Global Operation and Risks Management at Britvic Group Plc - Essay Example

1.0. INTRODUCTION  Britvic traces history since the mid of the 19th Century (Britvic, a) and today it is among the leading companies in the soft drinks industry with operations in Great Britain (GB), Ireland, and France (Britvic, 2014b). The business model of Britvic is based on the manufacturing, marketing as well as selling the products of the Britvic and the PepsiCo brands as depict-able from the image depicted below: (Britivic, 2014c) Company enjoys strong portfolio of leading brands; distribution of Pepsi and 7Up and existence in the around 50 countries of world (Britvic, 2014d; 2014e; 2014f). With the strong position of the company in the beverage industry, this report assesses the financial position of the company and risk management systems employed by the Britvic. 2.0. COOPERATE AND FINANCIAL ACTIONS Comparative assessment of the performance of the company is gauged by developing comparative competitors’ analysis (Pinto, et al., 2010), and ratio based assessment (Fabozzi, and Peterson, 2013). The analysis of the leading competitors concluded that Britvic is comparatively small player as compared to the competitors: (Adapted from: Hoovers, 2015; London Stock Exchange, (a); London Stock Exchange, (b); London Stock Exchange, (c)) Above graphical presentation reflects that Britvic’s share is only 9% of the market but stands on second in a row and Nichols Plc dominate in terms of revenue. However, with respect to EPS performance SabMiller is leading the position and Britvic is pushed last position. Despite limited share as compared to the competitors, the company has improved its performance by controlling operating cost. The net income improved from £61.9 m in 2013 to £ 89.7m 2014 (Britivic, 2014c). Given below is the five years trend of the revenue: The changes in the revenue and profits are also due to events that took place in the past five years of Britvic: Transformation with the acquisition of Fruite’ Enterprise in 2010 (Britvic, 2010) Recall of Fruit Shoot and economic challenges affecting in Ireland (Britvic, 2012). Failed merger with AG Barr plc in 2013 and joining of Simon Litherland as a chief executive (Britvic, 2013) Performance delivery of the new Irish team, beginning with the Indian operations and Expansion of Fruit Shoot the US, etc. (Britivic, 2014c) Pressures induced from the global competition and saturation of the market (Euromonitor International, 2014). The financial trends analysis conducted with respect to the income statement and balance sheet of the business produced following results: (Extracted from: Britvic, 2010; Britvic, 2012; Britvic, 2013; and Britvic, 2014c) The revenue fluctuated due to the Fruite’ Enterprise, the recall of the acquisition of Fruit Shoot, and the impact of the recovery measures taken in the subsequent years (Daneshkhu, 2014; Britvic, 2013). In addition, rising operating and net profit is the impact of the cost control programs. The balance sheet has shown mixed trends implying that Britvic is inclined in maintaining the capital structure; except 2010 in which company performance could not offset the losses from retained earnings. Similar movement between the short term and the long term assets is reported as company does not excessively stick capital in any short or long term assets. Company has issued debt of £105.8 million for the expansion of Fruit Shoot the USA and of operations in India. In addition to this investment of £40m was done to for achieving costs saving of £30m by the end of (2016 Britvic, 2013). 2.1. PROFITABILITY Net Profit Margin: As the name implies, net profitability is the net take home saving from the revenue after meeting all expenses (Gibson, 2012). Huge operating expenses in 2010 pushed the company into negative domain. Major working reasons behind these challenges included hard winds from the customers of France and Ireland, transformation acquisition of Fruite’ Enterprises, business and market related challenges in Ireland. However, company managed to revive under the new strategy from new CEO and the implementation with £40m net investment for costs saving target of £30m by the year 2016 (Britvic, 2014c); and Jones and Lucas (2013). (Source: Global business browser 2015) Returns on Assets: The return on assets measures the returns or net income that a business is generating by capitalizing its assets (Damodaran, 2012). With the focus on the synergy generation despite acquisitions, Britvic has limited total assets growth. On the other hand, company has managed to grow its profits (Jones and Lucas, 2013). Collectively, the ROA of the firm is increasing at attractive rate. Source: Global business browser (2015) 2.2. LIQUIDITY Current ratio: liquidity implies the ability of a business to meet its short-term financial and business obligations with its short-term assets (Damodaran, 2012). Britvic was liquid across five years of performance except in 2013. The stringent liquidity test exploring the role of inventory, Britvic was found to have limited capital stuck in the inventory; hence, adding positive note to its liquidity situation (Britivic, 2014c ). The major chunk of the current assets and liabilities comes from the trade receivables and payables that imply that industry characteristics where high competition calls for the easy credit facilities to the customers (Fernando, 2011). Source: Global business browser (2015) 2.3. FINANCIAL GEARING Long-term Debt/Equity ratio: The financial gearing implies for the role of the debt in the capital structure of the company as compared to equity (Arnold, 2008). Britvic’s revival is reducing the impact of retained losses that the company has on its balance sheet that in turn is improving its equity position. Alongside the company has also been reducing its long-term debt. Britvic has been relying on private placements at the modest rates while leaving its bank loan facility for the flexible capital acquisition that Britvic has been employing (Hay, 2014). Source: Global business browser (2015) 2.4. EFFICIENCY Efficiency implies improved capitalization of the assets by increasing sales per unit of assets invested in the business (Xue, Ray, and Sambamurthy, 2012). Asset and Inventory Turnover Source: Global business browser (2015) Assets turnover implies the generation of sales for every unit invested in the assets. It can be safely stated that the company is improving sales generation expect in 2012 due to the setback of Fruit Shoot. Revival of AT is reflected the success of the new strategy. Company also expanded in its sale base in USA due to the heat wave (Angelis, 2013). While the fall of the ratio for the recent year can be attributed to the addition of assets as a result of the acquisition. Inventory turnover is the number of times an inventory is sold in single reporting year. As discussed in the assets turnover section, the rise of inventory turnover in the year 2012 and 2013 is due to the recall of the Fruit Shoot and the implementation of the new strategy. The expansion in the Indian market calls for the additional inventory while waiting for the sales of the company to pick up in the country; hence, has reduced the ratio (Reuters - UK Focus, 2014). 2.5. INVESTMENT Payout ratio and Dividend Per Share (Global business browser, 2015) Companies in the highly competitive landscape attract investors by maintaining a strong dividend policy (Turner, Ye, and Zhan, 2013). Similar goes for the Britvic that has been paying dividend in the year 2010 despite of losses. This is aimed to signal the investors that the company has full confidence in its ability to deal with the challenges and hard winds. Influenced by the growing profits Britvic has further asserted pursuing aggressive dividend policy. Hence with these factors at affect, Britvic has been consistent in providing the dividend to the investors. 3.0. RISK MANAGEMENT The risk posed to the business in the external environment calls for mounted attention for the companies that operate in the multiple countries. Britvic recently initiated operations in India while at the same time having more than 50 countries in the portfolio requires it to assess and deal with not only local challenges but also the international challenges as well. Company not only issues an annual report in compliance with the financial regulations but has also moved up to sustainability of the entire business model than a simple focus on the corporate social responsibility (Britvic, n.d.). Some of the risks are assessed below: 3.1. EXCHANGE RATE RISK MANAGEMENT Exchange rate risk measurement and management are important for the businesses operating in other countries than home country (Frenkel, and Johnson, 2013). Measures to deal with the exchange rate risk are critical in order to reduce the vulnerabilities posed to the business profits and assets value as a consequence of movement in exchange rate (Papaioannou, 2006). Britvic having operations in Ireland, France, and India in addition to business in more than 50 countries also increases vulnerability of Britvic to exchange rate risk. For example, serious economic challenges in 2012 and the strengthened impact of the pound sterling on the competitive advantage of the business in Ireland remains source of exchange rate volatility (McDonnell, 2014). According to the Henderson, (2006) there are three types of the exchange rate risk. First is the transaction risk which affects the receivables and payables of the firm. Second is the translation risk which affects the value of the monetary assets and liabilities in balance sheet. Finally, the third type of risk economic risk which is present value of the future operations. Britvic for its foreign operations accounts each of the risk in details. For instance, for the transaction risk, company applies the exchange rate prevailing at the date of transaction. While for the translation risk, company uses the exchange rate prevailing at the date of the balance sheet preparations. This translation of operation into the currency of the parent company is important in developing a consolidate results for the business. The third type of risk is attempted to be managed by using derivative financial instruments and hedging for the fluctuations related to the operations in the foreign currencies (Britvic, 2013). These exchange in turn brings in profits or sometimes losses to firms for example, Britvic in the annual report of 2013 reports the benefit of £m 1.1 for the year 2013, which is lower from £m 2.4 enjoyed by the firm in 2012(Britvic, 2013). The decline in the profits is the result of the overall impact of the firm’s performance in respective regions as well as the exchange rate. Company retranslates the results of the prior years that were earlier converted to the current exchange rate (Britvic, 2014c). Company employees foreign current swaps and borrowings for hedging the translation risk to which the foreign operations are exposed to. This implementation is also subject to dealing with the economic risk. Forward foreign currency contracts are tool to hedge risk in which companies’ hedge risk by defining future fair value of the business in the agreed point in time. The advantage of the method is that it does not involve additional payments like debts (Adams, 1988). However, it does not ensure complete risk mitigation. Limited knowledge or sudden shocks to factors that affect the exchange rate risk can also produce negative impact (Pugel, 2008). For example, Britvic hedged 72% of the forecasted net exposure in 2014 in advance by using foreign exchange contract; which is 7% higher as compared to 2013 but also faced (Britvic, 2014c). This change in percentage implies that company has been constantly reviewing the potential performance of working factors that affect the exchange rate and so has increased its exposure. Alongside, this increased exposure in the exchange rate also increases the vulnerability of the company. 3.2. POLITICAL RISK MANAGEMENT According to the PwC (2015), understanding political risk in the contemporary world is as significant as understanding the business itself. It has important role in meeting economy challenges (Culp, 2012). Three variations of the political risks with respect to Britvic is discussed below: 3.2.1. Firm Based For the multinational corporations like Britvic, political risks impose an impact on the overall ability of the firm in dealing with the firm’s clients successfully (Mian and Khwaja, 2004). Despite fact of the Britvic’s claim of being less affected by the Eurozone crises, however, the ripple effect of the widely connected economy cannot be escaped. An internal control committee is developed to review the firm based risk which looks after the strategic, financial, capital investment and other regulatory risks that are posed to business. Similarly, Company’s recent expansion in India can be subject to various regulations keeping in view the track record of India system (Aswathappa. n.d.).In addition, Company’s audit committee consistently evaluates the performance of the company as well as financials reported. According to the annual report, publications of the company are in accordance with the FRC’s Turnbull guidance that was published in 2005 (Britivic, 2014c). In addition to this, being in the beverage industry that is closely connected to the health of the customers, the products of the company are also subject to the risk of health related regulations. For example, in the home market of Britvic there is a ban on the food and advertisements related to high fat food and drink (World Health Organization, 2014). Similarly, recently French government has taken initiative to induce a European-Union wide ban on the use of a certain element in the baby bottles (Lovells et al., 2013). This implies the activism of the country with respect to the health and safety related factors and Britvic having stakes in the manufacturing and distributing bottled and other related material can face such hard wind across its core markets. To respond to these risks, the internal control committee of the Britvic takes care such as responsible marketing, introduced health strategy for inspiring people to make smart and informed choices in beverages with lower calories, etc. In addition to this, environmental regulations is another area that the business is giving attention to and making business model sustainable in the long term (Britvic, 2014e). 3.2.2. Country Based With respect to the country, businesses are required to face and deal with dual types of risks. First type of risk is the transfer risk such as blocked funds and the second type of risk is related to dealing with risk associated with culture and institutions. The country based risks can be reviewed from various perspectives such as economy, rating agencies, currency etc (Eiteman, Stonehill, & Moffett, 2007). Britvic’s business model reflects clear attention to these facts. Business model of Britvic divides into two systems. First, it takes care of all operation from manufacturing to delivering it to customer and consumer in countries where it has core operations. On the other, Britvic has added partnership in the host countries for capitalizing their greater understanding of respective markets (Britvic, 2014c). Britvic has recently partnered with the Narang Group in the India for launhcing 25,000 stores in next three months (Reuters, 2014). Another measures taken by the business is to hire locals to capitalize on their expertise in dealing with the local procedures etc. However, the company is still subject to the challenges relaed to differences in the two parts of the world; i.e. characteristcis of emerging markets as compared to its local markets. In the similar context, competitive environment in the Ireland has become more challenging over a period that has led to the closure of some businesses (McDonnell, 2014). To mitigate the impact of this risk, the strong portfolio, constant innovation in the product line; and most importantly the business restructuring has enabled the business to get its profit level back in the Ireland (International Business Times. 2010). Hence, it can be safely stated that business has developed comprehensive systems to deal with the country based risk but still has long way to go in new market. According to the McKinsey, global companies often rank lower in sharing vision as compared to local companies. Therefore, company can acquire services of such organization in proactively dealing and identifying its future potential challenges and ways to deal with it (Dewhurst, Harris, and Heywood, 2012) 3.2.3. Global risk management Global world has considerably increased its dependence and connectivity. This in turn has increased the pressure on business to abreast for the global risks that would directly or indirectly will have an impact on the performance of the business. For instance, recently heightened crises related to Russia and Ukraine is on the verge of erupting huge crises for the global world (Mercier, 2014). EU has deemed to reduce the disparities in fueling, control prices differences, and most reduce the overall cost. It carries critical importance for the Britvic as prices in Ireland are much higher than the average price charged in the EU while France stands considerably below average price (Mock. n.d). For the purpose, Britvic has integrated cost saving program for achieving cost saving program of achieving £30m by the year 2016 (Britvic, 2014c). Another measure to deal with the global risk include measures taken for sustainability of environment and business as depicted below: (Britivic, 2014e) 4.0. CONCLUSION AND RECOMMENDATIONS From the above analysis, it can be concluded that Britvic has revived its business with the overhaul of the strategy under the dynamic leadership and strategy from new CEO Simon Litherland. All these are producing a positive impact on the financial performance of the business. Despite fact that business is doing considerably good in its current industry by constantly innovating and updating drinks for adults, kids, and families; however, owing to the higher level of competition and saturation in the market following recommendations are made for long term success: Company has already built loyalty and strong customer base; hence, for further exploiting the potential, the Britvic shall expand its business range such as bottled water and more importantly food side of the business. Pepsi Inc is the best example of such expansion in business domain. The set back from the recall of Fruit Shoot in 2012 has raised a question on the performance of the effectiveness of the operations of the company. Such also recalls add to the reputation shock that is more costly than finanical loss. Hence, it is important that systems are integrated to ensure that such challenges do not arise in the future. Innovative idea such as tango Turbo that is aerosol spray bottle does not have longevity. Hence, innovation must be focused on offering some breakthrough drink to the market. Company’s expansion in markets distance from its home market; therefore, it is recommended that company shall lend the services of global companies like McKinsey for proactive strategies to deal with global challenges. List of References: Adams, C. Mathieson, D., Schinasi,G. and Chadha, B. (1988). Developments, Prospects and Key Policy Issues. International Monetary Fund. Angelis, A.D. (2013). Britvic sales boosted by the summer heatwave. UK. Finance. Yahoo. . Available from: https://uk.finance.yahoo.com/news/britvic-sales-boosted-summer-heatwave-000000831.html [Accessed 11 February 2015]. Arnold, G. (2008). Corporate financial management. Pearson Education. Aswathappa. (n.d.). International Business 4E. Tata McGraw-Hill Education Britvic. (2010). Annual Report. 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