What's Global Reach Worth to Kraft? $19 Billion

Cadbury Purchase Gives It Distribution and Clout in Developing Markets

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CHICAGO (AdAge.com) -- Kraft Foods' agreement to purchase British confectioner Cadbury for more than $19 billion -- the culmination of a four-month courtship -- is testament to the growth categories major U.S. marketers crave, particularly in developing countries. The purchase would put Kraft atop the $167 billion global confectionery market, and ensure that one out of four of its sales dollars comes from developing markets.

The need for the global scale Cadbury affords is demonstrated by the fact that Kraft sold off its U.S. frozen-pizza business to raise funding for its bid. A single brand in that portfolio alone -- DiGiorno -- posted at least 20% growth for the last two quarters, but Kraft sacrificed pizza because it doesn't have international distribution channels to support frozen products, and the expense of building the proper distribution would have outweighed the rewards.

That's not the case with confections, where Cadbury has a rich distribution channel. "We're looking at focusing on high-growth categories, and clearly confectionery is one of those," Kraft spokesman Michael Mitchell said. "This really helps us increase our sales in developing markets as a combined company." Kraft currently does 20% of its $42 billion business in developing markets, and that number, based on 2008 sales data for both companies, would go to 25% as a combined company. What's most significant for Kraft in its acquisition of Cadbury is its access to developing countries where Kraft has a limited presence, such as India and South Africa, as well as the ability to capitalize on the company's sprawling distribution chain.

Sugar-free gum, one of Cadbury's mainstays, has long surpassed its real-sugar counterpart and is now one of the fastest-growing candy segments. The price point makes it accessible to consumers in developing nations and enticing to dieters here. Meanwhile, sales of premium chocolate have slowed, but lower-priced products have proven relatively recession-proof. During 2009, Cadbury's chocolate sales grew 7%, gum grew 2% and candy was up 5%. Emerging-market growth outpaced the rest of the globe, up 9%.

Chocolate sales are accelerating particularly in areas with growing fledgling middle classes, such as China and India. Euromonitor analyst Francisco Redruello noted that China's middle class, which he described as 300 million strong, "is trading up to chocolate from sugar confectionery." He predicted that other developing markets such as Brazil will follow the same pattern.

Swooping in
Now is the time to snag Cadbury, he said, because prices will only go up as the economy recovers, and if Kraft hadn't done it, another company would have.That could have squeezed Kraft out of the highly consolidated confectionery global-industry, of which Mars, Nestlé, Kraft and Cadbury now comprise 37%. Hershey is fifth, with 4.6%. Mars built its own juggernaut in 2008, snapping up Wrigley for $23 billion.

In the U.S., the move helps insulate Kraft from private-label penetration, which is 20% in package food, but 5% in candy, said Morningstar analyst Erin Swanson.

Kraft has declined to speculate on what marketing or advertising the combined company would do. But it certainly would have some pull. The company would be a $2.7 billion advertiser; $1.5 billion would be spent in the U.S., based on an Ad Age estimate.

The company is already quite large in Brazil and Russia, where Cadbury is smaller, Mr. Mitchell said. Therefore, when Kraft controls distribution channels in those markets, it will be able to sell products such as Ritz and Oreos virtually with the flick of a switch. It did 38% of its business, or $16 billion, in snacks in 2008, a 40% increase over 2007.

To expand its global footprint, Kraft needed established distribution channels. While Kraft knows supermarkets, Cadbury has presence in the corner stores, gas stations and kiosks critical in developing markets. In India, consumers make just 16% of confection purchases in supermarkets, and 77% of them in smaller grocery stores, according to Euromonitor. In Western Europe, by comparison, 43% of confectionery sales are done in supermarkets.

Euromonitor's Mr. Redruello noted that these sprawling networks are expensive to develop, and it doesn't happen overnight. "And time is money as well," he said.

Kraft timeline

1903: James L. Kraft begins a wholesale, door-to-door cheese company. During the first year, he loses $3,000 and a horse

1909: J.L. Kraft and Bros. Co. is founded

1911: The company begins advertising, including billboards

1920: Makes first acquisition, MacLaren, a Canadian cheese company

1926: Kraft acquires an interest in the Australian maker of Vegemite

1928: Acquires Phenix, and products including Philadelphia Cream Cheese. Company name becomes Kraft-Phenix.

1930: National Dairy Products Corp., maker of Breakstone's cottage cheese and sour cream, acquires Kraft-Phenix

1933: Radio sponsorship begins with Kraft Music Hall

1947: Kraft Television Theatre premieres as an hour-long series

1980: Merges with Dart Industries, maker of Duracell and Tupperware

1986: Kraft buys Tombstone Pizza

1988: Kraft sells Duracell

1988: Phillip Morris acquires Kraft; Lunchables are introduced

1989: Merger with General Foods, and brands including Maxwell House, Baker's chocolate, Kool-Aid, Sanka, Gevalia, Oscar Mayer, Jell-O, Post cereals, Budget Gourmet, Entenmann's, Crystal Light and Shake & Bake

1990: Acquires Jacobs Suchard, and chocolate brands including Cote d'Or, Milka, Toblerone and Jacob's coffee

1991: Acquisition of Capri Sun

1992: Kraft General Foods acquires five Eastern European confectioners

1995: Kraft sells Entenmann's, along with other products including Boboli, and introduces DiGiorno in the U.S.

2000: Acquisition of Nabisco, and brands including Planters, Triscuit, A-1, Grey Poupon, Oreo and Ritz

2005: Launch of South Beach Diet products

2007: Kraft Foods begins trading as a standalone, public company

2007: Sells Post cereals to Ralcorp Holdings, and buys Groupe Danone's biscuit business

2010: Nestlé buys pizza brands DiGiorno, Tombstone and California Pizza Kitchen. Kraft agrees to buy Cadbury

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