Description of Business
Goals and Priorities2005 Goals and Priorities
In October 2003, we set our strategic goals for the 2004 - 2007 period. Each goal has two priorities. While our goals are unlikely to change from year to year, the priorities may, depending on prevailing business needs and the market environment. The goals provide a small number of clear and achievable objectives against which our senior managers report and are incentivised. We believe we can consistently deliver superior shareowner performance by profitably growing our global confectionery and regional beverages businesses; by ensuring that our team and its capabilities are best in class; and by ensuring that we have strong relationships with our employees and the communities in which we do business. Goal oneOur first goal and overarching objective is to deliver superior shareowner returns. Performance in respect of this goal is measured by comparing our Total Shareowner Return (TSR) against a set of 28 international fast moving consumer goods (FMCG) peers. In 2005 our TSR of 23% was in the top quartile of these peers. We believe there is a direct link over time between superior business performance and superior shareowner returns. We measure our annual performance based on three key business performance indicators - sales, margins and cash flow - within set goal ranges.
The Fuel for Growth programme was designed to reduce our direct and indirect cost base by £400 million per annum by 2007. Following the sale of Europe Beverages, which accounted for approximately 10% of the Group, the targeted savings under the Fuel for Growth initiative have been reduced to £360 million. So far, we have realised cost savings of £180 million. Delivery of the remainder will provide further support for the achievement of our margin growth goal in 2006 and 2007. In 2005, we invested an additional £75 million in growth and capability related initiatives, including innovation, information technology, science and technology, commercial and sales force capabilities and the understanding of our customers. In order to achieve our free cash flow goal of £1.5 billion between 2004 and 2007, we are focused on both driving profitable growth and optimising allocation of our capital. Our free cash flow in 2005 was £404 million (2004: £229 million). The free cash flow goal is measured at constant 2003 exchange rates. On this basis, the cumulative free cash flow generated since 2004 is £715 million and was £450 million in 2005. In 2006, we will continue to implement programmes to reduce working capital and increase capital efficiency, specifically targeting improvements in receivables and inventory. As part of this goal, we are also targeting proceeds of approximately £100 million from the sale of surplus properties by 2007. We are also seeking opportunities to realise cash flow through the sale of smaller non-core businesses. These disposals, which are not included in our free cash flow target, are expected to raise £250 - £300 million by the end of 2007. We introduced Managing for Value (MFV) to the Group in 1997. Value Based Management remains fundamental to our strategic and operational processes. It enables us to identify the generators of economic profit, and thus sustainable long-term value growth, within our business; develop and implement strategies that create and sustain the most value; and monitor performance against forecasts. Economic profit is achieved when post-tax operating profit exceeds the cost of the capital used. Economic profit is widely used in Cadbury Schweppes in, for example, assessing products, customers, marketing and asset spend, and setting targets and incentive programmes for our businesses. In support of delivering superior performance for our shareowners, a high proportion of senior managers' compensation is based on MFV principles, with performance targets on incentive plans set to align their interests with those of shareowners. We give details of these performance targets in Directors' Remuneration Report. Executive Directors and senior managers are also required to meet a share ownership requirement; details of this requirement are given in Directors' policy principles. back to topGoal twoThe second goal is to profitably and significantly increase our global confectionery share. We aim to continue to grow our share of the global confectionery market to widen the gap between us and our competitors. Our Adams business is now fully integrated and continues to exceed our expectations. The top line is ahead of the acquisition case, margins are significantly improved and we exceeded our cost of capital in 2005, one year ahead of schedule. The increase in our share of the global confectionery market from 9.6% in 2003 to 10.0% in 2004, giving us market share leadership (Source: Euromonitor 2004), was driven by the combination of our Smart Variety initiative, and higher investment and an increased focus on innovation and market place execution. The Smart Variety growth initiative recognises that our business model is based on our diverse range of strong local and regional brands. Smart Variety is a commercial discipline which provides us with the decision rules and processes to leverage the combination of our broad product range, geographic reach, routes to market and manufacturing capabilities. In 2005, we continued to innovate and share our products and technologies across regions, under our Smart Variety growth initiative. An example of this approach was our roll-out of the Cadbury Dairy Milk master branding strategy in Canada and South Africa, following successful launches in Australia, the UK and Ireland in previous years. A key innovation in 2005, and a further example of Smart Variety, was centre-filled pellet gum, which we launched in multiple markets in Europe and in North America. Further details of the performance of our confectionery businesses are set out in the Operating Review. back to topGoal threeOur third goal is to profitably secure and grow our regional beverages share across our businesses in the Americas and Australia. Over the last two years, our primary focus has been on strengthening these businesses through reorganising operating and management structures and concentrating resources on a selection of advantaged brands. Our beverages business in North America now operates under a single, integrated management structure enabling it to generate significant cost savings and to leverage its scale with customers and suppliers. In 2005 we shifted our focus in beverages toward increasing innovation and improving market-place execution. Specifically in the US, our key priorities were improving the performance of our non-carbonated brands and strengthening our route to market. In 2005 we continued to build our share in the US carbonated soft drinks market, driven by the launch of innovative products, such as Dr Pepper Cherry Vanilla, and continued growth in our diet range. We improved the performance of non-carbonated soft drinks through increased investment and enhanced innovation in our four key brands of Snapple, Mott's, Hawaiian Punch and Clamato. We set out details of our Americas Beverages business and its financial performance and of our Australian beverage business. In May 2005 a new CEO was appointed at Dr Pepper/Seven Up Bottling Group, our largest bottling partner in the US. Together, we made progress on key initiatives such as joint buying and further consolidation of the independent bottler network. In Australia, we have also obtained significant operational and commercial benefits by integrating the beverages and confectionery businesses making us the fourth largest supplier to the grocery trade. back to topGoal fourOur fourth goal is to ensure our capabilities are best in class, by recruiting new and developing existing employees, and by developing world-class processes and systems. In particular, we have sought to build and improve our capabilities in innovation, consumer insights, sales and marketing, science & technology, sales and operations planning (S&OP) and systems. Since 2003, we have recruited externally over 25% of our 160 most senior employees worldwide, many from other leading consumer products companies. Details of changes to the Board and Chief Executive's Committee are given in Organisation structure and management. Product innovation is an important growth driver in the beverages and confectionery markets. We have set an internal ambition of generating 15% of sales from innovation by 2007 and have put in place processes and capabilities to support its achievement. We have made appointments in senior innovation roles at Group and regional level. We have also created global platforms, and a stage and gate process and a knowledge management system to support innovation. Our product innovation is managed and driven through our central and regional Commercial Strategy and Science & Technology functions. We provide further details on both these functions under Functions in this section. Our innovation to sales ratio has increased from 6% in 2003 to 9% in 2004 and 10% in 2005. We divide our innovation into three different types: brand renovation - changes to existing brands; breakthrough innovation - changes bringing a greater differentiation from existing products, and breakout innovation - creation of an entirely new category of product. We include brand renovation in our definition for two years from the date of launch, and breakthrough or breakout innovation for four years. In 2004, we undertook a major global consumer segmentation study and in 2005 we launched the Building Commercial Capabilities (BCC) development programme. Together, these give employees a common method of analysing consumer demand, and common tools and processes for developing commercial programmes. We spent approximately £7 million on BCC in 2005. In Supply Chain, we launched initiatives to improve production planning, quality control and safety and environmental standards. We give further information on the segmentation study and BCC programme under the description of the Global Commercial function, and we set out supply chain initiatives under the description of that function. back to topGoal fiveOur fifth and final goal in 2005 was to reinforce our reputation with employees and society. We take the engagement and commitment of our employees seriously and are strongly committed to the stewardship of the communities where we operate. We believe that the strong roots of the Cadbury heritage are a competitive advantage. Our priorities are to motivate, reward and develop our employees and maintain our high Corporate and Social Responsibility standards. Details of our policies, and developments in 2005, are set out in People capabilities in this section. We believe our interaction with employees, communities and the environment is critical to business success. We are committed to achieving high standards of business integrity, ethics and professionalism across all our activities. We support the highest standards of corporate governance, and have a financial Code of Ethics that applies to our Chief Executive Officer and senior financial officers. All executive members of our Board, CEC and Global Leadership Team sign the Cadbury Schweppes Business Principles. Both the Code and Business Principles are available on the Group's website www.cadburyschweppes.com. The full corporate governance report and an outline of the Board of Directors' remit, composition and activities is given in the Directors' Report and the Corporate Governance Report. back to top2006 Goals and Priorities
In 2006, our goals remain largely unchanged. We have refined our fifth goal, building on our existing strong reputation with our employees and society, to focus on creating a cohesive and talented workforce, through encouraging inclusiveness and increasing the diversity of our people. We will continue to work to our high standards of corporate and social responsibility both in the way we conduct our business, and in our products and the way we sell them. We have also altered selected priorities. Our overarching objective of superior shareowner performance is supported by continued execution of these goals and priorities. Our Fuel for Growth and Smart Variety programmes are now embedded within our processes, and our priority in 2006 is to deliver the maximum benefits for our shareowners by extracting Fuel for Growth benefits and leveraging Smart Variety. Having rolled out our Building Commercial Capabilities programme to much of the Group in 2005, in 2006 we will concentrate on embedding this and other core processes in the Group, and on improving our business planning in areas such as Sales and Operations Planning and Logistics and Customer Operations. Achieving this will require further changes to our supply chain and IT capabilities, which will be our eighth priority for 2006. We will publish our third corporate and social responsibility report in 2006. While maintaining our focus on this area we have altered our priorities to ensure that CSR is embedded both in our products and brands, and also in the way in which we interact with the communities in which we operate and do business. |
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