ECP001612_pcu (1).pdf X C O File | C:/Users/User/Downloads/ECP001612_pai%20(1).pdf Update E ECP001 612_pcu (1).pdf 19 / 171 69% + IND - 16 - IMD-3-0520 IN - 17 - IMD-3-0520 Production In 1987, the six largest producers spent over $750 million per year on chocolate advertising. In recent years, manufacturers had dramatically increased their In general, it was difficult to sustain a competitive advantage based on the overall level of marketing spending, particularly with respect to launching new manufacturing process or on product features due to the lack of proprietary products. By 1988, one manufacturer estimated that new products--which technology. However, some manufacturers had developed countline product generally had a much shorter ch shorter life span than established brands, would have to which were difficult to duplicate (e.g. Rowntree's "After Eights" and "Kit Kat"). generate at least $25 million in sales over the first two years to cover product 5/912029 59202212.28/31/2022. development and marketing costs. Manufacturers therefore tended to focus on 5/917029 /1204202.23/31/2022 The major manufacturers tried to be low-cost producers through increased scale brand extensions into new product segments and particularly into new geographic economies. Scale economies were more easily achieved in the produ in the production of block markets. chocolate and countlines (both relatively capital intensive), and less easily in the production of boxed chocolates (which was more labour intensive). While the The late 1980s also saw a move to global brands. As Klaus Jacobs stated, "We scale of minimum efficiency varied by product, most major producers were firmly believe that global brands are the wave of the future." An increasing moving toward fewer and more concentrated production plants, some dedicated to number of Jacobs Suchard's brands were marketed globally, under the sponsorship one or two products. Jacobs Suchard, for instance, had been concentrating of global brand managers. Mars' strategy, was similar: produce high quality, production of individual brands in fewer and larger plants in an effort to gain technologically simple products at very high volumes using the same equipment, absolute cost leadership since 1984. In 1987, European production of and build global brands with heavy marketing spending and aggressive sales and confectionery took place in 17 plants; Suchard planned to reduce this number organizations. In 1987, for example, Mars dropped "Treets", a E15 million UK 0 7 by 1991 as improvements were made in it order distribution system. brand, and re-positioned "Minstrels" under the "Galaxy" label, both in order to strengthen the 1988 launch of "M&Ms" in the UK market. Distribution Confectionery had the widest distribution of any consumer product. In the UK, for example, wholesalers serving thousands of small "Confectionery-Tobacco- Newsagent" (CTN) outlets accounted for 50% of total confectionery sales, with multiple grocery stores accounting for 30%, and department stores and multiple confectionery stores the remainder. While distribution patterns and the balance of Use outside these parameters is a copyright violation. Use outside these parameters is a copyright violation. power between manufacturers and distributors varied across markets, retail concentration was on the increase. Canada and Western Europe (in particular the UK, France, and West Germany) were noted for high levels of retail concentration. Manufacturers' trading margins in these countries averaged 8-12% compared to US averages of 14-16%. In general, European multiple retailers tended to stock narrower ranges of competing products than their US counterparts. As one industry executive commented, "In Europe, you pay more of a premium to get shelf space in a store. ree ChildBy108 Strategic Strat In addition, many of the (multiple) retailers stock only the leading brand and the number two. If you are third, you lose visibility and this damages brand reputation." Marketing Consumers displayed considerable brand loyalty. As one industry executive explained, "Most people have a 'menu' of products they like and know. They will buy a new product perhaps once or twice, but the tendency is to go back to the 'old familiars', the popular established brands." The most popular brands of chocolate were over 50 years old; "Mars Bar", for example, was introduced in 1932 and "Kit Kat" in 1935." AuthorizeBdous Type here to search O a W 1:40 PM 99+ 05-Jul-22 21)X ECP001612_pcu (1).pdf Update C O File | C:/Users/User/Downloads/ECP001612_pal%20(1).pdf 69% ECP001 612_pcu (1).pdf 21 / 171 + E IND IND - 19 - IMD-3-0520 - 18 - IMD-3-0520 Nestle-Rowntree (A + B) Nestle-Rowntree (A + B) Exhibit 1 Nestle S.A. - Selected Financial Data. 1984-1987 Average currency Equivalents, 1980-1988 1 5/912021 5/9420220223/31/2022 15/917028 5/9202202 28/31/2022. 1984 1985 1986 198 SF = Swiss Franc $ = US Dollar A. Financial Statement Data f = British Pound (SF millions) Turnover (Sales) 3114 42225 38050 35241 Gross Profit 1 1301 13603 13616 Trading Profit 3206 3671 3651 1 Swiss Franc 1 British Pound 1 US Dollar Net Profit 1487 1789 1827 equals equals equals Depreciation 1004 1157 1 184 Liquid Assets 6168 5619 6961 Current Assets 16407 13236 15820 16241 1983 $ 0.48 f 0.31 SF 2.08 1 0.6 8067 9952 9275 1984 E 0.32 SF 3.13 1.55 SF 2.33 E 0.7 Fixed Assets $ 1.28 25188 25095 25143 $0.41 f.0 32 SF 3.13 E0.78 Total Assets 24#14 1985 0.68 Current Liabilities 7651 8858 8119 7547 1986 $ 0.56 E 0.38 SF 2.63 Long-term Liabilities 3834 5002 4775 4939 1987 $ 0.67 E 0.41 SF 2.44 $ 1.63 SF 1 E 0.6 12201 1265 1988 $ 0.71 E 0.39 SF 2.57 $ 1.83 SF 1.41 E0.5 Share Capital & Reserves 12989 1 1238 outside these parameters is a copyright violation Use outside these parameters is a copyright violation B. Per Share Data (SF per bearer share) 1 As at April 1, 1988 13 Earnings 480.0 515.0 526.0 537.0 Dividends 136.0 145.0 145. 150.0 Stock Price (Average) 5062.0 7400.0 8600.0 9325.0 16 Price-Earnings (Average) 105 14 4 174 18 Employees (000) 138.0 154.8 162.1 163.0 Source: Schweizerische Nationalbank It is normal accounting practice for Swiss com swiss companies to write off "goodwill" when acquiring businesses. Nestle wrote off SF3.2 million of shareholders' equity on its purchase of Carnation in 1985. Jacobs Suchard reduced equity by SFI.1 million in 1987 due to depreciation of goodwill. Source: Company Accounts. 1:40 PM 99 + 05-Jul-22 21) O W Type here to search aX ECP001612_pcu (1).pdf Update C O File | C:/Users/User/Downloads/ECP001612_pai%20(1).pdf ECP001 612_pcu (1).pdf 23 / 171 69% + E IND - 21 - IMD-3-0520 Nestle-Rowntree (A + B) Development Executive Vice Research + IMD-3-0520 Preseident Exhibit 3 Chocolate Product Portfolios of Major Confectionery Companies, 1987 15/912029 5/984202202 23/31/2022 5/917028 5/9202202.23/31/2022. Technical Preseident Vice Executive * Nestec S.A Her Cad- own Such Nest- Mars shey bury tree ard le Others Tonnes (000) 800 400 320 300 220 190 2240 50% World M'ket Share 18% 70%% 50% Administration Vice Executive Control + Finance Presiden R. Domenicon Companies' Turnover by Product Type: Block 1% 46% 46% 11% 81% 73% 29% Countline 99% 54% 36% 55% 8% 17% 32% 10% 39% Boxed 18% 34% 11% Service Direction + Marketing Product Vice Executive Presciden Total 100% 100% 100% 100% 100% 100% 100% go Managementbirif Meiversityubt outside these parameters is a copyright violation -20 - Use outside these parameters is a copyright violation. * The "Nestle Products Technical Assistance Co. Lid.", NESTEC S.A., was in charge of al research and development activities as well as the provision of technical, commercial and Vice Middle East Preseident Exhibit 2 Managing Director Zone 5 For example, countline sales represented 99% of Mars' total chocolate confectionery turnover in H. Maucher Nestle-Rowntree (A + B) Nestle Organization Chart (partial) Executive Committee Executive 1987; block chocolate sales represented 1% of Mars' total chocolate turnover. Sources: International Chocolate Workshop, Vevey, 1988; Trade Estimates; IMEDE. administrative assistance to the companies of the Nestle group. North America Zone 4 H. Maucher Latin America Vice Zone 3 Presciden Executive Asia + Zone 2 Australia Vice Prescident Executive President Vice Zone 1 Executive Europe R. Masip 1:40 PM Type here to search O a 99+ W 05-Jul-22 21)X ECP001612_pcu (1).pdf Update C O File | C:/Users/User/Downloads/ECP001612_pai%20(1).pdf 25 / 171 69% + E ECP001 612_pcu (1).pdf IMD IND - 23 - IMD-3-0520 22 - IMD-3-0520 Nestle-Rowntree (A + B) Nestle-Rowntree (A + B) Exhibit 5 Exhibit 4 European Chocolate Market Shares by Major Competitor. 1988 Market Shares of Major Competitors by Product Type and Region. 1987 at702 6/91802202 28/31/2022 Mars Suchard Rowntree Ferrero Cadbury Nestle Others 15/917029 5/98202202 28/31/2022. Percentage Market Share Total' Market Mars Hershey Cadbury Rowntree Suchard Nestle Others 24% 2% 26% 2% 30% 13% 18 Austria owing 82 North Belgium 35 America France 13 5 60 Italy 13 Block 280 62% Netherlands 23 17 Countl. 898 9 36 112 53% Switzerland 22 3 Boxed W. Germany Total 1290 37% 290% 32% TOTAL 17% 13% 110 10% EEC Source: Henderson Crossthwaite. Block 541 Countl Boxed 437 1 .. Use outside these parameters is a copyright violation Exhibit 6 Use outside these parameters is a copyright violation. Total 1589 19% Rowntree pic - Breakdown by Activity, 1987 (f millions) Rest of World % of Total Block 521 Trading Countl 544 526 4% of Total Trading Trading Boxed Activity Turnover Turnover Profit Profit Margin Total 1591 Confectionery 1088 76.2% 101.0 77.6% 9.39 7.6 91.8 13.4 14.5 11.1 Snack Foods 97 3 6.8 81 62 8 3 World Retailing Grocery (UK) 50.0 35 65 50 13.0 Block 1342 1% 14% 13% Countl. 2053 39% 10% 9.1% Total 1427.6 100.0% 130.1 100.0% Boxed 1075 Total 4470 18% 9% Source: Company Accounts. Authorizeddou in tonnes (000) Author Sources: International Chocolate Workshop, Vevey, 1988; Trade Estimates; IMEDE 1:40 PM a 05-Jul-22 21) O 99 + W Type here to searchX ECP001612_pcu (1).pdf Update C O File | C:/Users/User/Downloads/ECP001612_pal%20(1).pdf E ECP001 612_pcu (1).pdf 27 / 171 69% + IND IND - 25 - IMD-3-0520 24 - IMD-3-0520 Nestle-Rowntree (A + B) Nestle-Rowntree (A + B) Exhibit 7 Exhibit 9 Rowntree pic - Breakdown by Region. 1987 Rowntree pic - Selected Financial Data. 1983-1987 1986 1987 (f millions) A. Income Statement Data 1983 1984 1985 5/edata /9:02202 28/31/2022 15/912028 5/91202202.23/31/2022. (f millions) 1 Turnover (Sales 951.9 1156.5 1205.2 1290.4 1427. of Total 759 4 790 2 of Total Trading Trading la Cost Of Sales 617.9 Trading Gross Profit (1-la) 334.0 417.5 500.2 590.5 Region Turnover Turnover Profit Profit Margin Fixed Overhead Expenses 265.6 328.3 350.5 400.5 465.8 Other Operating Income 42 4.6 6.0 6.0 Trading Profit (2-2a+2b) 72.6 93.8 101.3 105.7 130.1 UK & Ireland 566.4 40% 220 61-7 17% 10.9 Interest 12.2 19.3 21.7 18.0 Cont'l Europe 300.4 11.0 58.0 66.2 87.9 North America 416.1 29 41.0 4b Profit After Tax 13.5 16.5 0.0 Australasia 57 1 8.2 Extraordinary Items Net Profit After Tax 32.8 44 7 3 4 46.5 87.9 Rest of world 87.6 11.7 5 Depreciation (Em) 28.6 36.2 B. Balance Sheet Data 1983 1984 1985 1986 1987 Total 1427.6 100% 130.1 100% 9.1% (t millions) 6 Liquid Assets 25.1 41.8 96.7 Debtors (Receivables) 159 171.1 178.7 214.9 Source: Company Accounts. Stocks(Inventories) 159.1 172.9 170.2 176.9 163.5 Current Assets 330.1 399.7 390.7 454.6 475.1 Use outside these parameters is a copyright violation Use outside these parameters is a copyright violation Fixed Assets 359.7 408.5 403.1 475.1 808 2 463.2 Total Assets 689 8 793.8 929 7 938.3 Exhibit 8 Current Liabilities 217.8 229.3 242.4 310.2 270.1 Long-term Liabilities 123.0 186.3 177.0 228.1 59.6 Rowntree pie - Operating And Financial Performance. 1976-1981 Preferred Stock 27 2.7 12b Share Capital & Reserves 346.3 389.9 371. 388 7 405 9 ggio Start (f millions) C. Per Share Data 1983 1984 1985 1986 1987 (Pence) 13 Earnings' 1.0 20.0 40.8 1976 1977 1978 1979 1980 1981 14 Dividends 9.8 12.2 13.6 is. 15a Common Stock Price (High) 258.0 392.0 450.0 545.0 590.0 212.0 337.0 363.0 $67. Turnover 384 9 469.20 562.70 601.30 629.80 688.00 15b Common Stock Price (Low) 200.0 113 11.7 Trading Profit 36.80 46.90 $1.70 46.60 44.80 18.00 16 Average Price-Earnings 7.4 8.4 Equity Book Value (12b/19) 233.0 243.0 214.0 89. Net Profit 16.90 30.40 34.40 27.20 17.50 29.10 194.70 246.80 396.60 412.50 448. 60 1983 1984 1985 1986 198 Average Assets Average Owner's Equity 77.30 120.60 182 30 218.40 231.80 8.90 D. Other Data 7.80 7:10 7.20 18a Employees, UK (000) 19.7 18.9 17.7 9.60 16.4 15.6 Trading Margin % 10.00 9.20 Trading Profit/Assets % 8.90 19.00 15.60 11.80 10.90 10.70 Employees, World (000) 31.2 32.4 32.0 33.1 1 38 Ordinary Shares (000'000) 19.5 160.6 173.9 215.0 Turnover/Assets 1.83 1.66 1.47 1.46 1.52 12.50 7.60 10.30 Cash Flow (4a + 5) 99.8 Net Profit/Equity % 21.80 25.20 18.90 Capital Expenditures (Em) 59.9 71.5 82 5 Business Acquisitions(fm) 159.6 3.3 14.2 Net after-tax profit attributable to ordinary common shares. Asset Divestitures (fm) 40 31 Average of beginning and end of year. Source: Company Accounts. Earnings based on line 4a (Net profit after tax but before extra-ordinary items) minus preferred dividends. Average of high and low stock prices Source: Company Accounts. 1:40 PM O O 99 + W 05-Jul-22 21) Type here to search aECP001612_pcu (1).pdf X C O File | C:/Users/User/Downloads/ECP001612_pal%20(1).pdf Update E ECP001 612_pcu (1).pdf 29 / 171 69% + IND . 26 - IMD-3-0520 IND - 27- IMD-3-0520 Nestle-Rowntree (A + B) Nestle-Rowntree (A + B) Exhibit 10 Exhibit 11 Jacobs Suchard Group - Selected Financial Data. 1984-1987 Rowntree - Profit Forecast. 1988 (f millions) 15/917021 5/91202202 23/31/2022. no 5/91202 5/91202202 28/31/2022 1984 1985 1986 1987 Actual Forecast 1987 1988 A. Financial Statement Data (SF millions) Turnover 1,235.8 1,295.2 Turnover (Sales) 3582 5236 6104 Cost of Sales (662.2) (674.2) Gross Profit 1 104 1156 1304 1955 Trading Profit 244 265 338 150 Gross Margin 573.6 621.0 Net Income 120 191 265 antising and Promotion (128.6) (138.9) Depreciation 84 092 103 128 Fixed Overheads (329 4) (344.2 Liquid Assets 230 788 1470 705 Current Assets 1390 2008 2920 2206 Trading Profit of Continuing Businesses 115.6 137.9 Fixed Assets 666 832 886 Trading Profit of Snack Food Businesses Total Assets 2056 2682 3752 3092 Current Liabilities 796 843 1120 130 1 143.5 Long-term Liabilities 483 487 885 829 Interest 18.0) (8.5) Stockholders' Equity 777 1352 1450 11431 Profit on ordinary activities before tax 135.0 outside these parameters is a copyright violation Use outside these parameters is a copyright violation Taxation (30.8) B. Per Share Data (SF per bearer share) Profit on ordinary activities after taxation 87.9 104.2 13 Earnings $1.0 353.0 414.0 503.0 Extraordinary items 17.52 Dividends 150.0 155.0 is 160.0 165.0 Stock Price (Average) 5028.0 6101.0 7324.0 8228.0 Retained profit 87.9 121.7 16 Price-Earnings (Average) 14.3 17.3 177 16.4 Earnings per share 40.8p 47.0p 18 Employees 10.6 9.3 10.1 16.1 Dividends 15.5p 18.5p It is normal accounting practice for Swiss companies to write off "goodwill" when acquiring 1987 figures for turnover through to tra through to trading profit of continuing businesses have been restated to businesses. Nestle wrote off SF3.2 million of shareholders' equity on its purchase of exclude the results of Rowntree Snack Foods Limited, which was sold on 6th April, 1988, and Carnation in 1985. Jacobs Suchard reduced equity by SFI.I million in 1987 due to Tom's Foods Inc., the sale of which is expected to be completed by 26th June, 1988. lepreciation of goodwill. Extraordinary items in 1988 represent the net profit on the disposals of the Group's snack food businesses. Source: Company Accounts. Earnings per share based on profit after tax but before extraordinary items. Source: Rowntree Defense Document, 26 May. 1988. Type here to search O a 99 + W 1:40 PM 05-Jul-22 21)Case 7 - Nestle-Rowntree (A) & (B) 1. Evaluate Nestle's strategy and performance in the chocolate business to this point of time. 2. How important is the Rowntree acquisition to Nestle? What are the consequences for Nestle if Jacob Suchard succeeds in acquiring Rowntree? 3. Evaluate Rowntree's strategy and performance in the chocolate business. Why has Rowntree become a take-over target? 4. What synergies might be available to Nestle in acquiring Rowntree? 5. How important is a friendly acquisition to Nestle? To Rowntree? What are the obstacles in the way of such an event?IM) - 28 - IMD-3-0520 Nestle-Rowntree (A + B) Exhibit 12 Rowntree - Forecast for 1988 Geographical Analysis of Turnover and Trading Profit of Continuing Businesses Turnover Trading Profit Acutal Forecast Actual Forecast 1987 1988 1987 1988 Confectionery United Kingdom 440.5 470.8 51.2 64.5 Ireland 24.0 24.5 2.1 2.7 Continental Europe 300.4 312.7 11.0 15.3 North America 214.9 213.9 23.1 22.8 Australasia 57.1 61.4 47 63 Use outside these parameters is a copyright violation. Rest of the World 87.6 88.8 11.7 12 5 1,124.5 1,172.1 103.8 124.1 Other 111.3 123.1 11.8 13.8 Total 1,235.8 1,295.2 115.6 137.9 Source: Rowntree Defense Document, 26 May, 1988. Authorizelidoussepolyyit thRichardedmadejer DOBUSirategie StemECP001612_pcu (1).pdf X C O File | C:/Users/User/Downloads/ECP001612_pai%20(1).pdf Update E ECP001 612_pcu (1).pdf 5 / 171 69% + IND - 2 - IMD-3-0520 IND - 3 - IMD-3-0520 Nestle's Chocolate Business During the 1970s, Nestle's chocolate and confectionery business had been among Nestle the smaller and often less profitable businesses in the company (see the Appendix for a description of "confectionery" and "chocolate" products). However, in the In 1988, Nestle was the world's largest food company. With headquarters in early 1980s Mr. Maucher made chocolate a strategic priority, investing more Vevey, Switzerland, the company employed 163,000 people and operated 383 5/arte21 5/ 910220278/31/2022. heavily in research and development, and acquiring two small US confectionery started / 1x/20208/31/2022 factories in 59 countries. Its brand names, which included Nescafe, Stouffer, companies. In 1987 Nestle held 4% of the world chocolate market (refer to Carnation, Maggi and Findus, were known by consumers the world over. In spite Exhibit 3). The company's primary strength was in bloc was in block chocolate where it held of its Swiss base, 98% of the company's SF 35 billion ($20 billion) sales volume 14% of the European and American markets (refer to Exhibits 4 and 5). Nestle's was outside Switzerland. (A financial summary is given in Exhibit 1.) leading brands included "Milkybar" in the UK and "Crunch" in the US. Recent research into the new generation of chocolate and confectionery products had To manage its far-flung empire, Nestle divided the world into five zones, each one produced "Yes", a pastry snack product, and "Sundy", a cereal bar. "Because led by a vice president. Each of these executives was responsible for the block chocolate is a traditional product with traditional tastes," Mr. Maucher profits of the regional companies (75 in all) reporting to him. These managers explained, "a local market orientation is particularly important, because this kind represented the "line" side of Nestle. There were four important "staff" areas of chocolate must taste the way you got it as a child from your grandmother, within the company; finance and control; product direction and marketing; whether you are French, Italian, German, and so on. This is true for the traditional technical; and research and development (refer to Exhibit 2). Personnel in t chocolate products, not so much for the new generation of products such as areas were responsible for giving advice to the regional companies in each zone countlines." but did not have direct decision-making authority. This meant, for instance, that if a product director wanted to launch a new product in a particular market, he As a result of Nestle's market-oriented organization structure, Nestle's block would have to convince executives in that country to make the necessary chocolate products were generally produced and positioned according to the tastes investment. of local markets. For example, Nestle's white block chocolate products (often produced in the same plants as coffee and other food products) were made from When Helmut Maucher became Managing Director of Nestle in 1981, he made a several recipes and marketed under several brand names. In the UK, Nestle's number of significant changes. He banned the existing monthly 25-page reports outside these parameters is a copyright violation. white chocolate brand, "Milkybar", was positioned as a children's chocolate, and quarterly profit-and-loss statements, for instance, in favour of a monthly on whereas in the US it was called "Alpine White" and was oriented toward the Use outside these parameters is a copyright violation page report which highlighted key numbers such as turnover, working capital, a "female indulgence" market. inventories. "With quarterly reports, all managers care about is the next three months," he explained, "and they manage for the next quarter instead of for the As Nestle began to analyze the possibilities for significant expansion in the world next five years." chocolate market, it became apparent--in Mr. Maucher's word's--that "it would take 25 years to develop a major stake in this industry" unless growth were Under Mr. Maucher's direction, Nestle also made significant product line and achieved via acquisition. Mr. Ramon Masip, Executive Vice President in charge geographic changes, divesting low-profit businesses--like Libby's $180 million of the European market, added, "For some time we have discussed making a big canned food business--and acquiring 20 companies (at a total purchase price of $5 move into this business, and Rowntree has always been the number one choice. " dayTOOBU Str/206gis Stest billion) between 1983 and 1985. The largest of the acquisitions was the US-based BUGJOOBUStrategic S Carnation, purchased in 1985 for $2.9 billion. In spite of the pace of its acquisition Mr. Masip pointed out that Rowntree's strong position in the growing countlines program, Nestle was careful not to violate its long-standing policy of only making segment would complement Nestle's strength in block chocolate. In addition friendly acquisitions. Rowntree's strong position in non-grocery outlets would complement Nestle's strong contacts with the multiple grocery retailers. Rowntree also held a stronger Mr. Maucher strongly believed that any acquisitions that Nestle made needed to ft position in the UK and in some markets in continental Europe. Although Nestle into the company's corporate and marketing strategy. "We are not portfolio was interested in Rowntree's recent success in launching new products such as the managers," he explained, "acquisitions must strengthen our position in individual "Lion" bar, as Mr. Masip explained, "We are much more concerned with the countries or product groups, or enable us to enter new fields where we have not so brands that Rowntree already has in the world market! There are very, very few far been represented. Acquisitions are part of an overall development strategy. in the world with Rowntree's brands and skills in this particular That's why we cannot leave acquisition decisions to purely fin business. considerations. Of course, you must have some figures to evaluate an acquisition, but more important is the feel you have about what you can do with the brands." Nestle believed that, should the opportunity to acquire Rowntree arise. additional operating synergies could be achieved in research and development, Authorized dou administration, and the sales force. With the potential acquisition, it was estimated Authorized dou Type here to search O a 99 + W 1:39 PM 05-Jul-22 21)ECP001612_pcu (1).pdf X C O File | C:/Users/User/Downloads/ECP001612_pai%20(1).pdf Update E ECP001 612_pcu (1).pdf 7 / 171 69% + IND - 4- IMD-3-0520 IND - S - IMD-3-0520 that substantial savings (perhaps 5-15% of Rowntree's current fixed overhead Hershey in the event of a change in Rowntree ownership). Rowntree was still free expenses) could be realized from combining the two companies' operations. to enter the US market with its other brand names. In 1987, royalties from this agreement contributed about $2 million toward Rowntree Group profits Rowntree Between 1982 and 1987, Rowntree invested nearly $400 million in upgrading manufacturing facilities and developing high-volume, product-dedicated Rowntree was founded in 1725 in York, England, by a cocoa and chocolate 5/912028 5/9120220228/31/2022. equipment for several of the company's leading global brands--including "Kit 5/947029 5/91809202 23/31/2022 vendor, who sold the business to the Rowntree family in 1862. In 1988 the Kat", "After Eights", and "Smarties". Products produced on this equipment had a company's headquarters were still in York and, with 5,500 workers, the company consistent formulation and were sold all over the world; the Hamburg "After s by far York's largest employer. Many of the traditions of the Rowntree Eights" plant, for example, shipped to 16 countries. By 1987, Rowntree's family, including a strong concern for employee and community welfare, had investment program for rationalizing capacity was well under way, and been preserved; many of the current employees' parents and grandparents had also productivity improvements were running at 9% per annum. Trading margins were worked for Rowntree. continuing to improve and had almost reached the record levels set in 1977. Rowntree was primarily a confectionery company (refer to Exhibit 6), with major However, in 1987, Rowntree's $100 million investment in continental Europe was strengths in the countline and boxed choo boxed chocolate segments. Rowntree's major market still showing modest financial returns. Rowntree had entered the continental was the UK where, with a 26% market s European market in the 1960s, establishing production facilities at Hamburg, Rowntree's "Kit Kat" was the best-selling confectionery brand in the UK and Dijon, Elst (Holland) and Noisiel (France). Although advertising and promotion number five in both the US and Japan. "Kit Kat" was part of a portfolio of leading spending (as a percentage of sales) was double that of the UK, volume growth had global brands; many of which ("Kit Kat", "Quality Street", "Smarties", "Rolo", not met Rowntree's expectations. As one manager explained, "People find that Kit "Aero", "Black Magic") were launched in the 1930s; "After Eights" was in 1962, Kats' go well with a cup of tea, but not with wine and beer!" The trading margin "Yorkie" and "Lion" in 1976. Since 1981, Rowntree had launched seven new tried Memoriityhither on the continental European business had inched up very slowly, from 1.0% in brands in the UK, including "Novo", a chocolate cereal bar. 1985 to 3.7% in 1987. In early 1988, Rowntree believed that the long-term brand building strategy was finally beginning to pay off, when the "Lion" bar became arameters is a copyright violation. In 1987, Rowntree operated 25 factories in nine countries and employed 33,000 the second best-selling chocolate bar in France and more "After Eights" were sold people around the world, including close to 16,000 in its eight UK operations. in West Germany than in the UK. Group turnover was f1.4 billion, with the UK and Ireland accounting for 40% of Use outside these parameters is a copyright violation. total turnover (refer to Exhibit 7). Between 1983 and 1987, Rowntree spent nearly $400 million on acquisitions. The acquired companies expanded the company's presence in some traditional During the late 1970s, Rowntree's operating performance had shown significant businesses and also provided new activities, particularly in the area of branded deterioration (refer to Exhibits 8 and 9). To reverse this trend, Mr. Dixon, who retailing of specialist confectionery products. The retail shops acquired by was appointed Chairman and Chief Executive in 1981, initiated a long-term Rowntree were viewed not as outlets for Rowntree brands, but rather program to improve the efficiency of the UK core business and acquisitions of brands in their own right. Because of these acquisitions, a businesses, principally through the acquisition and significant stream of Rowntree's profits were being earned in North America. By development of brand names. Mr. Dixon also delegated more responsibility to the late 1987, however, it was clear that Rowntree's snack food acquisitions were not operating levels of the company, while maintaining a central brand and product generating trading margins consistent with other company activities. So, i January 1988, Rowntree announced its intention to divest its major snack food ooBustrat strategy. businesses in order to concentrate on confectionery, retailing, and UK grocery Branding was the essence of Rowntree's strategy. According to Mr. Dixon, "The activities, where the potential to develop distinct consumer brands was considered fundamental idea which drives Rowntree is branding, the creation of distinct, more promising. differentiated, positively identifiable and market-positioned goods. Rowntree seeks to build brands by marketing products and services at competitive prices, Although Rowntree's overall operating performance continued to improve, the positioning them accurately in the markets they serve, and giving them clear company's common share price performance between 1986 and early 1988 was identity and character." weaker than that achieved by the Financial Times' "All Share" and Food Manufacturing Indexes on the London Stock Exchange. In early 1988, London's In the 1960s, Rowntree granted Hershey a long-term licence to manufacture and financial analysts published mixed opinions regarding Rowntree's immediate sell Rowntree products in the US. With its expansion into continental Europe prospects. Mr. Nightingale, Rowntree's Company Secretary, recalled, "For years under way, at the time Rowntree believed that it lacked the resources to develop we have been trying to get the value of our brands reflected in our share price, but an effective marketing presence in both continental Europe and the US. In 1978 without much success. As a consequence, there have always been takeover the agreement with Hershey was renegotiated, giving Hershey rights in perpetuity rumours." AuthorizeBdous to the "Kit Kat" and "Rolo" brand names in the US (which would be retained by Type here to search O O a W 1:39 PM 05-Jul-22 21)IM) IMD014 INTERNATIONAL v. 17.12.2002 20/20823 1/2022 NESTLE-ROWNTREE (A + B) This case, prepared by On June 8, 1988, Mr. Helmut Maucher, the Managing Director Professor J. Peter Killing, is a of Nestle, met with Mr. Kenneth Dixon, the Chairman of condensed version of the Rowntree, to discuss the proposed acquisition of Rowntree by Nestle-Rowntree (A) and (B) Nestle. The meeting was attended by senior vice presidents from cases written by Dana Hyde each company, as well as each firm's investment advisors. Its under the supervision of purpose was to consider how Rowntree would be integrated into Professors James C. Ellert and the Nestle organization, if the acquisition took place. Nestle J. Peter Killing. This case is executives hoped that, as a result of the meeting, Rowntree intended for class discussion management would advise the company's shareholders to accept rather than to illustrate either Nestle's offer to purchase their shares. effective or ineffective handling of a business situation. The June 8th discussion, held in a London hotel, was the culmination of almost two months of intense activity--which had featured a "dawn raid" by Suchard, Nestle's Swiss-based coffee and chocolate competitor, whereby that company had netted almost 15% of Rowntree's shares, then a subsequent f2.1 billion bid by Nestle for all of Rowntree's shares, followed by an impassioned defense by Rowntree's management proclaiming that they had no need for either of the Swiss companies. At the time of the meeting, Nestle held just under 14% of Rowntree's outstanding shares, and Suchard held just under 30%. ODBU Stanegis Copyright 01989 by IMEDE, Lausanne, Switzerland. All rights acquired and retained by IMD - International Institute for Management Development, resulting from the merger between IMEDE, Lausanne, and IMI , Geneva. Nor to be used or reproduced without written permission directly from IMD Authorizeddouserohith Ricks Lausanne, Switzerland. Page 4 of 171ECP001612_pcu (1).pdf X C O File | C:/Users/User/Downloads/ECP001612_pai%20(1).pdf Update E ECP001 612_pcu (1).pdf 9 69% + IN - 6- IMD-3-0520 IND - 7 - IMD-3-0520 Nestle's Bid for Rowntree "We did not make a bid before because we do not like hostile takeovers," Mr. Maucher told the press conference on the afternoon of April 26th. "But, we had no In November 1987, Mr. Maucher and Mr. Masip met with Mr. Dixon and Mr. other choice; we had to move very quickly. We did not want Rowntree in the Guerin, who was Mr. Masip's counterpart in Rowntree, to discuss possible forms hands of our primary competitor in Europe. I could nearly say we have been of cooperation between the two companies in Continental Europe. Although the forced into this, for it is no longer a questions of if Rowntree will be taken over, discussions were amicable, they did not lead to any agreement. Indeed, but by whom." Mr. Maucher's suggestion that Nestle might purchase 10-25% of Rowntree to Vet2029 5/91202202 2/31/2022 15/912028 5/920920228/31/2022. facilitate the development of a long-term relation term relationship was met with Mr. Dixon's reply that, "Unfortunately, any sort of association association with a company of your size can Reaction to Nestle's Bid only have one ending, and at this time we don't feel we need to make that kind of commitment to anyone." Nestle's bid for Rowntree was the largest ever made by a foreign company for a British firm. When news of the bid reached the Rowntree Annual Meeting held In a surprise move five months later, on April 13, 1988, Jacobs Suchard acquired that afternoon, the atmosphere became quite emotional as shareholders and 14.9% of Rowntree's outstanding common shares from its major institutional employees rose to express their support for Rowntree. "The offer from Nestle is shareholders at a price 30% above the then unwelcome and does not reflect the value of Rowntree's unique collection of of the raid reached the markets, Rowntree's share price jumped to more than f7. In international brands," Mr. Dixon told the meeting. "It is not our intention to lose a press statement released the same morning, Suchard described its new our independence. We have the best collection of brands in the world, and we are stockholding as a "strategic investment" which was "not a prelude to a full bid", perfectly capable of developing them." Mr. Dixon urged the shareholders to take but the company did intend to acquire a holding of up to 25% of Rowntree shares no action in relation to the offer and received an enthusiastic ovation. at a price of no more than $6.30 per s Nestle's bid released Jacobs Suchard from the Takeover Panel's restriction, and Exercising its interpretive responsibility, the City of London Takeover Panel Suchard immediately began to acquire Rowntree shares. On the same day, at the swiftly ruled that this statement prevented Suchard from purchasing any further Jacobs Suchard Annual General Meeting in Zurich, Klaus Jacobs stated, "Ours is Rowntree shares for the next 12 months, provided that the Rowntree share price a strategic investment, and we will show the London markets shortly how serious stayed above 630p, unless a full bid for control came in from another party during we are about Rowntree. A Swiss does not give up so easily." e these parameters is a copyright violation. that time period. Use outside these parameters is a copyright violation Nestle's bid triggered what newspaper front pages called the "Bar Wars", and On the weekend following Suchard's dawn raid, Nestle initiated a meeting in began an intense period e period of political and public lobbying by Rowntree and its London attended by Messrs. Domeniconi (Nestle's Executive Vice President, daj5 008 Strategic Stantagto dah light blahtrial MemversityUbfitters supporters--including Rowntree unions, the City of York, Members of Parliament Finance) and St. George (from County NatWest, Nestle's advisors), together with of all three political parties, and even the Archbishop of York. On April 29th, Rowntree's Messrs. Nightingale and Bowden (Company Secretary and Finance Suchard disclosed that it had acquired another 4.5 million Rowntree shares, at Director respectively) and Mr. Challen (from Schroder Wagg, Rowntree's prices between 910p and 925p, to raise its holding to 21.0%. As the share price advisors). Nestle proposed a friendly full takeover bid, but Rowntree rejected any remained above Nestle's offer price, Nestle w price, Nestle was unable to increase its stake in idea of a full bid and also declined Nestle's renewed offer to purchase a stake in Rowntree. By May 7th, Suchard's stake (29.3%) approached the 30% limit which Rowntree. (according to the City Code) was the highest possible stake without making a full bid 2 On April 26th, Mr. Maucher telephoned Mr. Dixon to say, "This has nothing to do with our desire to maintain a friendly relationship, but Nestle is, very reluctantly, making a bid for Rowntree and, of course, we seek the cooperation of your The Question of Referral Board.", The Nestle offer was 890p per share in cash, valuing Rowntree at f2.1 billion. 1 By the end of April, rumours of a "white knight" appearing to rescue Rowntree had been largely discounted. Pressure from Rowntree's supporters was mounting on the Trade Secretary of Her Majesty's Government to refer the bid to the Mergers and Monopolies Commission (MMC); and an enquiry by the MMC The valuation at E2. I billion assumes the issue of 215.0 million Rowntree ordinary shares, the conversion of Rowntree convertible bonds into 12.2 million Rowntree ordinary shares, and the exercise of Rowntree warrants into 9 million Rowntree ordinary shares. This valuation excludes employee stock options exercisable between 1988 and 1997. Mr. Dixon had options on 2Rowntree's 215 million ordinary shares were widely held, with the largest block (8.5%) in the approximately 112.000 shares, and eight other Rowntree investors had options on 60-70,000 hands of a group of British charities, including two Rowntree trusts which together held 7%; no shares each, at exercise prices between 151p and 570p per share. other shareholder held more than 2.2% Author Type here to search O a 99 + W 1:39 PM 05-Jul-22 21)ECP001612_pcu (1).pdf X C O File | C:/Users/User/Downloads/ECP001612_pai%20(1).pdf Update E ECP001 612_pcu (1).pdf 11 / 171 69% + IM - 8 - IMD-3-0520 IND -9- IMD-3-0520 would take approximately six months and would effectively cancel all existing as six interviews per hour. In addition, Mr. Dixon and his team met with bids. At this point, many thought that only a reference to the MMC would keep at all levels, and made several presentations per day to institutional Rowntree independent. investors and the financial community. On May 17th, a mass rally--organized by the Yorkshire Evening Press and sponsored by Rowntree--brought over 1,000 The possible reference of the bid to the MMC was the most pressing issue facing employees and supporters to Westminster as part of the "Hands Off Rowntree" Nestle's team at the beginning of May. Mr. Frank Edwards, who had campaign. On May 19th, Mr. Dixon and two Rowntree Board members travelled Nestle 40 years and had been Managing Director of Nestle's UK operations since 592021 5/320220273/31/2022. to Strasbourg to rally members of the European Parliament. 5/92021 /8132 20238/31/2022 1986, said. "We have two battles to win, the first with the Government and the second with the shareholders." Nestle UK had a policy of maintaining good By May 19th, Nestle's analysis of Rowntree's Share Register showed that, without relations with political and industry contacts and, since announcing the bid, had a recommendation of the offer by Rowntree's Board, Nestle was in a "tight spot" mounted an intensive campaign seeking support for the bid in the UK, stressing in terms of achieving the 50% stake needed for control. Suchard's stake was Nestle's intentions of "building, not destroying Rowntree". substantial, and the tendency of some or the remaining large shareholders was to follow the advice of the Rowntree Board. All stockholders holding more than This was the theme of Nestle's campaign for Rowntree, often repeated in the two 50,000 shares had been contacted at least once and significant shareholders three evenings Messrs. Maucher, Edwards, and McClumpha (responsible for Nestle UK times, and Nestle's advisors believed that further "pestering" would be Corporate Affairs) spent in the House of Commons answering questions from counterproductive. By May 20th, Nestle estimated that small shareholders held IPs of all parties. Nestle's intention of building Rowntree were also emphasize more than 8% of the shareholdings left on Rowntree's Register. in frequent interviews with the press; during this period Mr. Maucher gave several hundred interviews, and later wrote an article for the Times of London. The Reference Decision During the week of May 9th, Rowntree's share price softened, enabling Nestle to purchase shares. By the close of trading on May 13th, Nestle had increased its stake from 9.5% to 12.6 %, with Suchard's share holding at 29.3%. That week the On the morning of Wednesday, May 25th, the Trade Secretary, Lord Young, announced that Nestle's bid would not be referred to the Mergers and Monopolies Lord Mayor of York led a York City Council delegation to Switzerland to meet Commission. Rowntree share prices soared by 83p, to reach a record high of with Nestle and Jacobs Suchard, and York's Euro-MP tabled a motion protesting $10--while the market anticipated a counterbid from Suchard. Within minutes of the bid at the European Parliament in Strasbourg. the announcement, Jacobs Suchard issued a press release offering to let Rowntree Use outside these parameters is a copyright violation. run the combined confectionery businesses of Rowntree and Suchard in exchange Use outside these parameters is a copyright violation for a 51% stake in Rowntree at 940p per share. The next morning, Jacobs Suchard Nestle's Formal Offer Document issued a full bid for Rowntree at 950p per share, valuing the company at $2.3 billion. On May 16th, Nestle issued its 44-page formal offer document. In the accompanying letter to Rowntree shareholders, Mr. Maucher wrote, "We are On the evening of May 26th, Mr. Klaus Jacobs flew to London to meet the press convinced that a merger of Rowntree's and Nestle's confectionery businesses is in and to try to convince Mr. Dixon of the merits of joining forces with Suchard. Mr. the best long-term interests of both companies. The confectionery industry is Jacobs, who had reportedly arranged a f1.75 billion loan facility (for a summary changing, and in our view Rowntree by itself does not have the resources to deyTOOBUSt/206gig Stest of Suchard's financial position, refer to Exhibit 10), rejected suggestions that compete effectively in increasingly competitive world markets--Rowntree needs a Suchard had bid in order to force Nestle : "We want Rowntree partner of Nestle's size. Nestle and Rowntree have highly complementary because we think we are the right partner. If we had known that it was so businesses, and the value of our offer reflects the added potential that Rowntree strategically important for Nestle to have Rowntree, we would have gone a will have as part of the Nestle Group." ifferent route and would have made a full bid right away." However, Mr. Dixon, who refused to meet with Mr. Jacobs that day, replied that he "had no intention of Mr. Domeniconi told the press conference that morning, "We are now in the being taken over by either Swiss company. There is nothing to choose between unfortunately unenviable situation of being seen as unfriendly. We do not seek them. Neither of them has any idea of what our business is worth." domination of Rowntree. It is our hope that even with the present Rowntree management, we could become friendly if we were allowed to." Rowntree's Defense Document "Nestle has nothing we need," replied Mr. Dixon in a press release, "not its money, not its research and development, not its marketing, and not its In its defense document released May 26th, Rowntree forecast results for 1988: distribution." By May 16th, Rowntree's share price had moved up 21p, to 903p. increased turnover of 5%, with an increase in pre-tax profits of 20% and in mings per share of 15% (refer to Exhibits 11 and 12) and with a recommended Rowntree and its supporters continued to fight for the company's independence Authorized dou 19% increase in the dividend. The strongly-worded document stated proudly that Authorized dou Mr. Dixon and his colleagues were hounded by the press, and often gave as many Type here to search O O a 99+ W 1:40 PM 05-Jul-22 21)ECP001612_pcu (1).pdf X C O File | C:/Users/User/Downloads/ECP001612_pal%20(1).pdf Update E ECP001 612_pcu (1).pdf 13 / 171 69% + IM - 10 - IMD-3-0520 IND - 11 - IMD-3-0520 Rowntree had invested over 1900 million in building its long-established, leading operations) and Challen on one side, and with Messrs. Maucher, Domeniconi, international brands during the past ten years. "Nestle has bought rather than built Masip, and St. George on the other. Mr. Dixon suggested the agenda: brands," stated the document, and it repeated that while Rowntree did not need introductions, followed by his team's presentation of Rowntree's organization and Nestle, Nestle desperately needed Rowntree. The document claimed that several their vision of how Rowntree would fit into Nestle should the Board agree to the of Nestle's major brands had 1 rands had lost significant market share in the UK in recent Nestle bid, and then Nestle's counterpart presentations. years, and concluded, "Nestle has clearly recognized Rowntree's strengths. There Rowntree." is no other company available which would offer Nestle the same opportunities as Mr. Dixon prefaced his presentation by saying, "We are here to discuss what d 5/912029 5910920278/31/2022. non-price proposals you have, should we agree to recommend the bid, and to tell you how we see Rowntree's fit in Nestle." During Rowntree's presentation of its Nestle was very careful in its public reaction to Rowntree's claims. "We are brand and product-oriented organization structure, the tone of the discussion was convinced we will win," explained Mr. Masip, "and therefore we don't want to fairly open and relaxed. create future problems." Mr. Dixon then began to outline Rowntree's vision of how Rowntree and Nestle May 26th, Rowntree's share price reached a record high of $10.32 amid City would fit together if Rowntree agreed to the bid. In presenting Rowntree's rumours that a third company would enter the battle for Rowntree. In the House of proposals, Mr. Dixon said, "Leaving aside the share price and shareholders' Commons, Prime Minister Margaret Thatcher was presented with a motion signed interests for the moment, we have three major concerns: what is best for our by 140 MPs (including 60 cluding 60 Conservatives), but defended the decision not to business, for our employees, a r employees, and for our communities." Rowntree handed Nestle a intervene in the takeover battle. list of proposals which included: On May 27th, the Rowntree board decided that, with over 40% of the company in the hands of Nestle and Suchard, it was time to open discussions with the two one world confectionery company within Nestle, based in York; bidders. Mr. Dixon met with Mr. Maucher in Frankfurt on May 28th. The major topic of discussion was Rowntree's fit in the Nestle organization should Mr. Dixon which would include all of Rowntree's current business as well as and his Board colleagues recommend Nestle's bid. Mr. Dixon proposed the Nestle's current confectionery business; parameters is a copyright violation. formation of a confectionery unit within Nestle to be run by Rowntree, telling Mr. Maucher "Rowntree ought to run the entire confectionery business. We have special skills at confectionery. Confectionery is different from other product and thus the existing business of Rowntree would be preserved; Use outside these parameters is a copyright violation. groups and, if you hope to compete against the Mars and Hersheys of the world with their strong world brands then you must be as focused as they are." this world confectionery business would be run by Rowntree, Mr. Maucher responded that, although there was some possibility of leaving with a Rowntree representative on Nestle's highest Management Rowntree fairly intact, "this is tact, "this is not Nestle's way, we are organized geographically," Board. and he discouraged Mr. Dixon's proposal. " 1. "If there is any question of recommending the bid," replied Mr. Dixon, "then this proposal must be part Before outlining how his team saw Rowntree's position in Nestle, Mr. Masip At the close of the meeting Mr. Dixon added, "Of course, the agreed upon bid explained the Nestle organization. "Nestle's philosophy is that primary price must be a price we can be proud of, a very good price, up towards f12." responsibility and authority should lie with the local country managers who know However, there was no other price-related discussion. Afterwards Mr. Maucher rele CRidej/ 808 Strategic Stam their markets best. So Nestle is organized geographically, with very strong said, "We made very little progress, but the tone was still friendly. I think it is country organizations reporting to regional managers in Vevey." Mr. Domeniconi likely that we will meet again." added, "We have very strong managers who are market heads in their particular countries, and all of the power and responsibility lies at that level." On June 6th, Nestle extended the deadline for acceptance of its original bid at On June 7th, Rowntree's share price fell slightly--to $10.33. Outlining Nestle's proposals for acquiring Rowntree, Mr. Masip emphasized that, like all other Nestle acquisitions, Rowntree would be absorbed into Nestle's country organizations: "Rowntree will be broken up to fit into Nestle's The June 8th Meeting geographical zone structure." The Rowntree people fell increasingly silent as they envisioned what would happen to Rowntree if it were acquired by Nestle. On Wednesday, June 8th, at 10 a.m., Nestle and Rowntree managers met at a Observing the dismayed faces of the Rowntree people, Mr. Maucher whispered little-known London hotel. Mr. Domeniconi, "This seems to be a real shock for them. They are thinking, "here is Nestle as it really is'." The nine executives gathered around a long table, with Messrs. Dixon, AuthorizeBdou Nightingale, Bowden, Blackburn (responsible for Rowntree's UK and Ireland Type here to search O O a W 1:40 PM 05-Jul-22 21)ECP001612_pcu (1).pdf X C O File | C:/Users/User/Downloads/ECP001612_pai%20(1).pdf Update E ECP001 612_pcu (1).pdf 15 / 171 69% + IN - 12 - IMD-3-0520 IND - 13 - IMD-3-0520 The Rowntree team members appeared completely disheartened by Nestle's APPENDIX reaction to their proposals, and the discussion became rather strained. THE CHOCOLATE INDUSTRY Nightingale: You reject the idea of a central confectionery company, then? "Confectionery" was conventionally divided into "chocolate" confectionery and "sugar" confectionery. " Chocolate" confectionery included products made with Masip At Nestle the zones are in charge, and there is no question 15/912028 5/92022022/31/2022. chocolate; "sugar" confectionery included boiled sweets, toffees, chewing gum, of an operating division separated from Nestle's traditional and other gums and jellies. Chocolate consumption represented a stable 54% of and 5/91202 5/91202202 23/31/2022 structure. the total volume of confectionery consumption in the major world markets between 1982 and 1987. Nightingale: So you will not consider our proposal for a world confectionery business? Within chocolate confectionery, there were three major product types:" Masip What you are proposing is unacceptable. You are asking us to break with our principles and to change our whole way Blocks were generally molded blocks of chocolate, with or of operating. without additional ingredients (Hershey's "Chocolate Bar", Nestle's "Milkybar", "Galak" and "Cailler", Suchard's Nightingale: Yes, but you are asking us to recommend the breakup of "Toblerone"); Rowntree! Countlines were generally chocolate-covered products Masip: There is no way we can adapt our organization structure to sold by count rather than weight (Mars' "Mars Bar" and your demands! "Snickers", Rowntree's "Kit Kat" and "Smarties"); Mr. Maucher, who had spoken relatively little during the meeting, summarized Boxed chocolates included assortments (Cadbury's "Milk rameters is a copyright violation. Nestle's reaction to Rowntree's proposals: "As Mr. Masip has outlined, there will Tray", Rowntree's "Black Magic") and also products such still be product coordination through our staff of product directors, but from an as Rowntree's "After Eights". operational point of view Rowntree will benefit from being integrated into our Use outside these parameters is a copyright violation system of regional and country management." "Product definitions varied widely by country. For the proposes of this case, British product definitions have been used. "It is quite obvious that our proposals are not acceptable to Nestle," Mr. Nightingale said. Mr. Dixon added, "You are asking us to recommend the A few manufacturers had succeeded in branding block chocolate, but in many dismantling of a great business, the breakup of the Rowntree Group, and this we markets block chocolate was considered a commodity product. cannot accept. We cannot recommend Nestle's offer to our Board on this basis." manufacturer's range included a standard variety of block chocolate (milk, dark, white, etc.) and additional ingredients (nuts, fruit, etc.) sold in standard sizes The room fell completely silent. After a long tense pause, Mr. Maucher said, (usually 100g and 200g). Block chocolate was sold mainly through grocery "Would you please excuse us? My colleagues and I must talk." ROOBUSIrategie Stant outlets, where it was displayed by manufacturer's range; all of the Nestle block chocolate products would be grouped in one section of the store shelf, with the "I strongly advise not continuing along these lines," Mr. Masip urged on the way other manufacturers' ranges displayed in adjacent sections down the hall to another room. "If they want to recommend the offer on this basis, then we should just go on without them!" "They are in a very difficult position, In contrast to block chocolate, countlines comprised a wide range of branded though," Mr. Domeniconi said, "and we have been very tough on them." "In fact," products which were physically distinct from each other in size, shape, weight, added Mr. St. George, "we may have lost them entirely." "Yes," Mr. Masip and composition. Countlines had wider distribution than the other two product replied, "but better to be clear and prevent misunderstandings. We must types, with a higher proportion sold through non-grocery outlets--including that it is either our way, or we'll act without the recommendation." As he followed confectioneries, news agents, and kiosks. his colleagues into the room, Mr. Maucher worried about the long faces of the Rowntree people and wondered if Nestle had gone too far. Boxed chocolates comprised a wide range of individually branded products, although in some markets boxed chocolates were marketed under the manufacturer's name and displayed by manufacturer's range. Because boxed chocolates were regarded as a "gift/occasion" purchase, sales were very seasonal. Approximately 80% of sales took place at Christmas and Easter, with a high Type here to search O a 99 + W 1:40 PM 05-Jul-22 21)ECP001612_pcu (1).pdf X C O File | C:/Users/User/Downloads/ECP001612_pal%20(1).pdf Update E ECP001 612_pcu (1).pdf 17 / 171 69% + IND - 14 - IMD-3-0520 IND - 15 - IMD-3-0520 proportion through grocery outlets; steady sales through the remainder of the year finished product used in the manufacture of block, countline, and boxed chocolate were made through non-grocery outlets. products. At 7% average annual growth between 1982 and 1987, countlines was the fastest Average costs for a representative portfolio of all three product types of sweet growing segment of the world chocolate market. Block chocolate sales showed an chocolate could be broken down as follows: ge annual volume increase of 1% over the same period, while sales of boxed chocolates had declined by an average of 1% per year. By 1987 countlines serzer21 5/ 310220238/31/2022. represented 46% of the world chocolate market by volume, up from 38% in 1982; raw material 35% block chocolate had declined to 30% from 33%, and boxed chocolates to 24% packaging 10% from 29%. In addition to growing demand for countline products, future growth production 20% was expected from "indulgence" products--such as chocolate truff distribution 5% specialist branded chocolate retailing. marketing/sales 20% trading profit 10% Industry Structure and Performance Total 100% (of manufacturer's selling price) In 1987, there were six producers in the world chocolate industry: Mars, Hershey, Cadbury-Schweppes, Jacobs Suchard, Rowntree, and Nestle. With individual For countline products, raw material costs were proportionately lower because world market shares ranging from 18% (Mars) to 4% (Nestle), these six smaller amounts of cocoa were used. For boxed chocolates, packaging costs were companies accounted for 50% of the tot 50% of the total world volume of chocolate proportionately higher. confectionery. With the exception of Jacobs Suchard and Nestle, countline production represented the largest proportion of the chocolate confectionery portfolios of the major confectionery producers (refer to Exhibit 3). (Additional Research and Development details about the product segment and geographic positioning of each company is outlined in Exhibits 4 and 5.) Research and development (R&D) generally focused on making a better chocolate and on developing new products, although one executive related, "There is never The major industry competitors had healthy rates of profitability. Because Mars Use outside these parameters is a copyright violation. really anything brand new in the confectionery market, just different ways of Use outside these parameters is a copyright violation was a privately-held US company, it did not publish sales and profit figures. For presenting combinations of the same ingredients." There were minor differences the other major competitors, trading profit on sales averaged 9.3% over the five- in R&D across the product types, although R& D in the countline segment tended year period ending in 1987; trading profit on assets averaged 16.1% and the rate to emphasize applied technology. of return on stockholders' equity averaged 16.1%. Over the past five years, several major producers had acquired a number of Raw Materials smaller, national chocolate companies. Between 1986 and 1988, Jacobs Suchard had acquired six confectioners, including E.J. Brach (the third largest confectioner in the US after Mars and Hershey), Van Houten (Holland), and Cote d'or, (a The major ingredient in chocolate confectionery was cocoa, followed by sugar and milk. Although Jacobs Suchard claimed to benefit from large purchase famous Belgian chocolatier which Nestle had also considered acquiring). In 1987, hedging, some manufacturers purchased cocoa supplies as needed at the spot price Hershey purchased the Canadian confectionery assets of RJR Nabisco. In early quoted on the major cocoa exchanges, while others purchased cocoa a year or two 1988, Cadbury acquired Chocolates Poulain, a famous French chocolatier, and in advance to obtain the "best price" and Nestle was negotiating the purchase of Buitoni, an Italian food group which to ensure long-term supplies. Between 1977 and 1988, the international cartel of coco d fallen into disarray included the leading chocolatier Perugina. the price of cocoa had fallen by 50% (SUS terms), and surplus cocoa stocks had continued to accumulate. Business System Industry practice was for manufacturers to absorb raw material price changes internally in order to smooth extreme changes in consumer prices. However, Mars Chocolate was made from kernels of fermented and roasted cocoa beans. The had made an unprecedented move in taking advantage of kernels were roasted and ground to form a paste which was hardened in molds to ng advantage of the falling cocoa price to stimulate volume demand. The company had held the price of its "Mars Bar" and make bitter (baking) chocolate, pressed to reduce the cocoa butter content and increased the product weight by 10% in the late 1970s, and then by another 15% then pulverized to make cocoa powder, or mixed with sugar and additional cocoa orized dou in the early 1980s, enabling Mars to gain market share. butter to make sweet (eating) chocolate. Sweet chocolate was the basic semi- Authorized dou Type here to search O O a 99 + W 1:40 PM 05-Jul-22 21)