Chocolate Industry Essay Example for Free

Chocolate Industry Essay The Chocolate industry in the UK has been facing many challenges in recent times. The escalation of prices of the main ingrediants such as cocoa, milk and sugar has forced companies to increase prices. Customers showed resistance to higher prices which prompted brands such as Cadbury Masterfoods (Galaxy) to reduce packaging sizes. Concerns among the public regarding obesity has also led chocolate companies to bring out smaller sizes of chocolate. A big issue facing the industry are cocoa prices hitting a 33% high in 2010 due to growing demands from the chocolate industry and a disappointing crop in the Ivory Coast, an important grower of cocoa. As per Euromonitor reports the total value of the chocolate market has grown by 3% to 5. 4 million from 2009. The main players in the market in UK are Cadbury (owned by Kraft Foods), Mars Nestle. Cadbury as of 2010 accounts for 31% value share in the market. In 2010 acquired Cadbury Plc in January 2010 for ? 11. 5 billion. Cadbury Trebor Bassett (CTB) is the confectionery division of the company, which holds a large stake in the three key confectionery areas – sugar, gum and chocolate. CTB’s key brand in the chocolate market is Dairy Milk. This acquisition has helped Cadbury as well as Kraft Foods by increasing their economies of scale as well as bring out more options to customers. Cadbury Ltd operates in both the chocolate and sugar confectionery markets. It manufactures branded confectionery and beverages, including the internationally-successful Cadbury chocolate brand. The company also manufactures dark chocolate under the Bourneville name, as well as supplying Maynards, Trebor and Basset sugar confectionery. The company owns the chewing gum brand Trident and manufactures the medicated sweet, Halls Soothers. Cadbury chocolate brands in the UK include: Dairy Milk, Wispa, Twirl, Twisted, Freddo, Crunchie, Chomp, Bournville, Decker, Boost, Flake, Dream, Time Out, Star Bar, Picnic, Fudge, Snack, Brunch, Curly Wurly, Roses, Creme Egg, Variety and its standalone organic chocolate brand Green Black’s. Cadbury also produces several other items of confectionary however the focus in this project is chocolate. In this project we will look at the competitive pressures facing Cadbury and how it remains the market share leader. Cadbury Ltd registered a turnover of ? 5. 98bn in the year ending 31st December 2009, up from ? 5. 38bn in 2008. In 2009, pre-tax profit stood at ? 378m, after falling by 5. 5% from ? 400m in 2008. Below is a graph showing positions of all key market players FIVE FORCES TOOL. Michael E Porter devised ‘Porter’s Five Forces tool’ as a way for companies to ascertain market attractiveness and competition with other companies. This tool is not just used by commercial organizations but also by public organizations and not for profit companies to understand their customers and suppliers. In the chocolate industry there is heavy rivalry due to the presence of several large scale and world renowned market players such as Nestle, Cadbury and Mars. Cadbury among others produces countlines, boxed chocolates and sharing bags as well as blocks and moulded bars. RIVALRY AMONG EXISTING COMPANIES Existing rivalry among market players in an industry is an important part of judging market attractiveness and competition. Cadbury in UK faces competition mainly from Mars and Nestle. These three brands command equal market shares in UK and an extra percentage of market share creates big marketing spends, strong pricing and new launches of products within the company. In March 2008, Mars acquired the sugar confectionery company Wrigley US, while, in 2010, Kraft Foods completed its acquisition of Cadbury. As per Keynote reports Nestle is expected to buy out US Hershey brand. Nestle is left with reduced market share after acquisitions of Mars Cadbury. Periods of low market growth according to Porter (1980) particularly during maturity or decline of product cycles intensify competition. Competitors take advantage of the saturation of other products. With excess production capacity and lesser competition, several players engage in price competition to get higher sales. Cadbury goes head to head with Nestle Mars as other players have fairly smaller market shares and often struggle due to these top companies. According to Hooley et all (Marketing strategy and competitive positioning) high exit barriers for a company lead to higher competition as well. If a company is unable to exit a market due to high initial investments, high costs of redundancy (monetary and social) they work harder to compete with other companies. Several companies have egotistical as well as psychological reasons for remaining in a market and ensure they stay on top of people’s minds as exiting is not an option due to brand history and value. Brands such as Cadbury have incredible media presence covering internet, television, print, etc. Cadbury is a major player on the internet and uses this tool as an advantage over competitors. Newer avenues such as E-markets are intensifying competition and deterring exit of big companies. Competition in the chocolate industry is also increased due to the fact that product differentiation is low. The intrinsic quality and external value of a bar of chocolate is similar therefore competition for sales is increased. Switching costs in terms of price and availability for customers is low as many players have similar varieties of chocolate on offer. Customers may not face difficulty in changing from one brand to another due to such factors and this leads to Cadbury, Nestle and Mars to participate in increased competitiveness for higher market share. According to Hooley et All (Marketing strategy competitive positioning) if fixed costs are high then competitive is intensified. THE THREAT OF MARKET ENTRY The chocolate industry must be prepared for the entrance of new competition. Several factors can allow companies from entering into an industry. The chocolate industry has several companies that hold highest market share however there are also small companies as well as a lot of new entrants. New companies enter the industry if cost of entry is low. Companies with relatively less resources can break into markets if capital and investment is low. The requirement of large financial resources in order to compete with established brands can deter new entrants. In the chocolate industry deterrents include rising prices of supplies like cocoa, sugar and milk. The health awareness among the public has also led to dropping sales and this can be a problem for new entrants. Factors distribution channels being accessible for all chocolate companies gives new companies accessibility to enter the market due to heavy presence to retail outlets. Competitive retaliation according to Hooley can hinder entrance of new and fairly smaller companies. Big players such as Cadbury can pursue aggressive marketing strategies to combat new companies from taking over. If bigger companies were unable to respond to new companies with competitive retaliation then it would be far easier for companies to enter. The chocolate industry is composed of very few companies as the main players (Cadbury, Kit Kat Nestle) hold highest market shares. These companies have aggressive market strategies and customer loyalty as well. Existing companies have the funds to expand their presence in the market through acquisitions or mergers. For example, in 2003, Cadbury acquired the Natural Confectionery Company, which has since become a well-known product in the sugar confectionery market. Such extensions serve to diversify the market, while introducing more options in terms of products and brands. Product differentiation can also trigger entry of new companies. The chocolate market is flexible and many different varieties of chocolate can be found. New companies can use this to their advantage by launching specialized products to cater different tastes. In the chocolate industry there are several brands offering niche variety of chocolates whereas the top players are creating extensions similar to what the competitor is providing. Cadbury offers a wide variety of chocolates to compete with Mars Nestle as well as other brands such as Ferrero Rocher, Lindtt Thorntons. Hooley states that when there are gaps in a market new entrants can enter with ease. In highly segmented markets, new entrants can cater to specialized segments of the market as well as newer and experimental audiences. In every industry companies need to understand diversifying interests and requirements of customers or else new entrants can use this opportunity to cater to new tastes and needs of customers. In the chocolate industry more and more varieties of chocolate are available and there is a demand for different types of chocolates that many specialized and newer brands are approaching giving a tough time to established brands such as Cadbury. THE THREAT OF SUBSTITUTES: Every industry including the chocolate industry is threatened by substitutes. New companies can come in and revolutionize the market and offer better and more unique substitutes of whatever is already on offer. In the chocolate industry new companies can provide better alternatives of existing products by offering cheaper prices and better quality. Product improvements can be made and this makes newer companies gain an advantage over existing companies. Due to health concerns in UK many customers are shifting to options such as biscuits. BARGAINING POWER OF SUPPLIERS. In the chocolate industry suppliers can gain power by increasing prices, limiting quality and services. The rising prices of Cocoa are forcing many chocolate brands to increase prices or reduce packaging size of chocolates. Bargaining power of suppliers are medium as even the suppliers require these brands to buy. The cocoa industry depends on the confectionary industry. However to combat the high prices Cadbury is reduce. ng packaging of sizes. The price of cocoa is consistently rising and the market is very volatile BARGAINING POWER OF BUYERS The other side of powerful suppliers are powerful buyers. Buyers today are expecting better quality and cheaper prices. Since chocolate is a standardized product buyers can choose between many brands and switching costs are low. Brands such as Cadbury and Nestle are following customer demands such as creating healthy alternatives as well as suiting their requirements in terms of flavours, types of chocolate, etc. Due to recession in the UK many people prefer to remain at home and Cadbury is creating ‘Nights in’ options such as chocolate sharing bags. Bargaining power of buyers is high as they have the option to switch to several options. GENERIC STRATEGY OPTIONS According to Porter, a company can outperform other companies in a competitive arena through: 1. Cost Leadership 2. Differentiation 3. Focus As of 2009 Cadbury UK ltd remains market leader in chocolate confectionary accounting for 31% in value sales. With new product developments and extensions Cadbury hopes to woo new customers. With the takeover by Kraft Foods Cadbury is benefitted by widespread distribution and larger economies of scale COST LEADERSHIP: Cadbury is not a cost leader in the market however follows competitive pricing along with Mars Nestle. Due to cocoa prices rising they are increasing prices or reducing package sizes yet maintaining almost similar prices so no one can gain competitive price advantage. In October 2010, The Grocer revealed that Cadbury and Nestle were to increase their recommended retail prices by up to 7% across some of their most popular lines, including Dairy Milk, Wispa and Yorkie. Rising commodity prices led to a 3 pence (p) price increase on standard Cadbury Dairy Milk bars in October — a 30% increase on 2007 — taking the retail price of the chocolate bar to 56p. DIFFERENTIATION: Cadbury provides similar products to its competitors therefore differentiation is hard to achieve. Cadbury’s Diary Milk however is their best selling chocolate and is a plain chocolate. A similar product cannot be found in competitiors. Cadbury however is known for its unique taste and therefore offers differentiation as competitors cannot imitate the same taste. FOCUS: Competitive advantage can be gained if Cadbury focuses on target groups. As per consumer research volumes of chocolate consumed are falling however the same amounts of people are eating chocolate. Several factors such as negative health effects of chocolate and the concept of ‘staying in’ due to recession are deterring consumers from consuming chocolate. Cadbury’s responded to the increasing concern over unhealthy ingredients with the acquisition of the Natural Confectionery Company, which manufactures sweets without artificial colouring or flavourings. Cadbury can capitalise on captive audiences staying in at home with chocolate sharing bags and boxes such as Buttons Roses. Nestle is known to have partnered with Empire magazine’s dvd rental service to gain advantage over this ‘stay at home’ audience. Cadbury also needs to focus on ethical sourcing as people in the UK are expecting companies to conduct business in a socially responsible manner. Cadbury is a supporter of sustainable cocoa farming and in order to appeal to global audiences they entered into Fairtrade. To summarize focus can be on health concerns, ethical sourcing and corporate responsibility as well as seasonal demand during Christmas , Easter, ETC. Cadbury among its competitors also leads in brand extensions, the revival of Wispa is an important example. Competitors feel it comes in the way of original brand sales however Cadbury found success. RESOURCE BASED VIEW: According to the resource based view companies can achieve high performance through their developed resources. This view bases success of a company on its assets and capabilities which help to create competitive advantage. As per the resource based theory competitive edge can be found if companies possess the following characteristics: value, rarity, inimitability and non-substitutability (VRIN MODEL). Resources are further classified into tangible and intangible assets. Intangible Resources for Cadbury are: 1. Brand Name: The brand name Cadbury is very renowned. Kraft’s takeover has helped Kraft more than it has for Cadbury. Cadbury is an easily recognized brand name and is the market share leader in the UK. 2. Reputation: Cadbury has a very good reputation among buyers in the UK. In 2010 Cadbury became Fairtrade and also follows ethical sourcing of cocoa which has helped enhance its image. Cadbury’s history goes beyond 150 years and is considered a top brand. 3. Country of Origin: Country of origin is also an asset and in the case of Cadbury, the COO is UK. The COO is a method of evaluation for quality. Customers except a lot more when a brand originates from certain countries. 4. Market Domination: Cadbury has an additional asset of market domination. As of 2010 as per Euromonitor reports, Cadbury leads market share in the UK accounting for 31% value share in UK. The Kraft takeover has only helped in increasing the dominance of Cadbury due to increased distribution networks and extensive economies of scale. Following the Kraft takeover in February 2010, sales of Cadbury’s Dairy Milk were up 12. 8% and Cadbury’s overall chocolate confectionery business grew by 5%. Although Kraft’s chocolate sales rose faster in percentage terms, at 7. 5% for the 52 weeks ending 30th October 2010, this was the result of increased distribution. Cadbury’s acquisition has helped Kraft Foods. Supply chain assets such as a strong distribution network and good relationship with suppliers (cocoa, milk sugar) are also a strong asset for Cadbury. Cadbury is available at all retail outlets and due to its ethical sourcing objectives and fair-trade association it shares a good relationship with suppliers despite the volatile price environment. Other strong intangible assets for Cadbury include its existing large customer base, glowing corporate culture and production expertise. Tangible assets for Cadbury are factory and equipment as well as cash/cash equivalents. Below is a table listing assets of Cadbury on a Likert scale. Rated from 1 to 5 (5 being the highest) INTANGIBLE ASSETS: Resources| Value| Rarity| Inimitability| Non Substitutability| Brand Name| 5| 5| 5| 5| Reputation| 5| 4| 3| | Country of Origin| 5| 3| 3| 3| Market Domination| 5| 3| 3| 3| Supply Chain Assets| 5| 3| 3| 3|. To gain competitive advantage, capabilities of a firm should also be taken into consideration. According to Hooley, processes that deploy assets are capabilities. Several marketing capabilities should be included such as robust advertising and promotion strategies, distribution capabilities, pricing etc. The following capabilities can apply to Cadbury: * Advertising Promotions: Effective communications can take place through advertising, public relations, direct marketing, etc. Cadbury also launched a ? 50m advertising plan in 2010 as part of its official sponsorship of the London 2012. In recent time Cadbury has received good PR for becoming a fairtrade product. On 28th February 2011, the company began its ‘Fairtrade Fortnight’, after Cadbury announced that it planned to donate 20% of total sales from its fairtrade products to charity in order to fund a program that would give Ghanaian cocoa farmers solar panels. Examples of such good PR and great advertising campaigns help in Cadbury’s aim to gain competitive advantage. * Distribution capability: Distribution capability is a capability for Cadbury as it is available in all grocery stores including large scale retailers such as Tesco, Sainsbury Asda. * Product developments: Cadbury’s newest innovations and brand extensions such as Diary Milk bliss (vanilla cream centre, extension of Diary Milk) are capabilities that help Cadbury achieve competitive advantage. Cadbury has also reintroduced Wispa which has been a big seller. During seasonal and festive times Cadbury innovates and brings out products that it is renowned for. Cadbury’s seasonal range offering new product innovations, such as Caramel Bunnies and Creme eggs are a popular choice that set it apart from competitors. CADBURY’S RELATIONSHIPS: Cadbury maintains a good relationship with its customers through effective marketing and PR tools such as social marketing and their website. Cadbury also has a good relationship with its suppliers, In order to achieve corporate social responsibility they have gone fairtrade and continue to support ethical farming of supplies such as cocoa. In 2011 cadbury donated one fifth of its profits from all fair trade certified products sold during fair trade fortnight (28th feb-13th march) to fund solar power projects in Ghana’s cocoa farming communities. Today sales of Cadbury’s Dairy Milk have resulted in 2. 3 million pounds of fairtrade premium paid to Kuapa Kokoo, a fairtrade cooperative for farmers. Cadbury has pledged to invest 45 million pounds over 10 years to secure sustainable future of cocoa farming in Ghana, India, South East Asia and the Caribbean. Cadbury has also invested in farmer education and also reducing its carbon footprint. Cadbury also keeps a good relationship with its distribution channels such as retail outlets like Tesco Asda. Relationships with the media, consumers, suppliers and distributors are the most important relationships for Cadbury. RECOMMENDATION Chocolate remains by far the largest sector of the confectionery market, with sales rising by 17% over the 5 years, compared to the sugar confectionery market which grew by just 6. 3% over the same period. This was principally down to the continued popularity of chocolate products and the rising retail price of confectionery. Countering highly competitive environment through differentiating your product and providing something different from competitors. A tough marketing strategy should be created to help increase value of the product among customers. This creates higher entry barriers for new market players and despite industry growth, market share and costs of supply a brand can cement its own and undisputable position. If product cycle reaches decline then the brand should work to reinvent the product. Cadbury at present is the market leader and with the association with Kraft they can benefit from synergistic strategies. The past few years have also seen concerns regarding the ethical sourcing and production of confectionery products escalate. As a result, organic and fairtrade ingredients have become more widely used in confectionery. Cadbury has created a good name for itself by going fairtrade and must continue to produce in ethical ways. In order to maintain competitive advantage Cadbury must continue to analyse market trends such as healthy eating, staying in and sharing as well as the public’s interest in corporate responsibility. As per keynote reports the price of cocoa and sugar has increased dramatically over the 5-year review period, which is likely to have an adverse affect on the chocolate confectionery sector. Although some companies maintained a good level of ingredient stocks in 2010, the rising cost of commodities, coupled with the increase in value added tax (VAT) in January,is likely to have a more noticeable effect on the industry in 2011. In the UK, the confectionery market continues to enjoy a high level of consumer penetration, with nearly nine out of ten adults purchasing chocolate bars or similar products on a regular or semi-regular basis. However, the market’s large size, its abundance of products and the dominance of well-known brands such as Cadbury. In response to economic downturns and the escalating prices of supplies, Cadbury should respond by producing budget and value items. In a response to escalating cocoa prices Cadbury has responded by not passing price increases onto customers by reducing the size of its products. In February 2011, Cadbury reduced its 140 gram (g) bar of Dairy Milk to 120g (removing two squares), but kept the price the same. Cadbury in order to maintain competitive advantage must continue to offer the customer value through its resources, keep the prices low as well as keep innovating and providing newer products. Another strength Cadbury should concentrate is on to keep focussing on key brands such as Dairy Milk. To have an advantage over competitors Cadbury must continue to follow market trends. REFERENCING Euromonitor reports Hooley, G. , Piercy, N. F. , and Nicoulaud, B. (2008) Marketing Strategy and Competitive Positioning, 4th Ed. , Harlow: FT Prentice-Hall Keynote reports Mintel reports Porter, M. E. (1980c) Competitive Strategy, New York: Free Press Porter, M. E. (1980b) How competitive forces shape strategy, McKinsey Quarterly, Spring, No. 2, pp. 34-50 www. cadbury. co. uk.