Company Analysis of Coca-Cola Enterprises - Case Study Example

Company analysis of Coca-Cola enterprises Introduction Coca-Cola Enterprises, Inc. (CCE) is the third largest independentbottler of Coca- Cola in the world. It is the producer, marketer and distributor of Coca-Cola products. It the sole licensed for The Coca-Cola Company products in Great Britain, Belgium, Monaco, Norway, The Netherlands, continental France, Sweden, and Luxembourg. Coca-Cola Enterprises is committed to reducing the environmental impacts of its operations and products, with a specific focus on water stewardship, sustainable packaging and recycling, and energy and climate protection. Its manufacturing sites were awarded ISO 14001 certification, the premier international standard for environmental management (CCE website). Coca-Cola Enterprises has also minimized its energy ratio across most of its manufacturing operations. Also, more that 99 percent of waste at the company’s sites is now recycled or recovered. Coca-Cola Enterprises computes and publishes the CO2 emissions that results from the manufacturing and distribution processes of all of its brands. The company partnered with Carbon Trust in 2007 to measure all of its greenhouse gas emissions that are embodied within selected products in the portfolio. Coca-Cola Enterprises manufactures, sells, delivers and distributes the following products in the Great Britain for the Coca-Cola Company: diet Coke, Schweppes Abbey Well, Coca-Cola, Fanta, Coke Zero, Glacéau, Dr Pepper, Powerade, Schweppes, Sprite, Relentless, Oasis and 5 Alive. It also produces, sells or delivers Capri Sun, Appletiser and Monster on behalf of other brand owners (CCE website). The company has an on-going product and brand innovation continuing in order to reinforce its position of having the largest share of the UK’s soft drink industry. Currently, Coca-Cola Enterprises is one of the most innovative brands in the world. This report tries to examine, evaluate and analyze if the company experienced a drop in its performance in the ten years or if the company just made a strategic choice to consolidate so as to improve performance. It will look at the ratio analysis, its marketing activities and its weaknesses and strengths. Finally, the report provides critical reasons why either one of the two actions happened and then propose key strategic changes to be made so as to restore the performance in the future. SWOT analysis Strengths customer loyalty Strong marketing and advertising corporate social responsibility bargaining power over suppliers extensive beverage distribution channel largest market share in the UK the best global brand Weaknesses significant focus on carbonated drinks high debt level resulting from acquisitions undiversified product portfolio brand failures Opportunities growth through acquisitions growth in bottled water consumption increasing demand for beverage and healthy food growing consumption of beverages in emerging markets Threats water scarcity strong dollar changes in consumer preferences decreasing net profit and gross profit margins saturated carbonated drinks market competition from other bottlers Analysis From the SWOT analysis it is clear that Coca-Cola Enterprises experienced a drop in performance in the ten years. The SWOT indicates that the company’s net profit margin as well as gross profit has been decreasing over the past few years and it is predicted to continue for more years due to higher raw materials and water costs. Further, the company has approximately US$4 billion of debt which has significantly increased its interest and borrowing costs thus decreasing the profits further. The world has begun fighting obesity and many consumers are moving away from carbonated drinks towards consuming healthy drinks and food. This has also greatly impacted their performance over the past few years. Ratio analysis Ratio analysis is a systematic use of ratios in interpreting the financial statements of a company in order to determine its weaknesses and strengths, financial health as well as its current performance and historical performance. Liquidity ratios A firm’s liquidity ratios illustrate the ability of CCE to meet its short term obligations. It is the main measure of a firm’s financial health (Kapil, 120). 2013 2012 2011 2010 2009 Industry Current ratio 1.17 1.07 1.45 1.18 1.20 5.00 The current ratio of CCE has been fluctuating for the past years; this indicates a reduction in its ability to meet short-term obligations. In comparison to the industry average, these ratios are lower than that of the industry average, an indication that CCE is less liquid. Profitability ratios Profitability ratios determine the bottom line of the company and the returns it gives to its investors. These ratios indicate the overall performance and efficiency of a company (Kimmel et al 290). 2013 2012 2011 2010 2009 Industry Net profit margin 8.12 8.40 9.04 9.29 3.38 12.00 ROA 7.01 7.28 8.47 4.99 4.57 15.00 The profitability ratios of Coca-Cola enterprises have been fluctuating or decreasing considerably implying that the efficiency of CCE has been decreasing over the ten year period. The ratios are also below the industry average value indicating that the company is less profitable than other firms in the industry. This has made it to drop in the rank. Asset management ratios Asset management or efficiency ratios indicates how well a company is managing its liabilities and/or how effectively a company is utilizing its assets. They show how efficiently the assets of the company are working to generate sales revenue or income (Kapil, 120). 2013 2012 2011 2010 2009 Industry Days sales outstanding 67.34 64.83 61.11 76.93 44.74 41 Inventory turnover 12.77 13.08 13.65 6.82 15.02 16.00 The company’s inventory turnover has decreased throughout the period implying that Coca-Cola Enterprises is using more inventories to generate less revenue hence inefficient in their operations. Day’s sale outstanding has been on the constant rise and fluctuations. This shows that CCE is taking more time to collect its receivable. The company’s days sales outstanding is higher than that of the industry , this indicates that the firm takes more time to realize its accounts receivable than the industry hence indicating reduction in efficiency. According to efficiency ratios, the efficiency of the company has been on a constant decrease. Debt ratios Debt ratios shows how leveraged a company is. They measures the long-term solvency of the company by showing the proportion of the company’s activities that is funded by the borrowed funds compared to those activities that are funded by the equity (Kimmel et al 290). . 2013 2012 2011 2010 2009 Industry Debt to equity ratio 1.68 1.29 1.04 0.73 10.22 0.85 Long-term debt to total asset 0.39 0.30 0.33 0.25 0.48 0.30 The debt to equity and long-term to total asset ratios have been on the constant rise throughout the period. This indicates an increase in the proportion of company’s assets that is funded by borrowed funds. The ratios are relatively higher than the industry average value, this indicates that Coca-Cola Enterprises is highly leveraged, uses more debts than its competitors in the industry. Coca-Cola is, therefore, regarded to have taken on more risk than other firms in the industry. It therefore has more business risks. Market ratios These ratios assess the economic status of a firm in the wider marketplace. They give the company’s management an idea of what the company’s investors think of or perceive the future prospects and current performance of the company (Kapil, 120). 2013 2012 2011 2010 2009 Industry Price to earnings ratio 17.96 14.09 11.26 13.66 13.02 12.00 Market to book value ratio 4.91 3.48 2.71 0.00 0.00 5.00 The P/E ratio of CCE has greatly fluctuated, however towards the end of the period; it has shown an upward trend. The ratio is relatively higher than the industry average indicating that the stocks of Coca-Cola enterprises are highly valued than the industry average. The investors expected slightly higher earnings growth from CCE implying that the investors are willing to pay a slightly more per dollar of earnings than those of other firms in the industry. Even though the M/B value of the company has shown n upward trend, it is lower than the industry average. This indicates that the relative value of CCE is lower than the industry. Critical reasons why the performance of the company declined There are a number of factors that have caused the decline in the performance of Coca-Cola Enterprises. First, constant change in weather conditions has brought seasonality in the sales of the company’s nonalcoholic ready to drink beverages. Due mainly to the seasonal nature of the soft drink and other beverages industry, the sales of the company have greatly reduced. Unreasonably cool weather reduces consumer demand for some beverages that are packaged in containers (Flamholtz & Yvinne, 176). Secondly, the soft drink industry is highly competitive. It consists of numerous small and large, well established companies. Such companies compete in multiple geographical areas; some are primarily local or regional in operation. Even though the company has competitive strengths against such smaller companies, they have been able to attract a portion of CCE’s customers because of their localized advertising and sales promotion programs as well as their low prices. This has reduced the sales volume of Coca-Cola Enterprises. Thirdly, the costs of raw materials and water have been increasing year in year out as water is a limited natural resource (Flamholtz & Yvinne, 176). This has lowered the gross profit and net profit of the company, which translates to reduced performance. Finally, the world has begun fighting obesity and many consumers are moving away from carbonated drinks towards consuming healthy drinks and food. This has significantly reduced the sales volume of the carbonated drinks thereby impacting its performance over the past few years. Further, the company has high debt which has increased its finance costs which further lowers its net income. Key strategies to restore the performance 1) Establishing an inclusive and winning culture Coca-Cola Enterprises must make it a priority to develop, attract and retain highly talented and diverse workforce (Steger & Wolfgang, 53). The company should also develop a close relationship with their consumers in order to be able to make products that meet their specifications to avoid losing them due to changes in their preferences, for instance, moving away from carbonated drinks towards consuming healthy drinks and food. This will help in generating long-term sustainable growth by outdoing their competitors. Driving global employee and customer engagement is a key element in increasing the company’s overall performance. 2. Changing the operating model Coca-Cola Enterprises look at a new, lower cost delivery and operating models. This will help in decreasing unnecessary costs thereby increasing its revenue. For instance, reduced cost of water and raw materials raises the operating profit of the company. The company should consider new internal operating model, the channels to the market, new distribution and production partners. A new internal operating model should be able to focus on products and services that the customers want (Steger & Wolfgang, 53).  Conclusion Coca-Cola enterprise has experienced a drop in its performance in the ten years because of changes in consumer preferences from carbonated drinks towards consuming healthy drinks and food. Also, it has experienced changes in weather conditions, high competition and increasing costs of raw materials and water. This has been justified by reduction in key financial ratios. The company may, however, restore the performance by changing their operating model to focus on products that customers need. Work cited CCE website: retrieved from: http://www.cokecce.co.uk/about-us/about-coca-cola-enterprises.aspx http://www.cokecce.com/ CCE’s financial statement: retrieved from: http://www.gurufocus.com/financials.php?symbol=CCE CCE’s ratios: retrieved from: http://www.gurufocus.com/term/pe/CCE/P%252FE%2BRatio/Coca-Cola%2BEnterprises%2BInc Flamholtz, Eric, and Yvinne Randle. Corporate Culture: The Ultimate Strategic Asset. Palo Alto: Stanford University Press, 2011. Print. Kapil, S. (2011). Financial management. Noida, India, Pearson. Pg. 120-130  Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. Accounting: tools for business decision making. Chichester, John Wiley, 2008. Internet resource. Pg. 290 Steger, Ulrich, and Wolfgang Amann. Corporate Governance: How to Add Value. Chichester: John Wiley & Sons, 2008. Internet resource. 53 Read More