Introduction
In this report, we would be focusing on the Beverage Segment of Food Empire Holdings Limited in the Russian Market. With reference to the Annual Report, both quantitative and qualitative data are used to analyse the strategies and performance of the company.
2 Michael Porter's Five Forces Model
2.1 Rivalry among Competitors
In Russia, Food Empire, Nestle and Kraft Foods are the key players. Multi-national Companies like Nestle has more financial power. There has been a decline in the market share for Food Empire. The instant coffee market share of MacCoffee has dropped by 7 percent (2009) in Russia (Standard & Poor's, 2010). Product differentiation for instant beverages is very low, and switching costs are low as they are affordable. Hence, the rivalry among competitors is relatively high.
Threat of Substitute
"Coffee is one of the world's largest traded commodities produced in more than 60 countries." (International Coffee Organisation, 2010) Product differentiation and switching costs for instant beverages are low, since they are affordable. Hence, the threat of substitute for Food Empire is considered relatively high.
2.3 Threat of New Entrants
Russian Federation Government Agencies have stringent requirements that have to be complied with to import foodstuffs (Global Agricultural Information Network report, 2009). Corporate taxation in Russia is relatively high at 20 percent (The Complete Worldwide Tax & Finance Site, 2010). With low product differentiation, switching costs and more than nine countries supplying coffee bean and tea, this encourages potential competitors. Therefore, the threat of new entrants ranges from Medium to High.
2.4 Bargaining Power of Buyer
Buyers make up a substantial percentage of Food Empire's revenue as they supply to merchandisers and not directly to consumers. The instant beverages of Food Empire are considered as undifferentiated products; therefore, buyers can easily switch to another brand further aggravated by low switching costs. However, being one of the pioneers of the instant beverage industry in Russia, Food Empire has developed a strong brand identity, discouraging potential competitors (Annual Report, 2009). Overall bargaining power of buyers is still relatively high.
2.5 Bargaining Power of Suppliers
The suppliers' products are considered as an important input to Food Empire's business increasing the bargaining power of suppliers. However, with the large availability of substitutes for suppliers and low switching costs, due to stiff competition between many suppliers, this decreases the bargaining power of suppliers. Food Empire is considered as one of the important customers of the supplier group in Russia (besides Nestle and Kraft). Overall, suppliers have low bargaining power to negotiate prices.
3 Michael Porter's three Generic Strategies
3.1 Focus Differentiation
Food Empire focused mainly on the beverage segment which constitutes 91 percent of their revenue, producing different types of instant coffee and tea. 3-in-1 instant coffee has a huge market share in Russia (38.8 percent) (Standard & Poor's, 2010). Russia has the biggest market (47 percent) for instant beverages within Eastern Europe and contributed to 51 percent of their revenue in 2009 (Standard & Poor's, 2010). In 2008, there is a repackaging exercise for MacCoffeeâ„¢ to target young consumers between the age of 18 and 35. Other beverage products also target at various consumer segments; for example, Klassno Xtreme 5-in-1 Coffee is targeted at people who want to strengthen their body's immune system and boost their energy level (Annual Report, 2008).
3.2 Differentiation
The brand image is one of the important factors that led to Food Empire's success, thus strong brand loyalty was built which brought out an advantage. 10 percent of their earnings were spent on creative marketing, sponsorships, offers and unique packaging (Abbas, n.d.). Some examples are the Sponsorship of ISU World figure Skating Championships Göteborg 2008 and a Bronze Medal at the Effie Advertising Festival. Winning numerous awards also built up consumer confidence. In 2008, there is an increase in the costs of raw materials; usually companies are unable to pass the cost to consumers. However Food Empire can gradually increase their prices to make up for the rising commodity prices (Annual Report, 2008).
3.2 Cost Leadership
"Cost control is other focus of our strategy to stay competitive…. As leader in our category, we cannot wait for the market to lead us." (Annual Report, 2009) Due to the financial crisis in 2008, Food Empire stepped up in controlling its costs. Sales in 2009 fell by 39.3 percent (Annual Report, 2009), leading to a decrease in various costs. Stock inventory levels also decrease significantly to deal with the lower demand. The company also tightened its credit terms and accelerated debt collection bringing about a strong net cash flow in 2009 (Annual Report, 2009). Food Empire adapted during the financial crisis and successfully maintained a strong net cash flow enabling the company with potential investment capabilities.
4 Risks
4.1 Raw Material Costs Variation
There is difficulty in passing on increased costs to the consumers if there is a rise in raw material prices. Any increase in the prices of raw materials can have an adverse impact on its profitability. To mitigate fluctuations in raw material prices, the company maintained good relations with its suppliers and were able to fix some of the prices. They also monitored raw material prices vigilantly and sourced for more suppliers to lessen its reliance on a single supplier. There are also possible acquisitions of businesses that are involved in the production of the creamer and sugar in the future (Abbas, n.d.).
4.2 Foreign Exchange
Being a global corporation, Food Empire is exposed to currency exchange risk. Offering credit terms to customers in developing countries, any decrease in the value of the foreign currencies, might cause the company to face difficulties in credit collection, payment of supplies or a decrease in the profitability of the company. Food Empire has guarded itself against the inconsistent changes of the foreign exchange rate by adopting a natural hedge. For example 83 percent (Standard & Poor's, 2010) of the operating costs and purchases made are denominated in the functional currency of the operating units. The company also implements more stringent control and monitoring of its credit policies frequently.
4.3 Russian Market Dependency
55 percent of the overall earnings of Food Empire came from Russia (Standard & Poor's, 2010). Any changes in the country's conditions may cause the demand of the products to decrease which will lead to serious impacts on its profitability. In 2009, the shrinking of the Gross Domestic Product of Russia by 7.9 percent and depreciation of currency caused the revenue contributions of Food Empire to decline by 51 percent (Standard & Poor's, 2010). In response, Food Empire is delegating more focus on other markets and looking into expansions into other countries. The company continuously monitored market conditions, so as to act quickly to any changes that could possibly affect their sales.
5 Value Chain Activities
The primary activities of Food Empire include inbound logistics, operations, outbound logistics and marketing & sales while general administration, human resource management, procurement and technology development forms the support activities.
5.1 Inbound Logistics
The responsibilities of inbound logistics are to plan production and project for optimal material usage. Food Empire has to manage their warehouse and do inventory control efficiently. In addition, the company has to ensure raw materials from suppliers are delivered on-time (Job Street, n.d.).
5.2 Operations
The Group has four beverage manufacturing plants, located in Russia, Singapore, Vietnam and Malaysia. It has a utilization rate of about 50 percent and 90 percent of its products are produced in the plants (Standard & Poor's, 2010). The Russian factory can manufacture 100 million packets of instant coffee a month (Tan and Prosvetov, 2008).
5.3 Outbound logistics
Food Empire exports to over 60 countries. Due to the decrease in demand in 2009, inventory levels lessened accordingly (Annual Report, 2009). To reduce shipping costs, the coffee sachets produced in Russia are transported throughout the country (Tan and Prosvetov, 2008). Timely delivery of their products to distributers need to be ensured.
5.4. Marketing & Sales
As figure skating is immensely popular in Russia (Wee, 2008), Food Empire has sponsored the European and World Figure Skating Championships since 2005 as well as the Russian football team (Annual Report, 2008). Sponsorship spending can run up to six figure sums (in Euros) for each event (Wee, 2008). In Russia, MacCoffee advertisements are visibly placed, from billboards to prime-time TV (Tan and Prosvetov, 2008). These help to create greater awareness among customers. A new packaging helped MacCoffee to target a new market - the young aged 18 to 35, by linking the brand to the youth's lifestyle (Annual Report, 2008). Food Empire stressed the importance of consumer research so as to better assist retailers, understand the customers' buying behaviour and to improve advertising efforts (Abbas, n.d.).
5.5 General Administration
Food Empire has 18 offices spread across mainly Europe and Asia. The offices report to Headquarters in Singapore. In 2009, the management was conservative in credit extension to their distributors and was active in recovering debts. Food Empire also uses Singapore Financial Reporting Standards and guidelines in preparing financial statements. In addition, Food Empire pays a corporate tax to the government (Annual Report, 2009). Stockholders use the annual reports to make investment decisions.
5.6 Human Resource Management
The company hires and trains nearly 1200 employees for its offices and plants, offering local communities job opportunities (Tan and Prosvetov, 2008). Food Empire contributes 26 percent of employees' salary as uniform social security tax to Pension Fund in Russia (Pension Funds Online, 2010). Employees are entitled to annual leave and are given share options as part of compensation (Annual Report, 2009).
5.7 Technology Development
Food Empire has continuously innovated new products, such as the Klassno Colombian Blend in 2010 (Food Empire Website, 2010). Accommodating to consumer's preferences, Food Empire also introduced MacCoffee Mini which comes in a smaller sachet at a more economic price. The company spent $500,000 to redesign packaging and introduced a new MacCoffee 3-in-1 logo (Abbas, n.d.).
5.8 Procurement
Food Empire purchases raw materials such as coffee powder, non-dairy creamer and packaging materials. As coffee bean supply was adversely affected by the changing climate and speculation in agricultural commodities (Standard & Poor's, 2010), the company negotiated with more suppliers so as to reduce reliance on main suppliers (Abbas, n.d.). They also contained costs by buying in bulk and entered long-term contracts at fixed prices (Cheong, 2010). (Refer to Appendix A)
6 Ratio Analysis (Refer to Appendix B)
6.1 Current Ratio
In 2008, the Current Ratio of the group was 5.46. In 2009, there was a drop in the ratio to 4.65. This still indicates the group's ability to pay off its short-term debts with its short-term assets.Food Empire tightened their credit terms and lowered their inventories to cope with the financial downturn causing a substantial decrease in Inventories, Trades Receivables and an increase in Cash and Cash equivalents, Trades Payable. Overall, this causes the current ratio to fluctuate and decrease to 4.65. This also means that the firm is generally in a safe liquidity position but not very efficient in managing their asset.
6.2 Quick Ratio
In 2008, the Quick Ratio of the group was 3.68, it increased to 3.95 in 2009. Food Empire is able to meet its short-term obligations with its most liquid assets. As a mainly manufacturing company, inventories are not as liquid, the Quick Ratio is more reliable measure of the company's ability to pay off obligations without relying on sales of inventories. There is a slight increase in the Quick Ratio because of the substantial increase in cash. Food Empire is in a better liquidity position to meet their obligations.
6.3 Cash Ratio
Food Empire had a Cash Ratio of 0.70 in 2008; this showed that the company was unable to pay off its short-term debts with the Cash and Cash Equivalents on hand. In 2009, the ratio increased to 2.39 as the company tightened its credit terms which indicated the company's ability to pay off its short term debts, thereby improving their liquidity position. This change is reflected due to better cash flow of the company in 2009. Food Empire is able to pay off their debts better in 2009 with cash. However, holding too much cash also means that they are not economical in maximizing the use of their cash at hand.
6.4 Inventory Turnover Ratio
Food Empire had an Inventory Turnover Ratio of 4.17 and 3.21 in 2008 and 2009 respectively. Part of Food Empire's strategy to deal with the financial crisis was to decrease their inventories, tightening of credit conditions provided to distributors caused a decrease in Sales and thus a decrease the Inventory Turnover Ratio.
6.5 Accounts Receivables Turnover Ratio
The Accounts Receivables Turnover Ratio for Food Empire was 3.1 in 2008 and 2.39 in 2009. As Food Empire tightened their credit terms and outstanding debts being reigned in, a reduction in accounts receivables is reflected. This also results to a lower volume of sales causing the ratio decreased overall but this does not mean that Food Empire is not efficient liquid and effective in credit collection.
6.6 Net Profit Ratio
Food Empire had a Net Profit Ratio of 11.72% in 2008, but it decreased to 2.28% in 2009. In 2009, Food Empire sold more than they manufactured, causing a drop in the inventories of finished goods which increased their expense.
6.7 Gross Profit Ratio
Food Empire had a Gross Profit Ratio of 35.70% and 35.47% in 2008 and 2009. This is relatively stable, indicating good financial health of the company and efficiency in the way Food Empire produces its products. Even with rising raw material prices and the financial crisis in 2009, Food Empire managed to maintain the cost of goods sold through negotiating with more suppliers to find cheaper alternatives, bulk purchases and long term contracts.
6.8 Asset Turnover Ratio
In 2008, Food Empire had an Asset Turnover Ratio of 1.21. In 2009, this value decreased to 0.76. Average Total Asset has been relatively stable over the two years, a drop in Net Sales due to the decreased demand in the financial crisis caused the decrease in the Asset Turnover Ratio.
6.9 Return on Equity Ratio
Food Empire had a Return on Equity of 18.24% and 2.16% in 2008 and 2009 respectively, with a decrease in the Net Income as previously mentioned, thus decreasing their profitability for the period.
6.10Return on Asset Ratio
In 2008, Food Empire had a Return on Asset of 14.66%, this value decreased to 2.01% in 2009, Food Empire is seen here as not as efficient in the way they use their asset to generate earnings thus lowering their profitability. However, we know that their Total Average Asset remained relatively stable and the decrease in the ratio is attributed to a decrease in Net Income as previously explained.
6.11Earnings per Share
In 2008, Food Empire had an Earnings per Share of 0.04, this value decreased to 0.005 in 2009. This shows that the profitability of Food Empire in terms of profit allocation to common stock decreased over the year. This change is due to the decrease in Net Profit as explained above.
7 Conclusion
Liquidity ratios are important for a company's short-term success and profitability ratios are important for a company's long-term success. Ratios have to be analysed with regards to the conditions of the market and not just purely quantitative. Food Empire's ratios decreased in 2009, due to recession, loss of consumer confidence and depreciation of currencies. With the measures taken, as discussed in the report above, they have managed to remain in a good liquidity position and maintain good operating efficiency despite lower profitability.
Appendix A
Appendix B
Ratio
2008
2009
Current Ratio
Current Asset / Current Liabilities
121232/22191
=5.46
119292/25627
=4.65
Quick Ratio
Current Asset (Less Inventories) / Current Liabilities
(121232-39645)/22191
=3.68
(119292-17955)/25627
=3.95
Cash Ratio
Cash & Cash Equivalents / Current Liabilities
15537/22191
=0.70
61291/25627
=2.39
Inventory Turnover
Cost of goods sold / Avg Inventories
180231/((39645+27781)/2)
=5.35
117000/((17955+39645)/2)
=4.06
Accounts Receivables Turnover
Net Credit Sales / Avg Accounts Receivables
180231/((60672+55778)/2)
=3.10
117000/((37255+60672)/2)
=2.39
Net Profit
Net Income / Net Sales
21127/180231*100
=11.72%
2665/117000*100
=2.28%
Gross Profit
Gross Profit / Net Sales
(180231-115883)/ 180231*100
=35.70%
(117000-75505)/ 117000*100
=35.47%
Asset Turnover
Net Sales / Avg Total Asset
180231/((35536+121232+104726+36263)/2)
=1.21
117000/((119292+32941+35536+121232)/2)
=0.76
Return on Equity
Net Income / Avg Total Equity
21127/((122620+109046)/2)*100
=18.24%
2665/((123701+122620)/2)*100
=2.16%
Return on Asset
Net Income + Interest Expense (net of tax) / Avg Total Asset
(21127+693*0.82)/((35536+121232+104726+36263)/2)*100
=14.57%
(2665+439*0.83)/((119292+32941+35536+121232)/2)*100
=1.96%
Earnings per share
Net Profit / Number of Weighted Average Common Shares
21127/527833
=0.04
2665/529044
=0.005
Tax on 2008 and 2009 = 18% and 17% respectively
Cost of goods sold = Net Sales (Figures not available)
Net Credit Sales = Net Sales (Figures not available)
