CRITICS of Cadbury Schweppes's lacklustre first-quarter trading report yesterday will seize on the slow sales growth as evidence that it is right to be about to demerge its American drinks business from its sweets division.
They will arg
ue that just such a shake-up is needed to get the business back on track and enhance shareholder value.
Cadbury blamed the early fall of Easter this year, effectively decoupling it from much of the normal two-week school break, the effect being that UK sweet sales rose just 3 per cent.
The company said a price-cutting war in the UK had also impacted the division.
UK growth would have been nearer 6 per cent without these two factors, the company said.
But the performance was still underwhelming and you can see why it would fuel calls for the demerger.
For one thing, you can turn the argument somewhat on its head. Easter falling in the first quarter should have made the comparatives easier with the first quarter of 2007.
That applies even without the schools being on holiday, when traditionally it allows kids to put a bigger squeeze on their parents for more sweeties for a longer period.
And Cadbury also took price increases to offset higher commodity costs so there should have been some margin protection there, which did not materialise.
It also gets worse. Without Easter to help it out this year, Q2 sales growth in the UK is also unlikely to be anything to get excited about.
Meanwhile, across the Atlantic, the Dr Pepper drinks business managed only 3 per cent revenue growth, down to 1 per cent when measured on a like-for-like basis.
Unfortunately for investors, it means Cadbury's drinks arm will be entering demerger with some question marks hovering over the fundamental strength of the underlying business in the States.
Cadbury after the demerger will become more or less a pure-play confectionery company, with a minor drinks operation in Australia.
Group chief executive Todd Stitzer tried to reassure the market by confirming the company's guidance for revenue growth at the two businesses in 2008.
That is growth of confectionery sales at the upper end of a 4-6 per cent banding, and growth of beverages revenues by between 3 and 5 per cent.
Many analysts believe these sort of growth figures, somewhat down on 2007, are already in the price of the constituent businesses, however, particularly in the case of the rump confectionery business when the demerger goes through.
That is also the case with profit margins projected by Cadbury to rise to 15 per cent by 2011. It suggests, therefore, that, post-demerger, possibly the main upside for the shares of Cadbury plc will be from a potential bid premium.
On the organic growth front, it is clear the City is disappointed, which is why the shares closed yesterday down 3 per cent at 563.5p. Ten months ago the stock was worth comfortably over £7.
Demerger may not solve all the company's problems. But it does look the best staging post around to any sort of sustained recovery.
EVEN if interest rate cuts came in Indian-file from the Bank of England from now on, it is worryingly clear that the banks still do not trust each other – the problem that has got us mired us in the mess arising out of subprime.
So it is doubtful how effective a restorative to the economy the rate cuts will be.
Following Thursday's quarter-point cut in rates to 5 per cent, the Libor rate – the rate at which banks lend to each other – is 5.9 per cent, still therefore virtually a full 1 percentage point above the official base rate.
The BoE is trying to stop the financial contagion spreading out into the real economy to clobber consumers.
But it is only when the Libor rate falls – and, more importantly, stays lower – that we will be able to begin to feel the crisis is over. That, and a stabilisation of the housing market in the US.
For the minute, though, the rate-cutting BoE resembles a headmaster telling children to "play nicely" in the playground.
But the playground plays to market rules, and the playground of interbank lending remains unruly.
The resolution of the nervy times we are in will not come, one suspects, from a consumer spendfest.
It will come when the banks stop kicking the tyres of each other's financial cars.
The full article contains 752 words and appears in The Scotsman newspaper.
