INTRODUCTION AND BACKGROUND
1.0 Introductory Remark
This section provides a brief examination of the United Kingdom (UK) economic and financial environment as well as sector in which Hilton Food Group (HFG) plc operates. Part of it involving strategic analysis of the food industry and Hilton Food Group Plc. Three companies from the same industry selected as peer for analysis and providing a basis for drawing conclusions about the industry as a whole and the basis of benchmarks with which to compare with HFG PLC.
1.1 United Kingdom Economic and Financial Environment
UK economy has been surviving the wave of global financial crises of 2008, which leads to weak job creation, high-energy prices and negative real income growth, which keep consumer-spending low and restrained business investment, weighed on the economy. From the year 2013 however, UK economy has started improving as Gross Domestic Product (GDP) grew by 1.7% and by 2.8% in 2014. Similarly, the UK economy grew by 2.2% in 2015 as a whole, down markedly from the growth of 2.9% recorded in 2014. In May 2015, the inflation rate rose to 0.1% from -0.1% in the previous month.
UK public finances remain weak despite slow good progress. Public-sector borrowing (excluding public-sector banks) is in deficit of £7.5 billion in December 2015, £4.3 billion lower than the total recorded in December 2014. For the period between the month of April and the month last month of the year 2015, borrowing of public sector amounting £74.2 billion, which is £11 billion smaller than that recorder from previous financial year. This improvement means that there is a chance government could meet its borrowing target for financial year 2015/16. The official bank rate has been 0.5% since March 2009; the rate is low when compared to historic trends comparison and has a positive impact on the economy, because reduces the cost of borrowing and makes savings less attractive – so people invest and consume more. Despite Bank of England downwardly revised its UK GDP forecast for 2016 to 2.2%, from 2.5% but Uncertainty over ‘Brexit’, weak overseas growth and financial market volatility potentially rising inflation and interest rates are prospecting to create poor environment for business performance in the years 2016.
1.2 Overview of United Kingdom Food Industry
According to FTSE 100 (2015), Hilton Food Group Plc classified into Food Producers and Processors, which form main suppliers of retail food Sectors. The food industry is the United Kingdom largest sector with turnover of approximately £70bn annually. Food Industry represents about 15% of the total manufacturing sector, about 20% of consumer expenditure and 500,000 people employed by the food manufacturing and processing industries. The sector affected by economic downturn and has a compound annual growth rate (CAGR) of 3%-4%. Overall performance of food industry defined in three phases according to history of UK economy. First phase defined between July 2007 and July 2008, in this period sales volumes experience growth with varying degree. More over this period dominated with lower Consumer Prices Index (CPI), which resulted in rising real earnings or purchasing power of consumers. On the other hand consumer credit increased by 8.6%, which driving sales growth. Second phase defined between August 2008 and May 2013, where volume of retail sales fluctuated between periods of contraction and expansion, which partly explained by the economic climate when consumer credit reduced by 24.8%. Moreover, earnings fell in real terms during this period.
The third phase started in June 2013, this phase defined by growth in volume despite earnings growing at a slower rate than CPI until September 2014. From the month of June 2013 to June 2016, consumer credit increase by 18.8%. Between June 2013 and July 2016, the price level (shown by the implied deflator) fell by 5.1%, coinciding with 13.9% growth in the volume of retail food sales over this period. In addition, this increment of spending has been in line with decrease of savings ratio, from 8.6% for the year 2008 6.5% from Quarter 1 (Jan to Mar) of the year 2013. Overall, despite such trends of difficulties in the economic performance, the extent of effect during this phase is small because demand of food is income-inelastic.
1.3 Food Industry Porter’s Five Forces Analysis
Porter’s five forces analysis is a framework that attempts to analyse level of competition within food industry and business strategy development by considering Competition among firms operating in the food industry, threat of new firm to enter the food Industry, threat of substitutes, bargaining power of buyers and bargaining power of suppliers. These factors determine the capacity for a Hilton food Group to outperform in the industry of specialization.
1.3.1 Competition among Firm Operating in the Food Industry
Competition among firms operating in food production and processing is high. To survive and remain competitive, it is critical to attract and retain customers for further development. Hilton Food Group has a very strong position in the food production and processing industry but major rivals fighting continuously to get on to each other are Cranswick and Devron Plc.
1.3.2 Threat of New Firm to Enter the Food Industry
Despite the fact that food industry is very profitable and competitive but demanding higher regulations and compliance from government and food safety authorities. More over food production and processing require huge investment in machinery and value chain process especially research and development. Therefore, threat for new entrants is low to Hilton food Group Plc because of economy of scale with good established distribution channel, good relationship with customers and suppliers and heavy investment in Science and technology hence it is difficult for the new entrants to enjoy market share.
1.3.3 Threat of Substitute Products
Due to the nature of the food industry, threat of substitute products for Hilton Food Group Plc is very high. From range of its products, there are arrays of similar products that provide direct competition as substitute given the fact of low switching cost in the food industry. In Europe market, competition is stiff from firms provides similar kind of product like Hilton Food Group Plc. It is vital for Hilton Food Group continuously finding new ways to improve its products because competition is so fierce. In recent years, Hilton food Group Plc has focused on the health and wellness aspects of its products to maintain its competitive edge and customer loyalty in the market.
1.3.4 Customers Bargaining Power
Customers have higher bargaining power in their purchasing of food products because of price sensitivity and low switching costs due to substitute products and competitors. According to Trading Economics, (2015) due to increase rate on how people perceive price, customers spend less of the disposable income. The situation worsen by the economic downturn, which made customers more cautious about their shrinking disposable income. Despite the fact that a lot of substitute products and competitors arise in the food industry and higher influential choice of customers but still, Hilton Food Group Plc has maintained the quality and health wellness made it very successful among the users as society has in progress of becoming more health conscious.
1.3.5 Suppliers Bargaining Power
The bargaining power of suppliers is low. Hilton Food Group Plc managed to establish good relationship with the suppliers around Europe due to presence of plenty of suppliers in the market. Additionally, the large volume of purchase by Hilton Food Group Plc and greatly investment in outsourcing of raw materials allows it to have a better bargaining position over their suppliers. Hilton Food Group focus over strong business relations to make quality stronger.
1.4 Descriptions and History of Hilton Food Group Plc
Hilton Food Group plc is a leading UK based company specialising in meat packing business and supplies to international food retailers in Europe. Hilton Food Group Founded in 1994 and began its operations as a beef and lamb central meatpacking facility in the UK then extend its operation in the Netherlands since 2000, Sweden and Ireland since 2004, Poland since 2006 and Denmark since 2011 with the headquartered in Huntingdon, the UK. The Company’s subsidiaries include Hilton Foods UK Limited, Hilton Meats Zaandam, Hilton Foods (Ireland) Limited, Hilton Foods Sverige, Hilton Foods Danmark, Hilton Food Group (Europe) Limited and Hilton Foods Asia Pacific Limited.
1.5 Strategic SWOT Analysis of Hilton Food Group Plc
Strategic SWOT analysis of Hilton Food Group plc involves the assessment of both internal environment and external or food Industry environment by using SWOT assessment model. This gives the company strengths and weaknesses and the potential opportunities and threats which form part and parcel of the company External and internal environment.
1.5.1 Hilton Food Group Plc – Strengths
This represents internal capabilities that may help Hilton Food Group Plc to reach its objectives; Basing on this analysis main strength of Hilton Food Group Plc are
126.96.36.199 Executable Business Model
Hilton Food Group Plc business model is the means by which it deliver strategic objectives. The model is proven and sustainable, whilst being relatively simple and straightforward. Hilton Food Group Plc model is largely decentralised, with capable, largely self-sufficient management teams running businesses operations in each local country. Hilton food Group spend nearly £200m and invested continuously, across all areas of our business to include outsourcing raw materials, packaging materials, processing, storage and IT infrastructures.
188.8.131.52 Market Position and Brand Recognition
Hilton food Group Plc has a significant geographical presence across many areas. This give a strong recommendation in the market and in the red meat segment. Such strong market position allows the company to gain significant competitive advantage to expand domestically and internationally. Hilton Food Group Plc operates through three segments namely Western Europe, Central Europe, and Central costs and other.
184.108.40.206 Diverse Products of the Highest Quality
Hilton food Group plc give the highest importance to the quality of their products. Innovation is core to HFG plc strategic approach both in terms of new product development and in terms of the range of its offering. The core of the product range includes fresh items such as roasting joints, steaks, chops and minces that are prepared and packaged according to customer specifications. Hilton’s Food Group Plc range of products includes barbecue ranges, marinated meats and meat cuts accompanied by serving sauces. To maintain quality of its out puts Hilton Food Group plc make significant investments in technology to support their growth every year.
220.127.116.11 Potential Investment in Human Resources
Hilton Food Group plc known for recruit high calibre persons in all areas of its businesses. This effective human capital management translates into great customer services and innovations. The Group benefits from each of its businesses being part of a larger organisation, which enables them to share best practice solutions, including equipment selection and other working segment. The Group currently employs 2,833 employees in six European countries.
18.104.22.168 Geographical Expansion with Strategic Partnership
Hilton Food Group strength build form strong and productive partnerships in each geographical zone of its operation. The group has been expanding rapidly with growing international reputation and success of the close partnerships created and maintained. HFG Plc operates in the following countries, in which the Group has production facilities to include United Kingdom -Tesco UK, Netherlands -Albert Heijn, Ireland-Tesco Ireland, Sweden-ICA, Central Europe- Ahold, Tesco, and Rimi. Denmark-Coop Danmark and the joint venture with Woolworths in Australia involves managing Woolworths’ meat processing and packing facilities at Bunbury in Western Australia, Brisbane in Queensland and, from September 2015, a new state of the art meat packing facility near Melbourne, in Victoria. Currently Hilton Food Group Plc agreed a partnership with a Portuguese retail chain to strengthen its position in the European market and signed an agreement with Modelo Continente Hipermercados.
22.214.171.124 Strong Customer and Suppliers Base
Over the years, Hilton Food Group Plc managed to achieve significant economies of scale with superior customer base, distribution channels and supplier relationships. Key customers of the company include Tesco UK, Albert Heijn, Tesco Ireland, ICA, Ahold Central Europe, Rimi Baltics, Tesco Central Europe, and Coop Danmark. On top of that, Hilton Food Group plc maintains cost reduction initiatives across the Group with resultant savings shared between Hilton and its customers hence improving customer satisfaction and stimulating demand for higher volumes. The Group also has strong relationships with suppliers of high quality meat around the world, sourcing product from over 40 different suppliers.
1.5.2 Hilton Food Group plc – Weaknesses
Weaknesses are internal limitations that may interfere with Hilton Food Group plc ability to achieve its objectives. Basing on analysis main weakness of Hilton Food Group plc are
126.96.36.199 Market Cannibalization through Overcrowding
Market cannibalization refers to a situation where introduced product “eats” up the sales and demand of an existing product despite the fact that sales increase. In turn, this lead to impact sales volume and market share of the existing product. By aggressive expansion in the market leads to self-cannibalization and diminishes long-term growth potential of Hilton Food Group plc. This is happen in the United Kingdom where Hilton Food Group plc operates many stores while introduction of new products kills old ranges of products.
188.8.131.52 Overdependence in the European Union Market
In line with self-cannibalization of the United Kingdom market and operations of many stores, Hilton Food Group plc generates a huge percentage of their total revenue from the European Union market. This has substantive impact and makes Hilton Food Group Plc being very sensitive to prospects of the Economy of the Europeans union Countries and growth especially following Brexit issues.
1.5.3 Hilton Food Group plc – Opportunities
This represent are external factors that the Hilton Food Group plc may able to exploit to its advantage. Basing on this analysis main opportunity of Hilton Food Group plc are
184.108.40.206 Expansion into Emerging Markets and Increasing Food Demand
The increase saturation and self-cannibalization of the UK and Europeans market makes its international strategy even more important. Hilton Food Group plc has a great growth potential in further expanding into developing markets especially in Africa where labour and other productive resources are cheap. According to Food and Agriculture Organisation of the United Nations (FAO) demand for food at global level expected to increase by 50% when reach the year 2030 and 70% by the year 2050. Growth of Global population, influence urbanisation, which in turn lead to, obdurate shifts in consumption pattern such as increased food consumption, especially for meat and dairy products.
220.127.116.11 Expanding Product Mix and Offerings
Hilton Food Group plc recently started to expand their product mix by venturing into the product offerings with a smart partnership strategy. This gives significant opportunities for Hilton Food Group plc.
18.104.22.168 Expansion of Retail Operations
Hilton Food Group plc currently sell its range of products through large box of retailers. This market’s potential is yet to be fully realized and provides Hilton Food Group plc great opportunities for the future capitalization of their brand. As main supplies of Food products to rail sector, growing of the sector gives an opportunity to expand more beyond current state of market capitalization.
1.5.4 Hilton Food Group plc – Threats
This represent current and emerging external factors that may challenge the Hilton Food Group plc performance. Basing on this analysis threat of Hilton Food Group plc are
22.214.171.124 Increased Competition
This is by far the biggest threat that Hilton Food Group plc faces because the market become very saturated and at maturity stage, there is increased pressure on Hilton Food Group plc from its competitors, which operates in the same industry and produce the same range of product like Devron, Cranswick and Finsbury. This on one hand or another force firm in the industry to engage in price war and other marketing strategies in order to survive.
126.96.36.199 Foreign Exchange Rate Movements
Exchange rate changes create a risk to Hilton Food Group Plc because hold assets in currencies other than Sterling mainly the Euro, Swedish Krona, Danish Krone and Australian Dollar while presentational currency of Hilton Food Group earning is sterling. This wide geographical spread increases Sterling sensitive to changes in the value of Sterling as compared to the range of overseas currencies where Hilton Food Group Plc operates. During 2015 the average exchange rates for the various overseas currencies in which the Hilton Food Group Operate have all depreciated significantly against Sterling, in comparison to the year 2014, Swedish Krona by 12.4%, Euro by 10.0%, Danish Krone by 10.0%, Polish Zloty by 10.0%, and Australian Dollar by 10.2%.
188.8.131.52 Interest Rate Fluctuations
This stems from the fact that Hilton Food Group Plc borrow on variable interest rates, being at set margins over LIBOR and other interbank rates, which fluctuate over time. On one hand or another it create additional cost to Hilton Food Group Plc hence hinder further investment.
1.6 Hilton Food Group Plc General Performance
For five years, revenues performance of Hilton Food Group Plc shows slightly variation of increase and decrease while remain almost flat with revenue of £1.10bn from the year 2012 to 2015. Performance was robust in the year 2012 where by revenue rose by 5.1% to £1,031.0m when compared to £981m in 2011, this attributed by inauspicious exchange rate movements and the effect of lower raw material prices on selling prices. In the year 2014, revenue drop by 2.3% to £1,099.0m, as compared to £1,124.8m in 2013 due to recovery of higher raw material meat prices and consumer downgrading to less expense meat cuts. For the year 2015 revenue drop by 0.4% to £1,094.8m, when in comparison to 2014 revenue, this attributed by inauspicious exchange rate movements at higher rate than offsetting the volume gains. .
For five years, operating profit of Hilton Group seems to improve. In the year, 2012 operating profit of £26.0m is 2.6%, higher than that of the years 2011 by 2.5%, which is a reflection of higher raw material meat prices effect, which recovered in selling prices. In the year 2014 operating profit, at £26.1m was 2.4%, above the previous year’s level (2013: £25.8m) by 2.3% after bearing increased start-up costs and effect of rate of exchange movement. This is an indication of higher operating profit level and the impact of lower raw material meat prices. Operating profit, at £29.0m was 11.3% above the previous year’s level (2014: £26.1m) and 20.9% higher basis of the same currency. Hilton Food Group Plc operating profit margin for the year 2015 is 2.6% higher than that of 2014 (2.4% ) which is a reflection of the lower operating cost level.
Despite flat revenue and increasing operating profit for five years, net income of Hilton Food Group showing an increasing trend from year to year which attributed by lowering of cost of goods sold as a percentage of sales by 0.55% from the year 2011 to the year 2015. From the year 2011 to 2012 net income increase by 2.2% from 17.2m in the year 2011 to 17.6m in the year 2012. While for the year 2013 to 2014 net income increase by 1.4% from 17,828 in the year 2013 to 18,071 in the year 2014. On the other hand net income increase by 10.77% from 18.07m in the year 2014 to 20.02m in the year 2015.
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