Perking Up For Competition

These are bittersweet times at Cadburys India Ltd. Profits hit by a costly expansion scheme are melting away like chocolate in the summer sun. And in a recessionary year, cost-conscious Indians are suddenly munching through fewer bars of chocolate than expected.

But Cadburys gung-ho boss Jim Robertson is unfazed by the unexpectedly lean times. He is increasing capacities in his chocolate factories around the country that will almost double Cadburys output. The production of old favourites like chocolate eclairs will be doubled; newer favourites like Perk and the revamped Cadburys Dairy Milk will be turned out in greater numbers. Also, the company will bring out a slew of new products including bubble gums, jam and jelly sweets and mint lozenges. The future will almost certainly be sweeter once Cadburys finishes putting its plans into action.

 

And yet the Rs 320 crore chocolate and beverage giant is caught in a bind. Back in the early nineties, Cadburys was the unchallenged big bar of the chocolate industry with a massive 90 per cent share of the market. Now, only a few years down the road, it is feeling the heat of competition. It faces powerful challengers like the Swiss multinational Nestle, which has already taken a giant-sized 20 per cent bite of the chocolate industry. Nestle products like Kit Kat and Polo are already established as fast-growth hot favourites in the Indian market.

If that isnt bad enough theres also the recession which is chewing its way through Cadburys bottomline. Since chocolates are something of a luxury in India, the industry goes into a slump at the first sign of an economic downturn. Until three years ago the Rs 350 crore chocolate industry was growing at a healthy 35 per cent each year. Now it is chugging along at a sluggish nine per cent.

But Cadburys hasnt even kept up with the market and is moving at an even slower pace. Over the last two years, its growth has slowed to an unimpressive five per cent and it expects to repeat this performance in 1997. Future growth projections are also modest though the company hopes to get back into double figures soon. Says Peter Calverley, director, finance and IT, 1998 will depend very much on the general economic situation. But we hope to resume double-digit growth of 10 per cent.

Cadburys is certainly taking no chances about ensuring that the future stays sweet. It is pouring around Rs 80 crore into its multi-pronged expansion programme, the second phase which will be ready by mid next year. At the companys largest factory at Malanpur in Madhya Pradesh which turns out Eclairs and Gems capacity will zoom from 7,000 tonnes to 17,000 tonne. Similarly, theres the Rs 40 crore plant at Indori in Maharashtra, which makes chocolate making intermediaries like scrum, a milk, sugar and cocoa concoction. There will be a new production line for small 15 gms and 22 gms moulded chocolate bars like 5-Star.

Theres hardly any doubt that these investments will pay off in the long-run. But for the time being the companys bottomline has lost a bit of its fat. Operating profit at Rs 6.18 crore was 36 per cent lower than last year. Says Robertson, It is the high interest charge prior to the rights issue which was responsible for declining profits.

That statement can hardly be questioned. Interest costs rose to a whopping Rs 3.75 crore for the first half of this year and that has more than doubled from Rs 1.43 crore for the same period last year, (Cadburys paid Rs 3.50 crore as interest cost for the whole of last year). Whats more, the 162 per cent jump in interest costs came despite cuts in the bank lending rate. Says Robertson, This cost should reduce as we are in the second phase of our expansion.

But Cadburys has made other expensive moves. It recently paid Rs 2.5 crore as royalty to its UK-based parent company Cadbury Schweppes Plc group for services and technical knowledge.

Still it will be interesting to see how Cadburys stands up to the new competitors whove recently entered the market. Its only rival all these years was Amul which had a measly seven per cent share of the market.

But the real taste of competition came with the introduction of Nestles Kit Kat two years ago. The product has been so successful that it has started eating into Dairy Milk which is Cadburys main brand. To fight off the new challengers Cadburys had to re-launch Dairy Milk. This time the company switched focus from children to young adults.

If that isnt bad enough there are a host of other new rivals whove barely got off the starting blocks. The competitors are companies like Candico and Perfetti. Also, waiting in the wings, is the giant Mars which will be a tough competitor. Perfetti, the Italian confectionery company, has a joint venture with the Modi group and entered the 1,00,000 tonne sugar confectionery market two months ago.

The fact is that Cadburys like any company which has a 90 per cent share of the market, had over the years become complacent and it has begun to show on the bottomline. But now it is heaving itself back into the thick of the fight. Much of its energy in the coming months will be devoted to pushing sales in the snacking segment, which is still growing by 25 per cent. By comparison, bars and moulded brands (like 5 Star) are only growing by about 10 per cent.

But the company is also focusing its attentions in other directions. It is looking at relaunching Bournvita, which has a 16 per cent share of the beverage market. Even here Cadburys faces competition from Nestle which has launched a brown beverage Milo earlier this year. Of course, the beverage market is dominated by Smith Kline Consumer Products Horlicks which has a 45 per cent share of the market.

At another end of the business, Cadbury is trying to muscle its way into the sugar boiled confectionery market. The company made its first move into this giant market last December when it introduced the first of its Trebor range. The first product on the market was called the Googly and it is expected to be the first of many more which will be introduced over the next couple of years.

Cadbury will, however, have a tough fight on its hands as it attempts to edge into the boiled sweets market. The boiled sweets business, which was shunned by the big players in earlier years, is largely dominated by the unorganised sector. Even the big established players like Parle, Ravalgaon and Parry only control one-fifth of the total market. Cadbury abandoned plans to acquire south-based confectionery maker Nutrine last year.

Presently, sugar confectionery is reserved for the small-scale sector and Cadbury is sourcing its products from manufacturers in Hyderabad. But, if its range gets bigger, it may look at manufacturing them in-house.

What will happen by the time Cadbury brings its expansion plans to a sweet conclusion 18 months from now? Will Indians start snacking and munching on a scale that will put Cadbury on course for bigger sales and profits? And will the company be able to tackle tough rivals like Nestle and Mars? These are high-calorie questions for the future.

But Cadburys gung-ho boss Jim Robertson is unfazed by the unexpectedly lean times. He is increasing capacities in his chocolate factories around the country that will almost double Cadburys output.