Sanjana Banerjee

Kraft and Cadbury - Case Analysis

Given the acquisition, Krafts and Cadbury emerge as world’s largest manufacturer of confectionaries.
However, to achieve the competitive advantage, the combined entity should be able to create the required
synergy in its core business and functional business. Hence, they should focus on the following strategies.

Corporate level strategies

Kraft's acquisition is the type of "horizontal expansion" that could work well in today's post-economic
downturn environment. The deal allow both companies to "expand on their strengths," while diversifying in
complementary markets. This acquisition puts the combined firm ahead against its competitors like Mars,
Nestle in the confectionary market. Accordingly, confectionery being the core, Krafts should now exit from
its low margin and low growth business (like some of the brands in grocery Jell-O, Miracle Whip and Shake
N' Bake).

Business Level and related functional Strategies

Re-structuring the distribution network - Kraft has struggled with its low margin (ie 6.9%) in comparison to
its competitors Nestle (ie 17.3%), the reason behind this was its difficulty to penetrate in the distribution
network in UK and other emerging countries. On the other hand, Cadbury being a UK based company is
extremely well positioned in the UK market. Further, Cadbury always had competitive advantage in emerging
markets, as a 186-year-old UK company, Cadbury has greatly benefited from UK’s colonial presence in parts
of the emerging world. Hence, Kraft should use Cadbury’s distribution network to sell its products in UK and
other emerging countries. In terms of the US market, Kraft has competitive advantage due its strong
distribution network in direct to store distribution strategy, where it has tie ups with big store (like Walmart)
to sell its products. Crafts competitive advantage is also evident from the fact that in terms of the revenue mix
51% of the Kraft revenue is generated in US. In comparison, Cadbury’s only 30% revenues are generated
from USA, accordingly in US Kraft’s should use its own distribution network to sell Cadbury’s products.
Further, distribution of products (like Peter Paul, York) of Cadbury is undertaken by Hershey, Kraft should
revoke Hershey’s license arrangement and should merge the distribution of these products in its own
distribution networks. Hence, at a functional level, Kraft’s should have two distinct distribution networks, one
catering to UK and emerging market operating under the UK subsidiary of Cadbury and the other one to
Europe and USA grouped under the Kraft’s operating company is US.

Operation efficiency– Given that there would be a certain level of overlap between both the Companies,
Kraft’s needs to implement a merger integration plan, which would minimize the cost of the overall company.
Classically, Kraft has always struggled with its cost management given its decreasing operating margins (ie
from 9.2% to 13.2 %). In contrast, Cadbury always had the benefits for better cost management as most of its
manufacturing facilities are located in the emerging countries, where costs of overheads are low in
comparison to the developed countries. As highlighted in the table SG&A expenses for the combined entities
amounts to 23% which is way less from its competitor Nestle 40.8%. Given this, Kraft should shift production
of its goods catered to the emerging market and UK to the Cadbury’s plants in emerging countries and
achieve significant level of economies of scale. Additionally, this strategy will also reduce the freight cost of
Kraft, as the majority of the consumer are located in the emerging countries ( due to population) and
manufacturing closer to the market will give Kraft the required competitive advantage over Nestle.

Pricing and Branding strategies – In terms of branding, Cadbury has a strong brand presence for
confectionary in UK and the emerging countries and Kraft’s has a strong brand positioning in US. Hence,
Kraft’s international snacks brands (like for Tiger, Toblerone, Twist) should be marketed under the Cadbury’s
brand. Further, for the US Market Cadbury’s brands (like stride, Belendents) should be marketed under the
Kraft’s brand. Pricing should be positioned as the overall business strategies of Kraft (ie selling products at a
low cost to consumer). Hence, Kraft should focus on pricing the products in US at low cost, so that it can
enjoy competitive advantage over Nestle.
 Sanjana Banerjee

The above strategies should provide competitive advantages to Kraft as it will be able to overcome the lower
margin and penetrate in the new markets. For Cadbury, Krafts superior marketing acumen and strong
presence in US will benefit their overall branding and weak marketing. Combining their strengths through the
above strategies and working on their weakness, Kraft and Cadbury should be able to overcome Nestle and
other competitors in the long run.

Percentag
Particulars Kraft Percentage Cadbury e Combined Percentage Nestle Percentage
100.0 100.0
Revenue 42201 100 7792 100.00 49993 0 104060 0
64.6 43.0
Cost of good sold 28186 66.79 4153 53.30 32339 9 44820 7
35.3 56.9
Gross profit 14015 33.21 3639 24.89 17654 1 59240 3
23.7 40.8
SG&A expenses 9059 21.47 2791 8.92 11850 0 42526 7
0.0
Depreciation 23 0.05 5.8 0.01 28.8 6 0 -
11.5 16.0
Net profit 4933 11.69 842.2 10.81 5775.2 5 16714 6