Britvic Performance and Risk Management - Case Study Example

INTRODUCTION Being an international leading soft drink manufacturing and supplying company, Britvic started its operations in the starting decades of1900 from Essex, UK (AR 2014). In 1930, the vitamin producer company started functionality of its operation in bottling juices and then begun the journey success. Achieving growth milestones, company is now operating internationally (Britvic, 2015a). The existence of successful sustainability of the company is depicted with the depiction of record profits in the year 2014 with about 17.6% growth rate (Britvic, 2014a). Withholding the mission of “make life’s everyday moments more enjoyable” (Britvic, 2014a), the company is successfully developed strong brand portfolio of soft drinks and successfully operating in three European countries including UK, France and Ireland. The company also holds the right of selling numerous products of the giant brand Pepsico in the said countries (Britvic, 2015b). The company defines its long-term strategy in terms of business model (Britvic, 2015c) as the capitalizing the opportunities that are available to the core business via employing strategic elements including global category exploitation, benchmarking, operational simplicity via empowerment and social responsibility (Britvic, 2015d). 2005 witnessed the huge milestone of the company in terms of becoming a public limited company via registering in London Stock Exchange. Company operates in the international environment and activity involved in the supply business. As reported, company holds most number one ranking in the supply business in all the three operating countries (Britvic, 2015e). Due to the nature of the business and international operational environment company is exposed to the risks associated with international and supply business environment. 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. The paper includes a comprehensive descriptive section to review the financial indicators’ performance of the company and an analytical section to measure the performance and risk management ability of a company to sustain in a highly challenging competitive international environment. BUSINESS AND MARKET STUDY Exploiting the “development via innovation to grow” strategy, the company is continuously investing in growth plan with the deeper consideration of costs and energy saving (Sidel, n.d.). Continuously growing company is now achieved the record financial level in 2014 as depicted below. (Britvic, 2014a) Considering the five year revenue trend below, it is revealed that the company is successful in improving its financial performance in terms of revenue generation. Additionally, it is depicted by the comparison of COS and revenue graph that company can make its cost of sales consistent with a decline rate of revenue of the company is continuously increasing while the COS trend is depicting steadiness and then a decline from 2013 to 2014. The evidence of the reduction is mentioned in the annual report 2014 in terms of controlling operating costs via improving global operation (Britvic, 2014a). The outcomes of cost controlling efforts are depicted below as continuous improvement in net income of the company (Britvic, 2014b). 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 COS, which is providing evidence of successful cost control that in turns benefiting company in increasing overall net income. The model of the business holds multiple units of operation and measures the performance of the said units individually to assess the viability of business unit in adding to the revenue of the company. Below depicted is the revenue distribution in four key business units including UK, International, Ireland, and France. (Britvic, 2014a) Analyzing the above graphic, it is revealed that the company is generating more of its business revenue from the birthplace that is United Kingdom. As both of the United Kingdom’s business units namely Stills and carbonates generating 67% of the business revenue. UK soft drink industry is accounted for adding value to the economy via employing 16,881 employees in 141 businesses with revenue of around UKD 3bn with an annual growth rate of 3.5% for 2010 to 2015 (IBIS, 2014). Britvic soft drink review 2014 report for industry review reports that despite having economic constraints the industry witnessed the growth of 2% in 2013 with an achievement of UDK 10bn revenue (Britvic, 2014b). The report also reported a positive value change of 3.9% of soft drink category in convenience and grocery market with the highest sales growth of 8% in the grocery market in FMCG category (Britvic, 2014c). It is maintained in IBIS world report, CCE and Britvic’s operational capability and a larger strong brand portfolio are considered as an entry barrier for new entrants (IBIS, 2014). Both of the said companies are leaders in the supply business of soft drink with holding a strong own brand portfolio as well. In review report of 2014, Britvic reported the supply volume as: (Britvic, 2014c) However, depicting a negative YOY growth rate, Britvic is still growing higher than a huge competitor Coca cola enterprise in the supply business with the 4% increase while Coca cola’s supply business only witnessed 3% increase in 2013. The evidence of the matter is depicted in the growth sales volumes of both the suppliers as presented below. (Britvic, 2014c) The report of market line forecasted the value CAGR of carbonated soft drinks only for 2012-2017 is 2.6% with volume growth of 2.3% and depicted a moderate five forces pressure on the industry. Further, among the giant industry Britvic falls in top four players in terms of the manufacturer (Market Line, 2013) and tops in the category of suppliers. 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 not manufacturer of its brands but also holds packaging rights of Pepsico. With such a flourishing status 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 of the company are not only accounted for investment and growth decisions but also for cost-cutting measures that are positively paying to the company as forecasted cost saving for the current year will be UDK 25m with a prospect increase of 5m more in 2016 with value of UDK 30m (Astley, 2014). Further, the outcomes of the company’s wise decisions are depicted below in terms of financial market performance of last five years of the company in London stock exchange where company was registered with IPO status in 2005. The graph above depicts a sound increasing share value trend of the company for last three years thus depicting the prosperity of the company in the stock market. 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. Income Statement   2014 2013 2012 2011 2010 Revenue 1,344.40 1,321.90 1,256.40 1,290.40 1,138.60 Gross Profit 726.9 675 631.8 663.1 627 Operating Profit 145.3 108.8 107.9 111.9 -2.5 Net Income 89.7 61.9 57.4 58.4 -48.2 Balance Sheet Short Term Assets 510.1 463.7 380.8 384.4 366.1 Long Term Assets 588.3 599.1 645 680.3 680 Current Liabilities 434.3 504.5 371.9 390 366.4 Long Term Liabilities 584.6 517.4 616.8 652.9 710.4 Equities 83.1 40.9 37.1 22.5 -30.7 Profitability Profitability of a company refers to the gaining results that a company generated out from corporate actions (McLaney, 2009). Profitability ratios are the measurement of profit margins for a company to indicate its financial health (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. Assessing the graph depicting the trends of gross and net margins of the company, it is revealed that gross profit margin was higher in 2010, but the year ended up with the lesser net income margin that depicts the presence of any other than COS huge expense that led the margin declined. 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. Current ratio is accounted for working capital management ability of a firm to pay current liabilities while quick transparent more of a company’s health via excluding its inventory from the current asset. 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). 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. 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. (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. (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 Management) When a company expands globally in terms of enhancing global coverage of the business, it is highly 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). However, claiming to be getting lower exposure company has ignored its vulnerability of international business unit that is accounted for around 50 different currencies. 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 with the increased expansion of international business. Moreover, considering other economic factors and its impact on the currency fluctuation level, the business is highly challenged to manage the economic indicator management in all those countries where company is operating. For instance, European 2008 economic downturn severely hurt all the European economies including Ireland, who faced drastically longer time to be recovered and reported stagnant growth in 2012 (Forfas, 2013). It was reported the competitiveness discrepancies slower down the growth of the economy and thus thrown many challenges for businesses to be survived. Operating in the euro area Britvic mainly deals in the Euro and pound exchanges while for US Britvic has to manage the exchange rate volatility impact of US dollar with British pound. Not only in terms of operating profits, incurred costs in terms materials, employee wages and other directly accounted for currency fluctuations. 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. 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). 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 including terrorism, relational preferences of governments with each other, currency fluctuations and law imposing. The political risk for the company are evaluated below in three different measures including the risks of the parent country, personal risks associated with the firm, as well as global risks. 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. Company needs to develop a particular strategy employing its risk management model efficiently to manage the risk associated with the local and international political environment. Firm Based Risks Specifically taking the risks that the company exposes with respect to its internal environment include currency fluctuations, regulatory exposure, market preferences and concerns and the risk associated with their core supply business in a multinational environment. However, company neglects the inherited impact of economic downturns that widely impact overall all globally operating companies in many aspects. 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. Company to deal with the impact of economic volatility is involved in practicing hedging contracts and evaluation of company’s performance in terms of reported risk management process in the annual report (Britvic, 2014b). Furthermore, considering the market preferences and concerns about health the company is highly exposed to the threat of consumer switch as communities are now highly showing concerns about the health issues due to carbonated drink consumption. 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, 2014b). Company is aimed in the regard to achieve their four stars via employing said strategy till 2020 (Britvic, 2014b). 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. 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Available from http://www.sidel.com/about-sidel/global-references/britvic,ireland [Accessed 14th February, 2015] Read More