Thursday, September 24, 2009

Cadbury's Stitzer's Key Customer Insights

Tuesday's Wall Street Journal featured an article detailing a supposed "softening" of Cadbury CEO Todd Stitzer.

However, buried deep within the story were two refreshing and insightful quotes by Mr. Stitzer. The first was,

"I completely respect the fact that we would be attractive to someone else, but the world of large conglomerates has passed," he said. "Shareowners recognize that focused businesses, and focused in an area that has commercial and operational synergies, is a very good space to be."

This is a rare, honest admission for a CEO. Granted, Stitzer's Cadbury is the prey, not the hunter. So it's self-serving. But it's also true. Contrast his candor with both parties' words in the recent Dell-Perot Systems deal.

This was followed by the article's noting,

By buying individual confectionery brands, Mr. Stitzer said Cadbury has tried to grow bigger within the category, rather than by teaming up with a bigger food company.

Stitzer's focus, via that strategy, becomes more evident with the next passage. The piece then quoted Cadbury's CEO again,

"I think scale works to a [point]," he said. "There's a confectionery buyer in retailers and I think you can focus on that buyer, and if you can offer chocolate, gum and candy, I think that's an advantage. What more can you offer to the confectionery buyer in the grocery store? They don't necessarily and are not generally responsible for anything but confectionery."

Putting these two views together, one what seems to be a really non-delusional, focused, in-touch CEO. One that understands his direct customers, the retail food merchant's buyers.

With them in mind, he's built Cadbury out within the scope of his current customers' pervue. But he rightly notes that Kraft primarily markets to other buyers, albeit within the same grocery store.

After the requisite administrative costs are shed, what then? What organic, post-merger accounting growth will be realized?

If anything, Stitzer is really making the case, by omission, for another approach entirely.

Why doesn't Kraft offer to sell its confectionary businesses to Cadbury for stock, and a seat (or however many make valuation sense) on the British firm's board?

That way, Kraft gets the value of scale within confectionary products, but avoids the curse of oversized conglomeration. Irene Rosenfeld's management team can focus on food products, while reaping the benefits of Cadbury's economies of scale within their category. In time, subject to deal terms, Kraft can sell its stake in the market, or to Cadbury, for a premium, while relinquishing board presence.

The nearby price chart for Cadbury, Kraft and the S&P500 Index shows an interesting picture. Over the period, though moving in similar patterns, Cadbury has substantially outperformed Kraft. In fact, Kraft ended down, in absolute terms, about even with the index, while Cadbury managed to have gradually, consistently bested Kraft's performance.

It argues for Cadbury's management to handle the commonly-held confectionary businesses, not for Kraft to get a larger collection of assets to mismanage.

Granted, Irene Rosenfeld has shown promise. But as I noted in this post from early 2007, Kraft has been plagued by management lethargy for years.

Looking at the price chart again, while mystified how Kraft could have a stock price prior to 2007, when it was part of Altria, I can't help but think that my idea would be better for shareholders of both firms than Ms. Rosenfeld's attempt to take over Cadbury.

No comments: