Kraft’s Acquisition of Cadbury Essay

The Kraft Foods Group Inc. (â€Å"Kraft†) operates in the food and beverage industry. Kraft is the U.S.’s #1 food company and #2 in the world (after Nestlà ©) in sales according to Hoover’s 2009. Their competitive advantages are: global scale [distribution around 150 countries, (LexisNexis, 2012)]; modern technology, equipment and R&D (â€Å"Kraft deploys SAP Tech. platform†, 2008); their partnerships with companies like AOL TWX, Rainforest Alliance, etc. (â€Å"Kraft Foods partners with Rainforest Alliance on sustainable coffee initiative†, 2009); and their supply chain (www.pincsolutions.com/kraft-foods, 2012). These advantages can attribute Kraft’s Net Profit Margin of 10.08%, compared to the industry’s average of 5.37% (Hoover’s, 2012). On the other hand, Cadbury is a confectionery and is the industry’s second-largest globally after Mars (Gray, 2009) and the company operates in approx. 50 countries worldwide. Their capabilities, brand popularity and innovation represent their main competitive advantages (â€Å"Using Open Innovation to Ensure Competitive Advantage†, 2010). With the acquisition, Cadbury will benefit from Kraft’s scale (Birchall & Wiggins, 2009), their distribution in emerging markets (Elms, â€Å"Kraft and Cadbury) and their marketing muscle (English, 2009), which will result in a faster growth for Cadbury. Kraft will benefit by diversifying even more on related business (they already own Toblerone, Nutter Butter, etc,) and also from Cadbury’s capabilities (brand, innovation, know-how, etc.) that will likely represent as an additional source of value creation for Kraft. Together the companies will surely impair the competition: for example the termination of Hershey’s license to make and sell the Cadbury brands in the U.S. (30% of total sales, Hoover’s, 2008). Currently Kraft if facing two major issues, and they are: – The acquisition only makes sense if Kraft can obtain a return on investment capital bigger than the cost of capital within a reasonable timeframe. – The competition with Nestle, Hershey and Mars. The recommendations are the following: Kraft should boost the growth and profitability of Cadbury by exploiting their scale, marketing potential, placing in emerging markets and partnerships, as they did with Post cereals in 2008 (Hoover’s, 2009). Additionally on the functional level, Cadbury’s legal department should terminate Hershey’s license to sell and distribute their products in the U.S. and transfer this licenses to Kraft. Kraft should also take advantage of the Cadbury acquisition (diversifying on related business) and this should result in the creation of additional value for Kraft, resulting in a competitive advantage vs. competitors (Nestlà ©, Mars, etc.). A â€Å"tapered† integration of Cadbury is reasonable: selling the distribution rights to competitors in the markets where Kraft is not present (43 countries); at the same time Kraft should exploit the exclusive distribution and fabrication rights for Cadbury’s products where they are present.