Performance and Risk Management: A Case of Britvic Plc - Essay Example

Performance and Risk Management: A case of Britvic plc INTRODUCTION Britvic started its operations in the starting decades of 1900 from Essex, UK (AR 2014). Since 1930 the journey of success began and company is now operating internationally (Britvic, 2015a). Britvic made record profits in 2014 with 17.6% growth rate (Britvic, 2014a). Withholding the mission of “make life’s everyday moments more enjoyable” (Britvic, 2014a), the company has strong brand portfolio of soft drinks and successfully operating in three European countries including UK, France and Ireland. Also, company has the right of selling products of Pepsico (Britvic, 2015b). The long-term strategy or business model of Britvic (Britvic, 2015c) includes capitalizing the opportunities in the core business via employing strategic elements including global category exploitation, benchmarking, operational simplicity via empowerment and social responsibility (Britvic, 2015d). Considering the international business model, the core supplying nature of the business and promising performance of financial indicators of the company, Britvic is chosen to study the performance and risk management measures of a company in the underlying paper. BUSINESS AND MARKET STUDY The company is continuously investing in growth plan with the deeper consideration of costs and energy saving (Sidel, n.d.). Financial performance in 2014 is as follows. Figure 1: Financial Performance of Britvic 2014-13 (Britvic, 2014a) Evident from the image below, it can be seen that revenue has improved as while cost is controlled. Closely analyzing the graphic, it can be evaluated that company’s operating profit, and net income is increasing almost with the same growth rate of revenue due the increase in gross revenue. The change in gross revenue is explaining simply via depicted inverse trends of gross revenue and cost of sales, which is providing evidence of successful cost control that in turns benefiting company in increasing overall net income. Figure 2: Five Years Graphical Summary of Britvics Income statement UK soft drink industry accounts revenue of around £3bn with an annual growth rate of 3.5% for 2010 to 2015 (IBIS, 2014). Britvic soft drink industry review for 2014 states that despite having economic constraints the industry witnessed the growth of 2% in 2013 (Britvic, 2014b). The positive change by 3.9% in soft drink category in convenience and grocery market including sales growth of 8% in the grocery market in fast moving consumer goods category also played positive role in improving Britvic’s sales (Britvic, 2014c). In the similar vein, the revenue contribution of the home market is highest as compared to rest as presented below: Figure 3: Market Based Revenue Distribution (Britvic, 2014a) It is maintained in IBIS world report, operational capability and a larger strong brand portfolio of leading players including Britvic act as an entry barrier for new entrants (IBIS, 2014). In review report of 2014, Britvic reported the supply volume as: Figure 4: Value and Volume Based Share of Leading Soft Drink Players (Britvic, 2014c) The positive position of Britvic in comparison with competitors is as follows: Figure 5: Supply Position of Britvic With Leading Competitors (Britvic, 2014c) According to Market Line, (2013) growth of carbonated soft drinks only for 2012-2017 is 2.6% with volume growth of 2.3% while a moderate five forces pressure on the industry. Britvic stands in top four players in terms of the manufacturer and tops in the category of suppliers (Market Line, 2013 and Britvic, 2014c). Cooperate and Financial Actions With the continuous growth efforts in terms of portfolio management and expansion, company is emerged as the number 1 leading supplier of UK soft beverages industry. The company is continuously operating in mode of growth via investing in acquisitions and investing in new business units specifically in Ireland, US (Fletcher, 2014) and now starting operations in India (Britvic, 2014b). Vigilant financial actions resulted in company’s growth with cost saving around £25m for 2014 to £30m in 2016 (Astley, 2014). Further, the outcomes of the company’s wise decisions are depicted below in terms of financial market performance of last five years as follows: Figure 6: Five Years Britvics Share Price Trend Financial Trend Analysis The section is crafted as the assessment of financial performance in terms of ratio analysis of the company that is developed as an outcome of cooperate and financial actions. Performance summary in terms of the income statement and balance sheet is presented below. Figure 7: Five Years Summary of Income Statement and Balance Sheet of Britvic Profitability Profitability of a company refers to the gaining results that a company generated out from corporate actions and indicates its financial health (McLaney, 2009 and Khan, 1993). Considering the strategic measures of Britvic of cost-cutting and investments, gross profit margin and net profit margin of the company is assessed below. Figure 8: Five Years Profitability Trend of Britvic From the graph above it is revealed that in 2010 the gross profit margin was higher but lower net income margin. Researching for the matter, the acquisition cost spending in 2010 for acquiring Fruite brand was found the culprit for making the net margin negative. However, with efficient measures of cost cutting strategy, company was able to recover in the next year and throughout after 2011, company is witnessing continuous growth rate in both gross and net profit margins due to set goals of expansion and continuous cost cutting target achievement as discussed above. Liquidity Liquidity of a firm refers to the business ability to pay back its short-term liabilities via utilizing its short-term assets (Gitman, 2003). The liquidity of the firm was assessed via utilizing current and quick ratio as depicted below in the graphic. Figure 9: Five Years Summary of Liquidity Trend of Britvic Above depicting graphic shows that possessing a good liquidity position company keeps lesser difference in both of the ratios suggesting that company operates with a lower level of inventory thus possesses more strength of being liquid (Britvic, 2014b) Solvency/ Gearing Solvency measures are utilized by the stakeholders to assess the gearing of capital structure of a company (Ross, Westerfield, and Jordan, 2009). Gearing ratios defines the capital structure of a firm via developing insight about equity and debt balance of a company (Gruen and Howarth, 2005). Figure 10Five Years Summary of Solvency Trend of Britvic The implication for gearing of the company suggested by above graph depicts that company after a ratio fluctuation in the beginning years is now improved on the ratio via debt reduction and equity improvement. Equity’s sustainable growth and debt management via strategic capital acquisition actions are paying positively in the growth of the company (Hay, 2014). Investment Investments in terms of payout aid company attracting more investors in the share marking depicting the strong financial health of a company. Britvic strategically behaved in 2010, where losses were higher, but the company gave dividends to its investors suggesting the healthy turnaround of the company. Afterwards, company is accounted as a continuous dividend payer to its shareholders. Figure 11: Five Years Summary of Investment Trend of Britvic Risk Management Surviving locally in a fiercely competitive environment and existing internationally, the company is highly exposed to the risk associated with the external environment of the said business. Peirson, & Brown, (2008) suggested that the company who operated as multinational is exposed to higher risks. The higher investment in the Ireland and entry in India with a prospective improvement in US brand business increasing the risks associated with the failure and /or decline in financial performance. Discussing the risks that are exposed to the company, Britvic highlighted the major ones in the annual report (Britvic, 2014b) as reported below. Britivc Macroeconomic condition Risk The company informs the measures of microenvironment in terms of loan management, currency fluctuation and country line risks. Industry Risk Retailer and Pepsico relationships, market preference change and health concerns about many drink categories are reported as risks. Supply business Risk Site lost, cost enhancement to maintain quality and pricing’s impact on profitability are considered as risks in this regard. Regulatory Risk Dealing in a beverages (food) category company is already exposed to many regulations and prospect future regulation is still a threat. IT related Risk Inherited IT risks associated with system failure, data loss, and corruptions are reported. Figure 12: Risks Identified By Britvic and Mitigation Strategies (Britvic, 2014c) However, for sustaining effectively in such environment, company has developed a systematic process to manage the risk associated with the business as depicted below (Britvic, 2014b). Utilizing the given model, company try to manage almost all the risks associated with the sustainability of the said business. Figure 13: Risk Management Process at Britvic (Britvic, 2014c) As depicted in the presentation of the risks by the company in the annual report of Britvic, (2014b), company is concerned with managing the risks that are faced by each firm in a global operating scenario. Taking the risk consideration of Britvic some of the addressed risks are analyzed below. Currency Fluctuation Risk (Exchange Rate Risk Management) When a company expands globally it is also exposed to the exchange rate disparity in between countries. Exchange rate fluctuations often hurt the profitability and asset values of a company (Arnold, 2008). Now moving out of Euro zone area via entering in India, currency fluctuation risk is increasing for the company (Britvic, 2014a). Maintaining to the facility of being in Eurozone the company is neglecting the impact of other currencies fluctuation measure that will increase impact on the company’s performance. For instance, European 2008 economic downturn severely hurt all the European economies specifically Ireland, that faced drastically longer time to be recovered and reported stagnant growth in 2012 (Forfas, 2013). To deal with the risks associated with contracts and financial instruments of hedging, Britvic changes its currency continually to reduce the impact of exchange rate on the financial drivers. The company further takes counter measures as translating previous years’ results for exchange rate conversions (Britvic, 2014b). For maintaining sustainability and reduce the prospective effect of the discussed implications Britvic cautiously monitor and develop policies of hedging forecasted exposure to deal with the matter via utilizing exchange contracts and financial instruments that reduce the impact of volatile currency exchange rates. The Forward contracts tool of hedging provides business with an opportunity to deal fix the price of an entity in future point in time to avoid risk assoicated with price fluctuation. Advantage that forward contract offers to the business is the fact that binds the price but does not requires additional payment like interest in debt (Adams, et al, 1988). Despite reducing the exchange rate risk of the business, forward contracts are faced with the default chance of either party. Also, the cotract being private in nature, therefore, there is limited system to prevent defaults. These and other factors make forward contact complexed finanncial instrument; hencee, increases risk of other types (Kevin, 2008). Although, as reported in the risks exposure section in the annual report of the company for 2014 is not highly affected via currency fluctuations but it take hedging measure to counter any uncertain risk effect (Britvic, 2014b). Political Risks in terms of regulatory Issues and macro environmental Measures Political risks in terms of uncertain political international environment, different regulatory measures and business operating environment is wider concern of businesses to survive efficiently. Britvic is not only exposed to the political risks associated with the Euro areas but now also have higher risk exposure of international political environment. The politcal risks posed to Britvic is further evaluated category wise as follows: Country Based Risks Deloitte particularly for the year 2015 reported political risks associated with the businesses in the UK as the general election arrival, Euro membership referendum as well as weaknesses of Euro area (Deloitte, 2015). Britvic among Britain businesses is also exposed to the certain said international and specifically British political risks. Britvic in order to effectively deal with country specific risks has developed a strategy of building contractual agreements with local people who are well equipped with knowledge of local systems and procedures. For example, recent entry in the Indian market is done with the support of the leading local player Narang Group to capitalize on their expertise in dealing local market (Britvic. 2014a). Also company has developed policies and procedures that are compatible to the local market to avoid challenges from country based risk (Britvic. 2014a) Firm Based Risks Firm based risk refers risk exposes with respect to its internal environment. Some of the related risks include currency fluctuations, regulatory exposure, market preferences and concerns and the risk associated with their core supply business in a multinational environment. Suggesting low exposure to the economic crisis, Britvic maintains that company is operating relatively lowered affected areas of Europe and thus holds a lesser impact of economic indicators. However, the evident crisis in Ireland, as mentioned above, counters the perception. Another risk is related to the market preferences and concerns about health. Being in the food industry company is also exposed to the implications from the governments of operating countries as well as implications from EU directives, world health organizations and others. Corporate social responsibility is another concern of the company that can raise political issues. According to the annual report, company is efficiently governing to overcome many of the said issues in terms of being socially responsible via valuing People, Planet and profit as sustaining strategy (Britvic, 2014a). Company is aimed in the regard to achieve their four stars via employing said strategy till 2020 (Britvic, 2014a). In addition to above measures, strong corporate governance system that engages entire employee base with management also is accountable. For example, employee from anywhere can contact the management through whistle blowing hotline for reporting policy breach (Britvic, 2014a) Global Environment Risks Operating in multiple countries and holding the intention growth via global expansion increases the exposure of global environmental risks to the company. According to (Moran et al., 2005), companies that perform as multinational have to fulfill requirements of several law sets to meet obligations of different countries. Second most important aspect in today’s scenario is the threat of terrorism for which U.S and Asia are highly threatened. Britvic planning to enter in India and expand in US highly need to be concerned about the said measures. One measure global concern for which EU is also highly concerned is the “Go Green” matter for which companies are thriving to meet the imposed level of governance. Britvic to deal with the issue already in the phase of achieving its four-star policy, as well as manage, many of the regulatory issues as imposed. Further, EU directives aid in improving the regional scenario for employee free movement in the region is increasing the risks of increasing employee power to dictate the terms. Finally, there are risks of cost and pricing disparities due to inflation, and other social-economic indicators is still present in terms of risk for the company in the global environment. Conclusion and Recommendations Conducting deep analysis of Britvic’s performance, business model, management and governance studies, it is concluded that the company is operating efficiently with the strategic revival in many areas. All the operating decisions from investing to cost cutting and corporate governance to people, planet and profit strategy are paying positively in the growth of the company. Furthermore, cautious risk management process development and utilization is adding company in mitigating many of the environmental risks associated with the business. Considering the growing via expansion strategy of the company in highly competitive international environment some recommendations are made below for sustaining successfully. Exploit the potential of new preferences of the market for healthy drinks via continuous enhancement in product portfolio. Take local market research in wider considerations for entering in the new regions. Continuously keep focus on risk management and environmental concerns. Keep higher concerns for obligation fulfillment while expanding to a new country and/or region. Market penetration is inbuilt requirement of the said business to acquire greater market share. Improve supply logistics to gain competitive advantage as evident from the measures of Amazon via acquiring and utilizing Kiva systems that will enable business in automated handling of material; hence, reducing leakages (King, 2012). References Adams, C. Mathieson, D., Schinasi,G. and Chadha, B. (1988). Developments, Prospects and Key Policy Issues. International Monetary Fund. Arnold, G. (2008). Corporate Financial Management, 4th Edition. Harlow: FT Prentice Hall. Astley, M. (2014). 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