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?
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?
-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
-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?
-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
-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
Consumers demand low prices
Each individual buyer has limited power, but group is powerful
***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.
-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
*2009-2010, EU fast fashion market
Total industry =1.7% per year
***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.
Consolidation trend- Few large retail chains dominate … requires strong relationships with them and consumers
***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.
Most growth is in pre-packaged foods, growing 7-8% per year
Potential to expand brands to emerging markets
Growing demand as population grows
***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.
Alternative sweeteners in developed nations
Limited land, volatile price
Only 25% of market freely traded
Supply and price often determined by government
Price affected by surplus or deficit
***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.
High barriers to entry- difficult to est. scale, often controlled by government
Increase in demand from developing countries, but
requires low/stable prices
Sugar consumption and production growing at 2% per year since 1989
Demand for food
Surplus vs. Deficit
Fuel (ethanol) Energy
***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.
-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
Competition often price based with limited land; competitive advantage gained through efficiency
Favorable to ABF, self-supplied
***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.
High barriers to entry-large investment needed to gain presence and scale
New entrants would likely have little effect
High volume/low price through better use of limited existing land
Ownership of limited land; using land productively
Increasing population requires more nutrient rich food
Safe, traceable products
Needs knowledgeable partner
Fragmented, many small rural farmers
***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.
Potential for joint ventures with developing nations/markets
Use enzyme technology from ingredients group to increase crop production
***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.
Threat exists for some food ingredients (oil), but not for others (enzymes) .
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.
Again, power is dependent upon the type of ingredient. Buyers of with commodity type ingredients have more power than non-commodity types.
Ingredients requiring special inputs are at the mercy of their suppliers.
Supplier power is often lessened through level of vertical integration in supply chain.
***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.
High barriers to entry due to high investment costs to achieve scale.
Industry growth and innovation could increase the threat.
Entrance of developing countries as producers
Demand for enzymes expected to rise 6.3% annually through 2013
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 poised for future growth include those needed for pre-packaged foods, enzymes, and those that will improve human and animal health
-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
Total Revenue by Division
Total Operating Income by Division
-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.
Operating Profit growth projections
Return on Assets
-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
-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
Supply to brands
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
***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.