It never rains but it pours: Two troubled giants

Two corporate giants, two public relations nightmares. But while BA shares rise above the turbulence, Cadbury will need more than sugar to sweeten the City
Click to follow
The Independent Online

How could something so sweet turn so sour? You might find salmonella in eggs, perhaps, or in a dodgy burger, but surely not in a bar of chocolate? But for Cadbury Schweppes, which reports interim results this week, that is exactly what has happened.

It emerged in June that the soft drinks and confectionery giant had discovered a rare strain of salmonella at its plant near Leominster, Hertfordshire. One million chocolate bars were pulled from the shelves. Adding to the mounting public relations crisis, though, were revelations that the FTSE 100 group had known about the outbreak since January.

The Health Protection Agency has since established that 37 people, many of them young children, had become ill after eating infected chocolate.

"Public recalls are not unusual in the food industry," says Andrew Wood, an analyst at New York broker Sanford C Bernstein. "So why has this one garnered so much attention? For a start, salmonella in chocolate doesn't seem to jive, and they have known about it since January. Its reputation has suffered."

ABN Amro, meanwhile, has downgraded its expectations for Cadbury ahead of Wednesday's figures. "While precedents suggest that [the salmonella outbreak] should not do lasting damage, we expect to see a short-term cost to sales and profits, and have cut our forecasts by 3 per cent," the Dutch bank said note. Pre-tax profits are expected to come in at £892m, against £834m in 2005.

Cadbury's shares fell after ABN Amro's report, with predictions for lost sales as a result of the health scare ranging from £20m to £41m.

While it is not surprising that the City has taken such a negative view, that doesn't explain why another company beset by negative PR, and which also reports results this week, has just seen its shares jump.

British Airways is being investigated by the Office of Fair Trading and the US Department of Justice over allegations of price-fixing, as part of a cartel, on fuel surcharges. If found guilty, the penalties could be swingeing - as high as 10 per cent of total revenues for each of the past two years, for a total of around £1.6bn.

Yet the City is not deterred. "BA's chairman indicated at the 18 July AGM that the company was hopeful of a resolution of the OFT investigation in the near future," investment bank Morgan Stanley said last week. "Should the company avoid any penalties, we believe this would be a positive share-price catalyst."

The latest passenger figures, meanwhile, suggest that customers bear BA no grudges over any alleged offences and continue to use the carrier.

So why the difference? The OFT probe "is potentially dangerous for BA," notes Thayne Forbes, a joint managing director of brand experts Intangible Business. "But they are being pretty open about it.

"For Cadbury, this is a really serious PR problem because it affects children and it's a health issue. They should be taking a proactive approach, be seen to be giving advice and putting in place quality control, and I don't really see them doing that."

Mr Forbes says Cadbury appears to have taken a "defensive" strategy. The company explained that it did not tell the authorities about the outbreak for five months because it was not, under health and safety guidelines, obliged to. It has also repeated that only a small percentage of its range is affected, and that the levels of salmonella are low.

A source close to the company points out that while the authorities continue to investigate the outbreak, Cadbury can do little more. "It really ties your hands. But the compayn absolutely does care," he says.

However, Mr Forbes remains unconvinced: "They are trying to downplay the effects, while I would say they should be trying to establish a quick, concerted and extensive programme to sort it out. Otherwise, it looks like they don't really care."

But it is not just salmonella that is infecting views of Cadbury in the City. The company's failure to secure Chupa Chups - the Spanish confectionery group that was acquired for €400m (£278m) by Italian-Dutch rival Perfetti - and the downgrading of its growth prospects, have been criticised in the city.

"There was a lot of uncertainty as to what the guidance was for the full year," says one analyst. "People, including myself, felt frustrated about how they had handled that."

Although Cadbury is performing well in the US, both in beverages and confectionery, conditions have been tougher elsewhere in the world, not least because of heightened awareness of healthier lifestyles and concern over childhood obesity.

"2006 is proving to be tougher for Cadbury than we expected," says Julian Hardwick at ABN Amro. "Cost pressures have eaten into margin growth, currencies have moved adversely and UK confectionery has had to deal with overstocking and the recent recall."

BA also has other issues, such as a £2bn pension deficit and a near-perennial need to axe costs. But the City appears more forgiving. "We now believe this is not the peak," said Morgan Stanley of the carrier's recent share-price improvements. "The Easter effect and subsequent strong summer demand should allow this buoyant revenue environment to continue across premium and non-premium routes."

Revenue growth is likely to be at the top of BA's 5 to 6 per cent guidance range. "We believe the first-quarter results will demonstrate a strong case for 10 to 15 per cent earnings upgrades," said Morgan Stanley.

But what about Cadbury? What can it do now? For starters, argues Mr Forbes, it should take a proactive approach to the outbreak and make sure it has policies in place to deal with any scares that arise in the future.

Not all analysts are concerned that the salmonella outbreak will cause long-lasting damage. Three years ago, worms were discovered in two Cadbury Dairy Milk products in India - a big market for the group. Sales dropped off, but a relaunch soon helped them to soar once more.

Chocolate, however, is not the only Cadbury product that is being chewed over by analysts. Mr Wood at Sanford C Bernstein, for example, would like to hear the company's American chief executive, Todd Stitzer, announcing a more bullish approach to its chewing gum range. The group owns French brand Hollywood, among others, and it acquired Pfizer's Adams confectionery business, which is particularly strong in gum, for $4.2bn (£2.3bn) in 2003.

"Cadbury should be a little bit more aggressive with its confectionery business, particularly gum in the UK," says Mr Wood. "It needs to take the initiative. It is kicking Wrigley and kicking it hard in the US.

"I can't believe it's been three and half years and it hasn't launched Adams in the UK yet. We're now into year four - this has got to be the time."

Come Wednesday, the company should be able to deliver details about the cost of the salmonella recall, as well as good news about the company's US operations. But some in the City, it would seem, are hungry for more as Cadbury looks to emerge from its sticky patch.

Comments