PRE-ACQUISITION DUE DILLIGENCE
The following data relate to the World confectionery market ( IN BILLIONS)
| MARKET VALUE
MARKET VALUE CAGR – 6%
CONSUMPTION CAGR – 4.8%
* Chocolate is the no. 1 impulse buy in many countries including India
* The global chocolate confectionary market till around 2008 was dominated by 9 multinationals namely Cadbury, Ferrero, Hershey, Kraft, Leaf, Mars, Nestle, Warner-Lambert, Wrigley
| Net Sales in billions
| Number of employees
| Number of factories around the world
| MARS Inc
PORTER’S FIVE FORCES MODEL
Using Porter’s Five Forces Model, a structural analysis of the industry shows:
* The threat of entry: LOW
* High Product differentiation
* High Economies of scale
* Advertising necessary for brand awareness
* Access to distribution channels: concentrated retail supermarket; * Capital requirements: High capital investments in production technology and supply chain technology * Cost advantages independent of size- Experience in production and distribution of major operators.
* Threat of substitutes: MODERATE/HIGH
* Growth in light food snacks, introduces possibilities: healthier snacks; fun fruit packaging; savoury snacks.
* Supplier power: MODERATE
* Milk, sugar subject to local country prices, maybe inflated but stable; * Cocoa
* Concentrated source of supply for Cocoa
* Cocoa product unique
* Subject to price fluctuations, but larger manufacturers can hedge against this by backward integration (Like Cadbury does)
* Buyer Power: Potentially HIGH
* As there is a concentration of buyers – limited retailers * Competition for shelf space in high;
* There is a threat of backward integration from retailers, especially with brand only products being introduced;
* Only 30% of confectionery is sold through supermarkets; other outlets include petrol stations, off-licenses, vending machines, and so on, so the effect is offset a little.
* Competitive rivalry: HIGH
* Numerous competitors - The global chocolate confectionary market till around 2008 was dominated by 9 multinationals namely Cadbury, Ferrero, Hershey, Kraft, Leaf, Mars, Nestle, Warner-Lambert, Wrigley There are many smaller companies operating within the chocolate confectionery and sugar confectionery sectors.
* Industry growth is slow – CAGR of about 6%
* Fixed costs are high to enter/exit the market
* Rivals are diverse in strategies, origins and personalities and constantly run head-on into each other
* Product can be differentiated
The industry is highly competitive and fragmented. Though the competition is among few notable players, no player has a dominant position to dictate the price levels. The players rely largely on advertisements to promote their brand and secure the market position (Food and Beverages Industry Profile, 2009).Substitutes threaten, competitors are in balance:There is slow market growth; There are high exit barriers (Capital intensive);
VERDICT: THE INDUSTRY IS NOT ATTRACTIVE
TESTS FOR DIVERSIFICATION:
Attractiveness Test: the acquisition makes Kraft the global leader in the chocolate and confectionary industry (try and put projected revenues). Also it gives Kraft an entry into the emerging markets and thus leading to geographical diversification. Cost of Entry Test: please do a comparison of revenue vs acquisition costs The Better- Off Test: The acquisition helps internalise Cadbury’s core competency of superior supply chain...
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