Kraft hits the sweet spot with Cadbury
Earnings jump as the food company leverages new supply and distribution networks in developing markets.
Smaller packs are often the key to success in developing markets for a couple of reasons. First, the absolute price matters more than perceived value as low prices often encourage consumers to try products. Chocolates and snacks are still a luxury for many, and consumers are reluctant to buy a higher-priced product even though it may offer better value.
Second, consumers outside the U.S. tend to prefer smaller portions. Cadbury's excellent supply chain and distribution networks allow Kraft to offer to a wide range of products with variegated pricing to appeal to a broader base of consumers. For example, Oreo cookies are now available in India for as little as Rs 5 (10 cents). A bigger pack, which costs Rs 20 (40 cents), was priced at Rs 50 ($1) before the acquisition.
And it's not just the distribution networks. Cadbury has a long-established relationship of trust with small retail outlets (read: "mom and pop stores"), which are more than willing to incorporate new products. Without Cadbury's networks, Kraft could not have added lower-priced products to its portfolio and maintained its profit margins.
In India, Kraft was able to use Cadbury's distribution networks to make Oreos and Tang available in more than 300,000 retail outlets within six months of their launch. Similarly, Kraft expanded sales in Brazil to 650,000 retail outlets.
It's also been a two-way street: Using its own supply chain and distribution networks, Kraft was able to make Cadbury products available in more than 75,000 retail outlets in Ukraine.
We currently estimate a $34.68 price for Kraft Foods, which competes with players like PepsiCo (PEP), General Mills (GIS) and Kellogg (K).
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