Cadbury battles a drink problem

Investment Column

David Wellings bows out as chief executive of Cadbury Schweppes this week on the back of a decent set of half-year figures. His swan song results yesterday showed a 13 per cent rise in pre-tax profits to pounds 231m in the six months to June, buoyed by a significant contribution from the Dr Pepper acquisition in the US.

The more interesting questions relate to what kind of business Mr Wellings' successor, John Sunderland, inherits and where he takes it from here. Cadbury Schweppes faces some challenging strategic issues. When the pounds 622m sale of its half-share in the Coca- Cola Schweppes bottling joint venture is completed later this month, it will leave Cadbury Schweppes reliant on third-party bottlers and a distant third in the cut-throat US soft drinks market behind Coke and PepsiCo, makers of Pepsi Cola. While the Dr Pepper brand is out-performing the US market, the Seven-Up citrus drink is finding the going tougher. It managed a 2 per cent increase in volumes in the first half, while Sprite, the Coca-Cola competitor, increased its volumes by a thumping 28 per cent, backed by a huge pre-emptive marketing spend designed to spoil Seven-Up's February re-launch.

Cadbury may have spent pounds 351m on marketing in the first half compared with pounds 297m in the same half last year, but its spending is dissipated across a wider portfolio of brands while its rivals concentrate on just a handful of products.

The confectionery business faces similar issues, battling against the likes of Nestle and Hershey. Confectionery sales were up by 15 per cent, but trading profits edged up only 3 per cent and the margin fell by 1.3 percentage points due to a drive by Trebor Basset to increase volumes and market share.

On the plus side, the new business in Poland will break even this year, only its second of operation, while investment in China and Russia is continuing. Further expansion is likely to be through acquisitions. The problem is finding suitable targets. Of the associated business, the 22.5 per cent stake in Camelot, the National Lottery organiser, yielded profits of pounds 9m in the six months.

BZW is forecasting full-year profits of pounds 580m. With the shares 8p higher at 520.5p they trade on a forward rating of 15. Much will depend on how the US drinks market holds up, particularly the battle between Seven-Up and Sprite. With rumours of a bid from Unilever or a US predator receding, the shares are only a hold.