Individual Case Analysis: Associated British Foods

Krista HaswellMGT 6859/27/12

Primary Question

Can well diversified ABF capitalize on its strengths and the opportunities for growth in its five operating areas in the face of financial investment restrictions, increasing competition, and a volatile global food market?

Sub-questions• How do ABF’s core competencies align with global trends? Which of these

trends will have the most impact on each of ABF’s divisions?

• What is ABF’s current position in each of its segments and how will that position be impacted in the future? Where are the current opportunities for growth in each segment? Which segments are best positioned to expand globally?

• What is the financial position of each segment? How will ABF continue to fund its growth? Where should the limited investment dollars be allocated?

• Can ABF remain well-diversified? Should any segments be divested? Can/should the firm continue its growth through acquisition strategy?

Company OverviewDivisions Growth

StateMode of Growth

Financial Position

Global Position

Management

-Retail-Grocery-Sugar-Agriculture-Ingredients

Rapid, Aggressive

Focus on long term

Acquisition and Joint Venture

Strong, Stable

-Based in UK-Global in each division, most (45.6%) revenue from the UK

-Privately controlled-Autonomous divisions-Funds allocated among divisions

-Company expects growth in all divisions, but aggressive growth is catching up in terms of available finances…can aggressive growth continue?-Has aggressive growth impeded the firm’s ability to fund the new/better opportunities?-Heavy reliance on the UK…where are best opportunities for global expansion?

Core Competencies: Food system knowledge, diversity, stable leadership, ability to capitalize quickly on opportunities

ABF Financial Ratio Analysis

2010 2009 2007 2005 2003 2001Net Sales (Revenue) 10167 9255 6800 5622 4909 4418

Gross Profit Margin 25.70% 29.28% 25.62% 27.89% 25.20% 22.41%

Operating Margin 8.06% 6.75% 8.18% 9.78% 7.84% 6.29%

Net Income 546 359 369 379 326 243

Return on Assets 5.88% 3.97% 5.29% 6.24% 6.92% 6.21%

Asset Turnover 1.09 1.02 0.97 0.93 1.04 1.13

Operating Income 819 625 556 550 385 278

EBIT 839 573 543 664 425 327

Profit Margin 5.37% 3.88% 5.43% 6.74% 6.64% 5.50%

Net Change in Cash (52) 151 151 (226) 26 32

Cash Flow Margin 11.53% 9.00% 10.24% 9.16% 10.69% 7.61%

***Strong Position

-Cash flow is typically positive. In 2010, negative change in cash was affected by high dividend payout and an increase in investment activities. By selling assets or divesting, ABF can generate additional cash and further invest in cash generating activities-Asset turnover is low so profit margins are high-ROA is increasing after decrease in 2009; shows effective use of assets-Operating margin is healthy and stable; in 2010 ABF made $0.08 for every dollar of sales-Free cash flows are expected to increase through 2013

ABF Division ComparisonIndustry/Products

Geographic Markets

Growth Strategy

% of Revenue (2010)

Retail Primark-high fashion/low end clothing stores

Operates stores in UK and Ireland with some expansion into W. Europe

Acquisition 26.3%

Grocery Foods and ingredients for consumers and food service customers

Different brands in different global markets

Acquisition 33.1%

Sugar Raw sugar- production and refining

Facilities in UK, Spain, China, South Africa

Acquisition, joint ventures, internal sales

19.8%

Agriculture Animal feed, grain trading, various marketing ventures

Operations in China and UK; sells in over 43 countries

Joint venture, merger 9.6%

Ingredients Enzymes, food toppings, oils, flavors, and food colorings

Facilities in 26 countries

Acquisition, internal sales

11.3%

-Internal sales must be also be a factor in analysis of each division’s potential for growth and profitability-Retail business in only non-food division---reduces risk of volatile food market, but not as knowledgeable about industry-Aggressive growth through acquisition ---can this continue and at what rate?-Are agriculture and ingredients divisions too diversified or does the diversification reduce risk within each? Which areas of each generate profit?

RETAIL-PEST AnalysisFactor Implication

Political/Legal

Economic Recession

Rising commodity prices and taxes

Opportunity for the high fashion/low cost marketThreat to profitability

Sociocultural

Technological

-Even post recession, Primark’s target market demands low cost/high fashion…this market will continue to exist and is expected to grow over the next five years , increasing Primark’s revenue and profit-Competition in this market could increase as retailers affected by the recession lower prices and drive down prices industry wide

RETAIL-Industry Analysis

Intensity of Rivalry

HIGH

Threat of Substitutes

LOW

Buyer PowerHIGH

Threat of New

EntrantsLOW

Supplier Power

LOW

-Much of W. EU is mature market– rivalry over existing customers-Consolidation trend increases intensity– greater control by fewer retailers-Rivalry in E. EU may increase as competition increases with the expectation of growth

***Industry conditions are favorable. Primark has been a leader in the UK and also profitable in this industry for the past five years….in a growth position. They intend to keep prices low. If ABF can provide the funds to expand to new markets and continue growth through acquisition, Primark should remain profitable.

Consumers demand low prices

Each individual buyer has limited power, but group is powerful

High barriers to entry to establish presence in new markets

Lower barriers to entry for those in similar markets (i.e. Wal-Mart, traditional clothing retailers)

RETAIL-Competitive Landscape Company Total Sales $

mill (Rank) % Growth (Rank)

Primark 3146 (6) 18.1 (1)TJ Maxx 2659 (8) 9.6 (2)H&M 12,222 (1) 8.9 (3)Deichmann 2597 (9) 5.6 (4)C&A 7742 (2) 4.9 (5)Kik 1614 (10) 4.5 (6)P&C 3027 (7) 3.4 (7)Next 3655 (4) 0.5 (8)Zara 5426 (3) -1.1 (9)New Look 1603 (8) -1.5 (10)Benetton 3146 (6) -1.8 (11)

-Primark is growing at almost twice the rate of its nearest competitor despite not being an investment priority for ABF

-C&A (2nd highest revenue) has been selling stores …is this an opportunity for Primark or a sign of a saturated market?

-Fast fashion market is also facing competition from large discount chains in the face of the recession

-Primark controls 9.3% of W. EU fast fashion sector…there is room for growth outside of UK, where it has focused and dominated.

*2009-2010, EU fast fashion market

RETAIL-Market Analysis

EU Clothing Market

Increasing Consolidation

High Growth Potential

(geographic)

Growth Potential (volume)Increasing

CompetitionPrice Conscious

Consumers

***Market is favorable for Primark. Their success in W. EU market, potential for growth in E. EU suggest market development and market penetration growth strategies. Increasing consolidation = opportunity if ABF can fund expansion. Historically, ABF has not taken away investment dollars from its other divisions to fund Primark.

Wal-Mart

Tesco

H&M

C&A

Takko

ZaraGermany

E. Europe

Total industry =1.7% per year

GROCERY-PEST AnalysisFactor Implication

Political/Legal

Economic Recession Minor Threat- Food is a necessity and less affected by the recession. Competition among brands may become more price based

Sociocultural -Migration to cities/Growth in pre-packaged foods

-Increased focus on food safety and traceability in foods

Threat- ABF has no presence or global brands in this area

Opportunity-ABF has been noted for its knowledge on food safety practices. They also have some integration in their supply chain to ensure the safety and traceability of their brands.

Technological

GROCERY-Industry Analysis

Intensity of RivalryHIGH

Threat of Substitutes

HIGH

Buyer PowerHIGH

Threat of New Entrants

LOW

Supplier PowerHIGH

Drives down prices and decreases profitability

High barriers to entry due to the high cost of marketing dollars required to have a presence

Brand loyal buyers

Mass market entry requires established relationships with grocery retailers

At the mercy of suppliers unless firms rely on vertical integration

***ABF has no real power in the industry. Market is consolidating ,so large brands and retailers are squeezing the market. To compete, ABF must keep prices low enough to attract loyal consumers and must continue to engage in expensive marketing. Further growth may require acquisition of successful brands in a “buy or be bought” market. ABF can’t compete on low cost/high volume due to limited brands in each geographic market and lack of retailer relationships.

Consolidation trend- Few large retail chains dominate … requires strong relationships with them and consumers

Bargaining power can be increased by brand loyalty

Many other brands and alternative products

GROCERY-Market Analysis

Global Grocery Market

Increasing Consolidation

High Growth Potential

(geographic)

High Growth Potential (volume)

Retail DistributionGrowing demand as population grows

Potential to expand brands to emerging markets

***Market is not favorable to ABF brands. It has no presence in pre-packaged foods, but could supply ingredients instead of purchase brands. The market suggests market development and product development strategies for growth, but requires sizeable marketing investment.

Most growth is in pre-packaged foods, growing 7-8% per year

GROCERY-Offerings vs. Opportunities

Opportunity

•Industry is growing through acquisition as large firms build up brands•Growing global demand

Threats

• Future success will require strong relationships with major retailers consumers

• Increased competition from traditional brands and new firms in developing countries

High potential of

finding buyer for

its collection of diverse

global brands

Grocery Division has demonstrat

ed profitability

and a strong

financial position

SUGAR-PEST AnalysisFactor Implication

Political/Legal Chinese government opening up to foreign investors

Opportunity to capitalize on sugar beet market; ABF has unique knowledge and manufacturing capabilities

Economic

Sociocultural Trend toward health foods

Changing diets in developing nations

Threat to revenue

Opportunity to enter a quickly growing market demanding sugar

Technological Growth of bio-plastics

Increase in ethanol usage as fuel

Opportunity to differentiate and enter new markets; also to supply to these growing markets

SUGAR-Industry Analysis

Intensity of RivalryHIGH

Threat of SubstitutesMEDIUM

Buyer PowerLOW

Threat of New EntrantsLOW

Supplier PowerLOW

Alternative sweeteners in developed nations

Self-supplied

Supply and price often determined by government

High barriers to entry- difficult to est. scale, often controlled by government

Price affected by surplus or deficit

Limited land, volatile price

Only 25% of market freely traded

***ABF is the world’s second largest supplier. It is unlikely that new competitors will enter and be competitive with them, despite a continuous growth in demand. The industry is expected to grow and suppliers will compete for land and the available free market trade.

SUGAR-Market Analysis

Global Sugar Market

Key Geographic Markets

Sugar Cane vs. Sugar Beet

Growing Demand Price fluctuations

New Market Potential

Sugar consumption and production growing at 2% per year since 1989

Fuel (ethanol) Energy

Increase in demand from developing countries, but requires low/stable prices

China

Africa

Brazil

Fuel prices

Demand for food

Surplus vs. Deficit

Bio-Plastics

***AB Sugar faces a favorable market. It’s core competencies in the knowledge, cultivation and processing of sugar can capitalize on growing demand and opportunities for joint ventures in China, who needs sugar beet expertise. As the world’s second largest sugar supplier, it should supply to the growing ethanol market rather than produce it. Since joint ventures have proven the most successful way for them to enter new geographic markets, AB should continue to build these relationships as it expands. Strategy= market development and penetration.

Global Sugar Production vs UseDeficit or Surplus AB Sugar Presence

Africa Deficit Six South African Nations -sugar processing; source from self and independent farmers

Asia Deficit China -sugar beet, sugar cane, processing

Central America Surplus

W. Europe Deficit UK -process entire supply of sugar beet; Joint venture to produce ethanol; seed technology companySpain -processed sugar cane and sugar beet

E. Europe Deficit

Middle East Deficit

N. America Deficit

S. America Large Surplus

-AB Sugar operates in deficit markets…deficits supplied by large surplus in S. America (Brazil)-Firm sells mostly to food industry, also to energy generation and bioethanol fuel. With demand growing and new uses, ABF will need to increase production to meet sugar needs…opportunity for Chinese and African expansion

AGRICULTURE-PEST AnalysisFactor Implication

Political/Legal Increased safety regulations in China

Opportunity-Land is available in China and ABF has extensive knowledge on safety

Economic

Sociocultural Increasing population Opportunity-Growing demand for agriculture products

Technological Rise of biotechnology Opportunity-Application of technology to crops and their products can improve quality and output, thus increasing profitability

Environmental Climate volatility Threat-Unpredictable conditions threaten reliability of harvest and revenue

AGRICULTURE-Industry Analysis

Intensity of RivalryHIGH

Threat of Substitutes

LOW

Buyer PowerHIGH

Threat of New EntrantsLOW

Supplier PowerLOW

Favorable to ABF, self-supplied

High barriers to entry-large investment needed to gain presence and scale

Competition often price based with limited land; competitive advantage gained through efficiency

Growing market

***The agriculture industry is competitive and offers a low profit margin. Prices must be kept low to compete. A competitive advantage would come from better efficiency in crop production and/or processing.

New entrants would likely have little effect

AGRICULTURE-Market Analysis

Global Animal Feed Market

Chinese Market

Differentiation Positions

Means of ProfitabilityGrowing Global

MarketInfluenced by Global

Food System

High volume/low price through better use of limited existing land

Safe, traceable products

Ownership of limited land; using land productively

Increasing population requires more nutrient rich food

Needs knowledgeable partner

Fragmented, many small rural farmers

***Market is somewhat favorable for ABF. They are positioned for continued growth in China with a differentiated position due to extensive knowledge and early presence. Profit margins are low in agriculture, so ABF should focus on leveraging knowledge to decrease costs or increase productivity. ABF should capitalize on strengths found in other operational areas to benefit the company as a whole.

AGRICULTURE-Offerings vs. Opportunities

Animal feed, pet and livestock nutrition

Grain trading

Poultry marketing

Consulting

Sales and Marketing from other ABF products

Joint venture with Cargill

***Success in the future will require application of biotechnology to crop production (genetics, seed enhancement/protection). ABF can rely on their “knowledge” strength and succeed by investing in biotech research or acquiring a biotech firm, as they already have a global presence in the agriculture market.

Increasing demand

Use enzyme technology from ingredients group to increase crop production

Potential for joint ventures with developing nations/markets

INGREDIENTS-PEST AnalysisFactor Implication

Political/Legal

Economic

Sociocultural Migration to cities andIncreasing population

Demand for higher quality and safer foods

Opportunity to supply ingredients to a growing market demanding processed foodsOpportunity for ABF Ingredients, which self sources from agriculture division

Technological Increase in biotechnology Opportunity for AB Enzymes group to supply to own agriculture division to improve food outputOpportunity to develop new biotechnology applications

INGREDIENTS-Industry Analysis

Intensity of RivalryHIGH

Threat of SubstitutesMEDIUM

Buyer Power?

Threat of New EntrantsWEAK

Supplier Power?

Threat exists for some food ingredients (oil), but not for others (enzymes) .Most food ingredients are commodity

like rivalry is high. There are a wealth of producers. New/differentiated ingredients enjoy less competition and rivalry is lower.

High barriers to entry due to high investment costs to achieve scale.

Industry growth and innovation could increase the threat.

***Degree of control in this industry is determined by the type of ingredient produced. Commodity type ingredients are highly competitive and price sensitive whereas innovative ingredients (such as enzymes) enjoy a greater level of power. ABF Ingredients has ingredients on both sides of the industry so each wield a different level of power.

Ingredients requiring special inputs are at the mercy of their suppliers.

Supplier power is often lessened through level of vertical integration in supply chain.

Again, power is dependent upon the type of ingredient. Buyers of with commodity type ingredients have more power than non-commodity types.

INGREDIENTS-Market Analysis

Global Ingredients

Market

New Geographic Markets

Higher Demand for Ingredients to

Improve Health

Increasing CompetitionInfluenced by

Global Food System

Entrance of developing countries as producers

Agriculture/suppliers affect profitability

Entrance of developing countries as consumers

Demand for enzymes expected to rise 6.3% annually through 2013

***Market is favorable to ABF. Ingredients that improve the health of humans and animals expected to have growing importance…ABF is positioned to capitalize on trends through both ingredients and agriculture divisions. With the entrance of developing countries as both ingredient consumers and producers, ABF should focus on what those nations cannot do (application of biotechnology) to differentiate and grow

INGREDIENTS-Offerings vs. Opportunities

Group Offerings Market

AB Mauri Baking colorings, flavorings, ingredients, oils, fillings, toppings, mixes for breads/cakes/donuts

Bakery

AB Enzymes Enzymes Animal feed, foodservice, textile, paper and pulp

Abitec Lipids Foodservice, personal care, pharmaceuticals

Other ABF companiesOhly Yeast extracts

PGP International Proteins, flours, lactose, and other ingredients

*Ingredients poised for future growth include those needed for pre-packaged foods, enzymes, and those that will improve human and animal health

-If ABF divests grocery division, baking ingredients (potential for vertical supply) is less critical-Further analysis is needed to determine which ingredients are in demand for pre-packaged market as compared to current products-AB Enzymes is positioned to capitalize on increased demand…increased production could be funded by divestment of ingredient groups/products not aligned with future growth strategy

Financial Ratio Analysis by Operating Area

Grocery Sugar Agriculture Ingredients RetailInt. Rev as % of Total 0.12% 4.34% 0.40% 6.57% 0.00%Total Revenue ($) 3427 2049 991 1171 2730Operating Income ($) 229 244 33 104 341Operating Margin 6.7% 11.9% 3.3% 9.1% 12.5%Net Profit Margin 6.1% 10.8% 3.6% 7.1% 12.5%Total Assets ($) 2,581 2494 288 1386 1892Operating Ret on Assets 8.9% 9.8% 11.5% 7.5% 18.0%Asset turnover 1.33 0.82 3.44 0.84 1.44

-Operating and net profit margins are significantly lower (also demonstrated by high asset turnover)than the other areas, but still positive.-Retail and agriculture provide the highest operating return on assets…suggest increased investment in assets if opportunity exists-Sugar and Ingredients have a small reliance on internal revenue by selling to other areas…this can be increased, especially with the growing need for enzymes in the agriculture sector

% of Total Revenue vs. % of Total Operating Income

Total Revenue by Division Total Operating Income by Division

Grocery33%

Sugar20%Agriculture

10%

Ingredients11%

Retail26%

Grocery24%

Sugar26%

Agriculture3%

Ingredients11%

Retail36%

-Despite 33% of total revenue, the grocery division only accounts for 24% of profits.-Retail and sugar profit margins are high as operating income percentages are significantly greater than revenue percentages.- Agriculture accounts for the least revenue and operating income.

Current Return on Assets vs. Operating Profit Growth Projections

Operating Profit growth projections

Sugar Agriculture Ingredients Grocery Retail0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00% Return on Assets

2010-2013

-Large growth in sugar, grocery, and retail profits projected…Grocery return is lowest in portfolio-Agriculture profits expected to remain stable with fair return-Sugar offers greatest profit growth-Retail offers highest return on assets + market is expected to grow and be profitable = good investment option

Sugar Agriculture Ingredients Grocery Retail0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

SWOT Analysis by Operating AreaStrengths Weaknesses Opportunities Threats

Retail -UK market-Low cost/high fashion clothing-High profitability

-Investment dollars-Industry knowledge

-E. European market-Recession

-Rising commodity prices and taxes-Competition from discount big box retailers

Grocery -Profitability-Strong financial position-Global brands-Supply chain integration

-No relationships with major retail chains-No brand identity

-Growing market- Large brand owners looking to make acquisitions

-Industry consolidation-Largest growth expected in pre-packaged foods

Sugar -Industry knowledge-Sugar cultivation and processing-Market leader

-No presence in major Brazil market

-Chinese and African markets-Ability to share expertise and grow through joint ventures-Supply to new market areas

-Volatile price-Volatile supply

Agriculture -Food safety knowledge/application-Existing relationship with Chinese market-UK animal feed market

-Low profit margins-Diversity of agriculture portfolio…does not play to core competencies

-China and emerging markets-Increasing demand/population-Biotechnology applications

-New competition from developing nations-Climate Volatility

Ingredients -Enzymes-Vertical integration in supply chain ensures safety-Global presence

-Some reliance on volatile agriculture industry-Lack of focus in portfolio

-Biotechnology applications-Increasing population-Source to other ABF divisions and agriculture firms-Increasing demand for healthy foods

-Increasing competition from developing nations

Summary by Operating AreaGrowth

potentialProfitability Competition Favorable

market?Retail High High Increasing Yes

Grocery Medium Medium Increasing No

Sugar High High Minimal Effect Yes

Agriculture High Low Minimal Effect Yes

Ingredients High Medium Increasing Yes

-Grocery sector faces an unfavorable market, increasing competition, and only a mid level opportunity for profitable growth-Despite ABF’s lack of knowledge in the clothing market, Primark is a growing cash generator-Low profit margins of agriculture sector may be helped by its potential relationship with the sugar and ingredient divisions-By increasing combining technology and unique food system knowledge, ABF will be uniquely positioned in the marketplace

How can operational groups work together?

Ingredients

Sugar

Agriculture

Grocery

Enzymes

Supply to brands

Seed Protection

This is one example of how ABF could increase internal revenue and build upon strengths of other divisions, but would require more communication and joint strategy planning than is currently done

Internal Analysis- BCG Matrix

Retail

Sugar Grocery

Market Share

IndustryGrowth Rate

STAR QUESTION MARK

DOGCASH COW

IngredientsHigh

Low

High Low

Agriculture

***Retail generates investment cash for ABF…they treat it as a cash cow, but it’s potential for growth makes it a star that will require investment. Sugar is a market leader in a growing market. Grocery, Ingredients, and agriculture face challenges that require an invest or divest decision. Ingredients and agriculture offer the best opportunities for growth in the future whereas Grocery’s increasing marketing dollars will start to drain finances, despite profitability.

Internal Analysis-Directional Policy Matrix

Competitive Capability

Prospects for Profitability

Result Recommended Action

Retail Strong Attractive Leader Invest

Grocery Weak Attractive Double or Quit

Quit- Possibility of finding a quality buyer is high

Sugar Strong Attractive Leader Invest

Agriculture Strong Average Growth Use competitive advantage (knowledge) for growth

Ingredients Strong Average Growth Focus on ingredients that align with core competencies and trends (biotechnology, safety)

Conclusions• With competition in the global food system increasing from developing countries and

demand growing, ABF’s overall strategy here should be to capitalize on its unique industry knowledge by applying technology to increase efficiency and revenues.

• ABF is well aligned with most global trends and well positioned in most of its areas of operation. Despite some financial restrictions, the company should continue to pursue a growth through acquisition strategy.

• In the past ABF, has been successful by realizing when its portfolio has become too diverse and divesting those businesses not core to their strategy. The agriculture and ingredient areas have reached this stage and certain businesses in these sectors should be sold.

• ABF should continue to invest globally to reduce risk of heavy reliance on UK market.

Recommendations• Retail-Primark total revenue and total assets have increased over the past five

years. Net profit margin increased 1.6% over the past year. High profit margins and a strong return on operating assets, along with the possibility of increased market share through acquisition and geographic expansion, indicate Primark should be able to continue to grow profitably. Primark has traditionally been a cash cow for ABF, but they should invest in expansion into E. Europe to ensure the generation of investment dollars for future opportunities in ABF

• Grocery- Operating and net profit margins have remained strong as total assets have increased. Increased competition lowers profit margins due to necessary marketing costs. Marketing is not a core strength of ABF. Further growth in the industry will also require strong relationships with key retailers, which ABF does not wish to develop. The ABF grocery brands are an attractive purchase for larger firms wishing to grow through acquisition. ABF should sell its grocery division.

Recommendations• Sugar- AB Sugar should continue its expansion into China and Africa

through joint venture and acquisition. This division is projected to have the highest profit growth. They are uniquely positioned due to their processing expertise, especially for sugar beets.

• Agriculture- The division is a small part of revenue and achieves low profit margins, but value of the division is really their knowledge, which can’t be sold and will be a strength in light of market trends. ABF should invest in research/biotechnology applications that will increase production efficiency, focus on its strength in animal feed and pet/livestock nutrition, and continue acquisitions in China. The division can sell of those businesses not directly involved in this future growth strategy.

Recommendations• Ingredients-AB Ingredients is facing many opportunities in the growing

global food system. As demand for safe foods and biotechnology use increases, the division can supply to both the agriculture and grocery industries. AB Enzymes is well positioned to grow. More analysis is required to determine the future growth businesses within the division. Which can supply to the growing pre-packaged foods sector? Some groups, perhaps AB Mauri, should be sold to fund core ingredient functions.

• Use cash generated from grocery divestment to fund growth in Retail, Agriculture, and Ingredients divisions. Further cash will come from selling those businesses within the ingredient and agriculture divisions unrelated to core strengths and future growth.