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Individual Case Analysis: Associated British Foods. Krista Haswell MGT 685 9/27/12. Primary Question.

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primary question
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
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
Company Overview

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
ABF Financial Ratio Analysis

***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
ABF Division Comparison

-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
RETAIL-PEST Analysis

-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
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

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.

  • 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
RETAIL-Competitive Landscape

-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

retail market analysis
RETAIL-Market Analysis

Total industry =1.7% per year

Wal-Mart

Zara

Germany

Tesco

E. Europe

Takko

H&M

C&A

***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 industry analysis
GROCERY-Industry Analysis
  • Many other brands and alternative products
  • Drives down prices and decreases profitability

Consolidation trend- Few large retail chains dominate … requires strong relationships with them and consumers

  • At the mercy of suppliers unless firms rely on vertical integration
  • Bargaining power can be increased by brand loyalty

***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.

  • 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
GROCERY-Market Analysis

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.

sugar industry analysis
SUGAR-Industry Analysis

Alternative sweeteners in developed nations

Limited land, volatile price

Only 25% of market freely traded

Supply and price often determined by government

Self-supplied

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

sugar market analysis
SUGAR-MarketAnalysis

Increase in demand from developing countries, but

requires low/stable prices

Sugar consumption and production growing at 2% per year since 1989

Fuel prices

Demand for food

Surplus vs. Deficit

Fuel (ethanol) Energy

Bio-Plastics

China

Africa

Brazil

***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
Global Sugar Production vs Use

-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 industry analysis
AGRICULTURE-Industry Analysis

Competition often price based with limited land; competitive advantage gained through efficiency

Growing market

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

agriculture market analysis
AGRICULTURE-Market Analysis

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.

agriculture offerings vs opportunities
AGRICULTURE-Offerings vs. Opportunities

Increasing demand

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.

ingredients industry analysis
INGREDIENTS-Industry Analysis

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.

ingredients market analysis
INGREDIENTS-Market Analysis

Entrance of developing countries as producers

Demand for enzymes expected to rise 6.3% annually through 2013

Agriculture/suppliers affect profitability

  • Entrance of developing countries as consumers

***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
INGREDIENTS-Offerings vs. Opportunities

*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
Financial Ratio Analysis by Operating Area

-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
% of Total Revenue vs. % of Total Operating Income

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.

current return on assets vs operating profit growth projections
Current Return on Assets vs. Operating Profit Growth Projections

Operating Profit growth projections

Return on Assets

2010-2013

-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

summary by operating area
Summary by Operating Area

-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
How can operational groups work together?

Supply to brands

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

internal analysis bcg matrix
Internal Analysis- BCG Matrix

Grocery

Sugar

Ingredients

High

Agriculture

Retail

STAR

QUESTION MARK

Industry

Growth Rate

Low

CASH COW

DOG

High

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.

conclusions
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
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.
recommendations1
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.
recommendations2
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.