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Managerial Economics:
Project Report on Cadburys India

Date: 5th September, 2011

Company Overview
Cadbury India Ltd. is a part of the Kraft Foods Group. Cadbury is a leading global confectionery company with an outstanding portfolio of chocolate, gum and candy brands. We employ around 50,000 people and have direct operations in over 60 countries, selling our products in almost every country around the world. In India, Cadbury began its operations in 1948 by importing chocolates. After 60 years of existence, it today has five company-owned manufacturing facilities at Thane, Induri (Pune) and Malanpur (Gwalior), Bangalore and Baddi (Himachal Pradesh) and 4 sales offices (New Delhi, Mumbai, Kolkota and Chennai). The corporate office is in Mumbai.

Our core purpose "creating brands people love" captures the spirit of what we are trying to achieve as a business. We collaborate and work as teams to convert products into brands. Simply put, we spread happiness!

Currently Cadbury India operates in four categories viz. Chocolate Confectionery, Milk Food Drinks, Candy and Gum category. In the Chocolate Confectionery business, Cadbury has maintained its undisputed leadership over the years. Some of the key brands are Cadbury Dairy Milk, 5 Star, Perk, clairs and Celebrations. Cadbury enjoys a value market share of over 70% - the highest Cadbury brand share in the world! Our flagship brand Cadbury Dairy Milk is considered the "gold standard" for chocolates in India. The pure taste of CDM defines the chocolate taste for the Indian consumer.

In the Milk Food drinks segment our main product is Bournvita - the leading Malted Food Drink (MFD) in the country. Similarly in the medicated candy category Halls is the undisputed leader. We recently entered the gums category with the launch of our worldwide dominant bubble gum brand Bubbaloo. Bubbaloo is sold in 25 countries worldwide.

Since 1965 Cadbury has also pioneered the development of cocoa cultivation in India. For over two decades, we have worked with the Kerala Agriculture University to undertake cocoa research and released clones, hybrids that improve the cocoa yield. Our Cocoa team visits farmers and advises them on the cultivation aspects from planting to harvesting. We also conduct farmers meetings & seminars to educate them on Cocoa cultivation aspects. Our efforts have increased cocoa productivity and touched the lives of thousands of farmers. Hardly surprising then that the Cocoa tree is called the Cadbury tree! Krafts Global Reach Annual revenues of $ 49.2 billion. More than 25% of Global revenue from emerging markets. Number 1 in global confectionery.

Number 1 in global biscuits. More than 50% of global revenue from snacks and confectionery

Cadburys Brand Portfolio 11 brands with more than $1 billion in revenue 70+ brands with more than $100 million in revenue 40+ brands over 100 years old 80% revenue from #1 share positions Market Share Cadbury plc (NYSE:CBY) is confectionery company that makes 7.3% of the world's chocolate (by dollar volume), 27% of the world's gum, and 7.4% of its candy. CBY is less reliant on the holiday season (which includes Halloween and Christmas) than its competitors Hershey's, Mars, and Nestle. Like its confectioner competitors, CBY suffers from rising commodities prices for ingredients such as corn, sugar, and milk. From 2006 to 2007, CBY raw material costs increased 10.9%, causing CBY operating margins to decrease from 14.4% to 13.2%.[2] In response, management says it will reduce 15% of its manufacturing and distribution centers by 2011 and has divested its Americas Beverages segment.[3] Management says the divestment will save CBY an estimated $66 million in 2008.[4]

Market Share[1] Competition Cadbury plc Mars (CBY) 8.9% Nestle Wrigley Hershey Ferrero (NSRGY) (WWY) (HSY) 7.7% 5.5% -5.5% 8.3% 4.2% 6.8% -1.5%

Global Confectionery Market 10.1% Chocolate Gum Candy 7.3% 27.0% 7.4%

14.7% 12.5% -2.8% 0.1% 2.9%

34.5% 1.3% 2.2% 2.7%

THE INDUSTRY SCENARIO

Till the eighties, the chocolate market was small and the product category itself was fuzzy. In the eighties, Cadburys - the virtual monopolist - had decided to focus its efforts on making chocolates a distinct category with an identity of its own. And the marketer had sharply positioned its product at children to do that. Hence, chocolates bore an Only for kids tag, and kept adults at bay. By the end of the eighties, Cadburys still ruled the roost with over 80 percent market share. And though several brands - like Amul and Campco - tried to break into the market, none of them had succeeded in shaking the leaders grip. In fact, Cadburys had become a brand virtually generic to chocolates. Then chocolates were used to reward and reinforce positive behaviour and hence were categorised as a luxury reserved for special occasions. This was, a stark contrast to the west where chocolates were snacked on, eaten as mini meals or just to suppress pangs of hunger. But constant working by players like Cadburys (re-launch of Cadburys Dairy Milk targeting adults and as a casual any-time buy) and Nestle towards

exploding the myth that chocolates are meant for children only, has resulted in the segment booming.

Trends in the Industry: With socio-economic changes rapidly taking place, the young and not so young population will lead a new life style and chocolate eating is definitely going to be widespread and acceptable. In the industry, both population and family incomes as well as urbanization are on the increase. There has been a significant growth in the middle class, with 5.8 million people having upgraded to the quoted middle class. There is quantified data on FMCG usage having increased (NRS-VI & IRS98 figures)

Marketers in the industry are looking forward to a much higher growth rate, as Indias per capita consumption of chocolates is only 15 Gms. Versus 6 Kg in the west. The Indian Chocolate market can be sliced into four parts.
1. Moulded Chocolate Segment - comprising slab chocolates like Dairy milk

chocolates, etc. These are made by pouring the ingredients into moulds. 2. Countline Segment - comprising bars like 5 star, Bar One, Perk, Kit Kat, etc. These have ingredients other then chocolate and are usually Bar shaped, making for chunky bites. 3. Choco-Panned Segment - comprising chocolate forms like Butterscotch, Nutties, Tiffins, etc. Panned variety has different cores/centers which are covered with a layer of chocolate. 4. Sugar-Panned Segment - comprising chocolate forms such as Gems, Chocolate eclairs, etc. These generally have a sugar coating on the outside.

Cadbury Products, product group and product range

Astros Boost Bournville Brunch Bar Cake Bars Caramilk Caramello Koala Cherry Ripe Chews Chomp

Clusters Creme Egg Crispy Crunch Crunchie Curly Wurly Dairy Milk Dairy Milk (original) Dairy Milk Apricot Crumble Crunch Dairy Mily Caramel Whip Dairy Milk Cashew Dairy Milk Chocettes Dairy Milk Chocos Dairy Milk Clinkers Dairy Milk Coconut Rough Dairy Milk Cookies Dairy Milk Crackle Dairy Milk Cranberry and Granola Dairy Milk with Creme Egg Dairy Milk Crispies Dairy Milk with Crunchie Dairy Milk Crunchie Rocks Dairy Milk Desserts - Berry Pannacotta Dairy Milk Desserts - Boysenberry Shortcake Dairy Milk Desserts - Crme Brulee Dairy Milk Desserts - Furge Brownie Dairy Milk Desserts - Lemon Cheesecake Dairy Milk Desserts - Tiramisu Dairy Milk Double Choc Dairy Milk Duo Dairy Milk Flake Bites Dairy Milk Fruit & Nut Dairy Milk Energy Dairy Milk Energy - Scroggin Dairy Milk Shortcake Biscuit Dairy Milk Snack Dairy Milk Snack - Strawberries & Cream

Dairy Milk Tasters Dairy Milk Three Wishes Dairy Milk Tiffin Double Decker Dream Flake Freddo Fudge Peanuts Perky Nana Pinky

Beverages

Bournvita Cocoa Orange Crush (Canada) Cool Ridge - spring water (Australia) Export Cola (Australia) Highlights - low calorie hot chocolate Highlights Espresso

Baking

Bournville Cocoa Cooking Chocolate

Others

Bytes (India) [1] Cadbury Dairy Milk Ice Cream - Chocolate chip ice cream Cake Bars Chocolate Gateau

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Business Model
Cadbury has spent the last five years transforming the company into a focused confectionery business. With distinct strength across product categories, developed and emerging markets, strong brands, talented people and clear values, Cadbury has a business model that is unique to Cadbury. Cadbury is well-placed to deliver superior performance, supported by clear opportunities: the global confectionery category has been growing solidly; the strength and breadth of our market positions, across different geographies and categories, help us to capture this growth and deliver high returns; the unexploited potential of our business is significant; and we have the strategy and management to deliver against our plans. We believe that Cadbury will benefit from our focus as a pure-play confectionery business. Confectionery growth The confectionery market has been growing around 5% p.a., with revenues growing in low single digits in developed markets and in double digits in emerging markets. Brand loyalty, a high level of impulse sales and limited private label penetration mean that confectionery is also a profitable market for companies with strong brands and effective routes to market. Cadburys robust business model Cadburys growth potential is underpinned by its robust business model. It has strong brands and strong competitive positions in the three major confectionery

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categories: chocolate, gum and candy. More importantly, it has a strong presence in faster growing categories such as gum. It has strong leadership positions in nearly half of the worlds largest markets. It has the largest confectionery business in the growing emerging markets with a 10.7% share: a stronger position than that of key global competitors. In summary, our growth ambitions are underpinned by our favourable category and geographic exposure. Despite near-term economic uncertainty, we continue to believe that in the long-term, confectionery will remain resilient and that by holding or growing our market share we will continue to deliver a strong performance. Our firm intention is to continue to outperform the market by increasing our focus on the highest return areas and reducing the complexity which is evident in many parts of our business. Our vision is to be the worlds biggest and best confectionery company. Following the acquisition of Wrigley by Mars, we are now the second biggest confectionery business by revenue. However, with significant scale in key markets and a strong global presence, we remain a strong business partner to our customers and suppliers. We continue to reinforce our positions in key markets and maintain our number one position outside the US. While we have every reason to aspire to being the biggest in the long-term, we will focus on being the best in the short-term. Developing our capabilities is a key priority of the business plan, and our progress is evident. Deliver superior shareholder returns Our governing objective is to deliver superior shareholder returns. Our VIA plan has created a clear roadmap and focuses the energy and efforts of our teams around the world. We have an advantaged confectionery business which has significant under-exploited potential in terms of both revenue and returns. We believe that a balanced delivery of strong growth in revenue and margins,

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coupled with an increased focus on disciplined capital allocation will allow us to deliver superior returns for our shareholders.

Sale revenue, price range, quantity

Cadbury India
Dec '09 Dec '08 Dec '07 Dec '06 Dec '05

12 mths

12 mths

12 mths

12 mths

12 mths

Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Total Expenses

2,045.08 110.71 1,934.37 12.67 -16.28 1,930.76 832.28 37.25 150.62 6.52 0 624.19 1,650.86

1,751.24 162.65 1,588.59 25.07 51.32 1,664.98 732.53 29.7 130.22 96.01 2.45 430.46 1,421.37

1,441.92 148.45 1,293.47 7.68 17.29 1,318.44 563.06 25.3 107.36 76.61 323.54 43.13 1,139.00

1,149.97 91.73 1,058.24 8.71 -2.54 1,064.41 441.53 20.83 93.93 57.63 266.54 35.88 916.34

1,006.02 126.24 879.78 17.87 10.44 908.09 246.22 19.62 94.38 138.85 0 292.11 791.18

Reported Net Profit

188.63

165.78

117.65

68.81

45.95

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Cadbury India Finished Products Product Name Cocoa Powder Biscuits Chocolate Gum

Dec 2009 Unit _____In Rs. Cr._____ Production Sales Quantity Quantity 1,09,338.00 1,37,334.00 8,92,22,616.00 1,72,33,596.00 NA NA 6,16,72,060.00 9,81,68,814.00 1,28,09,887.00 66,601.00 2,09,739.00 7,34,47,117.00

Hard Boiled Confectionery & Gums Malted Food Source : Asian CERC
Cadbury India Raw Materials Product Name Cocoa Beans Milk (Powder/Liquid/Condensed) Sugar & Liquid Glucose Other Raw Materials Malt Extract Edible Oil

_____In Rs. Cr._____ Unit Quantity Thousands 15,096 Kgs Thousands 39,487 Kgs Thousands 46,075 Kgs Not NA Reported Thousands 13,855 Kgs Thousands 3,864 Kgs

Dec 2009 Value 233.53 133.55 87.51 65.07 42.28 37.33

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Dry Fruits Total Source : Asian CERC

Thousands Kgs

862

18.04 617.31

FACTORS INFLUENCING PRICING OF CADBURY Internal Factors Corporate and marketing objectives of the firm. The image sought by the firm through pricing. The characteristics of the product. Price elasticity of demand of the product. The stage of the product on the product life cycle. Use pattern and turn around rate of the product. Cost of manufacturing and marketing. Extent of distinctiveness of the product and extent of production differentiation practiced by the firm. Other elements of the marketing mix of the firm and their interaction with pricing. Composition of the product line of the firm. External Factors Market characteristics. Buyers behaviour in respect of the given product. Bargaining power of major customers. Competitors pricing policy. Government controls regulations on pricing. Other relevant legal aspects. Societal (or social) considerations. Understanding, if any reached with price cartels.

Cadbury objective of pricing Profit maximization in the short-term. Profit optimization in the long-term. A minimum return (or target return) on investment.

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A minimum return on sales turnover. Targets sales volume. Target market share. Deeper penetration of the market. Entering new markets. Target profit on the entire product line irrespective of profit level in individual products. Keeping competition out, or keeping it under check. Fast turn around and early cash recovery. Stabilizing prices and margins in the market.

Competition
At present there are three major players Nestle, Cadburys and Amul in the Indian Chocolate market. Campco initially tried to break into market but failed. Brief profile of the same has been entailed below: Cadburys India Ltd. Cadburys India Ltd, has been in India since 1948. Its brands: Dairy Milk, 5 Star, Gems and Chocolate Eclairs are the households names in India today. In all the segments i.e. moulded chocolates, count chocolates and panned chocolates, it is undoubtedly the market leader. Cadburys has its manufacturing units at Thane (Mumbai), Malanpur, Indori (near Pune), Mithuri and Kolapur. It has a strong distribution network with about 500 distributors in North India and more than 3 lac retail outlets being serviced all over India. In 1997, Cadbury planned to pump in Rs.80-crore to up production capacity at a couple of Cadburys factories. This cash is exactly double of whats been invested in 1996. The Company launched Perk, a wafer enrobed chocolate in 1995. This was reactionary to the launch of Kit Kat and has been able to counter competition.

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Cadburys Dairy Milk (CDM) - The Flagship brand CDM, the oldest of Cadburys brands was launched in 1956. In the early 90s, a rise in the prices of cocoa, increase in the excise duty and a fall in the demand inspired the idea of repositioning. Two years in the process after relaunch Cadburys Dairy Milks market share stood at 25 percent with sales rising by an average 40 percent per annum. Besides CDM Cadburys has a number of endorser brands such as FruitnNut, Nut Milk etc. Even though contribution of these brands to the companys bottom-line is very small, they are required in order to make a complete portfolio of offering. The Company developed a concentration strategy on CDM, Five Star, Cadbury Gems, Cadburys Eclairs, Perk and the latest of its offering Picnic (which has drawn a good response in the market). The Company has also identified sugar confectionery, as a growth sector. Its first offering Googly.

Nestle India Ltd. Nestle India Ltd. has been in India for more than 35 years now. The worlds largest marketer of chocolates (became world number one when it acquired Rowntree Macintosh of the UK) - Nestle, made its foray in the Indian chocolate Industry in November 1990. It launched three products - the milk chocolate, the bitter chocolate and Crackle (a crunchy chocolate) - in the slabs category and Bar One in count lines. Cadburys was quick to react, and launched a whole host of products in succession: All Silk milk chocolate, Creamy Bar, and a new version of 5 Star.

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Nestle, in the beginning did not have its own manufacturing facility. It had an alliance with Campco to manufacture chocolates. Later, in 1995 a state-of-art manufacturing plant was set up at Ponda, Goa at a cost of Rs. 50 crores. This unit took care of the entire Kit Kat production. However, the production tie-up with Campco still continued. Launch of Kit Kat Kit Kat, one of worlds most popular chocolate, was launched in India in 1995. Within months of its launch, it fulfilled every target Nestle had set. Its launch was accompanied by the launch of Cadburys Perk in order to counter Kit Kat and safeguard the flagship brand CDM. Kit Kat has been able to define a new segment in the industry in the form of the wafer enrobed any time snack. Kit Kat outsells Perk in the outlets where both are available. In the crucial markets of Bombay and Delhi both are running neck-and-neck. It has even said to have threatened the mother brand, Cadbury Dairy Milk.

NESTLEs New Launches Brand Allen Splash (Sugar Candies) After Eight Mints Lion Wafer Bars Future Outlook Focus will be on chocolates and confectionery followed by culinary products which include the Maggi range and coffee. Delhi & Mumbai Delhi & Mumbai Launch Selected Cities

Amul

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Gujarat Cooperative Milk Marketing Federation (GCMMF) launched the Amul Chocolate way back in 1974. With its milk chocolates, Badam Bar, Crunch and Fruit n Nut has a market share of about 5 %. Due to lack of focus and with multinationals spending huge amounts on advertisements its market share has been falling. GCMMF is involved in a large number of products, of which chocolates constitutes just 1-2 %. The company is not concentrating much on its chocolate business. As of now, Amul chocolates are not on companys focus. Interestingly, Kaira District Cooperative Milk Producers Ltd. (KDCMPL) - the manufacturer of Amul chocolate - is selling whatever it produces. Limited capacity is also a reason for the share it has. However, Amuls memorable advertising campaign positioning it as a A Gift for Someone You Love, saw the sales graph rising. Amuls sales grew by 39% then. Ever since, Amul has maintained a low profile. It can further be seen that Amul (SEE FINDINGS). Other Domestic Players The only other organized player in the market is Campco, which has an insignificant share of the market. It is supplying its production to Nestle. Apart from this Campco did come up with its new brands like Treat. But crunch of resources grossly effected the pace of the company and is hardly to be heard of today.

IMPORTED BRANDS Considering the high growth potential, various multinationals wanted to set up facilities in India (Mars being one of them). However, shortage of cocoa, seasonality in demand, and the absence of a proper cold chain deterred them from investing in India. The government also moved the import of chocolates

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from special item list to open general license category. The duty structure was also reduced. This resulted in making import of foreign brands easier and price competitive. Due the above, Mars Inc.-the US giant, who had decided to set up facilities in 1995(the site for which was also selected), decided to postpone its investment plans. An alternate strategy was formulated to import Mars chocolate brands into India through Sarura Business (I) Ltd. Sarura imports Mars brands and sells through its own distribution network.

References:
1. www.cadburyindia.com 2. www.kraftfoodscompany.com 3. http://www.moneycontrol.com/financials/cadburyindia/ 4. http://en.wikipedia.org/wiki/Cadbury