{"id":22827,"date":"2017-11-14T20:57:39","date_gmt":"2017-11-15T01:57:39","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/fighting-for-freddo-cadburys-fight-for-profitability-in-the-face-of-brexit-uncertainty\/"},"modified":"2017-11-26T19:29:47","modified_gmt":"2017-11-27T00:29:47","slug":"fighting-for-freddo-cadburys-fight-for-profitability-in-the-face-of-brexit-uncertainty","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/fighting-for-freddo-cadburys-fight-for-profitability-in-the-face-of-brexit-uncertainty\/","title":{"rendered":"Fighting for Freddo: Cadbury\u2019s Fight for Profitability in the Face of Brexit Uncertainty"},"content":{"rendered":"

On June 23, 2016, 51.9% of the U.K. electorate voted to leave the EU sending shockwaves around the world. Within 24 hours of \u201cBrexit,\u201d as this referendum became known, the S&P Global Broad Market Index lost $2.1 trillion of value and the British pound suffered its biggest one-day selloff in recent history.[1]<\/a> Today, uncertainty remains around the U.K.\u2019s withdrawal from the EU with negotiations over the single market and freedom of movement having significant consequences for British manufacturing supply chains. If British leaders opt for a \u201chard Brexit,\u201d the country embraces World Trade Organization (WTO) terms, leading to firm customs duties and closed borders.[2]<\/a> The elimination of the prevailing low cost, low friction trade environment will complicate supply chains and pose a substantial risk to the profitability of companies operating in the U.K.<\/p>\n

Cadbury, the iconic British chocolate company owned by Mondelez, is one of many food companies with global operations that must rethink its supply chain strategies to maintain profitability in a more isolationist macroeconomic context. If Cadbury does not respond, import and export tariffs, higher inventory requirements to compensate for procurement bottlenecks and delays, and a depreciation of the British pound could destroy the company.[3]<\/a> The magnitude of these changes is severe. A \u201chard Brexit\u201d could cause a shift to standard WTO tariffs (2% to 13%) on all exports and imports, and result in a 10% increase in the cost of labor in the U.K. and a 20% devaluation of the British pound.[4]<\/a> The confluence of these factors will dramatically increase the cost of production and erode already slim margins.<\/p>\n

One solution is to move all production outside of the U.K. However, Cadbury traces its roots to a grocer\u2019s shop in Birmingham and its quintessentially English heritage is foundational to the brand. Moving all production out of the country is not a viable option and Glenn Caton, President of Mondelez for Northern Europe, who manages Cadbury in Britain, expressed the company\u2019s commitment to remaining in the U.K.[5]<\/a> Nevertheless, Cadbury has experienced a decline in revenue since the Brexit vote and the decline of the British pound is making raw materials imports more expensive. The price of cocoa has increased over 50% since 2013.[6]<\/a> In the short term, Cadbury has raised its prices and shrunk the size of its goods, also known as \u201cshrinkflation,\u201d to maintain profit margins as input costs increase.[7]<\/a> In January 2017, Mondelez announced a 20% price increase on Cadbury\u2019s Freddo bars which inspired outrage in the British media. In response, a Mondelez spokeswoman said: \u201cIncreasing prices is always a last resort, but to ensure we can keep people\u2019s favorite brands on shelf and look after the 4,500 people we employ in the U.K., we are having to make some selective price increases across our range.\u201d[8]<\/a><\/p>\n

In the medium term, Cadbury is focused on boosting productivity to protect the quality and taste of its chocolate as the company faces mounting pressures. Mondelez, Cadbury\u2019s parent company, has invested more than \u00a3200 million in the business, including \u00a375 million on modernizing manufacturing at Bournville in Birmingham, the home of the brand.[9]<\/a> In addition, Caton chairs a company committee examining the implications of Brexit.[10]<\/a><\/p>\n

Given the uncertainty surrounding Brexit negotiations with outcomes ranging from no change at all to severe change, it is paramount that Cadbury remains a nimble organization. Glenn Caton and his team must develop a strategy that can adapt to various future outcomes, engaging in a continuous cycle of implementation, monitoring, and adjustment to initiate incremental changes in the organization and its supply chain.[11]<\/a> It is prudent to delay major, irreversible decisions, such as relocating all manufacturing overseas, until there is more clarity on the extent of trade regulations. Yet there are certain actions, such as investing in cost management and operational effectiveness, that augment Cadbury\u2019s competitive edge regardless of the outcome of negotiations. Creating the most efficient domestic manufacturing process by investing in technology to increase productivity and eliminate waste can only help Cadbury long-term. Shifting to automation would mitigate the impact of rising labor costs. Cadbury can also invest in a few small-scale pilot plants in the EU that can be scaled up or down quickly.[12]<\/a> If the U.K. initiates a \u201chard Brexit\u201d Cadbury is well positioned to relocate and ramp production quickly. In the case of minimal change, Cadbury has avoided a large, unnecessary investment and preserved its reputation. Financial hedging instruments and denominating contracts in different currencies could also mitigate foreign currency risk.[13]<\/a><\/p>\n

The key question is whether these steps will be enough to preserve Cadbury\u2019s business model in the face of mounting uncertainty. Will raising prices and \u201cshrinkflation\u201d erode the consumer\u2019s brand loyalty? If a \u201chard Brexit\u201d does occur, how can Cadbury can maintain profitability and preserve its British brand heritage without relocating manufacturing overseas?<\/p>\n

[799 words]<\/p>\n

[1]<\/a> Graeme Wearden and Nick Fletcher, \u201cBrexit Panic Wipes $2 trillion Off World Markets \u2013 As It Happened,\u201d The Guardian, <\/em>June 24, 2016, https:\/\/www.theguardian.com\/business\/live\/2016\/jun\/24\/global-markets-ftse-pound-uk-leave-eu-brexit-live-updates<\/a>, accessed November 2017.<\/p>\n

[2]<\/a> Thomas Kwasniok, Peter Guarraia and Michael Garstka, \u201cIs Your Supply Chain Ready for Brexit?,\u201d Bain & Company, February 6, 2017. http:\/\/www.bain.com\/publications\/articles\/is-your-supply-chain-ready-for-brexit.aspx, accessed November 2017.<\/p>\n

[3]<\/a> Ibid.<\/p>\n

[4]<\/a> Ibid.<\/p>\n

[5]<\/a> Graham Ruddick, \u201cCadbury Says Chocolate Could Get Smaller After Brexit,\u201d The Guardian, <\/em>March 24, 2017, https:\/\/www.theguardian.com\/business\/2017\/mar\/24\/cadbury-warns-chocolate-could-get-smaller-after-brexit<\/a>, accessed November 2017.<\/p>\n

[6]<\/a> Zoe Wood, \u201cToblerone Maker to Hike Price of Cadbury\u2019s Freddo Bars,\u201d The Guardian, <\/em>January 12, 2017, https:\/\/www.theguardian.com\/business\/2017\/jan\/12\/toblerone-maker-mondolez-hike-price-cadbury-bars-freddo<\/a>, accessed November 2017.<\/p>\n

[7]<\/a> Graham Ruddick, \u201cCadbury Says Chocolate Could Get Smaller After Brexit,\u201d The Guardian.<\/em><\/p>\n

[8]<\/a> Zoe Wood, \u201cToblerone Maker to Hike Price of Cadbury\u2019s Freddo Bars,\u201d The Guardian.<\/em><\/p>\n

[9]<\/a> Graham Ruddick, \u201cCadbury Says Chocolate Could Get Smaller After Brexit,\u201d The Guardian.<\/em><\/p>\n

[10]<\/a> Joel Dimmock, \u201cA View from the Top: Glenn Caton, Head of Northern Europe for Cadbury-maker Mondelez,\u201d The Independent, <\/em>October 12, 2017, http:\/\/www.independent.co.uk\/news\/business\/analysis-and-features\/glenn-caton-mondelez-cadbury-maker-head-of-northern-europe-dairy-milk-a7980986.html<\/a>, accessed November 2017.<\/p>\n

[11]<\/a> Thomas Kwasniok, Peter Guarraia and Michael Garstka, \u201cIs Your Supply Chain Ready for Brexit?,\u201d Bain & Company.<\/p>\n

[12]<\/a> Ibid.<\/p>\n

[13]<\/a> Ibid.<\/p>\n","protected":false},"excerpt":{"rendered":"

This post examines Cadbury's challenge to maintain profitability in the face of increasing input costs due to Brexit.<\/p>\n","protected":false},"author":9828,"featured_media":22828,"comment_status":"open","ping_status":"closed","template":"","categories":[3230,3548,1320,33,3549,3222,3239,3550,3266,897],"class_list":["post-22827","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-brexit","category-cadbury","category-chocolate","category-food","category-free-trade","category-global-supply-chain","category-isolationism","category-single-market","category-tariffs","category-united-kingdom","hck-taxonomy-organization-cadbury","hck-taxonomy-industry-food-and-beverage","hck-taxonomy-country-united-kingdom"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\nFighting for Freddo: Cadbury\u2019s Fight for Profitability in the Face of Brexit Uncertainty - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/fighting-for-freddo-cadburys-fight-for-profitability-in-the-face-of-brexit-uncertainty\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Fighting for Freddo: Cadbury\u2019s Fight for Profitability in the Face of Brexit Uncertainty - 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