Mars deal is start of consolidation season

One way of looking at the Mars/Wrigley deal is that it is a back-handed compliment to Cadbury’s strategy under the leadership of Todd Stitzer.

Cadbury has had the wit to play to its strength and minimise its weakness. Its weakness is its struggling soft drinks business which it had hoped to sell, but which it is now resigned to spinning off. Its strength is its global distribution, particularly in developing countries, and the power of its confectionery interests. These, already powerful in the chocolate and sugar sweets areas, were tremendously reinforced by a spectacular entry into the gum market with the Adams acquisition in 2003. The subsequent launch of the Trident and Stride gum brands, allied to rock-solid Cadbury global distribution, has had an unexpectedly early and devastating impact on Wrigley’s formerly untroubled market dominance.

The spinning off of Schweppes was to be Stitzer’s crowning moment as he contemplated all the “one is wonderful” advantages of leadership in the global confectionery market. But it was too good to be true. The fiercely independent family-dominated Wrigley business was sufficiently frightened of Cadbury’s success to scuttle for cover into the waiting arms of Mars. Mars, too, had reasons to be fearful. Though less US-centric than, say, Hershey, it lacks Cadbury’s strength in the vital emerging markets – a deficiency remedied by Wrigley. And it has, of course, at a stroke re-established global leadership in the confectionery business, with a 14.4% share.

So, bad luck Cadbury. But what else does the deal tell us? It tells us something about the underlying value of brands. When times are hard, as they may be now, good brands become rightly prized for their defensive, resilient qualities.

The trouble is, they don’t come on the market that often. For good reason: it has taken years of patient investment to create that desirability. With the exception of the technology sector (Google, Microsoft, maybe a telecoms company) many bluechip brands date back at least 50 years, a few 100 years and over.

Warren Buffett, in his characteristically shrewd way, has exploited a market opportunity (in the guise of the Cadbury bogey man) to get his hands on a sizeable chunk of the Wrigley brands. He has been able to do so because, while nearly everyone else is writhing in the tightening grip of the credit crunch, he doesn’t have to borrow other people’s money to strike the $4.4bn (£2.23bn) part-deal. Kirk Kerkorian, the corporate raider, may well savour a similar moment of triumph as he snaps up nearly 5% of Ford. Kerkorian has a faith in old, established automobile brands almost as profound as Buffett’s in classic food and drinks brands. Whether justifiably remains to be seen.

Some people are already pairing up Hershey and Cadbury, or even Cadbury and Kraft. They may be wrong in detail but right in substance. Over the next year or two a number of famous brands are likely to change hands. The logic, both from the viewpoint of industry consolidation and investment opportunity (if, that is, you have the money) is overwhelming.

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