258 7.5%
    Operating Profit (EBDIT) 162 175 7.7% 365 426 16.9%
    Operating Profit Margin (%) 15.1% 14.7%   14.8% 15.9%  
    Interest 7 4 -36.8% 15 10 -32.5%
    Depreciation 45 51 14.0% 95 109 14.8%
    Profit before Tax 114 141 23.2% 276 348 26.0%
    Exceptional items 15 7 -51.0% 13 7 -43.5%
    Tax 43 53 23.3% 98 137 39.3%
    Profit after Tax/(Loss) 86 95 10.5% 191 219 14.3%
    Net profit margin (%) 8.0% 8.0%   7.8% 8.1%  
    No. of Shares (eoy) (m) 23.8 35.7   23.8 35.7  
    Earnings per share* 14.5 10.7   16.1 12.2  
    Diluted Earnings per share* 9.6 10.7   10.7 12.2  
    *(annualised)            
    Current P/e ratio   39.0     33.9  

    Despite its exceptional growth record, Cadbury is under pressure owing to the downturn as well as pressure from competition. In 1HFY02, the company’s net sales have gone up by merely 8%. But the positive news is that even then the company's net profit grew by 19% YoY in 1HFY02 (excluding extraordinary income).

    Though the short-term horizon is clouded with concerns over the economic downturn, however, in the long run Cadbury is most likely to continue its dominance of the Indian chocolate scene. The urban penetration of chocolates continues to remain low at around 15%-20%. In the long run, as the economy improves and per capita income levels improve, chocolate consumption would also improve. In such a scenario, obviously Cadbury would benefit too, especially in light of the management pro-activity.

    The only concern is that competition too would be clued in to this chocolate potential. Till now competitors like Nestle and Mars have not been able to dent Cadbury’s dominance but going forward one can expect them to up their ante. Also, contraband imports are creeping up. Till now it doesn’t seem to have affected Cadbury’s growth, but going forward this could be a headache as it has proved to be for ITC in cigarettes.

     

     

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