Smuckers In 2011 Expanding The Business Lineup

Smuckers In 2011: Expanding The Business Lineup

Contents

TOC o “1-3” h z u Introduction PAGEREF _Toc380783420 h 1Internal Company Situation PAGEREF _Toc380783421 h 2Financial Analysis PAGEREF _Toc380783422 h 3Weakness PAGEREF _Toc380783423 h 7Opportunities PAGEREF _Toc380783424 h 7Threats PAGEREF _Toc380783425 h 8Problem Analysis PAGEREF _Toc380783426 h 9Strategic Alternative & Analysis PAGEREF _Toc380783427 h 9Strategic Recommendation & Justification PAGEREF _Toc380783428 h 11Strategic Implementation PAGEREF _Toc380783429 h 11

IntroductionThis is a case analysis for a food processing company called the J. M. Smuckers. Jerome Monroe Smucker established the company in 1879 in the state of Ohio, in Orville, as a cider mill, powered by steam engine. A few years in the business, he realized the market for cider was smaller than the rate of production. Accordingly, he expanded the product line with a family recipe by producing butter. This product became very popular in the local market that by 1920 he started to expand the product line to include preserves, jam and jellies. In the following year product line expansion became the means the company realized its growth objectives. In 1970, though, there was a change in strategy where the company started to acquire other firms to pursue growth objectives. This continued into 1980, for instance they acquired Magic Shell in 1982 that specialized in production of ice cream topping to help the firm expand the product line. This acquisition strategy came around also due to changes in the food processing industry. Besides, the product line the leadership of the company also exchanged hands over the years. The company had excellent human resources strategy as exhibited by its being ranked in the top quartile of the 100 Best Companies by the Fortune magazine in 1997. This case study analysis, reviews the company internal and external strengths and points out strategic challenges and how the company can overcome them.

Internal Company SituationValue Chain Analysis & Core Competencies

The area the company had greatest strength in was in the production of jams, preserves and jellies. These products made the company a leader in United States, Australia, and Canada in the first years of 21st century. In spite of this, the company still performed relatively poorly compared to giants in the industry due to its slim product line and the smaller size of the company. This gave the company a lower bargain power as compared to giants like Nestle and Unilever. It had difficulties in bargain for higher prices, which would have made the company to expand its profit margins. Industry growth at the time was through consolidation by acquisition of smaller companies by the larger ones. This gave the young generation of leaders for the company difficult times.

The new firm leadership developed a three legged growth strategy to build company resilience. This included introduction of new products, organic growth in sales, and acquisition of firms that the company felt they shared in vision. For instance, acquisition of P&G Folgers in 2008 enabled the firm to become the largest producer of beverages and breakfasts in North America. Acquisitions enabled the firm to expand its product line to strengthen brands like jellies and jams, coffee, cooking oil and peanut butter all in North America. The company was also able to raise its sales to 4.6 billion in 2010 from $632 million recorded in 2000.

In spite of these gains, the company relatively smaller size compared to competitors in the food processing industry remained a great concern as indicated by analyst. This is because it created a price negotiation disadvantage when competing for larger retailers. Bigger companies like Nestle over these years that Smucker registered an increase in sales revenue had also recorded significant gains. Nestle sales increased to $100 billion from $61.3 between 2010 and 2000. The relative smaller size also placed the firm at a disadvantage as market share was proportionately cut by consolidating super5markets.

Financial AnalysisGross Profit Margin

Gross Profit Margin analysis for the firm indicates that the firm was able to sell its products at higher price than the cost of producing them. Smucker had a GPM of about 38.8% in 2010, as compared to a GPM of 31% computed from the sales made in 2008. This indicates that the company sales and ability to meet the costs of production increased relatively between the two years. The following computation shows the GPM ratio for the two years.

GPM 2010 = 4,605,289 – 2818599/4,605,289 * 100

= 38. 79%

GPM 2008 = 2,524,774 – 1,742,610/2,524,774 * 100

= 30.97%

Net Profit Margin

On the other hand, net profit margin analysis indicates that Smucker was able to meet its tax obligations. Smucker profits in this sense were 10.73% of the sales in the year 2010. This shows an increase from the previous year 2009 of 7.08%. The following computation shows how these statistics were reached.

NPM ration for 2010 = 494,138/4,605,289*100

= 10.73%

NPM ration for 2009 = 265,953/3,757,933*100

=7.08%

Return on Assets

This ratio indicates the firm’s bottom-line profit ratio as per the firms’ total assets. The Smuckjer after tax rate of return in 2010 was 6.20%. Again, this shows an improvement from the previous year rate of 3.25%.

ROA 2010

Net Income = 494,138

Total Assets = 7,974,853

ROA= 494,138/7,974,853*100

= 6.2%

ROA 2009

Net Income = 265,953

Total Assets = 8,192,161

ROA= 265,953/8,192,161*100

= 3.25%

Return on Equity

This is an important indicator that the firm is financially stable to attract investors. It is denoted as ROE and is one of the financial indicators that investors look at in building their confidence with a firm. As shareholders their intention is to invest in a company likely to give them the maximum returns on their investments. Smuckers year 2010 return of equity was 9.28%. This shows that for every dollar invested in the firm by an investor it earned 9.28 cents. In 2009 the ROE was lower than this standing at 5.38%. This indicates why the stock price for the company increased significantly between the two years. The following computation shows how this conclusion was reached.

ROE 2010

Net Income = 494,138

Common Equity = 5,326,320

ROE= 265,953/5,326,320*100

= 9.28

ROE 2009

Net Income = 265,953

Common Equity = 4,939,931

ROE= 265,953/4,939,931*100

= 5.38%

SWOT Analysis

Strengths

Leader in Certain Brands

Smucker had a strong brand name for certain product categories. In 2010, it held the first position in marketing of 11 categories of food. This include dessert toppings and fruit spreads, ground and roasted coffee, natural and health beverages, cooking oil, peanut butter, evaporated and condensed milk. Brands like Robin Hood, Bick’s Europe’s and Carnation were leaders in their respective categories in Canadian market.

Strategic Acquisitions over the years

The food processing industry is highly consolidated. As a result, many firms use acquisition strategy to expand and enlarge their market share. Strategic acquisition by Smuckers has enabled the firm to enlarge its product line and market presence and coincidentally improve its sales revenue over the year.

Expanding Market Presence

Smuckers operates both locally and internationally. It has many production points in United States and Canada. This local and international presence enables the firm to reach a large customer base.

Financial Health

The firm operating profit margins are good enough as indicated by the financial analysis section. The firm has adequate funds to finance growth strategy for internationalization. Besides, the firm’s return on investment is also attractive meaning the firm can attract investors to fund potential growth avenues.

WeaknessDeclining Market Share

Globally the firm sales were minimal compared to those of giant food processor like Nestle. In 2001, for instance, the firm recorded $651 million as compared to Nestlé’s 84.7 billion and Swiss Francs’ 61.3 billion. Further, this challenge was magnified by the fact that the firm was relatively small and its product line too limited.

Smaller Product Line

The smaller product line of fruit spreads, organic and natural beverages, natural peanut butters, ice cream toppings, and other smaller specialty put the firm at a bargain disadvantage. Besides, even with the acquisition the changing consumer preferences and high rate of innovations in the industry makes it difficult for the firm product line to build a strong competitive edge.

OpportunitiesExpanding market

Following the 2009, European markets were highly affected by financial recession. However, new emerging markets in the industry existed in less developed countries with growth potential of between 3 and 4 percent. Companies that are growth oriented as a result focused their efforts in Asia, Latin America, Africa, and Eastern Europe markets.

New Advertisement Channels

The social media is a rapidly expanding marketing avenue that the firm can use to build strong brand loyalty. Social media offers opportunities for creating brand community platforms and referrals to enhance the firm opportunity.

Expansion of Product Line

The firm can take advantage of the changing consumer preference to develop a strong R&D mechanism to roll out new products and enhance the strategic acquisition. The firm can use point of sale data collection methods like RFID to collect strategic information on the consumer tastes and preferences.

Internationalization

As indicated previously international markets especially in less developed countries offers important growth opportunities that the firm can pursue to increase its total revenues. Currently the firm is popular in North America and expanding especially to the East where new emerging markets are opening up can give the firm the competitive edge.

ThreatsIncreased Price Competition

The popularity of supermarkets enabled them to change the competition dynamics tilting it from strong brands to price differentials. Through use of point of sale technologies these firms were able to tell what appealed to consumers and how they can induce them to change between brands.

Large and Expanding Retailers

Large grocery stores like Wal-Mart controlled the largest share in the market. In 2010, 70 percents of the total sales were accounted for by large retailers like Wal-Mart, Safeway, Kroger, Ahold USA and Supervalu/Albertson’s. Besides, competition in the industry is also high because some very large manufacturers like Nestle have more dominant brands.

Changing Consumer Preferences

One of the greatest risk factor for firms operating in the food processing industry is change in consumer preferences. Participants in this industry are compelled to keep responding to changes in consumer preferences. This make it relative hard to build strong brand names. This is further compounded by rivals who keep innovating to increase their market share.

Problem AnalysisStrategic Problem

The Challenge faced by JM Smucker is maintaining a competitive edge in rapidly expanding market dominated by huge manufactures. The company relatively smaller size and limited product line is a major competitive disadvantage. Further, this challenge is magnified by the high competition on the bases of price in some local market and changing consumer preferences.

Strategic Alternative & AnalysisCertain strategic solutions do exists that the firm can use to pursue a growth model that enhances its capacity to meet the strategic challenges highlighted above. The first solution is to ensure that the strategic alliance the firm pursues enhances its competitive advantage. According to Ahuja, Lampert, &Tandon one of the ways that a firm can be able to increase or expand innovations is to ensure it has access to external knowledge. This can happen either through having the right networks or alliances. Collaborations in particular can improve firm’s access to technology needed to steer innovations (31). This indicates that acquiring firms that adds the firm technical ingenuity can be one of the solutions to improve the firm expand its product line through innovations. Additionally, the firm must emphasis on its people as they are of strategic importance in creating a competitive edge. In the early 21st century the firm was considered one of the best 100 companies. Wan Ismail, Omar & Bidmeshgipour emphasize that success of a company can be hinged on existence of strategic management of people, based on knowledge, learning organization, and leadership (396).

Besides innovations, the firm can increase its market share through a growth strategy that emphasize on internationalization and localization of the firm. There are numerous opportunities in the food processing industry in Asia, Africa, East Europe and Latin America. The firm should move out of its traditional North American market and venture into these emerging markets. The firm can use joint venture or acquisition strategy to penetrate these new markets. A joint venture can for instance help the firm market its brand very easily in international markets. It can use its huge margins to conduct advertisements on social networks to raise public awareness of the brand. The firm can also make local brands in these international markets to attract huge market shares.

Strategic Recommendation & JustificationHaving looked at alternative solutions to counter the strategic challenges facing J.M Smuckers, my recommendation to the firm executive is to explore new markets internationally. This is because this strategy especially if implemented through forming alliance with in a joint venture approach can lower the risk of penetrating these new markets. Besides, the firm relative size makes it relatively disadvantaged as compared to other huge firms like Nestle and Wal-Mart stores.

Strategic ImplementationThe Major challenges that the firm is likely to encounter in implementing this solution are establishing trustworthy and resourceful partners internationally. However, the firm can use various sources of data to collect information about various firms in the local markets targeted to identify potential partners. Only those firms that are likely to add value to the firm should be picked for the joint ventures. The firm should also not give up its control of decision making process in this arrangement. The firm should start by moving to one region for instance Asia, before rolling out the scheme to other regions. This is to give the firm an opportunity to understand the new market dynamics and the cultural differences challenges. It will also provide management with an opportunity to understand the challenges of joint venture and develop solutions.

Work Cited

Ahuja, Gautam, Lampert, Curba Morris and Tandon, Vivek. Moving Beyond Schumpeter: Management Research on the Determinates of Technological Innovation. The Academy of Management Annals, (2008), 2.1: 1-98. Print.

Wan Ismail, Wan Khairuzzman, Omar, Rosmini, and Bidmeshgipour, Maryam. The Relation of Strategic Human Resource Practices with Firm Performance: Considering the Mediating Role of Resource Based View. Journal of Asia Pacific Studies, (2010) 1.3: 395-420. Print.