Chocolate Wars

by Deborah Cadbury

  That same year, Dominic was promoted to chief executive of Cadbury Schweppes, working alongside Adrian, who was now the chairman. They were the fourth generation of Cadbury brothers at the helm of the company. “It really worked because I understood Adrian and he really understood me, and we probably got the best out of each other as a result,” says Dominic. But the brothers soon faced a predicament unlike anything their predecessors had encountered.

  In a hostile move, the American company General Cinema, which owned a nationwide chain of movie theaters, acquired 18 percent of the shares of Cadbury Schweppes. The American leisure firm was hoping to engineer a hostile takeover. “They were trying to put us into play,” says Dominic. “We went through uncertain times.” For the first time, the independence of the company was at stake.

  General Cinema was able to take advantage of the fact that Cadbury’s American campaign was not going smoothly, which depressed the share price of Cadbury Schweppes. Cadbury managers discovered that their chocolates—including the beloved Dairy Milk and Wispa—were simply not in stores. With literally hundreds of lines to sell, wholesalers had failed to give Cadbury’s products an extra push to secure orders from retailers. As long as Cadbury chocolates languished in stockrooms and warehouses, there was no way to see if Americans liked the taste. Profits from the U.S. market plummeted.

  “Did I lose sleep? Yes very much,” says Adrian, “over the factory and over Peter Paul. They were nice people and I felt we had taken them over in the hopes of building their business and it hadn’t worked out. I felt responsible.”

  On July 22, 1988, Cadbury U.S. was sold to its rival Hershey for $300 million. The press spelled out the end of Cadbury’s American dream. The press was also critical of Mars: “The Mars Universe,” observed Fortune in September 1988, for so long “the black hole” of the industry, “so powerful that it influences all the other objects in its system,” was now “locked in a time warp.” Forrest Jr. and John were described by Fortune as struggling “to escape the influence of their innovative father” as they failed to act while Hershey collected the benefits that stemmed from Cadbury’s difficulties. The Hershey giant reclaimed its position as the number one confectionery company in America.

  General Cinema retained its 18 percent stake in Cadbury Schweppes. If General Cinema could find a bidder, over 160 years of independence could come to an end. Noting the presence of American “tanks on the lawn,” the Guardian pointed out on October 10, 1990, that General Cinema “did not intend to be passive shareholders.” There were repeated rumors that a bid was imminent. General Cinema failed to deny them.

  It was an anxious time for Adrian and Dominic. But the brothers and the Cadbury Schweppes management team had a strategy to raise the share price to protect them from the American predator.

  CHAPTER 19

  The Quaker Voice Could Still Be Heard

  The year 1988 was a critical one for the British chocolate industry.

  The saga began to unfold on April 13, 1988. The Swiss-German firm of Jacob Suchard made a “dawn raid” on Rowntree, acquiring 15 percent of the company’s shares. Jacob Suchard had already snapped up smaller European confectioners such as Belgium’s Cote d’Or and the Dutch Van Houten. Now it had set its sights on Rowntree. But Nestlé’s directors were watching closely. On April 26, they made a rival £2.1 billion ($3.82 billion) hostile bid for outright ownership of the great Quaker firm.

  It was now possible to measure global market share, and Rowntree was the fourth largest chocolate maker in the world, after Cadbury and the American firms of Mars and Hershey. Like Cadbury, Rowntree was well established in the old Commonwealth and was exporting to over 130 countries. In addition to its merger with Mackintosh, it had also merged with the oldest French chocolate company, Chocolat Menier, as well as Laura Secord in Canada.

  Not surprisingly Nestlé’s bid to buy Rowntree was greeted with outrage in Britain. People were appalled at the idea of a much-loved British chocolate icon falling to foreign hands. There was a real fear that Nestlé would move production to cheaper plants overseas. And what about the different values and culture of the two firms?

  In stark contrast to the high Quaker standards that Joseph Rowntree had once set for his firm, Nestlé was being boycotted over allegations of unethical practices. In question was the very issue about which Joseph Rowntree felt so strongly: unprincipled advertising and promotion. This first came to light when the antipoverty charity War on Want published The Baby Killer in 1974—later published under a different title in German, Nestlé tötet Babies. The publications claimed that babies in the world’s poorest countries were dying because mothers were inappropriately encouraged to favor infant formula over breast-feeding when poor sanitation and lack of clean water could spell a death sentence. Nestlé sued for libel and won the case—but the issue did not go away. Eventually the World Health Organization developed international guidelines for marketing breast-milk substitutes, but allegations that Nestlé breeched the code prompted further boycotts.

  With opposition to the takeover mounting from all quarters, Rowntree’s management rejected Nestlé’s offer. At Bournville, chief executive Dominic Cadbury could see a potential solution. Cadbury would keep Rowntree British—but only if local competition rules could be relaxed. “The idea that Rowntree and Cadbury together were going to hold the British public to ransom through chocolate prices was just absurd,” he said. “The supermarkets were already strong, Mars was strong.” Cadbury’s management approached the Department of Trade and Industry. “We said if you look at Cadbury and Rowntree’s market share on a global basis—which is how you should look at it—there is not a competition problem.” But he soon found that British government thinking was purely local. “Civil servants in 1988 did not think about global market share.” He was told that if he proceeded with the acquisition, he would be referred to the Monopolies Commission.

  Cadbury’s proposal won no government support. On May 25, Margaret Thatcher’s Conservative government announced a foreign group could take over Rowntree. The next day Jacob-Suchard topped Nestlé’s bid with an offer of £2.3 billion ($4.19 billion). This was trumped in mid-June when Nestlé raised its bid to £2.5 billion ($4.55 billion). The Rowntree Trusts, which had once held a 51 percent stake in the company, now possessed less than 9 percent. This was partly due to the Rowntree Trusts diversifying their share portfolio but also due to their holdings being diluted in size following successive share issues. The decision was down to Rowntree’s shareholders—a diverse group—and they voted to accept. Overnight, Nestlé became one of the world’s top four chocolate confectionery firms, and a famous Quaker company had a taste of unfettered shareholder capitalism.

  For Dominic Cadbury, the decision was a disaster. The idea that Nestlé was allowed to buy Rowntree and not Cadbury was “ridiculous.” “That was a big fork in the road. We as a country have always shot ourselves in the foot here. Had we been more forward thinking about global market share, we would have pushed Cadbury and Rowntree together.”

  In the aftermath of the takeover, some of the assurances Nestlé made to Rowntree’s management appear to have been quietly put aside. Staffing at Joseph Rowntree’s great factory at Haxby Road has declined to 1,600. The manufacture of famous brands like Smarties was moved overseas. Even the name Rowntree has been discreetly dropped from the packaging on many brands.

  Nestlé continued to grow: It was the world’s largest food company and had 7 percent of the confectionery market. Protected for years by Switzerland’s federal and local governments, it was immune from takeover. Today, its presence is felt in almost every country in the world. Its company literature considers developments in food in the context of feeding the global population. Questions about its size and market dominance seem to dissipate under the sheer might of the company itself.

  General Cinema still held almost a fifth of Cadbury Schweppes’s share register, but the Cadbury brothers had a plan to strengthen the company’s independence. Dominic w
anted to focus the business on its strongest global brands in confectionery and drinks.

  At the time, Cadbury Schweppes owned a household products division and a food business that included Typhoo tea, Kenco coffee, biscuits, preserves, and canned goods. For the Cadbury brothers, the most satisfactory outcome was that their managements should be their future owners. Both divisions were successfully sold to their respective managing teams.

  Although Cadbury could not grow the chocolate division of the business through mergers with its natural partners—Hershey or Rowntree who shared a similar heritage and ethical values—it was able to expand the confectionery division by acquiring strong sugar confectionery brands: Lion confectionery in 1988, followed by Bassett and then the Trebor Group. This brought in popular brands like Bassett’s Liquorice Allsorts, Bassett’s Jelly Babies, Trebor Mints, Trebor Extra Strong Mints, and many others.

  Cadbury was also keen to find ways to make the drinks side of the business more dynamic. Schweppes had nowhere near the share of the drinks market that Cadbury had in confectionery, but Dominic could see a solution. “We signed up with Coke to create a new bottling company called Coca-Cola Schweppes.” This was four times the size of Cadbury Schweppes’s original bottling business in Britain. The company soon acquired soft drink brands in America, including Canada Dry. “The aim was to buy a local company, get a local presence, and bring in the global brands off the back of that.”

  As the brothers refocused the business, the share price recovered. Despite the efforts of General Cinema, no bidder came forward. “At no stage did we agree to meet General Cinema for any negotiation over the future of the firm,” Dominic recalls. At the time hedge funds were less of a factor. The share register remained stable. Eventually after three worrying years, General Cinema sold their shares. “It was hugely satisfying to see this threat to the company disappear,” he says. “One of the best moments of my life.”

  In the years following Adrian Cadbury’s retirement in 1989, another astonishing opportunity opened up. The collapse of the Soviet Union unlocked an enormous new market. Mars was first to venture into the “Wild East.” In the deadly winter of 1990, Moscow citizens gratefully succumbed to what became known as “Snickerisation,” when eager buyers waited patiently in queues almost half a mile in length. When Cadbury began exporting chocolates to Russia in 1992, the products sold out almost immediately. Soon Cadbury executives learned that Mars was converting a former military base at Stupino into a chocolate factory. Cadbury was also planning to build a Russian chocolate works—in Chudovo, near St. Petersburg. Two years later, Cadbury and Mars were in Beijing tackling the largest market of all.

  “Renowned as a marketing whiz,” reported Andrew Davidson in August 1997 in Management Today, Dominic has helped to position a company with good Commonwealth links “into a truly global multinational.” While Cadbury chocolates were selling around the world, the company also had a major presence in America through its soft drinks. Under Dominic’s era as chairman from 1994 to 2000, Cadbury Schweppes acquired Dr. Pepper and 7UP for £1.6 billion ($2.48 billion), swiftly followed by Sunkist, Mott’s apple juice, and Snapple. This meant that Cadbury Schweppes could compete with Coke and Pepsi globally, “with astonishing audacity,” observed Davidson.

  When Dominic stepped down in 2000, for the first time in the firm’s 170-year history, there was no longer a member of the family on the board, and less than 1 percent of Cadbury Schweppes shares were in family hands. Over the years, the shares held by the Cadbury benevolent trusts had also declined. The trust’s financial advisors had recommended they diversify their holdings. “That is simply a prudent decision by the trusts,” Adrian says, “and in my view the wealth which the company produced for the family continues to be used for the causes that the family holds dear.” Recent figures show that the Barrow Cadbury Trust, valued at £53.7 million, gives roughly £2.5 million in annual grants. Edward Cadbury’s trust, William Cadbury’s trust, and several other family trusts give a combined 250 grants each year. All the while, the Bournville Village Trust, still run by family members, continues to flourish.

  The shareholders in Cadbury Schweppes, however, were increasingly made up of investors who had no direct personal links to the business and its values and whose priorities were purely to maximize profit. The Quaker voice no longer held sway in the boardroom, but could it be heard anywhere in the modern drinks and confectionery giant?

  Dominic argues that it could, proudly citing his brother’s role in developing the first code of corporate governance. “Adrian’s Quaker background influenced his whole career at Cadbury and his understanding of how a company best operates,” he says. “I think you can say the Quaker DNA has shone through the Cadbury company in terms of the work that the former Cadbury chairman has done to help develop the first code of best practice.”

  Adrian Cadbury was invited to chair a Committee on Financial Aspects of Corporate Governance in 1991 when he was working as a director of the Bank of England. At the time several sensational business scandals had undermined the public’s confidence in how companies were run. For Adrian, “The proper governance of companies was becoming as crucial to the world economy as the proper governing of countries.” The Governance Committee set a code of best practice on critical issues, among them: honest disclosure, excessive executive pay—especially when not correlated to performance—improving the quality of financial reporting, balancing short-term and long-term interests, and who should be considered stakeholders in the process. The code was the basis for effecting widespread reform of corporate governance.

  “Eleven years and twenty-eight countries later,” wrote Simon Caulkin in the Observer on October 27, 2002, “Cadbury is the elder statesman of the corporate governance movement and Britain is the corporate governance capital of the world.” The Cadbury Code recommendations have influenced governance in twenty-eight countries and the World Bank. Although Quaker values were not explicitly mentioned in the Cadbury Code, for Adrian, they were crucial. The aim of the code was to bring “greater transparency, honesty, simplicity, and integrity to the process of running a company,” he said.

  Even as a global corporation, the company tried to stay faithful to its Quaker heritage, says Todd Stitzer, Cadbury’s chief strategy officer in 2000. A Harvard-educated lawyer, Stitzer worked for the British chocolate company his entire career. “I admired the culture,” he explains. “It’s the appeal of the head-heart relationship that existed within the business. It mattered hugely to me.” In 2000, Stitzer points out, Cadbury had a major role in Business in the Community, the organization within the Prince’s Trust that Cadbury helped found that focuses on mobilizing business for good. “Cadbury had a very significant role in Help the Homeless and many other causes. And there was a continuing relationship with HIV AIDS and other health projects in Africa.” That year, he says, they launched a program to build wells in Ghanian villages that had no fresh water. To date, they have built over nine hundred of them.

  In the new millennium, the confectionery industry faced seismic shifts as a fresh wave of consolidation hit. The Hershey Company, so long protected by the Hershey Trust, became the focus of unwelcome attention once more. Just as the Cadbury trusts had diversified their holdings, directors of the Hershey Trust began to question whether the Hershey School would be better protected with a more diverse source of income. They consulted lawyers to find out if the Hershey Trust could sell its controlling stake. “They literally decided that they would auction the Hershey Company,” recalls Todd Stitzer, “and they had a line of potential buyers.”

  Wrigley, Cadbury, and Nestlé began separate negotiations with the Hershey Trust. Now that Nestlé owned Rowntree, they wanted to win back the license to the Kit Kat brand in America—which was owned by Hershey. Wrigley wanted a stake in the chocolate market. Cadbury had always seen Hershey as its closest cultural fit. When news of the secret negotiations was leaked, there was an immediate outcry. The Hershey community felt betrayed. Posters were
printed warning, “Wait ’til Mr. Hershey finds out!” Residents and workers paraded down Chocolate Avenue reminding anyone who would listen of Milton Hershey’s proud heritage. The state attorney general, Mike Fisher, who was campaigning to become governor of Pennsylvania, was deluged with complaints and mounted a legal challenge to any sale. On September 3, 2002, the case came before the court in Harrisburg, Pennsylvania. The judge ruled no sale could happen without his approval. By that point, however, negotiations were virtually complete and bids were in. “Much to our surprise, at the very 11th hour, 59th minute plus 30 seconds, the trust decided they did not want to sell,” recalls Stitzer. Once again, Hershey’s chocolate company remained independent.

  After spending three months in hotel rooms in New York “trying to put this thing together,” Stitzer politely describes the U-turn as “remarkable.” But his disappointment was quickly forgotten because “literally the day after it happened, the Pfizer people came over to the UK and said, guess what, we are having an auction for Adams.” Adams, an American firm, was the world’s second largest chewing gum concern, and its portfolio included gums like Trident, Dentyne, and Chiclets, bubble gums like Bubbaloo and Bubblicious, and other popular brands like Halls cough drops. Stitzer, who was promoted to chief executive in 2003, was charged with growing Cadbury’s confectionery business, and it was increasingly clear that there were very few public chocolate companies left to acquire. He changed strategy, buying sugar confectionery and gum businesses in different parts of the world. The acquisition of Adams for $4.2 billion made Cadbury Schweppes the world’s largest confectionery giant.