Cadbury to Be Swallowed Whole
Emerging market is a financial market of a developing country, usually a small market with a short operating history. Monopoly power is the power of a monopoly firm where they are able to control or set a price in its market. 2. Kraft’s marketing strategy will benefit significantly from buying Cadbury in two different ways. Firstly, when we look at the brand portfolio of Kraft, which is the world’s second biggest food company. It is clear that there are plenty of old-timer cash cows, such as cheese, Nabisco and Suchard, but there are only very few rising stars.
According to the Boston Matrix, cash cow means a product with a high share of a slow growth market, which can generate a stable profit. Stars are the products that are in high growth markets with a relatively high share of that market of that market. In this case, The cash cows of Kraft would be Maxwell House Coffee, Toblerone chocolate which can generate a stable profit but no growth. On the other hand, There is a star product in Cadbury, which is the chewing gum business ( Trident and Trebor Mint Gum ) in a high growth market with a relatively high share.
And Cadbury also owns a number of long-established brands, its chewing gum business is regarded as having huge growth potential. Therefore, I think Kraft would definitely benefit from buying Cadbury with it’s chewing gum business, because stars tend to generate high amounts of income in a high growth market. Secondly, Kraft generates 80% of all its profit in America, and its stuck at home while the biggest areas for future growth would be china, India and other developing countries. Cadbury generates only 30% of its income in Britain, and also a major brand in Brazil and India.
In the first half of 2009, 69% of its sales growth came from ‘emerging markets’, which I think Cadbury is having a better performance than Kraft’s. Because Cadbury has made a huge success in those developing countries, like India which has a future growth in the future while Kraft is still stuck in America. Therefore, if Kraft buy Cadbury, this would benefit Kraft as they can generate more profit outside America, meanwhile, Kraft could also easily launch their own products in those developing countries. 3. Kraft’s current ratio:
Current assets / current liability 2007: 2500+3800+400 / 10700 = 0. 63 2008: 2300+4000+800 / 6900 = 1. 03 Kraft’s acid test ratio: Current assets – stock / current liability 2007: 3800+400 / 10700 = 0. 39 2008: 4000+800 / 6900 = 0. 69 If Kraft generate ? 1. 4 billion of cash to buy Cadbury, Current ratio 2008: (2300+4000+800)-4100 / 6900 = 0. 43 The acid Test Ratio 2008: 6700-4100 / 10700 = 0. 24 Liquidity ratios measure the business ability to pay all its short-term debts, it can be divided into current ratio and the acid test ratios.
Meanwhile, the shareholders may loss their confidence in Kraft as well as there will be less dividends for them. Therefore, they may start to sell their share, this will lead to a fall in the shares value. These show us it is very risky to take on a long-term loan for 4. 1 billion for buying Cadbury However, there are still possibility of making a huge profit from buying Cadbury as Cadbury’s chewing gum business is a rising star in a high growth market and could generate high amount of profit while most of the existing products of Kraft are cash cows in a low growth market.
Therefore, by buying the Cadbury, it will make Kraft a stronger food company, they might be able to push themselves to be the biggest food company in the world and gain higher market share. And also, by buying Cadbury, Kraft could definitely benefit from enjoying higher profit from Cadbury’s sales from the huge growth ‘emerging markets’, which can definitely generate enough money to pay their loans. Overall, even the liquidity ratios and the gearing ratio show that it is very risky to take on along-term loan for the 4. 1 billion that Kraft needs for buying Cadbury.
But I think the possibility of Kraft making a huge amount of profit from that high growth market from chewing gum business and emerging markets are quite high. Because if Kraft decided not to buy Cadbury, Kraft might still have to stuck in America for years, therefore why not expand its market share by buying Cadbury, which they could benefit from generating more profit from stars, Cadbury’s existing products and also the future growth market which Cadbury has already became a major brand in those countries. Therefore, even it might become overstretched, I think the risk is worth taking to expanding Kraft’s business.