Business Plan: Raisinable Limited Case Study

Executive Summary:

Shareholder value is one of the concepts which has seen much discussion in its favour and against. Accounting scandals and financial crisis have called for a re-evaluation of the many popular concepts of shareholder value creation, and much criticism has been sent its way. However, shareholder value is rather an important principle which has not failed the management. On the contrary, the management has not been prudent in comprehending its true meaning. The idea behind has been to align the management interests with that of shareholders. This thesis works by looking at the measures of shareholder value creation for a specific company. This case revolves around one of these companies; RaisinAble which is a medium size private company in the UK whose core business is processing, sourcing, packaging, selling and marketing of the edible and dried nuts, fruits and seeds in the UK market. Companies are adopting more of a healthier preference of their consumers in snacking due to changing customers’ preferences. More and more companies are adding a variety of options in its product line to increase their competitiveness. The rising customer inclination towards healthy snacks has compelled the companies to innovate for increased customer retention.

The RaisinAble Company is not sure how to retain its current market share and how to grow in the coming years. This report is going to provide insight into the strategic options, their financial viability, and their potential to increase shareholder value. The Analysis shows three strategic options along with the current strategy and evaluates it to consider its financial viability, risks, profitability, returns, and shareholder value. The analysis evaluated the four strategies of 1) continuing the current strategy 2) Strengthening the core business 3) Diversifying into new product lines 4) Entering International Markets. The financial ratio analysis and the various KPIs for the evaluation of shareholder value have shown that the company RaisinAble is better off with the current strategy. It may be because we are unable to evaluate the influence of several factors in the short run as the five-year span is limited to look at the success rate of the strategies. The shareholder value, in this report, is higher for the company with the current strategy.

Background of the Case Study & Application

Earlier, snacks were considered a lighter option of food for break time. Break time meals were not so much popular in earlier times. However, with the increased awareness regarding the health benefits of smaller meals and with snacks being considered as one of the important meals of the day, the consumption of snacks has risen. The snacking culture in the UK is quite pervasive with about 96% of the UK reporting consuming snacks between meals. 69% of these individuals have reported snacking as their daily habit. The key driver of snacking is to maintain the energy level and making sure that it is perceived as a necessity in the busy lifestyle. It has increased the legitimacy of snacking on its health and benefits. Youngsters being the forerunners in the snack eaters as they love to snack while they are working, driving, are in theatre and transit (Berghman et al., 2006). Consumers consume fresh fruits, chocolate and crisps the most in the UK as snacks showing the varying needs of snacking in different contexts. About 39% of the snackers are reported to indulge in healthy snacking most of the time. Along with the challenge of delivering PHE sugar level and reducing calories, catering to the sizeable UK demand of healthy snacks is a challenging industry to operate in (Soininen, 2018). The trend has led the companies to look for better snacking options. The Chips and bakery industry, being the leading market share holder in this industry, is closely chased by the healthy snack industry. This case study revolves around one such company; RaisinAble.

Shareholder Value Approach-Definition

The Economic Times define the Shareholder Value as; the value that is enjoyed by the shareholders who owns the stock of the company. The value of this term is derived from the company delivered through its profitable operations benefiting the shareholders (The Economic Times, 2018). Any management of the company is concerned about the shareholder value as it is the prime reason the company exists. Management is needed to exercise effective decision making to not only just increase their revenue, but also create shareholder value (Cleverism.Com, 2015; Bird, 2004; Doole & Lowe, 2012; Fletcher & Crawford, 2013). For this purpose, the true definition of shareholder value might be more detailed.

It has become a trend to blame the pursuit of creating shareholder value and the pressure of the stock market for the ills of the management; however, it is the management who has betrayed the principle in the actual. It shows that management can often get shortsighted, while delivering shareholder value only if the true definition of shareholder value is not clear to the management or wrong measures are used for creating shareholder value. So what should management do to create shareholder value? The principles put forward by Alfred give some insight towards it. Alfred claimed that management should not manage their earnings and should not provide any earnings guidance. It is because of the reason that following the earnings game calls for compromising value by investing at rates lowers then the cost of capital or by not investing in opportunities worth creating value in pursuit of short-term gains. He then put forward to his second principle of making decisions which maximise the expected value even if it means foregoing short-term earnings. It comes along with the principle of making acquisition decisions which maximise the expected value and carrying the only assets which maximise value. Another important principle put forward by Alfred is that dividends should only be distributed when the company cannot find any credible value-creating opportunity for investment. Rewarding of management executives as well as operating unit’s executives, and middle management for their long-term goal achievement is also emphasised. Furthermore, he claimed that better disclosures and value relevant information should be communicated to the shareholder (Rappaport, 2006).

The shareholder value origin can be traced back to an article by Milton Friedman in 1970 who claimed that the sole purpose of the company is to create profits for its shareholders. Much criticism has been made against this idea and it is even considered as dumb to believe that money creation for shareholders is the sole purpose of a company (Denning, 2013). More specifically, after the financial crisis in 2009, the concept of shareholder value was much critiqued for its narrowness. The critics claimed that this model does not provide measures for social issues like environmental issues, employment, and ethical practices of business. As it is clear that the creation of shareholder value at the expense of the other parties and the environment is not an acceptable approach, the criticism stands right. However, many studies have followed to revive the lost glory of this theory by covering up its weakness and making it appropriate for the complexity of the more globalised world (Mertens, 2013).

For RaisinAble, the shareholder value depends on the following variables. These variables would provide the standard or act as Key Performance Indicators for the given strategy options to direct on the best strategy that creates the highest shareholder value.

DuPont Analysis:

It is one metric which shows the return of the company on its equity depicting the ability of the company to use its equity for earning returns. It is done by breaking down the formula and looking at its components to figure out how the company can earn more return for its shareholders (Winer, 2004; Wnuk-Pel, 2015).

ROCE exceeds Ko:

Return of the Capital Employed is another important metrics which measure the profitability of the company. The Return on Capital Employed should be greater than the Cost of the Capital to make sure it is earning a return which is enough for the company shareholders (Azuayi, 2016).

ROE exceeds Ke:

The Return on Equity as computed by the Net Income divided by the Equity of the company should be greater than the cost of acquiring the equity. The cost of acquiring the equity is computed in the Report through the use of the CAPM Model (Kedar-Levy, 2004).

Total Asset Turnover:

It is the ratio which measures the efficiency of the operations by looking at the utilisation of the total assets. The measure shows how much efficiently the company is using its assets. The shareholder value is known by the higher efficient utilisation of the assets (Davis, 2017).

Financial Liabilities:

The financial liabilities of the company are an obligation which is always an important component of the company balance sheet; however, exceeding the current assets can cause major problems for the company and its shareholders (Lehmann & Winer, 2008).

Macro Environmental Analysis

Industry Analysis

Looking at the industry of the dried nuts and fruits in the UK, certain opportunities and limitations can be seen as evidence. For being competitive in the UK market, the food safety systems are the first step to be operative. Investing in the latest processing technologies for high-quality products and also the preservation of the ingredients is the main factor for a competitive edge (Silk, 2006; Arora, 2013; Doney & Connon, 1997).

Competition:

The total imports of the edible fruits and nuts in the UK have increased in last year’s. The growth is expected to increase in the edible nuts segment, which was higher in 2016. The growth rate is also higher from other developed countries than from the developing countries showing more dependence on developed countries (CBI.Eu, 2018). The company’s imports are influenced majorly by the US imports of almonds (Agribusiness Intelligence, 2017).

About the 70% of the Imports of the dried nuts and fruits in Europe is concentrated in four countries of Italy, Spain, Germany, and the Netherlands. Regarding suppliers, the company has a supplier of edible nuts from the US, Turkey, and Spain (CBI.Eu, 2018), while Turkey, China, and the USA are the major suppliers for dried nuts. China, Vietnam, Argentina, Philippines, and Chile are competing for many nuts like prunes, dried grapes, and walnuts.

Retail Pricing:

The pricing in the UK for the edible nuts and dried fruits show that raw material holds about only 5% of the total retail price in case of fresh fruits (used for drying) and 15 to 20% for already dried. 30% of the price is used in handling, selling, and processing of the bulk product. The 60% of the price is consumed in the processing, handling and import while the other 32-35% is used in shipment (Ellickson et al., 2012; Kareh, 2018; Zhu & Singh, 2007).

Several new companies have announced their introduction of healthy snacks in their portfolio with a variety of combinations, mixtures, flavours, and tastes. The companies are launching a variety of pickings as well to increase their competitiveness. The customer rising inclination towards the healthy snacks has compelled the companies to innovate for increased customer retention (Charles & Anderson, 2016; Fernandex, 2006; Jandaghi et al., 2011).

Challenges:

The limitations of the UK dried fruits and nuts market include the food safety certification, which is a must as it is required for all food retailers. CSR is another major initiative which is slowly integrated into the safety and product quality requirements (Goldstein Research, 2018). The company with more suppliers having food safety ad CSR certification would benefit the most. The substitutes for the snacking industry are many (Faircloth et al., 2001; Herscott, 2005; Gao, 2010). Chips and other baking items remain the strongest threat of substitute for the company. Private label products are another threat which is important as well.

The snack segment of Europe has been dominated by the potato chips with the largest market of savoury snacks in Europe is the UK. The snack consumption of savoury snack per capita in Europe is almost around 3.6 kg. It is one of the main threats to the healthy snack industry. Other than this, the fresh fruit industry is also considered as the substitute for the healthy snack industry. The companies in this industry are required to provide detailed sourcing information. It means that the companies are required to show where products raw material has come from. The processing industry, on the other hand, is dependent excessively on dedicated suppliers. Even though companies are looking for a lower casting supplier, the companies prefer long-term joint ventures with suppliers. However, this does not mean that the companies are not constantly on the lookout of new suppliers. Furthermore, the increased awareness of sustainability has required companies to show the labour conditions under which the goods are processed and originally produced. The CO2 footprint information and the strategies for sustainability are required to be shown. Furthermore, the eating patterns of the European may change as well (CBI.Eu, 2018).

BREXIT:

BREXIT is another important factor to consider for this industry. The sweet and savoury snacks market is among the ones which are expected to be most affected by the BREXIT. The categories which are expected to be most affected by the BREXIT are the discretionary items. Staples, one the other hand, are not affected in a same way. The drop in the sterling has created a sharp rise in the fuel pump prices, which is expected to divert the spending of the consumers. Higher fuel prices are expected to eat into the discretionary spending in case the pound remains weak. The uncertainty revolving around the BREXIT situation is the key challenge. It will influence the confidence of the consumers and business and on their investment decisions (Bamford, 2016).

SWOT

Strengths	Weaknesses
· Being a privately acquired small company gives it the flexibility · Located in the prime area of the UK · Quality Product · Reliability in customers · Supplier Pool	· Competitive Healthy snacking market · The threat of buyout to another company · Inadequate sales department · Limited target market · Seasonal Supplies · Reliance on suppliers
Opportunities	Threats
· Emerging Markets · Tapping into the Children snacking market · Using more of healthy snacking products · Focusing on branded products · Diversifying into baking products	· Strong competition · Weather conditions of the Supplier Countries · Price Inflation · Dependence on Supermarkets labels · Dependence on Exchange rates

(Vasudeva, 2006; Van de Ven, 2008; Smith & Hanover, 2016; Shaw & Onkvisit, 2008)

Market Analysis

Porter’s Five Forces

Competitors:

There are many competitors in this industry. The UK market share is divided majorly in Whitworths, Sundora, S&B Herba and Own-labels of the Supermarkets. Other than this, PepsiCo Nobby Nuts, Trigon, and United Biscuits are one of the competitors as well. Other than this, the groceries themselves have their own-label products in their stores which are cheaper than the branded ones of RaisinAble. The competition would be termed as high (Oyza & Agwu, 2015).

Suppliers:

The company has many suppliers, however, mainly deals with the more specific ones. The company gets its suppliers from the US, Turkey, Iran, Spain, India, Greece, France, and China.

The bargaining power of the supplier is medium as the companies have to rely on its suppliers for product quality. However it can change its suppliers between various countries. However, changing supplier is a lengthy process which is often tolerated (Philip, 1997).

The threat of Entry:

The threat of the new entrants in this industry is medium. The dried nuts and fruits industry like any other food industry offers the opportunity of low costs of entry. However, the companies who have already been in the industry always have the edge as they not only have access to the best suppliers but also has experience of having past contracts with the supermarkets and grocers (Philip, 2000).

Buyer Power:

The power of the buyers in the European retail industry is very high and is expected to increase more. Attention to responsible sourcing, traceability of raw material, and suitable sourcing is given a priority. Supplying companies of retailers need detailed information on the sourcing (Onkvisit & Shaw, 2009).

The threat of Substitutes:

The snacking industry offers several alternatives for snacks and more specifically for healthy snacks as well. However, the baking industry is expected to use nuts and fruits as an option. The food industry needs companies to maintain prices as customers are constantly switching between different options. However, one should notice that even with all the alternatives available, the customers who know quality, or taste gets loyal to their companies (Mishra & Modi, 2016).

PEST Analysis

Political–The UK Healthy snacking and Baking Products industry is one part of the food industry, and it gets influenced by the trends. The healthier trend is leading the companies to add healthier options in their product range. Public health policies are usually the one dictating these changes. Other than these, the inflation, exchange rate, import and export costs, health policies by the government all affect the industry (Paul, 2008).

Economic—the unemployment rate of the economy, for instance, affects this industry. Furthermore, the healthier the options, the food are pricier as compared to the other meals making it expensive for the customers. Food interest rates, High sugar rates, consumer spending of UK customers, their consumption trends, taxation in the UK and supplier countries of RaisinAble are important economic factors.

Social—Business is based primarily on what the consumer wants. The shift in the want and needs of the consumer is derived from social trends and values. Healthiness is one of these trends which is socially become more relevant and has consequently become important for the companies as well (NGEN Partners, 2017).

Technological—Technology has become a tool on which companies are making their competitive advantages. The technology involves from marketing to packaging, to labelling, and production and delivery of food. It provides not only the competitive edge for the companies in this industry; it has become more of a survival tool.

Business Analysis

The business of the Dry Fruits, Nuts, Healthy Snacking, and baking products is based on the disposable income of the consumers. The growing urbanisation increased awareness of a healthy lifestyle, and increased disposable income are the main drivers of this business. The use of the nuts and dry fruits in the chocolates, bakery items, and milk has also caused the demand of these products to increase. The use of the usual fruits and exotic fruits has also led the demand of the dry fruits for bakery products (Grand View Research, 2017). Premium quality and variety of the fruits and nuts are propelling the market. The increasing middle class globally is also one of the main drivers of this industry growth. The emerging economies are majorly the driver for this growth with vast populations and increased middle-income class and awareness of the healthy snacking (Whitehead, 2017).

The processing and packaging and its associated costs are the factors which are limiting the growth of this market globally. The toxins and pesticide detection in the nuts and fruits have limited the adopting rate of the fruits and nuts as snacks. The excessive side effects of the excessive intake of these snacks also led lower frequently consumption in the consumers making the consumers constipated, gain weight and have feelings of bloating.

Product Analysis

The company products are majorly based on the edible nuts and dried fruits and seeds. The company materials include vine fruits, which is consists of currants, sultanas, and raisins. The product of the vine fruits is used separately and in different combinations. The prices vary as depending on the currency movements, weather, oil prices, commodity prices, and inflation rates. The input costs are manageable by the buyers as the raisins and sultanas are interchangeable.

The Tree fruits include cranberries, prunes, figs, apricots, dates. The raw material is supplied from Iran, the US, and Turkey. Drought, Frosts, and currency fluctuations influence the company product lines. The RaisinAble mix of supply has almonds, walnuts, cashews, Brazil nuts, hazelnuts, and pecans.

The product line includes;

Healthy snacks- RaisinAble brand
Baking Products- RaisinAble brand
Healthy Snacks- Supermarket own labels
Baking Products- Supermarket own labels
Bulk Ingredients

Market Research

The highest rate of Obesity and the increasing trend towards healthier options has led the acceptance towards dry nuts and fruits as snacks for the customers propelling this market segment in the world. The year of 2015 reported global production of about 2.7 million metric tons of the nuts. This value is projected to reach above 72 million metric tons by the year 2024. The rising demand of the global dry nuts and fruits snacking has shown that the market is projected a CAGR of about 5.5% from 2016 to 2024 (Factmr.Com, 2017).

The market in the Asia Pacific is considered the largest region for this market, which is probably going to dominate in the coming decade as well. The consumer awareness and high consumption of these fruits and nuts in China and India are seen to grow tremendously in the coming years (Zion Market Research, 2018). This Asian Pacific region’s market is projected to grow to $17.4 billion by 2024 with a CAGR of 7%. The fastest growing region regarding this industry is Latin America, Africa, and Middle East regions. It is major because of the high awareness of the healthy lifestyle in these regions (CBI Insights, 2018). The 2016 statistics for the market share shows about major consumption of 50% of the dried figs, grapes and dates in the African and Middle Eastern region. Europe and America, on the other hand, would be witnessing steady growth as the demand is steady as well. The Production by European and US dried fruits and nuts is increasing, however, more vastly. The growing production is expected to impel the opportunities in this business sector in Europe (Daneshkhu, 2017).

Marketing Strategies

The marketing strategies provide the company with alternatives that the company can use for its future growth and operations. The company is given three strategic options here;

Strengthen Core Business

It includes the strengthening of the core business of the company. The company has branded label products and then it also provides the business to business products to supermarkets, grocery stores, health food outlets, etc. The company has supermarket sales based on three-year renewable contracts which are callable. The competitive tenders win the contracts as reliant on the supply, quality, and price. Discount on pricing is given to the supermarkets. The margins are lower from these supermarket contracts, but it is a steady revenue stream.

The company owned brands provide more margins. However, the growth opportunities are vast here the company is reluctant to invest more in this revenue stream. It is one of the core business areas in which the company can strengthen.

Diversify Product Range

Another option can be diversification of product. It is the area which calls for the addition of a new product line in the current portfolio. The company can work on diversifying the portfolio and thus increase its market share by using it. Using this strategy would allow RaisinAble to lower its dependency on one market segment. The company can look for opportunities in the new nuts, low sugar, nuts, dried fruits, and seeds.

Enter International Markets

The international markets have large markets of the dried nuts, and dried seeds and fruits. The company RaisinAble can work on expanding its market by entering emerging markets like China, India, and Vietnam.

Current Strategy & Financial Position & KPIs:

BCG Matrix for five products

The above matrix classifies the products of RaisinAble as Cash Cows, Question Marks, Stars, and Dogs. It is evident that three of the products fall in the cash cow category with high market share but lower market growth opportunities. The two products which are branded are classified as question marks as it is not evident if RaisinAble would be able to take advantage of the high growth opportunity in this sector or not.

Current Financial Analysis

The current financial analysis will look at the financial position of the company RaisinAble regarding its liquidity, profitability, KPIs, and Rate of Returns, payback periods, and break-even points.

Liquidity Ratios

Liquidity Ratios:
Current Ratio	2018	2019	2020	2021	2022	2023
Current Ratio	4.85	4.79	4.74	4.72	4.95	5.07

Quick Ratio	2018	2019	2020	2021	2022	2023
Quick Ratio	2.76	2.38	2.29	2.30	2.35	2.29

Cash Ratio	2018	2019	2020	2021	2022	2023
Cash Ratio	1.34	0.91	0.81	0.83	0.91	0.85

The liquidity ratios show the company has enough liquidity to manage its liabilities. The management needs to know how much financial liabilities it bears and would it be able to cover it in any instant needed with its short-term assets. It shows that the shareholders can have the relaxation that the company liquidity is enough to compensate its short-term obligations.

Profitability Ratios

The profitability ratios show that going on with the current strategy would yield barely their profit margins, which would steadily increase over the five years. It is the most important measure as the profits of the company are most important for the shareholders. The company is needed to increase its profitability for the creation of shareholder value. However, the value creation can be misleading as it is based on short-term earnings measure.

KPIs

Break Even

The break-even point of the company in Kgs is shown in the above table. This KPI shows how much of the products in Kgs is needed to be sold to cover the costs of producing it. The fixed and variable costs of production are taken into account. The measure shows that how much more of the products have been sold above the breakeven point to create shareholder value.

Payback Period

Payback Period

9.25

years

With the current strategy, the company would not be able to pay its debt repayments until 10 years. It is an important measure for showing the following of strategies that consider shareholder value. The company capital expenditures require financial sourcing which is often sourced from debt sources. It is important to see if the company would be able to utilise these funds effectively to refund the liabilities.

The rate of Return on Investment

The investment in the current strategy is yielding a negative return in 2019 which steadily grows into positive returns which is not enough to satisfy shareholders. Shareholder creation is based on justifying the investment by giving the returns. The Return on investment shows how much effectively the investment has been utilised to create value for shareholders.

DuPont Analysis

The DuPont Analysis shows how this Return on equity is getting earned. The low-profit margins and debt to equity ratios along with low asset turnover are giving lower ROE. It also shows how the returns on the equity are created to maximise the shareholder value.

Stock Turnover/ Inventory Turnover

Other KPIs
Inventory Turnover Ratio	2018	2019	2020	2021	2022	2023
Inventory Turnover Ratio	3.70	3.69	3.50	3.44	3.10	3.01

Asset Turnover Ratio	2018	2019	2020	2021	2022	2023
Asset Turnover Ratio	1.52	1.54	1.56	1.58	1.50	1.48

Debt to Equity Ratio	2018	2019	2020	2021	2022	2023
Debt to Equity Ratio	0.71	0.75	0.76	0.77	0.74	0.73

The company efficiency ratios show that the inventory turnover is at 3 times, while asset turnover in at 1.5 times, and debt to equity ratio is at 0.75 showing high debt dependence. It is important to understand how efficiently the company is utilising the assets, and its debt regarding maximising the shareholder value.

ROCE exceeds Ko

The ROCE has to be greater than the total cost of capital. The Difference shows that it is indeed greater than Ko. However, it is not higher with a substantial margin. The returns gained by using the capital employed shows how the capital has been effectively used for value creation of the shareholders.

ROE exceeds Ke

Following the current strategy would not yield a return on equity greater than it’s in all five coming years. The returns gained by using the equity of the company shows how the equity has been effectively used for value creation of the shareholders.

All in all, it is to be noted that all these measures are not the only measures for justifying the creation of shareholder value. Non-financial KPIs like the sustainability efforts, CSR activities, and disclosure practices of the financial reporting are some of the factors which are important to measure the shareholder value creation. It also depicts that this financial and non-financial measure can be misleading to predict the actual value creation for the shareholders as it only shows measures for a short-term period. The company evaluation is focused on five-year basis, while this limits the evaluation of the strategic options in the long term, it is important to notice, that a value-creating strategic option might be non-profitable, and yielding negative returns in its initial five years. Thus, the analysis is limited in representing its true implications.

Proposed Strategy

Critical Success Factors

The company management’s dedication with the strategy and its utilisation of the resources would be critical for its success. The dependence on the suppliers and reliance on the supermarket contracts can limit the chances for success of the company. Other than this, the KPIs mentioned above hold as Critical Success factors of the company.

Organisational Structure:

For the execution of the plan, the organisational structure should be aligned accordingly. The company should follow a more of a decentralised system in which the inventory planning and distribution are done for individual distribution centres. Furthermore, the allocation of responsibility and authority to middle managers would increase productivity.

Operational Plan:

The company would need to align its strategy with its human Resource, Production, Finance, Administration and Procurement Department.

Strategy Option 1:

Financial Plan/Projections/KPIs:

Five Year Projections

Assumptions

Shift the Capacity by 3% each year from Supermarket labels to Branded products
Keep Capacity Utilization at 91% from 2019 to 2022
Increase Capacity Utilization to 94% in 2023
Hire 2 new workers in 2023
Increase Training Budget in 2022 to 5%
Increase Marketing Budget by 1% each year

The detail shows that the company’s adaptation of this strategy of strengthening its core business in the UK would yield a negative profit after tax in 2019 which would substantially increase in five years.

Gross Margin by product line	2018	2019
Healthy snacks – branded	32%	29%
Healthy Snacks – own supermarket label	12%	8%
Baking products – Branded	27%	23%
Baking products – own supermarket label	11%	6%
Ingredients	9%	3%