Description of Business

Risk factors

Our business, financial condition, results of our operations or share price could be materially adversely affected by any or all of the following risks, or by others that we cannot identify. In addition to the following risk factors we face certain market risks that are discussed under the headings Treasury Risk Management, Liquidity Risk, Interest Rate Risk, Currency Risk, Fair Value Analysis, Commodities and Credit Risk under Cash Flows in the Operating and Financial Review.

Competition and demand

Both the beverages and confectionery industries are highly competitive. In our major markets, we compete with other multinational corporations which have significant financial resources to respond to and develop the markets in which both we and they operate. These resources may be applied to change areas of focus or to increase investments in marketing or new products. This could cause our sales or margins to decrease in these markets. Furthermore, consumer tastes are susceptible to change. If we are unable to respond successfully to rapid changes in consumer preferences, our sales or margins in individual markets could be materially adversely affected.

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Contamination

Despite safety measures adopted by the Group, our products could become contaminated. We use many ingredients in manufacturing beverages and confectionery, which increases the risk of contamination, either accidental or malicious. While we believe that incidents of this type are generally localised, any contamination may be expensive to remedy, and could cause delays in manufacturing and adverse effects on our reputation and financial condition.

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Dependence on business partners

A significant part of our CSD business in the US is conducted through licensing arrangements with independent bottlers, in some of which our major competitors have substantial equity interests. These bottlers may come under pressure to replace our brands with competitor products, and although we would be able to re-licence these brands, such a change could adversely affect volumes and profit, particularly in the short term. There is also a greater concentration of our customer base around the world, due to consolidation of the retail trade. Pricing pressures from customers in countries with concentrated retail trades, could adversely impact our sales or margins. In addition, inappropriate action by or an incident at a licensee partner involving our brands could impact the reputation of Cadbury Schweppes brands or the Group as a whole.

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Information technology

We depend on accurate, timely information and numerical data from key software applications to aid day-to-day decision making. We have continued to implement our new SAP based IT system, with successful launches in 2004 in our carbonated soft drinks business in the US, Cadbury Adams in Japan, and Cadbury in Ireland. In 2005 we implemented it in Great Britain - both in Cadbury Trebor Bassett and the Group HQ. Any disruption caused by a failure of this new system or similar applications, of underlying equipment or of communication networks, for whatever reason, could delay or otherwise impact day-to-day decision making, or cause us material financial losses.

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Intellectual property

We and our major competitors have substantial intellectual property rights and interests which could potentially come into conflict. If any patent infringement or other intellectual property claims against us are successful, we may, among other things be enjoined from, or required to cease, the development, manufacture, use and sale of products that infringe others' patent rights; be required to expend significant resources to redesign our products so that they do not infringe others' patent rights, which may not be possible; and/or be required to obtain licenses to the infringed intellectual property, which may not be available on acceptable terms, or even at all. There is also the risk that intellectual property litigation against us could significantly disrupt our business, divert management's attention, and consume financial resources.

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Legislation and regulation

Production, distribution and sale of many of our products are subject to governmental regulation regarding the production, sale, safety, labelling and composition/ingredients of such products in the various countries and governmental regions in which we operate. In addition, the manufacture of many of our products, and other activities, in various markets is subject to governmental regulation relating to the discharge of materials into the environment, and the reclamation and re-cycling of packaging waste. At all times we are subject to employment and health and safety legislation in those countries in which we have operations.

Our operations are also subject to the risks and uncertainties inherent in doing business in numerous countries. A number of countries in which we operate maintain controls on the repatriation of earnings and capital. We are subject to substantial government regulation that may change dramatically as a result of political, economic or social events. Such changes may be wide-ranging and cover cross-border trading, taxation, employment practices and environment, health and safety issues, and involve actions such as product recalls, seizure of products and other sanctions.

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Manufacturing and logistics

Our manufacturing and distribution facilities could be disrupted for reasons beyond our control, such as extremes of weather, fire, supplies of material or services, systems failure, workforce actions or environmental issues. Any significant manufacturing or logistical disruptions could affect our ability to make and sell products which could cause revenues to decline.

We are in the third year of our four year Fuel for Growth programme, which includes significant restructuring of our manufacturing and distribution facilities. While this is carefully and sensitively planned, major unforeseen difficulties could nevertheless reduce our revenues and earnings.

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Raw materials

Our profitability depends to some extent upon the cost of raw materials from around the world, which exposes us to price and supply fluctuation. Key items such as cocoa, milk, sugar packaging materials and energy are subject to potentially significant fluctuations in price and availability. While we take measures to protect against the short-term impact of these fluctuations, there can be no assurance that any shortfalls will be recovered. A failure to recover higher costs or shortfalls in availability could decrease our profitability.

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Retirement benefits

We have various retirement benefit schemes which are funded via investments in equities, bonds and other external assets. The scheme liabilities reflect the latest salary levels. The values of such assets are dependent on, among other things, the performance of the equity and debt markets, which are volatile. Any shortfall in our funding obligations may require significant additional funding from the employing entities.

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Role of food in public health

Many countries face rising obesity levels due to an imbalance between energy consumed in food and expended through activity. The reasons for the changes in society that have occurred and for some individuals having a greater inclination to obesity are multifaceted and complex. There are, however, risks associated with the possibility of government action against the food industry, such as levying additional taxes on or restricting the advertising of certain product types. This could increase our tax burden or make it harder for us to market our products, reducing sales and/or profits. Also, consumer tastes may change rapidly for health-related reasons, and if we are unable to respond our sales or margins could decline.