Associated British Foods SWOT & PESTLE Analysis

Strength

1. Diversified Business Segments and markets: The Company is operating in five business segments across United Kingdom, Europe & Africa, The Americas, Asia Pacific. More than 60% of the profits and sales are from the regions apart from UK. For the Grocery segment Twinings and Ovaltine are the international hot beverage brands. In Europe Silver Spoon and Billington’s sugars, Kingsmill and Jordans and Dorset cereals are the prominent brands. Mazola in the US is the leader in corn oil and Capullo is selling premium canola oil in Mexico. In Australia KRC brands sells Ham, bacon and Tip Top Bakeries produces breads and baked goods. Revenue grew to £3,381m in 2017 from £3,097m in 2016.In the sugar segment factories in UK produce over 1MT of beet sugar annually whereas Azucarera in Spain has a capacity of 0.4MT annually. Illovo is the largest producer of sugar in Africa with production facilities in six countries. Revenue grew to £2,174m in 2017 from £1,636m in 2016. The segment’s operating profit increased to £223m in 2017 from £35m in 2016. Agri Business of British Foods operates at the agriculture industries heart and make use of its experience to add value to the supply chains of the food, drink and bio-fuel industry. Revenue grew to £1,203m in 2017 from £1,084m in 2016. It is the only business segment which registered a decrease in the operating profit from £58m in 2016 to £50m in 2017.Ingredients segment focuses on ingredients for food as well as non-food applications. The company manufactures enzymes, extracts, yeast, lipids and cereal specialties with facilities in Europe and the US. The Company operates in yeast and bakery ingredients production globally through AB Mauri and uses technology for dough conditioners and bakery mixes. Revenue grew to £1,493m in 2017 from £1,294m in 2016.

2. Growth of Primark in Retail Segment: Primark is a retail group of British Foods operating in the value fashion sector with over 315 stores in eleven countries. The company provides its customers high quality fashion at value prices, its tagline, “Amazing Fashion, Amazing Prices”. The company sources its fashion items internationally to reflect the season’s key fashion trends. Primark’s range includes women’s wear, menswear, lingerie, children’s wear, footwear, hosiery, accessories, and home ware. Primark is continuingly expanding its selling space and sales were particularly excellent over the summers leading to an increase in the market share. Due to the fall in sterling against the US dollar the manufacture and input cost increased but the cost to customers was not increased which provided best value in the high-end market. The merchandising and buying teams reduced the impact of the fall in sterling and therefore the profit margins reduced by less than expected. Through its store design, location, stock availability and on-trend fashion Primark constantly delivering values to its customers. It has added 1.5 million square feet of space across nine countries with a net addition of 30 new stores. Social media is being increasingly used to develop deeper relationship with its customer by providing awareness about the products. Total social media following is 10.7 million customers and Instagram reached a milestone of 5 million followers.

3. Strategic Turnaround of Sugar Business along with Policy Changes: Associated British Food Sugar business has over the last few years taken various steps to transform. It has sold its cane sugar operations in South China in 2017 as well as taken full ownership of its Illovo plant and undertaken various performance improvement programme over the years. The performance improvement programme consisted of business development achieved by improving production efficiencies, increasing capital investment and procurement activities. The company also keeps a track of the changing customer need and also those of the end consumers to serve them better. Illovo has initiated an accelerated programme for commercial development of its plant as well as to further increase the production efficiencies. It is also establishing itself as a low-cost business that is positioned to take advantage of the market opportunities as well as the freedom to export. The company sold its cane sugar business in south China to focus on operations in other plants Due to an increase in sugar prices and removal of the sugar quotas in EU it could mean substantial increase in the Sugar profits subsequent years putting the company at an advantage. It has also entered into multi-year contracts with UK beet growers. In the EU market its business is being positioned to exploit low cost market opportunities following the sugar quotas abolition in October 2017.

4. Positive Trend for Ingredient Segment with Research Capabilities: The revenues and the adjusted operating profits increased by 15% and 34% compared to last year respectively. The strong growth in sales and profits was driven by higher revenues from premium markets. Associated British Foods Mauri yeast and bakery ingredients showed significant improvement in growth. In North America new bakery ingredient product was successfully launched in an already competitive market. It also participated in the International Baking Industry Exposition having participation from 100 countries where it promoted its baking technology. The acquisition of Speciality Blending, Cedar Town, Iowa was completed in January 2017. The plant has multiple blending lines which are capable of handling concentrates of whole-grain bread and sweet goods. It is also capable of handling ancient and organic blends. The company has made improvements in doughnut and cake mixes with the application of ingredients’ technologies. Abitec in North America, company’s speciality lipid business has shown significant upward trend in the nutritional application of beverages and food as well as those of branded and generic pharma drugs. The protein business has also benefitted from the healthy snacking trend.

Weakness

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Opportunity

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Threat

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Political

1. Impact of Brexit: In June 2016, people of UK voted to exit the EU which was an-European political and economic union with a single market. Since then it has been hailed as a first step towards improved economic growth by some and as a destructive step moving away from globalization by others. There is a lot of uncertainty around the future trade relationship between the UK and the EU. Since Associated British Foods has high dependence on trade it is vulnerable to a lot of uncertainty around Brexit. Due to a decrease in the value of Sterling against Euro the cost of input has increased substantially. The supply chain has been designed to work in no tariff borderless regime but the company may incur additional cost such as import/export duties, custom costs which may impact its profit margin depending on how the Brexit unfolds. The increased lead times due to the decrease in the speed and flexibility of supply chain may reduce responsiveness to the customers and may lead to additional inventory costs in supply chain. The company is re-examining its contracts with supplier to understand their post Brexit viability to minimize exposure to non-UK supplier. It is also trying to pass on selectively the cost inflation to the customer.

2. Introduction of Sugar Tax in UK: Government in UK has proposed imposition of the “sugar tax” to tackle the obesity crisis. Misconceptions surrounding the consumption of sugar have demonized it and people are now replacing it with products that contain more calories. The government motivation to bring out this law is around the thinking that reduction in sugar consumption would reduce obesity rates but solving obesity is not just about sugar it is also about the lifestyle, exercise and eating. AB sugar and Silver Spoon sugar processes the sugar cane and beet crop around the world and the introduction of the sugar tax could affect the revenues of the company as its major customers are the soft drink manufacturers. The sugar segment accounts for around 15% of the Associated British Foods overall sales.

Economic

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Social

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Technological

1. Use of Technology in day to day Operations: The Companies sugar business uses VR to train its employees for its safety programmes. The immersive training platform helps its 500 employees improve hazard awareness, increase their risk perception as well as help them make decisions related to safety. The company has also created a community website to help its employees share ideas and seek help from each other. It has 1,000 members in different operating functions developing innovations and solving problems. The Ingredient business is using ‘Authenticate” a web-based platform the helps to track all the supplier of ingredient to have a knowledge and assurance for all feed material required for manufacturing. It also helps the business to understand the source of their supply as it sources 2,200 types of ingredients from more than 550 suppliers from 35 countries around the world. ‘iSOYLscout’ is an app developed by the Agriculture business that helps make monitoring, recording and review of in-field problems much easier for farmers. It also helps to transfer the noted information quickly and easily through the cloud for monitoring and scrutiny later. It also helps farmers to share the information with their agronomist.

2. Genetically Modified (GM) Ingredients: Ingredients business has a close interdependence with the agriculture sector and it helps the Companies interest to ensure that farms supplying to it are healthy and sustainable in long term as well as short term. Also, the consumers around the world have different views regarding the use of GM ingredients in food chain. The company meets the consumer expectation as it varies country by country; as also complying with the local regulations regarding the use and labelling of GM ingredients. Majority of food products sold to the customers in Australia, Europe and New Zealand do not contain GM ingredient. The GM crop cleared by the UK and EU as safe for both human and animal consumption form a part of the animal feed supplied to the farmers to be competitive as their use doesn’t affect the wholesomeness of the feeds. The customers seeking non-GM feed material are supplied with a price premium expected by the producers. The company tries to keep the price premium at industry’s lowest level in spite of difficulties in storage, transportation and manufacturing. GM microorganisms are used in enzymes business in the manufacturing process but not in the end product

3. Information Security: Delivery of effective and efficient operation is achieved by the use of technology and information sharing. The business is subject to potential external and internal cyber threats such as loss or theft of data and computer viruses. As the company is increasingly interacting with consumers, customers and suppliers using technology therefore higher emphasis is place on secure and reliable IT systems to manage information carefully. Disruption to operations can also be from unforeseen system and IT malfunctions or external attacks. To be ready for such situations the company has well established processes and IT security policies and technologies in place. Access to data is closely monitored and restricted along with a disaster recovery plan for business-critical applications. IT security team is continuously tasked to identify and respond to potential security risks.

Legal

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Environmental

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