Operation Performance and Risks Management of Britvic Group Plc - Case Study Example

Operation Performance and Risks Management of Britvic Group Plc Table of Contents Introduction 3 Business and key Markets Study 4 Corporate and financial actions 5 Financial Trends 5 Profitability 6 Liquidity 8 Efficiency 9 Risk Management 9 Exchange Rate risk 10 Political risks 11 Conclusion and Recommendation 12 Reference List 14 Introduction Britvic plc is a soft drinks manufacturing and distributing company, headquartered in UK. (Britvic, 2015a). The company operates in overseas locations like US, Great Britain, France and Ireland. The company own four distinct subsidiaries which are Britvic International, Britvic Ireland, Britvic France and Britvic GB. The global soft drinks industry is growing at a steady pace, with an annual growth of around 4%. As of the fiscal year 2013 the total revenue generated the soft drinks industry has been recorded to be $624,363.5 million. In the European market the market growth has increased by 2.4% and 6.9% in the Asia-Pacific market. The consumption of soft drinks has also increased in a global perspective by nearly 4% in between the year 2009 to 2013. The consumption volume has been recorded to be 571.9 billion liters as of 2013 (Marketline, 2014a. The company operates in a highly competitive industry; therefore it faces threats and challenges from rival companies like Coca-Cola, Hangzhou Wahaha Group Co., Ltd., Tingyi, etc (Marketline, 2014a). However, owing to the steady growth of the industry, the company also holds prospective opportunities to expand its business activities. As of fiscal year 2013, the group company has earned revenue of £1,321.9 million, which is a 5.2% increase over the previous year. In the same years the company recorded an operating profit £108.8 million, which is a slight increase of 0.8% than that of year 2012. This paper is focused on the financial structure of Britvic plc. It also covers the exchange rate risk and political risk management by the company (Marketline, 2014). Business and key Markets Study Figure 1: Revenue structure of Different subsidiaries and Parent company Source: (Britvic, 2015b) The above mentioned chart highlights the revenue generation of the company and its business units. From the chart it can be stated that the Britvic GB carbonates generates the maximum revenue for the company, followed by Britvic GB Stills. This suggests that Britvic GB is the most lucrative business unit of the company. The revenue generation of Britvic France has increased significantly over the years and has surpassed that of Britvic International and Britvic Ireland. The revenue of Britvic Ireland had recorded a gradual decrease in revenue from 2010 to 2013. On the other hand the revenue of Britvic International has increased from £29.3 million in 2012 to £37.5 million in 2013. The revenue of the parent company has increased significantly in the last fiscal year to £1321.9 million. Corporate and financial actions According to Morningstar (2015) in the year 2013, the company handed over 4.5% of the voting rights to Vidacos by selling more than 11 million shares. In the same year the merger between AG Barr plc and Britvic failed to close, as Britvic did not accept the proposal. Based on the data provided by Britvic (2015c) in the next year, the company has sold the interests of around 12.5 million shares to Prudential plc group. In the year 2014 the company has also given a recommendation of £14.8 for each share which is a hike of 13.8 pct over the dividend which is announced previous year. Reuters (2015) has also mentioned that in the year 2014, the total dividend value has been recorded to be around £36.3 million. The company has also provided a recommendation of £0.061 for each share which is an increase by 13 pct over the last year’s dividend. Financial Trends Figure 2: Financial Performance of Britvic Plc All figures in £ million Particulars 2010 2011 2012 2013 2014 Revenue 1139 1290 1256 1322 1344 Gross Profit 627 663 632 675 727 Cost of Revenue 512 627 625 647 618 Operating Expense 626 550 524 566 582 Net Income (48) 58 57 62 90 Source: (Morningstar, 2015) From the above chart it can be stated that the company’s revenue has seen a steady growth from 2012. The gross profit has also increased over the last three years to £727 million. This suggests that Britvic has been able to improve its profitability steadily from 2012. The Net income however, gives a clear idea of the company’s profitability which suggests that Britvic has managed to keep up its profit making after a sharp loss in 2010. Thus it can be stated that the company has been successfully able to rejuvenate its business operations since its downturn in 2010 (Morningstar, 2015). Profitability Gross Profit Margin Source: (Morningstar, 2015) The gross profit margin provides a rough idea of the profitability of the firm (Drake, 2014). From the graph mentioned above it can be stated that the gross profit of the company took a sharp downfall in the year 2012. The primary reason for this downfall is mostly because of the increased operating cost mostly in the fields of promotional activities and increased price of raw materials (Britvic, 2014). However, the company has managed to gradually restore its profit making over the last 2 years. Net Profit Margin Source: (Morningstar, 2015) The above mentioned graph shows that the company has faced severe loss in the year 2010. However, it has managed to recover the net profit in 2011 and has significantly increased it to 6.67% in 2014 from 4.68% in 2013. The severe competitiveness in the industry has been challenging for the company. As in 2010, the company has seen decrease in its sales volume as due to decrease in brand awareness. This issue had been taken care of in the next year as the company has improved its promotional activities and reviewed its distribution channels (Britvic, 2010) Liquidity Current Ratio Source: (Morningstar, 2015) The current ratio can be obtained by dividing the current assets by the current liabilities (Drake, 2014). The above graph indicates that the current ratio is quite close to 1, therefore it can be stated that the company’s liabilities are almost equal to its assets value. However in the year 2011 and 2013, the liabilities exceeded the assets, which suggest that the company has very less liquid cash availability. Low cash availability suggests that the company is not in good financially health, as it will not be able to pay off its immediate debts or take care of any unforeseen contingencies. Efficiency Asset Turnover Ratio Source: (Morningstar, 2015) The assets turnover ratio indicates the efficiency of the firm’s assets. It is the revenue generation capacity of the per unit value of the assets (Drake, 2014). The above graph shows that the ratio has been fluctuating over the past five years. In 2014 it has decreased from 1.27 in 2013 to 1.24 in 2014. This suggests that the revenue generating efficiency of the firm has reduced. This fluctuation is a result of the drastic changes in the assists of the company, this is mostly because of the several mergers and acquisition that the company as undergone (Britvic, 2015c). Risk Management In order to ensure a sustainable business operation, every firm needs to take care of all forms of imminent risk to the company. The two most important forms of risks to a company are the financial risk and the political risk. These risks are omnipresent and affect the business activities of almost all the firms in the world irrespective of its financial strength or infrastructure. The following sections highlight the exchange rate risk and the political risk faced by Britvic Plc. Exchange Rate risk The exchange rate risk is one of the major financial risks that emerge from the unexpected changes of the currency exchange rates (Giddy and Dufey, 2014). This is more predominant in companies that operate in multiple nations that have different currency values. It affects the profitability of the company. Different countries have different currency rates and when the currency rates of the home country and host country change unexpectedly, it influences the financial figures of firms. The revenue of the firms reduces due whenever the local currency depreciates. The changing currency rates mostly influence the present value of future cash flow and it also affects the revenue generated from the overseas exports (Beckmann and Stix, 2015). Papaioannou (2006) has described the exchange rate risks to be of three types, which are transactional risks, translational risks and economic risk. The translational risks are mostly dominant when a firm translates the financial figures in to the currency of the home country (Watkins, 2014). This risk is also known as the risk of cash flow that deteriorates the revenue generated from fund repatriation and import and export contracts. The transactional risk involves unexpected changes in the value of the company’s balance sheets of foreign business units (Papaioannou, 2006). This risk can be assessed in terms of the company’s net assets and its values in foreign currencies. The economic risk is characterized by the financial down fall of the company due to the currency rate fluctuations (Giddy and Dufey, 2014). Britvic plc operates in several overseas locations and exports its products worldwide. This as a result exposes the company to significant exchange rate risks. The company is mostly influenced by the exchange rate between currencies, Sterling-US dollar, sterling-euro and euro-US dollar (Britvic, 2014). Whenever the rates between these currencies fluctuate revenue generation of the firm is also affected. The company operates mostly in countries with euro as their domestic currency. Therefore any fluctuations in that currency affect the company. The exchange rate risks can be mitigated by employing several strategic techniques, such as hedging. Hedging is a financial risk mitigation process in which a firm enters in to a contract to protect its financial status from unexpected changes in currency rates. The primary advantage of this process is to reduce the risks of the loss for the shareholders. It helps to mitigate the exchange rate risks in a long term basis (WU, 2014). However, it also has certain disadvantages such as it does not offer much flexibility to the shareholder to react to the market changes (Frenkel and Johnson, 2013). Risk mitigation is a vital part of the organizational activities. The process of “value at risk” is mostly used to assess the potential risk of currency rate fluctuations (Holton, 2003). The hedging process is the most popular among firms for mitigation exchange rate risks. The long term risks are mitigated by the strategic hedging and the short term ones are taken care of by tactical hedging. Hedging process is most effective in dealing with translational exchange rate risks. It is mitigated by nonsystematic and infrequent hedging (WU, 2014). Britvic plc uses a series of strategies to mitigate the exchange rate risks. The business activities in the euro dominated regions are mostly paid off by foreign currency borrowings and cross currency swaps. This as a result hedges the translational risks of net investments in overseas operations. Moreover, the company uses the revenue generated from the euro dominated business operations to pay off the euro dominated liabilities. The advantage behind this technique is that the company is able to avoid inter-currency exchange, thereby minimizing the exchange rate risk. The company also faces transactional risks from the expenses made in currencies apart from the functional currency. Britvic has hedged almost 65% of its net exposure of the forecasted 12 months in advance through forward currency exchange contracts (Britvic, 2014). This technique allows the firms to protect themselves from unexpected future spot rates, thereby keeping the cash flow predictable (Bidvest Bank, 2015). Political risks The political risks have become a subject of great concern for any business firm. The political risk involves sudden instability in the political environment which in turn greatly influences the business activities of an organization (Bekaert et al, 2014). Political risks are present in both domestic and multinational operations. However, the multinational firms are affected more by the cross border political issues. Different countries bear different political scenario and as a result a firm which operates in multiple geographic locations, must have a clear idea current political scenario of the host countries. The negative influence of the political risks is gradually increasing in the global business market (Bakaert et al, 2012). The adverse political scenario of some of the developing countries has hardly improved in the last decade. The business activities in countries like Libya, Syria, Brazil, etc. have been greatly degraded by its adverse political scenario. However, in countries like Columbia and Zimbabwe, the situations have improved over the years (Moran, 2014). Britvic operates in several overseas locations and often faces political issues which get in the way of their business activities. However, the company has successfully managed to stay out of any political issues by strictly adhering to its “Conduct of Business Policy” (Britvic, 2014). According to the policy the company does not associate itself with or endorse any political parties. It follows all the legal regulations of the cross border trading activities, thereby avoiding any political issues. Moreover the company has also laid down strict rules for its employees for not making the company involved in any political issues. Britvic also do not make any donations or offer sponsorship to any political parties. Thus the company uses all the risk aversive strategies to avoid political risks (Britvic, 2015d). According to Rajwani (2014) the political risks can prove to be fatal for a company is not mitigated properly. The reason for political instability cannot be summed up easily as different countries have different political issues caused from different reasons. In counties such as the Middle East, Latin America and North Africa the political risk arises from corruption and growing of unemployment (Erb, Harvey and Viskanta, 1996). Political risks can be mitigated by following several techniques such as making good relationships with the local government by signing investment contracts, local sourcing etc. Local sourcing includes sourcing of resources for the host country so as support its economy. The firms often employ proactive measures to avoid any imminent risks. This mostly involves investing in insurance policies that help the company to protect its assets and overcome financial loss. Thus political risks greatly influence the activities of Multinational firms, thereby compelling the MNCs to devise their business strategies accordingly (Rapoza, 2013). Conclusion and Recommendation Britvic has successfully diversified its business portfolio over the years by making strategic business partnerships and acquisitions. The company holds a strong position in the UK fruit juice market and operates in business collaboration with PepsiCo, thereby giving it certain bottling rights and distributorship. Operating in a global perspective exposes the company to political and exchange rate risks. However, the Britvic has successfully managed to mitigate these risks by efficient use of its risk management team. The firm mostly uses several hedging techniques like forward currency contracts, using derivatives, and forward currency exchanges to reduce the impact of the currency exchange rate risks. The political risks are also a concerning issue for the company. Britvic maintains good relationship with the local government and follows all the ethical business processes thereby keeping it away from any political issues. In the near future Britvic can expand its product line up by introducing carbonated soft drinks. Owing to its financial strength and brand awareness, it can have huge potential in the CSD industry. Moreover, while making any further geographical expansion strategies, Britvic must assess the political scenario of the host country, so as to avoid any dispute with the host country. Reference List Bakaert, G., Harvey, C., Lundblad, C., and Siegel, S., 2012. Political risk and international valuation. Columbia: Columbia University. Beckmann, E., and Stix, H., 2015. Foreign currency borrowing and knowledge about exchange rate risk. Journal of Economic Behavior & Organization. Pp. 25-42. Bidvest Bank, 2015. Forward Exchange Contracts. [online] Available at: [Accessed 4 February 2015] Britvic, 2010. A year in soft drinks. [online] Available at: [Accessed 4 February 2015] Britvic, 2014. Annual Report. [online] Available at: [Accessed 4 February 2015] Britvic, 2015a. Company Overview. [Online] Available at: [Accessed 4 February 2015] Britvic, 2015b. Financial Reporting. [Online] Available at: [Accessed 4 February 2015] Britvic, 2015c. History. [online] Available at: [Accessed 4 February 2015] Britvic, 2015d. Public Policy. [online] Available at: [Accessed 4 February 2015] Drake, P.P., 2014. Financial Ratio Analysis. [online] Available at: [Accessed 4 February 2015] Erb, C. B., Harvey, C. R., and Viskanta, T. E. (1996). Political risk, economic risk, and financial risk. Financial Analysts Journal, 52(6), pp. 29-46. Frenkel, J. A., and Johnson, H. G., 2013. The economics of exchange rates: Selected studies. London: Routledge. Giddy, I. H and Dufey, G., 2014. The Management of Foreign Exchange Risk. [online] Available at: [Accessed 4 February 2015] Holton, G.A. 2003. Value-at-Risk: Theory and Practice. San Diego, California: Academic Press. Marketline, 2014. Britvic plc. [Pdf] London: Market Line. Available at: [Accessed 4 February 2015] Marketline, 2014a. Global Soft Drinks. [pdf] London: Market Line. Available at: [Accessed 4 February 2015] Moran, M., 2014. Political risk on the Rise: the Peril of Emerging Markets. [online] Available at: [Accessed 4 February 2015] Morningstar, 2015. Britvic PLC. [online] Available at: [Accessed 4 February 2015] Papaioannou, M., 2006. Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms. International Monetary Fund, 6(255). Pp.7-10. Rajwani, T., 2011. How Should Firms Deal With Political Risk? [online] Available at: [Accessed 4 February 2015] Reuters, 2015. Britvic PLC. [online] Available at: [Accessed 4 February 2015] Watkins, T., 2014. Accounting or Translation Risk Exposure. [online] Available at: [Accessed 4 February 2015] WU., 2014. Currency Hedging. [Online] Available at: [Accessed 4 February 2015] Read More