Whether is Food Industry Doing Badly - Term Paper Example

INDUSTRY ANALYSIS I. INTRODUCTION The purpose of engaging in industry analysis is to determine how all economic　factors come into play in favor of the selected industry. Factors like sales, government, labor, competition, market, financial indices, management and the rest usually play significant roles in　determining the level of success of the industry under investigation. II INDUSTRY ANALYSIS A. Analysis of sectors The business operations in any country comprises of some sectors of industry: the　industry could be transport, educational, service, manufacturing, health and safety, pharmaceutical fashion, trading, legal, food and so on. The current global financial crisis makes one industry performs better than the other. However, the following criteria are used when analyzing sectors of industry: Size: Currently in the United States, food industry commands the largest share of the market, because people would have to eat no matter their economic status. Level of desirability: Food industry still holds the highest level of desirability, followed by health, fashion and transportation industry. B. Analysis of Selected Industry For the purpose of this report, the selected industry is food industry, because it is the largest industry in the United States. And its importance could never be underestimated. Hence, this industry would be analyzed using the factors highlighted below: 1. Industry life cycle: Azevedo et al (2004) explained clearly that US Food industry has a very long life cycle in the sense that since it began centuries ago, it has flourished from year to year. Food industry, as a matter of fact, is as old as human beings. 2. Past Sales: The past sales volume of the food industry in the United States is in the excess of 900 billion dollars a year (Nestle, 2003). And that volume increases every year with the introduction of new kinds of foods. The presence of convenience stores aids quick and easy sales of food in the United States. Convenience Stores like Wal-Mart and Costco have billions of dollars as their turnovers from food sales. 3. Permanence of industry: There is no doubt that as long as there are people on this earth to consume foods, food industry won’t go out of operation: it would collapse. And the development of new forms of food makes the industry to be constantly appealing to the customers. And since the pricing system in food industry is quite flexible, the industry could conveniently serve many classes of people in the society. What this statement means is that both the poor and the rich could afford to buy a corn, for instance, even though the quality of the corns they bought are different, because of different prices. 4. Attitude of government: The government of the United States has always offered strong support for the food industry in the country in many ways. According to Nestle (2003), US government assists the food industry in the following ways: Enactment of business laws: By making laws that could make the business activities in the sector of food industry, the US government provides a comfortable atmosphere for the industry to grow successfully. Farm subsidy: The United States is still one of the developed nations that offer some encouraging subsidies for farm products. Since most of the food are grown on the farms, these subsidies help the food industry to flourish. This is another reason why the food industry would continue to command a lion share of the market, since it could receive aid from the government to expand its operations. Provision of infrastructure: Government makes infrastructures available for the food business to use, and this reduces the cost of producing food for people to consume. 5. Labor Conditions: Most US food companies follow the US Employment Laws, which guarantee that workers be given equal and fair treatment irrespective of their race or color or age. Concerning the availability of workforce, Food industry has enough workers that work tirelessly in all the food companies across the US. Government also help to make laws that encourage smooth recruitment of professionals and experienced hands to handle the operations at the food companies. 6. Competitive conditions: Being the largest industrial sector in the US, food industry enjoys little or no competition from other sectors. However, there is stiff competition among the food companies as they compete for the market and try to win consumers’ confidence at all cost. C. Prediction of sales growth for 2005 and 2006 The US food industry was projected to grow by 3% and 5% in 2005 and 2006 respectively. It wasn’t surprising that the predictions came to past as sales volume of food in the US topped 750 and 820 billion dollars in the year 2005 and 2006 respectively. This growth in sales occurred as result of influx of many immigrants into the US after four years after the security alert since September 11, 2001 was lowered. D. Long-term Prospects US Food industry is expected to continue to expand despite the current economic crisis, because foods are significant necessities that human beings could not do without. As long as there is going to be continuous demands for foods, the market would continue to grow. The recent philanthropic activities of the United States whereby food supplies are made available to some poor countries in the developing world would definitely increase the sales volume of US foods. E. What industries are going to be hot next year? Considering the current states of the United States, the industries that would hot next year include food, health, fashion, banking, transportation and educational industry. III HISTORICAL COMPANY PERFORMANCE (Ratio analysis) A. Trend Analysis: Schaefer (1995) declared that trend analysis is necessary for companies to understand what the current nature of the market is: In food industry, the trend now is fast /instant food, and many companies are building successful business on that. Take for instance, McDonalds, KFC and other fast food restaurants. B. Industry Analysis: The food industry is congested with many food companies, however, there are new companies springing up every year. US food industry is segmented with big food companies staying on the top while smaller companies remain at the bottom of the scale. Plunkett (2006) observed that in US food industry, the companies specialized on a kind of product: for example, there are beverages companies, canned food companies, meat companies etc. C. Du Pont Chart Du Pont Chart is a useful analytic tool in business that shows the financial instruments of a company: namely, the income statement, Assets, Equity and Liability. Below is an example of Du Pont Chart for a company ExcelUser, inc. This chart is used to demonstrate how Du Pont Chart works: Note: The Du Pont Chart below is obtained courtesy of Charles W. Kyd (2004-2009). IV. INTERNAL ANALYSIS A. Evaluation of Management Expertise: For an industry to succeed, there must be laid-down standards to measure or evaluate the skill and extent of experience of the management. The management of a company comprises of the directors, managers and administrators. B. Labor Relations: There must be a spirit of cooperation between employees of all ranks and levels before a company could be successful. Many food companies lag behind in reaching their operational goals because of communication problem among their employees. C. International operations: For companies that have branches overseas, there must be advanced organizational structure that would fit the demands and rigor of international trade/investment. D. Others: The management culture must be comfortable for the workers to give their best to the company. And quality assurance standards must be established to guarantee continuous production of quality food products. V. EXTERNAL ANALYSIS A. Government regulations: In the United States, the government regulates food industry by giving some standards of operations through Food and Drug Administration (FDA) Agency. Also, there are laws and ethics issued by the government to guide business practices. B. Competition in the industry: There are strong competitions among the companies in the food industry, as companies vie to attract the customers with new products and moderate pricing systems. C. Impact of Technology: The advent of technology has brought positive development to food industry, as machineries are now available to speed up the food production processes. Also, there are good standards that technology has impacted to the food industry. VI. RISK ANALYSIS A. Business Risks: There are some business risks associated with the food industry: these include faulty foods, contaminated foods, the use of wrong recipes and food poisoning. All these could lead to legal suits against the food company that produced the food. B. Financial Risks: Some of the financial risks include making wrong investment, and inability to pay back bad loan or putting the company’s funds in a bank that soon collapsed. C. Market Risks: Most of the risks in the market come from producing food products that are not trendy, and which the consumers would likely reject because it lacks enough appeal. Much money could be lost in this way. D. Currency rate risk: As the currency exchange rates fluctuate each hour, food companies that import food materials from a country whose currency suddenly rises up against dollars may lose a lot of money. E. Exposure to Derivatives: Some food products lose their flavor or quality when they are exposed to derivatives. So, to avoid sending bad food products to the market, the food company should check for quality. VII VALUATION OF COMMON STOCKS A. Implied Growth Rate: The implied growth rate of company could be estimated using the formula below: g =required rate—(Dividend payout/price-to-earnings) .B. Intrinsic value of Stock Compared to market: The intrinsic value is the stock value of a food company, while the market value is the market worth of the company. At the moment, most US food companies enjoy better market value than intrinsic value as the general stock value plummeted in the wake of the global financial crisis. B. Price-to-Earnings Analysis 1. Compared to Market and Industry: At the moment, the price-to-earning of food company is the highest in the market when compared with the price-to-earning of other industries. 2. Actual company PE to Predicted: The actual Price-to-Earning of the company is a bit lower than the predicted because the current economic depression has gradually slowed the usual buying habit of the Americans, as many families prefer to save their money for the raining day. VIII Conclusions Considering the above analysis about industry sectors in general, and concentrating on food industry, it is clear that all economic indicators point to the fact that food industry isn’t doing badly, even in the face of the current financial meltdown. References 1. Furquim de Azevedo, Paulo, Chaddad, Fabio, R., Farina Elizabeth & Inter-American Development Bank, Institute for the Integration of Latin America and the Caribbean (2004), The Effects of the FTAA on Trade and Investment, New York: BID-INTAL 2. Nestle, Marion (2003), Food Politics: How the Food Industry Influences Nutrition and Health, California; University of California Press. 3. Schaefer, Howard G (1995), International Economic Trend Analysis, Westport, CT: Greenwood Publishing Group. 4. Plunkett, Jack W (2006), Plunketts Food Industry Almanac 2006: The Only Complete Reference to the Business of Creating and Selling Food, Beverages and Tobacco, Houston, Texas: Plunkett Research Lt Read More