Business Environment Analysis - Coca-Cola Amatil - Case Study Example

Business Environment Analysis-Coca-Cola Amatil Name: Lecturer: Course: Date: Executive summary Australia is Coca-Cola Amatil’s most important market as it hosts its largest customer base in the Asia Pacific region. However, the 2014 statistics on the CCA’s performance shows that its profits have fundamentally plummeted in Australia, after experiencing a 19-percent drop in profits. A deeper exploration of CCA’s business environment reveals that the company experiences a broad diversity of challenges in the Australian markets due to macro-economic and consequent social and economic changes. The business environment in Australia is likely to worsen in the short-term (next 12 months) as well as in the long-term (over the coming decade). Since the Australian consumers are ever-more becoming health consciousness by tending to avoid high energy foods and beverages, it implies that CCA faces a long time barrier to profitability. It also faces the risks of higher production costs and low profitability due to the rising labour cost in Australia. The low purchasing power because of the current economic situation also presents a long-term barrier for CCA’s growth. CCA need to scale up its operations across Australia by expanding across the underdeveloped markets in Australia to make greater sales and hence mitigate the effects of low purchasing power. The company should invest in significant internet marketing and use of e-commerce. It also needs to integrate the theme of health and wellness in its advertising messages. The company should also engage in significant diversification to mitigate the risks of low sales. Table of Contents Executive summary 2 Table of Contents 3 1. Introduction 4 2. Analysis of the business environment 4 2.1 Social and cultural environment 5 2.2 Economic environment 6 2.3 Political and regulatory environment 7 2.4 Infrastructure 8 2.5 Trade and financial environment 8 3. Overall assessment 9 4. Recommendations 10 5. References 11 1. Introduction With its head office in Australia, the Coca-Cola Amatil (CCA) is a multinational bottling company that manufactures and distributes soft drinks like Coca-Cola, Fanta, Sprite, and Diet Coke (Mayes 2011). As the Coca-Cola Company’s (TCCA’s) leading global bottling partner worldwide, CCA currently operates in Asia, Eastern and Central Europe, South-East Asia, as well as Australia. Its key customer segments include the supermarkets, restaurants, grocery stores, and convenience stores (Suddath & Stanford 2014). The company manufactures, distributes, and retails a large beverage portfolio comprising Coca-Cola, Fanta, Sprite, as well as energy drinks, water, flavoured milk, fruit juice, vegetable products and coffee. It also distributes and retails premium wine and spirits like Makers Mark and Jim Beam. It is also the largest distributor of soft drinks in the developed markets like Australia and New Zealand, and the developing markets like Poland, Indonesia, and South-East Asian countries (Karnani 2014). Still, Australia is its most important market as it hosts the company’s largest customer base. However, the recent statistics on the CCA’s performance shows that its profits have fundamentally plummeted in Australia. In June 2014, the company was reported to have made a profit of $182.3 million, representing a 19-percent drop. Its earnings before interest and tax (EBIT) fell by up to 15.3 percent to $316.7 million. Again, CCA’s had strong cash flow in 2014, its earnings before interest, tax, depreciation and amortisation (EBITDA) plummet 10 percent during the same fiscal year (Dyer 2014). Hence, this paper examines the key elements in the company’s business environment that may give rise to opportunities and/or risks to its profits. 2. Analysis of the business environment The company’s key tenets for success are anchored in 5 fundamental areas: (a) quality, as it constantly seeks to supply customers with high quality non-alcoholic drinks, (b) marketing, as it constantly seeks to deliver innovative marketing programs across its operating territories, (c) global accessibility, as it persistently seeks to bottle and distribute its products globally (d) continuous innovation, as it constantly provides its customers near-product offerings. However, an exploration of CCA’s business environment reveals that the company experiences a broad diversity of challenges in the Australian and international markets because of the market-motivated changes and consequent social and economic changes (Piercy & Giles 2007). 2.1 Social and cultural environment The Australian consumers are ever-more becoming health consciousness and therefore tend to avoid foods with high carbohydrates (Australia Food and Grocery Council 2014). In return, the increase in consumer health consciousness regarding sugar diet is slackening the consumption rate of its soft-drinks, such as Coca-Cola, Fanta, and Sprite that CCA produces. Indeed, as a recent study by EuroMinitor (2013) indicates, more health-conscious consumers are considering taking naturally homemade soft-drinks rather than the carbonated Coca-Cola drink. Again, the emergent health and wellness trends in Australia and the neighbouring markets have meant that CCA will need to reconsider the quality of its products in this respect. It also presents a challenge to its advertising efforts, as it will need to consider integrating the theme of health and wellness in its advertising efforts, rather than vitality as has been the norm. One reason for this is since consumers considering healthy diets need to understand the healthier drinking alternatives that CCA provides (Dyer 2014). Still, it could be argued that the rise in the middle class and population in countries such as Brazil, China and India, were CCA distributes its drinks, has meant more opportunity to make greater sales. Current consumer trends show that more people in Australia are increasingly becoming eco-conscious, by preferring eco-friendly living. This may affect the consumption of CCA’s products unless it uses eco-friendly methods of production and packaging of its products (AFGC 2014). Again, the country’s huge geographic expanse means that the Australians live at a distance to each other and increasingly depend on technology for communicate and shopping (AFGC 2014). Indeed, Australia is considered to be among the leading countries with the highest rate of internet penetration, which has led to a prosperous e-commerce sector (approximated to be $2.3 billion). This implies the potential of high response rates when CCA uses e-commerce sites. This will highly affect the marketing and advertisement techniques that CCA should use. For instance, it will need to consider using internet to market its products and to reach customers (McMahon 2012). 2.2 Economic environment Australia currently faces high interest rates and a growing level of unemployment, of nearly 5 percent. This implies that less people would go for the seemingly lavish soft drinks that CCA produces. Hence, the risks of low sales continue to confront the company due to the slackening purchasing power in the country (Weller 2007). Australian consumers are also experiencing the negative effects of the rising Australian dollar, since it has reduced their purchasing power. In Australia in particular, consumption CCA’s non-alcoholic drinks has persistently been on the decrease. The Australian’s purchase and consumption of the CCA products constitute nearly half of the overall drinks manufactured and distributed in the country (The Drum 2013). The increasingly high labour costs in the Australian marketplace continue to threaten the company’s profitability. This implies that CCA risks realising higher production costs if it has to maintain the current number of staff. Indeed, employment in the beverage manufacturing sector reduced slightly in 2013-2014 by 2,571, or 0.9% compared to 2012-2013. The sector employed some 299,731 people in 2013-14, compared to 302,302 in 2012-2013. However, Australia hosts an extensive cheap labour market due to the increasing number of immigrants in the country. This has increased the potential to tap the cheap labour into its production plants (Australian Retail 2012). This creates an opportunity to reduce the costs of production. In fact, in its April 2014 statistics, CCA’s trading update provided evidence showing that has had to cut on its capital expenditure (production cost) if it had to sustain its financial strength. Indeed, CCA’s its EBIT between January and June 2014 reduced by 15 percent. The reason for this was because of the reduced capital expenditure, which resulted to the rise in cash flow by AUS$125.9 million from AUS$141.5 million (Dyer 2014). At the same time, CCA’s fruit business division known as SPSC Ardomona equally encounters severe financial pressure due to the emerging competition from the homemade readily available in the groceries and supermarkets. The issue of price war has also eaten away CCA’s profitability. In spite of CCA’s prosperous product portfolio, its profitability is threatened by frequent instances of price wars that Pepsi, Pepsico, Nestle Waters France, and Dr Pepper Snapple Group instigate in the Australian market (Williams 2013). Indeed, in May 2013, a report by the company revealed that price wars radically affected its profitability (Chappel 2014). At the same time, the recent global financial recession also has long-term effects on the profitability of the non-alcoholic beverage sector, as it has led to low consumer confidence, hence reducing their expenditure on luxury soft-drinks (Dyer 2014). In fact, in June 2014, the company experienced a drop in its earnings by 19 percent, to $182.3 million. Part of the decline was attributed to the decline in consumer confidence (Reuters 2014). 2.3 Political and regulatory environment Australia’s political and regulatory environment is generally stable and provides Coca-Cola Amatil with a high degree of certainty and confidence. The business environment has a healthy competitive environment due to the laws and regulations intended to make sure that markets are operating with proper competitive pressure levels to sustain market efficiencies and protect consumer rights (AFGC 2014). The Competition and Consumer Act 2010 (CCA) seeks to promote consumers’ welfare and healthy competition and fair trading in the beverage industry. This implies that Coca-Cola Amatil will need to be aware of the applicable regulations under the Trade Practices Act to evade the risks of potential fines due to violation, or costly civil damage suits and negative publicity. What this also implies that the healthful competition the Competition and Consumer Act 2010 provides ensures that Coca-Cola Amatil’s business in the country has a high degree of certainty (SMallBizConnect 2015). At the same time, the transparency and effectiveness of the Australian government also provides a business environment for Coca-Cola Amatil. The victory for the Liberal-National Coalition during the September 2013 election marked the end of 6 years of the Labor Party government, which also heralded a new investment phase for business investment (MapleCroft 2014). Accordingly, the previous two Labor regimes were marked by detrimental internal factionalism and a signature carbon tax that ultimately become intolerable in the manufacturing sector. The victory of the Liberal-National Coalition has, however, created a more benevolent operating environment for the Australian manufacturers. In particular, Prime Minister Tony Abbott spearheaded the repealing of the contentious carbon tax in July 2014. This led to the reduction of the energy costs in the country (MapleCroft 2014). Still, the liberal-capitalist democracy dominates in the country, as the parliament enacts liberalised trade policies that have opened the market to imports. This implies that CCA’s soft-drinks are not protected from the low-cost competitive beverages, particularly from China. 2.4 Infrastructure In general, the country’s infrastructure is highly rated by global standards. Despite lagging behind developed markets like Canada and the United States, the country’s infrastructure sufficiently caters for the transportation needs of the manufacturing industry (Bishop et al 2013). Australia has continued to present the most attractive business environment in the Asia Pacific region that enables manufacturers to realise comparatively considerable rewards (BMI Research 2014). In 2014, Australia retained its top ranking position in the Asia Pacific regional rating with a Risk/Reward score of 73.1 (See Figure 1). Figure 1: Australia tops in Infrastructure Rewards (LHS) and Risks (RHS) Score in Asia Pacific (BMI Research 2014) The unprecedented level of public sector involvement in developing the road and railway sector in order to offset to the declining mining-related infrastructure opportunities presents a healthy operating market for CCA to distribute its soft drinks across the entire corners of Australia (AFGC 2014). 2.5 Trade and financial environment Despite the generally attractive trade and financial environment in Australia, the heterogeneous trade and investment policy creates substantial barriers in the Asia Pacific region creates extensive barriers for CCA. Although some sectors are liberalised, others are overseen by restrictive and interventionist policies (Alavi 2007). For instance, the barriers to the Australian exports has remained large in the areas of processed foods and manufactured goods, such as soft drink beverages. The high tariffs in the food and beverage sector potentially locks CCA exports out of a market (Australian Government 2012). 3. Overall assessment The business environment in Australia will worsen in the short-term (next 12 months) as well as in the long-term (over the coming decade). Based on the findings from the analysis of the business environment, it is clear that Coca-Cola Amatil encounters diverse business challenges and that it runs significant reduction in profitability over the long term, as well as its market share within the highly disadvantaged beverages industry. Since the Australian consumers are ever-more becoming health consciousness by tending to avoid high-energy foods and beverages, it implies that CCA faces a long time barrier to profitability (EuroMinitor 2013). Again, since more health-conscious consumers are considering naturally homemade soft-drinks rather than the carbonated Coca-Cola drink, it implies that the business environment in Australia will worsen for the soft drinks in the long-term. The reduced employment, despite the relatively increasing high labour costs in the Australian marketplace poses another long-term major barrier to CCA. In particular, the costly labour cost implies that CCA will need to spend higher on employee attraction and retention, which would threaten the company’s profitability during the next 12 months as well as in the long run. This implies that the risks of higher production costs and low profitability are high. The low purchasing power because of the current economic situation also presents a long-term barrier for CCA’s growth. The recent global financial recession of 2009-2019 has had enduring effects on CCA’s profitability, and is likely to persist in the next 12 months. In turn, it has led to low consumer confidence, hence reducing their expenditure on soft-drink treats (Dyer 2014). 4. Recommendations The operations should be scaled up across Australia. In particular, CCA should increase revenue in its entire product offering through expansion of its geographic spread across the entire Australia, as this will mitigate the risks of low sales due to the rising level low purchasing power. It could achieve the expansion through establishment of strategic alliances with distributors in underdevelopment Australian markets (Holmberg & Cummings 2009). The company should invest in significant internet marketing and use of e-commerce to capitalise on any the positive changes in the business environment, where more Australians use the internet and internet-enabled smartphones (Richardson 2014). CCA should further will integrate the theme of health and wellness in its advertising messages since consumers considering healthy diets need to understand the healthier drinking alternatives that CCA provides (Dyer 2014). The company should engage in significant diversification to mitigate the risks of low sales, as more health-conscious Australians are avoiding high-energy foods and beverages. For instance, it should make its portfolio in tea and vegetable products to be stronger rather than just depend on carbonated drinks (Reuters 2014). In addition, CCA should capitalise on the growth of the health and wellness trend. In which case, it should acquire companies that deal in variety health and wellness drinks. To counteract the cannibalisation of standard cola by low calories colas, CCA should carry on sustaining its growth standard cola even as it seeks to expand into low calories cola. At any rate, CCA will need to spread risks from its carbonate drinks, by diversifying (Tripodi 2011). 5. 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