Associated British Foods as One of Europes Largest Food Companies - Case Study Example

ASSOCIATED BRITISH FOODS: CORPORATE STRUCTURE, PARENTING AND PORTFOLIO MANAGEMENT Associated British Foods: Corporate structure, Parenting and Portfolio Management Executive Summary The increased need to establish competitive advantage in the global market motivates firms to establish effective market portfolios. Every firm has a unique portfolio that meets the needs of its business environment. The firm’s corporate strategy defines and ensures the implementation of such portfolios. Associated British Foods (ABF) is one of Europe’s largest food companies that have developed with time through a diverse portfolio. ABF deals with a wide variety of popular branded and non-branded grocery products sold internationally, an increasingly strong presence in advanced research and technology and a highly successful European textile business. Indeed, the firm has five segments that include sugar, agriculture, retail, grocery, and ingredients businesses (Associated British Foods plc 2012, p. 1). There are various companies in the ABF portfolio but the inclusion of Primark in the ABF portfolio is very significant. The financial rationale of Primark is fundamental for the inclusion of Primark in the ABF portfolio. Indeed, Primark is the biggest contributor to earnings in the ABF portfolio where it restores economic growth in the entire firm despite the failures of other subsidiary businesses in the same firm. ABF portfolio derives a high degree of autonomy to the firm (Associated British Foods plc 2013, p. 1). Notably, the aspect of portfolio planning applies in ABF where the executive managers adopted a common framework to compare five business divisions as discussed by Goold and Luchs (Goold and Luchs 1993, p. 11). Moreover, ABF fostered investments in a mix of businesses with different strategies with an aim of ensuring future growth. Introduction This report defines Associated British Foods as one of Europe’s largest food companies that adopts a diverse portfolio that encompasses five market segments that include sugar, retail, grocery, agriculture, and ingredients. The report will use an appropriate framework to assess the diversification of Associated British Foods and discuss the logic of the portfolio. It will also assess the nature of the corporate parent. With reference to long-term history of ABF and key management figures, the report will justify the inclusion of Primark in the ABF portfolio. Ultimately, the report will discuss the historical perspective of corporate diversification as discussed by Goold and Luchs with reference to the development of Associated British Foods. To achieve this, I will rely on information and data from the ABF Annual Report 2012-13, the financial rationale of Primark, ABF website, BCG matrix, and Ansoff growth matrix to draw conclusions and thoughts on ABFs corporate strategy. Assessing the Diversification of Associated British Foods BCG matrix will help in portraying the firm’s brand portfolio along relative market share and speed of market growth. From this analysis, we can justify the diversification of ABF and explain the logic of its portfolio. Notably, Primark is a source of income in the ABF market environment. Indeed, Primark is a leader in a mature market where it exhibits significant returns on assets or average capital employed. According to the ABF ANNUAL REPORT AND ACCOUNTS 2013, Primark recorded a 26.1 % return on average capital employed, which was greater than the market growth rate (Associated British Foods plc 2013, p. 5). Having employed 48,000 people and being the biggest contributor to earnings, Primark is a market leader in this industry (Associated British Foods plc 2013, p. 5). Primark generates more cash than it consumes by incurring no advertising costs, buying in wholesale, and passing on the cost savings to customers, keeping overheads to a minimum but investing in state-of-the-art logistics, and maintaining quality in production. Primark is also able to develop new products and processes which may later become stars. This portfolio records huge profits where Primark recorded a 44 % increase in profits and added 800,000 sq. ft. to its substantial estate (Associated British Foods plc 2013, p. 8). Ideally, ABF should “milk” the marginal profits and invest into stars like AB Mauri whose capital nets out (Associated British Foods plc 2013, p. 5). Indeed, Primark has been reversing the losses encountered by other SBUs in ABF (Thesing 2014, p. 1). Nevertheless, ABF should continue supporting Primark so that it can maintain its current market share and support innovations that lead to product development. With a 0.1% return on average capital employed, AB Mauri is a star in BCG matrix (Associated British Foods plc 2013, p. 5). AB Mauri has a large market share in the fast growing ingredients industry. Indeed, it operates in 26 countries where it is a technology leader in bread improvers, dough conditioners, and bakery mixes (Associated British Foods plc 2013, p. 5). ABF should invest in this portfolio because it has a potential to grow and generate positive cash flows in the future. On the other hand, the BCG matrix confirms AB Sugar to be Question marks. Indeed, AB sugar has low market share in a fast growing market where it consumes large amounts of cash and incurs losses. Indeed, ABF expects AB Sugar to record reducing profits in the coming years (Associated British Foods plc 2013, p. 9). AB Sugar has a potential to gain market share and become a star and hence it requires much closer consideration. Ideally, ABF should invest in this portfolio because it has potential to gain market share and become a star. The Ansoff growth matrix approach will derive suggested growth strategies that direct the firm’s strategy through market penetration, product development, market development, and diversification. ABF is penetrating the market with its current products. The firm offers various agricultural products and services, which include supplying technology-based products and services to farmers (Associated British Foods plc 2013, p. 1). Moreover, the firm offers benefit service to the food, drink, and bioethanol companies internationally by marketing their co-products as animal feed (Associated British Foods plc 2013, p. 1). The firm engages in retail textile business through Primark, which employs more than 48,000 people across the UK, Republic of Ireland, Spain, Portugal, Germany, the Netherlands, Belgium, and Austria (Associated British Foods plc 2013, p. 1). Indeed, the firm operates more than 257 stores where it provides quality, up-to-the-minute fashion at value-for-money prices (Kavanagh & Lucas 2013, p. 1). Moreover, it operates 52 plants in 26 countries where it depicts advanced technology in the supply of bakery ingredients (Associated British Foods plc 2013, p. 1). ABF develops new products to cater for the same market. Having opened its stores in in Dublin in 1969, Primark is the home of textile retailing and fashion where it offer a diverse range of products, stocking everything from baby and kids, to women’s, men’s, home ware, accessories, beauty products, and confectionery (Primark Stores Limited 2013, p. 1). The company introduces new products for the same market. These products include Mens black jeans, floral chiffon panel top, Limited Edition Aztec necklace, and Mens burnout sweater among others (Primark Stores Limited 2013, p. 1). ABF adopts the market development strategy by expanding its customer base by attracting new customers for its existing products and selling its existing products in new international markets. For instance, Primark opened its stores Berlin, in Belgium, and Netherlands while Ubombo sugar mill expanded its business to Swaziland, AB Mauri completed a new yeast plant at Harbin, China, and the Wessington glasshouse expanded to 18 hectares (Associated British Foods plc 2012, p. 1). Assessing the Nature of the Corporate Parent Associated British Foods (ABF) is the parent company of various companies that operate under its umbrella. The board of directors includes the Chief Executive, George Weston, and Finance Director, John Bason. The board of directors has a role of collective responsibility where they guarantee the overall management and performance of ABF (Associated British Foods plc 2012, p. 1). Moreover, the board believes in good corporate governance that protects ABF’s shareholders and remains committed to maintaining high standards of business ethics and integrity across the group (Associated British Foods plc 2012, p. 1). They also set corporate values and performance and ethical standards of the firm. Most of all, they ensure that the firm meets the shareholders’ obligations. The Chairman of the board is Charles Sinclair and he has responsibility of leading the board and ensuring its effectiveness (Associated British Foods plc 2012, p. 1). He also guarantees timely and effective communication to the shareholders and directors. The chairperson oversees regular performance evaluations and enhances good relations and effectiveness of non-executive directors. The non-executive directors of the firm include Peter Smith, Lord Jay, Timothy Clarke, and Javier Ferrán who are Independent non-executive directors and Emma Adamo who is a Non-executive director (Associated British Foods plc 2012, p. 1). The non-executive directors play the role of ensuring the accuracy of financial information, appoints and removes senior management, and enhances risk management in the firm. Moreover, the non-executive directors challenge and contribute to the development of ABF’s strategy (Associated British Foods plc 2012, p. 1). As a parent corporate, ABF plays the role of ensuring that the subsidiary businesses adhere to the set standards and government policies (Roundtable on Sustainable Palm Oil 2012, p. 1). ABF plays the role of establishing good leadership in markets that offer beneficial opportunities for the entire firm (Associated British Foods plc 2012, p. 1). Moreover, ABF values the firm’s shares, allocates dividends, and prepares the Annual Report and Accounts for the entire film operations. The parent company also encourages the business leaders to report to the executive management on the areas they think they can make the most difference. The executive management and board members of Associated British Foods and CR leaders from the subsidiary businesses listens, understands, and addresses different challenges of the different businesses (Associated British Foods plc 2012, p. 1). The parent company mandates and motivates the subsidiary businesses to create ethical business cultures of their own and taking their responsibilities seriously (Associated British Foods plc 2012, p. 1). The firm’s rationale entails the portfolio manager, synergy manager, and parental developer. In this context, the portfolio manager acts as an agent for ABF financial market and values the expansion and the diverse portfolio adopted by the firm. He also identifies and invests in beneficial opportunities as well as disinvesting in low-performing business subsidiaries. He guarantees the autonomy of the firm, establishes cost effective staff, and rewards good performance in the firm (Associated British Foods plc 2012, p. 1). On the other hand, the synergy manager guarantees the achievement of synergetic benefits and oversees the sharing and transfer of skills and competence in the firm and in the business environment where ABF seeks to have the most qualified personnel to gain competitive advantage. The synergy managers plays the role of addressing all issues related to the transfer, sharing, performance, rewards, and interrelations of ABF staff (Associated British Foods plc 2012, p. 1). Ultimately, ABF has a parental developer who plays the role of ensuring the correlation between competency and value in subsidiary companies where the staff must use their skills to offer products and services that meets the customer’s needs. The parental developer ensures that ABF is maximizing its parenting opportunity and has the necessary resources and competence to pursue the goals of subsidiary companies like Primark (Associated British Foods plc 2012, p. 1). The parental developer ensures that the board of directors and executive managers understand the business environment of the subsidiary companies, guarantee the autonomy of the subsidiary companies, and establish an effective link between ABF and its subsidiary companies like Primark and AB sugar (Associated British Foods plc 2012, p. 1). Justification for the Inclusion of Primark in the ABF portfolio Primark is one of subsidiary companies of the Associated British Foods, which is the parent company. The integration of Primark in the firm’s portfolio is very fundamental to the success ABF. Indeed, recent statistics confirm that Primark, which trades as Penneys in Ireland, has been saving the market situation for ABF as other operating divisions failed to deliver the necessary goods and services. Notably, Primark has been in operation for many years where its products, services, and pricing appeal the less-affluent background of the local community (Associated British Foods 2013, p. 7-8). As such, Primark understands the cultural, social, and market dynamics of this industry. The continued revenue growth at Primark and margin improvement in Grocery has the potential to increase profits in ABF portfolio (Associated British Foods 2013, p. 9). Moreover, after selling Fine Fare supermarkets chain 15 years ago, Primark remains as the only ABFs retail interest and hence its significance (Associated British Foods 2013, p. 1-8). Among ABF business subsidiaries, only Primark has been a consistent clear driver of the group’s growth. Primark’s success story has been a motivation to customers in Europe who abhor Primark brand thus expanding the selling space for the parent company (Kavanagh & Lucas 2013, p. 1). With the availability of market demand derived by Primark and market success, ABF derives the motivation to investing huge capital in the industry. Indeed, ABF predicts that Primark’s profits will increase with a higher margin in the coming years. Additionally, Primark offers market and growth opportunities for ABF (Associated British Foods 2013, p. 7). The size and location of Primarks stores is another fundamental benefit to the ABF’s portfolio since it accommodates many customers who can easily access the stores (Associated British Foods 2013, p. 8). Development of Associated British Foods and Corporate Diversification According to Goold and Luchs, diversification and corporate strategy started in the 1950s and 1960s where the diversified company emanated from the argument that company managers possess general management skills that contribute to the overall performance of a company (Goold and Luchs 1993, p. 8). In the 1970s, diversification and corporate strategy resulted from the recognition that large and diversified companies present particular management problems that managers should address (Goold and Luchs 1993, p. 10). This period also presented the aspect of portfolio planning that provided corporate managers with a common framework to compare many different businesses (Goold and Luchs 1993, p. 11). ABF used the same approach to diversification where the firm adopted a common framework to compare five business divisions. During this period, many companies adopted portfolio-planning techniques where ABF decided to expand its operations to Europe by investing in Primark, which is the most profitable company under ABF. During the 1970s, portfolio planning fostered investments in a mix of businesses with different strategies with an aim of ensuring future growth. ABF took this approach where it invested in food, sugar, textiles, and groceries. During the 1980s, diversification and corporate strategy were prone diverse skepticism about the ability of companies to manage and add value to diverse, conglomerate portfolios (Goold and Luchs 1993, p. 13). ABF adopted this approach where Primarks Dublin HQ implemented the group’s decision to expand its stores across Europe. Ultimately, diversification and corporate strategy in the 1990s sought to identify the businesses that should form a core portfolio for a corporation, and how to find ways of adding value to those businesses (Goold and Luchs 1993, p. 16). ABF adopted this approach by identifying Primark as the core business for ABF. Works Cited Associated British Foods 2013, Annual Report and Accounts 2013, retrieved 4 March 2014, < http://www.abf.co.uk/documents/pdfs/2013/2013_abf_annual_report_and_accounts.pdf> Associated British Foods plc 2006, Annual Report & Accounts, retrieved 4 March 2014, < https://bib.kuleuven.be/files/ebib/jaarverslagen/ABF_2006.pdf> Associated British Foods plc 2012, FAQs, retrieved 4 March 2014, < http://www.abf.co.uk/tools/header/faqs> Associated British Foods plc 2012, Forum for the Future, retrieved 4 March 2014, < http://www.abf.co.uk/responsibility/assurance/forum-for-future> Associated British Foods plc 2012, Overview, retrieved 4 March 2014, < http://www.abf.co.uk/about_us/our_group/overview> Associated British Foods plc 2013, Associated British Foods plc - Key facts, retrieved 4 March 2014, < file:///C:/Users/Acer/Downloads/key_facts_2013.pdf> Goold, M, and Luchs, K 1993, “Why diversify? 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