Individual Case Analysis: Associated British Foods Krista Haswell MGT 685
Transcription
Individual Case Analysis: Associated British Foods Krista Haswell MGT 685
Individual Case Analysis: Associated British Foods Krista Haswell MGT 685 9/27/12 Primary Question Can well diversified ABF capitalize on its strengths and the opportunities for growth in its five operating areas in the face of financial investment restrictions, increasing competition, and a volatile global food market? Sub-questions • How do ABF’s core competencies align with global trends? Which of these trends will have the most impact on each of ABF’s divisions? • What is ABF’s current position in each of its segments and how will that position be impacted in the future? Where are the current opportunities for growth in each segment? Which segments are best positioned to expand globally? • What is the financial position of each segment? How will ABF continue to fund its growth? Where should the limited investment dollars be allocated? • Can ABF remain well-diversified? Should any segments be divested? Can/should the firm continue its growth through acquisition strategy? Company Overview Divisions Growth State Mode of Growth -Retail -Grocery -Sugar -Agriculture -Ingredients Rapid, Aggressive Acquisition Strong, and Joint Stable Venture Focus on long term Financial Global Position Position -Based in UK -Global in each division, most (45.6%) revenue from the UK Management -Privately controlled -Autonomous divisions -Funds allocated among divisions Core Competencies: Food system knowledge, diversity, stable leadership, ability to capitalize quickly on opportunities -Company expects growth in all divisions, but aggressive growth is catching up in terms of available finances…can aggressive growth continue? -Has aggressive growth impeded the firm’s ability to fund the new/better opportunities? -Heavy reliance on the UK…where are best opportunities for global expansion? ABF Financial Ratio Analysis 2010 2009 2007 2005 2003 2001 Net Sales (Revenue) 10167 9255 6800 5622 4909 4418 Gross Profit Margin 25.70% 29.28% 25.62% 27.89% 25.20% 22.41% Operating Margin 8.06% 6.75% 8.18% 9.78% 7.84% 6.29% 546 359 369 379 326 243 5.88% 3.97% 5.29% 6.24% 6.92% 6.21% Asset Turnover 1.09 1.02 0.97 0.93 1.04 1.13 Operating Income 819 625 556 550 385 278 EBIT 839 573 543 664 425 327 5.37% 3.88% 5.43% 6.74% 6.64% 5.50% (52) 151 151 (226) 26 32 11.53% 9.00% 10.24% 9.16% 10.69% 7.61% Net Income Return on Assets Profit Margin Net Change in Cash Cash Flow Margin ***Strong Position -Cash flow is typically positive. In 2010, negative change in cash was affected by high dividend payout and an increase in investment activities. By selling assets or divesting, ABF can generate additional cash and further invest in cash generating activities -Asset turnover is low so profit margins are high -ROA is increasing after decrease in 2009; shows effective use of assets -Operating margin is healthy and stable; in 2010 ABF made $0.08 for every dollar of sales -Free cash flows are expected to increase through 2013 ABF Division Comparison Industry/ Products Geographic Markets Growth Strategy % of Revenue (2010) Retail Primark-high fashion/low end clothing stores Operates stores in UK and Ireland with some expansion into W. Europe Acquisition 26.3% Grocery Foods and ingredients for consumers and food service customers Different brands in different global markets Acquisition 33.1% Sugar Raw sugar- production and refining Facilities in UK, Spain, China, South Africa Acquisition, joint ventures, internal sales 19.8% Agriculture Animal feed, grain trading, various marketing ventures Operations in China and UK; sells in over 43 countries Joint venture, merger 9.6% Ingredients Enzymes, food toppings, oils, flavors, and food colorings Facilities in 26 countries Acquisition, internal sales 11.3% -Internal sales must be also be a factor in analysis of each division’s potential for growth and profitability -Retail business in only non-food division---reduces risk of volatile food market, but not as knowledgeable about industry -Aggressive growth through acquisition ---can this continue and at what rate? -Are agriculture and ingredients divisions too diversified or does the diversification reduce risk within each? Which areas of each generate profit? RETAIL-PEST Analysis Factor Implication Recession Opportunity for the high fashion/low cost market Threat to profitability Political/Legal Economic Rising commodity prices and taxes Sociocultural Technological -Even post recession, Primark’s target market demands low cost/high fashion…this market will continue to exist and is expected to grow over the next five years , increasing Primark’s revenue and profit -Competition in this market could increase as retailers affected by the recession lower prices and drive down prices industry wide RETAIL-Industry Analysis -Much of W. EU is mature market– rivalry over existing customers -Consolidation trend increases intensity– greater control by fewer retailers -Rivalry in E. EU may increase as competition increases with the expectation of growth Threat of Substitutes LOW Consumers demand low prices Supplier Power Intensity of Rivalry Buyer Power LOW HIGH HIGH ***Industry conditions are favorable. Primark has been a leader in the UK and also profitable in this industry for the past five years….in a growth position. They intend to keep prices low. If ABF can provide the funds to expand to new markets and continue growth through acquisition, Primark should remain profitable. Threat of New Entrants LOW Each individual buyer has limited power, but group is powerful High barriers to entry to establish presence in new markets Lower barriers to entry for those in similar markets (i.e. Wal-Mart, traditional clothing retailers) RETAIL-Competitive Landscape Company Total Sales $ mill % Growth (Rank) (Rank) Primark 3146 (6) 18.1 (1) TJ Maxx 2659 (8) 9.6 (2) H&M 12,222 (1) 8.9 (3) Deichmann 2597 (9) 5.6 (4) C&A 7742 (2) 4.9 (5) Kik 1614 (10) 4.5 (6) P&C 3027 (7) 3.4 (7) Next 3655 (4) 0.5 (8) Zara 5426 (3) -1.1 (9) New Look 1603 (8) -1.5 (10) Benetton 3146 (6) -1.8 (11) *2009-2010, EU fast fashion market -Primark is growing at almost twice the rate of its nearest competitor despite not being an investment priority for ABF -C&A (2nd highest revenue) has been selling stores …is this an opportunity for Primark or a sign of a saturated market? -Fast fashion market is also facing competition from large discount chains in the face of the recession -Primark controls 9.3% of W. EU fast fashion sector…there is room for growth outside of UK, where it has focused and dominated . RETAIL-Market Analysis Germany E. Europe Total industry =1.7% per year High Growth Potential (geographic) Increasing Consolidation Growth Potential (volume) Wal-Mart Zara Tesco Takko Increasing Competition EU Clothing Market H&M C&A Price Conscious Consumers ***Market is favorable for Primark. Their success in W. EU market, potential for growth in E. EU suggest market development and market penetration growth strategies. Increasing consolidation = opportunity if ABF can fund expansion. Historically, ABF has not taken away investment dollars from its other divisions to fund Primark. GROCERY-PEST Analysis Factor Implication Economic Recession Minor Threat- Food is a necessity and less affected by the recession. Competition among brands may become more price based Sociocultural -Migration to cities/Growth in pre-packaged foods Threat- ABF has no presence or global brands in this area -Increased focus on food safety and traceability in foods Opportunity-ABF has been noted for its knowledge on food safety practices. They also have some integration in their supply chain to ensure the safety and traceability of their brands. Political/Legal Technological GROCERY-Industry Analysis Many other brands and alternative products Drives down prices and decreases profitability At the mercy of suppliers unless firms rely on vertical integration Supplier Power HIGH ***ABF has no real power in the industry. Market is consolidating ,so large brands and retailers are squeezing the market. To compete, ABF must keep prices low enough to attract loyal consumers and must continue to engage in expensive marketing. Further growth may require acquisition of successful brands in a “buy or be bought” market. ABF can’t compete on low cost/high volume due to limited brands in each geographic market and lack of retailer relationships. Threat of Substitutes HIGH Consolidation trend- Few large retail chains dominate … requires strong relationships with them and consumers Intensity of Rivalry Buyer Power HIGH HIGH Threat of New Entrants LOW Bargaining power can be increased by brand loyalty High barriers to entry due to the high cost of marketing dollars required to have a presence Brand loyal buyers Mass market entry requires established relationships with grocery retailers GROCERY-Market Analysis Potential to expand brands to emerging markets High Growth Potential (geographic) Increasing Consolidation High Growth Potential (volume) Global Grocery Market Most growth is in prepackaged foods, growing 78% per year Growing demand as population grows Retail Distribution ***Market is not favorable to ABF brands. It has no presence in pre-packaged foods, but could supply ingredients instead of purchase brands. The market suggests market development and product development strategies for growth, but requires sizeable marketing investment. GROCERY-Offerings vs. Opportunities Opportunity Threats • Industry is growing through acquisition as large firms build up brands • Growing global demand • Future success will require strong relationships with major retailers consumers • Increased competition from traditional brands and new firms in developing countries High potential of finding buyer for its collection of diverse global brands Grocery Division has demonstrated profitability and a strong financial position SUGAR-PEST Analysis Political/Legal Factor Implication Chinese government opening up to foreign investors Opportunity to capitalize on sugar beet market; ABF has unique knowledge and manufacturing capabilities Trend toward health foods Threat to revenue Changing diets in developing nations Opportunity to enter a quickly growing market demanding sugar Growth of bio-plastics Opportunity to differentiate and enter new markets; also to supply to these growing markets Economic Sociocultural Technological Increase in ethanol usage as fuel SUGAR-Industry Analysis Limited land, volatile price Threat of Substitutes Only 25% of market freely traded MEDIUM Alternative sweeteners in developed nations Supply and price often determined by government Self-supplied Supplier Power Intensity of Rivalry Buyer Power LOW HIGH LOW ***ABF is the world’s second largest supplier. It is unlikely that new competitors will enter and be competitive with them, despite a continuous growth in demand. The industry is expected to grow and suppliers will compete for land and the available free market trade. Threat of New Entrants LOW High barriers to entrydifficult to est. scale, often controlled by government Price affected by surplus or deficit SUGAR-Market Analysis Increase in demand from developing countries, but requires low/stable prices Sugar Cane vs. Sugar Beet Growing Demand Sugar consumption and production growing at 2% per year since 1989 Price fluctuations Fuel prices Demand for food Surplus vs. Deficit Fuel (ethanol) Energy Bio-Plastics China Africa Brazil Key Geographic Markets Global Sugar Market New Market Potential ***AB Sugar faces a favorable market. It’s core competencies in the knowledge, cultivation and processing of sugar can capitalize on growing demand and opportunities for joint ventures in China, who needs sugar beet expertise. As the world’s second largest sugar supplier, it should supply to the growing ethanol market rather than produce it. Since joint ventures have proven the most successful way for them to enter new geographic markets, AB should continue to build these relationships as it expands. Strategy= market development and penetration. Global Sugar Production vs Use Deficit or Surplus AB Sugar Presence Africa Deficit Six South African Nations -sugar processing; source from self and independent farmers Asia Deficit China -sugar beet, sugar cane, processing Central America Surplus W. Europe Deficit E. Europe Deficit Middle East Deficit N. America Deficit S. America Large Surplus UK -process entire supply of sugar beet; Joint venture to produce ethanol; seed technology company Spain -processed sugar cane and sugar beet -AB Sugar operates in deficit markets…deficits supplied by large surplus in S. America (Brazil) -Firm sells mostly to food industry, also to energy generation and bioethanol fuel. With demand growing and new uses, ABF will need to increase production to meet sugar needs…opportunity for Chinese and African expansion AGRICULTURE-PEST Analysis Factor Implication Increased safety regulations in China Opportunity-Land is available in China and ABF has extensive knowledge on safety Sociocultural Increasing population Opportunity-Growing demand for agriculture products Technological Rise of biotechnology Opportunity-Application of technology to crops and their products can improve quality and output, thus increasing profitability Environmental Climate volatility Threat-Unpredictable conditions threaten reliability of harvest and revenue Political/Legal Economic AGRICULTURE-Industry Analysis Threat of Substitutes LOW Competition often price based with limited land; competitive advantage gained through efficiency Growing market Favorable to ABF, self-supplied Supplier Power Intensity of Rivalry Buyer Power LOW HIGH HIGH ***The agriculture industry is competitive and offers a low profit margin. Prices must be kept low to compete. A competitive advantage would come from better efficiency in crop production and/or processing. Threat of New Entrants High barriers to entry-large investment needed to gain presence and scale LOW New entrants would likely have little effect AGRICULTURE-Market Analysis High volume/low price through better use of limited existing land Safe, traceable products Means of Profitability Differentiation Positions Ownership of limited land; using land productively Growing Global Market Increasing population requires more nutrient rich food Needs knowledgeable partner Fragmented, many small rural farmers Chinese Market Global Animal Feed Market Influenced by Global Food System ***Market is somewhat favorable for ABF. They are positioned for continued growth in China with a differentiated position due to extensive knowledge and early presence. Profit margins are low in agriculture, so ABF should focus on leveraging knowledge to decrease costs or increase productivity. ABF should capitalize on strengths found in other operational areas to benefit the company as a whole. AGRICULTURE-Offerings vs. Opportunities Animal feed, pet and livestock nutrition Potential for joint ventures with developing nations/markets Grain trading Joint venture with Cargill Use enzyme technology from ingredients group to increase crop production Increasing demand Sales and Marketing from other ABF products Poultry marketing Consulting ***Success in the future will require application of biotechnology to crop production (genetics, seed enhancement/protection). ABF can rely on their “knowledge” strength and succeed by investing in biotech research or acquiring a biotech firm, as they already have a global presence in the agriculture market. INGREDIENTS-PEST Analysis Factor Implication Migration to cities and Increasing population Opportunity to supply ingredients to a growing market demanding processed foods Opportunity for ABF Ingredients, which self sources from agriculture division Political/Legal Economic Sociocultural Demand for higher quality and safer foods Technological Increase in biotechnology Opportunity for AB Enzymes group to supply to own agriculture division to improve food output Opportunity to develop new biotechnology applications INGREDIENTS-Industry Analysis Most food ingredients are commodity like rivalry is high. There are a wealth of producers. New/differentiated ingredients enjoy less competition and rivalry is lower. Ingredients requiring special inputs are at the mercy of their suppliers. Supplier power is often lessened through level of vertical integration in supply chain. Threat of Substitutes Threat exists for some food ingredients (oil), but not for others (enzymes) . MEDIUM Supplier Power Intensity of Rivalry Buyer Power ? HIGH ? ***Degree of control in this industry is determined by the type of ingredient produced. Commodity type ingredients are highly competitive and price sensitive whereas innovative ingredients (such as enzymes) enjoy a greater level of power. ABF Ingredients has ingredients on both sides of the industry so each wield a different level of power. Threat of New Entrants WEAK Again, power is dependent upon the type of ingredient. Buyers of with commodity type ingredients have more power than non-commodity types. High barriers to entry due to high investment costs to achieve scale. Industry growth and innovation could increase the threat. INGREDIENTS-Market Analysis Demand for enzymes expected to rise 6.3% annually through 2013 Higher Demand for Ingredients to Improve Health New Geographic Markets Entrance of developing countries as consumers Increasing Competition Global Ingredients Market Entrance of developing countries as producers Influenced by Global Food System Agriculture/suppliers affect profitability ***Market is favorable to ABF. Ingredients that improve the health of humans and animals expected to have growing importance…ABF is positioned to capitalize on trends through both ingredients and agriculture divisions. With the entrance of developing countries as both ingredient consumers and producers, ABF should focus on what those nations cannot do (application of biotechnology) to differentiate and grow INGREDIENTS-Offerings vs. Opportunities Group Offerings Market AB Mauri Baking colorings, flavorings, ingredients, oils, fillings, toppings, mixes for breads/cakes/donuts Bakery AB Enzymes Enzymes Animal feed, foodservice, textile, paper and pulp Abitec Lipids Ohly Yeast extracts Foodservice, personal care, pharmaceuticals PGP International Proteins, flours, lactose, and other ingredients Other ABF companies *Ingredients poised for future growth include those needed for pre-packaged foods, enzymes, and those that will improve human and animal health -If ABF divests grocery division, baking ingredients (potential for vertical supply) is less critical -Further analysis is needed to determine which ingredients are in demand for pre-packaged market as compared to current products -AB Enzymes is positioned to capitalize on increased demand…increased production could be funded by divestment of ingredient groups/products not aligned with future growth strategy Financial Ratio Analysis by Operating Area Grocery Sugar Agriculture Ingredients Retail Int. Rev as % of Total 0.12% 4.34% 0.40% 6.57% 0.00% Total Revenue ($) 3427 2049 991 1171 2730 Operating Income ($) 229 244 33 104 341 Operating Margin 6.7% 11.9% 3.3% 9.1% 12.5% Net Profit Margin 6.1% 10.8% 3.6% 7.1% 12.5% Total Assets ($) 2,581 2494 288 1386 1892 Operating Ret on Assets 8.9% 9.8% 11.5% 7.5% 18.0% Asset turnover 1.33 0.82 3.44 0.84 1.44 -Operating and net profit margins are significantly lower (also demonstrated by high asset turnover)than the other areas, but still positive. -Retail and agriculture provide the highest operating return on assets…suggest increased investment in assets if opportunity exists -Sugar and Ingredients have a small reliance on internal revenue by selling to other areas…this can be increased, especially with the growing need for enzymes in the agriculture sector % of Total Revenue vs. % of Total Operating Income Total Revenue by Division Grocery 33% Retail 26% Ingredients 11% Agriculture 10% Sugar 20% Total Operating Income by Division Grocery 24% Retail 36% Sugar 26% Ingredients 11% Agriculture 3% -Despite 33% of total revenue, the grocery division only accounts for 24% of profits. -Retail and sugar profit margins are high as operating income percentages are significantly greater than revenue percentages. - Agriculture accounts for the least revenue and operating income. Current Return on Assets vs. Operating Profit Growth Projections Operating Profit growth projections 30.00% Return on Assets 20.0% 2010-2013 25.00% 18.0% 16.0% 14.0% 20.00% 12.0% 15.00% 10.0% 8.0% 10.00% 6.0% 4.0% 5.00% 2.0% 0.00% 0.0% Sugar Agriculture Ingredients Grocery Retail Sugar Agriculture Ingredients Grocery -Large growth in sugar, grocery, and retail profits projected…Grocery return is lowest in portfolio -Agriculture profits expected to remain stable with fair return -Sugar offers greatest profit growth -Retail offers highest return on assets + market is expected to grow and be profitable = good investment option Retail SWOT Analysis by Operating Area Strengths Weaknesses Opportunities Threats Retail -UK market -Low cost/high fashion clothing -High profitability -Investment dollars -Industry knowledge -E. European market -Recession -Rising commodity prices and taxes -Competition from discount big box retailers Grocery -Profitability -Strong financial position -Global brands -Supply chain integration -No relationships with major retail chains -No brand identity -Growing market - Large brand owners looking to make acquisitions -Industry consolidation -Largest growth expected in pre-packaged foods Sugar -Industry knowledge -Sugar cultivation and processing -Market leader -No presence in major Brazil market -Chinese and African markets -Ability to share expertise and grow through joint ventures -Supply to new market areas -Volatile price -Volatile supply Agriculture -Food safety knowledge/application -Existing relationship with Chinese market -UK animal feed market -Low profit margins -Diversity of agriculture portfolio…does not play to core competencies -China and emerging markets -Increasing demand/population -Biotechnology applications -New competition from developing nations -Climate Volatility Ingredients -Enzymes -Vertical integration in supply chain ensures safety -Global presence -Some reliance on volatile agriculture industry -Lack of focus in portfolio -Biotechnology applications -Increasing population -Source to other ABF divisions and agriculture firms -Increasing demand for healthy foods -Increasing competition from developing nations Summary by Operating Area Growth potential Profitability Competition Favorable market? High High Increasing Yes Medium Medium Increasing No Sugar High High Minimal Effect Yes Agriculture High Low Minimal Effect Yes Ingredients High Medium Increasing Yes Retail Grocery -Grocery sector faces an unfavorable market, increasing competition, and only a mid level opportunity for profitable growth -Despite ABF’s lack of knowledge in the clothing market, Primark is a growing cash generator -Low profit margins of agriculture sector may be helped by its potential relationship with the sugar and ingredient divisions -By increasing combining technology and unique food system knowledge, ABF will be uniquely positioned in the marketplace How can operational groups work together? Ingredients Supply to brands Grocery Enzymes Seed Protection This is one example of how ABF could increase internal revenue and build upon strengths of other divisions, but would require more communication and joint strategy planning than is currently done Agriculture Sugar Internal Analysis- BCG Matrix Grocery Sugar Ingredients High Retail Industry Growth Rate STAR Agriculture QUESTION MARK Low CASH COW High DOG Low Market Share ***Retail generates investment cash for ABF…they treat it as a cash cow, but it’s potential for growth makes it a star that will require investment. Sugar is a market leader in a growing market. Grocery, Ingredients, and agriculture face challenges that require an invest or divest decision. Ingredients and agriculture offer the best opportunities for growth in the future whereas Grocery’s increasing marketing dollars will start to drain finances, despite profitability. Internal Analysis-Directional Policy Matrix Competitive Capability Prospects for Profitability Result Recommended Action Retail Strong Attractive Leader Invest Grocery Weak Attractive Double or Quit Quit- Possibility of finding a quality buyer is high Sugar Strong Attractive Leader Invest Agriculture Strong Average Growth Use competitive advantage (knowledge) for growth Ingredients Strong Average Growth Focus on ingredients that align with core competencies and trends (biotechnology, safety) Conclusions • With competition in the global food system increasing from developing countries and demand growing, ABF’s overall strategy here should be to capitalize on its unique industry knowledge by applying technology to increase efficiency and revenues. • ABF is well aligned with most global trends and well positioned in most of its areas of operation. Despite some financial restrictions, the company should continue to pursue a growth through acquisition strategy. • In the past ABF, has been successful by realizing when its portfolio has become too diverse and divesting those businesses not core to their strategy. The agriculture and ingredient areas have reached this stage and certain businesses in these sectors should be sold. • ABF should continue to invest globally to reduce risk of heavy reliance on UK market. Recommendations • Retail-Primark total revenue and total assets have increased over the past five years. Net profit margin increased 1.6% over the past year. High profit margins and a strong return on operating assets, along with the possibility of increased market share through acquisition and geographic expansion, indicate Primark should be able to continue to grow profitably. Primark has traditionally been a cash cow for ABF, but they should invest in expansion into E. Europe to ensure the generation of investment dollars for future opportunities in ABF • Grocery- Operating and net profit margins have remained strong as total assets have increased. Increased competition lowers profit margins due to necessary marketing costs. Marketing is not a core strength of ABF. Further growth in the industry will also require strong relationships with key retailers, which ABF does not wish to develop. The ABF grocery brands are an attractive purchase for larger firms wishing to grow through acquisition. ABF should sell its grocery division. Recommendations • Sugar- AB Sugar should continue its expansion into China and Africa through joint venture and acquisition. This division is projected to have the highest profit growth. They are uniquely positioned due to their processing expertise, especially for sugar beets. • Agriculture- The division is a small part of revenue and achieves low profit margins, but value of the division is really their knowledge, which can’t be sold and will be a strength in light of market trends. ABF should invest in research/biotechnology applications that will increase production efficiency, focus on its strength in animal feed and pet/livestock nutrition, and continue acquisitions in China. The division can sell of those businesses not directly involved in this future growth strategy. Recommendations • Ingredients-AB Ingredients is facing many opportunities in the growing global food system. As demand for safe foods and biotechnology use increases, the division can supply to both the agriculture and grocery industries. AB Enzymes is well positioned to grow. More analysis is required to determine the future growth businesses within the division. Which can supply to the growing pre-packaged foods sector? Some groups, perhaps AB Mauri, should be sold to fund core ingredient functions. • Use cash generated from grocery divestment to fund growth in Retail, Agriculture, and Ingredients divisions. Further cash will come from selling those businesses within the ingredient and agriculture divisions unrelated to core strengths and future growth.