Cpa Exam Case 2012

Exam cases:
 Patties Foods Ltd (PFL)  The death of the iPod  Australian Beverages Ltd

Pre-seen exam information Semester 1 2012

Global Strategy and Leadership
© CPA Australia Ltd 2012

Case Scenario 1
Patties Foods Ltd (PFL)
Patties Foods Ltd (PFL) is a leading manufacturer in Australia’s branded frozen food industry. The company can trace its origins back 50 years to a small cake shop in the Victorian country town of Lakes Entrance. This cake shop was purchased in 1966 by the Rijs family who soon extended into pies and bread rolls. The business continued to grow through acquisition and product development and subsequently refocused its business around frozen savoury, dessert and fruit products. The company listed on the Australian Stock Exchange in 2006. Two members of the Rijs family remain involved in the company as board members. Today PFL is a major supplier and marketer of frozen savoury, dessert and fruit products. It has some iconic Australia brands in each of these product categories. PFL’s frozen savoury products include meat pies, sausage rolls, cheese and spinach rolls, pasties and quiches. Its well-known frozen savoury brands are Herbert Adams, Four’N Twenty, Snowy River and Wedgewood. PFL’s dessert products include fruit pies, waffles, crumbles and crepes. It also has fruit products that include frozen whole fruits (e.g. cherries, strawberries, cranberries and raspberries) and processed fruit products (e.g. fruit smoothies that are cubes of frozen concentrated fruit which can be added to milk by the consumer to create a drink). PFL has some well-known dessert and fruit product brands including Creative Gourmet, Nanna’s and Chef’s Pride. PFL does not sell directly to consumers. Rather it sells to retailers (e.g. supermarkets) and foodservice outlets (e.g. sporting venues or cafes). PFL distinguishes its two main distribution channels as In-Home [retailers where products are bought for home consumption] and Out-of-Home [foodservice outlets where products are bought ready for consumption]. PFL has less than 1 per cent of sales coming from exports, despite moves to enter the US market with its Four’N Twenty products. It has also developed halal products in its Four’N Twenty range with the intention of growing sales in Asia. Its headquarters and production facilities are in Bairnsdale, Victoria. Following are extracts from three corporate publications of PFL. Extract A provides an overview of PFL’s current strategic framework. Extract B is the 2010 Managing Director’s report by Greg Bourke. Extract C provides three items of news about some recent developments at PFL.

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A Phases

PFL’s strategic framework Build the base     Low costs High customer service levels Defend the core Category leadership Develop and grow     New products Extra ranging Extra distribution More customers Expand and extend     New channels New regions New categories New sub-business

Outcomes

Source: Adapted from Patties Food Ltd (2011), Full Year Results 2011: Market Briefing (accessed February 2012).

B

Managing Director’s Report (2010)

This year’s improved trading is the result of a focused effort of the executive leadership team on the ‘Build the Base’ phase of our strategic plan with a relentless drive to build revenue and reduce factory conversion costs. During the year we rebuilt market share in our important In-Home savoury category with revenue increasing well over the category growth. Our strong relationships with the major supermarkets have enabled Patties’ brands to strengthen as market leaders. The Out-of-Home revenue increased to another record level, in line with the strategic intent of increasing our mix of revenue towards foodservice and other non-grocery channels [products sold through the Out-of-Home market]. The sales management was restructured with a new Head of Sales (Tim Peters ex Fonterra) joining the business. The investment in sales resources in all regions of Australia ensures we have a truly national representation. New products, across all channels, once again, drove the increased sales. The company’s exceptional technical expertise, led by the well experienced members of the original owners, the Rijs Family, has enabled these new products to be launched with rapid entry to market. The new Four’N Twenty legendary Angus range was developed and taken to commercialisation stage during the year with the successful launch in June 2010. We expect this range to provide further growth in the near term. There was increased marketing for the premium range of Herbert Adams savoury products. A significant lift in sales in both In-Home and Out-of-Home channels was achieved from the new TV commercial and consumer promotion celebrating Herbert Adams 100 years. The Four’N Twenty brand increased exposure with the sponsorship of the AFL [national league] All Australian Football team. This initiative, and the successful tendering of a number of additional stadium supply rights, provided good growth in our core pie range and confirmed Four’N Twenty’s close connection with football in Australia. Patties Foods now has exclusive supply rights at most football stadia in Australia. We are certainly the largest pie company in Australia, but we aren’t just a pie company. Our desserts business continues to grow with Nanna’s and Creative Gourmet brands retaining market leadership. In February we successfully closed and relocated the frozen fruit packing operation from Silverwater NSW to Bairnsdale [in Victoria]. This has lowered our cost base and has ensured the Creative Gourmet business can remain competitive in a very competitive market.

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Manufacturing efficiencies are a critical driver of profitability. Conversion costs continued to improve as we increased the economies of scale from the investment in production capacity during the year, and further developed our team based continuous improvement projects. A critical factor in our short and long term strategic plans is to maintain and build the high performance culture of the company. During the year we introduced a comprehensive incentive scheme across the business. 340 people received monetary incentives based on specific and targeted key performance indicators across the business. With the strong cash flow from both the improved trading and focused working capital management, the balance sheet has been strengthened, providing an excellent foundation for growth.
Source: Patties Food Ltd (2011), Annual Report 2010, p. 3 (accessed February 2012).

C

News items

Patties Foods wins Reliance contract for BP sites Patties Foods has won a $4.0m+ contract to supply its products to the 200 BP branded sites in the Reliance Petroleum Group. The convenience stores will stock exclusively Four’N Twenty and Herbert Adams products. In announcing the contract, Reliance commented, ‘Patties have proven they are best positioned to build our Pie & Sausage Roll business through strong marketing activity, excellent cost price and most importantly, a good pie!’ Patties Foods Head of Sales, Tim Peters, says the contract win confirms Patties Foods’ market leadership in the Petrol and Convenience Channel. Creative Gourmet targets ‘Smoothie’ market Creative Gourmet’s innovative new range of Smoothie CubesTM are proving a big hit with consumers. Launched in March with a national Television commercial featuring food presenter Maeve O’Meara, the new frozen Smoothie CubesTM are available at all leading supermarkets. Desserts Marketing Manager, Jane Westney, describes Smoothie CubesTM as a ‘game changer’, set to revolutionise how Australians enjoy breakfast and snack-time. ‘Smoothie CubesTM are fruit-packed frozen cubes for making delicious Smoothies in a moment. As a product innovation they have rated extremely highly in market testing. We’re confident they’re set to change the way Australians enjoy breakfast and snack-time’, Ms Westney said. The innovative Smoothie CubesTM come in four great flavours, Strawberry, Berry Antioxidant, Breakfast and Tropical. Look out for them in your local Supermarket.

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Four’N Twenty rules—Home and Away Four’N Twenty has extended its national marketing push into northern States with a five-year sponsorship agreement with the Sydney Swans [football team]. Patties Foods GM Marketing, Mark Connolly, says Four’N Twenty has achieved instant popularity with Sydney fans since becoming the pie of choice served at the SCG [sports stadium] last year. ‘Sydney fans have really taken to Four’N Twenty at the footy and we’re delighted to be partnering with the Swans through this sponsorship—not only at the SCG, but by focusing on their positive community program—via local Footy Clubs and Schools throughout Sydney and northern NSW,’ Mr Connolly said. Four’N Twenty also sponsors [football teams] the Brisbane Lions, Brisbane Broncos, Gold Coast Titans, the Gold Coast Suns, and has secured supply rights at Subiaco Oval in Perth, as well as sponsorship of the Fremantle Football Club. Plus, as part of our commitment to the local community in Bairnsdale, Four’N Twenty has signed a 3-year deal to sponsor the Bairnsdale ‘Redlegs’ in the [regional football] Gippsland League. ‘Now fans can enjoy a Four’N Twenty pie at [sports stadiums] the MCG, Etihad Stadium, SCG, Sydney Football Stadium, the Gabba, Skilled Park (Gold Coast), Suncorp Stadium (Brisbane) and Subiaco (Perth), further cementing Four’N Twenty’s association with Football—at both grass roots and AFL level,’ Mr Connolly said.
Source: Patties Food Ltd (2011), Shareholder Newsletter, June (accessed February 2012).

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Case Scenario 2
The death of the iPod
Johnny Davis … The iPod Classic, as the famous scroll-wheel design is now known, hasn’t been updated now since September 2009, with a modest capacity jump from 120GB to 160GB. On the Apple Online Store, shipping times have slipped from 24 hours to 1–3 days in the UK. Across the US, several major retailers have reported short supplies, leading to speculation the device may soon be discontinued. It didn’t even warrant a mention at Apple’s annual Developers Conference in 2010. ‘The iPod’s essentially finished, give or take,’ says Dr Alice Enders, a former senior economist at the World Trade Organisation who now reports on global music markets for media consultancy Enders Analysis. ‘Sales have been in decline for some time. The converged media device is the way forward.’ In other words: the iPhone, the iPod Touch and the iPad—devices that the iPod paved the way for, devices that have helped push Apple’s latest profits to a record-breaking $US20b. If the iPod now finds itself as the least-loved of the company’s shiny portable devices, you get the sense Apple is probably OK with that. The iPod is 10 this year. Developed during 2001 and brought to market in just eight months, the circumstances surrounding its launch were hardly auspicious. For a start, it debuted days after 9/11. The press launch promised ‘the unveiling of a breakthrough device’, the only other information on the invitations from Apple’s Silicon Valley HQ was some small print along the bottom: ‘Hint: It’s Not a Mac’. The assembled media probably figured that was just as well. Apple’s most recent computer, the G4 Cube, had failed to match the success of its iMac—the candy-coloured, egg-shaped machine that had transformed the desktop computer from functional grey workstation to translucent object of desire. And even its appeal was dwindling. Apple’s CEO, Steve Jobs, who had recently returned to the company after being dismissed as the head of the Mac division in 1985, had failed to appreciate quite how important downloading would become to the online generation. The ‘i’ in iMac was supposed to stand for ‘internet’, but the first models had no slot drives—users had no way of burning their own CDs or DVDs. Given that almost 30m PCs were sold with this capability during 2000, Apple had missed a trick. Along with other companies associated with the dotcom bubble, its stock was on the slide. ‘When I joined Apple, the company was in decline,’ Jonathan Ive, senior vice-president of industrial design and the man who would help revolutionise the business, has said. ‘It seemed to have lost what would become a very clear sense of identity and purpose.’ Nevertheless, the launch saw Jobs making great play of Apple’s ‘digital hub’ strategy. He envisaged the Mac as the centre of a new digital ecosystem, a place where we would soon come to plug in all manner of wonderful new devices. The first of these turned out to be something of a surprise. With no previous experience in music, Apple announced it was launching an MP3 player. ‘Why music?’ Jobs asked. ‘Well, we love music, and it’s always good to do something you love.’ He suggested music was something that touched everyone. ‘It’s a large target market. It knows no boundaries. And there is no market leader. No one had really found the recipe yet for digital music.’

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Apple’s iPod would hold 1000 songs, could be recharged within an hour and would cost $US399. ‘Do you remember what it was like when you got your first Walkman?’ asked the singer Seal, who alongside other musicians appeared behind Jobs on a giant video screen. ‘‘Wow! I want to carry this wherever I go.’ ‘Others were less convinced. Apple’s MP3 player was neither the first nor the cheapest nor the largest capacity device on the market. At that point it was only compatible with Macs—the majority of people used PCs. What’s more, it had a silly name. Technology bloggers soon decided iPod must stand for ‘Idiots Price Our Devices’, ‘I Pretend It’s An Original Device’ or ‘I’d Prefer Owning Disks’. But within five years, via its iTunes Store, Apple would go on to become the number one music provider in the world—all but taking over the music business. After the introduction of iTunes video in 2007, it would quickly become the world’s most popular video store. Now, in 2011, Apple is set to become the world’s most valuable company full stop, overtaking the current leader, oil multinational ExxonMobil. Apple has changed the way we think about technology and design, the way we shop, the way we consume media and the way we interact with each other. Via the iPod Touch, iPhone and iPad it has opened up doors for other methods of technology to come into our lives. None of that would have happened without the iPod. ‘It was the first cultural icon of the 21st century,’ says Dr Michael Bull, a lecturer in media and film at the University Of Sussex, south-east England, where his studies on the sociology around the MP3 player have earned him the sobriquet ‘Professor iPod’. ‘It was the first MP3 player that really worked. With the earlier ones you had to get down on your knees and pray to get a bit of music out of them. And it became symbolic of the way people like to move around in cities. It fitted the desire for a technological freedom, whereby you moved to your own soundscape. Roland Barthes argued that, in medieval society, cathedrals were the iconic form. Then by the 1950s it had become the car—the Citroen DS. I argue that 50 years later it was the iPod, this technology that let you fit your whole world in your pocket. It was representative of a key moment in the social world of the 21st century.’ ‘Apple got the consumer experience right from the start,’ says Enders. ‘In 2004 they started introducing smaller iPod variants [the iPod Mini, the iPod Nano] that dramatically increased its penetration.’ But the real key to Apple’s success wasn’t so much the iPod, but iTunes. Track the company’s share price and it starts heading skywards in 2003, right after the introduction of the iTunes Store. ‘They made life as simple as possible,’ Enders says. ‘Payment issues are a major stumbling block with all ecommerce. Amazon has patented its so-called ‘1-click’ ordering but iTunes does it so much better.’ It is usually assumed the iPod was dreamed up by Jobs and Ive. But this isn’t quite right. Before there were any MP3 players, there were MP3s: invented in 1987 by a group of German scientists looking for a way to shrink video files so that they would be easier to use on computers. To achieve this they stripped out as much ‘extraneous’ data as possible, supposedly the stuff we wouldn’t miss. This loss of quality is at its least discernable when listening on headphones with the volume cranked up, so by 1998 the first portable digital music player had arrived: the MPMan F10, created by South Korean company SaeHan. (It wasn’t a hit; SaeHan now mostly manufactures textiles.) In January 2001 Apple had added iTunes to its iMovie and iPhoto ‘digital hub’ suite; a slick geometric window with a brushed metal effect that made something as mundane as organising music files seem like a cool thing to do. Other portable MP3 players had already joined the unfortunate MPMan F10 on the market: now Apple proposed to develop its own. Jonathan Rubinstein, head of Apple’s hardware division, rang a 32-year-old engineer called Tony Fadell, who took the call on a chairlift above the ski-slopes of Vail, Colorado. Rubinstein offered him an eight-week contract but refused to tell him what the project was. Fadell accepted. He had recently quit his post as an engineer at Philips to start his own gadget company. One of the ideas he was shopping around Silicon Valley was a portable music player. Everyone—including Sony, which presumably continues to kick itself daily—had passed. So Apple stuck Fadell in its special projects division and set him to work on project P-68, codenamed ‘Dulcimer’. Fadell began mocking up designs using foam and cardboard. Both Fadell and Rubinstein knew Jobs liked to be presented with prototypes in batches of three. Sure enough, he rejected their first two designs, but the third—

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a cigarette packet-sized box with a mobile phone-like screen and buttons on the base—he loved. Another Apple executive, marketing vice president Phil Schiller, came up with the idea of a scroll wheel in the middle. Jobs was adamant that every song needed to be accessible in three pushes of the button; any more and people would find it too much bother. According to one Apple insider the iPod was louder than other MP3 players because Jobs is partially deaf, so they pushed up the volume for him. Leander Kahney’s book The Cult of iPod posits that it was Fadell who envisaged a company built around an MP3 player, with a Napster-style shop to support it. In other words, that Apple’s future business model was his idea. ‘This is the project that’s going to remould Apple and 10 years from now, it’s going to be a music business, not a computer business,’ he’s alleged to have said. Ive set to work on the iPod’s case. It would have no battery door or on-off switch and would be a completely sealed unit. ‘From early on we wanted something that would seem so natural and so inevitable and so simple you almost wouldn’t think of it as having been designed,’ Ive explained. He maintained that the shape was incidental. ‘It could have been shaped like a banana if we’d wanted.’ But white was his idea. ‘It’s neutral, but it is a bold neutral. Just shockingly neutral.’ (According to Kahney, Fadell dressed each day in clothes and accessories with a different matching colour scheme, down to the rims of his glasses and his socks. Later, the iPod Minis would deploy a similar rainbow palette. ‘One might wonder if it’s mere coincidence,’ he writes. Fadell left Apple in 2008, and is forbidden from talking about his time at the company.) ‘The thing I always admired about Jony [Ive], right from the very beginning, is his absolute commitment to getting it right,’ says Robert Brunner, who employed Ive at Apple, and is now partner in the San Francisco-based design consultancy Ammunition, makers of Beats By Dr Dre headphones, among other things. Ive had previously co-founded London design firm Tangerine, developers of everything from VCRs to combs. ‘He’ll just relentlessly focus on the details. Of course the products are beautiful and well resolved. But technically they’re almost impossible to copy.’ Bolstered by the ‘silhouette’ ad campaign devised by New York ad agency TBWA\Chiat\Day, iPod’s initial sales were good, but not great. For a new product launch, Apple’s ad spend was relatively small—$US25m. Instead it was able to rely on the best advertising model of all: word-ofmouth. The iPod’s earphones were white as an afterthought, to match the player. The unusual colour served as a showy advert for a gadget that remained mostly hidden from view, in people’s bags and pockets. Then the media did their work, falling over themselves to promote this fashionable new wonder-device: pretty soon it was asking ‘What’s On Your iPod?’ to everyone from [UK comedian] Lenny Henry (Dizzee Rascal) to George Bush (My Sharona). An independent accessories market mushroomed around it, flogging everything from leather Chanel pouches to iPod-enabled toilet roll holders, and is now valued north of $US1b. Playlists replaced albums as the defining way we listen to music; ‘shuffle’ decimated artists’ entire recording careers. With its iTunes Store Apple had succeeded in making the one-stop digital superstore that in-fighting and anti-trust competition laws had prevented the record labels from establishing for themselves. Instead, those labels had wasted a lot of time and money trying to set up subscription models: the idea that users would pay a monthly fee to access digital music as and when they liked. Steve Jobs, a Bob Dylan fan who once dated the singer’s ex, Joan Baez, insisted that people wanted to own their music, not rent it. They had collected vinyl, cassettes and CDs in the past and they would collect digital music in the future. One by one, Jobs managed to talk the big five major labels into signing up to his vision. ‘Jobs’s stock went from $8bn to $80bn,’ recalls one music executive. ‘Ours went in reverse.’ Sony, in particular, was hamstrung. On the one hand its hardware division wanted to push a Walkman that would compete with the iPod. On the other, its record label, Sony Music, accounted for the majority of its revenues and was unwilling to push forward with something they thought would be filled with illegally downloaded music. Paralysed, Sony allowed Apple to clean up on both the digital device and the songs to play on it.

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‘As it turns out, iTunes has become much more important for Apple than simply being a music store,’ says Roger Ames, former chairman of Warner Music who brokered the iTunes deal with Jobs at the time. ‘It’s been a place where their customers can very helpfully register their credit cards, and Apple can stay in touch with them. Every record label had the opportunity to come to a business model like that.’ On iTunes in the US Apple would take 22 cents out of every 99-cent track sold, leaving just 67 cents for the labels to split between the artists, the publishers and themselves. A rather poorer return than those labels had been used to, selling albums for $US18. Apple itself wasn’t going to get rich on 22 cents a song. But it was going to sell a lot of iPods off the back of it. And the record companies get nothing from iPod sales. ‘The iPod makes money. The iTunes Music Store doesn’t,’ Schiller has admitted. (Despite the ‘Don’t Steal Music’ sticker attached to every new iPod, it makes little odds to Apple where the songs on its devices come from. And it seems unlikely that anyone with a full 160GB Classic has paid for all 40 000 songs.) ‘The record industry was very good at providing the stick to beat file-sharers with, but it singularly failed to provide the carrot. Steve Jobs provided the carrot,’ says Tim Clark of ie: music, co-manager of Robbie Williams among others. ‘I’m sometimes asked, ‘Who’s the richest man in the music industry?’ I always say, ‘Steve Jobs’.’ Today, the iPhone has effectively replaced the iPod. The day it launched, Apple quietly dropped ‘Computer’ from its corporate moniker. And it’s the ability to download apps, and the connectivity of the device, not music, that’s now driving sales. ‘The US market for digital music appears to be flat,’ says Enders. ‘It has flattened well before everyone, and certainly the music industry, hoped. At this point the real issue is that more than 75 per cent of recorded music sales are still on CD.’ But that’s of little concern to Apple. Jobs may now be on a medical leave of absence, and Ive reportedly contemplating a return to the UK so he can educate his children over here, but the brushed steel wheels are unlikely to fall off the Apple juggernaut any time soon. Its next launch is rumoured to be the iPhone Nano. If that does what the iPod Nano did for the iPod—reducing entry point at the mid and lower end of the market, sending sales through the roof—then ExxonMobil can start counting off its remaining days as the world’s most valuable company even more quickly. ‘We were very lucky,’ Jobs told Rolling Stone in 2003. ‘We grew up in a generation where music was an incredibly intimate part of that generation. More intimate than it had been, and maybe more intimate than it is today, because today there’s a lot of other alternatives. We didn’t have video games to play. We didn’t have personal computers. There’s so many other things competing for kids’ time now. But, nonetheless, music is really being reinvented in this digital age, and that is bringing it back into people’s lives. It’s a wonderful thing. ‘And in our own small way,’ he said, ‘that’s how we’re working to make the world a better place.’
Source: Daus, J. (2011), ‘The death of the iPod’, Sydney Morning Herald, 22 March (accessed February 2012).

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Extended case study
Australian Beverages Ltd—Pre-seen case study information
A Introduction to Australian Beverages Ltd
In 1937, Australian Beverages Ltd (ABL) commenced manufacturing soft drinks [non-alcoholic drinks rather than ‘hard’ drinks that contain alcohol]. During the 1970s and 1980s, the company expanded its beverage portfolio by entering into other non-alcoholic beverage categories, such as fruit- and milkbased drinks. In 2011, the company was Australia’s largest supplier of non-alcoholic beverages. Tom Dwyer, the current Managing Director, has been with the company since 2008. He joined the company at a time when carbonated soft drinks (CSDs) growth was stagnating and shareholder confidence in the company was waning. Dwyer established a strategic planning team within the company to assess the current product portfolio and identify organic and acquisition growth opportunities. From this review the importance of operational excellence was identified and strong investment was made in world-class manufacturing facilities and systems. Process re-engineering was implemented to reduce the costs of manufacturing and time-to-market. Given the declining consumption of CSDs, Managing Director Tom Dwyer has sought to reduce ABL’s reliance on them, focusing on growing new products and entering new non-alcoholic beverage categories since his appointment in 2008. Alongside significant investment in product development of other non-alcoholic beverages, several acquisitions have been made to grow the market share of nonCSD based beverages in the company’s portfolio, and entry into the Australian snack food market was recently undertaken. Having finalised the integration of a snack food business acquisition just over 12 months ago, this latest acquisition enabled ABL to leverage its strong distribution capabilities to supermarkets, convenience stores and hospitality channels by adding complementary food products to non-alcoholic beverages. Nevertheless, CSDs still accounted for 68 per cent of company revenue in 2011. The board has requested the company continue to accelerate entry into other complementary products to counteract the expected strong decline in the CSD business over the next five years. The only major non-alcoholic beverage not produced by the company now is bottled water, and bottled water is an industry that has been of interest for some time to the company as it had grown fast in recent years and is not subject to negative health concerns.

B

The Australian bottled water manufacturing industry

Note: All figures are for the year ended 31 December 2011 unless otherwise stated.

A relatively new industry, the bottled water manufacturing industry evolved out of the soft drink manufacturing industry during the 1990s. In 2011, bottled water was the fastest growing category in the non-alcoholic beverage market in Australia. The Australian bottled water manufacturing industry is currently in the growth stage. Growth has been achieved due to the increase in per capita consumption of bottled water, albeit from a relatively low base compared with other more established beverages. As consumers become more health conscious and change their drinking habits away from CSDs to healthier beverages, bottled water will increasingly become their drink of choice. As a result, bottled water sales are expected to increase.

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1

Demand and consumption trends

Note: Projection figures for the industry were provided by industry experts at the recent Bottled Water Institute of Australia’s ‘Future Focus’ conference.

Given that bottled water is a category within the broader non-alcoholic beverage industry, trends in this broader industry also impact on bottled water. Total non-alcoholic beverage revenue in Australia was over $10 billion in 2011, including CSDs, bottled water, fruit juices, energy drinks, sports drinks, ready-to-drink teas and milk beverages. Table 1 shows that bottled water has significantly increased its market share within non-alcoholic beverages over the past 10 years and is predicted to have further strong growth. Table 1: Australian non-alcoholic beverages—Market share of volume by category, 2001 to 2016 Category Diet CSDs Full-calorie CSDs Total CSDs Bottled water Milk drinks* Fruit drinks** Sports drinks Ready to drink tea/coffee Energy drinks Total non-alcoholic beverages 2001 16.70% 46.10% 62.80% 6.40% 8.20% 20.70% 1.50% 0.40% 0.00% 100.00% 2006 16.50% 41.30% 57.80% 9.50% 9.60% 18.80% 2.20% 1.70% 0.40% 100.00% 2011 16.30% 34.70% 51.00% 13.30% 11.90% 16.90% 3.70% 2.00% 1.20% 100.00% 2016 (P) 16.10% 25.30% 41.40% 17.40% 16.00% 14.80% 5.00% 2.90% 2.50% 100.00%

P = Projection * Includes white and flavoured full fat, skim and soy milk beverages ** Includes fruit juice and fruit drinks

Australians consumed 963 million litres of bottled water in 2011. However, Australian consumption of bottled water is significantly lower as compared with the consumption of the top 10 global bottled water consuming countries. When compared to similar markets, such as the United States, Italy, France and Spain, this data suggests that the Australian market has potential for a higher rate of consumption and sales growth before it reaches maturity. It needs to be noted, however, that the drivers for bottled water consumption can differ. The climate or lack of clean drinking water impacts on consumption levels in countries such as Mexico and the United Arab Emirates. However, in Italy, France and Austria, for example, consumption of bottle water is driven by fashion. A recent report by the Global Earth Policy Institute concluded that global consumption of bottled water rose 56.8 per cent to 164 billion litres from 2007 to 2011.

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Bottled water is the fastest growing part of the non-alcoholic beverages industry. Historical industry growth has been derived from increased consumption per capita aided by broader distribution, new products launched over the past five years and increasing awareness of health issues. Research shows that people want better tasting and healthier alternatives to many of the soft drinks currently available. Increasing awareness of the obesity problem in Australia, as well as the firmly established focus toward health and wellbeing, is ensuring strong future growth for ‘healthy’ beverages. This has resulted in the introduction of sugar-free or diet CSDs. However, many older Australians are not switching to sugar-free versions of the CSDs they used to drink. Instead, they are moving to alternative beverages. Hence the general decline in the consumption of CSDs has also been accompanied by a rise in the consumption of beverages that are perceived to be healthy, such as bottled water, juices, flavoured milks, energy drinks, sports drinks and ready-to-drink teas. These trends are expected to continue in the future and bottled water will continue to increase its share of the non-alcoholic beverage market. Due to the increase in health consciousness, water has now also become a fashion accessory. Some consumers now carry a bottle of water with their mobile phone and iPod. Packaging is therefore critical. Small plastic bottles are preferable for many consumers as they are re-sealable, perceived to be more contemporary and can fit in car cup-holders. The convenience factor means that the most popular pack size is around 600 ml. This is an important consideration for convenience when travelling for business or leisure. In fact, it is the convenience aspect that has, to some extent, driven the growth in bottled water. 2 Industry segmentation

The Australian bottled water industry has two clearly defined segments, summarised below.  Still water: Accounted for 76 per cent of consumption volume in 2011. Still water is generally consumed for hydration and thirst satisfaction at home, in the office or while travelling. Still water is an alternative to other packaged beverages when consumers want to moderate their calorie intake and seek an unsweetened, clean-tasting and natural product. Water is the best and healthiest form of hydration as it is a fat-free and calorie-free thirst quencher. Consumers also drink bottled still water when they are not satisfied with the aesthetic qualities (e.g. taste, odour and colour) of their tap water. Many people wish to drink something that is refreshing, clean and pure, and avoid certain chemicals used in the treatment of public water supplies, such as chlorine and fluoride. Lastly, convenience is a major factor in the growth of the still water segment, as consumers require the convenience of bottled water for their refreshment. This is especially the case with the development of more widespread leisure activities and the expansion of travel, for both business and pleasure. Significant growth in bottled still water in Australia has occurred over the past six years, and driven most of the overall industry growth. Sparkling water: Accounted for 24 per cent of consumption volume in 2011. Sparkling water is essentially still water into which carbon dioxide gas has been dissolved, resulting in the formation of bubbles. Sparkling water is generally consumed as a refreshment beverage mostly while dining out rather than for hydration or thirst satisfaction alone. In the last few years, supermarkets have started to stock premium sparkling water brands. The majority of the sparkling water consumed is comprised of premium imported spring waters, such as Eau de Vivre, which is the world’s premier sparkling water brand. As such, the average price per litre for sparkling water is substantially higher than that of still water. This reflects the increased cost of manufacturing required to carbonate the water, different closure types required to retain the carbonation, the cost of imports and the premium nature of this product.

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3

Distribution channels

Bottled water has several distribution channels. Table 2 shows the share of revenue in 2011 by channel. Table 2: Major distribution channels—Share of revenue, 2011 Distribution channel Supermarkets and grocery wholesalers Convenience stores (including petrol stations) Hospitality Home and office delivery Vending machines Other 2011 35.0% Revenue ($m) 519 Comments Supermarkets use online ordering systems direct to manufacturers, bypassing wholesalers in general. Major growth in this channel, reflecting convenience purchasing. Main outlet for the purchase of single-serve products. Dominated by higher priced spring and mineral waters, including imported products. Bulk packaged water is the main product through this channel. Placed in schools, sports clubs and other public places or venues. Niche value-added brands only, due to high transportation costs (e.g. exports) or specific to single distribution channels.

30.0%

445

15.0% 9.0% 6.0% 5.0%

222 133 90 74

Historically, bottled water was sold to wholesalers who on-sold to a range of retail and hospitality customers. In the past few years, however, large retailers and hospitality operators have been increasingly buying direct from the manufacturer to eliminate the wholesaler margin from their purchase price. This has been facilitated by improved information systems that now provide timely information to manufacturers for production planning, thereby enabling them to engage in direct sales to a larger numbers of customers. This increase in direct distribution has been most notable among major industry competitors as major retailers want to purchase from fewer, larger companies. Beverage wholesalers, however, still play an important role in distribution for smaller bottled water manufacturers as these manufacturers generally have a narrow product range and are unable to meet major retailer demands for inventory management and direct to store delivery. Sales in convenience stores have always been an important distribution channel for soft drinks. This importance is growing, not only for soft drinks but also for bottled water, driven by the trend in more frequent convenience shopping for ‘time-poor’ consumers. Success in the convenience store channel is critical for any new product to succeed. If the brand recognition is achieved, it is often quickly followed with brand extensions, leveraging the brand to offer new flavours and packaging. A key strategy employed by non-alcoholic beverage manufacturers to lock out rivals is the placement of vending machines and refrigeration units in distribution outlets. This ensures that their products are stocked and presented for the best possible sales while making it difficult for competitors to get refrigeration space. The distribution outlet has to invariably agree not to stock competitor products as part of the terms of using the refrigeration equipment supplied. Vending machines are increasing in variety, size, style and sophistication, depending on where they are located. Distributors in some locations, such as private or non-government schools, have worked with the manufacturers to introduce the use of smart card technology for payment and therefore avoid the need for cash.

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Similarly, in the hospitality arena, manufacturers have to tender for the supply of beverages to key entertainment and sporting venues. Once a manufacturer has secured a contract with a venue, their product has guaranteed sales for a defined period of time. Quite often, patrons are not allowed to bring in their own beverages for consumption or are limited in the amount they are allowed to bring in. Hospitality, through restaurants and cafes, is the main distribution channel for sparkling waters and it is also common practice for venues to be locked into one particular manufacturer. Exports and imports represent about 5 per cent of industry production. These levels are not expected to change in the future due to the high cost of transporting the heavy weight and bulk of water. The Australian bottled water manufacturing industry is protected to some extent from the threat of water imports due to the high volume and low unit value of water, even though water with no additives is exempt from tariffs. For water that has added sugar or other sweeteners, there is a 5 per cent import tariff. The main distribution channel for imported waters is cafes and restaurants, which primarily serve premium sparkling waters. 4 Industry profitability

Bottled water has the highest profit margins of all non-alcoholic ready-to-drink beverages. This is due in part to the strong growth that the industry has achieved. Manufacturers are also able to sell all production in a year. Industry rivalry is relatively low, particularly as the major competitors are focused on supplying through different distribution channels. Purchases include water supplies, labels and other packaging materials such as glass and plastic resin bottles and closures which are generally purchased on five year contracts. One of the key costs is polyester (PET) resin for bottles; however, there is no forward market for PET resin that would enable producers to lock in prices for a defined period of time and thereby provide certainty of costs. As a commodity, PET resin has been subject to price rises over recent years, as the price of oil has increased. This is reflected in a minor decline in gross and net margins experienced by manufacturers in 2009. Overall, however, the cost to create bottled water is relatively inexpensive. Therefore, water is a more profitable product than other non-alcoholic beverage categories. A net margin of 16.3 per cent was achieved by the industry in 2011. Current levels of profitability are expected to continue. However, it is noted that as sales through the supermarket distribution channel increase, so too will the buyer power of these large retailers and this may have a negative impact on profitability levels. The increasing power of major retailers will squeeze the small competitors in both the food and beverage businesses. Without modern technology, smart systems and economies of scale, it will be very difficult for small manufacturers to generate an acceptable return on capital employed and maintain current levels of profitability. 5 Industry key success factors

Industry experts summarise the following areas as critical to future success in the Australian bottled water manufacturing industry.  Product innovation: The ability to launch new products to suit changing consumer consumption trends and fashions. Packaging and labelling are important factors for success in the industry. Launching new varieties of water and the design of the bottle including the label contribute to the appeal of a product. Convenience is a key benefit of bottled water. Hence bottle size, shape and functionality form a basis of competition. Bottles are designed with particular uses in mind (e.g. some water bottles have a pop-top cap for ease of use when playing sport or training). Recent growth in bottled water is related to the successful positioning of a number of brands as fashion accessories.

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

Brand marketing: Market research and speed-to-market are important capabilities. Successful competitors need to be able to clearly segment the market and develop products that reflect the requirements of different customer groups. The ability to effectively promote their brand is also important. First movers with effective distribution have an advantage in that new competitors need to spend heavily on marketing to catch up. The effectiveness of strong advertising, a sophisticated distribution chain and a focused strategy are critical in influencing consumer choice. Strong brand names contribute to the appeal of bottled water as an accessory as well as building product reputation, allowing bottlers to win market share within particular consumer segments and charge premium prices. Distribution and inventory management systems: Control of distribution channels through an established and comprehensive network of distribution outlets to gain access to end consumers is essential to ensure timely delivery, low costs and maximised product reach through effective placement. If they are not operating in a niche market, manufacturers must become a major competitor in the wider market. In general, a major competitor needs to have at least a 20 per cent share of at least one distribution channel. Large retail buyers (both in the supermarket and convenience store channels) prefer to deal with large manufacturers or suppliers that can provide a large product range. Access to and use of market data are also important. The larger the competitor, the more likely they are to have retail check-out scanning data to understand what their customers are buying. In this way, manufacturers can ensure retailers replenish their stock as required. This provides larger manufacturers with an advantage of responsiveness and flexibility as they make use of this information and respond quickly. Economies of scale and scope: Economies of scale are very important for a low-value product since high volumes must be produced and sold to maintain profitability. Manufacturers must have effective cost controls and access to the most efficient manufacturing and distribution processes, tracking technology and techniques to monitor sales and respond accordingly. Economies of scale are particularly important for competitors who have undifferentiated products. Some manufacturers have commenced contract bottling for smaller industry participants in order to secure manufacturing volumes. Economies of scope via breadth of product range enables efficiencies in distribution, marketing and administration. Such efficiencies are gained when a competitor uses their manufacturing process to produce a wide range of beverage brands (and possibly also complementary products) which are provided as part of a total solution to the various distribution channel customers. Being a total beverage provider to major customers is becoming more important as these major customers are increasing in concentration and prefer to deal with fewer larger manufacturers.

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C

Industry competition

The Australian bottled water manufacturing industry is dominated by large beverage manufacturers. Two of the major competitors are subsidiaries of global food and beverage conglomerates that are also major competitors in the non-alcoholic beverages market. It should be noted that Australian Beverages Ltd (ABL) is not currently in the Australian bottled water manufacturing industry, despite being a major competitor in the Australian non-alcoholic beverage market. Table 3 below shows market share across major distribution channels by key industry competitors in 2011.

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Table 3: Market share by distribution channel and major competitors, 2011
Australian bottled water manufacturing industry— Market share by distribution channel Total market share 26.9% 26.3% 18.3% 12.0% 16.5% 100.0% Supermarkets and grocery wholesalers (35%) 27.0% 38.0% 20.0% 10.0% 5.0% 100.0% Convenience stores (30%) 35.0% 22.0% 17.0% 10.0% 16.0% 100.0% Hospitality (15%) Home and office delivery (9%) 15.0% 15.0% Vending machines (6%) 30.0% 35.0% 15.0% 15.0% 55.0% 100.0% 20.0% 100.0% 70.0% 30.0% 100.0% Other* (5%)

Competitor Butlers Corporation Hydrate water International Beverages Fountain springs Other** Total market share
*

25.0% 20.0% 35.0% 5.0% 15.0% 100.0%

Other includes export sales and use of purified water for medical procedures (e.g. dental, dialysis).

** Other competitors comprise small, locally based water manufacturers. No single entity has greater than 2 per cent market share.

The industry has grown significantly to date. As previously mentioned, product innovation and share of distribution channels have been important bases of competition. To keep industry profitability levels relatively high, the industry’s major competitors have tended to dominate one or two distribution channels only, rather than all channels. In this way, they hope to avoid strong head-to-head competition. This has assisted in keeping the overall level of industry rivalry relatively low to date. However, this is expected to change in the future as consumption growth begins to slow. Several new competitors have entered the market over the last five years. In addition, industry consolidation has occurred. Major industry competitors have acquired smaller competitors to increase economies of scale, scope, market share and profitability. In 2011, the four largest competitors accounted for approximately 83 per cent of industry revenue. No major change is expected to this trend in the future as further consolidation will be difficult due to the relatively high market shares held by the four major companies. Regulatory concerns about restriction of competition will also affect further consolidation. Two of the competitors, Butlers Corporation and International Beverages, are owned by global food and beverage conglomerates that use Australia as the base for their non-alcoholic beverages operations in Asia. Industry experts believe that acquisition of either of these companies, to be used as a mode of entry into the industry and gain significant market share, is not possible. The parent companies will be unwilling to sell their Australian operations. The bases of competition for non-alcoholic drinks are primarily price, convenience and taste. The main basis of competition by which bottled water competes against other beverages, such as CSDs, fruit drinks, sports drinks and energy drinks, is health appeal. Given zero or very low sugar content, water has successfully developed an image of being healthier than other drinks and this has driven growth in the industry. To a degree, home filters also serve as a source of competition, although mainly against the bulk water segment. Tap water is also an external competitor, with a clear advantage in price.

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D
1

Australian Beverages Ltd (ABL)
History

Australian Beverages Ltd (ABL), formerly known as Australian Soft Drinks Ltd, commenced operations in 1937. The original company was established by a group of enterprising pharmacists who had previously made carbonated soft drinks in their pharmacies which were then offered for sale in sealed bottles. The first manufacturing plant opened in Sydney in 1938. Business began slowly, but the arrival of American soldiers in Australia in 1942 had a significant impact on both sales and market acceptance of carbonated soft drinks. Australian Soft Drinks initiated its move into noncarbonated soft drink beverages in 1984 when it began manufacturing fruit drinks. This followed the acquisition of a fruit juice manufacturer in Victoria. The fruit drinks business expanded nationally over the next 10 years. In 1990, Australia Soft Drinks entered the milk drink market with the purchase of manufacturing facilities from a dairy co-operative. The company officially changed its name to Australian Beverages Ltd upon listing on the Australian Stock Exchange (ASX) in 1996, to reflect the broader beverage base of the business. Since listing, ABL has adopted a multi-beverage strategy—product range has been expanded to cover all categories of the non-alcoholic beverage market. However, bottled water remains outside this product range. The company has also moved into the manufacture and distribution of snack food products through its acquisition of several small businesses. It aims to strengthen distribution relationships with convenience stores and hospitality channels. These developments have resulted in ABL’s revenue composition changing from 90 per cent CSD-based in 2000 to 68 per cent CSD-based in 2011. The aim is to further reduce dependence on CSDs by 2017. ABL intends to increase its market share of non-CSD beverage products so that CSDs will represent less than 40 per cent of company revenue as part of its multi-beverage strategy. 2 Business strategy

ABL’s vision is ‘To satisfy Australia’s thirst by being a manufacturer of non-alcoholic beverages for every occasion in every location’. The company aims to achieve this vision by pursuing the following strategic goals for 2012 to 2017:   Offer a complete range of products in the non-alcoholic beverage and complementary markets. Grow the company’s share of the non-alcoholic beverage market to move from the second largest to the largest competitor. This goal will be achieved by offering a wider range of products; increasing per capita consumption of non-alcoholic beverages through branding, product and packaging innovation; and expanding into new non-CSD beverage categories. Extend key customer relationship capabilities and grow product availability through effective placement of refrigerated drink equipment and outlet expansion. This strategy would help the company to establish a major presence in all major non-alcoholic beverage distribution channels. Maintain world-best practices throughout the company’s operations to deliver cost discipline, low cost leadership and timely responsiveness to changing market demand. Ensure that the company’s operations are environmentally and economically sustainable.

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At a recent strategy presentation to market analysts, managing director Tom Dwyer outlined the company’s intention to be a major competitor in all categories of the non-alcoholic beverage market. He stated that: ABL hopes to achieve this aim by being the supplier of choice for the distribution channels of supermarkets, convenience stores and hospitality outlets. Having finalised the integration of a snack food business acquisition, Dwyer is now aware that he needs to identify further growth options, given predicted continuing decline in the CSD market. In January 2012 he asked the strategic planning team to undertake another review of future growth opportunities, specifically identifying products where the company would have the capabilities for successful entry. Bottled water was an industry that was identified, based on its complementary nature to the existing beverage portfolio. This industry had been identified as ‘of interest’ in ABL’s first strategic review in 2005 but at that time the market was deemed too small and unsophisticated. However, the Australia bottled water manufacturing industry has grown significantly since this initial review. Dwyer has requested a detailed review to determine whether entry into the domestic bottled water manufacturing industry is now a viable strategic option. It is hoped that ABL’s position in the snack food market, which it recently entered via acquisition, would be made stronger by another potential acquisition in line with the general consolidation already taking place in the food and beverage supply industry in Australia. Such an acquisition would add further breadth to the company’s total product offering to its customers in all major distribution channels. Of all the competitors, ABL would provide the greatest share of beverage and snack foods. By offering a broader product range, ABL expects to leverage its market power in soft drinks to sales of related products. It also aims to control product supply, apply discounts, introduce loyalty rebates or promotions, and secure conditions of use on supplied refrigeration equipment. As more Australians now drink different beverages at different times of the day, Dwyer highlighted his belief that a modern beverage company needs to be highly flexible in manufacturing, distribution and marketing as well as being able to operate in all product areas. 3 Business operations

ABL is currently the second largest competitor in the non-alcoholic beverage market in Australia, not far behind the market leader, Butlers Corporation. ABL’s large size has enabled the company to take advantage of economies of scale, making it worthwhile to invest in state-of-the-art systems and technology. This helps the company to track and monitor product demand through the various sales channels, enabling manufacturing operations to respond accordingly. Flexible response is also backed up by sophisticated distribution systems. ABL has about 40 per cent of the packaged soft drink market in Australia. This scale enables the company to justify the significant investment needed to create one of the most highly automated warehousing and distribution systems in Australia. Industry analysts expect that the cost reductions and increased speed to market generated by these systems will give the company an even greater advantage over its competitors and provide a solid base for its continuing expansion. Being a major supplier to the non-alcoholic beverage market has afforded ABL significant power over its customers. It has enabled the company to retain cost reductions achieved through efficiency gains rather than pass them onto the retailers. These efficiency gains have enabled the company to enjoy higher profitability levels than the industry overall, and supported continuous investment to improve technology and infrastructure.

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3.1

Infrastructure

In 2010, ABL undertook significant infrastructure investment. A major manufacturing plant capable of processing over one billion drinks per year was built in New South Wales. The company also introduced a state-of-the-art automated warehouse system in its Victorian distribution centre that significantly reduced employee levels by 75 per cent from 200 down to 50. A similar reduction in labour is expected when the system is implemented in New South Wales. Modern warehouses are also operated in Perth and Brisbane. In the past, ABL had offered contract bottling services to smaller competitors; however, its own growth has meant that it can no longer offer this service as it needs the bottling capacity for its own manufacturing operations. 3.2 Technology and systems

A core element of ABL’s multi-beverage strategy is its ability to deliver products quickly to retailers. This requires efficient distribution systems, particularly among very small retailers such as convenience stores (which form about half the market). A significant investment in IT means that the company now offers vendor-managed inventory (VMI) to its major customers in the distribution channels of supermarkets, convenience stores and hospitality outlets. Through this system, vendors can manage their own inventory in accordance with an agreed set of inventory parameters established at the start of each year. ABL undertakes all inventory replenishment and management functions for a nominated period which includes providing assistance with merchandise presentation. Customer service representatives periodically ensure that services are being delivered as required. As business conditions change, these representatives also have the authority, within defined parameters, to amend agreed arrangements. The VMI system is only possible where there is networked access to real-time scanning data, made available as products are checked out at the store. This means that the company receives immediate information and is able to reshuffle its manufacturing requirements so as to respond to changes in demand for any stocked item. Knowledge of stock movements and sales is also linked to an extensive database of customer information. Competitions are regularly run to collect customer information that can be used not only to understand who is buying certain products, but also to contact customers electronically and via text message for special offers. Such an activity can assist in clearing slow moving products, as well as targeting marketing information to specific customer groups. 3.3 Marketing and product innovation

ABL’s multi-beverage strategy also involves tailoring marketing campaigns to customer groups and to beverages for different times of the day. The company’s range of products is able to match the various consumer beverage needs at different times of the day (e.g. fruit juice for the morning, coffee for the afternoon and sparkling water for the evening). ABL recently acquired several coffee bean businesses to capitalise on the growth of the coffee market in Australia. In response to key consumption patterns that the company continuously monitors, it is exploring a new product idea— ready-to-drink chilled coffee—to be offered through convenience stores. ABL is expecting strong growth for this product, given this market has not achieved the same level of growth in Australia as that achieved in the United States. A new product development team tests new products in small markets to assess their viability. Using focus groups and market research, the team monitors changes in consumer tastes and behaviours. An alliance with a US-based food and beverage conglomerate is in place to monitor trends in the United States, since Australian consumer behaviour usually follows trends in that country. Investment in market research has kept ABL’s product development at the forefront of global trends. This has resulted in the company winning numerous industry innovation and marketing awards over a long period of time. ABL expects to extend its beverage product development capability into the food industry as it grows its range of snack foods, thereby extending the breadth of products offered to major customers.

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A key focus of the product development team is further development of ‘diet’ beverages. This would help to maintain market share for CSDs while stemming any negative perception associated with being a major CSD supplier and the link of CSDs to growing obesity levels. ABL was the first Australian beverage manufacturer to introduce sugar-free drinks using Stevia, a natural sugar replacement. Stevia is extracted from a native plant of Paraguay in South America. It is a natural product compared with the chemically synthesised artificial sweeteners, such as aspartame, that are used in most diet drinks. ABL had to wait two years to get Australian Food Standard approval to use Stevia, despite the fact that the product had already been approved by the Therapeutic Goods Administration. Product development also extends to packaging innovation. However, while some innovations are developed in-house, ABL prefers to work together with key suppliers and service providers to develop packaging ideas. This is because packaging innovation requires a high degree of engineering design capability, something which is not a core strength of the company. As part of the collaborative process, ABL provides the market, customer and trend information to packaging specialists to develop into new concepts. A recent packaging innovation success entailed working with suppliers to reduce the weight and amount of PET used in bottle plastic by 20 per cent and thereby reduce the cost of packaging. 4 Management

The current managing director, Tom Dwyer, has a strong background in the beverages market. He spent 20 years working in senior roles with the international food and beverage giant, Butlers Corporation. These roles covered sales, marketing and operations. He was also the head of the Australian business operations for several years. Constant cost cutting at Butlers and a lack of autonomy due to increasing head office involvement in the Australian operations motivated his move to ABL. Upon joining the company, Dwyer established an internal strategic planning team to assess the current product portfolio and identify organic and acquisition growth options within this product range. 4.1 Operations and performance

Operational improvements were achieved through strong investment in world class manufacturing facilities and systems as well as process re-engineering to reduce time-to-market. Just as importantly, Dwyer led the charge in collecting customer information and investing in the systems that would enable data to be used in product and market development decisions. Building this approach over 10 years has meant that the company now has a strong innovation culture with a continuous focus on new product development. Ideas can come from all employees and if the data supports the concept, investment is made in testing the concept. If an idea actually gets to market, the employee who presented the idea receives an immediate bonus. However, all employees participate in a company share scheme, making success a shared goal. ABL also has a strong performance focus. Return on investment and market share are performance measures used in all business units. Recognising that some beverage categories have better profitability than others, different benchmark levels are applied to different categories. Benchmarks for the different categories are set based on understanding the performance of leading US and European beverage manufacturers. The company employs rigorous financial and compliance reporting systems and is proud of its ability to complete end-of-month reports in half a day. Compliance with relevant legislation is paramount as is a focus on sustainability in four key areas: the environment, employees, workplace and community. The company is proud of the fact that it was the first Australian beverage manufacturer to implement triple bottom line reporting. ABL is very conscious of the impact that its packaging has on landfill. It has several projects underway to find out ways to reduce its environmental impact.

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ABL operates a decentralised organisational structure. Each major beverage category and the new snack food business operate as separate business units. The leaders of each business unit hold strategic and decision making power over the products and manufacturing operations within their portfolio. To maximise efficiencies, the various business units are supported by a centralised shared-services function for product distribution, receivables, payables, payroll, reporting and capital expenditure management. 4.2 Skills and experience

It is critical that the business unit leaders have the commercial acumen and technical skills to operate their business units on a stand-alone basis. Limited support is provided by Head Office in terms of product strategy and manufacturing operations. In the recent acquisition of the snack food business by ABL, access to the required technical skills became an issue when the incumbent managing director and the manufacturing manager resigned within 12 months of the acquisition. These resignations created a significant skills gap in the business. ABL had to quickly recruit replacements for these key roles, offering to pay higher than market salaries to lure staff away from competitor companies. Ensuring availability and retention of the right skills for the business would be an important consideration in future acquisitions. Senior executives of ABL are active participants in industry bodies. The company is a member of the Beverage Council of Australia which has been proactive in approaching the Federal Government, particularly in relation to health and obesity issues. Such involvement provides the company with a better understanding of public policy and its implications for the business as well as the ability to shape the policy debate to maximise business outcomes. Currently, the senior executive group of ABL is working on assessing options and developing a ‘healthier’ policy for CSD placement and promotion to children and young adults. Employing and training the right people in customer service roles continues to be a challenge for the company’s management. ABL has grown rapidly and has had to integrate employees from acquired organisations. This has required a significant investment in training and development. All new employees must complete a week-long induction program which provides an overview of the range of activities conducted by the company. New sales and customer service representatives must also undertake a week of training each year to update their skills in using company technology and systems. This ensures that the data they enter into the system is correct and meaningful for further analysis and reporting. A graduate employment program is also in place. The graduates are rotated through different business units and each graduate spends six months working in a business unit over a two-year period. Following this training, an assessment is made of their capability and an appropriate career plan developed. 5 Latest developments—April 2012

The Federal Government has recently announced a major package of health reforms targeted at preventative health, which includes the offer of incentives to individuals to maintain good health. The government also announced sweeping measures to addressing the issue of obesity and diabetes in Australian children. One such measure is the banning of television advertisements for CSDs, fast foods and snack foods during children’s television shows between 3.30 p.m. and 7.30 p.m. Hailed as a significant step forward by health professionals, this policy would have a significant impact on CSD sales, as about 20 per cent of CSDs are consumed by children, with a further 30 per cent by young adults. In addition, bans on all full-calorie CSDs in government-owned primary and secondary schools were announced to take effect from the start of the 2011 school year. Several tertiary institutions had come out in support of the bans and announced that they would also voluntarily withdraw full-calorie CSDs from sale in on-campus cafeterias and vending machines.

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Over the coming weeks, information sessions are scheduled to be run in all states by officials from the Department of Health to outline how the bans would be enforced and the penalties that would ensue for those schools that failed to comply. Consultation with the non-alcoholic beverage industry would also be undertaken, with several proposals for industry compensation being considered. These include incentive payments to manufacturers who offer bottled water as well as compensation for lost CSD sales over the next three years. Such measures should provide the industry with sufficient time to move into alternative beverage categories and compensate for the expected decline in CSD sales. In light of this news, the board confirmed that bottled water is now a critical category to have in its beverage range to meet its strategic goal of having a beverage for every occasion to meet ABL’s future growth targets, and that ABL will enter the Australian bottled water industry. The board has requested ABL’s strategy team to urgently evaluate entry into the Australian bottled water manufacturing industry, assess potential acquisition targets from existing competitors within the industry and summarise the potential implementation issues related to an acquisition. The strategy team has identified two companies for review against these criteria. These are Hydrate Water and Fountain Springs. The board has requested that Dwyer and the senior management team provide a recommendation at the next board meeting as to which company to target for acquisition. Sensitive to the problems experienced with the company’s acquisition of its snack food business, the board has requested the identification of possible implementation risks in relation to the potential acquisition of these identified companies. Further, a detailed implementation plan needs to be drawn up at the outset with recommendations to resolve the potential issues identified. It is commonly known that ABL has not previously been a part of the Australian bottled water manufacturing industry as it was deemed too small. Going ahead with entry into this industry via an acquisition would therefore require an explanation to existing company employees as to the reasons for the change in strategy. One such reason is to defray the company’s reliance on CSDs. It would also be important to show the positive benefits to the company’s reputation by reducing the reliance on CSDs and fruit juices, given the link between these beverages and diabetes and obesity. Over recent years, ABL had been widely criticised by leading dieticians and health professionals for its role in contributing to these health issues, particularly in children. The company’s recent employee survey indicated dissatisfaction with the way reasons for the acquisition of the snack food business were communicated to employees. The board did not want a repeat of this poor employee communication. Dwyer also recognised that a plan for generating some quick wins by the potential new bottled water business would lessen concern over the acquisition and assist employees to appreciate the value being added to ABL’s total operations. Short- and long-term incentives would need to be developed for shared-services staff to ensure a seamless integration of the acquired bottled water business to realise back-office synergies. This was an area that had been handled particularly badly by the company in the past. Dwyer knew that he needed his employees to be in favour of the potential acquisition if it was going to be successfully integrated into the rest of the company’s activities.

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