With the announcement of a major restructuring programme, Cadbury Schweppes has challenged its US soft drinks operations to show real improvement in their ongoing battle with Coke and Pepsi. And with job cuts and talk of a demerger circling, the stakes are high. Olly Wehring reports.

Sweets and soft drinks would seem to be a fairly logical combination to group together in an international conglomerate but if the major restructuring recently unveiled at Cadbury Schweppes, the UK-based group which boasts just such a mixture, proves unsuccessful, a parting of the ways is a possibility.

In an interview in the UK's Sunday Telegraph, incoming chief executive, Todd Stitzer said: "We are fixing our beverage business in America and, once we get it fixed, we certainly will look at the relative competitive advantage it has and the relative value it has. We will make a determination from a strategic perspective whether we think that competitive advantage and value creation is going to be something that goes on ad infinitum, or relatively consistently into the future, or if it doesn't."

While the remarks were widely construed as a hint that it might consider de-merging the soft drinks operations at some stage, such a decision appears to be just one of a number of options and still some way off. Cadbury Schweppes would not comment further on Stitzer's comments, other than to say that that the company was "committed to consolidating the beverage market in North America."

It is no surprise to find Cadbury Schweppes tight-lipped on the subject. The company has just announced a major reorganisation programme designed to adapt the company's structure following a series of major acquisitions across the group. The restructuring programme will involve the loss of 5,500 jobs and the closure of 27 factories.

"As a consequence of the number of acquisitions we have made in recent years, we have a complex organisational structure for a business of our size and a disproportionate cost base," the group said in a statement.

The measures, while severe, are generally being viewed as a necessary step. As one analyst put it: "Consolidation is necessary. The company hasn't restructured or reorganised since making the acquisitions." Nowhere is this more true than in its North American beverage operations and with the US soft drinks division accounting for 58% of the group's total profits, it is little wonder that this is a part of the company Cadbury is keen to fix.

Cadbury Schweppes has been running a weak third behind Coca-Cola and Pepsi in North America and, while the company has been busy making acquisitions in the last few years, the big two have remained in a league of their own. With Dr Pepper, Seven-Up, Snapple and Mott's, Cadbury has a large portfolio in North America, but it lacks the iconic star brands on which its larger competitors' empires have been founded.

This consolidation comes under two plans put in place by the company, 'Managing for Value' and 'Fuel for Growth'. With a cut in Cadbury's workforce of 10%, and the closure of 20% of their factories, the company aims to save £400m a year by 2007.

The consolidation of Cadbury in North America will be, according to David Jago of market analysts, Mintel, "quite possibly the biggest consolidation the drinks industry has ever seen. There is a lot of duplication of roles at the moment," he says, "and job cuts and factory closures would be inevitable on a consolidation of this scale.

Under the restructuring, taking place with effect from 15 December, the group's US soft drinks businesses, Dr. Pepper, 7-Up, Snapple and Mott's will become one regional business, headquartered in Plano, Texas where Dr Pepper and 7-Up currently has its head office.

Consequently, employees from Mott's in Connecticut and staff from Snapple in New York will be transferred to Texas. Offices in the north-east of the US will be consolidated, but a presence will remain in the area. "We're employing common sense. Where do people need to be based to do their jobs? But Plano will be the focal point," Michael Martin, director of communications at Dr Pepper/Seven-Up, told Just-drinks.

While Dr Pepper/Seven-Up may have in the past looked longingly at the prominent lead brands of PepsiCo and Coca-Cola, it is ironically the portfolio marketing strategy of its competitors which Cadbury is keener to emulate. "Our major competitors have begun to market their total beverage portfolio. By doing the same, this moves us more closely to our competition as a total beverage company," says Martin.

David Jago believes this will prove successful. "At the moment, all Cadbury Schweppes' brands are competing with each other," he says. "To bring them all under one umbrella is certainly the best solution. One needs only to look at Coke's 'share of throat' approach." To clarify, 'share of throat' is, according to a Datamonitor report, a "highly aggressive approach to the soft drinks competitive environment in which companies view all soft drinks manufacturers as direct competitors rather than simply their immediate rivals in the categories in which they have traditionally operated."

"Total share of throat is a very broad area," explains Jago. "While Cadbury is not necessarily copying Coke with this approach, it is certainly trying to follow the same route: to become one group with a wealth of different brands."

Further changes will be applied in the fields of development and innovation. But here there is a radical departure from the approach of its two bigger rivals. "We've looked at the life-cycle for new products released in the last two years," says Martin. "They have become very short, with sales dying down as quickly as they take off. If your core brand is growing then that's not so bad. But innovation for the sake of it isn't the formula to grow the business."

Instead, Cadbury will look at introducing innovation in other areas, like packaging. One example of this is 'Poptopia', a mix-and-match eight-pack of 8oz cans. The consumer can choose which beverages they want to make up the eight-pack. "We're going to place the emphasis on our core-brand," says Martin.

Again, Jago feels this is a move in the right direction. "I think that makes a lot of sense. To create new brands when Cadbury has such a widespread in its portfolio would be a big mistake," he says.

Of the job cuts and factory closures, Martin would not elaborate at this point. "We're not ready to disclose specific information," he says, "but these should have a minimal impact on soft drinks in the US." US investment bank, Merrill Lynch, praised Cadbury's stance saying: "It is refreshing to see a management that recognises the reality of their marketplace."

Marketing strategy and distribution, however, will be the main areas of consolidation. "The biggest challenge in North America is distribution and availability," concedes Martin. "But there is a tremendous amount of opportunity for Cadbury Schweppes, with so many regional brands that could be overtaken by the wide range of our portfolio. The investment is there to drive growth."

David Jago too believes the restructuring could pay off for Cadbury. "Personally, I think it will work. I can see Cadbury catching up some market share, although probably not breaking into the top two. While Cadbury will probably take some share from Coke and Pepsi, I can see the smaller, regional players losing share to Cadbury."

Given Stitzer's comments, the restructuring may need to show tangible success if the group is to retain its unique sweets to soft drinks mix. Cadbury Schweppes has clearly grasped the nettle in the US and is showing, for now at least, its commitment to retaining and developing its US soft drinks operations, putting them in the best possible shape to compete with Coke and Pepsi.

Michael Martin is right to contend that the US soft drinks operations "continue to be a valuable asset to Cadbury Schweppes," but the UK parent has identified room for improvement and will clearly be looking for progress. In making 10% of its global workforce redundant, the group has shown that it is not afraid to make tough decisions. If the hoped for progress is not forthcoming in the US, the company may face another tough call a couple of years down the line.