Despite flat sales in US carbonates and difficulties in its Argentinean and Canadian confectionery operations, Cadbury Schweppes still expects to achieve double-digit profit growth for the year. Although the company should be in a good position to benefit from increasingly snack-orientated consumer habits, Cadbury needs to improve its distribution channels to capitalize on this trend.
The year started off well for Cadbury Schweppes and, according to its latest trading update, H2 has been no disappointment. Despite difficult trading conditions, the drinks and confectionery giant expects to meet its targets of double-digit underlying profit growth and $423 million free cash flow this year.
The US carbonated drinks market has been sluggish of late - Datamonitor expects a CAGR of just 3.25% to 2005 - but Cadbury has been attempting to energize its sales with non-fizzy offerings such as Snapple, which it purchased for $1.45 billion last year. While Cadbury's US drinks volumes and profits are expected to show reasonable growth for the year, its Dr Pepper/Seven Up subsidiary is unlikely to show any volume growth at all.
As competition in the sector continues to get tougher, especially with PepsiCo's renewed interest in the US lemon-lime sector, Cadbury is being forced to fight back to keep market share. September and October were particularly weak months for the division, keeping results down and doing little to bolster hopes of imminent improvement.
Cadbury's confectionery business has also had a difficult time of late. Lower volumes and profits in Canada and Argentina will result in a lower level of profit for the entire American division. On a more positive note, the European confectionery business has been faring rather better, especially in Russia and Poland.
With consumer eating habits continuing to move towards all-day grazing, Cadbury should be in a good position to provide people with on-the-go snacks. However, there is room for improvement in its distribution channels if it really wants to take full advantage of this trend.
Confectionery sales in newsagents and corner shops are declining in favor of supermarket and service station purchases, where Cadbury must pay a premium to secure the best positions. In addition to its traditional outlets, Cadbury might be well advised to expand its vending machine operations and get itself in more optimum, high-footfall locations with limited competition.