Kraft Foods' purchase of Cadbury is likely to have repercussions throughout the cocoa supply chain as a newly created chocolate giant seeks to drive down costs.
The new company will be the top player in the chocolate and confectionery industry by revenue, overtaking Mars-Wrigley, and traders and analysts expect it to use its increased clout to achieve promised cost savings.
"The rationale for the merger is cost savings. The result is there is going to be consolidation in the supply sectors as well," said Chris Brockman, market research manager at UK consultants Leatherhead Food Research.
Kraft announced last week its acceptances of more than 75 percent of Cadbury's stock to seal its 11.7 billion pound ($18.4 billion) acquisition after a near five-month takeover battle.
U.S.-based Kraft Foods already owns Toblerone and Milka chocolate bars and is set to add UK-based Cadbury's brands which include Dairy Milk bars and Roses chocolates.
The U.S. food group has targeted annual cost savings of at least $675 million a year.
"I think it could spur some additional consolidation in the industry," said analyst Judy Ganes-Chase of J. Ganes Consulting in New York.
Brockman noted costs for chocolate producers have been rising sharply as cocoa prices climbed.
Cocoa futures on ICE rose to a near 31-year high of $3,510 a tonne in mid-December 2009 as key producers in West Africa struggled to ramp up supply in response to long-term demand growth, resulting in a prolonged drawdown in global stocks.
The cocoa market has fallen back slightly in the last few weeks, currently trading around $3,000 per tonne, but is still around double prices paid for several years in the mid-2000s.
"It will be a challenge to suppliers. What it means is we need to be more efficient," said Piter Jasman, chairman of the Indonesian Cocoa Industry Association
One Singapore-based cocoa trader said driving down costs will imply more central buying and thinner margins of suppliers. He noted margins for suppliers were already very poor.
"On balance I would rather see more players than the consolidation of another giant," he added.
Marcelo Dorea, partner at hedge fund Round Earth Capital, said along the supply chain the weaker and under capitalized links will disappear as they have no real economic function and do not have the balance sheets to survive market volatility.
"The chocolate industry's commodity procurement process will evolve into long-term supply agreements 'priced as you go' with the processing industry and main dealers which are present at the key origins and thus, far more cost efficient and much better at managing forward performance risk," Dorea said.
Brockman said the merger would also provide the opportunity to strengthen global brands.
Cocoa consumption had been growing much faster in Asia and eastern Europe than in more developed markets such as the United States and western Europe before the global economic downturn early last year which stalled the expansion.
Analysts said demand in markets such as China was likely to drive long-term growth in cocoa and chocolate demand.
Jasman said there would be new opportunities to launch global brands in emerging markets, especially China, providing a source of increased cocoa consumption over the next few years.
"With the presence of major global brands, it will bring new ideas and influence the local confectioners and food regulatory bodies to set new standards to provide, most importantly, a food product that is safe for mass consumption," he said.
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