114-Industry Evolution Forces Cost Management

The evolution of a market often brings new consumers who prefer, or can afford, only low-priced products. In order to reach these consumers, a company must reduce its costs while it grows.

The British confectionery firm Cadbury dominates the Indian chocolate market. It has 70% market share in the chocolate market and a 30% share of the confectionery market in India. The company began operations in India in 1947. They imported its chocolate bars and sold them to the very wealthy. Later, it developed its own factories in India.

As the Indian market develops, more consumers and potential consumers enter the chocolate market. The growth in the market comes with consumers who live outside the major cities and who have very low incomes. In order to reach these consumers, Cadbury has to offer products that it can sell at very low prices. (See Diagnose/Products and Services/Innovation For Customer Cost Reduction/Four Price Points on StrategyStreet.com.) To meet these new consumers, the company has developed a product called Cadbury Dairy Milk Shots. These are small chocolate balls that are covered with a sugar shell. A package of two of these balls sells for about $.04. But these low-priced products still drive growth.

But Cadbury can not reach these new consumers with very low-priced products without containing its cost structure. The evolution of the market forces Cadbury to reduce its costs as it grows. Over the last few years, the company has reduced its workforce, moved factory locations from high-cost to low-cost areas, and improved the cost effectiveness of its supply chain. This is all on the base of a company that was profitable to begin with. (See Diagnose/Costs/Measuring Current Economies of Scale on StrategyStreet.com.)

Posted 7/2/09

Update:

Cadbury continues to be wildly successful in India, where it embedded itself in the culture. The company was taken over by Kraft Foods in 2010. In turn, Kraft spun off its grocery business into Kraft Foods group. Cadbury stayed in the remaining business, renamed Mondelez International. The company traditionally advertises its products as high quality and helpful and a luxury treat . In India, it modified its approach to reach the growing middle classes. In 2003, the company began advertising its products as gifts for Diwali. Customers began to understand the chocolate could be used for celebration and Cadbury’s market grew. It framed its brand as part of Indian culture. Today, it has a 70% market share in the Indian market. It’s bars are everywhere, priced as low as five rupees (less than $0.10) and available in 2.5 million stores.

THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.