Omens not good for Cadbury Schweppes' global aspirations
STOCK MARKET WEEK
Monday 03 March 1997
From its historic chocolate-making base at Bourneville in Birmingham, Cadbury aspires to conquer the world by building a truly global presence in both markets - drinks now account for almost two-thirds of profits - but the omens are not good. In carbonated soft drinks, it lags a distant third behind Coca-Cola and Pepsi, while in confectionery it is fourth to Nestle, Mars and Kraft Jacob Suchard, owned by Philip Morris.
True, Cadbury operates in growing international markets but they are also consolidating ones. "This poses challenges as well as opportunities for a group that has more limited resources than its international competitors and has satisfied market appetite for its paper," argues Tim Potter, food analyst at Merrill Lynch in a note previewing Cadbury's full-year results this Wednesday, when he will be looking for pre-tax profits to advance from pounds 512m to pounds 590m.
Given these key strategic and structural considerations, it is small wonder that Cadbury's investors have not exactly enjoyed a bountiful return on their investment.
In the last year alone the shares have underperformed the stock market by almost 20 per cent, coming off a high of 561p to close on Friday at 508p, having touched a low of 468p earlier this year.
One reason for the market's caution is Cadbury's falling market share in the US soft drinks market.
Splashing out $1.7bn two years ago for Dr Pepper gave Cadbury the 7-Up lemonade brand and number two slot in the global non-cola soft drinks league. But the deal came at a heavy price. It made Cadbury a much greater threat to Coca-Cola, which responded ruthlessly by mounting a heavy promotion campaign for Sprite, its own lemon-lime brand.
In turn, 7-Up was re-launched and although several years of volume decline has been arrested some loss in market share is inevitable.
According to brokers NatWest, US trade sources say Dr Pepper/7-Up volumes rose 0.3 per cent last year compared with a market increase of 3.6 per cent. Of the top four players in the US market, Cadbury was the only one to have recorded a loss in market share - to 14.8 per cent from 15.3 per cent.
Longer-term, analysts are concerned that the relative weakness of 7-Up and the long tail of smaller beverage brands will restrict Cadbury's ability to compete in the US soft drinks market. Its decision to sell its 51 per cent stake in its UK soft drinks bottling joint venture to a Coca-Cola subsidiary for pounds 623m has also raised fears that it will no longer be able to exert enough control on its business when it relies on external bottlers.
At the time the deal was completed last month Dominic Cadbury, chairman, said its main purpose was to allow Cadbury to release funds hitherto tied up in bottling assets and devote them to the growth of the group's branded portfolio. Debts will also come tumbling down to around pounds 900m at the end of this year from an estimated pounds 1.4bn in 1996.
Talk that Cadbury may embark on the acquisition trail again, possibly by swooping on that old takeover favourite United Biscuits, looks wide of the mark. Indeed, with the Anglo-Dutch food and detergents giant Unilever apparently keen to expand by using the cash it will get from the sale of its speciality chemicals businesses, speculative interest in Cadbury itself has been growing.
Cadbury Schweppes is just one of the features in one of the busiest weeks of the year for corporate results, which include big-hitters like HSBC bank, conglomerate BTR, drugs giant Glaxo Wellcome, speciality chemicals group Cookson, and engineers GKN and Rolls-Royce.
Healthcare group Smith & Nephew is set to announce solid profits growth tomorrow. Few surprises are expected as the company assured analysts in January that it is coping well with tough market conditions and the impact of a strong pound. They expect up to pounds 197m at the pre-tax level versus pounds 180m in 1995.
Prices in the US, which accounts for around 40 per cent of Smith & Nephew's turnover, are under pressure in such areas as orthopaedic implants and wound management by increasingly powerful health providers. News about the company's novel skin replacement product Dermagraft will also be eagerly awaited.
The betting and hotel group Ladbroke is expected to report a profit rise of around 30 per cent to around pounds 160m when it releases its 1996 figures on Thursday.
The main focus of attention is likely to be on any plans Ladbroke might have to launch a bid for the rival London casino operator Capital Corporation, which is currently on the receiving end of a hostile pounds 181m approach from London Clubs.
Analysts expect Hilton Hotels Corporation to move swiftly to acquire the 5 per cent holding in Ladbroke it has said it will take "in due course" following the recent deal to reunite Hilton hotels brand name for the first time in 32 years. They insist that HHC's $6.5bn bid for ITT Corp, owner of the Sheraton hotel chain, was already being lined up before the Hilton alliance with Ladbroke was sealed.
The tobacco and insurance group BAT Industries is expected to post pre- tax profits of up to pounds 2.70bn (pounds 2.38bn) when it reports 1996 results on Wednesday. Like Cadbury Schweppes, Smith & Nephew and Ladbroke, US factors will be to the fore again.
Tobacco litigation in the US dominates sentiment towards the shares and investors are keen to hear about any developments on this front.
Both BAT and RJR Nabisco have said that they will consider an industry- wide settlement to bring an end to the ongoing legal battles, while Philip Morris is also thought to be amenable to settling the disputes.
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