Business Strategy of Associated British Foods - Assignment Example

?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 Penneys 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 requirements of more than half of UK. Finally, in 2007 ABF acquired an Indian food business (ABF, 2010). The company provides employment to more than 97,000 people and operates in more than 44 countries (ABF, 2010). The company’s geographical profits and sales are shown in Appendix 1 and 2 respectively .UK contributes to around half of the company’s sales and profits (ABF, 2010). ABF has been rigorously diversifying into other markets than Sugar since early 2000s which is a crucial aspect of its strategy. ABF acquired ‘Twinings’ in 1964 to broaden the range of national and international marketing resources available (Whittington, R. and Mayer, M., 2002). To date Twinings has been an asset in the company’s portfolio as it enjoys strong brand loyalty and has had a pull effect which has increased sales of other brands within ABF’s portfolio (Whittington, R. and Mayer, M., 2002).ABF further diversified into the food business with the intention of providing one-stop convenience shopping to customers; the company had realized that customer buying habits and trends were changing (Whittington, R. and Mayer, M., 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, O., 2002). Another crucial aspect of ABF’s strategy has been its diversification and growth strategy. The company has, over the years, expanded to sectors beyond sugar which is a conscious and well-thought out strategy based on strong reasoning. Firstly, the highly debated EU sugar reform intended to cut surplus in sugar beet production by slashing prices by an exorbitant 43% which would adversely affect the company’s earnings (Bertin, O., 2002). Secondly, sales from the sugar business were subject to seasonal fluctuations which had to be recovered from non-seasonal businesses so the diversification to other lines such as retail, ingredient and grocery was well justified for ABF. (Bertin, O., 2002).Thirdly, world markets had become very unstable especially in the years following 2000 because of which its sugar line was capable of being harshly affected (Cherney and Elena, 2001). Furthermore, its sugar industry was highly dependent on the local UK economy for raw materials and output which made it undesirable for the company due to the country’s history of slow recovery from economic recessions so its diversification was justified. (Cherney and Elena, 2001). Therefore, it is evident from the reasons mentioned above that 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 and 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. 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. 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 and 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). 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. 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, P., Morschett, D., Rudolph, T., 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, P., Morschett, D., Rudolph, T., 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, P., Morschett, D., Rudolph, T., 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 (Varley, R., 2006). 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 (Varley, R., 2006). 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. As far as its overall financial performance is concerned, ABF’s revenue ratio has shown a drastic increase from 3.7% in 2003 to 5.8% in 2009 (Msn, 2011). However, due to heavy outflow of cash in acquisition-related activities, the company’s liquidity position has worsened with current ratio dropping from 3.1 in 2005 to a mere 1.2 in 2009 (Msn, 2011). Similarly, its inventory turnover and receivables turnover declined from 9.7 and 8.8 (as of 2005) to 7.5 and 7.9 respectively due to mismanagement of overwhelmingly diversified portfolio (Msn, 2011). Its profitability has also weakened. The company’s net income margin and gross profit margin have also shown declining trends from 6.7 and 9.5 (as of 2005) to 4.1 and 6.7 (as of 2009) respectively due to increase in raw material costs subject to heavy fluctuations in exchange rates (Msn, 2011). Greater insight into ABF’s strategy reveals several flaws and weaknesses as far its strategy is concerned. The company has, over the years, relied mostly on its tea division and revenues from the developed part of the world. The company’s earnings are, thus, biased towards the developed world, particularly Western Europe which contributes 50% towards its total revenue (Euromonitor International Inc., 2011). However, over the years, market dynamics have changed rapidly to the extent that all major consumer goods firms are moving towards the developing world for their growth and sales. The BRIC economies present a major potential opportunity for ABF; however, the company’s transition into the same is slow combined with its weak financial position. The need for investment in international markets is supplemented by the fact that Western Europe does not present growth opportunities as far as the hot drinks market is concerned. In fact, the growth figure is a mere 2% for the same in Western Europe (Euromonitor International Inc., 2011). Therefore, ABF will have to look towards alternative international markets for its hot drinks and other products. To this end, the Asia Pacific region presents steady growth (approximately 5%) with China and India being the major drivers of this growth (Euromonitor International Inc., 2011). Further investment and expansion in tea and hot drinks segment is required by ABF in these regions. Eastern Europe also provides a 5% growth in the same and ABF has developed its infrastructure in this region, particularly in Poland and Russia (Euromonitor International Inc., 2011). ABF has struggled to free itself from its dependence on Western Europe through organic growth strategy; however, its efforts remain limited and weak. A reflection of this can be seen in only a mere reduction in hot drinks sales contribution by Western Europe, from 50% in 2005 to 44% in 2010 (Euromonitor International Inc., 2011). Another significant weakness of ABF as far as its international strategy is concerned is that its primary tea label brands have been overshadowed by the dominance of the Ovaltine brand. Asia Pacific, Africa and Middle East account for majority of sales of this brand. Therefore, the company needs to focus more on its hot drinks brands which is its core business and which presents the greatest scope for sales (with a 4% growth rate) (Euromonitor International Inc., 2011). As far as malt-based drinks segment is concerned, the company’s strategy has not been very impressive either with Nestle and GSK dominating the top 2 positions (Euromonitor International Inc., 2011). The company has recently altered its strategy keeping this in mind, and has re entered newer geographical regions with its Ovaltine brand. However, since this strategy has recently been implemented it has yet to reap profits. Also, ABF was the only company in top 5 companies in this segment, that possessed a single-digit growth (7%) compared to its competitors that had impressive double-digit growth figures (Euromonitor International Inc., 2011). This reveals a major weakness in the company’s growth strategy which is that of limited geographical coverage. Also, the nature of highly growing markets, such as Nigeria and Thailand, is that they are low-income markets and where economies of scale and enhanced volumes do not necessarily translate into enhanced sales revenue (Euromonitor International Inc., 2011). Another major weakness of its strategy has been the concentration on the growth of its sugar business, particularly that generated by Primark (Euromonitor International Inc., 2011). The company has neglected its core source of revenue- the hot tea division which presents brilliant opportunities, especially in the developing world. To this end, ABF’s strategy can be characterized as lacking focus. Another major flaw in ABF’s strategy is its lack of development in the coffee sector. The company has a very limited presence in this sector, which is limited to its Twinings coffee range. Perhaps, it seems like a part of its future strategy to develop further in the coffee segment in an attempt to enhance its brand equity. However, since the past few years, the company’s strategy in this regard has not been as aggressive as its objectives are s suggestive of. The company ought to capitalize on its British heritage and its Twinings’ brand equity in the coffee segment in order to make the most of this segment. The Asia Pacific offers vast potential for the “coffee mixes” segment. Markets such as China, Malaysia and South Korea are large consumers of these coffee mixes which provides scope for expansion for ABF into these markets (Euromonitor International Inc., 2011). Of all the mixes, the 3-1 mixes, that include a combination of sugar, skimmed milk and coffee, are the most sought after in these markets. Here, a contrast can be seen in the consumption patterns of ABF’s largest market- Western Europe and the Asia Pacific. Sophisticated, health-conscious consumers in Western Europe are moving towards freshly ground coffee, whereas, consumers in the newly developed and developing nations of Asia Pacific still prefer the mixes (Euromonitor International Inc., 2011). Furthermore, the company has been deploying an organic growth strategy to date and has not yet completely focused on a non-organic strategy based on acquisitions and mergers. This could limit the investment required for further expansion and aggressive growth that the company is aiming at. The establishment of industrial infrastructure in China is a part of this effort; however, it needs to be supported by an acquisition-led strategy to reap maximum results (Euromonitor International Inc., 2011). As far as ABF’s brand strategy is concerned, it is worth noting that its Hot Drinks portfolio focuses on two major brands: Twinings and Ovaltine, which account for a large chunk of its sales (Euromonitor International Inc., 2011). Further diversification is required at this end and the company ought to expand into the coffee segment to maintain its foothold. Several strategies are worthy of praise- most notably its repositioning strategy of Twinings as an everyday brand and Ovaltine as a healthy drink (Euromonitor International Inc., 2011). This repositioning towards the health-conscious segment could pay off ABF very well in future since it does not enjoy a strong tea base to back other brands. As far as ABF’s overall strategy is concerned, the company needs to establish coherence in its operating and business models. Through this it can reap the benefits of synergies and various integrations including expansion into various international markets. The health conscious segment offers tremendous potential for the company and by focusing towards brands such as Ovaltine it is sure to win the hearts of many modern, sophisticated consumers. However, it must realize that consumers in the developing world do not possess this level of sophistication and since they offer tremendous opportunities for the company, it shall have to reposition itself to suit the needs of international consumers. Furthermore, although the company offers a well diversified portfolio holistically, its offerings are not as diverse in individual markets. Thus, the company has to enhance its offerings in individual markets to attain a broader coverage. Furthermore, the company ought to revamp and redefine its existing core brands, such as Ovaltine and Twinings in order to align them with customer needs and preferences in ever changing markets. Private own-label brands seem to have been giving a tough competition to ABF which can be countered by repositioning its core brands. To this end, the company has already reintroduced its Kingsmill and Allinson brands in U.K in 2007 and 2008 (Euromonitor International Inc., 2011). ABF also has a strong presence in its Dairy Foods category and this is the third largest contributor to the company’s overall revenues (Euromonitor International Inc., 2011). The company has successfully captured this market through its strategic focus on this segment, through which it benefits since this segment lacks the presence of own label brands. It has effectively channelized and positioned its flavored milk offering towards emerging markets such as Thailand, that have a weak presence of own label brands (Euromonitor International Inc., 2011). Emerging markets offer a promising future for ABF in terms of rising purchasing power and expansion of hypermarkets and supermarkets. To conclude, ABF faces still competition in the international market in years to come by MNCs such as Nestle and DANONE. Also, the company faces competition from own label brands and a price sensitive strategy of competitors. Another aspect of ABF’s strategy worth improving upon is its fragmented geographic portfolio which hampers the achievement of economies of scale and synergies. But perhaps the biggest of these challenges is for ABF to reposition itself in developing BRIC economies. The company should consider options such as repositioning its brand persona and offer greater value for money in these markets. This is coupled with greater infrastructure development, particularly in China and Poland. References ABF, 2010. Associated British Foods plc. [online] Available at: [Accessed 21 March 2012]. ABF, 2010. History of the group. [online] Available at: [Accessed 21 March 2012]. ABF, 2010. ABF Global Coverage. [online] Available at: [Accessed 21 March 2012]. ABF, 2010. Segmentation. [online] Available at: [Accessed 22 March 2012]. Whittington, R. and Mayer, M., 2002. The European corporation: strategy, structure, and social science. 2nd ed. [e-book] New York: Oxford University Press. 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