Kraft Foods and Cadbury’s Global Marketing Ethics

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Introduction

The Global marketing strategies, regarded from the prism of the business ethics principles are becoming more important and popular in the contemporary business society. The case of merging of Kraft Foods with Cadbury is generally regarded as the perfect instance of global marketing strategy performance, and the aspects of the global ethics in this case may be regarded as the exemplary values of arranging the merging process. Originally, the aspects and issues which should be regarded entail not only ethical aspects of the deal, but also the advantages of both sides after this merging, the implications of the shareholders, and the relevant marketing theory, which is applicable for this business case. The aim of the paper is to analyze the fact of merging, and describe the case from the perspectives of ethical considerations and global marketing theory.

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Market Analysis

The analysis of the market, where Kraft Foods and Cadbury operate should be performed on the basis of the precise differentiation of the manufactured foods, both companies specify in. The fact is that, the market of sweets (Cadbury) and the market of ready packed foods (Kraft) differ by the issues of market positioning and the aspects of performing the branding campaigns. Moreover, the market analysis should entail the following facts:

  • Market size (current and future)
  • Market growth rate
  • Market profitability
  • Distribution channels
  • Market trends
  • Key success factors (Chaudhuri, 2009)

Size of the market entails more then 250 sectors of ready and packaged foods, with the target audience of the whole world. The market is steadily increasing, as foods are required for survival and maintenance of the health level. Surely, some sectors of food industry may lose their popularity, as flakes and chewing gums are not required in the countries of the third world, as people are worried with the issues of survival and hunger, but keeping the proper Ph levels, or caring of their slim diets. Nevertheless, chocolate bars may be regarded as sweets, and as the caloric food, suitable for quick energy restoration. (Applbaum, 2004)

The growth rates, in accordance with Peston (2010) are close to 2,5% each year. Considering the size of the market in general, these rates are immense. Profitability of the market, as it is stated in Peston (2010) is the following:

Overall, the market for organic foods and beverages grew 81 percent between 2005 and 2009, a constant dollar growth of 70 percent. U.S. organic food sales totaled nearly $17 billion in 2008, up 22 percent during the previous year, according to preliminary findings from the Organic Trade Association’s 2007 Manufacturers Survey

As for the matters of distribution channels, it should be emphasized that this market possesses the widest range of channels, including emergency requirements, vending networks, restaurants, etc. The market trends, which represent the tendencies of market development and expansion, presuppose that the entire global food market is close to the peak of its development, as people are purchasing foods in more then 99% of cases. (Culpan, 2002) Few harvest foods and breed cattle for the personal requirements. Consequently, the market is developing, and the dead end is close.

The key success factors of this market entail the matters of quality, usefulness and availability. The fact is that, the development of the chemical technologies in food industry is approaching the food industry to the industry of artificial foods and a set of barely eatable components. Thus, the companies who care of the health of their consumers prefer using natural technologies of food production. The aspect of usefulness is defined by the naturalness of the components and the manufacturing process, as extensive heating or cooling may violate the molecular structures of some vitamins and microelements.

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Interests of Kraft Foods

To begin with, it should be emphasized that Cadbury had experienced serious problems with employment, and part of the workers were fired because of the shortages in incomes. The company needed serious financial investment, and the described takeover is, probably, the best solution for Cadbury. The interests of the Kraft foods are closely associated with an opportunity to extend the range of the manufactured goods and buy the additional manufacturing powers. Moreover, the extension of the market and manufactured goods is regarded as the excellent opportunity to diversify the range of the brand names, which were possessed by Cadbury. In the light of this statement, it should be emphasized that the necessity to takeover Cadbury, its manufacturing powers and human resources, is covered by the fact of comparatively simple extension of the target audience sector. Surely, if rebranding will be performed, it will be slight, nevertheless, devoted customers will not be forgotten. Thus, as it is stated in Kraft Foods research (Kraft Foods, 2010):

When Kraft passes the 75% threshold it intends to take Cadbury off the stock market. When it reaches 90% support, under UK law, it can automatically buy up the remaining shares. “The combination of Kraft Foods and Cadbury creates a global powerhouse in snacks, confectionery and quick meals,” said Ms Rosenfeld. “Together we have impressive global reach and an unrivalled portfolio of iconic brands, with tremendous growth potential. “This combined company has a phenomenal future, and I firmly believe it will deliver outstanding returns to our shareholders.”

In the light of this statement, it should be emphasized that Kraft foods Company is anticipating the financial growth and profit from the actions, issued by Cadbury. The fact is that, this takeover was aimed at diversification of the product branding and product manufacturing in general, nevertheless, another important aim was to preserve the potential and experience of Cadbury, and not to let the company fail.

Advantages and Disadvantages of Both Parties

Considering the conditions and aspects of the takeover deal, it should be emphasized that the conditions were mutually advantageous and fair, as Kraft Foods Company has agreed to purchase the actions belonging to the stakeholders of Cadbury for $19, 4 billion. In accordance with the data, provided by Kraft Foods, the merging will originate the appearing of the representatives allover the world. The yearly sales of the united company will exceed $50 billion, which exceed the sales volume of the world leader Mars-Wrigley.

Kraft Foods has paid $13,7 for each action by Cadbury, nevertheless, considering the price of the Cadbury actions before closing the stock market sales, the bonus for the deal was close to 5%. Moreover, Cadbury will be able to pay its stakeholders additional dividends, totaling in 10 pence for each action. The fact is that, the offered price is essentially higher than the initial offer by Kraft Foods, which offered $17 billion.

In accordance with BBC data, Kraft Foods is expecting to get a loan of GBP 7 billion, and perform the deal, using these financial reserves. The rest sum will be ensured by the actions of Kraft Foods. Thus, the Company is planning to arrange the emission of additional actions. Up to 256 million of custom actions will be issued after the merging of two companies, which is 18% of the existing share capital. Thus, both companies have their own benefits from the takeover. Nevertheless, as for the matters of disadvantages, it should be stated that the takeover will probably cause the changes in the marketing tendencies. Thus, as it is stated in Iuf.Org (2010):

A combined Kraft and Cadbury would significantly expand the global reach of both businesses and create synergies worth in the region of $625m, according to Kraft chairman and chief executive Irene Rosenfeld. $300m would be accrued in operational savings with $200m coming from administrative costs and $125m from marketing and selling.

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Nevertheless, it should be emphasized that changes in the market, caused by this takeover are important, as these will become the origin of new opportunities, threats, and innovative tendencies, which will cause the improved conditions for customers and employees of the companies. Considering the fact, that the relevant trends of the food market are industry dependent, it should be stated that some tendencies are price, demand and quality sensible, thus, outlining the issues of service and support.

Implications to the stakeholders

When the destiny of the takeover deal was defined, the director board of the Cadbury advised the shareholders to agree for the merging. In general, this deal is beneficial for both parties, and the shareholders will have an opportunity to acquire the actions of the joint company, as the described emission of the actions will be the inevitable step for the merging. As it was emphasized by Culpan (2002, p. 281):

Acquisitions inevitably have one beneficiary – the shareholders and the top management (through their stock options) of the acquired company. Workers at Kraft, and at a former Cadbury taken over by Kraft, would be the losers despite the leap in market share which enthuses the financial analysts. Kraft’s earnings are floundering and the company is loaded with debt equal to nearly half their market capitalization, the consequence of attempting to finance dividends and share buybacks by cost-cutting alone (i.e. slashing jobs) rather than building the company through productive investment.

Consequently, the involvement of the stakeholders into the merging process may be regarded as the inevitable step for the successful performance of the entire merging operation. In general, it should be claimed that the involvement of the stakeholders was minimal, nevertheless, it was important for the entire business sector, represented by the merged company.

Ethical Issues

The ethical issues, which were touched upon are closely related with the matters of Human Resource Management and the aspects of compensation of possible losses to owners of the actions. As it has been already stated, Cadbury was close to massive firing of the employees and executives, thus, the takeover helped to prevent the massive staff reduction.

Another aspect, which deserved particular attention is closely associated with the matters of business diversity, and the quality of the provided services. Thus, the planned diversification may be considered the improvement of the ethical performance of the company, as in accordance with Murphy and Lacziniak (2006, p. 56): “diversity is key to understanding the global marketplace your potential customers, business partners and vendors may have different perspectives on ethics and proper behavior than those you hold.”

Global business ethical strategy presupposes that running business on a global level, requires observation of particular business rules and the values of business ethical strategy. Thus in accordance with the Foreign Corrupt Practices Act (FCPA), it is forbidden to pay, to take or to offer bribes in any type, way or mean. Nevertheless, rebranding, appearing of the new products may be essentially accelerated, if bribes are offered to store keepers, managers of the retailing chains etc. Thus, there is strong necessity to follow the further actions of the director board of the united company, and mind, whether the success of the innovative products will be caused by its high quality, extensive advertisement or unreasoned loyalty of the authorities. Nevertheless, in spite of the possible exception of bribery, it should be emphasized that the company should not misuse this exception.

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The most important ethical consideration is closely associated with the leading position of the joint company. In spite of the fact, that Nestle company stays the largest manufacturer of the packed foods, Kraft company enjoys the leading positions in some countries, and has an opportunity for further merging and takeovers, which may cause the appearing of monopolies in some countries or regions. Surely, if the company will take care of the consumers, and improve the quality of the foods, the monopolization will have positive effect. Otherwise, it should not be allowed because of ethical considerations.

Theoretic Perspective

The theoretical aspect of the takeover is closely associated with the merging processes, and operations with stock market instruments. It should be emphasized that globalization, may be regarded as the key driving force of the described process, as the necessity to entry the markets of various countries and aim various target audiences was the main reason of the takeover.

The creation of the network, as the key aim of the takeover, should be considered from the perspective of global business theory, described by Usunier and Lee (2005). It was claimed, that the original behavior principles of the customers and the companies are selfish, and the key motive is the profit maximizing by the means of improving the quality, increasing the quantity of the manufactured goods. Thus, the key theoretic approach, which may be outlined is the “individual ambition serves the common good”. As it was stated by Lee (2003, p. 145):

Institutions such as profit-maximizing firms behave selfishly too. In the Absence of restraints, selfish agents have a strong incentive to cheat one another. A trader may not pay his partner, for example, even though when both parties do this it is self-defeating.

Conclusion

The global business strategy aspects, which are applied in the takeover process are closely associated with the necessity of the developing company to enter new markets and diversify the manufacturing of new production. The takeover itself was aimed at the simplified extension of packed food business by the means of purchasing the manufacturing powers and experience of the company, which required essential financial investment for the further survival.

Reference

Applbaum, K. 2004. Survival of the Biggest: Business Policy, Managerial Discourse, and Uncertainty in a Global Business Alliance. Anthropological Quarterly, 72(4), 155

Chaudhuri, K. 2009. A Discussion on HPWS Perception and Employee Behavior. Global Business and Management Research: An International Journal, 1(2), 27

Culpan, R. 2002. Global Business Alliances: Theory and Practice. Westport, CT: Quorum Books.

Iuf.Org. 2010. Unite Demands Kraft Divulge Employment Implications of Potential Cadbury Takeover. IUF – Uniting Food, Farm and Hotel Workers World-Wide. Web.

Keller, K.L. 2003 Strategic Brand Management: Building, Measuring and Managing Brand Equity, 2nd Ed, Prentice hall, New Jersey.

Kraft Foods, 2010. Offer by Kraft Foods Inc. for Cadbury Plc Offer Update. PR Newswire United Business Media. Web.

Murphy,P.E. &Lacziniak,G.R. 2006 Marketing Ethics, Pearson Prentice Hall

Peston, R. 2010 “Cadbury agrees Kraft takeover bid” BBC News. Web.

Peston, R. 2010 “Kraft Foods completes Cadbury takeover” BBC News. Web.

Usunier, J. & Lee J. 2005 “Marketing Across Cultures”, FT Prentice Hall.

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