Cadbury FailureBarnea CIM Jan 2012

Competitive Intelligence Magazine, Vol. 15, No. 1 , January/March 2012

The Chocolate Battle: Cadbury's Failure in Israel, a Case Study

Avner Barnea, Ono Academic College, Israel

In 2002 the global food giant Cadbury Ltd. failed to penetrate into the Israeli

food market together with its local partner Carmit Ltd. The failure was primarily due

to a poor assessment of the powers in the local chocolate market, especially the well-

established market leader, Elite Ltd. If Cadbury had known the competitive arena in

Israel better, it could have increased its prospects for success.

TIMELINE

Established in 1973, Carmit Ltd. was a market leader in the niche of sugar

products (confectionery), candy, marshmallows and pastries. The company also sold

chocolate products which in 2001 accounted for about 10% of its business. In 1993

the company had gone public and was traded in Tel Aviv Stock Exchange (TASE).

In 2001 Carmit signed a cooperation agreement with Cadbury to exclusively

distribute Cadbury’s chocolate products, and in late 2002 Carmit began marketing

Cadbury's chocolate in Israel. It set an ambitious target of 15% share of the chocolate

market estimated at $ 300 million (in 2002) then dominated by Elite.

Faced with major difficulties, five months after launch Carmit stopped

marketing Cadbury products in Israel, and withdrew from the strategic cooperation

agreement with Cadbury ceased. Carmit suffered severe financial damages: It took

three years before it managed to get its finances back on track. Legal procedures

against misconduct by Elite are still not concluded. (See time line of event in table 1.)

ABOUT CARMINT LTD.


Lenny Sakstien, Carmit’s founder, was born in South Africa and immigrated

to Israel in the early 1970s. He established a duty-free shop at Ben Gurion

International Airport which sold sweets. In 1993 the company was traded on the Tel

Aviv stock exchange in Tel Aviv, and in 1995 the company acquired another sweets

company. Sakstien remained the major shareholder (37.5%) while about 30% of its

shares were held by the public. By 2002 Carmit's sales reached $15 million. The

company's growth was steady over the years, approximately 5-7% per annum on

average, and it was managed in a fairly moderate way.

To identify new growth opportunities, in 2000 Carmit conducted a strategic

analysis of the local markets where it operated. Management concluded that

expanding its operations in chocolate would be attractive, based on its effective

distribution network and a long experience in the food market.

Carmit’s managers concluded that collaboration with an international

corporation would provide the fastest growth, and approached Cadbury, one of the

world's largest companies in sweets and soft drinks with a yearly turnover of $8

billion (2001). Cadbury had a long history in the chocolate market -- in 1905 it

introduced the Dairy Milk, its famous brand of chocolate tablets. The company

operated in many countries but did not sell its chocolate products in Israel.

Carmit convinced Cadbury that Israel had a high market potential, and

products could later be expanded to kosher markets worldwide. Market analysis

showed that chocolate products in Israel had about $300 million in yearly sales. Israel

had one major player in the chocolate market, Elite, which nearly had a monopoly in

the chocolate and coffee products, holding a market share of about 70%. In 2001, a

year before the launch, Carmit signed an agreement with Cadbury.

PREPARING FOR PRODUCT LAUNCH

During the negotiations between Carmit and Cadbury, the former presented its

market penetration strategy. Carmit's believed that its competitive advantage was an

excellent knowledge of the local food market, as it had been active in this field for


many years. Carmit also emphasized its first rate financial condition. Under the

agreement, Carmit would import a range of Cadbury's chocolate products to Israel and

distribute them through its delivery system.

Taste tests of the new products indicated that Israeli customers liked Cadbury's

chocolate. One potential difficulty was resolved when Carmit acquired kosher

certification for all Cadbury products imported to Israel.

After signing the agreement with Cadbury, Carmit management made a

crucial decision. The founder Sakstien stepped down as CEO and stayed on as

Chairman of the Board. Another director who grew up the company and served at the

senior level became CEO. This change resulted from Carmit’s senior management

persuading its Board of Directors that the company was entering a new era primarily

driven by marketing while Carmit's sales orientation would become less relevant.

However, some Board members had doubts about the new business strategy,

involving massive market infiltration efforts with a simultaneously wide range of

products. The high quality of Cadbury, its brand strength and distribution capability of

Carmit managed to convince them that this strategy will be successful.

Carmit's ambitious goal was to achieve a 15% share of the chocolate market in

a few years and to sell about $10 million in products the first year. Carmit created

agreements with the major retail chains and with about 20 wholesalers who were

to distribute the new products to 6000 points of sale throughout the country.

Management assessed that the introduction of Cadbury products into the retail

chains will be relatively easy, although Cadbury's prices were the same or even

slightly more expensive than those of the rival Elite. An advertising budget of $3

million, mostly allocated by Cadbury, would boost this campaign.

The launch was planned to begin in the winter of 2002, deemed the

appropriate time to introduce products which are sensitive to hot weather.

However the launch was postponed to the end of 2002 as a result of Cadbury's

products arriving late in Israel. Looking back this was a significant setback as a short

time after the launch the weather became hot.


DIFFICULTIES IN INTRODUCTION

The initial information received from the sales force after launch reported that

the first stage of distribution started successfully. Then the momentum stalled, and

sales began to rapidly decline. Carmit's sales people reported that Elite engaged in an

aggressive strategy to block Cadbury products through major promotions that

included lowering prices and pressuring shopkeepers and wholesalers to stop buying

from Carmit. These actions were brought to the attention of the Anti-Trust

Authority but they declined to stop Elite’s actions.

An interview with Chairman Sakstien (Barnea 2009) noted that "such activity

as reducing prices was of course a legitimate part of competition. However, the

actions described earlier were illegal and the authorities have done nothing to stop

them." Carmit was determined to continue on course even when encountering these

setbacks. In another interview Sakstien said: "There is no doubt that all the moves, if

carried out were illegal moves. They undoubtedly stopped our momentum and hit

us hard during the initial penetration and I leave that to the Commissioner of Anti-

Trust Authority."(Globes 2003).

In addition, sales figures revealed that customers demand was low and despite

the promising taste tests, the new products were not strongly preferred by Israeli

customers. Carmit was required to give notice to Cadbury 3 to 6 months advance

notice on additional orders for products, but based on the disappointing sales reports it

decided to terminate the Cadbury's products campaign.

THE STRATEGY OF ELITE LTD.

Elite, the leading food company in Israel, had sales of about $ 600 million per

annum (in 2003) with about $ 350 million in the domestic market, and about $200


million from its revenues came from chocolate. As mentioned earlier, Elite held a

monopoly position and enjoyed wide customer recognition for its chocolate and

coffee. The company was widely recognized for its aggressive marketing strategy that

stressed introducing new products and consolidating existing ones. In chocolate, Elite

had dominated the market for many years, with its market share reaching 70%.

Elite showed no tolerance towards any threats to its core business, chocolate

or coffee. Several years before, Elite successfully slowed down the introduction of

Nestle chocolate in Israel (Globes 2009).

Another example of Elite's marketing strategy was against the local coffee

company Rajowan that in 2001 launched a 'black coffee' with innovative texture.

Rajowan caught Elite by surprise and quickly climbed to a 25% market share in this

segment. Elite then initiated a robust offensive strategy against Rajowan, and within a

short-period Rajowan coffee disappeared from the shelves (Ynet 2002).

Elite viewed Cadbury as a significant threat to its core chocolate business. Just

before Cadbury products were introduced in Israel, Elite announced that it would

spend about 10 million NIS ($3M) in preparation for Cadbury’s entry)Globes, 2004).

THE FINAL STAGE

Elite's strong response surprised Carmit. The Chairman said: "The magnitude

and extent of reaction surprised us, particularly their aggressive lowering of

prices."(Barnea, 2009). As the Cadbury introduction continued to go wrong,

Carmint’s board fired the CEO and eventually Sakstien returned to the CEO position

to save the company. He noted that "Elite used its power monopoly to abuse and to

place pressure on various market factors and succeeded in excluding Cadbury

products from the market."(Globes 2006). The Cadbury product failure resulted

in heavy financial losses for Carmit.

The Israel Anti-Trust Authority opened an investigation against Elite

following Carmit’s complaints. In his statement of August 2003 the Anti-Trust

Commissioner noted that "the Anti-Trust Authority completed its investigation


concerning allegations that Elite abused its position as a monopoly and set restrictive

arrangements with retailers of chocolate bars in order to block the penetration of

Cadbury chocolate in Israel ". Later he said in another message that "The

investigation concerns the arrangements by Elite with retailers, including discount and

benefit for pushing and blocking chocolate rival Cadbury and stop the competition

which began to emerge with the introduction Cadbury products to the market in late

December 2002."( http://archive.antitrust.gov.il/ANTSearchItems.aspx)

Almost three years later, on February 2006, the Anti-Trust Commissioner

announced an agreement between the Authority and Elite that the latter will pay a fine

of 5 million NIS ($1.5 M) for its actions. Elite pledged that "it will take no sanction or

efforts to force its competitor from the market, block or hobble the market in a

manner that could prevent a competitor's entry into the market."(Ynet 2006). Carmit

objections to the agreement were denied. A year later in January 2007, the Anti-Trust

Tribunal approved the agreement with Elite.

A local consumer association argued that the small fine Elite paid was not

reasonable.The response of the Antitrust Authority was that "the large amount of the

fine was due to the Authority’s great sensitivity to behavior of a monopoly as new

competition comes into their market, and the personal responsibility of company

executives." (http://archive.antitrust.gov.il/ANTSearchItems.aspx)

Carmit discovered that the public pressure faded quickly. Since 2002

Cadbury's chocolate products have not been sold in Israel.

Sidebar 1: Timeline of events

February 2001 Signed agreement between Cadbury Inc. and Carmit Ltd. to

launch Cadbury chocolate in Israel.

October 2001 Postponement of Cadbury's launch.

http://archive.antitrust.gov.il/ANTSearchItems.aspx

http://archive.antitrust.gov.il/ANTSearchItems.aspx


January 2002 Start of competitor Elite Ltd. blockade campaign to halt

Cadbury products.

February 2002 Launch of Cadbury products in Israel.

May 2002 Decision by Carmit to terminate Cadbury chocolate launch.

August 2003 Opened Investigation by the Anti Trust Authority against Elite

February 2006 Decision by the Anti Trust Authority to fine Elite for illegal

activities to block Cadbury.

January 2007 Approval by the Anti Trust Authority of the fine on Elite.

January 2010 Filing of Carmit claim of $6M against Elite and its senior

executives for damages. Not concluded yet.

SUMMARY

Carmit lacked the strategy of Peripheral Vision (Day and Shoemaker 2005,

2006). The absence of intelligence management played a major role in the strategic

surprise the company confronted, as management accepted optimistic assumptions

rather than realistic ones. In addition, Carmit did not have any contingency plans

(“what if’s”) to implement when it faced an unpredicted reaction by the rival Elite.

It is valuable to mention that this complete failure was also a result of an

unsatisfactory overall customer value (DeSarbo 2001; Flint 1997). Cadbury’s

products faced a combination of various factors such as price, service quality and

product quality that were perceived as not appealing enough to the local customers.

The soft response by the Anti-Trust Authority is still questionable, although it

is unlikely that a different outcome could have changed Carmit's ultimate position

fundamentally.


CI ANALYSIS

Before the collaboration with Cadbury, Carmit has never directly competed

with Elite, and this was actually the first time the company had gone against such a

strong competitor. Carmit's strategy was based largely on wishful thinking, lacking a

reasonable assessment of its prospects to achieve the market share stated in its goals.

In addition, very rarely will a successful company change its senior executives

shortly before entering a potentially fierce competitive battle. The change in CEOs

was another example that showed how wrong Carmit was in reading the market signs

and its lack of anticipating such a powerful reaction by its rival. Elite’s blocking

strategy was actually started almost two months before the launch of Cadbury

products, when Elite initiated an aggressive campaign to reduce chocolate prices.

Carmit saw the storm coming, but ignored these signals (Barnea 2010).

Carmit management did not have any structured procedures to prepare for new

challenges, perhaps because it was a small company. They did not seek advice from

competitive intelligence experts and relied on internal marketing and sales forces,

which had no formal assessments regarding the potential strong reaction by Elite. In

addition, Carmit management was too confident that the company’s market expansion

would be successful, thus they did not consider using tools such as war game or

scenario planning to test their strategy. If they had, they might have uncovered their

blindspots in time and reconsidered their strategy. This is a classic example of the

added value competitive intelligence can provide (Gilad 2003).

Carmit had moved from the status of a niche player into a "central court

player" without restructuring its resources. It also lacked a thorough understanding of

the possible external risks to its new strategy. Potentially a better assessment done

prior to the launch would have led management to reconsider their head–on collision

strategy with Elite in the battle field of the large food chains in favor of entering the

market indirectly. Another approach would have been to consider launching just a few

new products and evaluate how they were accepted by customers. Again, a closer


linkage between business strategy and competitive intelligence could have helped

Carmit avoid these significant and devastating mistakes (Grant 2005).

Cadbury relied heavily on the market knowledge of its local partner, Carmit,

so the likelihood that Cadbury would have anticipated the failure and come up with a

different strategy was very low. However, the question remains concerning how this

global company selected its local partner. In this case, the size and the capabilities of

Carmit should have raised questions at Cadbury regarding the distribution

agreement’s likelihood of success. Generally global companies are expected to have a

more rigorous system for selecting their strategic partners, where competitive

intelligence input could also be useful (Kahaner 1996).

REFERENCES

Barnea, Avner (2010) "Intelligence failures: Competitive intelligence and strategic

intelligence," Competitive Intelligence Magazine, v13n3, July/September

Barnea, Avner, (2009), An interview with Lenny Sakstein, conducted on the 7th

May,

2009.

Day, George S.; Schoemaker, Paul (2006). Peripheral Vision: Detecting the Weak

Signals That Will Make or Break your Company. Harvard Business School.

http://www.amazon.com/Peripheral-Vision-Detecting-Signals-

Company/dp/1422101541

Day, George S.: Schoemaker, Paul (2005). “Scanning the periphery,” Harvard

Business Review, November p135-148.

http://hbr.org/2005/11/scanning-the-periphery/ar/1

DeSarbo, Wayne; Jedidi, Kamel; Sinha, Indrajit (2001). "Customer value analysis in a

heterogeneous market", Strategic Management Journal, v22n9, September p845–857.

http://onlinelibrary.wiley.com/doi/10.1002/smj.191/abstract

Flint, Daniel; Woodruff, Robert; Gardial, Sarah Fisher (1997). "Customer value

change in industrial marketing relationships," Industrial Marketing Management, v26

n2 March, p163-175.

http://www.sciencedirect.com/science/article/pii/S0019850196001125

http://www.amazon.com/Peripheral-Vision-Detecting-Signals-Company/dp/1422101541

http://www.amazon.com/Peripheral-Vision-Detecting-Signals-Company/dp/1422101541

http://hbr.org/2005/11/scanning-the-periphery/ar/1

http://onlinelibrary.wiley.com/doi/10.1002/smj.191/abstract

http://www.sciencedirect.com/science/article/pii/S0019850196001125


Gilad, Ben (2003) Early warning: using competitive intelligence to anticipate market

shifts, control risk, and create powerful strategies. NY. AMACOM, pp.104, 135.

Globes (Israeli business magazine), 13th

. August 2003.

Globes (Israeli business magazine), 30th

. December 2004.

Globes (Israeli business magazine website), 5th

. April 2006.

http://www.globes.co.il/news/article.aspx?did=1000080499

Globes (Israeli business magazine website), 22nd

. June 2009.


Grant, Robert (2005). Contemporary Strategy Analysis, Blackwell Publishing,

Oxford, UK, p113-117.

Kahaner, Larry (1996). Competitive Intelligence: How to Gather Analyze and Use

Information to Move Your Business to the Top, NY. Simon & Schuster.

Ynet (Israeli newspaper website), 1st. August 2002.

http://www.ynet.co.il/articles/1,7340,L-2032835,00.html

Ynet (Israeli newspaper website),28th

. February, 2006.


Avner Barnea, teaches CI in the MBA program of the Ono Academic College, and in

the Management School of the Western Galilee College, Israel. He is a consultant in

the field of Competitive Intelligence and Business Strategy in Israel and abroad. He

held senior positions at the Israeli Intelligence Community. The author has an

intensive experience in the integration of CI systems into Israeli corporations. He can

be reached at: [email protected]





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