In his hugely underestimated Rethinking Unionism (1996), Norman Porter took an innovative look at the Northern Ireland peace process by examining both traditions – Unionist and Republican – to break an age old deadlock. Porter concluded that a zero sum game was not productive and, a search for common ground in future perspectives was the real way forward. After weeks of vitriolic comment about the Kraft pursuit of Cadbury Porter’s insight reminds us of how the polar views of the City and shareholders versus the Business community and employees fall into the same old trap. History may give us some clues as to the future but, it is a dangerous pursuit to think of it as an iron law going forward. Let’s rephrase this – in other words, is the balance sheet based on historical performance the best way to determine value going forward in a takeover bid?
The Punch and Judy show is simple enough. In one corner, we have the big bad bankers and hedge funds reaping even bigger bonuses and havoc by pushing the shareholders to a sale with promises of despatching lazy and incompetent managers to the scrap heap where they belong. Slicker executives would carve greater value out of a bigger empire through synergies and rationalisation. And UK PLC has yet another chance to prove its open policies are best by hosting more Corporate Headquarters and, the sophisticated banking that enables the wheel of fortunes to turn once again.
Peter Mandelson, UK Minister with-various-portfolios, gave us the pithy soundbite: “we want less financial engineering and more engineeering” that could have led the opposing view – were it not for the fact that it came from one of successive governments that have bought into the City’s view of value over values. As Larry Elliott in the Guardian put it: “The Americans arrived with a fanfare and a barrowload of promises. There would be higher levels of investment. There would be no fire sale of assets. The future of an iconic British brand would be secure.” However, he was talking of Manchester United and the tale of the Glazers loading up the brand with debt and reduced to touting the players to buy in to a Bond issue designed to pay ever more crippling interest rates. The fact is that Cadbury, as did the Glazers with Manchester United previously, is being bought by Kraft with a huge recourse to debt: $7 billion of a final figure of $11.9 billion in fact.
The contras argue hard that and this is selling the family silver year yet again – despite the fact that only 5,600 staff out of a 40,000 global workforce are located in the UK. Mind you the pull of a company founded by a Quaker family in 1824 with a major commitment to worker welfare is strong. And then, blame shifts to the shareholders – after all over 40% of them reside in the USA – including Warren Buffet (who happens to think that this is a bad deal).
The Pro Sale lobby says that modern business is not about countries but about globalisation and shareholder value. After all, the shareprice has climbed from 550p last summer to a closing offer of 850p. This 45% hike is not to turned down – as those who bought KC shares in Hull a few years back will attest; to see them peak at over $30 to be valued in cents in under a year. Digby Jones uses a far better example of the merit of the UK being open when he points out that the UK Auto industry has never been healthier than in recent years – though volumes are more to do with components than actual cars; that Airbus has Italian seats; German fuselage but the Brits designed and build the stuff that takes it up and puts it down on the ground (I may have got the exact non-UK provenance wrong here!). The point being that Britain benefits more from open borders and markets than it suffers. In other words, you can’t have your cake (sell at a 45% premium) and eat it (complain of selling Britain by the pound thereby losing our forefathers legacy on the cheap).
The Contras yell back that these stateless Corporates with their tax avoidance schemes and footloose location of operating facilities where the costs are lowest must be stopped. Are we better off in the UK for the loss of Pilkingtons, Boots, P&O Ports, BAA and Npower? The Germans and French economies offer support to their argument. When Pepsico wanted to take over Danone, the French Government said that yoghurt -making was a strategically important industry to France; as was HP sauce (and other brands) to the economy of a small towns throughout the UK once upon a time. The German economy resited the lurch to services and, with its strong manufacturing base largely intact has weathered the global recession rather better than the UK whose sluggish climb out of the doldrums is blamed on a bonfire of manufacturing started with the Thatcher Administration.
Like NormanPorter on Northern Ireland, Transformational Logistics sees a third way. It is based on the value argument BUT, shifts the perspective from history and the balance sheet and firmly into the future. Today, I walked down a street packed with Kirana stores – Mom and Pop or CTNs are the equivalent in the US and the UK – in Mumbai. It was not difficult to see that Cadbury has a 70% share of India’s chocolate market and, not difficult to understand that that equates to 1.2 million retail outlets. Take the figures from Euromonitor and the potential that such a foothold gives Cadbury is staggering. The global retail spend, $ per head, in 2009, (total $809.5 billion) corresponds to: World, $12.08; UK, $139.87; Germany $82.58; France, $70.83 and, the USA, $49.38. Here’s the T L point. Brasil, $16.40; Russia, $40.91 and China, $0.78. That leaves India to complete the BRIC at $0.45p. Viewed this way, Kraft have got a bargain. Hmmm …
Years ago, I worked on branded goods sales throughout Europe; the USA and Japan. I learned that if you could make your brand visible, accessible and grouped you would increase sales. The choreography that Mars and their competitors made out of a local newsagents was mind blowing. Right next to the till mars bars, kit kats and, milkas were pole dancing into your pocket. Imagine the impact on the bottom line of taking these techniques into the BRICS. As the figures above demonstrate, there is loads of chocolate potential in Russia and the others could follow. All it takes is for innovative products that can meet the needs of the on-the-move brand bonkers youth in the ever increasing urban global landscape to buy a snickers (or whatever) on their way. Money rich and time poor is no longer the birthright of the developed world.
Cadbury have built an impressive market share in India. They are poised to open this up and, they have learned that there is money in the Majority World. Their insight is light years away from Kraft who, lest we forget tried to conquer the Indian market with a powdered orange drink called Tang and, could never contemplate bringing in their leaders – cookies and cheese – through the import route. In fact, in contrast to Cadbury, Kraft has struggled to lose the tag of a “low growth conglomerate”; a sprawling company that has been a disappointment to … shareholders.
The fact is that, as Transformational Logistics consistently points out, there is massive money to be made in the Majority world and there are those who have spent a life time understanding how. This afternoon I walked around the stores and was impressed by the presence of the products of that brilliant Indian entrepreneur C K Ranganathan; whose Cavinkare company blazed a trail with single use sachets of shampoo. The same goes for Amul, a cooperative from the North who have cracked the code on branding and could go a long way. There are many other examples in Brasil and, increasingly, in China.
Many companies are waking up to this fact. GE is a good example of a company that has reversed the trend to devlop high end products in the developed world and then flood the developing world with the stripped down, essentially second best, versions. Now, with what GE call “reverse innovation”, value products are developed and sold in markets such as India and China to be moved back, with modifications, into the developed world. Using the BOP (Bottom-Of-The-Pyramid) paradigm, this has been called the trickle up approach. Coke is another example. They tried to launch the classic approach in Peru only to find that they could not break the stranglehold of the local product (see this Blog). Learning from this failure, Coke are more disposed to learn from the emerging and developing world than ever before as their use of the manual distribution model in Africa demonstrates. Danone and their developing world price points is another. After all, this is the brands new world.
You see, the Punch and Judy Show has missed the value in the future and that will be in the BRICS; the next 11 and, for those who can figure out how to sell to the Majority World; after all, it is 75% of global population – which will rise from 6 to 9 billion by 2050. This is where Transformational Logistics is pushing its agenda. It is not enough to leave logistics and market access to humanitarian techniques at one end and, conventional developed world wisdom at the other. This is not value generation it is value attrition for both the developed world because they will fail and, for the developing world; because, as the Kishore Biyanis and the CK Ranganathan’s (there are thousands more) demonstrate – they can do better. Shareholders beware – an Indian company may buy up some failing brands in the developed world and turn the whole story on its head. Majority world values driving value at last! And, the idea of buying brands through debt rather than from a platform of superior performance has surely had its day. Or has it? It seems not – as resurgent Corporate Bankers have started to whisper.
Cadbury had gone a long way to understanding the dynamics within this huge potential. I saw the same attention to detail in Russia several years ago. And now, the management leadership for Cadbury will come from a management team that has no significant presence in any of the BRICs and has no track record in understanding these demanding markets. And that’s where the Pro deal lobby will rest their case – that Kraft realise where the potential is and will use Cadbury for a reverse transformation – except for the fact that this sprawling conglomerate has rarely demonstrated such innovative instincts and this could have a stifling impact on Cadbury-ites slowing down hard won momentum. Only time will tell.
As for the UK, the FT carried the following warning on 20th January: “The UK must be a location that attracts businesses or – at least – does not drive them away. This means a predictable tax regime … and, my italics, the presence of a highly skilled and educated workforce.” Which brings us back to the value of skills in the developing and emerging world.
These days the developed world seems to be obsessed in fighting the last commercial war and, paying handsome dividends to its advisers for doing so – it is estimated that fees associated with the Cadbury sale will be more than $390 million (Cadbury’s advisers Goldman Sachs, Morgan Stanley and the UBS team share nearly $55m and Kraft’s team of Lazard, Centreview, Citi and Deutsche could rise to $60 million. Even Hershey, who may launch a counter bid, will pay their investment Bank a $1 million retainer fee to their Advisers JP Morgan and Bank of America if their deal does not go through. Imagine spending that sort of money on product innovation in the emerging and developing world. Now that would be transforming value for shareholders and other stakeholders alike.