Richard Brookes looks at Cadbury's Dunedin closure in a merger & acquisition context, and asks if this is the new unacceptable face of shareholder capitalism

By Richard Brookes*  

The first two were decided by the international food giant Mondelez, and the third by Kraft Heinz, a mainly US-focused grocery food conglomerate. There is a larger back story to these closures than simply the rational corporate arguments of cost and efficiency gains and economies of scale in optimising production facilities and locations. That back story has to do with the recent increase in mergers and acquisitions and their follow-on implications, not only for the players, people and communities concerned, but also for commerce and society in general.  

We’ll start with Cadbury. As Holly Ryan recently discussed in the Herald, in 2010 after an acrimonious takeover process, Cadbury was bought by Kraft Foods, a mostly US. grocery food manufacturer looking for international growth opportunities. Kraft’s initial offer, in September 2009, set off a buying scramble for Cadbury shares by hedge fund managers and other short-term investors, thereby ratcheting up its price. By the time Kraft made its final offer in January, 2010, Cadbury’s CEO was forced to admit he and his board “don’t own the company – the shareholders own the company and the board has a fiduciary duty (to recommend and offer) when appropriate value has been paid.” A Guardian editorial at the time called it a ‘capitulation’, and criticised the Labour government for believing the limits of their role were no more than “to take the edge off the dislocations caused by globalisation.”  

That criticism cannot be made of the Commerce Commission in New Zealand for its rejection of the proposed merger between Sky TV and Vodafone. And it is likely that the public hostility shown by the UK Conservative government toward the recent Kraft Heinz “hostile” bid for Unilever would have been a key factor in that industry-changing deal not proceeding. 

The saga of Kraft and Cadbury and of Kraft Heinz and Unilever, is part of a larger and growing story of what has been termed “shareholder capitalism”. This refers to large public-owned companies needing to show continuously rising shareholder returns, and basically they do this in two ways. One is internal growth, for example, by reinvention through discontinuous innovations. Apple is exemplary in this, even telling shareholders to invest elsewhere if they don’t like Apple’s long-term perspective.

The other approach is growth through mergers or acquisitions, and this is basically short-term focused. The new corporate entity Kraft Heinz is an exponent of this approach, and Cadbury (as part of the conglomerate Mondelez) is caught up in it. When The Economist headlined the Kraft Heinz proposed US$143 billion takeover of Unilever in February as Barbarians at the plate, it may well have been signalling that unfettered shareholder capitalism was the new unacceptable face of capitalism. 

Buy, squeeze, repeat

Kraft Heinz is controlled by 3G Capital, a Brazilian private equity group, overseen by Brazil’s richest man, and with considerable financial backing from Warren Buffett and his conglomerate, Berkshire Hathaway. The New York Times says they “are the architects of some of the biggest mergers of household names in American food and drink in recent memory.” 3G Capital and Berkshire Hathaway joined forces in 2013 to buy Heinz, and in 2015 they led Heinz’s merger with Kraft Foods. Earlier, in 2012, Kraft had separated itself from what had became a collection of mostly non-US snack food businesses known as Mondelez International, now an independent publicly-traded company (and owner of Cadbury). 

FORTUNE terms the 3G method of operations as “buy, squeeze, repeat”. When it takes over a company it quickly replaces its top echelon of management with its own hand-picked team. That is quickly followed by massive cost-cutting. As an ex-Kraft manager told FORTUNE, that means getting rid of “a lot of remaining ties” like historic factories and iconic head offices. For Cadbury, that means at some point in the near future there will be no funding for the Jaffa race down Baldwin Street. In a meritocracy, everyone and everything is appraised, often from a zero-based budgeting approach. It’s also why at 3G there’s no corporate jet, all executives fly economy-class, and receive the same relatively small daily stipend. The short-term impacts on costs, profit margins and share returns can be dramatic, and this makes the company attractive to investors. 

However, says FORTUNE, “[a] central feature of this model is that it can’t work forever”. The uncertainty issues are longer-term, and associated risks are bigger: talented people are gone, innovation and marketing budgets cut, and changing technological and market trends not addressed. For example, in the grocery food business, consumers are looking for more nutritious, authentic, and convenient solutions. Online alternatives are emerging, as are local competitors with offerings more suited to our habits, tastes and sensibilities, such as, Whittaker’s, Lewis Road, and My Food Bag. In the meantime, potential targets of the conglomerates have begun acting in a similar “squeeze and repeat” fashion in order to mollify their own shareholders. 

The shark that can’t stop swimming in order to feed itself

At some time then, corporate revenue growth slows. It’s like the shark that can’t stop swimming in order to feed itself. Only each time, after feeding the shark is bigger, and so too is its next feeding target, and the risks associated with an attack. For example, another reason for the hostility shown toward the recent Kraft Heinz bid for Unilever was that the UK company, under its current CEO, was actively pursuing a culture of sustainability practices. A major concern by many in and outside the company was that this would not be continued after the take-over, especially if Unilever’s entire senior leadership team was replaced by a 3G cohort. 

If FORTUNE is right, then a key question for any society to ask is: Is this a business model to encourage, or discourage? Whilst we might simply accept the business logic of closing out-of-place chocolate factories, is it really the society’s role only to take the edge off the dislocations caused by this particular M&A form of globalisation? Or is there the possibility that societies can accept the potential returns and risks associated with shareholder capitalism, so long as those societies are also actively willing and able to encourage the likes of the Whittaker’s of its time and place to emerge and flourish? In the meantime, it must now be one New Zealand chocolate manufacturer that is laughing all the way to the supermarkets.

*Richard Brookes is an associate professor in marketing at the University of Auckland Business School.