Selection of the targeted market and enterprises

The selected enterprises are Cabbury and Nestle in the Chocolate Industry. Chocolate has become essential in the daily life, and this phenomenon is particularly outstanding in the western countries. It is estimated that UK has the second highest chocolate consumption in Europe (Cost Sector catering Online, 2011). According to Mintal statistics (2010), the sales of chocolate confectionery in UK improved by 9.2% from 2007 to 2009, and the market could be estimated to get £4.1 billion by 2015. However, in the coming 20 years, chocolates would be as expensive as caviar, so that people may not be able to afford them, because the growth of chocolate consumption is faster than cocoa production (The Independent News Online, 2010). Low revenues and time-consuming work of replanting lead farmers to be reluctant to continue the cocoa planting, and millions of new consumers in the developing countries have become addicted to this product. What’s worse, in 2009, there was a piece of news on BBC Online, saying a doctor has suggested to establish certain chocolate tax to increase the cost of chocolate and to reduce the growing levels of obesity in UK (BBC News Online, 2009). Facing so complicated changes in the market, it is worthwhile to know more about this industry from the financial perspective, and we also wonder know more about out preferable chocolate brands.

 

 

Competitors in the Market

According to Mintel’s report of chocolate confectionery in UK (2010), the major players in the Britain chocolate industry include Nestlé, Cadbury Trebor Bassett, Mars UK Ltd, Kraft Foods Ltd and Ferrero UK Ltd. Therefore, the primary competitors for our selected enterprises are Mars Ltd and Ferrero Ltd; besides, one brand should also be mentioned: Hershey Foods Corp.

Mars Inc is founded in the Tacoma, Washington with a history of near a century. Its business segments include Chocolate, Petcare, Wrigley Gum and Confections, Food, Drinks and Symbioscience, with annual revenues of more than $30 billion (Mars Inc Online, 2011). Since 1932, Mars has been manufacturing many much-loved products in UK, under the brands of Mars, Snickers, Galaxy, Maltesers, Extra, Orbit, Pedigree, Whiskas, Uncle Ben’s, Dolmio, Klix and Flavia (Mars UK Ltd Online, 2011).

Ferrero is a Italian family business, founded in 1946. Present since 1966, Ferrero UK is part of the leading global company, with several iconic brands: Ferrero Rocher, tic tac, Nutella and Kinder Surprise. Leading position in confectionery markets in mainland Europe occupies a competitive position in the Britain market; and the last few years have witnessed the rapid, consistent growth of this company, successfully becoming the 4th largest chocolate confectionery company in UK (Ferrero UK Online, 2011).

Hershey Foods Corp is the largest manufacture of chocolate in North America. It is also considered to be the Great American chocolate, since it is one of the oldest chocolate companies in the US, founded in 1894. The reason to mention it is that

 

 

Summary of the Selected Companies

Cadbury

Cadbury is a well-known brand, loved around the world, but has humble beginnings. In 1824, John Cadbury opened a grocer’s shop in Birmingham. Then it gradually grew to one of the global leading chocolate brands. EuroMonitor’s report (2010) suggests that Cadbury UK Ltd maintained its significant lead in the Britain chocolate confectionery market in 2009, with almost 31% of value sales. Cadbury’s reputation has been built up over its lifetime and is an intangible asset with incomparable value; meanwhile, the success of Cadbury is considered to be derived from the quality and motivation of its personnel (Cadbury & Cadbury, 2010). The top iconic brands of Cadbury contain:

  1. Dairy Milk. Put more milk in for the sake of taking on Swiss chocolate makers in the field of milk chocolate (Philips, 2010). Established in 1905, it is presently prevalentin more than 30 countries, satisfy a global love of chocolate. Further, Dairy Milk generates more than $ 1 billion of sales each year, with a growth rate of 8.6%.
  2. Easter Eggs. Cadbury pioneersmanufacturing Easter Eggs by modern processes. First launched in 1875, the chocolate Easter Egg soon became a tradition. 
  3. CrèmeSince 1975, this item has been a seasonal Easter icon around the world, with an annual sale volume of more than 300 million. Besides, it is the biggest-selling confectionary product in UK during the first new months each year. 

On February 2, 2010, Cadbury official became part of Kraft Foods, under the £11.7 billion takeover. Heretofore, this takeover is the biggest since the credit crunch and one of the most significant all over the world. The combined value share got to 36%, and the new company could offer a more extensive product range and would benefit from greater economies of scale and the more widespread distribution.

In the autumn of 2008, the deal of a Tier Two Supporter makes Cadbury the official Confectionery and Packaged Ice Cream Supporter for London 2012, which enables Cadbury to utilize the London 2012 marks on the packaging as well as marketing rights in UK (Cadbury UK Online, 2011). Further, Cadbury aims to make more people be involved in the London 2012, and to bring the fun, pleasure and smile, which are same to those when eating Cadbury, to the 2012 Games.

Nestle

Founded in 1860, Nestle is a multinational packaged food company, headquartered in Switzerland. In the whole world, Nestle is renowned with its diverse product lines, including milk, chocolate, confectionery, bottled water, coffee, creamer, food seasoning and pet foods. Nowadays, it is treated as one of the largest chocolate companies, with a wide range of brands: Aero, 100 Grand Bar, Kit Kat, Nestle Crunch and Rolo. It is seldom understood that Nestle sells the largest quantity of dark chocolate, and has business in the most countries. Further, most of its business comes from the local brands, such as Rossiya in Russia, Caliller in Switzerland, and Perugina and Baci in Italy. Its popular brands include:

  1. Introduced in the North of England in 1935, it was so popular that sales were extended throughout the UK at the end of 1935. It is the unique bubbly texture that makes its success. 
  2. It is one of the oldest, best-known and best-loved chocolate brands in the Switzerland. This brand creates the positive, world-renowned reputation of Swiss chocolate, and its success is derived from the deep respect for tradition and the excellence of its ingredients and manufacturing processes. 
  3. Kit Kat. It is a perfect snack to delight consumers all over the world, with its light wafer texture and delicious taste, freshness and variety of formats. 

Recently, Nestle has set up the Cocoa Plan, with the aims of caring about the wellbeing of others and the environment to improve the quality of life. Actually, Nestle is involved in a broad range of social and environmental initiatives throughout the world and across its own brands. The Cocoa Plan is devoted to create a better future for cocoa farmers, their families and communities, since as one of the international biggest chocolate manufactures, any challenges facing the cocoa industry would have significant impact towards the production of Nestle.

 

 

Ratio Analysis

Financial ratio describes a mathematical correlation between two terms, while financial ratio analysis interprets financial ratios by considering market data and economic data to evaluate managerial performance or to predict pertinent variables (Fabozzi & Peterson, 2003). Five groups of ratios are categorized as below:

  1. Liquidity ratio. To evaluate a company’s ability to meet its short-term obligations, including current ratio and quick ratio.
  2. Profitability ratio. To evaluate the profit-generating ability of certain company. 
  3. Financial leverage ratio. To evaluate the level of financial risks a company has taken on. 

Cadbury

Liquidity

Two kinds of ratios are utilized in Liquidity.

Current Ratio =

Quick Ratio =

Ratio Types

Current Ratio

Quick Ratio

As of 2009-12-31

0.873

0.5657

As of 2008-12-31

0.7777

0.5514

As of 2007-12-31

0.5635

0.3856

As of 2006-12-31

0.7158

0.5003

As of 2005-12-31

0.7930

0.5628

As of 2004-12-31

0.8145

0.5668

As of 2003-12-31

0.7787

0.5613

As of 2002-12-31

0.7938

0.5896

As of 2001-12-31

0.8087

0.6059

Current ratio illustrates Cadbury capability’ to cover the claims of short-term creditors exclusively from existing current assets, namely for every £1 in current liabilities there is less than £1 in current assets. However, the increasing current ratio indicates the liquidity of Cadbury has been improving. On the other hand, Quick Ratio, also termed as ‘acid ratio’, is a more stringent measure of liquidity, as it considers inventories are normally one of the least-liquid current assets (Moyer, McGuigan & Kretlow, 2009). In the case of Cadbury, although this figure is also below 1, its changing trend is in accordance with that of current ratio, which means the inventory keep at a such stable level that would seldom influence the company’s overall performance.

Profitability 

Gross Profit Margin Ratio =

Net Profit Margin Ratio =

Return on Total Assets Ratio =

Return on Stockholders’ Equity Ratio =

Ratio Types

Gross Profit Margin Ratio

Net Profit Margin Ratio

Return on Total Assets Ratio

Return on Stockholders’ Equity Ratio

As of 2009-12-31

0.4628

0.046

0.0338

0.0785

As of 2008-12-31

0.4669

0.0687

0.0416

0.1051

As of 2007-12-31

0.4671

0.0317

0.0131

0.0358

As of 2006-12-31

0.4727

0.0392

0.0172

0.0477

As of 2005-12-31

0.1587

0.1208

0.0715

0.2590

As of 2004-12-31

0.1588

0.1187

0.0731

0.2123

As of 2003-12-31

0.1633

0.0888

0.0549

0.1939

As of 2002-12-31

0.1855

0.1234

0.0831

0.2166

As of 2001-12-31

0.1685

0.0982

0.0730

0.1882

Gross Profit Margin Ratio indicates how much of every pound of sales is left after costs of sales. This figure in 2009 indicates a gross profit margin of 46.28% produces £0.4628 of gross profit per £1.00 of sales. The slight declining tendency may be related with pricing and the control of production costs. Net Profit Margin indicates how much of each pound of sales is left over after all expenses. The low level of this figure may result from the characteristics of this industry: high turnover of raw materials, and it still could operate profitably with high sale volumes. Return on Stockholders’ Equity Ratio indicates the proportion of returns earned on stockholders’ equity, and 7.85% in 2009 displays 7.85% of earnings is earned from stockholders’ resources.

Financial Leverage

Four types of ratios are selected:

Debt Ratio =

Debt-to-Equity Ratio =

Times Interest Earned Ratio =

 

 

 

Ratio Types

Debt Ratio

Debt-to-Equity Ratio

Times Interest Earned Ratio

As of 2009-12-31

0.2106

0.4889

-24.1429

As of 2008-12-31

0.2871

0.7252

16.1667

As of 2007-12-31

0.3295

0.8976

4.9

As of 2006-12-31

0.3263

0.9054

6.6667

As of 2005-12-31

0.4421

1.6013

5.4949

As of 2004-12-31

0.3857

1.1194

3.7036

As of 2003-12-31

0.4461

1.5742

3.8619

As of 2002-12-31

0.2946

0.7676

8.1698

As of 2001-12-31

0.2823

0.7278

10.6747

Debt Ratio demonstrates the proportion of Cadbury’s total assets from creditors’ funds, and in 2009, Cadbury’s creditors financed 21.06% of its total assets. Meanwhile, this figure remains at a low level with a decreasing tendency, implying there is more protection in the event of liquidation or other major financial problems. Furthermore, 48.89% of Debt-to-Equity Ratio in 2009 shows Cadbury raises nearly £0.4889 from creditors for each pound invested by stockholders, and the corresponding declining trend shows Cadbury’s debt suppliers have a gradually higher margin of safety. Times Interest Earned Ratio utilizes some data from income statement to analyze how the current earnings meet current interest payments. The higher Times Interest Earned Ratio illustrates sufficient operating incomes to cover interest expense.

Nestle

Liquidity

Ratio Types

Current Ratio

Quick Ratio

As of 2009-12-31

1.105

0.8906

As of 2008-12-31

0.9824

0.7047

As of 2007-12-31

1.0000

0.7408

As of 2006-12-31

1.0000

0.7726

As of 2005-12-31

1.166

0.9382

As of 2004-12-31

1.2136

0.972

As of 2003-12-31

1.1932

0.9629

As of 202-12-31

1.0476

0.8462

As of 2001-12-31

0.941

0.7557

 

The Current Ratio for Nestle remains at 1, implying that there is almost 1 franc from current assets to cover each 1 franc of current liabilities. When deducting inventories, the liquidity ratio declines, which seems that inventories occupy a relatively large part of current assets, and the difference between current ratio and quick ratio illustrates Nestle’s capability to repay current debts is weakened. However, compared with Cadbury, liquidity of Nestle seems to be firmer and stronger.

Profitability

Ratio Types

Gross Profit Margin Ratio

Net Profit Margin Ratio

Return on Total Assets Ratio

Return on Stockholders’ Equity Ratio

As of 2009-12-31

0.5799

0.117

0.1135

0.2347

As of 2008-12-31

0.5693

0.1082

0.1119

0.2165

As of 2007-12-31

0.5813

0.1079

0.1006

0.214

As of 2006-12-31

0.5865

0.1017

0.0983

0.1825

As of 2005-12-31

0.5834

0.1002

0.0882

0.1774

As of 2004-12-31

0.583

0.0987

0.0959

0.2074

As of 2003-12-31

0.5728

0.0989

0.0971

0.2359

As of 2002-12-31

0.568

0.097

0.099

0.2483

As of 2001-12-31

0.5542

0.0892

0.0806

0.2246

Compared with Cadbury, four kinds of profitability ratio are almost higher. The better gross profit margin ratio illustrates Nestle has the higher efficiency of manufacturing and distribution during the production process. The higher net profit margin ratio illustrates Nestle could get more of each sales as net profit after covering all expenses. The higher return on total assets ratio illustrates Nestle does a good job in using its assets to generate sales. For example, in 2009, there are 11.35% of profits earned relative to Nestle’ level of investment in total assets. Similarly, the increase of the last ratio illustrates Nestle does a good job in using investor’s money.

Financial Leverage

Ratio Types

Debt Ratio

Debt-to-Equity Ratio

Times Interest Earned Ratio

As of 2009-12-31

0.1631

0.3372

19.772

As of 2008-12-31

0.1374

0.2658

12.571

As of 2007-12-31

0.1835

0.3904

10.0697

As of 2006-12-31

0.1078

0.2

10.9212

As of 2005-12-31

0.2607

0.5241

20.4181

As of 2004-12-31

0.2922

0.6316

16.0837

As of 2003-12-31

0.3292

0.7994

18.5286

As of 2002-12-31

0.3349

0.8401

16.4511

As of 2001-12-31

0.3778

1.0529

24.5381

Cadbury possesses higher figures in this area of financial ratio. However, the lower debt ratio implies the level of dependence of financial assets is lower. On the other hand, the violent changes in the times interest earned ratio may be related to the elusive changes in the internationally and nationally economic context.

After the comparing and contrasting various figures, it can be figured out that Nestle has better asset and risk management.

 

Recently, there is an online poll to survey the favorite types of chocolate for Brits, within which two thirds chose milk chocolate, 22% for dark chocolate and 12% for white chocolate (Cost Sector catering Online, 2011). Besides, most chocolate entering the Britain market is milkier and contains less cocoa that those entering other European countries. Although this kind would not be good quality and not be beneficial towards health, the market research illustrates that Brits prefer such sweet, milky chocolate.

 

Reference List

 

 

 

Appendix 1 Annual data for Cadbury

Primary Data from Balance Sheet

In Millions of GBP (except for per share items)

As of 2009-12-31

As of 2008-12-31

As of 2007-12-31

As of 2006-12-31

As of 2005-12-31

As of 2004-12-31

As of 2003-12-31

As of 2002-12-31

As of 2001-12-31

Total Current Assets

2,125.00

2,635.00

2,600.00

2,418.00

2,456.00

2,309.00

2,407.00

2,052.00

1,940.00

Total Inventory

748.00

767.00

821.00

728.00

713.00

702.00

672.00

528.00

487.00

Total Assets

8,129.00

8,895.00

11,338.00

10,233.00

10,992.00

10,939.00

10,410.00

7,867.00

7,425.00

Total Current Liabilities

2,434.00

3,388.00

4,614.00

3,378.00

3,097.00

2,835.00

3,091.00

2,585.00

2,399.00

Total Debt

1,712.00

2,554.00

3,736.00

3,339.00

4,860.00

4,219.00

4,644.00

2,318.00

2,096.00

Total Equity

3,502.00

3,522.00

4,162.00

3,688.00

3,035.00

3,769.00

2,950.00

3,020.00

2,880.00

 

 

Primary Data from Income Statement

In Millions of GBP (except for per share items)

As of 2009-12-31

As of 2008-12-31

As of 2007-12-31

As of 2006-12-31

As of 2005-12-31

As of 2004-12-31

As of 2003-12-31

As of 2002-12-31

As of 2001-12-31

Sales

5,975.00

5,384.00

4,699.00

4,483.00

6,508.00

6,738.00

6,441.00

5,298.00

5,519.00

Cost of Sales

3,210.00

2,870.00

2,504.00

2,364.00

5,475.00

5,668.00

5,389.00

4,315.00

4,589.00

Earnings before Interests and Taxes

507.00

388.00

147.00

180.00

1,033.00

937.00

699.00

866.00

886.00

Interests Charged

-21.00

24.00

30.00

27.00

188.00

253.00

181.00

106.00

83.00

Earnings after Taxes

275.00

370.00

149.00

176.00

786.00

800.00

572.00

654.00

542.00

Source: Thomson Reuters

 

 

Appendix 2 Annual Data for Nestle

Primary Data from Balance Sheet

In Millions of CHF(except for per share items)

As of 2009-12-31

As of 2008-12-31

As of 2007-12-31

As of 2006-12-31

As of 2005-12-31

As of 2004-12-31

As of 2003-12-31

As of 2002-12-31

As of 2001-12-31

Total Current Assets

39,870.00

33,048.00

35,770.00

35,305.00

41,765.00

35,285.00

36,233.00

35,342.00

39,045.00

Total Inventory

7,734.00

9,342.00

9,272.00

8,029.00

8,162.00

7,025.00

6,995.00

6,794.00

7,691.00

Total Assets

110,916.00

106,215.00

115,361.00

101,805.00

103,397.00

87,117.00

89,561.00

87,352.00

93,786.00

Total Current Liabilities

36,083.00

33,640.00

35,770.00

35,305.00

35,818.00

29,075.00

30,365.00

33,737.00

41,492.00

Total Debt

18,085.00

14,596.00

21,174.00

10,971.00

26,958.00

25,453.00

29,483.00

29,250.00

35,432.00

Total Equity

53,631.00

54,916.00

54,234.00

54,848.00

51,435.00

40,299.00

36,880.00

34,819.00

33,653.00

Source: Nestle Group

 

 

Primary Data from Income Statement

In Millions of CHF (except for per share items)

As of 2009-12-31

As of 2008-12-31

As of 2007-12-31

As of 2006-12-31

As of 2005-12-31

As of 2004-12-31

As of 2003-12-31

As of 2002-12-31

As of 2001-12-01

Sales

107,618.00

109,908.00

107,552.00

98,458.00

91,075.00

84,690.00

87,979.00

89,160.00

84,698.00

Cost of Sales

45,208.00

47,339.00

45,037.00

40,713.00

37,946.00

35,312.00

37,583.00

38,521.00

37,756.00

Earnings before Interests and Taxes

15,699.00

15,676.00

15,024.00

13,302.00

11,720.00

10,760.00

11,006.00

10,940.00

9,987.00

Interests Charged

794.00

1,247.00

1,492.00

1,218.00

574.00

669.00

594.00

665.00

407.00

Earnings after Taxes

12,587.00

11,889.00

11,608.00

10,009.00

9,123.00

8,356.00

8,699.00

8,645.00

7,558.00

Source: Nestle Group

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