New products to drive Cadbury growth

In the 18 months since Cadbury acquired US-based confectioner Adams, the company has worked hard to restructure its operations to unlock the synergies created by the addition of the largely functional confectionery business.

And the hard work appears to be paying off. "We have made good progress in 2004 with momentum in key areas of the business driven by strong performance of core brands and cost savings from our Fuel for Growth initiative,"​ CEO Todd Stitzer said this week in a trading statement.

In the confectionery sector, growth was driven by core brands Cadbury, Halls, Hollywood and Trident, and by innovation, Stitzer said, underlining the importance of new product development to the company.

Cadbury is targeting a threshold of at least 15 per cent of sales from NPD over the next four years, and GS estimates that the company will up its investment in innovation by around 20 per cent as it seeks to generate even greater returns from innovative products, in particular in the functional confectionery sector.

The acquisition of Adams gave it unrivalled positions in many more international markets - it now has 23 number one or two positions in global confectionery markets, up from just 14 prior to Adams.

Moreover, while its global market share of 9.2 per cent puts it on a par with Mars (9.9 per cent) and Nestlé (7.8 per cent), only Cadbury has strong positions in chocolate (7.2 per cent of world sales), sugar confectionery (6.4 per cent) and gum (24.7 per cent), as well as a truly global reach with strong market shares in every region.

This - along with a major R&D hub for gum and medicated confectionery in the US and smaller research centres for chocolate in Bourneville (UK) and sugar confectionery in Lille (France) - has given the company a very solid base on which to build a strategy focused on NPD, according to GS.

Yet Cadbury has traditionally lagged behind its rivals in terms of NPD development - indeed, the company's share of new launches in confectionery has dropped from 5.1 per cent in 2001 to 4.8 per cent in 2004, according to GS. Cadbury has traditionally generated around 6 per cent of its revenues from new products, but its main gum rival Wrigley claims that some 20 per cent of its revenues over the last three years have come from NPD - in part related to its move into the broader sugar confectionery sector.

The relative importance of NPD to Cadbury and Wrigley is also highlighted by their respective marketing expenditure over the last few years. With a larger number of new products to promote, Wrigley's media spend to sales ration in 2003 was 15 per cent, according to GS, while Cadbury's was just 4.4 per cent.

But all this is set to change as part of Cadbury's Fuel for Growth programme. Adspend is expected to rise by at least 6 per cent a year by 2007 as Cadbury strives to reach its target of 15 per cent of sales from new products by that same date.

The GS data suggests that gum and medicated confectionery will be the focus of most of this growth. The company's share of new product launches in chocolate dropped from 7.7 per cent in 2001 to 5.2 per cent, while in sugar confectionery the figure remained static at 3 per cent - in gum, however, Cadbury accounted for 27 per cent of all launches in the first nine months of 2004.

The western European gum market is expected to grow by 2.5 per cent in volume terms by 2008, according to Euromonitor estimates cited by GS, but the market is dominated by Wrigley, whose share is almost twice that of Cadbury. As a result, Goldman Sachs' analysts suggest that the North American market is likely to be a more important arena for Cadbury in terms of gum NPD, not least because a consistent lack of marketing for US-based Adams by former owner Pfizer saw it lose market share to Wrigley.

Nonetheless, with Wrigley's market share in North America more than twice that of Adams (49 per cent compared to 21 per cent), an increase in NPD is only likely to narrow the gap slightly, even in the long term. Latin America, where Adams already has a 60 per cent share of sales and Wrigley is non-existent, is also therefore unlikely to see much in the way of new product launches

It is therefore the Asia Pacific region which GS predicts will see the most NPD activity from Cadbury over the next four years. The region accounts for 24 per cent of total world gum sales but only 15 per cent of new product launches, and with strong growth expected in the various Asian economies over the next few years (GS predicts a CAGR of 7 per cent), companies are expected to focus on developing sales there.

Cadbury, which accounted for 12 per cent of all new Asian gum launches since 2000, faces competition not only from Wrigley but also from Italian-Dutch group Perfetti Van Melle and local giant Lotte, suggesting that the battle for shelf space and consumer acceptance will be bitter.