Cadbury Schweppes: What Now?

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Euromonitor's Kazanthuk cautions that the company also must make non-chocolate acquisitions—especially in chewing gum and fruit candies—to tailor its business to the tastes of emerging countries.

The changes in customer tastes and the growing importance of emerging economies have made Cadbury's situation tougher. To be sure, the company's revenues grew a strong 10% year-over-year in the third quarter, to $7.66 billion, but analysts think the company will have trouble matching that pace going forward. "Cadbury will struggle to continue to grow at the 10% rate in the fourth quarter," says Credit Suisse Group (CS) analyst Charlie Mills, who has an underperform rating on the company. "There's an issue over increasing margins. The company has to convince the market it can do that."

Profiting from a Merger?

Lifting profits will also be tough. Cadbury Chief Executive Todd Stitzer conceded when reporting third-quarter results that commodity prices are on track to rise 5% to 6% in 2008—increases that will inevitably hurt the company's bottom line. Last year, for instance, higher costs for energy, sweeteners, and other raw materials lopped 1.4 points off Cadbury's operating margins. And in the first half of this year, margins were just 8.1%—highlighting how difficult it will be for Stitzer to reach his stated goal of "mid-teen" margins by 2011.

There's always the possibility that Cadbury might end up merging with another candymaker. But the list of potential candidates is limited by regulatory concerns. Competition authorities would likely balk at a deal with Mars or Nestlé, which compete in many of the same markets as Cadbury. Wrigley (WWY) and Kraft would similarly shy away from buying the candymaker, as both are currently focused on sorting out their own business problems.

The merger that makes the most sense would be with Hershey (HSY), which announced a 66% year-on-year drop in third-quarter profits to $62.8 million on Oct. 18. Rumors abound over whether the two underperforming candy companies could pull off a deal. Industry analysts say any linkup, however, is unlikely until the Hershey Trust, which holds a controlling stake in the company, agrees to give up some of its control.

Without such a megamerger, Cadbury will have to hit its projected 4% to 6% annual revenue growth target increases through organic growth and acquisitions of small companies. All in all, not an easy task. Cadbury Schweppes may have made billions from selling chocolate to the masses, but now it faces a major toothache over how to keep its own business moving forward.

Scott is a reporter in BusinessWeek's London bureau .