Cadbury looks a tasty snack

AFTER a terrible run of results from top companies, Cadbury Schweppes has proved it is possible to prosper on both sides of the Atlantic, even after 11 September.

Admittedly selling chocolate eggs and Snapple fruit drinks should be a solid business in difficult times. Nor is it lumbered with the same overcapacity as telecoms. But it is a highly competitive marketplace. Competing with the likes of Coca Cola and Pepsi in their home market and with Nestle and others worldwide is no mean feat.

Cadbury has been admirably nimble in moving from the unfashionable carbonated drinks market into trendier health drinks. It has also been successful in selling British sweets in new markets including China, Poland and Russia, where it hopes to be profitable in 2002.

One of the problems for Cadbury, with its market value of £9bn, is size. Chief executive John Sunderland let it be known that he has £1bn in the kitty for further acquisitions. With much of the new fangled soft drink market spread among a number of smaller companies, that will be useful in augmenting product range and sales, but it is hardly likely to be transforming.

In a food manufacturing world dominated by giants on the scale of Nestle, Danone, Mars and Kraft, Cadbury might seem to some like a bite-sized snack, especially as it sells on a lower multiple of earnings than some of its overseas rivals. The discrepancy will be even more obvious as the global economy picks up momentum after the recent slump. Cadbury may be essentially British, but so was Rowntree Mackintosh. And we know what happened to that.

King's challenge
BRITAIN'S twin track economy is starting to give pause to Mervyn King, the deputy governor of the Bank of England and mastermind behind the Inflation Report. The Bank fears 'retrenchment' and when it does come, the adjustment could be extremely severe, eventually causing the pound to tumble against the euro.

Just how big the problem has become is described by King and the Monetary Policy Committee, which sets interest rates. They are particularly fearful of the divergence between the booming consumer sector and the deep recession in manufacturing - particularly the traded goods sector. Last year the services sector expanded by 3.5% and manufacturing fell by 5.7%.

This is the biggest imbalance in the economy since 1981. Even more worryingly, it is the first time in a century that manufacturing has declined for six years in a row.

The MPC describes how the slowdown it expects might take place. It notes that 'high and rising levels of household and corporate debt' are a source of vulnerability were there to be a shock to the economy.

Even though debt servicing costs have been reduced by cuts in headline interest rates, the potential impact could be felt far and wide as a result of a collapse in asset prices. The Bank believes that although house prices will remain firm in 2002, rising by a further 7% to 8%, they could decline in 2003.

Another source of vulnerability is bank lending to commercial property. Agents Jones Lang LaSalle note that in the final quarter of 2001 property lending climbed by £3.8bn, to bring the increase for 2001 to £14bn. This brings total lending to commercial property companies to £70bn, far higher than the peak of £41bn in the early 1990s.

Although the Bank highlights the vulnerability of the economy to a collapse in domestic spending and asset prices, it remains unspecific about when it will happen. When it does, the effects could cascade through the economy.

In the markets the most dramatic effect, in the Bank's view, would be on sterling, which would fall sharply. The pound could also be vulnerable to the widening current account deficit (the published figures may understate this) and a recovery of the euro.

The possibility of a future sterling crisis is of particular interest to King. It would make his task of controlling inflation that much more difficult - a lower pound means higher import prices and would raise the risks to the inflation outlook. But after a long period of stability in policymaking, it would also test the Bank and King's mettle in handling instability.

This could provide important guidance for the Chancellor and the Prime Minister as they weigh who will be best fitted to lead the Bank when Sir Eddie George steps down next year.