Business environment analysis of A.G. Barr soft drinks company

Business Environment

The growth of every economy depends largely on the performance of the private companies. The private sector is one that the government has no stake and their main motive is to increase their profits. In the case of UK, most private businesses are sole traders in which the ownership is for an individual doing business using limited capital. Because of the fierce competition in the private sector, businesses have to operate in a tough environment that is characterized by changing economic condition, government regulations and constant changing customer tastes and preferences Kash, 2001.

In the competitive industry, companies must ensure that they keep their operations as efficient as possible and maximizing the quality of their production without hiking prices charged to the consumers who constitute the demanders of the product. In UK, competition forms one of the basics in which private companies operate and this therefore implies that the management of private companies must assiduously and consistently conduct an environmental scan to assess the changing economic environments in order to formulate strategies that promotes the core objectives of the business.

Company Overview

A.G. Barr, the largest soft drink company that was incorporated in 1895 and which is listed in the London stock exchange will be used for this report. The company manufactures soft drinks and operates in North Lanarkshire, Scotland and Cumbernauld. The company is specifically known for the manufacture of Irn-Bru which is a popular Scottish drink. Since its formation, the company has realized tremendous growth through acquisition of other companies in the industry to become a market giant a.G., 2012.

In 2002, the first non-family CEO was appointed to steward the business towards the realization of its aims. Because of the nature of the industry that is characterized by local and international competition, Barr becomes a good organization for this analysis as the economic environment plays a critical role in the realization of its vision.

Barr's Economic Environment

The environment in which that operates affects all businesses irrespective of their locations. Overall, the business environment is faced by economic factors, social factors, political environment, and technological environment. For a business to thrive in this dynamic environment, the management should continuously scrutinize the performance of the business with the aim of unravelling the deviations and taking corrective measures to ensure that the direction is not lost in the process a.G., 2012.

Barr is not an exception and has been faced by the fierce challenge in its attempts to maximize the shareholders returns in the market. Our analysis in this case will only concentrate on the economic environment of the business and will compare the performance against those of competitors and the industry in general.

The revenues and profits that are earned by the business depend entirely on the economic environment. The economic environment affects the revenue centre of any business and must therefore be continuously looked at to ensure that the business income does not deteriorate. In the case of Barr, the company's revenues for the financial year 2012 increased by 6.6% to £237 million from £ 222.4 million in the 2011 financial year a.G., 2012.

This supported the increment in profits by 6.2% and ensured that the shareholders record an increase in their earnings per share by 24.8%. The company's major brands performed well making the company increase its total profits. The major revenues were derived from the exotic juice brands, Rubicon and KA. Simultaneously, the balance sheet figures remained stronger with the improved returns on the capital employers and strong cash flows that were generated. The following factors affected the company economically:

Raw materials constitute the largest percentage of the cost that is incurred in the manufacturing of a product. In the case of the manufacture of soft drinks, the company major raw materials like sugar, fruit pulp, PET, minerals and other materials made the company management be placed under pressure to ensure that the company's, margin are not reduced in large proportion. The gross margin therefore reduced from 51.6% in 2011 to 50.6% in 2012 attributed to the increased raw material costs. At the same time, the cost of production went high because of the increased fuel prices in the international markets. Energy also forms part of the business costs and any slight increase in its cost will translate in increment in the cost of the final product. The business in its efforts to realize the profit motive therefore had to reduce the costs by increasing the level of efficiency in its operations.

The stretched consumer budget also affected the business economic performance. To ensure that the revenues grow, businesses have to ensure that they record increase in the amount of products that is sold to the market. Because the UK citizens form the market, a stretch in their budgets will make them reduce the quantity of the drinks that are purchased. This will therefore reduce the total amount of sales made. To avert the potential decline and losses, the management has engaged in continuous marketing of the final products making Barr continue to record increased revenues Botha and Kourie, 2008()

In addition, the rate of inflation also plays a major role in the economic environment. Inflation can be defined as the general surge in the prices of consumers' goods and services within a period. In the case of the manufacturing companies, cost-push inflation causes a major threat on their margins making the businesses record decline in its profitability. To mitigate the impact of the increased prices on the final prices of their drinks, the management of Barr ensured source its inputs from the lowest suppliers and made their tendering process competitive. However, in doing this, the management ensured that the quality and tastes of the final products remain high.

The amounts of taxes that are paid by the businesses also affect the amount of profits and revenues posted. Taxes forms part of the economic environment and are mandatory expenses that even the management lacks control on. Businesses pay different kinds of taxes, which affect directly the final prices of the products. In the year 2012, Barr effective tax rate was at a lower rate of 20.5% compared to the effective tax rate of 25.8% in the year 2011. The corporate tax that is charged on the net profit was reduced by 2% making the business record positive growth in the amount of taxes remitted. This is attributed to the increase in the amount of property sold which attracted tax credits from the government. Another tax that is paid by Barr is the value added tax that is a withholding tax. The increase in the VAT had an adverse effect on the prices in a market where consumers are very sensitive with price changes.

UK National Environment

In UK, the allocation of resources is purely based on the forces of demand and supply. This form of economy is a free economy in which competition is embraced and firms have to become efficient to increase their level of competitiveness. The government only intervene to provide the necessary infrastructure and to ensure that consumers are not exploited by the businesses. Besides, the government will formulate policies that ensure fair competition and collect revenues for the country development agenda. With these, businesses must ensure that they operate within the law and abide by the regulations that are set by the state. Barr Company can therefore conduct business in a competitive industry without government interference on what form of business to do or the amount of prices to charge on their products. The management has large latitude of choice to make on how to produce, what to produce, and who to receive the output of the process. This has therefore given Barr an opportunity to determine the strategies to use to win the confidence of their customers in the highly competitive marker.

Government policies and its Effects on Business

The government through their economic policies also affects the operations on any business within the jurisdiction. In the case of Barr, both the monetary policies and the fiscal policies that are formulated by the state will affect the way to conduct business and the amount of profits the company will post. Monetary policies are the policies that are formulated by the central bank to determine the money supplied in an economy. The tools used in controlling the money supply, as interest will influence the cost of doing business hence affect the capital structure of the firm. When the interest rates rise, the cost of borrowing increases hence leading to an increase in the interest expense of the business Kangas, 2003.

This would reduce the amount of profit that a company will report. The reduction in the level of interest rates by the government for instance led to reduced interest expense in 2012 making the business increase the profit. Monetary policy may therefore make the company change the capital structure decisions.

Fiscal policies are the government policies that are formulated to control the amount of money available with the public through altering taxes or increasing the amount of government expenditure to stir economic performance Shubik, 2009 .

An increase in the amount of taxation will deprive businesses their profits and reduce the earnings available to the shareholders. For example, the increase for government VAT, made Barr record decline in the profit posted. On the other, hand the government extension of credit allowance to firms also made Barr realize a reduction in the tax expense. At the same time, government through alteration of their expenditure will affect the level of demand of goods or could increase the price levels. When the government increases the amount spent, Barr will realize an increase in the goods consumed making the profit rise.

Market Structure

The competitive nature of the business in the soft drink industry determines how the operations of Barr are conducted. The fact that the market is competitive ensures that the Barr make efficient their manufacturing process. Competition has also made the company reduce the cost of operation to make the company sell their products at low cost Welford, 2012.

The forces of market and supply and not any other means therefore determine prices. It has also ensured that the quality of the soft drinks n of Barr meet the high quality to ensure the public prefers them. The business has also had to operate within the set legislation and rules to make the company avoid unnecessary costs.

In a competitive industry, the market forces will also influence the types of products manufactures by the businesses. Businesses, Barr included, will have to remain innovative on the manufacturing of products to meet the consumers need. The business will have to be competitive in their sourcing of goods and in making payments to their suppliers and employees as a way of retaining their customers and keeping secret their strategy from competitors 2003.

Consumer loyalty if attained will make the business record repeat purchase and guarantee long-term business profitability.

Global Factors and Barr's Performance

All business, whether local or international, are affected by the global economic conditions. In the competitive industry where there are no barriers to international trade, businesses have to monitor the impact of international competitors on their operations and performance Hughes and Taggart, 2001.

Some of the international businesses that operate in the soft drink industry are coca-cola and PepsiCo. The products of international businesses affect Barr sales and they should therefore ensure that they make their product quality conform to the international standards so that they continue to realize sales.

Moreover, the business will be affected by the fluctuations in the foreign exchange rates. This is because the firm imports some of the input use in production from other countries where payments are made in different currencies. If exchange rates move adversely, Barr will incur additional losses. The foreign exchange risks can however be mitigated by exploring the hedging techniques as currency swaps or invoicing in the home currency.

European Union Policies and UK Business Performance

Finally, European Union policies further influence UK firms' performance. Policies like changes in the tax rates, currency rates, removal of bureaucracy and other trade procedures and wavering of trade barriers would motivate the growth of businesses and reduce the cost of conducting businesses Agraa, 2007.

At the same time, EU block provides an external market where sales can be made to increase the earnings and profits of UK organizations. Besides, policies that promote integration and business partnerships can be exploited to ensure businesses succeed.

Conclusion

Barr Plc strategies have made the business thrive in a highly competitive market characterized by both internal and international competition. The changing economic environment will call for continuous monitoring of the competitors and analyse the industry performance to ensure their performance remain above that of the market rate. Government regulations and other international corporations will therefore make the business achieve its strategic fit if well controlled and analysed.

Recommendations

Given the good performance in the UK industry together with the increase in profits and revenues of Barr, the following can be recommended:

The company should ensure they maintain the quality of their products in the market to ensure they retain and attract new customers. This would also promote customer loyalty of their customers hence guarantee long-term success of the firm.

Global factors affect how businesses are conducted. This makes it necessary that the Barr remain alert on the strategies that arte pursued by international soft drink companies to gain dominance in the local market. Actions and strategies that strengthen the firms control of business is mandatory

Furthermore, the facts that free market characteristics are exhibited in the market, the management of Barr must emphasis on efficiency and effectiveness and eradicate all the factors that deter growth.

Lastly, performance review would be necessary to determine if the business performance and management is in line with the long-term strategic objectives. The business must then take measures to correct the adverse deviations. Such deviations can be detected from the analysing the financial performance and results.