Foodco Holding: Business Strategy

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Introduction

Foodco Holding is one of the companies under the banner of UAE’s Abu Dhabi National Foodstuff Company (Foodco), a public shareholding company established in 1979. Food is involved in importing and distributing household items and foodstuff in the UAE, packing, repacking, importing, exporting, distribution, and sale of food products.

Purpose

The purpose of this report is to develop a comprehensive analysis of the company’s performance (based on ratio analysis) and business strategy based on the five forces analysis.

Business strategy analysis

A business strategy is an initial step in determining the profitability of a proposed venture. The Michel Porter model is a framework that examines some five forces that influence an industry.

Business strategy analysis

Rivalry

Food faces strong competition from rival corporates in the food distribution industry in the UAE. The international and regional firms that are involved in the foodstuff business, including distribution, importation, exportation, packing, repacking, and processing activities, dominate the UAE foodstuff industry. Among other companies, Alma Foodstuff, the Gulf International, Jaleel General Trading, Belselah Foodstuff, and Food Center are the major rivals in the industry. Nevertheless, Foodco is able to fight rivalry through working with subsidiaries and providing them with the appropriate backing in order to achieve the core objectives.

Threats of Substitutes

Substitute products are the products and services in other industries that have the capacity to satisfy the same need (Kevin, 2007). In the UAE, the foodstuff industry does not have substitutes, which means that the company does not have concern for substitutes.

Buyer power

The presence of many suppliers and few buyers means that buyer power is strong (Triantis, 2009). In the case of Foodco, the number of foodstuff suppliers in Dubai is relatively large due to the presence of local, regional, and international competitors.

Supplier power

The power of suppliers in an industry is the impact that suppliers of goods and services or raw materials have in an industry (Porter, Argyres&McGahan, (2006). In the UAE foodstuff industry, the number of suppliers is relatively large.

Barriers to entry

In the UAE, the government regulates the foodstuff industry through laws and food safety regulations. In addition, the government has a strict tax policy that demands heavier taxes from foreign companies than local companies. However, the industry’s profitability is relatively high, which encourages foreign companies to enter the market.

Generic strategies to counter the five forces

Foodco has been using a strategy that involves working with subsidiaries in order to counter the competition and rivalry, expand the market, and increase sales. This means it has differentiated its business in order to counter these forces.

Food Introduction

Mission

The company’s mission is to provide all of its subsidiaries with the appropriate backing in order to achieve their core objectives and ensure that they are resourced and managed appropriately.

Ratio Analysis

Liquidity Ratios and Analysis: As of 31 December.

2013 2012
AED AED
Working capital = current Assets – current liabilities -102,992,315 -103,478,585
Current ratio = current assets ÷ current liabilities 0.55 0.53
Current cash debt coverage ratio = cash provided by operations ÷ average current liabilities 0.17 (0.05)
Days in inventory =365 days ÷ inventory turnover ratio 44.26 81.98
Receivable turnover ratio = net credit sales ÷ average net receivable 1.66 1.64
Average collection period = 365 days ÷ receivable turnover ratio 219 223

Working capital measures the amount of cash the firm has put into operations. Foodco working capital has decreased by AED 486270 from the previous financial period, which represents a 0.47% decrease. The indication is that the firm cannot be able to meet some of its current liabilities.

The current ratio measures the ability of the firm to offset its immediate debts. The current ratio of the Foodco has increased by 0.2 from the previous financial period indicating that the firm has a strong position in terms of its liquidity.

The current cash to debt coverage ratio measures the ability of the firm to generate enough cash to offset its immediate short-term loans. The ratio remains significant in solving the problems of the current ratio that utilizes the annual balances of current assets and current liabilities. The current cash to a debt coverage ratio of Foodco has increased significantly, 0.17 in the 2013 financial period compared with -0.05 in the 2012 financial year. The indication is that the firm can easily generate enough cash to offset its short-term loans.

The receivable turnover ratio measures the average times the receivables are collected during the financial period. The receivable turnover ratios of the firm indicate an improvement of 1.66 times in the current period compared with 1.64 times in the previous period. The improvement, though slight, indicates that the firm can easily convert some of its assets into liquid cash.

The average collection period indicates how the firm is effective in its credit collection and policies. The collection period of the firm during the 2013 period slightly improved from the previous period from 223 days to 219 days.

Solvency Ratios and Analysis

2013 2012
AED AED
Debt to total assets ratio = Total liabilities ÷ Total assets 40.27% 49.49%
Cash debt coverage ratio = Cash provided by operations ÷ Average total liabilities 0.14 (0.04)
Times interest earned ratio = (Net income + Interest expense + Zakat expense) ÷ Interests expense 5.04 1.70
Free cash flow = Cash provided by operations – Capital expenditures – Cash dividends (9,646,590.00) (60,474,104.00)

The debt to asset ratio measures the proportion of both firms’ assets they financed using long-term debts. The ratio also indicates the level of financial leveraging. The ratio of Foodco decreased in the last financial year indicating a decrease in debt financing in the last financial period.

The cash debt coverage ratio measures the ability of the firm to offset its liabilities from cash generated from operating activities without asset liquidation. The ratio increased from the last financial period to the current period indicating decreased liabilities.

Times interest coverage ratio measures the ability of the firm to meet its interest payments. The interest coverage ratio of Foodco increased in the 2013 financial period, which indicates its strong position in paying the interests.

Free cash flow indicates the ability of the firm o pays its dividends as well as the capability to expand its operations. The ratio also indicates the extra cash generated after investments to maintain its productive capacity and pay dividends. The ratio decreased in the current financial year indicating that the firm used a lot of cash in investments.

Profitability Ratios and Analysis

2013 2012
AED AED
Earnings / Share ratio (EPS) = Not income – preferred stock dividend ÷ average common share. 0.35 0.14
Price earnings ratio (PE) = stock price / share ÷ Earnings / share 2.85 7.12
Gross Profit Ratio = Gross Profit ÷ Net Sales 18% 13%
Profit Margin Ratio = Net Income ÷ Net Sales 33% 6%
Return on Asset Ratio (ROA) = Net Income ÷ Average total assets 5% 1%
Asset Turnover Ratio = Net sales ÷ Average total assets 0.16 0.22
Payment ratio = Cash dividend declared on com stock ÷ Net Income 31% 80%
Return on commercial stockholder’s equity ratio (RCE) = Net income / Preferred stock ÷ Average com stock equity 10% 2%

Earnings per share (EPS) measure the net income on each share. EPS of food increased in the 2013 period indicating the firm made a lot of profit. The ratio reduced considerably from 7.12 to 2.85 indicating the investors’ confidence in the firm.

The price-earnings ratio measures the market price of each share of common stocks to the earnings per share.

Gross profit ratio the profit margins generally indicate the profit quantity on sales that the company generates. In fact, profit margins indicate the return on sales at various points in the company balance sheet. Foodco gross profit increased in the 2013 financial year indicating increased sales.

The profit margin ratio measures the percentage of sales the result in net income. The profit margin increased significantly in 2013 indicating strong sales.

Return on assets shows the firm’s net income as a percentage of assets they hold. The companies use return-on-assets to evaluate their profitability by indicating the amount of profit they have generated from their assets. Return on assets of Foodco also improved in the current period.

Asset turnover indicates the efficiency of the firm in turning assets into sales. The ratio decreased in the last period indicating the firm is not efficient enough in turning its assets into sales.

The payment ratio indicates the amount of cash distributed in form of dividends. The payment period of the firm has decreased from the last period to the current period indicating that the firm has not effectively offered dividends.

Return on common stockholders’ equity ratio measures the net income earned from each owner’s equity. The ratio increased to 8% from 2% indicating increased net income from the owners’ equity.

Horizontal Analysis of Consolidated Balance Sheet of FODCO Company

The comparative analysis indicates of the consolidated balance sheet indicate several positive changes in Foodco from 2012 to 2013

Foodco Holding Co – P.J.S.C.
Consolidated statement of financial position
As of 31 December
Horizontal Analysis
Notes 2013 2012 Increase/(Decrease) 2011
ASSETS AED AED Difference Amount Difference % AED
Non-current assets
Property, plant, and equipment 5 8,095,028 7,764,099 330,929.00 4.26%
Intangable assets 6 1,417,543 1,524,981 (107,438.00) -7.05%
Investment property under development 7 43,002,576 56,973,024 (13,970,448.00) -24.52%
Investment property 8 251,217,810 206,473,864 44,743,946.00 21.67%
Investment in an equity account investee 9 8,155,612 8,238,726 (83,114.00) -1.01%
Investments held at fair value through other comprehensive income 10 257,855,439 129,223,452 128,631,987.00 99.54%
Total non-current assets 569,744,008 410,198,146 159,545,862.00 38.89%
Current assets
Inventories 11 9,727,120 21,916,861 (12,189,741.00) -55.62% 8,730,389
Investments held at fair value through profit and loss 10 53,888,240 14,668,408 39,219,832.00 267.38%
Trade and other receivables 12 52,799,900 65,416,012 (12,616,112.00) -19.29% 71,305,870
Amounts due from related parties 25 9,227,107 15,893,576 (6,666,469.00) -41.94%
Cash and bank balances 1,346,937 297,394 1,049,543.00 352.91%
Total current assets 126,989,304 118,192,251 8,797,053.00 7.44%
–
Total assets 696,733,312 528,390,397 168,342,915.00 31.86% 484,677,091
EQUITY
Share capital 13 100,000,000 100,000,000 – 0.00%
Legal reserve 14 49,471,135 49,471,135 – 0.00%
Regulatory reserve 15 47,865,669 47,865,669 – 0.00%
Fair value reserve (38,468,152.00) (183,447,026.00) 144,978,874.00 -79.03%
Translation reserve 28,436 41,167 (12,731.00) -30.93%
Retained earnings 249,721,061 244,650,999 5,070,062.00 2.07%
Equity attributable to owners of the company 408,618,149 258,581,944 150,036,205.00 58.02%
None controlling interest 7,515,991 8,285,485 (769,494.00) -9.29%
Total equity 416,134,140 266,867,429 149,266,711.00 55.93% 269,179,317
Liabilities
Employees’ end of service benefits 17 2,932,990 3,030,291 (97,301.00) -3.21%
Bank borrowings (none current portion) 18 47,684,563 36,821,841 10,862,722.00 29.50%
Total non-current liabilities 50,617,553 39,852,132 10,765,421.00 27.01%
Trade and other payables 19 27,547,113 24,727,110 2,820,003.00 11.40%
bank borrowings 18 195,983,414 192,522,752 3,460,662.00 1.80%
Amount due to related parties 25 6,451,092 4,420,974 2,030,118.00 45.92%
Total current liabilities 229,981,619 221,670,836 8,310,783.00 3.75% 164,591,872
Total liabilities 280,599,172 261,522,968 19,076,204.00 7.29% 215,497,774
Total equity and liabilities 696,733,312 528,390,397 168,342,915.00 31.86%

Horizontal Analysis of Consolidated Income Statement

Similarly, the horizontal analysis indicate of the consolidated balance sheet indicate several positive changes in Foodco from 2012 to 2013

Foodco Holding Co – P.J.S.C.
Consolidated income statement
for the year ended 31 December
Horizontal Analysis 2013 2012 Increase/(Decrease)
Note AED AED Difference Amount Difference %
Revenue 98,408,128.00 112,029,041.00 (13,620,913.00) -12.16%
Cost of sales (80,212,314.00) (97,576,568.00) 17,364,254.00 -17.80%
Gross profit 18,195,814.00 14,452,473.00 3,743,341.00 25.90%
Operating rental Income – net 20 25,205,929.00 24,532,568.00 673,361.00 2.74%
Fair value (loss) on investment properties 8 (1,239,132.00) (15,271,429.00) 14,032,297.00 -91.89%
Share of profit of an equity accounted investee 9 141,886.00 813,058.00 (671,172.00) -82.55%
Net changes in fair value of investments held at FVTPL 10 5,945,316.00 38,757.00 5,906,559.00 15239.98%
Investment income 21 16,684,008.00 8,289,634.00 8,394,374.00 101.26%
Selling, general and administrative expenses 22 (21,603,977.00) (17,681,994.00) (3,921,983.00) 22.18%
Provision expense for winding up Bahrain operations 32 (2,714,918.00) – (2,714,918.00) 100.00%
Finance costs (8,056,842.00) (8,921,752.00) 864,910.00 -9.69%
Profit for the year 32,558,084.00 6,251,315.00 26,306,769.00 420.82%
Profit / (loss) attributable to:
Equity owners of the Company 35,071,649.00 14,036,378.00 21,035,271.00 149.86%
Non-controlling interests (2,513,565.00) (7,785,063.00) 5,271,498.00 -67.71%
32,558,084.00 6,251,315.00 26,306,769.00 420.82%
Earnings per share
basic and diluted 24 0.35 0.14 0.21 150.00%

Cash Flow Statement

Foodco Holding Co – P.J.S.C.
Consolidated statement of cash flows
for the year ended 31 December
2013 2012
AED AED
Cash flows from operating activities
Profit for the year 32,558,084.00 6,251,315.00
Adjustments for:
Depreciation of property, plant and equipment 2,039,255.00 1,839,574.00
Amortisation of intangible assets 107,438.00 114,187.00
Dividend income (7,908,357.00) (6,832,236.00)
Finance cost 8,056,842.00 8,921,752.00
Rental income (25,205,929.00) (24,532,568.00)
Provision for employees’ end of service benefits 541,590.00 403,701.00
Share of profit from equity accounted investee (141,886.00) (813,058.00)
Gain on disposal of property, plant and equipment (193,197.00) (3,595.00)
Gain on disposal of investment property (3,117,685.00) –
Net changes in fair value of investments held at FVTPL (5,945,316.00) (38,757.00)
Gain on sale of investments (1,165,428.00) (1,527,813.00)
Impairment loss on trade receivables 2,854,946.00 592,799.00
Provision loss for winding up Bahrain operations 2,714,918.00 –
Provision for inventory obsolescence 478,854.00 794,000.00
Fair value loss on investment properties 1,239,132.00 15,271,429.00
6,913,261.00 440,730.00
Changes in:
Inventories 11,710,887.00 (13,980,472.00)
Trade and other receivables 9,761,166.00 3,643,431.00
Amounts due from related parties 6,666,469.00 (6,498,396.00)
Trade and other payables 2,820,003.00 5,398,373.00
Amounts due to related parties 52,547.00 1,444,673.00
Cash used in operating activities 37,924,333.00 (9,551,661.00)
Employees’ end of service benefits paid (638,891.00) (394,410.00)
Net cash from / (used in) operating activities 37,285,442.00 (9,946,071.00)
Cash flows from investing activities
Acquisition of property, plant and equipment (2,919,403.00) (1,441,509.00)
Payments for investment properties under development (39,012,629.00) (42,086,524.00)
Proceeds from disposal of property, plant and equipment 742,416.00 17,102.00
Acquisition of investments (125,008,310.00) (15,595,726.00)
Proceeds from sale of investments 85,251,246.00 11,983,091.00
Dividends received 7,908,357.00 6,741,898.00
Dividend received from an equity accounted investee 225,000.00 300,000.00
Changes in investment properties – (160,000.00)
Proceeds from sale of investment property 10,117,684.00 –
Rent received 25,205,929.00 24,532,568.00
Net cash used in investing activities (37,489,710.00) (15,709,100.00)
Cash flows from financing activities
Net increase in bank borrowings 14,323,384.00 40,910,460.00
Finance costs paid (8,056,842.00) (8,921,752.00)
Dividends paid (5,000,000.00) (7,000,000.00)
Net cash from financing activities 1,266,542.00 24,988,708.00
Net increase / (decrease) in cash and cash equivalents 1,062,274.00 (666,463.00)
Cash and cash equivalents at 1 January 297,394.00 965,425.00
Net movement in translation reserve (12,731.00) (1,568.00)
Cash and cash equivalents at 31 December 1,346,937.00 297,394.00

Vertical Analysis of FODCO Consolidated Balance Sheets

The base for the asset items is the total assets, and the base for the liability and stockholders equity items is the total of liabilities and stockholder equity.

Financial Statements

Foodco Holding Co – P.J.S.C.
Consolidated statement of financial position
As of 31 December
Vertical Analysis
Notes 2013 2012
ASSETS AED % AED %
Non-current assets
Property, plant, and equipment 5 8,095,028 1.42% 7,764,099 1.89%
Intangible assets 6 1,417,543 0.25% 1,524,981 0.37%
Investment property under development 7 43,002,576 7.55% 56,973,024 13.89%
Investment property 8 251,217,810 44.09% 206,473,864 50.34%
Investment in an equity account investee 9 8,155,612 1.43% 8,238,726 2.01%
Investments held at fair value through other comprehensive income 10 257,855,439 45.26% 129,223,452 31.50%
Total non-current assets 569,744,008 410,198,146
Current assets
Inventories 11 9,727,120 7.66% 21,916,861 18.54%
Investments held at fair value through profit and loss 10 53,888,240 42.44% 14,668,408 12.41%
Trade and other receivables 12 52,799,900 41.58% 65,416,012 55.35%
Amounts due to related parties 25 9,227,107 7.27% 15,893,576 13.45%
Cash and bank balances 1,346,937 1.06% 297,394 0.25%
Total current assets 126,989,304 118,192,251
Total assets 696,733,312 528,390,397
EQUITY
Share capital 13 100,000,000 24.03% 100,000,000 38.67%
Legal reserve 14 49,471,135 11.89% 49,471,135 19.13%
Regulatory reserve 15 47,865,669 11.50% 47,865,669 18.51%
Fair value reserve (38,468,152.00) -9.24% (183,447,026.00) -70.94%
Translation reserve 28,436 0.01% 41,167 0.02%
Retained earnings 249,721,061 60.01% 244,650,999 94.61%
Equity attributable to owners of the company 408,618,149 98.19% 258,581,944 96.90%
None controlling interest 7,515,991 1.81% 8,285,485 3.10%
Total equity 416,134,140 59.73% 266,867,429 50.51%
Liabilities
Employees’ end of service benefits 17 2,932,990 5.79% 3,030,291 7.60%
Bank borrowings (none current portion) 18 47,684,563 94.21% 36,821,841 92.40%
Total non-current liabilities 50,617,553 18.04% 39,852,132 15.24%
Trade and other payables 19 27,547,113 11.98% 24,727,110 11.15%
bank borrowings 18 195,983,414 85.22% 192,522,752 86.85%
Amount due to related parties 25 6,451,092 2.81% 4,420,974 1.99%
Total current liabilities 229,981,619 81.96% 221,670,836 84.76%
Total liabilities 280,599,172 40.27% 261,522,968 49.49%
Total equity and liabilities 696,733,312 528,390,397

Vertical Analysis of Consolidated Income Statement

The base for the calculation is the net sales

Foodco Holding Co – P.J.S.C.
Consolidated income statement
for the year ended 31 December
Vertical Analysis 2013 2012
Note AED % AED %
Revenue 98,408,128.00 100.00% 112,029,041.00 100.00%
Cost of sales (80,212,314.00) -81.51% (97,576,568.00) -87.10%
Gross profit 18,195,814.00 18.49% 14,452,473.00 12.90%
Operating rental Income – net 20 25,205,929.00 25.61% 24,532,568.00 21.90%
Fair value (loss) on investment properties 8 (1,239,132.00) -1.26% (15,271,429.00) -13.63%
Share of profit of equity-accounted investee 9 141,886.00 0.14% 813,058.00 0.73%
Net changes in fair value of investments held at FVTPL 10 5,945,316.00 6.04% 38,757.00 0.03%
Investment income 21 16,684,008.00 16.95% 8,289,634.00 7.40%
Selling, general and administrative expenses 22 (21,603,977.00) -21.95% (17,681,994.00) -15.78%
Provision expense for winding up Bahrain operations 32 (2,714,918.00) -2.76% – 0.00%
Finance costs (8,056,842.00) -8.19% (8,921,752.00) -7.96%
Profit for the year 32,558,084.00 33.08% 6,251,315.00 5.58%
Profit / (loss) attributable to:
Equity owners of the Company 35,071,649.00 35.64% 14,036,378.00 12.53%
Non-controlling interests (2,513,565.00) -2.55% (7,785,063.00) -6.95%
32,558,084.00 33.08% 6,251,315.00 5.58%
Earnings per share
basic and diluted 24 0.35 0.14

Comparative analysis between Foodco and Al Marai Company (Saudi Arabia)

In terms of profitability, Al Marai indicates strong profitability ratios. This is indicated in the earnings per share of the two firms. In the 2013 financial period, Al Marai recorded 3.6 against 2.8 of Foodco. Similarly, the return on stockholders’ equity of Al Marai is 12% in the 2013 financial period compared with 10% of Foodco. The other profitability ratios indicate similar trends. However, Foodco is stronger in terms of liquidity and solvency ratios. In fact, all the liquidity and solvency ratios of the firm are higher compared to the Al Marai.

Conclusion

While Foodco is a well-developed firm in the industry with well-developed resources and market share, Al Marai is a relatively new firm in the industry. Depending on the firm’s history, Al Marai is comparatively doing well in terms of profits. However, Al Marai needs to improve in terms of its liquidity and solvency. On the other hand, Foodco is a well-established firm in terms of liquidity and solvency. Even though the firm’s profits could be seen to below, the firm’s cost of sales could have been higher. In fact, the firm needs to check its operating costs.

References

Kevin, P. (2007). Coyne and SomuSubramaniam, “Bringing Discipline To Strategy”, The Mckinsey Quarterly, 12(4), 14-25.

Porter, M., Argyres, N., &Mcgahan, A. M. (2006). An Interview With Michael Porter. The Academy Of Management Executive 16(2), 44-46.

Triantis, J. E. (2009). Navigating Strategic Decisions: The Power Of Sound Analysis And Forecasting. New York: CRC Press.

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