Cadbury Acquisition Starting to Reap Benefits for Kraft

KFT: Kraft Foods logo
Kraft Foods

Kraft Foods‘ (NYSE:KFT) Cadbury acquisition is starting to yield results as the company is able to leverage the high brand recognition of its products with Cadbury’s existing distribution and supply chain networks in developing markets. Kraft reported a 54% jump in full year earnings on February 21. Revenues from the developing markets were up 16% to $15.9 billion and now constitute almost 30% of the total revenues. Kraft acquired Cadbury Plc in February 2010 in a deal valued at around $18 billion. Kraft competes with players like PepsiCo (NYSE:PEP), General Mills (NYSE:GIS) and Kellogg (NYSE:K). We currently estimate a $34.68 price for Kraft Foods.

See our full analysis for Kraft here

Price Matters

Smaller packs are often the key to success in developing markets for a couple of reasons. Firstly, the absolute value of the price matters more than price/quantity. Lower-priced products often encourage consumers to try them. Spending money on chocolates and snacks is still a luxury for a considerable portion of the population, and the consumers don’t feel the need to spend on a higher priced product (even though it may offer better price/quantity).

Relevant Articles
  1. How Will Coffee Prices Affect Kraft’s Beverages Business?
  2. Commodity Cost Pressures Weigh On Kraft’s Second Quarter Earnings
  3. Kraft Earnings Preview: Higher Commodity Costs, Lower Grocery Sales To Weigh On Earnings
  4. 3 Key Trends Impacting Our $61 Price Estimate for Kraft Foods Group
  5. Kraft Earnings Preview: Pricing, Cost Pressures Could Mute Earnings Growth
  6. Higher Commodity Costs To Weigh On Kraft’s Margins This Year

Secondly, Americans have a preference for larger portions of food compared to people outside the U.S. This is where Cadbury’s excellent supply chain and distribution networks will come in handy for Kraft. It will allow the company to possess a wide range of products with variegated pricing to appeal to a broader base of consumers. For example, Oreo cookies are now available in India for a price as low as Rs 5 (10 cents). In fact, the bigger pack, which costs Rs 20 (40 cents) now, was priced at Rs 50 ($1) before the acquisition.

And it’s not just the distribution networks. Cadbury has established a long relationship of trust with small retail outlets (read mom and pop stores) and these retailers are more than willing to extend the relationship to incorporate new products. Had it not been for Cadbury’s existing networks, Kraft wouldn’t have been able to add lower-priced products to its portfolio since the absolute value of margins is too low to sustain profitability.

In India, Kraft was able to use Cadbury’s existing distribution networks to make Oreo and Tang available in more than 300,000 retail outlets within 6 months of their launch. Similarly, in Brazil, the company expanded sales of Kraft products into 650,000 retail outlets.

And its not just Cadbury’s networks that the company is leveraging, the reverse is true as well. Using its own supply chain and distribution networks, Kraft was able to make Cadbury products available in more than 75,000 retail outlets in Ukraine.

Understand how a company’s products impact its stock price at Trefis