BOURNVILLE (Reuters) - Cadbury, the world’s second-largest confectionery maker, argues that even when times are tough, chocolate is an affordable treat and one of the last to be scratched off people’s shopping lists.
But even this company, traditionally a “defensive” play which can weather hard times, now faces slowing economies, high cocoa prices, a new industry-leader as rival and the aftermath of salmonella and melamine health scares.
Founded by John Cadbury nearly 200 years ago as a family firm, Cadbury is now a widely recognized brand selling products in over 60 countries: as an institution, it has a memory of economic depression.
It saw demand slump in the 1920s and 1930s and had to drive costs sharply down, to make chocolate — at the time a relatively expensive product — affordable for Britain’s expanding population.
“We are not immune from a more challenging environment but confectionery is a resilient category,” its Chief Executive Todd Stitzer told a conference call this week. “We ... are less affected in difficult times.”
Now once again the company, with annual confectionery sales of 5.1 billion pounds ($8.9 billion) and operating profit of 497 million in 2007, is cutting costs, closing factories and trimming chocolate bar sizes — without reducing the price.
It is also reissuing some discontinued lines in a bid to tempt sweet-toothed British consumers with nostalgia, along with a host of new products in gum and candy as well as chocolate.
“We are making major changes to streamline the company,” Stitzer said.
Since his appointment in late 2003 he has improved the group’s financial performance and split the then Cadbury Schweppes, spinning off beverage business Dr Pepper Snapple in May to focus Cadbury tightly on confectionery.
Cadbury has set a four-year 2008-2011 strategy to deliver 4-6 percent underlying sales growth and mid-teen percentage margins by 2011, up from 10.4 percent in 2007.
But its stock, which has underperformed the DJ Euro food and beverage industry index by 8 percent since early September, earns hesitant recommendations from investment analysts.
Of 23 polled by Reuters Estimates, nine have a “hold.”
To judge by its leading UK market share of over 30 percent, Cadbury has formed British tastes in chocolate. Its milky flavor appeals in the country where 92 percent of chocolate is milk compared with just 65 percent in continental Europe.
Over 100 years ago chocolate was only available as a drink, but for Cadbury’s that changed when John’s grandson mixed cocoa solids with fresh milk to produce Cadbury Dairy Milk chocolate in 1905: that is now the foundation of the group.
The launch was a gamble, as the recipe was much milkier than the then-dominant Swiss products, and it meant raising factory production by a fifth.
“It will take a lot more than a financial meltdown to stop me eating Cadbury’s chocolate,” said Graham Barrett, buying a bar of Dairy Milk chocolate in the Canary Wharf financial district. “In fact, people are probably eating more to cheer themselves up.”
In a fiercely competitive marketplace, the London-based group is taking no chances.
Cocoa prices are up around 40 percent from 6-9 months ago, so it has cut the weight of its slab chocolate bar to 230 grams from 250 to absorb the cost. The price is unchanged.
Just as Cadbury thought it had banished the memory of a 1 million pound fine for selling unsafe chocolate in Britain and Ireland in 2006 in a salmonella scare, it had to withdraw all chocolate products from its Beijing plant last month due to concerns over melamine contamination.
And earlier this month it lost its crown as the world’s biggest confectionery group as Mars finalized a merger with Wrigley.
Now Cadbury plans to cut about 8,000 worldwide jobs and close 10 plants as it trims both its global workforce and factories by 15 percent to boost productivity and meet its targets.
In the UK, it plans to focus chocolate production at Bournville, a plant in Birmingham which dates back to 1879. Now running around the clock with a sweet chocolate fragrance at the factory gates, it can churn out 5.5 million molded bars and 17 million chocolate buttons in a 24-hour period.
Mark Jones, head of chocolate-making at Bournville, said the company is spending 40 million pounds on the site up to 2010 to take on output of UK molded chocolate and update production.
Cadbury’s lines for production of Crunchie and Picnic bars — called countlines because they are sold by count rather than by weight — will move to Poland.
For Bournville, the changes may be a return to the past. A site by the Bourne brook in south-west Birmingham chosen by John Cadbury’s sons George and Richard, its name appears on one of Cadbury’s dark chocolate bars.
Back in 1879, the brothers added “ville” to its name as a token of sophistication — it was thought confectionery should always have a French flavor.
The factory site attracts over 420,000 visitors a year and an exhibition gives a flavor of the plant, which at its peak in 1925 employed 11,000 in Britain’s second-largest city. That number has now shrunk to about 1,000.
In England, Bournville became known as a home for philanthropic capitalism: the Cadbury family were Quakers and initially championed tea, coffee and cocoa as a substitute for alcohol, seen to cause poverty and deprivation among workers.
Now Jones, who has been manager for the past nine months after moving from U.S. food giant Heinz, said the plant could boost annual chocolate output to 150,000 tonnes a year from 110,000.
It will be dedicated to molded bars, chocolate assortments like Milk Tray and Easter eggs, and the Wispa bar, a bubbly chocolate first introduced in the 1980s that Cadbury’s recently relaunched in Britain to compete with Nestle’s Aero.
This year’s relaunch was billed as a response to petitions by an Internet-based group of fans and supermarket chain J. Sainsbury sold one million bars in its first week.
Along with the Wispa, Cadbury has introduced new “wholesome” products such as Dairy Milk with Apricot Crumble Crunch or with Cranberry and Granola.
Analyst Graham Jones at brokers Panmure Gordon is optimistic: “The indulgent appeal of its products and low price points give us confidence that both sales and margins can progress, despite more challenging economic conditions in many developed markets,” he said.
Reporting by David Jones; editing by Sara Ledwith