A New Future for Cadbury Schweppes

Separating the candy and drinks divisions is supposed to allow them to sharpen their focus on rivals such as Coke and Wrigley, but big challenges await

by Mark Scott

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The moment was almost a year in the making. On Apr. 11, shareholders of Cadbury Schweppes (CSG), the world's largest candymaker and one of the top sellers of beverages, finally voted to spin off the company's U.S. drinks division. Separating candy from drinks theoretically will boost shareholder value and allow the two halves of the company to sharpen their competitive focus on rivals such as Coca-Cola (KO), Pepsi (PEP), Nestlé (NESN.BE), Hershey's (HSY), and Mars.

But despite an upbeat tone set by Chief Executive Todd Stitzer, both new companies face big challenges. Lacking the diversified product ranges of its competitors, the newly independent chocolate, candy, and gum business—to be listed on the London Stock Exchange on May 2—could become a takeover target (BusinessWeek.com, 10/19/07) for a deep-pocketed rival such as Kraft Foods (KFT). Some British shareholders worry about another iconic brand falling into foreign hands.

Meanwhile, the new U.S. drinks business—which will be named Dr. Pepper Snapple Group (DPSG) and is set to be listed on the New York Stock Exchange on May 7 (BusinessWeek.com, 3/12/08)—could face even tougher odds. Competing against giants Coca-Cola and Pepsi, DPSG must find new ways to exploit its noncarbonated brands, including Snapple and Mott's, to take advantage of consumer movement away from soda pop to healthier, fruit-based beverages.

Candy and Gum Sales Up

"The jury is still out on whether the demerger of the U.S. drinks business will solve Cadbury's problems," says Jeremy Batstone-Carr, director of private client research at stock brokerage Charles Stanley (CAY.L) in London, who has a reduce rating on the stock. "The U.S. [beverage] market is moving in their direction, but both sides of the company face an uphill battle." Shareholders voiced their doubts on Apr. 11 by driving Cadbury Schweppes shares down 2.6% in London and 3.2% in New York.

From the company's first-quarter interim report, released Apr. 11, it was clear why Stitzer would rather be in the confectionery business. First-quarter candy and gum sales climbed 7% over the same period last year (the company doesn't disclose specific revenue figures), due primarily to growth in emerging markets. Analysts figure sales for the group will hit $11.3 billion in 2008, up 9.5%.

By comparison, the Americas Beverages division turned in growth of just 1%, mainly due to weakness in its carbonated drinks, which include 7Up, Dr. Pepper, A&W, Canada Dry, and Schweppes tonic. The company expects revenues for the group to grow 3% to 5% for 2008 as a whole, to around $6 billion.

Foreign Expansion

So what happens now? Though chocolate in Britain—especially the iconic purple-wrapped Dairy Milk bar—is still Cadbury's core, the new confectionery company is staking its hopes on chewing gum and emerging markets. Cadbury paid $4.2 billion in 2003 to buy Adams from Pfizer (PFE) and since then has grown its share of the North American gum market by nine percentage points, to 35%.