Chocolate spread over

May 2010

The takeover of UK chocolate maker Cadbury by US food giant Kraft was announced in January 2010. Ending months of speculation, the decision was greeted with dismay by workers at Cadbury factories in the UK. Corporate mergers and acquisitions of this nature often result in a process called rationalisation where operations are streamlined, with jobs nearly always shed in the process. Of wider concern is the fact that Cadbury represents nearly 200 years of British tradition. As children, most UK citizens enjoy Cadbury products. As adults, many worry that ownership of such a key British player can transfer so easily into foreign hands.

In our in-depth analysis of Cadbury, we take a look at the issues surrounding the increasingly globalised ownership of big businesses.

More widely, this case study asks why some countries have rules to prevent foreign acquisition of their firms while others do not. We also analyse the geography of chocolate production and the wider workplace ethics of this global business.

In the Members' Area:

• Building a bigger global business: Kraft chews up Cadbury

• Should the UK allow its own TNCs to be taken over by foreign firms?

• The global geography of chocolate

• Homework assignment (for IB and A-level courses)

• Practice question and mark scheme

• KS3 overview

Building a bigger global business: Kraft chews up Cadbury

After 186 years trading as an independent company, Cadbury has now been swallowed by an even bigger firm – US food giant Kraft. In the past, predatory Cadbury has gobbled up its own fair share of confectionery and drink firms from lower down the food chain – including rival chocolate company Fry's (1919), drinks maker Schweppes (1969) and Fair Trade chocolate producer Green & Blacks (2005). But this time around, Cadbury has itself become the prey.

Cadbury has Quaker roots – meaning is founders had a strong religious belief that all people should be treated fairly, including its staff and suppliers. For nearly two hundred years,

Cadbury employees have reported feeling “part of a family”. In the Victorian era, firms like Cadbury – and a few other visionary firms such as Lever’s soap factory (in Port Sunlight, Merseyside) – were beacons of hope for England’s exploited working class. Today, thanks to workplace legislation and the UK’s minimum wage, all people can claim as their right what only a minority comprised of Cadbury employees could expect 150 years ago, namely an adequately paid job with decent working conditions.

Over time, Cadbury has gone from strength to strength and the company’s more recent experiences as a major transnational corporation (TNC) makes an interesting case study.

In 2000, Cadbury’s management made it their goal to build Cadbury into the biggest business in the global confectionery market (Financial Times, 12 March 2010). They began a new round of growth by buying Adams, a US chewing gum company. But in 2006, Cadbury was suddenly rocked by a health and hygiene scandal: salmonella contamination of its UK factories forced the recall of one million chocolate bars, damaging sales and incurring a heavy fine.

This setback was a turning point in the fortunes of the firm. Soon after, Cadbury jettisoned the Schweppes brand in order to raise funds and re-consolidate its primary position as a food, rather than drink, company. Now that Cadbury had become smaller, however, it was suddenly an easier target for other firms to buy; key hedge fund players began to purchase large amounts of company shares. The combination of shares moving into the hands of people keen to encourage a takeover of Cadbury (anticipating that the value of their investment would rise) - allied with the ambition of Kraft chief executive Irene Rosenfeld to build a bigger portfolio of famous confectionery – lies behind the recent takeover

At the start of 2010, US food giant Kraft - famous for making Ritz crackers – agreed to pay almost £12 billion for Cadbury after a four-month hostile takeover battle. Once the initial dust had settled, Kraft’s integration of Cadbury began in earnest with the transfer of 12 out of 17 Cadbury senior executives into the Kraft management team. However, an "inner circle" senior management team that surrounds chief executive Rosenfeld remains unchanged, meaning that no-one from Cadbury has been taken on at the very top level of decision-making (Financial Times, 20 march 2010). Cadbury has been acquired by Kraft, rather than this being a merger. “It is a bolt-on acquisition rather than a transformation deal” one source told the Financial Times.

Interestingly, Kraft was itself acquired by US tobacco manufacturer Phillip Morris in1995; the decision to continue to use the Kraft name thereafter may reflect the poor image that cigarette makers increasingly have. It is one of globalisation's many ironies that the idealistic Green & Black's brand - founded on the use of Fair Trade cocoa from Belize, and later acquired by Cadbury - is now part of an enormous financial empire founded on tobacco manufacture.

Should the UK allow its own TNCs to be taken over by foreign firms?

Critics of the Cadbury-Kraft deal say the US company has been allowed to “steal” a British company. In March 2010, UK workers' union Unite even proposed that a new "Cadbury's law" should be introduced. Its purpose? To stop "national treasures" such as Cadbury from falling so easily into foreign hands. Iconic British businesses, some people argue, should stay under national ownership, even in such a globalised world as ours. But analysis of the geography of Cadbury prior to its takeover reveals surprising facts suggesting the business has not been truly British for many years!

Companies with long-established roots in a particular place - such as Cadbury, whose deep association with the Midlands spans almost two centuries - can benefit local societies in more than economic ways. They also become part of the social and cultural "fabric" of a place. Whole generations of families may work for such firms, providing a community with its own sense of history and continuity. This kind of externality cannot be financially valued; but many people will agree that it should be an important consideration when firms are considering whether or not to change location.

One major shareholder of Cadbury was reported to be upset that this “iconic and unique British company” has now been sold to an American firm (Financial Times, 12 March 2010). The "loss" of such a famous British brand to a foreign predator brought hostile comments from many newspapers. The Daily Mail filed the report “Keep Cadbury British!” (20 December 2009), saying: “We believe that far too many British companies have fallen into the hands of foreign owners. We do not want the same to happen to Cadbury. We do not want to eat American chocolate. We want British chocolate made by British workers.”

The Kraft deal was especially sensitive because Cadbury became the highest-profile sale to date in a long and potentially worrying line of acquisitions of successful British businesses by overseas agents. These have included Corus (steel), airport operator BAA and chemical group ICI.

Ownership issues are, however, more complex than might at first appear to be the case. In a globalised and interconnected world, the economic facts require careful investigation. To build an accurate "global profile" for any firm, we need to examine several different aspects of ownership and production. The real facts about Cadbury prior to its takeover were as follows:

• Cadbury already operates in 60 countries, sourcing its production from the most cost-effective locations it can find

• Prior to the takeover, UK institutions only remained in control of one third of total equity (shares). North American institutions and investors already controlled around 50%

• At the time of takeover, one-third of Cadbury's board of directors was foreign and no Cadbury family member has served on the board of directors for over a decade

Admittedly, the head office has until now remained in the UK. But as the Financial Times (22 February 2010) argues, does it really matter where it is located when so many other aspects of ownership, control, production and sales are already globalised? It is certainly true that Cadbury, in many respects, ceased to be a truly "British" firm many years ago.

Nearly all of the world's TNCs today show similarly diffuse patterns of ownership, control and profit distributions, with the exception of a minority of family-owned firms such as Walmart.

Globalisation and protectionism

International organisations such as the International Monetary Fund (IMF) and the World Trade Organisation (WTO) are advocates of free trade and decry protectionism. In line with this, poor countries that borrow money from the World Bank make pledges not to politically interfere with international trade and investment flows. However, a quick look at the actions of key global players shows us that it is far from being the case that all nations adhere to these guidelines. For instance: 

• India New Delhi prohibits outright foreign ownership of businesses operating in India. In the retail sector, for instance, foreign equity (share ownership) is capped at 51 per cent. This rule last year led Ikea to abandon its efforts to set up shops in India.

• China The Chinese government sometimes directly intervenes when foreign firms try to buy important Chinese businesses. China's rejection of Coca-Cola Co.'s $2.3 billion bid in 2009 to buy China Huiyuan Juice Group Ltd. is an example (the Ministry of Commerce, said any deal would “harm competition in the domestic beverage market”).

• US “Poison pills” are a policy designed to stave off unwanted attention by potential buyers of well-established companies. When threatened by takeover, firms can dilute the value of their shares, thus weakening the voting power of a potential acquirer.

Should the UK government do more to prevent foreign acquisition of UK companies along similar lines? Can, and should, anything be done to change the rules in the UK?

The case against making any changes to the law is that:

• The UK remains the world's sixth largest manufacturing economy measured in terms of output (rather than employment). In part, this success may be attributable to foreign direct investment (FDI) from US, Japanese and German firms. Would Mini cars still be produced in the UK if it were not for investment from German owner BMW?

• Exchanges work both ways and UK firms can increase their own profits by buying foreign firms too. Since 2000, British companies have bought more companies overseas than vice versa (Financial Times, 16 March 2010).

• Foreign ownership can increase a firm's profitability, by helping build overseas sales

However, it would be possible for the UK government to “tweak” the existing rules and lift the shareholder acceptance threshold level (for a foreign bid) from 50% today to a higher future figure such as 60%. This would allow long-term investors (rather than short-term speculators) to have a bigger say in blocking the sale of British brands, thereby protecting local jobs.

Any such change would be warmly welcomed by Todd Stitzer, the out-going chief executive of Cadbury. He told the Financial Times (16 March 2010): “I spent 27 years of my life at this company, I absolutely love what it stands for and what it has done ... the whole idea that ‘doing good is good for business’, the intersection of principled capitalism, and commercial and financial performance, is what drives people at this company. They actually believe that not only are they great confectionery marketers or sellers or manufacturers but that it means something because the Cadbury Cocoa Partnership is investing in underdeveloped farming areas or because the chocolates have been certified by Fairtrade.”

The global geography of chocolate

"Globalisation has sharpened competition, and confectionery is easy to make somewhere and transport. The hard truth about soft centres is that while consumers care passionately about a brand they are unlikely to care where it is made" (Financial Times, 17 September 2010).

Cadbury is not the only major chocolate company to have changed greatly in its structure and functioning in recent years. Other firms have grown their global businesses in sometimes controversial ways. Whether a firm domiciled in a particular country should accept that it has a wider social responsibility (safeguarding the livelihoods of workers and their families) - or should instead act solely in the interests of shareholder profits - is a highly debatable issue.

Cadbury was itself heavily criticised over plans first announced in 2007 to shut down its UK Somerdale plant at a loss of almost 500 jobs. The reason offered? Vacant premises had been found in Poland where chocolate can be made far more cheaply than in the UK.

Another UK firm, Rowntree (makers of KitKat), was bought by Swiss food giant Nestle back in 1988. Nestle at first pledged "business as usual" after the takeover, suggesting British Rowntree jobs were safe.

• But 20 years later, the UK Rowntree workforce is half what it used to be.

• Pay for workers was frozen between 2007-09.

• In 2006, Nestle moved 645 jobs into Europe. Kitkat is now manufactured in Bulgaria, and Aero in Czech Republic where wages are much cheaper than in the UK

However, being part of a bigger brand has benefited the Rowntree legacy in varied ways. Nestle were able to expand KitKat into Asian and Latin American markets by employing glocalising strategies. In Japan it is made in 100 varieties, including sweet potato! In total, the KitKat brand now has annual global sales of £584 million (Financial Times, 17 September 2010).

Find out more at this blog: Tokyo5

Homework assignment (for IB and A-level courses)

Chocolate & corporate responsibility in LDCs: further research suggestions

1) Prior to chocolate manufacturing, conditions and pay for workers in the primary phase of cocoa production also often brings controversy. One third of all cocoa is grown in Ivory Coast, a very poor African country. Its HDI score is ranked 163rd and GDP per capita is $1,100.

Try and answer the question: If chocolate is such a big global business, why is Ivory Coast still so poor?

2) Nestle has often courted social and environmental controversy on account of its global actions. There have been recent accusations that Nestle products like KitKat contain palm oil from Indonesians suppliers who are clearing tropical rainforest and driving orangutans to extinction. Protesters in orangutan suits recently gathered outside Nestle’s Croydon headquarters. Find out more on the BBC website.

Try and answer the question: Why should ethical production of chocolate involve more than just Fair Trade?

Practice Questions

Practise Questions (with mark scheme)

Study Figure 1.

Figure 1 A timeline for Cadbury

(a) Explain how companies such as Cadbury have grown into global businesses. (10)

(b) Examine how globalisation presents different groups of people with moral and ethical challenges. (15)

Mark scheme

Question Number

Indicative content

(a)

Ideas can be taken from Figure 1 or own knowledge:

• Use of advertisements

• National / international mergers and acquisitions

• Glocalisation strategies (products or adverts)

• Embracing initiatives e.g. Fair Trade

Level

Mark

Descriptor

Level 1

1-4

One or two simple ideas. Geographical terminology is rarely used. There are frequent written language errors.

Level 2

5-7

Some structure and some discussion of a range of ideas. May categorise (e.g. national and international mergers). Some geographical terminology is used. There are some written language errors.

Level 3

8-10

Structured explanation of a range of ideas. Appropriate geographical terms show understanding. Written language errors are minor.

Question Number

Indicative content

(b) Possible groups of people:

• Shoppers (what to buy?)

• TNC managers (where to invest?)

• Governments (what rules should govern TNCs?)

• Producers (can form co-operatives / unions)

• Focus should be on globalisation and the fair treatment of people, employees. Can also extend to environmental considerations.

Level

Mark

Descriptor

Level 1

1-4

One or two simple points about Fair Trade. Frequent written language errors.

Level 2

5-8

Some structure. Knows that Fair Trade is important and may discuss views of two or more groups of people. Some geographical terminology is used. There are some written language errors.

Level 3

9-12

Structured account dealing with a range of people and some global issues. Geographical terms show understanding. Written language errors are minor.

Level 4

13-15

Well-structured account which explains how a range of groups of have addressed some of the key ethical and moral issues associated with globalisation. Uses appropriate geographical terms and exemplification to show understanding. Written language errors are rare.

KS3 overview of this topic (PDF)

Written by Dr Simon Oakes, a teacher at Bancroft’s School (Essex), Chief Examiner for IB Diploma Programme geography and A-level Principal Examiner for Edexcel. His new book Globalisation is published by Philip Allan Updates (April 2010).