You are on page 1of 11


The study was conducted to evaluate the economic analyses of Cadbury production with a view
to establishing the profitability of the investment. The method used in this study involved an
investment decision model comprising Net present value (NPV), Benefit Cost Ratio (BCR) and
Internal Rate of Return (IRR). The results indicates an NPV of N480, 535 discounted at 21%,
BCR of 2.5 and IRR of 21.33% .These positive values are indices to the fact that investment of
Cadbury is a profitable venture and worthwhile.
Cadbury is one of the British fastest and a rapid growing confectionery company among all
multinationals and national companies engaged in their well-known dairy and milky products.
From 2010 to 2012, Cadbury is managed by Kraft Foods then followed by Mondelz
International who now operates the company from 2012 to present. In 1824, Cadbury was
established in Birmingham by John Cadbury, one of ten children of Richard Tapper Cadbury, a
prominent Quaker who sold tea, coffee and drinking chocolate. Cadbury then developed the
business with his brother Benjamin in 1847, followed by his sons Richard and George who had
joined the company in the 1850s and became the second Cadbury brothers to run the business. In
21st century, the expansion of business has widened to more than 70 countries. The company
manufactured and marketed mainly different kinds of confectionery products such as chocolates,
snacks, beverages, candy and gums. Dairy milk is one of the renowned and best-seller chocolate
brands among the other Cadbury products.
The following shows the global market share and research indicates that Cadbury consists of
70% market share all over the world. The dairy milk chocolate alone has accounted for 30% of
market. Besides, research also found out that an estimated number for chocolate bars are sold in
every year consists of 120 billion and about 60 million of these are manufactured by Cadbury.
Cadbury then becomes the second largest confectionery company in the world.

The Cadbury industry offers a wide variety of opportunities for the small business owner
weathers economic recession well and is growing despite increased health-consciousness and
calorie counting. Overall idea about this economic research on Cadbury for its common use of
these days. Basics on those these product which increases its consumption in last few years
which we will see under the passages which been over view and try to prove is how it shows its
usefulness for this world and our community. For proving those in this assignment gave data
with methodology.
Data and Methodology
For the project analysis, we use the project Net Present Value formula, stated in Brealey et al.,
Where PV is the todays value of future cash flows that the project will generate, and I is the
initial amount of money put in order to start the business. PV calculation is:

Where FV is the expected future cash flow of the project on an annual basis, i.e. correspond to
cash flows in years: 1, 2, 3, etc., r is the discount rate used for discounting the future cash flows
each year and t is the number of periods.
Project cash flow (PCF) contains three elements: (1) the Cash flow from Operations (CFO), (2)
the Cash flow from Investments in fixed assets (CFI), and (3) the Cash flow from changes in
working capital (CFWC). PCF calculation is:
The CFO represents the cash generated from the everyday business operations. CFO calculation
Where NP is companys net profit, A is the amortization and D is depreciation. The CFI is the
cash spent on purchasing, building and selling plant and equipment.

Cadbury operates in a monopolistic competitive market structure in which they have been able to
maintain a control over their inflated prices. With usage of the Cadbury logo, quality, and various
trademarks, they differentiate their chocolates from their competitors. Cadbury understands the
concepts of brand identity and product differentiation which is a reason why Cadbury has
become the second largest confectionery company all over the world. The companys strategy to
focus on their main competencies to differentiate themselves has made Cadbury into a
confectionery powerhouse. Cadbury understands how to benefit their customer in which they
conduct an observation on consumer feedback; leverage the company widely to many products
and markets, and create innovative ideas that are hard for competitors to imitate.
Monopolistic competitive firms, like Cadbury are driven by mass advertising and the
establishment of brand names and logos. There are many other brands of confectionery products
on the market that also offer same flavor and same price, but the advertising of Cadbury attracts
all major part of population. To differentiate between those confectionery products, consumers
must sample all types and determine what suits their tastes. Yet, there are too many on the
market and consumers do not have the time or the funds to sample various brands. Advertisers
are aware of this and therefore focus on targeted ad campaigns to attract more consumers.
Cadbury attracts their customers over their competitors by their creative designed advertisement
campaigns. This is the reason why Cadbury is able to create an array of loyal buyers.
Determinants of Demand
Population and Age Group
Brand Image
Consumer Preference and Taste
Expected Future Price
Price of Complementary Goods
Cooling Weather and Recession
Determinants of Supply
number of supplier
expected price
price of input costs
Factors that Affect the Demand of Cadbury
Income of the consumer will also affect the demand of goods. For example, if the income of the
consumer increase, they have more money to spend, therefore they will buy more goods. At that
moment, the demand curve for the goods will shift to the right. However, not demand for the
goods will increase only, demand for normal good will increased. There is a real life instance for

this theory. When our salary increases, we will have extra money to spend, so before increase of
salary, we may only purchase 1 or 2 chocolate bars. However, after increase of salary, maybe we
will buy dozens of chocolate bars. This made us to purchase more of the goods sold. Therefore
the demand of the product will increased due to the raise of income. So, there is a positive
relationship between income and the product demand.
The determinant that affects the demand of Cadbury is population and age group. The
product is known for the children, adults and also for the old people so the age group are not
much affected the demand of the product. In this case, demand remains constant. If by increasing
in the population, there will be more buyers than there must be more of the market demand.
Thus, the demand of the Cadbury products will increase and the demand curve shifts leftward to
The brand image also determines the demand of the product as its brand of Cadbury plays
an important role in the demand of the Cadbury. This product has built such a brand image that it
has attracted the mind of the consumers so they will not like to go for any other product.
The demand of Cadbury product also depends on consumers preference and taste. If
people enjoy eating and develop a preference for the sweet and classic tasting Cadbury
Chocolate, they will want more of it. If consumer do not prefer by its sweetness tasting, they will
want less of it or change to other brand. Income changes and lower priced substitutions could
affect their taste and a cheaper priced alternative could become a new preference.
Expected price is also included. If consumer expects that the price of a certain
commodity will rise in future, the demand will increase as the product is under the current lower
price before the price rise. Inversely, consumers may believe that a price of a good will be
reduced in future; they will delay on purchasing the product until the price reduces to the lower
rate. Many consumers may purchase Cadbury products if they know that the price is going to be
increasing in the near future. On the other hand, consumers may wait to buy the products if they
know the prices are going to drop in the near future.
Competition is also other factors that affect the demand of Cadbury products. In this
market, consumers can find a lot variety of different brands of chocolate that are available such
as Nestle Kit-Kat, Ferrero Roche, Hershey, and Mars and so on. All chocolates are sold
according to the market price including Cadbury. So it is a tough competition for all
confectionery companies. In order to increase the demand for Cadbury products, the price of the
competitors have to be increase. In vice versa, if the price of the competitors decrease, the
demand of Cadbury products not much affected by it as it is considered as consumers brand
loyal but the sales volume is not much as the previous. In the results, the profits will not that
high as before the changes of price of competitors.
Furthermore, price of complementary goods is also another determinant. If the price of
complementary goods increases then there will be no change in the demand as Cadbury has

referred to normal goods. It becomes every people daily needs. But there is another consideration
that the demand will be affected if the price of complementary goods increases highly. For
example, in 2009 a shortage of cocoa was reported in UK. The cost of cocoa has increased
drastically to 2,055 a ton, the highest since 1985. The sale revenues dropped drastically as many
consumers may be unwilling to buy the product. They would rather to purchase sweet or candy
rather than buy chocolate.
Factors that Affect the Supply of Cadbury
The price of related goods will affect the supply that will shift the supply curve. For
example, in 2009, UK had faced inflation in the price of cocoa that brought a huge impact to all
confectionery companies including Cadbury. The increases in the price of the related good
(cocoa) will affect less supply on the confectionery products although the price of the product
remains constant. This shifts the supply curve to the left.
Besides, the number of suppliers also will affect supply. For example, as Cadbury
expands their business to more than 70 countries, there are a lot of supplies for Cadbury product.
An increase in number of suppliers shifts the supply curve rightward. The greater the number of
suppliers in the market, the greater the supply of Cadbury products in the market. There will be
more Cadbury products to go around for the consumers.
Expected price of the good also determines the supply of Cadbury products. Producers
may delay the production of Cadbury in the current period if they expect the price of the
products to rise. They will be more willing to sell the products at a higher price rather than
selling and producing at the lower price. The higher price will increase their net revenue.
Price Elasticity of Demand
Price elasticity of demand measures the extent to which the quantity of demand of good
changes when the price of good changes. In order to determine price elasticity of demand we
compared the change in quantity demanded with change in price.
In 2008, Cadbury announced that the commodity input costs rose by 5-6%. The current
original price of the dairy milk chocolate was $1.20 per bar. Assume we use 6% to determine the
price change, and it increases $0.7, the price would be RM1.27. Assume quantity demanded is
100 units drop to 95 units.
Although there are increase in price in input costs, but it is not going to affect much in the
demand of Cadbury products as Cadbury is necessity for consumers. Necessity tends to
have inelastic demand and it is unresponsive price change. By referring the past incident based
on the article, the price of input costs has increased around 3 times. However, the quantity

demanded did not decreased so much. In 2007, the price of input costs rose up and revenues still
grew by 7% that became the best performance in a decade.
We can prove that Cadbury has an inelastic demand. This is because the percentage
change in quantity demanded is less than the percentage change in price (-0.4 <1) However, the
annual sales revenues for Cadbury in 2008 decreased by 9% as the unstable of economic
In 2008, Cadbury announced that its profit before tax was down at 112 million
compared to 134 million. However, its sales revenue rose from 2440 million in 2008 to 2767
in 2009.
The profits earned for inelastic demand is higher than elastic demand when the price
increases. Revenue is calculated as Price Quantity demanded. When p= $1.27, Qd=95 units,
TR= $1.27x 90 = $120.65. Original price, p = $1.20, Qd=100 units, TR = $1.20 x 100 =$120.
Determinants of Price Elasticity for Cadbury
Price elasticity is determined by a number of factors. There are number of substitutes,
time and definition of the market. As there is more substitution in market, then its price elasticity
of demand will be more elastic. However, if there is no substitutes for certain product, although
the price of the product itself increased, people cannot switch to other alternative, then it will be
more inelastic. For example, once the price of Cadbury increases highly and there is decrease in
price of Nestle Kit Kat, consumer rather to buy Kit Kat although Cadbury is loyal brand. Thus, in
this case, Cadbury is elastic demand.
Secondly, time is significant. Inelastic is occurred when something new is entering the
market and there are no substitutes in the market. However, in long term, more similar product
will enter the market, and then people have other choices and will switch to alternative once
price increased. The product in long term will be more elastic. For example, the demand for the
dairy milk is less inelastic as if the price of the dairy milk chocolate suddenly increases $1.20 to
$1.50, than the demand of the product decrease but if in the long run the demand may not be
much affected.
There are some criteria that also affects and they are like: Our product should be in the
monopolistic competitive market product. No change in the taste and quality. In the Long run
period of time, the demand for the dairy milk is more elastic because if the price of the dairy
milk in the 2007 was $1.20 and in the 2010 it costs $1.50 but the quantity and the quality will
remain the same and the other products also like Kit-Kat and Munch, if they dont change any of
the things like price, quality and quantity than it will greatly affect the demand of the dairy milk
and it will started decreasing day by day.
Lastly, market definition is important in determine the price elasticity of demand. For
instance Cadbury chocolates have other substitutes, for example Kit Kat. The price elasticity of

demand for Cadbury is inelastic since it has lesser substitutes as it is sold at low price than the
other brands. . If we wider the definition of the market, we changed the Cadbury to Kit Kat
market, then it will have more substitutes. The price elasticity of demand will be more elastic as
the price is higher than the Cadbury products.
Income Elasticity of Demand
Income elasticity impacts change in demand curve. When income increases, the quantity
of demand increases and when income decrease, quantity of demand decreases. As income
increases, people will tend to purchase more Cadbury products. But some facts states that
Cadbury product might become inferior good for some people as it is sold at low price. Some
consumers rather switch into a more expensive or more-prestigious chocolate brand products
such as Ferrero Roche rather than purchase Cadbury products. When income decreases, the
demand for normal goods will fall. Consumers will switch back to Cadbury as they are easily to
be bought at an affordable price.
Cross-Price Elasticity of Demand for Substitution Goods
The concept of cross-price elasticity of demand measures the responsiveness of
consumers of one good or service to the change in price of another. If two goods are substitutes
and increases in price, we expect to see consumers purchase more of the good. For example, if
there is an increase in price of Kit Kat (original price = $1.30, new price = $1.40), quantity for
Cadbury increase from 100 units to 150 units then the demand for Cadbury Dairy Milk will
increase as well.
We conclude that the cross-price elasticity of demand for Cadbury when the price of Kit
Kat increases from $1.30 to $1.40 is 6.5. As a result, there is a strong demand towards Cadbury
Cross-Price Elasticity For Complementary Goods
If they complement each other we should see a price rise in on good cause demand for
both goods to fall. Basically impact of prices changes substitutes and complements when the
price of related good changes. For example, if there is an increase in the price of the cocoa bean,
milk and other complementary goods like plastic packaging materials, the cost of the production
will increase and by this the price of the related product will also increase but the demand of the
Cadbury will remain constant because it is referred as normal good.
The increase in demand for Cadbury products will have different implications in the short run
and the long run at the industry level. For example, In short run, as there is has a greatly increase
in demand for Cadbury Dairy Milk, each of the firms will increase their labor supply by getting

existing workers to work overtime or having an extra shift and raw materials to meet the added
demand for Cadbury Dairy Milk. At first only existing firms will be likely to capitalize on the
increased demand as they will be the only ones who will have access to the four inputs needed to
make the chocolate. However, the factor input is variable as well when it exits in long run. This
means that existing firms can change the size and number of factories they own and new firms
can build or buy factories to produce chocolate. In the long run, we will see new firms enter the
confectionery market, while they will not exist in the short run as firms will not be able to obtain
all of the inputs they need.
Economies of scale are achieved when more units of a good can be produced on a larger
scale, yet with less input costs. When economies of scale are realized, economic growth can be
achieved. However, diseconomies of scale can happen when production is less than in proportion
to inputs. The costs on average would rise as there is insufficiency occurring within the firm.
If Cadbury wants to remain their position in the market, they need to capitalize in
economies of scale. For example, in 1968, Cadbury was merged with the company Schweppes.
Since they had invested in new machinery in one of their modern confectionery plants (run by
Cadbury Schweppes), they were able to switch part of factory capacity from lines where demand
was in decline, to where demand was on the increase through well-organized production
management. Besides, they will be benefited from technical and financial economies of scale.
For example, they will be able to invent better, bigger and faster machinery. It means that they
could cheaply produce a large quantity of units and yet lowering their costs. Furthermore, since
they merged, the company was already seen as a secured firm. They will be easier to borrow
capital at low interest rates, as banks knew that the company was less of a risk. But in 2007, the
merged company had confirmed to split itself into two, its confectionery and soft drink business.
This would cause the increase in input costs.
Diseconomies of scale will be occurred if Cadbury expands their business too quickly. It
could become a tough task to monitor the productivity and quality of output from these many
thousands of employees. With different managers of these individual branches having different
objectives, it means that Cadbury needs to place more input costs in business that will results in a
low levels of production. Also, with thousands of employees, the morale levels for individual
workers could be reduced. As a result, the productivity decreases, wasting factor inputs and
increasing costs for the company.
In 2010, Kraft, the worlds second largest food company took over Cadbury. Kraft said
the combination of the two companies could create a global confectionery giant as Kraft are
now able to increase their market shares and growth overseas, while Cadbury could expand its
markets and place itself as a competitor among the US confectionery market. Kraft indicates that

the combination of two companies allowed them to invest in economies of scales, meaning sales
and distribution would increase and deliver 640m in revenue synergies.

Market Overview
In this part we take a sample market over of Indian market.
Indian Market

Size of Rs 8 billion in value and around 33,000 tons in volume

Low per capita consumption of around 160 gm as compared to 8 kg in UK

Very low penetration level

Growth rate of 11.5%

Market Demand

Region-wise Distribution of Sales

Age-wise Market Segmentation

In conclusion, Cadbury has had much market power in the confectionery industry all over the
world. Cadbury realizes their success depends significantly on the value of the Cadbury brand
while relying on its excellent reputation for their product quality and flavor, accessible, and
affordable price. In the current economic state, they are still facing and need to sort out the issue
of the deficit of cocoa and the price increases in cocoa. Besides, they need to compete with other

chocolate brands as many firms have entered freely in the market. To remain a major player in
the confectionery industry, they need to be effective in the current market by introducing more
new products and react to the alternatives within the market.
[1] Cadbury (2011) Wikipedia [online]. 11 April.
[2] Amy Chapman (2009) Demand and Supply in action - Cocoa Shortage to Affect Price of
[3] Bized (2009) Cadbury.
[4] Microecono (2012) Subsidy of sugar, Price Elasticity of Kitkat and Cadbury.
[5] Amy Chapman (2011) Cost Cutting at Cadbury.
[6] Mike Moffatt (unknown) Short Run vs. Long Run.
[7] BBC NEWS (2008) Cadbury plans to increase prices.
[8] Business Today (2003) The Strategy Summit.
[9] BBC NEWS (2010) Cadbury Agrees Kraft Takeover Bid.