After months of back and forth, Kraft Foods has now reached a firm agreement to buy Cadbury. This may be a good thing for Kraft. Warren Buffett demurs due to the price. The jury is out. However, this merger may not be good for some of the other competitors in the industry. (See the Symptom & Implication, “The industry is consolidating through mergers and acquisitions” on StrategyStreet.com.) In particular, some industry observers are pointing to the precarious position of Hershey. They note that Hershey will be a very small competitor in the global confectionary business. That may be, but I would not be so fast to write off Hershey’s chances of survival. Often the smaller firms are more profitable than the largest firms in the industry.
A few years ago, we analyzed 240 industries that had five or more competitors reporting line of business sales of at least $50 million. (See the Perspective, “Is Bigger Really Better” on StrategyStreet.com.) In each of these industries, we studied the top four competitors measured in sales. We evaluated their market shares and their returns, looking for the benefits of natural economies of scale.
We calculated the percentage of time that a company ranked first in market share was also the leader in pre-tax return on assets. Pure chance would have seen the industry’s market share leader lead in returns 25% of the time. We found some economies of scale at work. In all of the 240 industries, we saw that the industry market share leader led the industry in returns on assets 29% of the time, only 4% more than random chance.
Surprisingly, the distant followers can sometimes be powerful competitors. In our study, the competitor ranking fourth in market share led its industry in returns 23% of the time, only 2% less than the 25% random chance.
So, Hershey is far from dead on arrival. This is not to argue that Hershey has an easy time of it. Quite the contrary. But it can survive, and even thrive, even in a more competitive confectionary market. (See the Perspective, “Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets” on StrategyStreet.com.) To do so, though, it will have to be quite astute in its choice of product benefits and in its management of its smaller-than-average cost structure.
Showing posts with label Cadbury. Show all posts
Showing posts with label Cadbury. Show all posts
Thursday, February 4, 2010
Thursday, July 2, 2009
Industry Evolution Forces Cost Management
The evolution of a market often brings new consumers who prefer, or can afford, only low-priced products. In order to reach these consumers, a company must reduce its costs while it grows.
The British confectionery firm Cadbury dominates the Indian chocolate market. It has 70% market share in the chocolate market and a 30% share of the confectionery market in India. The company began operations in India in 1947. They imported its chocolate bars and sold them to the very wealthy. Later, it developed its own factories in India.
As the Indian market develops, more consumers and potential consumers enter the chocolate market. The growth in the market comes with consumers who live outside the major cities and who have very low incomes. In order to reach these consumers, Cadbury has to offer products that it can sell at very low prices. (See Diagnose/Products and Services/Innovation For Customer Cost Reduction/Four Price Points on StrategyStreet.com.) To meet these new consumers, the company has developed a product called Cadbury Dairy Milk Shots. These are small chocolate balls that are covered with a sugar shell. A package of two of these balls sells for about $.04. But these low-priced products still drive growth.
But Cadbury can not reach these new consumers with very low-priced products without containing its cost structure. The evolution of the market forces Cadbury to reduce its costs as it grows. Over the last few years, the company has reduced its workforce, moved factory locations from high-cost to low-cost areas, and improved the cost effectiveness of its supply chain. This is all on the base of a company that was profitable to begin with. (See Diagnose/Costs/Measuring Current Economies of Scale on StrategyStreet.com.)
The British confectionery firm Cadbury dominates the Indian chocolate market. It has 70% market share in the chocolate market and a 30% share of the confectionery market in India. The company began operations in India in 1947. They imported its chocolate bars and sold them to the very wealthy. Later, it developed its own factories in India.
As the Indian market develops, more consumers and potential consumers enter the chocolate market. The growth in the market comes with consumers who live outside the major cities and who have very low incomes. In order to reach these consumers, Cadbury has to offer products that it can sell at very low prices. (See Diagnose/Products and Services/Innovation For Customer Cost Reduction/Four Price Points on StrategyStreet.com.) To meet these new consumers, the company has developed a product called Cadbury Dairy Milk Shots. These are small chocolate balls that are covered with a sugar shell. A package of two of these balls sells for about $.04. But these low-priced products still drive growth.
But Cadbury can not reach these new consumers with very low-priced products without containing its cost structure. The evolution of the market forces Cadbury to reduce its costs as it grows. Over the last few years, the company has reduced its workforce, moved factory locations from high-cost to low-cost areas, and improved the cost effectiveness of its supply chain. This is all on the base of a company that was profitable to begin with. (See Diagnose/Costs/Measuring Current Economies of Scale on StrategyStreet.com.)
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