Sweet Surrender: Can Kraft’s Cadbury Acquisition Help It Tap the Indian Market?

Even skeptics of U.S.-based Kraft Foods’ lengthy courtship of U.K. confectioner Cadbury over the past year have to concede that the cash-and-shares acquisition — with a final price tag in February of US$19.4 billion — makes sense when considered from one particular perspective: growth. Hit by the Great Recession, Kraft’s home market has been suffering, in sharp contrast to the heady double-digit expansion of its developing-market businesses. To help fan that growth, Cadbury will give the multinational something it didn’t have — a foothold in India. In return, Kraft will bring a bigger array of products to Cadbury’s chocolate-and-gum portfolio, while cementing the newly expanded company’s impressive lead in the country’s confectionery business. As C. Y. Pal, non-executive chairman of Cadbury India, notes, “India is a very happy story for Kraft and Cadbury.”

Kraft’s acquisition is the type of “horizontal expansion” that can work well in today’s post-economic downturn environment, according to Wharton management professor Larry Hrebiniak. The deal might be overpriced, he says, but it does allow both companies to “expand on their strengths,” while diversifying in complementary markets in countries such as India. “The number-one reason for a company like Kraft to do a deal like this is that it is looking for new markets and the attendant increased size and market share — and with size and market share comes clout.” Indeed, the acquisition puts it nearly 70% ahead of rival Mars in terms of confectionery sales in emerging markets, says a Cadbury manager.

But a new market can also bring new headaches, as Kraft, which has tried to enter India before, well knows. Winning over Indian consumers with new snack foods won’t be easy. Chocolate is one thing, says Hrebiniak, but selling macaroni and cheese is another. “It’s not going to be a picnic.”

Emerging Stronger

Emerging markets have underpinned both Cadbury’s and Kraft’s growth strategies for a number of years. Today, developing countries account for 38% of Cadbury’s US$8.3 billion group sales and 20% of Kraft’s US$40 billion in sales, according to London-based research firm Euromonitor International. In most of those key markets, Kraft dwarves Cadbury — 2008 revenue in Brazil, for example, totaled US$1.2 billion against Cadbury’s US$400 million; in China, its turnover was US$400 million compared with the U.K. firm’s US$50 million, and in Russia, US$800 million compared with US$200 million.

Yet India is one country where Kraft will be leaning heavily on Cadbury. Since setting up in India more than 60 years ago, Cadbury is the largest confectioner in the country, with Nestlé a distant number two. Cadbury brands such as Dairy Milk, 5 Star, Perk, Eclairs and malted milk additive Bournvita have helped it command some 70% of India’s US$425 million chocolate market, and 30% of the US$1 billion sugar boiled confectionery category, according to marketing research firm ACNielsen.

However, market share is not the only gain for the U.S. multinational. “Cadbury’s distribution network will be invaluable for Kraft,” says Sridhar Samu, professor of marketing at Hyderabad-based Indian School of Business (ISB). Today, a network of 1.2 million shops sells its products across India — no small feat in a country with highly fragmented supply chains. “It’s a marriage made in heaven as far as the distribution is concerned,” Sanjay Khosla, Kraft’s president of developing markets, told The Economic Times during a recent visit to Mumbai.

‘Generations Behind’

But Samu adds a note of caution: Indian consumers aren’t always quick to embrace Western products, and getting accepted can take “over a generation.” He notes that while the Indian market may look attractive in terms of size and spending power, “the buying and consumption pattern has not changed significantly over the years.” A case in point: Despite the growing presence of supermarkets and hypermarkets in India, 98% of food is still purchased from the 12 million neighborhood mom-and-pop outfits called kirana stores. If nothing else, that makes distribution extremely difficult.

Also, because India is still a very agrarian society, Sumit Chandna, Mumbai-based head of fast-moving consumer goods (FMCG) at Aditya Birla Retail’s MORE supermarkets and hypermarkets, says Kraft could face an enormous challenge getting its food products on to supermarket shelves. “The whole processed food category is fairly nascent,” he explains, noting that the largest FMCG company in the country is the personal and home care division of Unilever. “We are generations behind when it comes to food,” says Chandna.

That could partly explain why growth has been relatively slow for Cadbury. Other reasons include the company’s narrow confectionery product range. Over the years, the Cadbury has tried to expand its repertoire in India, launching, for example, the country’s first apple drink, Apella, and Dollops ice cream and cookies. Yet the purple wrapping of its chocolate bars is still what Indian consumers associate the Cadbury brand with. Being under the Kraft umbrella, however, will broaden that range to include cheese, Oreo cookies, more chocolates like Toblerone and Milka, and beverages such as Tang, Kool Aid and Maxwell House coffee.

With the help of markets like India, Hrebiniak says Cadbury worldwide will need to step up the pace over the next few years “to justify its purchase price.” Kraft, he notes, will want to see the top line at Cadbury growing globally around 10% and Ebitda (earnings before interest, taxes, depreciation and amortization) margins at 27% over the next four or five years to justify the premium Kraft is paying. “Historically, Cadbury has been a little short of that, approximately 5% and 20% respectively.”

Survival Tactics

Regardless of the new diversity of its portfolio, the old challenges of India’s confectionery market will remain. Consider the low unit price of many candies, which range from half a cent to 15 cents. Given the low prices, a chocolate maker can hit volume targets relatively easily and can regularly roll out new candiesto keep consumers enticed — in 2009 alone, there were more than 70 launches. However, the survival rate is extremely low. According to marketing experts, less than 10% of these new brands survive beyond their first year. What’s more, the low barriers to entry attract many fly-by-night manufacturers and have also left the market enormously fragmented, to the consternation of many Western players like Unilever. After just four years, the Anglo-Dutch firm withdrew its Max candy range in 2005, apparently disappointed that it only had 5% of market share. “The costs didn’t justify the volumes,” says a Unilever manager.

To get a foothold in India, innovation is critical, as other confectioners in the country confirm. A case in point: Perfetti Van Melle (PVM), a privately held Italian-Dutch firm, which owns Chupa Chups lollypops and Mentos mints. Having entered India in 1994 and set up three factories in various parts of the country, PVM has a 25% share of the confectionery market today. The company’s success, say experts, is due to its innovative products — it was the first company to launch center-filled gums and candies in India — at the right price points. “The innovation helped us price the products at 100% premium to the competition,” says Sameer Suneja, the New Delhi-based managing director of PVM.

The company has been innovative in other ways, including sales and distribution. During its early years in India, PVMsent its entire range of products to retailers throughout the country, but “we soon realized that retailers operate on a daily working capital basis and choose only fast-moving products,” Suneja notes. So it segmented its sales teamalong product lines — chocolate, gum and mints — and the speed at which the products were sold, tailoring their sales efforts accordingly to increase supply chain efficiency.

But pricing and distribution are not the only hurdles for Western chocolate makers. While there is still huge growth potential — Cadbury estimates that per capita consumption of chocolate in India is 54 grams, compared with 11 kilograms in the U.K. — India has its own formidable confectionery industry. For sure, Cadbury and the raft of other Western confectioners in India are competing not only with each other, but also with the ubiquitous assortment of traditional milk-made Indian sweets, or mithai, consumed at home and on special occasions. “Indians have a massive sweet tooth, but it’s fulfilled by mithai, not chocolates,” says Ramesh Srinivas, executive director of KPMG Advisory Services India, who oversees the consumer business practice.

Even mighty multinationals like Cadbury have been unable to crack that market. According to a former marketing head at the company, “We always grappled with the question of how to take on mithai.” Some years ago, he says, Cadbury worked with local brand Amul, which is owned by a dairy cooperative in Anand in the western state of Gujarat, to make mithai to add to its chocolate. But the Indian-Western medley ultimately failed to excite consumers.

Snack Attack

The good news is that India is a snacking haven, with every state having its own vast array of sweet and savory treats. “The snacking market is driven by unorganized players, leaving enough room for established companies to grow,” says Vijay Chugh, vice president of research at Mumbai-based Ambit Capital.

Kraft is hoping to make the most of that opportunity. The American food giant entered India in 2003 in a joint venture with Chennai-based Kothari Group to manufacture Tang, its powdered orange drink. The launch of the premium-priced drink mix coincided with the introduction of 10-cent 200 milliliter bottles by U.S. soft drink manufacturers Coca-Cola and PepsiCo. With Tang making little headway in a price-conscious market, Kraft beat a hasty retreat a year later.

Even so, Kraft is a known brand name in India: Products like Kraft cheese and Toblerone chocolate are imported and prominently displayed on shelves in many of India’s new supermarkets and hypermarkets. “Kraft’s portfolio is what I call ‘higher order’ products,” says Aditya Birla’s Chandna.

Now, with the Cadbury acquisition sealed, “Kraft’s success will require a lot of brand-building activities to position [other] brands among Indian consumers,” says ISB’s Samu. Pivotal to Kraft’s success in India will be its ability to forge an “adapt-and-adopt” strategy, says Chandna. “It needs to be very selective [about] which products in its portfolio it wants to sell and has to know what the local market is ready for. The key is not where to introduce its products, but what to introduce.” Kraft’s Khosla echoed this approach during his Mumbai visit. It’s “about being ‘glocal’ [that is, both global and local],” he said. “We are now empowering local leaders and listening to local consumers.”

In that respect, Kraft might want to take a leaf from PepsiCo’s book. With a 20-year track record in the country, the US$43 billion snack food and beverage multinational is now one of the largest consumer products companies in India. Its flagship India brand — Frito Lay’s Kurkure snack — was created specifically for the Indian palate. Kurkure flavors include “masala munch,” “green chutney Rajasthani style,” and “xtreme risky chili,” and three years ago, a special edition flavor — “jaljhalo hit” — was launched during the traditional puja festival in the eastern state of Bengal. On the back of Kurkure’s success, Frito-Lay India launched Aliva crackers, which are made with local spices, wheat and other ingredients, in June last year. As Cadbury’s former marketing executive notes, “We need to see if Sanjay Khosla can do for Kraft what [PepsiCo CEO] Indra Nooyi did for Pepsi India.”

Perhaps because of its earlier experience in India, Kraft has been busy honing its “localization” skills in other emerging markets. Sometimes, it has been a matter of trial and error. In China, for instance, after it launched the American version of its Oreo cookies, sales were flat initially. Research showed that both the product and price were problems: The cookies were too sweet for the Chinese palate, and the 72-cent pack was considered too expensive. Kraft then developed less sweet Oreos in smaller packs costing 29 cents. Also, a new Oreo variant was launched soon after. The four-layered Chinese Oreo — with vanilla and chocolate cream coated in chocolate — soon became the best-selling biscuit in China, racing ahead of the original Oreos.

However, Cadbury India has been slower to tailor its products to Indian tastes. “Cadbury never thought of localizing its products until recently,” notes Srinivas of KPMG. But it has been making up for lost time. In the last year, Cadbury has been changing recipes to improve the shelf life of some of its chocolate bars. For example, mini-packs of Dairy Milk are now made to withstand India’s heat — which is useful in a country with many retailers who do not have refrigeration units and who have to contend with regular power outages — and are sold in packs costing 4 cents, compared with nearly 50 cents earlier. Distributors say that the strategy has not only helped Cadbury increase chocolate penetration, but consumers are also buying more.

Amid all this, Kraft will have to keep an eye on the usual post-merger integration issues, says Wharton’s Hrebiniak, including production, possible structural change, distribution and communication externally and between the two companies. “Will Kraft try to change anything at Cadbury India?” he asks. Perhaps not initially. After all, “it needs to learn what the impediments are; what it can and can’t do in India. For that, it needs Cadbury.” But given a few years, “I have confidence that they’re going to work this out,” he says. “They’re going to be big.”

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