Evaluation of the Victorian State Bailout of SPC Ardmona - Case Study Example

Evaluation of the Victorian State Bailout of SPC Ardmona Introduction On February 13, 2014 the State of Victoria announced that it had agreed to provide a financial assistance package worth $22 billion to SPC Ardmona, Australia’s only significant processor of canned fruits and vegetables and a major employer in the Goulburn Valley around the city of Shepparton, where the company is headquartered (ABC News, 2014a). The deal was somewhat controversial because a similar request for funding SPC made to the Abbott government was rejected in January (SBS News, 2014a). This report has two main objectives; first, to analyse and compare the different decisions of the Federal and Victorian governments with respect to providing SPC Ardmona with a financial “bailout.” Second, each of those decisions is assessed in the context of SPC’s sustainability, or “triple bottom line,” which takes into account the company’s performance in financial, environmental, and social terms. The analysis overall demonstrates that as long as the assumption is made that SPC will successfully meet its side of the bargain and restore the viability of its business, the decision by the Abbott government was clearly wrong and counter-productive with respect to the company as well as its immediate community, and in some ways for the entire country. Summary and Background SPC Ardmona is described as one of the last fruit and vegetable processers in Australia (ABC News, 2014a). It manufacturers canned and other processed food products under the Ardmona, Goulburn Valley, SPC, IXL, Taylor’s, and Weight Watcher’s brands from four manufacturing facilities in the Goulburn Valley, including the main one, a 21-hectare factory at Shepparton. The company was formed as a result of the 2002 merger of the Shepparton Preserving Company (SPC, founded in 1917) and the Ardmona Fruit Products Co-Op Ltd. (founded in 1921); the merged company was then acquired by the Australia-based global conglomerate Coca-Cola Amatil in 2005 (“About Us”, 2014). In 2013, SPC Ardmona made a formal complaint to the Federal government about unfair import competition, claiming that dumping of cheap products imported from China had hurt its business to the point that if drastic action was not taken, the company likely would be forced to close in 2014. The Productivity Commission assessed the complaint, and issued a report with four main findings: That the company had been hurt by reduction in the overall demand for processed fruit products, declines in exports, the growth of supermarket brands, and adverse weather conditions affecting local orchards and farms (ABC News, 2014b). The company then proposed a $200 million investment plan to upgrade its facilities and distribution network, of which $25 million was to be contributed by the Federal government, $25 million to be contributed by the state government in Victoria, and $150 million from SPC Ardmona’s parent company Coca-Cola Amatil (SBS News, 2014b). On January 30, 2014, the Abbott government rejected SPC Ardmona’s application for Federal financial assistance, with the Prime Minister going on record as saying that SPC Ardmona’s “excessive” wages and compensation packages offered to its employees were largely to blame for the company’s financial troubles, and that in any case, the healthy balance sheet of parent company Coca-Cola Amatil would provide enough resources to save SPC Ardmona without Federal help (Cowie, 2014). On February 13, the Victorian government responded where the Federal government had not, offering $22 million in assistance from existing funds as part of a revised $100 million total investment package, a move that was considered salvation for up to 2,700 jobs in the Goulburn Valley either at SPC Ardmona itself, or amongst related farm, manufacturing, and other businesses. The offer from Victoria carried a couple significant conditions: SPC Ardmona would be required to employ a minimum of 500 full-time employees for the three years the investment package would take to fully implement; Coca-Cola Amatil would have to hold up its end of the bargain and contribute the remaining $78 million of the package; and if SPC Ardmona stopped operating at Shepparton within five years, it would be required to repay the full $22 million to the Victorian government (The New Daily, 2014). The decision of the Federal government not to support SPC Ardmona sparked a surprising surge in public sympathy for the company. In the first two months of 2014, company sales of peaches and pears increased by 60%, and in mid-March, Woolworths signed a $70 million, 5-year deal for SPC Ardmona to package fruit products under various Woolworths’ brands. SPC Ardmona’s CEO Peter Kelly, noting that the prospect of closing down SPC Ardmona and putting close to 3,000 people out of work has suddenly changed to one in which he must quickly find even more growers and factory workers, characterised the Federal refusal to help the company “the best thing that could have happened to SPC Ardmona.” (Carswell, 2014) Critical Analysis Both the Federal government and the government of the State of Victoria were faced with the same question of whether or not to provide financial assistance to SPC Ardmona, and as has been pointed out, each made a different decision. In order to analyse which was the correct decision, it is helpful to examine the factors that would have to be considered in the decision-making process; these factors are best explained using a PESTLE analysis. A PESTLE analysis, which is sometimes referred to as a PEST or PESTEL analysis, is an acronym for Political, Economic, Social, Technological, Legal, and Environmental, and is a marketing tool used by companies to analyse the environment in which they operate (PESTLE Analysis, 2014). It is an appropriate tool to use for the analysis of the SPC Ardmona issue, because essentially both the Federal and the Victorian governments were assessing an investment decision. PESTLE Analysis of the SPC Ardmona Situation POLITICAL: A financial bailout of SPC Ardmona could have one of two political implications. On the positive side, it could be viewed as proper support from the government to an Australian business, supporting the Australian economy and Australian workers. On the negative side, it could be viewed as supporting a private company at taxpayers’ expense, or as Prime Minister implied, placing some of the responsibility for keeping a company healthy on the citizens of Australia rather than on the company itself (SBS News, 2014b). Abbott was criticised publicly, and even by some members of his own coalition, for a double standard in refusing to help SPC Ardmona for the reason that “it was the company’s responsibility to get its own house in order”; while rejecting SPC Ardmona’s appeal, the Abbott government approved a similar $16 million package for candy maker Cadbury, saying that it would help to support tourism in Tasmania even though a part of the investment would be made in farms in Northern Australia (SBC News, 2014c). ECONOMIC: In terms of economic factors, both governments had to weigh a specific figure – $25 million – against the conceivable gains that could be achieved from saving SPC Ardmona, or the costs to the economy that would be incurred if the bailout was refused and the company closed down. SOCIAL: The obvious social issue is connected to jobs; closing down SPC Ardmona would result in the direct loss of 600 permanent and another 400 seasonal jobs at the company, as well as the loss of 1,700-2,000 other jobs amongst growers and other businesses in the surrounding community. The question to be decided on this point, then, was whether those jobs were indispensible, or if there would be some other alternatives. As the outgoing head of Coca-Cola Amatil stressed shortly after the announcement of the Victoria government assistance, the question of whether Australia would have a fruit-growing sector of orchards and farms or not depended on SPC Ardmona getting some investment help (SBS News, 2014d). TECHNOLOGICAL: This is a relatively minor factor, except for the use intended for the bailout money by SPC Ardmona. The stated purpose of the investment is to upgrade production facilities; therefore, the judgment had to be made whether or not those upgrades would result in better financial performance. LEGAL: Part of the reason SPC Ardmona gave for needing a bailout was because it was disadvantaged by cheaper imports that were not held to the same strict standards, characterising this situation as a flaw in Australian law (SBS News, 2014d). The Productivity Commission, did not find that to be the case, and instead cited market changes as being the main source of SPC Ardmona’s troubles (ABC News, 2014b). ENVIRONMENTAL: This also is a relatively minor factor, but in commending the Victoria government for offering the financial assistance package and noting that public disagreement with PM Abbott’s decision led to widespread support for the company, SPC’s Peter Kelly pointed out that support indicated public concern for sustainably-grown food with high quality standards (Bourke, 2014). The Triple Bottom Line Because both the Federal government and the Victorian government have to base their decisions on what is best for the entire population for which they are responsible, they would need to consider SPC Ardmona’s “triple bottom line”, which is consideration of a business’ social and environmental impact along with its financial results; the concept is sometimes thought of as “people, planet, and profit” (Milne, Tregidga & Walton, 2009). A related idea is sustainability, which was defined by the World Commission on Environment and Development of the United Nations as, “...a development model which ensures the satisfaction of the needs of the present without compromising the ability of future generations to meet their own needs.” (WCED, 1987 in Hussey, Kirsop & Meissen, 2001, pp. 143-144); or in other words, doing business now in such a way that future generations can do it in the same way in the future. Sustainability and triple bottom line performance are also reflected in concepts such as “creating social value” (Porter & Kramer, 2011) and “integrated external engagement” (Brown & Nuttall, 2005), two different ways of looking at how companies can create value in their communities in ways that go beyond just what is created by their products. From that, the triple bottom line of SPC Ardmona can be identified. In terms of financial factors, revenues earned by SPC Ardmona obviously provide profits to its own shareholders, and contribute tax revenue to the local, state, and Federal governments. In terms of social factors, SPC Ardmona fits a definition of corporate citizenship described by Matten and Crane (2005); it has a sort of governing role, serving as guidance and support for its community. It does this by direct assistance through charity – particularly through providing food assistance to communities affected by natural disasters (“About Us”, 2014) – by supporting an extensive supply chain of growers, packaging manufacturers, transport companies, and other related businesses that provide livelihoods for more families, and by providing its own workers with substantial pay and benefits. In terms of environmental factors, the company highlights its strict observance of food quality guidelines, which also encompass good farming practises that do not harm the environment. The decision not to provide funding by the Federal government was not a decision that SPC Ardmona should close, but rather that it should rely on its parent company and significantly reducing its compensation to its workers to make up the financial shortfall. SPC Ardmona was unwilling to reduce workers’ wages and benefits as drastically as Prime Minister Abbott demanded, thus putting the “people” aspect of its triple bottom line ahead of “profits”. Provided SPC Ardmona meets the conditions of the Victorian government bailout, the state of Victoria made the right decision while PM Abbott and the Federal government made the wrong one; the evidence for this is the overwhelming public support for the company following the Federal rejection of the financing bid, and the subsequent deal struck with Woolworths which will help SPC Ardmona return to a more stable condition. Conclusion In conclusion, it is best to look at the evident choices made by the State of Victoria in choosing to support SPC Ardmona rather than those made by the Federal government in refusing to help the company. Allowing SPC Ardmona to fail would have negative impact on the triple bottom line; the company’s own stakeholders would suffer financial loss, of course, but more importantly, an entire social and economic structure created by the plant’s presence would fail as well, causing losses that extended well beyond the company itself. And losing SPC would also send the message that good practises in producing food were not as important as simple financial considerations. The State of Victoria obviously considered $22 million a small price to pay to prevent all that from happening, and the support the move gained from the public – the people, after all, to whom the politicians owe their jobs – endorsed the decision. Reference List ABC News 2014a, ‘Victorian Government announces $22m assistance package for SPC Ardmona’, ABS News, 13 Feb 2014, viewed 1 June 2014, . ABC News 2014b, ‘Fact file: Labour costs not to blame for SBC Ardmona’s woes’, ABS News, 17 Feb 2014, viewed 1 June 2014, < http://www.abc.net.au/news/2014-02-17/fact-file-labour-costs-not-to-blame-for-spc-ardmona-woes/5245260>. “About Us” 2014, SPC Ardmona, 2014, viewed 1 June 2014, . Bourke, L. 2014 ‘Tony Abbott 'pleased' with SPC Ardmona's $70m deal to supply Woolworths with fruit and vegetables’, ABC News, 11 March 2014, viewed 1 June 2014, . Browne, J. and Nuttall, R. 2013, ‘Beyond corporate social responsibility: Integrated external engagement’, McKinsey & Company, March 2013, viewed 31 May 2014, SlideShare, . Carswell, A. 2014, ‘Coalition bailout refusal ‘saved’ SPC Ardmona, company boss Peter Kelly believes’, The Daily Telegraph, Sydney, 12 March 2014, viewed 1 June 2014, . Cowie, T. 2014, ‘SPC funding rejected by Government’, SBS News, 30 January 2014, viewed 1 June 2014, . Hussey, D.M., Kirsop, P.L., and Meissen, R.E. 2001, ‘Global Reporting Initiative Guidelines: An Evaluation of Sustainable Development Metrics for Industry’, Environmental Quality Management, Autumn 2001, pp. 143-162. Matten, D., and Crane, A. 2005, ‘Corporate Citizenship: Toward an Extended Theoretical Conceptualization’, Academy of Management Review, vol. 30, no. 1, pp. 166-179. Milne, M.J., Tregidga, H., and Walton, S. 2009, ‘Words not actions! The ideological role of sustainable development reporting’, Accounting, Auditing & Accountability Journal, vol. 22, no. 8, pp. 1211-1257. PESTLE Analysis 2014, ‘What is PESTLE Analyis?’ PESTLE Analysis, 2014, viewed 1 June 2014, . Porter, M. and Kramer, M. 2011, ‘Creating Shared Value: how to reinvent capitalism and unleash a wave of innovation and growth’, Harvard Business Review, January-February. SBS News 2014a, ‘Abbott says SPC did not need Federal money’, SBS News, 13 February 2014, viewed 1 June 2014, . SBS News 2014b, ‘Government cool on support for fruit processor’, SBS News, 28 January 2014, viewed 1 June 2014, . SBS News 2014c, ‘Labor gives Abbott no credit for SBC deal’, SBS News, 11 March 2014, viewed 1 June 2014, . SBS News 2014d, ‘Buy local or bye-bye farmers: Coke boss’, SBS News, 18 February 2014, viewed 1 June 2014, . Schneiders, B. and Massola, J. 2014, ‘Cannery SPC Ardmona put under cosh to cut wages in return for government bailout’ The Sydney Morning Herald, 20 February 2014, viewed 1 June 2014, . The New Daily 2014, ‘SPC Ardmona future secure after $100m bailout: Vic govt’, The New Daily, 13 February 2014, viewed 1 June 2014, . Read More