Case 1 : Cadbury’s Products

Lean Supply Chain Through Demand Management

Traditionally, confectionery has been seen a transformation with the conventional chocolate
éclair complemented by a host of fruit filled, soft centred, coffee cream and caramelized
candies. Broadly, the entire confectionery market can be divided into 7 major categories
namely, hard-boiled confectionery (HBC), toffees, éclairs, chewing gum, bubble gum, mint
and lozenges. The entire confectionery market in India is estimated to be 80,000 tonnes in
volume and Rs. 7 billion in value.

Gums Éclair
18% 5%

Mint
4%
HBC
Toffee 52%
18%

Lozenges
3%

Major categories of the confectionery market

The Indian Chocolate market grew at the rate of 10 per cent per annum in the 1970s and 1980s,
mainly due to the children segment. However, in the 1990s the industry witnessed a growth of
12 per cent. ORG-MARG estimates that chocolate penetrated just 5 per cent of Indian
households in the year 2000, as against sugar boiled confectionery, which reached 15 per cent
households. Even considering the urban market alone, this category reached just 22 percent
urban consumers. Of the total market, the chocolate segment makes 22,500 tonnes, which is
valued at Rs. 400 crore, and is dominated mainly by Cadbury’s and Nestle.
In the late 80s when the market started stagnating, Cadbury’s repositioned its Dairy Milk as an
anytime product rather than an occasional luxury. Its advertisement focused on adults rather
than children. Cadbury’s Five Star, the country’s first chocolate, was launched in 1968. Due to
its resistance to temperature, Five Star has become one of the most widely distributed
chocolates in the country. Other competing brands, such as GCMMF’s Badam Bar and
Nestlé’s Bar, have minor shares. In the early 90s, high cocoa prices compelled manufacturers
to raise product prices and reduce their advertisement budget, affecting volumes significantly.
The launch of wafer chocolate Kit Kat and Perk spurred volume growth in the 1990s. These
chocolates were positioned as snack food rather than as an occasional indulgence.

Chocolate consumption in India is extremely low as compared to foreign countries. In India the
consumption is around 160 gm in urban areas as compared to 8 to 10 kgs in developed
countries. In rural areas, consumption is even less.

Cadbury’s a subsidiary of Cadbury’s Schweppes, is a dominant player in the Indian chocolate

market, with brands like Dairy Milk, Five Star, and Perk. Dairy Milk is in fact the largest
selling chocolate brand in India. Chocolates contribute to 64 per cent of Cadbury’s sales
turnover. Confectionery sales account for 12 per cent of their turnover. Cadbury’s attempting
to expand its confectionery product portfolio with the launch of sugar based confectionery but
it is not a success story. In malted health drinks Cadbury’s has a strong presence in Bournvita,
which accounts for 43 per cent of its sales turnover.

Cadbury’s continues to dominate the chocolate market with about 70 per cent market share.
Nestle has emerged as a significant competitor with about 20 per cent share. Key competition
in chocolate is from Amul and Campco besides a host of players from the unorganized sector.
In confectionery products Cadbury’s enjoys a 4 per cent market share, wherein leading national
players are Nutrine, Ravalgon, Cadinco, Parle’s, Joyco India, and Perfetti. MNCs like Joyco
and Perfetti have aggressively expanded their presence in the country in the last few years.

The malted drink category covers white and brown drinks. White drinks account for two third
of the 80,000 tonne market. The South and East are the largest markets in India for food drinks.
Cadbury Bournvita is the leader in the brown drink (cocoa based) segment. In the white drink
segment SmithKline’s Horlicks is the leader. The other significant players are
Heinz(Complan), Nestle(Milo), GCMMF(Nutramul), and other Smithkline brands(Boost,
Maltova, Viva). Cadburys holds 14 per cent of the share in the health drinks market.

Despite tough market conditions and increased competition, Cadbury’s managed to record a
double digit (11 per cent) top line growth in the year 2000. The company achieved volume
growth of 5.2 per cent. This was achieved through innovative marketing strategies and focused
advertising campaign for its flagship brand Dairy Milk. The net profit of the company rose by
41.8 per cent to Rs. 520 million in 2000. Reduced material cost, effective and efficient logistics
operations, and tight controls on working capital enabled the company to grow. The company
added 6 million consumers and saw the growth of its outlets to 4.5 lakh and consumers to 60
million.

Cadbury’s management has cut down on its growth target by setting a target of 10 per cent
average volume growth for the next three years (as against 12 per cent growth in volume and
20 per cent in value, as targeted earlier). Coupled with inflationary price increases, this could
translate into top line growth of 14 to 15 per cent. This target is also difficult to achieve due to
consumer slowdown and the fact that the company is dependent on a single category –
chocolate – to drive growth. In the malted food drinks category the company faces stiff
competition from Smithkline Beecham and market share is stagnant at 14 per cent, despite the
company’s efforts and investments in repositioning the brand. Efforts at the expanding
confectionery portfolio have also not yielded the desired results. The management has declared
its intension to focus on Eclairs for the time being in this category. In chocolates, the onus is on
two to three brands that have supported the company’s growth in the past. Cadbury’s
dominates the Indian chocolate market with 70 per cent market share.
Product Categorywise Contribution to Cadbury’s Sales
Product Category Contribution Contribution
in sales turnover (%) 1994 in sales turnover (%) 2000

Chocolate 59 64
Sugar confectionery 9 12
Food Drink 32 24

Cadbury’s main manufacturing facilities are at Thane (Maharashtra), Gwalior(Madhya

Pradesh), Hyderabad(Andhra Pradesh), and Pune(Maharashtra), Cadbury’s also outsources
manufacturing to third parties, who are located at Phalton, Warna, and Nasik in Maharashtra.
The raw material is procured from Uttar Pradesh, Gujarat, and Maharashtra.

Cadbury: Income and Profit Growth

Year Income Income

(Rs. Million) (Rs. Million)

2001 6263.2 597.2

2000 5711.4 523.1
1999 5110.8 412.3
1998 4283.3 264.2
1997 3541.4 185.7
1996 3118.0 203.2
Source: Annual Reports
The company controls its marketing operations through four regional offices located at
Mumbai, Delhi, Kolkata, and Chennai. Each branch has 4 to 6 depots managed by carrying and
forwarding agents (CFAs). There are 27 CFAs located across the country. Material is supplied
to the CFAs from 4 warehouse hubs located at Thane, Gwalior, Hyderabad and Pune. These
CFAs supply material to 2,100 stockists, who in turn serve 4,50,000 retailers. The company has
a total consumer base of 60 million.

Warehouses CFAs Stockists Retailers

(4) (27) (2100) (4,50,000) Consumers

Marketing supply chain at Cadbury’s

As the product melts above 35 C, all the Cadbury warehouses are installed with temperature
controlled facilities. CFAs store the products in cold storage with storage areas varying from
2,000 to 5,000 sq ft. The hub warehouses are bigger, with areas varying from 20,000 to 45,000
sq. ft, depending on the demand in the region. The product is transported through refrigerated
vehicles. The average pack size is 2 feet x 2 feet x 2 feet with a maximum weight of 20
kilograms. Cadbury’s has excellent connectivity with its braches, CFAs and stockists. They
have developed and extended IT support throughout the distribution network. Cadbury’s is
attempting to improve distribution quality. To address the issue of product stability they have
installed Visi coolers at several retail outlets.

For product transportation Cadbury’s uses two types of vehicles, insulated (for chocolates) and
non-insulated (for chocolates) and non-insulated (for products that are not temperature
sensitive). In 85 per cent cases they go in for containerized vehicles, while in 15 per cent cases
they use open trucks. All consignments are full load trucks.
Currently Cadbury’s outsource transportation to various parties. The insulated vehicle category
includes National Freight Transport (NFT), Fresh Express, Assam Transport, Haryana Freight
Carriers (HFC), Interstate etc. while dry type vehicles includes Best, Delhi Road Services
(DRS), Shivalaya, East India Transports, and Transport Corporation of India (TCI). The
logistics cost incurred in distribution is around 10.5 per cent of the sales value. The
contribution of transportation cost and warehousing cost to the logistics cost is to the extent of
45 and 55 per cent respectively.

Cadbury’s presently maintains 15 days finished goods inventories at its various warehouses
and 18 to 20 days at the CFA locations. For cost reduction the management is planning to
reduce the inventory level further to 8 to 10 days at warehouse hubs and 15 to 16 days at each
CFA, without losing out on the market front. The major deciding factor is demand accuracy.
Even though the firm has excellent connectivity with its warehouses and CFAs, it has no direct
interaction with the retailers and customers.

Discussion Questions
1. For reduction of inventory level, what measures should the company adopt, without
sacrificing customer service and market share?
2. Does Cadbury’s need to undertake any major changes in its distribution network?
3. Discuss the nature of logistics programmes the firm needs to evolve for different
channel members.
4. ‘Demand Management is essential for operating a lean supply chain.’ How should
Cadbury’s tackle the issue of demand management for chocolates?