Economic Analysis for a Company

Economic Analysis for a Company

Introduction to the Firm and its Markets

Over the last several years, the dairy and health food industry has been undergoing a tremendous amount of changes. Where, there has been a consistent focus on increasing sales and profits by taking more of an international view. This is because the industry has been seeing a steady decline in sales, in developed markets over the last 30 years. Part of the reason for this is consumers are preferring bottled water and carbonated soda, over dairy products. At the same time, the aging population in these countries is helping to contribute to the slow down, as the older demographic is consuming less dairy. These two elements have caused many of the mature markets to see consistent declines in sales. To mitigate these effects, a variety of companies have begun focusing on ways to be able to increase profits in developing markets, where demand for dairy products is increasing. (Allen 2007, pp. 123 -- 124) In the case of Groupe Danone, they are involved in: the dairy, biscuit and beverage industries. With the company owning a number of different brands to include: Dannon related products (i.e. yogurt), Evian bottled water and Stoneyfield Farm just to name a few. (Plunkett 2009) This is significant, because it shows how the company has been focusing on both markets, to increase their overall profitability. However, to understand the performance of the business, the implications of the global economic recession and creating a strategy for 2010 / 2011, requires looking at the company in comparison with key competitors. To achieve these objectives you must examine: the company's exposure to the markets and its macroeconomic exposure. Together, these different elements will provide the greatest insights, as to the underlying performance of Groupe Donone in relation to its competitors.

Vulnerability of the Firm

Groupe Danone is exposed to large swings in the economy through: changes in the economic cycle, the currency and the increases in commodity prices. These different elements are important because, they can expose the company's underlying business model, to uncertainty in numerous instances. (Plunkett 2009)

Market Exposure

When you look at the overall exposure that Donone is having in the various markets, it is clear that a number of different factors can affect sales including: changes in consumer tastes and sharp wholesale price increases. This can have an impact on the underlying bottom line, as these prices can cause earnings to become more stable for select divisions. Looking at the changes in consumer tastes, it is obvious that many customers in the North American market, wanting soda and bottled water has remained fairly stable. However, over the last few years the competition has become so intense that the profit margins have become razor thin. (Look into the Future 2010) An example of these challenges can be seen with an earnings report from 2007. Where, Groupe Denone said that sales at Wahaha bottled water, declined, because they were trying to co package the different products together. (Danone Sales Up 2010) This is significant, because it shows how the profit margins within the industry have become so thin, that the competition is using a variety of strategies to separate themselves from everyone else.

Over the last several years the worldwide market for milk prices has been steadily rising. This is because of increasing demand in Asia, mainly the Chinese and Indian markets. As a result, this caused milk prices to become more volatile for the company. Where, it is not unusual to see sharp increases and implosions in prices. A good example of this, can be seen by comparing 2008 with 2009. Where, milk prices were hitting an all time high in 2008 and then collapsed in 2009. This is important, because it highlights how the company is exposed to sharp changes in supply and demand. (Look into the Future 2010)

In the biscuit market, the company is facing similar challenges as in dairy. Where, they are seeing increasing pricing pressures from rising wheat and flour prices in 2008. At which point, prices would decline dramatically in 2009. This information is significant, because it shows how the market forces of demand or lack of demand, for various products can have an impact on the overall earnings of the company. (Look into the Future 2010)

When you compare this exposure with its overall effects on earnings, it is clear that all of these different elements will have an impact on the overall bottom line of the company. Evidence of this can be seen with the organic growth seen between 2008 and 2009. Where, 2008 results were 8.4%, while 2009 earnings were up 3.2%. At the same time, the operating expenditures of the company were: -706 million Euros for 2008 and -699 million Euros for 2009. The below charts compares the organic growth and the operating expenses of Groupe Donone from 2008 to 2009. (Financial Info 2010)

(Financial Info 2010)

This is significant, because it shows how the company was able to protect its overall bottom line from the volatility that is occurring in its core businesses. As the overall product mix and focus on various kinds of foods, have helped the Danone adapt to the changes from its exposure to different markets. In many ways, one could argue that the diversification of various product lines, have allowed the company to be able to continue to deliver growth, when many competitors are facing similar challenges.

When you compare this with General Mills, is clear that there organic growth is following a similar trend between 2008 and 2009. With the company posting organic growth of: 9.0% in 2008 and 7.3% for 2009. The below chart illustrates the organic growth of the company between these two years. (General Mills 2009 Annual Report 2009)

(General Mills 2009 Annual Report 2009)

This is significant, because it shows how General Mills is facing similar challenges as Groupe Donone. Where, company would post similar organic growth results as its key competitor. As a result, one can easily see that General Mills is also taking an international focus, by investing in a number of different areas.

Nestle, has been facing more challenges in comparison with Groupe Donone and General Mills. With the organic growth of the company experiencing, large amounts of volatility. Evidence of this can be seen by looking no further than earnings results that were reported from 2008 to 2009. Where, Nestle would post organic growth rates of: 78.2% in 2008 and a decline of 40.0%. The below chart illustrates the underlying amount of organic growth at the company during this time. (Annual Report 2010)

(Annual Report 2010)

This is significant, because it shows how Nestle was more exposed to large changes in commodities prices and from increased competition. As these two forces, would work together, to prevent the company from: having consistent bottom line growth. This means, that one could imply that the company is not as diversified as General Mills and Groupe Donone, in being protected from the overall market challenges.

GDP Development and Income Inelasticity

Group Danone is exposed to various changes in the GDP. Where, this can have an impact upon the underlying levels of income, as the changes in the economic picture can have effect prices and demand. Where, inflation is causing, the price of raw materials to increase or decrease. This will have an effect on income inelasticity, as the changes in the economic cycle and the inflation will cause consumer demand to increase or decrease.

Customer Structure and Degree of Dependence

The company is clearly dependent upon consumer spending to remain strong, in order to maximize profits. That being said, they have also diversified into many different areas, to address changes in consumer demand, by offering certain products that are in need at all times. This is how the company is able to protect its bottom line, against large amounts of volatility. (Plunkett 2009)

Competition and Price Elasticity

The industry is filled with a variety of competitors who offer similar product. This has an impact upon Groupe Danone, as the prices they are charging for various products will depend upon what competitors are charging. As a result, this will cause the underlying prices to become more volatile at certain times, based upon competitor actions. (Plunkett 2009)

Macro Economic Exposure

The biggest challenge that Group Donone faces from macroeconomic forces, is sharp changes in consumer spending. Where, this number will work together with the underlying amounts of inflation. If wholesale and consumer prices are consistently rising, it could be a sign that the economy may be overheating, which would result in a sharp contraction in consumer spending. To determine the underlying effects that this will have on the company requires: examining sales between 2004 and 2009. In 2004, Groupe Donone was posting sales growth of 7.8% or 13.1billion Euros. In 2008, the company would post an increase of 16.1% in sales or 15.2 billion Euros. In 2009, this number would decline by 1.2% or 14.9 billion Euros. The below chart illustrates the overall amounts of sales growth that have taken place between 2004 and 2009. (Financial Info 2010)

This is significant, because it shows how the underlying sales of Groupe Donone will depend upon the amounts of inflation and its impact on consumer spending. As periods of price increases, will be followed by: a severe slowdown in sales. In many ways, this highlights how the company's vulnerability to extreme changes in the economic cycle.

In the case of General Mills, they are following a similar kind of trend with, net sales for 2004 coming in at $11.0 billion or 5.3%. In 2008, the company would post sales of $13.6 billion of 9.8%. While in 2009, General Mills posted net sales of $14.6 billion or 8.0%. The below chart illustrates the economic growth of the company between 2004 and 2009. (10 K. General Mills 2005)

This is significant, because it shows how General Mills is facing a similar trend, as far as their economic exposure to the economy is concerned. Where, a decrease in consumer spending will mean that they will see a decrease in sales. However, why you compare this with Groupe Donone, it is clear that their sales are more stable during times of severe economic contraction.

In the case of Nestle, they are exposed to changes in the underlying macroeconomic forces and in the currency. Evidence of this can be seen by look at 2004 sales for the company, where they declined 1.4% or 60.1 billion Euros. In 2008 sales would increase by 38.9% or 83.5 billion Euros. In 2009, sales would decline by 2.0%, coming in at 81.7 billion Euros. The below chart illustrates Nestles' exposure to changes in the economic cycle. (Nestles Sees Profit Growth 2005) (Consolidated Income Statement 2008) (Consolidated Income Statement 2009)

This is significant, because it shows how the volatility of Nestles' sales is exposed, to changes in the underlying macroeconomic conditions and in the currency. These two factors mean that the company is seeing more volatility, as part of their sales in comparison with Group Donone and General Mills. (Consolidated Income Statement 2009)

Material Price Fluctuations

Like what was stated previously, Group Danone is exposed to large swings in inflation. This will cause the underlying raw cost that they are charging, for various goods to rise or fall. At which point, it will have an impact upon the overall bottom line. (Plunkett 2009)

Exchange Rates

The currency exchange rate will have an impact upon the profit margins of the company. As a rising / falling Euro in comparison with the major currencies will have an impact upon the company's profitability (because of the fluctuation). (Plunkett 2009)

Government Intervention

Government intervention is when the government in particular country can have an impact upon Group Danone's profits based upon: the various regulations, taxes and the nationalization of key industries. Depending upon how these different policies are applied, this will have an impact upon the earnings of the company and its competitors. (Plunkett 2009)

Protection

Brand Development and Price Positioning

The way company develops different brands is through making strategic acquisitions. This is mainly accomplished by purchasing products that will compliment the underlying business model and give them greater pricing control. This can be seen within the various divisions that the company has, as each one will serve to compliment the others. (Plunkett 2009)

Economies of Scope

In general, Group Danone has engaged in bundling, by offering numerous products in a variety of different markets around the world. Where, they will offer these products, in various packages. This is designed to reduce the overall marketing costs, while increasing the profitability of the company. (Plunkett 2009)

Technology

Groupe Danone will use numerous forms of technology when marketing their various products and as way of protecting their profit margins. Where, the different tools can help executives to see in real time the possible negative effects that various economic or market forces could have on the company. This allows them to adjust for changes that are occurring, as the use of technology will help them to adapt. (Plunkett 2009)

Low Cost Production and Economies of Scale

The low cost of production has allowed Groupe Danone to purchase other competitors and to diversify in other markets. The reason why are: these low production costs increase the overall profit margins of the company. This will allow them to aggressively expand into other areas (economies of scale). (Plunkett 2009)

Current Strategic Positioning and Strategic Advantage

The current strategy that the company is using has allowed them to able to protect their earnings against some of the uncertainty that is occurring. This helps Groupe Danone to maintain market share and to take advantage of the new economic opportunities that are presenting themselves. Where, they can use the current recession to be able to purchase brands that have been severely impacted by what has been occurring. Over the course of time, this strategy will allow the company to be able to increase its overall dominance among competitors. At the same time, this increases the strategic advantage of the company, by allowing them to be able to expand into other areas. This is because the company has used a strategy that will diversify it into a number of different areas. (Plunkett 2009)

How does the Analysis Explain the Performance of Groupe Donone?

When you analyze the performance of Groupe Donone, it is clear that they have been exposed to variety of forces the most notable would include: sharp increases in the wholesale costs. This is important, because sharp increases can have an impact upon the underlying business model of the company. An example of this can be seen with the changes that the company experienced in organic growth rates between 2008 and 2009. Where, Groupe Donone would experience: an 8.4% increase in earnings for 2008 and increase for 2009 of: 3.2%. At the same time, the company has been experiencing volatility in its net sales. With there being a decrease in sales between: 2008 and 2009; of 300 million Euros. This above the sales numbers of 13.1 billion Euros that were seen in 2004. This is significant, because it shows how Groupe Donone has been able to maintain consistent earnings growth, despite volatility in wholesale prices and a sharp slowdown in consumer spending.

When you compare this with General Mills and Nestle, it is obvious that General Mills has been having similar effects on their businesses. While Nestle was exposed to large changes in their earnings because of: exposures to the currency and inflation. In the case of General Mills, they were able to see better organic growth rates than Groupe Donone. With the company reporting an increase in organic growth of: 9.0% in 2008 and 7.3% for 2009. At the same time, they reported an increase in sales between 2008 and 2009, to $14.6 billion from $13.6 billion. This above what the company was seeing in 2004, when sales were coming in at: $11.0 billion.

In the case of Nestle, they have been facing more volatility as far as their exposure to the markets and macroeconomic forces. Evidence of this can be seen with the company's organic earnings growth going from: 78.2% in 2008 to a decline of 40.0%. At the same time, Nestle would experience sales declines from: 83.5 billion Euros in 2008 to 81.78 billion Euros in 2009. This is above the sales figures for 2004, which are 60.1 billion Euros.