Happiness in Industry

Cadburys - Myriad Problems

Cadbury Schweppes plc. has announced the closure of the Chocolate Factory in the town of Keynsham near Bristol. (Beginning 2009)

This is not a popular move in Keynsham, in Bristol or in Bath & North East Somerset. Understandably so: being unemployed sucks. Over 500 well paying manufacturing jobs in the area are going to be axed; some going to another UK factory and most ultimately to Poland.

The "Somerdale" plant has a lot of history: the Cadbury's operation in Bristol was originally the J.S. Fry and Sons company which exists now only as a brand name in the Cadbury's stable. Thousands once worked there and most families in the area can claim a family member as part of the Cadbury's family (my mother-in-law, for example).

Local politicians have put forward motions against the closure with cross party support as have Members of the UK Parliament. Senior Clerics express their concern about the immorality of the closure. The local press in Bristol are campaigning for a reversal of company policy. So is Roger Moore.

The TGWU points to the hypocrisy of trading off a past record of Quaker-inspired generosity to workers and scoffs at Cadbury's claim to be a Responsible Business, particularly the comments of the last of the Cadbury's. The shop stewards highlight the company's strong financial results and cry "Greed!".

Consider this report in the trade press from yesterday - "Strong Sales Boost Cadbury revenue output". Revenues up. Margins up. CEO Todd Stitzer reports "a recovery in the UK chocolate market".

So why the planned closure? Well - there are two things you have to consider: the price of commodities and the price of land.

Let's start with commodities - we're living in a Bull Market for "stuff". Whether it's Oil, Metals, Cereals, Frozen Concentrated Orange Juice or Pork Bellies, there are more people out there with cash wanting a better quality of life for themselves and their children. That's a good thing, by the way. Hell, it's the manifest destiny of our species.

And we're a pretty cunning lot, by and large. The collective action of billions of consumers striving for the best deal - the Invisible Hand - works to keep prices down and switch consumer preference to cheaper substitutes. But at some level, there is no way to get away from the economic fundamentals: lots of demand and limited supply leads to higher prices.

Why is this a problem for Cadburys? Because to make chocolate, you need Cocoa derivatives and Sugar. Different cultures express preferences for different combinations of ingredients - preferences set in childhood - but the underlying requirements don't change.

Here's a Chart for Cocoa . (These are New York prices, but the trend is the same in Europe.)


And here's one for Sugar (specifically Sugar #11).

Sugar #11

One wonders when Cadburys locked in their supply chain - it seems likely they are paying a lot more than in the past for their raw materials. And yet high street prices for confectionary haven't changed a great deal. For a generation.

I don't have a database of historic prices to hand, but here's a quick example: today a Penguin (UK Chocolate biscuit snack, not made by Cadbury's) will costs you £1.19 for a pack of 9 in Tesco. Now have a look at this TV advert from 1982:

The advertised price is 29 and a half pence for a pack of six penguins (down from 31 pence).

1982: 5 pence for a chocolate biscuit

2007: 13 pence for what is broadly the same biscuit.

Allowing for inflation, the 1982 price is equivalent to at least 12 pence in today's money. If anything the chocolate snack is cheaper now. Customer demand and rising input prices, which one would expect to raise prices, are counter-balanced by a lot of competition and expectations of supply chain efficiency from retail partners. Translation: the big supermarkets - Tesco, Asda(Wal-Mart), Sainsbury and Morrison - would throw a wobbly if the food producers tried to pass higher commodity prices up through the supply chain.

So Cadbury's are in a bit of a bind. They've got an expensive UK-based workforce with a historically generous pension plan, rising input prices, the government on their back about childhood obesity, a history of EU interference in the market preventing economies of scale, fierce competition and stagnating market share, a £50 million pound hole in the accounts due to Nigerian corruption, environmentalists moaning about food miles, commodity producers unwilling to modernise and abandon inefficient slave labour, not to mention health scares and product recalls.

The management of Cadbury's are putting a brave face on it in their annual Accounts, but the company is not the shareholders' money machine one might assume.

So what's this all got to do with closing a factory?

Remember I mentioned land prices? The UK has one of the most restrictive planning systems in the world. Despite 90% of the country being undeveloped and a chronic lack of housing putting home ownership out of reach of most people under thirty, UK planning laws make building new homes extremely difficult. 13% of the country is greenbelt land (doubled since 1979) - most of it around cities which a tiny fraction of the space could be developed to provide cheap homes for everyone.

But "brownfield" sites, now those are candidates for development, and their value is further enhanced by the artificial, government-imposed land scarcity. So let's say you're a company - a chocolate company for example - with a need to improve cash flow, and you happen to own an old factory in the middle of a commuter belt, slap bang between two large cities. The greenfield bits of the site - the Quaker sports grounds - are about a square kilometre of protected land. But there's a hell of a lot of brownfield land that could be developed as a housing estate.
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Is this the whole story? No - there is a historical trend away from manufacturing employment in this country, although we make more stuff then we ever have due to higher productivity. Cadbury's Keysham employment is down ninety percent from mid-twentieth century highs, and the potential of the site is just the final item in a long cost-benefits analysis. But before you blame shareholders and company executives, consider the role of politicians in this matter.