Globalization and Global Strategic Planning - Associated British Foods - Essay Example

Introduction Associated British Foods is an international public limited company that has its headquarters in London (ABF, . The company was established in 1935 and is the leading British supermarket chain as far as production of sugar and baker’s yeast is concerned (ABF, 2010) The company has five strategic business units: Sugar, Agriculture, Retail, Grocery and Ingredients (ABF, 2010). The grocery division stocks both branded and own label products. Brands that fall under its grocery division include Mazola, Ovaltine, Ryvita, Jordans and Twinings, Silver Spoon, Tip Top and Kingsmill. The company’s retail division (called Primark in UK and Penney’s in Ireland) has a global presence with over 215 stores covering a total area of 6.9 million square feet (ABF, 2010). The retail division’s outlets are located in Belgium, Germany, Ireland, the Netherlands, Portugal, Spain and the UK (ABF, 2010). In 1963, the company acquired the British supermarket giant, Fine Fare which it sold later in 1986 in order to acquire British sugar (ABF, 2010). As of 2009, British Sugar fulfills the sugar (ABF, 2010). The company provides employment to more than 97,000 people and operates in more than 44 countries (ABF, 2010)The Company’s profits by geographic region are such that the company derives 53% of its profits from U.K and rest from international sales. Amongst the international regions it targets are Europe , Africa, America and Asia Pacific with Europe and Africa contributing the most and Asia Pacific contributing the least (ABF, 2010). Mode of Market Entry The mode of market entry employed by ABF has been diversification of both products and markets (Whittington & Mayer, 2002). It has been observed at times, that diversification into new markets has been the result of product diversification; that is, the company has entered into new markets simply because those markets had demand for the product that the company had newly introduced. This was the case with sugar. ABF diversified into the food business because of its intention to provide one-stop convenience shopping to customers; the company had realized that customer buying habits and trends were changing (Whittington & Mayer, 2002). One of the most important reasons however was the instability of earnings from sugar sector due to its seasonal nature, coupled with the anticipated EU reform (Bertin, 2002). International Strategy and Strategic choices for different countries By the early 1900’s, ABF diversified into the tea and coffee segment (through acquisition of Twinings and Jackson), the biscuits and chips bread business (through acquisition of Burtons and Ryvita) and finally, the frozen foods and edible oils segment (George Weston Limited, 2010). The chairman, Weston purchased the bread delivery route in 1882 and in the next 36 areas he built several bakeries in that region (George Weston Limited, 2010). In 1935 seven bakeries were purchased in England, Wales and Scotland (George Weston Limited, 2010). After the end of the World War II, the company purchased two Australian bakeries, namely, Gold Crust Bakeries in Adelaide and Gartrell White in Sydney (International Directory of Company Histories, 2008). It continued in the 1960’s with the acquisition of A.B. Hemmings, Ltd. and the launch of the largest bakery in Glasgow in 1970 after which it diversified into the frozen foods segment by capturing the ice cream market and pizza bakery market (International Directory of Company Histories, 2008). In 1882, the acquisition of the bread delivery route led to the creation of George Weston Limited which was ranked as one of America’s top businesses (International Directory of Company Histories, 2008). However, towards the beginning of World War II high taxes and voluntary defense contributions led to low profits. The company’s decision to acquire Australian bakeries Gold Crust Bakeries in Adelaide and Gartrell White in Sydney created profits worth £2 million a year (Cherney & Elena, 2001). The 1950’s boom led ABF to become the largest miller, baker and grocers in the UK and abroad (International Directory of Company Histories, 2008). In 1960’s the company acquired a controlling interest in A.B. Hemmings, Ltd., a multi-billion dollar business in itself, comprising of over 230 bakery outlets across the UK (International Directory of Company Histories, 2008). By the 1990’s the company left its competitors behind with an exorbitant 80% market share (International Directory of Company Histories, 2008). The company was formally employed in the sugar industry; however, it spread its operations to other unrelated sectors such as grocery, retail and ingredients (Austen & Ian, 2007). A key aspect of ABF’s diversification strategy has been its geographic diversification. In 2006, it got hold of Illovo; a South Africa based company which it has used as a means of penetrating deeper into the South African sugar market and could use this opportunity to acquire more firms in the same line. (George Weston Limited, 2010). Similarly, the company’s acquisition of Patak business in India presents a similar opportunity. Challenges and profits from the diversification strategy Ever since its acquisition of Illovo, a South African based company; the latter has become one of the largest sugar manufacturers in South Africa which has enhanced profitability for ABF (International Directory of Company Histories, 2008). The company’s marketing and distribution system has been enhanced, as it has been able to tighten grip over its supply chain. However, the company’s diversification into the UK grocery sector has been met by several challenges. Recently, the grocery sector has seen a consolidation of retail supermarkets. Two significant mergers include that of Wal-Mart and ASDA and that of Carrefour and Promodes (Schnedlitz, Morschett, & Rudolph, 2010). The effect has been narrowing down of sales channels and increased bargaining capacity of major grocery retailers (sellers) which has led to the outbreak of price wars on several occasions (Schnedlitz, Morschett, & Rudolph, 2010). Offers such as ‘Everyday low price’ and ‘buy one get one free’ have increased pressure on ABF as it continues to survive in the highly competitive grocery industry (Schnedlitz, Morschett, & Rudolph, 2010). In its value retailing sector, Primark’s raw materials ( that come from low-cost developing countries), have suffered heavily from drastic fluctuations in exchange rates As a result, profit margins have been volatile for this sector (Cherney & Elena, 2001). However, growth in the value retailing sector has jumped from 11% in 1998 to 25% in 2008 which has added to the company’s profitability (Cherney & Elena, 2001). As far as bio-fuel market is concerned, ABF has managed to produce 70 million liters of bio-fuel using sugar beet and 420 million liters of bio-fuel with the help of wheat (George Weston Limited, 2010). Due to new EU laws, there is an upward trend for demand of bio-fuel in UK market and the company has potential for selling bio-fuel in order to generate additional revenue. Due to heavy outflow of cash in acquisition-related activities, the company’s liquidity position has worsened with a declining current ratio (Schnedlitz, Morschett, & Rudolph, 2010). Similarly, its inventory turnover and receivables turnover declined due to mismanagement of overwhelmingly diversified portfolio (Schnedlitz, Morschett, & Rudolph, 2010). Its profitability has also weakened. The company’s net income margin and gross profit margin have also shown declining trends due to increase in raw material costs subject to heavy fluctuations in exchange rates (Msn, 2011). Conclusion The company represents a case of successful deployment of diversification strategy in order to hedge its risks and reach out to customers at a global level. The company’s heavy reliance on international operations; however, exposes it to several global political, economic, social and environmental risks as mentioned above; it is recommended that the company lowers its pace of expansion by reducing mergers and acquisitions and focus more on organic growth. References: ABF. (2010). Associated British Foods . Retrieved November 5, 2011, from Associated British Foods : http://www.abf.co.uk/default.aspx Austen, & Ian. (2007, April 11). Back to Roots for Retailer in Canada. New York Times . Bertin, O. (2002, January 23). Acquisition Boosts Weston Bottom Line. Globe and Mail . Cherney, & Elena. (2001, March 28). Canada’s Weston Girds for U.S. Food Fight. Wall Street Journal , p. A.18. George Weston Limited. (2010). Our History. Retrieved November 6, 2011, from George Weston Limited: http://www.weston.ca/en/Our-History.aspx International Directory of Company Histories. (2008). George Weston Ltd. Retrieved November 6, 2011, from International Directory of Company Histories: http://www.encyclopedia.com/topic/George_Weston_Limited.aspx#1-1G2:2690400034-full Schnedlitz, P., Morschett, D., & Rudolph, T. (2010). European Retail Research. Heidelberg: Gabler Publishing Group. Whittington, R., & Mayer, M. (2002). The European corporation: strategy, structure, and social science. New York: Oxford University Press. Read More