Analysis of Economies of Scale

Analysis of Economies of Scale GONZALO PARENTE QUESTION 1: ECONOMIES OF SCALE: Shipping is an immense industry requiring huge financial investments and continuous development. Therefore, it has become an ideal game field to find and implement economies of scale. Any minor achievement on this will mean an impressive extra benefit in terms of cost reduction and efficiency gains. However, when economies of scale are managed under wrong market perspectives it can generate catastrophic results affecting for example ports flexibility and their commercial feasibility (e.g. congestion at terminal, hinterland) (P. Rodrigue, 2014). It is important to highlight that different shipping segments require different strategies due to variations on operations and infrastructure. Therefore, it can be found different shipping niches where economies of scale can be applied: Bigger capacity leads to lower costs per unit: Benefits, in terms of costs per unit, increase with ships capacity. If a comparison, in terms of operating costs, is made between a TTT class and a New Panamax vessel, it can be seen that megaships would be 30% cheaper than medium size vessels ($100/TEU) (P. Rodrigue, 2014). Bigger ships carry less fuel consumption: It is known that fuel consumption counts around 45%-50% of operating costs. Modern ships have led to a reduction on fuel consumption turning the shipping industry into a more profitable business. Under normal conditions, megaships consume 164 tons of fuel per day, being 35% lower than a medium size vessel (P. Rodrigue, 2015). Low speed (Slow steaming) also reduces fuel consumption: During the crisis of 2008-9 a new sailing approach came up, Slow steaming, reducing the speed to 18-20 Knots aiming to lower the fuel consumption. It enabled the market to absorb the over-fleet capacity during periods of slack demand, without impact in port congestion thanks to keep the fleet port call frequency. While a Post Panamax consumes 230 tons per day sailing at 24 Knots/hour, at 21 Knots/hour it would burn 150 tons per day (33% less) (P. Rodrigue, 2015). New shipbuilding techniques mean vessels being built rapidly: It has let ship-owners increase their fleets in a much reduced time at very low prices, taking advantage of the market conditions at all times. It is economy of scale applied to ship design. For example the new ships price fall between 2008 and 2009 was due to the appearance of revolutionary techniques offering new ships at very low prices (Stopford, 2009). Vessel ´s specialization leads to market flexibility: Not only economies of scale but also economies of scope are encompassed by ship specialization. Case: In order to fight against the inefficiency generated by bulk carriers sailing in ballast, a new specialized vessel came up called Multi-purpose. In terms of economies of scale, a multi-purposes vessel was an innovated idea due to the wide range of goods that it can accommodate at the same time, adapting it to the market conditions at all the moments without concerning about the port features, season, trends etc (Stopford, 2009). New technology and handling equipment speed up port operations: Operating mega vessels under high levels of productivity/efficiency requires sophisticated handling equipment. TTT vessels can be operated by 7 cranes at once (251 TEU/hour); while NewPanamax vessels need 6 cranes to handle 140 TEU/hour (Stopford, 2009). As a conclusion, the application of economies of scale to the shipping industry has led to a positive impact on the global economy. QUESTION 2: COST ELEMENTS OF SHIPPING: When talking about shipping costs, two main types of costs must be always taken into account: voyage related costs and no-voyage related costs. However, a better way to understand how different costs work in the shipping industry is by classifying them into capital, operating and voyage costs (ICS 2012, 2103; Plymouth university -Mr Adkins, 2014). The capital costs are fixed costs directly related to the vessel ´s purchase. These costs are part of the owner ´s responsibility. Some of these costs are Pre-delivery costs: the cost of transporting the vessel from the shipyard (e.g. japan) to the delivery point (e.g. Rotterdam). Loan repayment: it involves all the money that the shipowner must pay back to the bank. Leasing charges refer to the cost that shipowners must pay to the lessor e.g. TC for capesize, 5 years = $10500 per day. Depreciation: it refers to the decline in value of the vessel or any other infrastructure. Depreciation depends on the cost of the asset, the expected salvage value of the asset, the estimated life of the asset. Vessels life aprox. 25 years. Operating costs can be divided into four groups: crew costs, repair and maintainace, insurance and administration. Crew costs include the seafarer`s wages (Not the same for Philippines, American or Greeks), the travel costs (Not the same from UK to Rotterdam than UK to Italy), crew training (Depends on flag state/ship registries), medical inspections, recruitment process, insurances for crew accidents. Repair and maintenance costs include the maintenance of engines and other equipment, replacement of vessel ´s parts. For old vessels, it counts even 14% of operating costs. Insurance costs: The two compulsory insurances that every vessel must have are the 2/3 hull and machinery and the 1/3 third party liability. Administration costs consists of communication costs agents in port, or shore based administration and management charges. The voyage costs are one of the most important costs that shipowners must take into account when planning voyages. It is usually known as voyage estimation. Fuel charges: include the fuel price, the engine power and efficiency, the design and state of hull and the ship ´s speed. Port charges include the port dues which is the general use of port facilities (depends on volume of cargo, weight of cargo, gross tonnage and net tonnage). Service charges which include the pilotage, towage and cargo handling. Canal charges refer to the price vessels have to pay to ship across these short cuts. Please see below a good example of voyage estimation: (Private data from Shipbroking firm) Vessel: 8.000 TEU Route: Shanghai-Rotterdam (12.000 miles and 100% load factor). Bunker price = $650 Ship cost = $100m Containers = $20m Operating costs = $8.500 Value of cargo = $60.000 per TEU Annual interest rate = 3% Emission cost = $30 per tonne of fuel consumed Freight rate = $800 per TEU A ship is considered profitable when after taking into account capital, operating and voyage costs, still generate profits for the shipowner. This profit directly depends in the market level and freight rates. It is not the same to fix a vessel for WS50 than for WS80.Sometimes, it happens that freight rates vary for the same vessel size. One of the main factors is the geography. Depending on the demand for vessels in those specific markets, some shipowners will be willing to accept higher or lower freight rates. . For example: A vessel operating in Cross-MED for WS50 and a vessel operating UKC-ARA for WS80. In order to make your vessel more profitable, some strategies can be applied to seek economies of scale. Nowadays, one of the most popular seems to be slow steaming. QUESTION 3. WORLD MERCHANT FLEET, STRUCTURE AND COMPOSITION: As seen, shipping is a global industry formed by a sum of different sub-markets. This question is focused on the bulk market and the main differences between three of the biggest segments: tanker, dry bulk and containers. When looking at different shipping segments, it is important to analyze not only the routes of each segment but also the type and vessel size used in each of the markets. For liquid bulk cargoes, the type of vessel used is known as tanker vessels. Tankers are divided in two main groups: crude oil tankers and product tankers (ICS, 2015). Crude oil tankers range from 80.000-120.000 dwt (Aframax), 120.000-200.000 (Suezmax), to 200.000-500.000 dwt (VLCCs-ULCCs). The main routes are AG-USG, AG-China, AG-Japan and AG-ARA-UKC (ICS, 2014). Product tankers range from 10.00-42.000 dwt (Handy), 42.000-60.000 dwt (MR), 60.000-120.000 dwt (LR1-LR2). The main routes are USA-UKC for Diesel, NE to USG-N. America for gasoline and AG-China/Japan/ARA for Naphtha. For the product industry it is important to take into account the refineries location (ICS, 2015). The main features of crude oil and chemical products are that must be stored into tanks, handled by pumping and in some cases can be corrosive and toxic. For dry bulk cargoes, the type of vessel used is known as dry bulk ships. Some of the main features of this cargoes are that are shipped in large quantities and handled with automated equipment like belts and conveyors. The size of the vessel usually varies with the commodity transported. These are the most important commodities in the dry bulk industry (ICS, 2013; E. Branch, 2012). Iron ore: Main routes: Brazil to China-W. Europe (Panamax)- Australia to Japan/China (Panamax). Raw material of steelmaking. Major importers, it changes with countries development. China, Japan and USA are considered the three bigger consumers. Major exporters, Australian, Brazil, India or South Africa. Key players: Vale, BHP Billiton, Rio Tinto, ArcelorMittal, Metalloinvest, Anglo American. Ports/Terminals: Itaqui, Tubarao, Sepetiba, Ponta do Uba, Dampier, Port Walcott. Coal: Main routes: Australia to Japan/W.EU S.Africa to EU (Handymax), Columbia to W.EU (Panamax). Raw material of steelmaking as well as fuel for generating power. There are two main types: Cocking coal and steam coal. Coking coal: Australia is the worlds largest exporter. Steam coal: Australia Indonesia larger exporters. Major coal importers are Europe and Japan (43% of the world ´s coal imports). Grain: Main routes: US to S.America/Japan/Asian countries (Panamax), Argentina to Brazil (Handysize). Wheat, maize, rice, barley, soya etc. They all seasonal and irregular in volume and route. Major importer: Japan, China, Russia, EU, N. Africa, Brazil, Middle East countries. Main exporters: Canada, N.S. America, Australia. The last group are the containerships. Containerships have been positively affected by technologic improvements such as containerization or automization. Vessels range from: -1000 TEU (Small feeder), 1.000-2.000 TEU (Feeder), 2.000-3.000 (Feedermax), 3.000-5.000 Panamax, 5.000-10.000 TEU (Post Panamax), 10.000-15.000 TEU (New Panamax), +14.000 (ULCV) (ICS, 2015). The main routes for containerships are from F.EAST to EU and US (Panamax, Post Panamax), USA to China (Panamax and Post Panamax) and from USA to EU (Post Panamax and smaller) (ICS, 2015). It is interesting to highlight that companies are struggling on the return voyage from West to East. It makes operators to find different ways to optimize the empty containers in order to avoid the loss of marginal profit. QUESTION 4. SUPPLY AND DEMAND AND ITS IMPACT ON FREIGHT RATES: (Based on my dissertation) The shipping industry is a global-scale industry ruled by a combination of factors in charge of determining market trends, market levels and cycles. The supply and demand for vessels will establish the shipping market balance. The mechanism used to link the supply and demand in this industry is known as freight rates. Freight rates reflects the balance of ships and cargoes available in the market at a certain time (Stopford, 2009). Too many ships usually mean low freight rates, and too few ships usually mean high freight rates. Once freight rates are established, charterers and shipowners adjust to them, bringing the supply and demand into balance (Stopford, 2009). The Baltic Exchange is the organization in charge of providing, in co-operation with top shipping companies, daily reports for different markets and vessels sizes (BDTI TD1, TD6à ¢Ã¢â€š ¬Ã‚ ¦). In terms of the shipping market model, 5 supply and 5 demand factors strongly influence the freight rates. On the demand side, one of the most important variables is the world economy and, especially, the global business cycles and local development trends (emerging economies-Nigeria). World economy plays an important role when determining the price of commodities and also when setting the freight rates that buyers and sellers are able to pay to transport them. Another two key factors to achieve economies of scale are the average haul distance and the amount of cargo shipped per voyage. Random economic shocks (2008 crisis) have also a great weight in shipping demand. As these shocks affect demand and people economic power, freight prices are reduced as the demand for these commodities is considerably reduced. And, last but not least, transport costs encompassing capital, voyage and operational costs (ICS, 2015; Stopford, 2009; Lectures given by Jonathan Challecombe: International Shipping and Maritime Management and Markets). On the supply side, the new buildings and scrapping activities are essential to adjust the market balance. New buildings increase the fleet supply, lowering freight rates. Scrapping reduces the fleet supply, increasing freight rates. Fleet productivity is another factor which is focused in vessel ´s efficiency. In a fast pace market, speed and waiting times are crucial for business profitability. The last variable is the freight revenue. For example in markets with strong trends, shipowners may extend their vessel ´s life or purchase second-hand vessels to take advantage of the market; while in markets ruled by weak trends, old ships are scrapped 10 or 15 years before their commercial life ends (ICS, 2015; Stopford, 2009; Lectures given by Jonathan Challecombe: International Shipping and Maritime Management and Markets). For example it is good to understand what is going with the current dry bulk and container markets. The very low freight rates experienced during the last few months are caused by the extreme difference in terms of fleet growth (+) and the fleet demand (-). This situation has led to overcapacity. As a conclusion and in order to become again a balanced industry, shipping companies should follow a new tool developed by BIMCO known as Zero supply growth. It mainly require shipowners to neutralize the delivery of new vessels every year by scrapping an equal amount of capacity from the existing fleet (BIMCO, 2016). Mergers and acquisitions are also great strategies although will lead to a more monopolized market. QUESTION 6. RELATIONSHIP BETWEEN GLOBAL ECONOMIC DEVELOPMENT AND SEABORNE TRADE: As a derived demand, maritime shipping is shaped by worldwide macroeconomic conditions. Although shipping market is very complex we can say that there are five major factors which rule the demand for shipping: transport costs, seaborne commodity trades, average haul, random shocks and world economy, which is the most important one (Stopford, 2009). World economy impacts on the demand for shipping mainly through the business cycle and the trade development cycle. Business cycle lays the foundation for shipping cycle, so that fluctuations in the rate of world economic growth cause a cyclical pattern of demand for shipping. There is a close relationship between the growth rate of shipping and the world GDP, what becomes clear if you see how both parameters have closely changed over the recent history. It is not surprising given that world economy generates the most of demand for shipping by importing raw materials for manufacturing or exporting manufactured products. Another side of the relationship between macroeconomics and shipping is the seaborne commodity trades, which can be divided into short-term and long term. Seasonality of some trades is an important cause of short-term volatility. For instance, many agricultural commodities are linked to seasonal reasons, caused by harvest. But in the oil business there also is a cycle that reflects the seasonal fluctuation in energy consumption in western countries. Seasonality has a great impact on spot market (Dry and wet bulk) (ICS, 2015). The flows of raw materials (mainly ores and crude oil) follow a shipping pattern from developing countries towards developed countries. Transports terminals in developing countries are specialized in loading raw materials while developed countries unload are focused on unloading. On the other hand, the flows of manufactured goods mainly concerned developed countries, but it is changing due to the effects of globalized manufacturing processes. We have a new geography of global trade, which can be depicted quite accurately by maritime shipping routes. Developing countries are no longer just the suppliers of high volume-low value raw materials, but instead now also import large volumes of oil, iron ore, and participate in global value chains and the globalized production of manufactured goods (Stopford, 2009). As a result, developing countries are emerging as major world exporters and importers. They have also become main players in globalized manufacturing processes. As an instance we can mention that the growing energy needs of developing countries and the expansion of South-South trade are contributing to recharging tanker shipping and trade maps, supported by the US strategy to get its energy independence. QUESTION 7. ESTIMATING AND FORECASTING It is said that information is the most important variable that make shipping companies win or lose. Currently, technology has enhanced companies to get information from the market, global economy and many other factors in order to make an accurate market estimation and take advantage of it (Stopford, 2009). However, it is said that not all information is reliable, creating uncertainty among shipping players. It is why not only shipowners but also charterers, traders, operators and even brokers must have a clear network to get daily outlooks of what is going on in the market at every stage. Some of the most common information sources are: Shipping institutions: BIMCO, IMO, ICS, BALTIC EXCHANGEà ¢Ã¢â€š ¬Ã‚ ¦ Broking companies: PLATEAU DAILY REPORTSà ¢Ã¢â€š ¬Ã‚ ¦ Newspapers, magazinesà ¢Ã¢â€š ¬Ã‚ ¦ QUESTION 9. RISK MANAGEMENT: A popular strategy used in the shipping industry to reduce the effects of volatile markets is known as bunker hedging. It consists in a fuel price analysis and it is used with the purpose of reducing the company ´s exposure to volatile bunker costs and eliminating the risk of companies ´ bunker budgets getting out of control (Mercatus, 2016). Swap is one of the most popular uses when bunker hedging (Mercatus, 2016). It allows the buyer to hedge his bunker exposure by fixing the price he pays for fuel at a predefined level, over a predefined period of time. Two different scenarios can be found: Scenario 1: It is when fuel prices move from below the swap execution price. As a financial compensation, the shipping company has to pay back the difference between the market price and the swap price to his trading counterparty in order to offset low prices in the market (C, Cheetham, 2013). Scenario 2: It is when fuel prices move above the swap execution price. As a financial compensation, the shipping line has to receive the difference between the market price and the swap price from his trading counterparty in order to offset high prices in the market (C, Cheetham, 2013). A great forecasting job must be done before entering into a bunker hedging agreement. Shipping companies need to be sure in terms of future bunker prices trends. Related factors such as new oil fields, global trade and international regulations must be always taken into account. When properly managed, bunker hedging can lead companies to generate bigger profits as the exposure to fuel prices fluctuations is removed. A freight derivate contract is defined as a financial contract between two different parties, where future prices for transporting goods by sea are agreed. Freight derivate contracts are usually divided into two main groups: Forward Freight Agreement (FFA) and Freight Swap Agreement (FSA) (Baltic Exchange, 2016). These derivate contracts are used by charterers and shipowners in order to hedge against fluctuations in freight rates. The main difference between the FFAs and FSAs is the assumption of risk. With FSA risk for both parties, with FFA risk assumed by the counterparty. FFAs cover the route, settlement date, contract size and contract rate. Lastly, the main difference between hedging and speculation is that speculation involves an activity to make profit and hedging only attempts to reduce economic business risk. QUESTION 10. OTHER SEGMENTS AND SPECIALIZED CARGOES: LNG stands for Liquefied Natural Gas and it is considered the third major energy source carried by sea, after oil and coal. It is one of the most environmentally friendly energy source which is mainly used for power generation and for the domestic use. LNG is considered a hazardous cargo which requires coated tanks and isolated facilities at port in order to safely handle its extremely low temperature (ICS, 2015; Stopford, 2009; Energy Annual Reports, 2016). LNG is usually transported by Very Large Gas Carriers for very long voyages. LNG can be also transported via pipelines, although for that liquefaction is needed. The transport of LNG includes four different activities: Transportation of LNG from gas fields to plants, via pipeline. Methane gas is separated from other substances and stored for sea transportation. LNG loaded into ships. Receive and store LNG at delivery terminals. The LNG costs are divided in the following proportions: 15% production, 40% liquefaction, 25% sea transport, 20% regasification. It is important to highlight that LNG trade is conducted with long-term contracts (Bareboat or Time Charters) with fixed prices. Main exporters: Iran, Qatar and Russia in less scale: Africa, Asia, North and South America and the EU. Main importers: USA, EU, Japan, S. Korea and China. QUESTION 11. PORT DEVELOPMENT: In order to better understand how ports and terminals develop, it is fundamental to focus in a specific port. In my case, the Port of Rotterdam has been chosen as it was one of my research topics at university. As shipowning companies, ports and terminals are in continuous development process where technology and efficiency improvement are always sought. Time reduction when loading and unloading, port accessibility, hinterland connections and the ability of create economies of scale in terms of cargo handling and cargo storage are some of the main reasons why ports have evolve from individual specialized terminals to huge multipurpose shipping hubs where not only shipping but also logistics activities are carried out(Notteboom and Rodrigue, 2004). It has led to improve the supply chain and the instalment of strategies such as JIT (Just in time). Spatial relationships between terminals are key points in port competition. In order to explore how terminals should interact with each other, two main concepts are highlighted: centrality intermediacy (Notteboom and Rodrigue, 2005). Centrality places terminals as a point of origin and destination traffic. It involves intermodal activities and gene rates economic activities in its vicinity. Intermediacy sees terminals as an intermediate point in the flow of freight. It could also be a good point to exploit transshipment (Notteboom and Rodrigue, 2005). The main reasons why some ports stop developing when they reach a certain stage are: lack of green fields to build new terminals (Eg, Southampton Port or the ICTT Terminal, Vallarpadam-India) and the strong competition from terminal global terminal operators such as Dubai Ports World and APM (Venugopal, 2014). For example, the Port of Rotterdam has been working for a long time in two main expansion projects. Firstly, Maasvlakte I which was completed few years ago, and Maasvlakte II which is still on-process. In terms of space, the Port of Rotterdam will gain a total of 20%-22% extra space to allocate the forecasted rising number of containers and enhance a more viable multimodal system. Economies of scale are achieved by the great number of containers that it is able to handle. Thanks to its dimensions, total costs are divided over more than 11.5 million TEU they handle every year. The provision of customer focused services as well as 24/7 cargo handling and storing activities enhance the port to provide a reduction on vessel ´s turnaround times what leads to better productivity. Last but not least, the proximity of the dry bulk and tanker terminals to key production and storing points give the port an important comparative advantage. It minimizes costs and increases safety and effi ciency in terms of time. The great connections with the hinterland and foreland makes this port a global shipping choke point (Notteboom and Rodrigue, 2004). In order to remain globally competitive, attract foreign trade and increase the total volume of exports and imports, countries have to encourage private operators to invest in national ports infrastructure including port configuration, handling equipment and port connectivity. QUESTION 12: THE CONTAINER SHIPPING MARKET: Over the years, container shipping lines have placed increasing amounts of hope in the notion that the trading growth being experienced in emerging markets would improve the demand of containerships. However, as a large number of Super-Post Panamax containerships (ULCV) of size between 13,000 19,000 TEUs being introduced to the market, increasing the current total capacity of world containership in service to 18.2 million TEUs; the overcapacity issue looks set to continue in 2015, although less severe than year 2009. Currently, the largest containership recorded in the industry are the sister vessel MSC Oscar and MSC Oliver with the size of 19,224 TEU (Lloyds List, 2016). The market is expecting to see more of such vessels magnitude being built and deliver in the near future. In terms of global trends ruling the container`s supply and demand, some facts can be highlighted: 1. Container ´s overcapacity: Timing is one of the main factors when referring to the shipping supply and demand. As great expectations were placed into the current market, many shipowners purchased bigger and more sophisticated vessels, which nowadays can ´t be employed. 2. Emerging economies power demand for shipments: Containerships owners can still find a glimpse of light for this market in emerging economies. For example, Nigeria will see its population grow by 275 million by 2050. It gives an idea of the shipping potential of this emerging economies/countries. 3.Cargo adaptation to the container shipping method: containerization. Cargo can be directly shipped from the mill to the consignee, or even to the customer, making the shipping industry more efficient and safer. 4.Sustainability and environmentally friend: New trends have come up concerning about environment issues. It has radically affected the cost for carriers and consequently the vessel ´s supply and demand (CSR). 5.Customer focus and new technology: Development in technology mainly seeks compliance with new regulations and cost-efficiencies. The current lack of transparency along the supply chain can affect either supply as demand due to wrong market forecast or unforeseen constraints. The East-West trade is mainly driven by the import demand of products from China and India to Europe. However, companies are struggling on the return voyage from West to East. It makes operators to find different ways to optimize the empty containers in order to avoid the loss of marginal profit. In order to remain competitive, operators will have to follow some tendencies which will shape the container industry (ICS, 2015) Cost reduction and vessel optimization can be achieved through forming shipping alliances between containership operators. The alliance agreements generally cover areas such as the type and size of vessel to be employed on each route; itineraries; port rotations, chartering of ships; feeder services and the coordination of inland services. 2M, O3, G6 alliance and the CKYHE. Slow steaming can be also applied (Lloyds List, 2016) Another way is the slot chartering: By leasing out part of the vessel ´s slot during the return voyage from Europe to Far-East, operators can obtain optimum efficiency of fleet operation and to maximize slot utilization (Lloyds List, 2016). And last but not least, cost-savings measure adopted by operators is through the use of longer routes in the East-West trade. For instance, instead of using the Suez Canal, ship operators may choose to travel by a longer sea route through the Cape of Good Hope enabling operators to accommodate additional ships with a similar frequency of port calls and reducing the overcapacity issue. Reference List: Alan Jugovic (2015 ) Scientific Journal of Maritime Research 29, 23-29 BIMCO (2016) BIMCO market analysis: 31 May 2016. Available: file:///C:/Users/gonzalo/Downloads/BIMCO_Road_to_Recovery_for_the_dry_bulk_market_FINAL%20(1).pdf Baltic Exchange (2016) FFAs. Available: https://www.balticexchange.com/ffa/ C. Cheetham (2013) Introduction to Bunker Hedging Tools: Swaps. Available: http://shipandbunker.com/news/features/risk-management/120043-introduction-to-bunker-hedging-tools-swaps E.Branch (2012) Elements of Shipping: Routledge: 7th edition ICS (2012) Dry Cargo Chartering. 2012 edn. Livingston : Witherby Shipping Business. ICS (2013) Shipping business. 2013 edn. London : Institute of Chartered Shipbrokers. ICS (2015) Tanker chartering. 2015 edn London. Institute of Chartered Shipbrokers IMO (2016) International shipping: carrier of world trade. Available: http://www.imo.org/en/KnowledgeCentre/ShipsAndShippingFactsAndFigures/TheRoleandImportanceofInternationalShipping/IMO_Brochures/Documents/Internatioinal%20Shipping%20-%20Carrier%20of%20world%20trade.pdf Lectures given by Jonathan Challecombe, Philip Rogers: International Shipping and Maritime Management and Markets (2014,2015,2016). M. Stopford (2009). Maritime Economics. 3rd ed. New York: Routledge. Mercatus Energy Advisors (2016) Bunker Fuel Hedging Price Risk Management Swaps. Available: https://www.mercatusenergy.com/blog/bid/74900/an-introduction-to-bunker-fuel-hedging-updated Notteboom, T.E. and Rodrigue, J. (2005) Port Regionalization: towards a new phase of development. Maritime Policy and Management. Vol: 32(3) 297-313. Notteboom, T. (2004). Container Shipping and Ports: An Overview. In: Review of Network Economics. Vol: 3(2) 86-106. Paul Rodrigue. (2014). Economies and Diseconomies of Scale in Container Shipping. Available: https://people.hofstra.edu/geotrans/eng/ch3en/conc3en/contchipecoscale.html Paul Rodrigue. (2015). Transport Costs and Spatial Inequalities. Availab

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The raising of the children in Wuthering Heights seemed to be mostly done by the nannies. In fact, the story is mainly told from the perspective of Nelly Dean, the housekeeper of Thrushcross Grange and Wuthering Heights. Upper-class parents delegated the entire care of their children to a nurse or a "nanny". The nanny and the children occupied a separate wing or floor of the house. Ideally, the wing or floor had a day nursery, one or more night nurseries for children of different ages, bedrooms for older children and their governess, and a schoolroom or older children's sitting room. The fully staffed nursery had additional nurserymaids, a schoolroom maid, a laundress, and sometimes a cook. The reason children were separated from adults was that they were to be sheltered from adult life and given a structured routine and also to hvae their characters trained. The adults were freed for their own pleasures and responsibilities, and for the London season and foreign travel which were expected parts of aristocratic life. The full-fledged nanny was a professional and she had full charge of the children and their upbringing. Mothers recognized their own deficiencies and deferred to the nanny's training and experience. Children spent mostly all of their time with the nanny. Her bed was in the night nursery where they slept. The parents paid little attention to the everyday happenings as in seen in Wuthering Heights. Catherine and Francis depended on Nelly's care of the children all throughout Wuthering Heights. When the kids were about eight, their lessons began to occupy most of their time. Boys went to boarding school and girls became primarily responsible to the governess. Despite a nanny's absolute authority, children were still called "miss" or "master" when

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Exam case Australian Beverages Limited Pre-seen information Semester 1 2010 Australian Beverages Limited — Pre-seen information A. Introduction to Australian Beverages Limited — March 2010 Australian Beverages Limited (ABL) commenced soft drink manufacturing in 1937. During the 1970s and 1980s, the company expanded its beverage portfolio by entering into other non-alcoholic beverage categories, such as fruit and milk-based drinks. Entry into the snack food market was recently undertaken in response to declining consumption of carbonated soft drinks (CSDs), the company’s traditional area of business strength. This move also enabled ABL to leverage its strong distribution capabilities to supermarkets, convenience stores and hospitality channels by adding adding such complementary food products to non-alcoholic beverages. Nevertheless, CSDs still accounted for 90 per cent of company revenue in 2004. Tom Dwyer, the current managing director, has been with the company since 2005. He joined the company at a time when CSD growth was stagnating and shareholder confidence in the company was waning. This had resulted in the share price declining by 15 per cent in the two years prior to his appointment. In order to restore shareholder confidence, 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 costs of manufacture and time to market. Having finalised the integration of a snack food business acquisition just over 12 months ago, Dwyer is now aware that he needs to identify further growth options given predicted continuing decline in the CSD market. In January 2010 he asked the strategic planning team to undertake another detailed review of opportunities for future growth, specifically identifying products and markets where the company would have the capabilities for successful entry. Bottled water was one industry that was identified, based on its complementary nature to the existing beverage portfolio. This industry had been identified as ‘of interest’ in the ABL’s first strategic review in 2005. 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. If deemed to be a viable strategic option, Dwyer also wants a recommendation whether the ABL should enter the industry by establishing its own operations or by targeting an existing competitor for acquisition in order to gain immediate market share. B. The Australian bottled water manufacturing industry 1 Bottled water is the fastest growing category in the non-alcoholic beverage market in Australia, with sales revenue of $1. 483 billion in 2009. The major segments of the industry include bottled still and sparkling water. Within these two segments, different packaging sizes and types are offered. Water can be purchased in a range of single or multi-serve bottles including 600 millilitre, 1 litre or 5 litre bottles from the supermarket or convenience store. Bottled water is also available in bulk packs (that is: 10 litres or greater) for water coolers for home or office use. Different types of water also exist, from naturally sourced sparkling mineral waters to purified 2 and specialty waters. Manufacturing facilities for purified water are generally located in close proximity to major water utility suppliers to minimise the transport distance from the water source to the purification plant. In contrast, most sparkling mineral water manufacturing plants are necessarily concentrated in close proximity to high quality mineral springs where the product is bottled at source, usually in regional locations. The bulky and relatively low value of the product as well as the high costs of transport mean that the manufacturing and distribution plants need to be located where there are major population centres. The Australian bottled water manufacturing industry is currently in a 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 would increasingly become their drink of choice. 1 2 All figures are for the year ended 31 December unless otherwise stated. Purified water is water that has been produced by distillation, deionization, reverse osmosis or other suitable processes. Page 1 of 21 As a result, sales of bottled water are expected to increase. Of particular significance in the industry has been the large number of new products that have been launched and accepted by consumers since 2005, making bottled water a dynamic and fast growing industry. 1. Evolution of the Australian bottled water manufacturing industry 3 A relatively new industry, the Australian bottled water manufacturing industry evolved out of the soft drink manufacturing industry during the 1990s. Soft drinks are those that do not contain alcohol. Soft drinks are distinguished from hard drinks—beverages such as distilled spirits, beer or wine—by the simple fact that they do not contain alcohol. Given bottled water is a category within the broader non-alcoholic beverage industry, trends impacting this broader industry also impact on bottled water. Total non-alcoholic beverage revenue in Australia was over $10 billion in 2009, including CSDs, bottled water, fruit juices, energy drinks, sports drinks 4, ready to drink teas and milk beverages. Table 1 shows the market share of bottled water within non-alcoholic beverages over the past 10 years and predicted market share to 2014. Table 1: Australian non-alcoholic beverages – market share of volume by category- 1999 to 2014 Category Diet CSDs Full calorie CSDs CSDs Bottled Water Milk Drinks* Fruit Drinks** Sports Drinks Ready to Drink Tea/ Coffee Energy Drinks Total non-alcoholic Beverages 1999 16. 70% 46. 10% 62. 80% 6. 40% 8. 20% 20. 70% 1. 50% 0. 40% 0. 00% 2004 16. 50% 41. 30% 57. 80% 9. 50% 9. 60% 18. 80% 2. 20% 1. 70% 0. 40% 2009 16. 30% 34. 70% 51. 00% 13. 30% 11. 90% 16. 90% 3. 70% 2. 00% 1. 20% 2014 (P) 16. 10% 25. 30% 41. 40% 17. 40% 16. 00% 14. 80% 5. 0% 2. 90% 2. 50% 100. 00% 100. 00% 100. 00% 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 2009. However, Australia consumption of bottled water is significantly lower as compared with the total consumption of the top 10 global bottled water consuming countries. Table 2 shows Australia’s per ca pita consumption compared with that of the highest consumption per capita countries in the world. 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 2005 to 2009. Table 2: Global bottled water consumption: Litres per capita – 2005 and 2009 Country Italy Mexico United Arab Emirates France Spain Germany Switzerland United States Australia Global Average 2005 170. 3 128. 7 120. 7 129. 0 112. 0 110. 8 99. 1 70. 0 35. 3 17. 9 2009 202. 0 185. 4 179. 9 155. 8 140. 3 137. 4 109. 5 89. 6 45. 5 26. 6 Total % Change 18. 6% 44. 1% 49. 0% 20. 8% 25. 2% 24. 0% 10. 5% 28. 0% 28. 9% 48. 6% Projection figures for the industry were provided by industry experts at the recent Bottled Water Institute of Australia’s â€Å"Future Focus† conference. Beverage designed to help athletes rehydrate, as well as replenish electrolytes, sugar and other nutrients, which can be depleted after strenuous training or competition. 4 3 Page 2 of 21 Table 3 contains consumption statistics of bottled water in Australia, showing actual consumption for the past seven years and projected consumption for the next six years. Table 3: Australian bottled water consumption, 2003 to 2015 2003 605 30. 6 2004 677 33. 8 2005 715 35. 3 2006 765 37. 2007 825 39. 9 Consumption million litres Consumption per capita (litres) 2008 906 43. 3 2009 963 45. 5 2010 (P) 1024 48. 0 2011 (P) 1089 50. 5 2012 (P) 1159 53. 3 2013 (P) 1235 56. 3 2014 (P) 1316 59. 4 2015 (P) 1398 62. 4 P = Projection Table 4 shows total industry revenue over the past seven years and projected revenue for the next six years for the Australia bottled water manufacturing industry, compared to that of non-alcoholic beverages in total. Historical growth in bottled water has been derived from increases in total consumption, helped along by strong customer acceptance of new products launched over the past five years. The increase in the total Australian population together with an increase in per capita consumption of bottled water has contributed to this historical growth. (Compared with other developed markets, however, growth in the Australian market has been achieved from a relatively low base). These trends are expected to continue in the future. Bottled water will therefore continue to increase as a percentage of the non-alcoholic beverage market. Table 4: Australian bottled water and non-alcoholic beverage revenue – 2003 to 2015 2003 810 $1. 34 7 199 2004 920 $1. 36 7 675 2005 990 $1. 8 8 191 2006 2007 2008 2009 Bottled water revenue $m Bottled water Ave $ per litre Non-alcoholic beverages revenue $m Bottled water % of non-alcoholic beverages 2010 (P) 1 070 $1. 40 8 723 1 200 $1. 45 9 250 1 335 $1. 47 9 648 1 483 $1. 54 10 449 1 660 $1. 62 11 024 2011 (P) 2012 (P) 2 121 $1. 83 12 235 2013 (P) 2 375 $1. 92 12 871 2014 (P) 2 611 $1. 98 13 515 2015 (P) 2 796 $2. 00 14 177 1 877 $1. 72 11 619 11. 3% 12. 0% 12. 1% 12. 3% 13. 0% 13. 8% 14. 2% 15. 1% 16. 2% 17. 3% 18. 5% 19. 3% 19. 7% P = Projection An exception to the identified growth trends, however, is the delivery of bulk water for home and office use. This product type is now in the mature phase of its life cycle. It has experienced low growth over the past five years as more offices and homes install water filters as a result of improvements in filter technology. To counteract the decline in bulk water sales to offices and homes, bottled water manufacturers have developed new distribution channels for bulk water products. Increasingly bulk packs are sold in petrol station forecourts and supermarkets. To date, manufacturing capacity within the industry has meant that manufacturers have been able to meet growing demand using existing manufacturing infrastructure. Production stockpiling has not occurred which has helped manufacturers protect their profit margins. They have been able to achieve an increased weighted average price per litre as all production is generally sold in the year it is produced, reflecting the strong demand growth. The average price per litre has also been influenced by new product launches during the past five years, particularly the range of premium 5 waters and smaller, more convenient packaging sizes that achieve higher average prices. 2. Bottled water manufacturing The Australia bottled water manufacturing industry has similar manufacturing and distribution processes to the non-alcoholic beverages industry from which it emanates. 2. 1 Water supply There are several sources of water for bottling, such as underground springs, wells and water storages. The source of water plays a key role in the quantity and quality of bottled water that is produced. About 25 per cent of all bottled water comes from water storages that is tap water) that is further treated before 5 Premium waters are generally higher priced waters which have higher levels of purity or are sourced from natural springs. Page 3 of 21 bottling at an average price of $2. 40 per kilolitre. The other 75 per cent of water comes from groundwater at an average price of around $1. 00 per kilolitre. In some Australian states, permits are required to extract groundwater. Bottled water manufacturers often contract out the actual extraction of water to external providers. The price of water in Australia compared with other countries and with other products is very low. It has become the subject of debate due to diminishing water supplies caused by extended drought conditions in Australia. To increase water prices would be politically contentious and many consumers would argue that because water is a basic human need it should be free. It is significant to note, however, that Australians pay a thousand times more per litre for bottled water than they do for tap water of similar quality. 2. 2 Treatment Once water has been sourced, the next step is to filter and purify the water to remove organic compounds such as metal ions. These compounds can contribute adversely to the taste and odour of the water and to bacteria that may cause health problems. Some water, mainly mineral water, is naturally carbonated at the source. However, more commonly, carbonation of both spring and purified water takes place in the factory (where both the treatment process and bottling occur). For other drink types (for example sparkling wines or beer) carbonation is achieved naturally during the fermentation of sugar into alcohol. However, for sparkling water, carbonation cannot be achieved through a fermentation process, as no sugar is added. It is therefore achieved by injecting carbon dioxide, into the water under pressure. The pressure increases the solubility of the water and allows more carbon dioxide to dissolve than would be possible under standard atmospheric pressure. When the bottle is opened the pressure is released, allowing the gas to come out of the solution, thus forming bubbles. 2. 3 Bottling and labelling After the water has been treated, and in some cases carbonated, it is transferred (if carbonated, this transfer occurs under pressure) to a filling machine. Here, bottles or bulk containers are filled and then passed by conveyor belt to a sealing machine. Once sealed, the bottles are packed in cardboard boxes for transport. There are currently 22 bottled water manufacturers in Australia certified by Food Standard Australia. Some manufacturers operate on a contract bottling basis only, providing bottling services to companies that have their own brands or to supermarkets which sell private label products 6. However, a number of these bottlers do have brands of their own which they sell. 2. 4 Packaging Bottled water is provided to consumers in a variety of packages. These may be glass, PET plastic (polyethylene terephthalate) or polycarbonate bottles. Water can be purchased in a range of single or multiserve bottles from various outlets and is available in bulk packs for water coolers for home or office use. The technology required to bottle water is quite basic and widely available. However, to achieve the volume of manufacturing required to be cost competitive, the level of capital investment is large. Key improvements in technology have been focused on quality control and automation to meet the need for greater manufacturing efficiencies and the strict health and regulatory standards of food standards that apply across all Australian states and territories. Environmental concerns are rising in relation to the disposal of empty drink bottles. With the increasing amount of water being consumed, the issue of the resultant bottle waste has become significant. In Australia, of the 118000 tonnes of drink bottle plastic used every year, only 35 per cent is recycled. In South Australia, where consumers can redeem a deposit for drink containers, the bottles made up less than 10 per cent of the state's rubbish, compared with 13. 4 per cent nationally. Drink bottles also take up more space than other waste, comprising 38 per cent of total volume of litter. Recycling experts believe that the recycling of empty water bottles is hampered because most bottled water is consumed as a convenience beverage outside the home where recycling bins are not readily accessible. Following the success of reducing the use of plastic shopping bags it is thought that the introduction of a nationwide empty bottle deposit law would create the incentive to recycle bottles. This would also help to ease the burden on taxpayers who pay for the clean-up of litter. Private label products or services are typically those manufactured or provided by one company for offer under another company's brand. Private label goods and services are usually positioned as lower cost alternatives. Page 4 of 21 3. Industry segmentation The Australian bottled water manufacturing industry has two clearly defined segments: †¢ Still water – this segment accounted for 7 6 per cent of consumption volume in 2009. †¢ Sparkling water – this segment accounted for 24 per cent of consumption volume in 2009. 3. 1 Still water Still water is generally consumed for hydration and thirst satisfaction at home, in the office or while travelling. Convenience is a major factor in the growth of the still water segment. It is used: †¢ as an alternative to other packaged beverages when consumers want to moderate their calories intake and seek an unsweetened, clean tasting and natural product. Water is the best and healthiest form of hydration as it is a fat and calorie-free thirst quencher; †¢ when consumers are not satisfied with the aesthetic qualities (for example, 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; †¢ when 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; and †¢ for nutritional and performance benefits, such as near waters 7 and mineral water supplements claiming to have the nutritional components equivalent to a bowl of salad. As shown in Table 5 below, significant growth in bottled still water in Australia has occurred over the past six years, and this has driven most of the growth in the overall industry. As with the industry overall, the average price per litre has increased due to the introduction of premium bottled still waters. Table 5: Revenue and production- Still Water- 2003 to 2015 Type Revenue $million Production million litres Ave $ per litre 2003 555 516 $1. 08 2004 648 584 $1. 11 2005 708 619 $1. 14 2006 780 668 $1. 17 2007 883 720 $1. 23 2008 999 796 $1. 25 2009 1 127 847 $1. 33 010 (P) 1 279 901 $1. 42 2011 (P) 1 472 958 $1. 54 2012 (P) 1 688 1 020 $1. 65 2013 (P) 1 934 1 095 $1. 77 2014 (P) 2 154 1 173 $1. 84 2015 (P) 2 323 1 252 $1. 85 P = Projection 3. 2 Sparkling water Carbonated water was commonly known by the name of soda water until World War II. In the 1950s, new terms such as sparkling water began to be used due to the negative perceptions associated with use of the word ‘car bon’ being considered a chemical additive in water. Sparkling water is essentially still water into which carbon dioxide gas has been dissolved, resulting in the formation of bubbles. Sparkling water is generally consumed as a refreshment beverage mostly while dining out rather than for hydration or thirst satisfaction alone. In the last few years, supermarkets have started to stock premium sparkling water brands. 7 Near Water – also known as functional waters. These are bottled water beverages which have nutrients added, such as fruit juices, vitamins or minerals to enhance the positive health benefits associated with water. Page 5 of 21 Table 6: Revenue and Production:- Sparkling water- 2003 to 2015 Type Revenue ($million) Production (million litres) Ave $ per litre 2003 255 89 $2. 7 2004 272 93 $2. 92 2005 282 96 $2. 94 2006 290 97 $2. 99 2007 317 105 $3. 02 2008 336 110 $3. 05 2009 356 116 2010 (P) 381 123 $3. 10 2011 (P) 405 131 $3. 10 2012 (P) 433 139 $3. 12 2013 (P) 441 140 $3. 15 2014 (P) 457 143 $3. 20 2015 (P) 473 146 $3. 24 P = Projection $3. 07 While experiencing declining growth, sparkling water is still showing some growth, albeit at much lowe r rates than still water. This reflects the refreshment beverage nature of sparking water which is generally consumed at restaurants and cafes rather than in the home. 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 sparking water is substantially higher than that of still water (see Table 6). 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. The increase in average price over the projection period reflects estimates in foreign exchange movements. Foreign exchange xperts forecast that the current high levels in the value of the Australian dollar are not sustainable and project them to decline in the future. 4. Distribution trends Bottled water is sold by manufacturers to independent wholesalers, including specialist confectionary and soft drink wholesalers as well as grocery wholesalers. Figure 1 below illustrates the current industry distribution channels. Figure 1: Australian bottled water distribution channels – 2009 Manufacturer Wholesaler Supermarket Convenience stores Direct Distribution Hospitality Home & office Delivery Vending machines Other End Consumer In the past few years, retailers have been increasingly buying direct from the manufacturer to reduce the cost of goods by eliminating 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. The increase in direct distribution has been most notable amongst major industry competitors. Major retailers want to purchase from fewer, larger companies. Beverage wholesalers, however, still play an important role in distribution for smaller bottled water manufacturers. These smaller competitors generally have a smaller product range and are unable to meet major retailer demands for inventory management and direct to store delivery. Page 6 of 21 Table 7 shows the share of revenue in 2009 by distribution channel. Table 7: Major distribution channels share of revenue- 2009 Distribution channel Supermarkets and grocery wholesalers 2009 35. 0% 30. 0% 15. 0% 9. 0% 6. 0% 5. % 519 445 222 133 90 74 Revenue ($m) 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. Convenience stores (including petrol stations) Hospitality Home and office delivery Vending machines Other Branding is an important differentiator in the bottled water manufacturing industry. Existing competitors that have established brand names have an advantage over new entrants who have to spend heavily on marketing for brand recognition. 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. Once consumer demand is established in the convenience store channel, the move into the supermarket channel generally supports maintenance of profit margins, considering that supermarket buyer power is reduced when strong product demand has been established. Manufacturers have had to respond to significant changes in consumer buying behaviour. Product distribution, presentation and availability has had to match these changes in order to maximise sales. Increasing quantities of product are now distributed through convenience stores and petrol stations. For example, bulk water packs were once sold via direct sale to offices. However, as more offices have installed their own in-built water filters, this channel has declined and there has been a shift to bulk water sales through petrol stations and supermarkets. 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 whilst 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. 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 that primarily serve premium sparkling waters. Page 7 of 21 5. Demand trends Bottled water is a growing part of the non-alcoholic beverages industry. While the broader non-alcoholic beverages industry is growing, bottled water is growing at a faster rate due to increasing awareness of health issues. Research shows that people want better tasting and healthier alternatives to many of the soft drinks and sports drinks currently available. Market research surveys suggest that over 90 per cent of Australians consume too many sugary and caffeine-based drinks. As bottled water is part of this larger beverages industry, it is important to understand firstly, the trends impacting on non-alcoholic beverage consumption overall, as well as the trends specifically impacting on bottled water consumption. 5. 1 Non-alcoholic beverages Consumption of non-alcoholic beverages in Australia increased from 179. 7 litres per capita in 2005 to 228. 5 litres per capita in 2009. Per capita consumption trends for all non-alcoholic beverages generally follows consumption patterns in the United States. On that basis, there are still significant opportunities for growth in all non-alcoholic beverages, including CSDs. Currently, Australian per capita consumption is 63 per cent of the US consumption level. 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 fresh fruit juices, flavoured milks, energy drinks, sports drinks and ready-to-drink teas. Changing lifestyle trends, health consciousness and a growing ‘cafe culture’ have also contributed to an increased demand for these alternative beverages. For example: †¢ Freshly squeezed fruit juices, with fresh flavour attributes being preferred by the consumer. With the emergence of juice bars and a greater focus by manufacturers in establishing juice brands, consumption of juice products has increased. In the United Kingdom and United States, juice bar sales represent about 5 per cent of total juice sales in those countries. However, in Australia, juice bars are still only an emerging distribution outlet and offer a good opportunity for new product development and growth. Ready-to-drink teas, with their antioxidant properties being promoted, have become a popular ‘health’ drink. The Australian market for this product is currently 2 million litres per annum and predicted to grow to as much as 20 million litres over the next few years, particularly as the Australian population ages. Product development includes a variety of flavoured ready-to-drink teas. †¢ Flavoured milk is a growth beverage. Data shows that A ustralians are each drinking, on average, nearly 0. litres more flavoured milk per annum than a year ago. Perceived health benefits of milk have contributed to this growth, and this is expected to drive continued growth in the future. Milk sales have increased by 6. 7 per cent with low fat brands performing particularly well. Last year, each Australian, on average, drank 9. 5 litres of flavoured milk – more than the per capita figure for any other country. †¢ Both energy 8 and sports drinks 9 are growing products in a society that is increasingly health conscious and aspiring to be more active. Energy drinks have had double digit growth since 2006 and the sports drink market has grown 14 per cent on volume and 20 per cent on revenue compound annual growth over the last three years. 8 Beverages that are designed to give the consumer a burst of energy by using a combination of methylxanthines (including caffeine),vitamins and herbal ingredients. 9 Purified water with additives similar to those of sports drinks with the aim of providing hydration during sport. Page 8 of 21 5. 2 Bottled water Bottled water consumption has increased significantly over the past six years, but is still significantly below consumption levels of other developed countries including Europe and the United States. This indicates further opportunities for growth in Australia, primarily at the expense of CSDs and fruit based drinks, given the rising concern surrounding the link between CSD consumption and obesity, especially in children. One possible reason for the lower per capita consumption of bottled water by Australians is the relatively good quality of tap water available. Tap water contains fluoride ions which have a positive effect on tooth decay. The drinking of bottled water, which is distilled 10 to remove element such as fluoride, is believed to be contributing to an increase in the risk of tooth decay. However, most people continue to cook with tap water and this should provide sufficient fluoride to prevent tooth decay. Alternatively, some people wish to avoid exposure to fluoride, particularly systemic ingestion of fluoride in drinking water, and may choose such bottled water for its absence of fluoride. Nevertheless, surveys show that there is an increasing concern about the quality of tap water in Australia and that this is driving some growth in bottled water consumption. Growth is further supported by concerns about alcohol consumption and associated drink-driving accidents which has encouraged the consumption of non-alcoholic beverages, such as bottled water, when dining out. Females consume about 58 per cent of all bottled water in Australia. Young people, in particular females aged between 18 and 35 years, are the largest consumers of bottled water. In general, bottled water consumers are more health conscious and socially aware. Studies have found that younger generations are far more diligent in drinking their recommended daily intake of water and men are less likely to think about water consumption on a daily basis than women. In addition, for young women, image is an important factor in determining consumption behaviour. Figure 2 shows consumption by age group. Figure 2: Australian bottled water consumption by age group, 2009 30 25. 8 25 20 23 18. 5 14. 8 % 15 10 5 0 9 8. 9 18-24 25-34 35-44 45-54 55-64 65 and older Age group (years) 10 Distillation is the process of eliminating impurities by heating a liquid until it boils, capturing and cooling the resultant hot vapours, and collecting the condensed vapours. Page 9 of 21 Due to the increase in health consciousness, water has 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, as shown in Table 8 below. 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. Table 8: Australian still water revenue share by pack size Pack Size 1999 2004 2009 500 – 750ml 1–2 litre Bulk 47. 3% 22. 8% 29. 9% 52. 3% 27. 5% 20. 2% 57. 3% 32. 6% 10. 1% 2014 (P) 60. 3% 34. 8% 4. 9% P = Projection Increased future consumption of bottled water in the home is likely to result from continued growth in household disposable income in Australia. This disposable income growth will also sustain growth of takeaway foods and restaurant meals, both of which tend to increase consumption of bottled water and fruit juice. However, while currently experiencing positive growth, total household expenditure on consumable goods is expected to slow in the future. This will adversely affect growth in discretionary spending on all beverages. However, a factor which contributes positively to growth in the sales of bottled water is the climate. The gradual warming of Australia’s climate is expected to support further growth in water consumption. Bottled water is well positioned to benefit from the shift in consumer preferences towards healthier and natural drinks. Spring water is particularly popular in Australia because it is perceived to have come from a natural, pristine environment. This is reinforced by marketing that emphasises the pure and natural image of water. As well as purchasing more bottled water, consumers are also prepared to pay more; with 69 per cent of consumers recently surveyed believing quality is more important than price. New product development activities are targeting changing consumer lifestyle needs and the trend towards purchase convenience. There are now numerous bottled water brands available in Australia, from international beverage brands to boutique ‘rain farms'. The huge variety of waters and sources means that the bottled water market has a broad demographic reach. According to a recent consumer survey, at least 99 per cent of all Australians have tried or purchased bottled water in the last 12 months. The Australian bottled water manufacturing industry has pursued sales growth by developing products for niche markets. Smaller producers can supply relatively small segments with specialist or premium products. Given the continuing concern about the use of artificial colourings, flavourings and preservatives, the industry is expected to develop a range of premium products better suited to the demands of the health conscious consumer. For example, pet owners can now buy ‘vitamin-fortified’ water specifically formulated for their canine companion. 6. Costs and gross margins 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. A percentage breakdown of costs in 2009 is as follows: †¢ 55. 2 per cent for purchases of supplies; †¢ 26. 8 per cent for marketing, distribution and selling costs; †¢ 12. 1 per cent for wages; †¢ 4. 1 per cent depreciation and administration costs; and †¢ 1. 8 per cent for utilities and rent. A net margin of 16. 3 per cent was achieved by the industry in 2009. Page 10 of 21 Purchases include water supplies, labels and other packaging materials such as glass and plastic resin bottles and closures which are generally purchased on 5 year contracts. One of the key costs is polyester (PET) resin for bottles; however, there is no forward market 11 for PET resin. 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 the minor decline in gross and net margins experienced by manufacturers in 2009, as shown in Table 9 below. Overall, however, the cost to create bottled water is relatively inexpensive. Therefore, water is a more profitable product than other nonalcoholic beverage categories. Table 9: Five year weighted average industry gross and net margins 2005 2006 2007 Gross margin % Net margin % 31. 3% 16. 6% 31. 9% 16. 9% 31. 1% 16. 5% 2008 2009 30. 7% 16. 3% 31. 5% 16. 7% 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. At a recent presentation, ABL’s managing director, Tom Dwyer, commented: ‘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. ’ 7. Industry key success factors and future predictions Industry experts summarise the following areas as critical to future success in the Australian bottled water manufacturing industry: †¢ Distribution and lacement: 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 not operating in a niche market, manufacturers must become a major competitor in the wider market. I n general, a major competitor needs to have at least 20 per cent share of at least one distribution channel. Effective market orientation, product promotion, and advertising: Market research, product development 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 and provide label and packaging design 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 is critical in influencing consumer choice. Strong brand names contribute to the appeal of bottled water as an accessory as well as building a product's reputation for quality. Having these attributes allows manufacturers to win market share within particular consumer segments and charge premium prices. Economies of scope: Breadth of product range enables efficiencies in distribution, marketing and administration. Such efficiencies are gained when a competitor uses its 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. Economies of scale: 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. Since unit manufacturing costs are an important element of profitability, it follows that economies of scale, based upon critical mass, are also important. Some manufacturers have commenced contract bottling for smaller industry participants in order to secure manufacturing volumes. †¢ †¢ †¢ 11 A forward market enables producers to lock in prices for a defined period of time, thereby providing certainty of costs. Page 11 of 21 At the recent annual Australian Beverage Congress, Alan Vaughan, an independent industry expert of 30 years’ experience, presented an extensive insight into the bottled water market and its future direction. Vaughan concluded his presentation with this comment: ‘The Australian and global beverage industries are in a period of growth and major transformation. In general, there has been a switch away from carbonated drinks to beverages with less sugar and additional functional benefits. To the younger customer, the older brands are looking a little staid, with bottled water and energy drinks viewed as more cool and exciting. This is reflected in marketing and advertising campaigns. People these days are working harder and have greater commitments. Bottled water and energy drinks are replacing other traditional beverages because they provide refreshment as well as a functional benefit, such as re-invigoration, replenishing hydration and energy levels, improving mental alertness and enhancing concentration. These beverages appeal to everyone from partygoers to office workers, through to truck drivers. ’ C. Industry competition 1. Basis of competition The basis 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, both still water and near waters have 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. Beverage marketing and display are beginning to undergo dramatic change. There will always be the major conventional media promotions, but the consumer market is becoming much more time sensitive and there is a high level of competition from substitute products, mainly other non-alcoholic beverages. The major ways for industry participants to differentiate and compete successfully include: †¢ Branding, image and breadth of product range: Recent growth in bottled water is related to the successful positioning of a number of brands as fashion accessories. Both media support behind the brand and the design of the bottle including the label contribute to the appeal of a product. Breadth of product range is also important as concentration of major customers continues. 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. Packaging: 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, for instance some water bottles have a pop-top cap for ease of use when playing sport or training. Distribution coverage: An ability to satisfy the needs of retailers, and obtain favourable terms such as promotional programs and stock positioning is important. Market share dominance of distribution channels is important as it allows manufacturers to diffuse the power of large buyers and maintain strong profitability levels. The ability to secure shelf space in convenience stores is also important, given that success in the convenience store channel is a precursor to getting new products into supermarkets. Taste: Especially at the premium end of the market, taste can be a basis of competition for both still and sparkling waters. Use of market data: Access to and use of market data is also important. The larger the competitor the more likely they are able to afford retail check-out scanning data to understand what its 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. †¢ †¢ †¢ †¢ Page 12 of 21 2. Current industry competitors 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 beverage market. Table 10 summarises the market share of the industry competitors in 2009. It should be noted that Australian Beverages Limited (ABL) is not currently in the Australian bottled water manufacturing industry, despite being a major competitor in the Australian non-alcoholic beverage market. Table 10: Market share by distribution channel and major competitors – 2009 Total market share 26. 9% 26. 3% 18. 3% 12. 0% 16. 5% 100. 0% Other includes export sales and use of purified water for medical procedures (for example: dental etc) ** Other competitors comprise small, locally based water manufacturers. No single entity has greater than 2 per cent market share Competitor Butlers Hydrate Water International Beverages Fountain Springs Other** Total Market Share Australian bottled water manufacturing industry – Market share by distribution channel Supermarkets Convenience Hospitality Home & Vending Other* & grocery stores (15%) office machines (5%) wholesalers (30%) delivery (9%) (6%) (35%) 27. 0% 35. 0% 25. % 15. 0% 30. 0% 38. 0% 22. 0% 20. 0% 15. 0% 35. 0% 20. 0% 17. 0% 35. 0% 15. 0% 10. 0% 10. 0% 5. 0% 15. 0% 70. 0% 5. 0% 16. 0% 15. 0% 55. 0% 20. 0% 30. 0% 100. 0% 100. 0% 100. 0% 100. 0% 100. 0% 100. 0% The industry has grown significantly to date. 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. Moreover, industry consolidation has occurred. Major industry competitors have acquired smaller competitors to increase economies of scale, scope, market share and profitability. In 2009, the four largest competitors accounted for approximately 82 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 major industry competitors are summarised below. 2. 1 Butlers Corporation A wholly owned subsidiary of a large multi-national listed company, Butlers Corporation commenced operations in the United Kingdom in the 1800s as the official chocolatier to the King. Operations were expanded throughout the 20th century to include other types of confectionary, biscuits, snack foods and non-alcoholic beverages. Geographic expansion was also undertaken. Butlers Corporation is now a global giant in its chosen products. Butlers established its operation in Australia during the 1950s. It has held the majority market share in the Australian confectionary, non-alcoholic beverage and snack food industries for the past 20 years. The company entered the Australian bottled water manufacturing industry during the 1980s through the acquisition and consolidation of several state-based water manufacturers. This helped Butlers to become the first bottled water manufacturer to have national distribution. Page 13 of 21 Butlers has strong distribution capabilities given its broad product range. It is the largest supplier to convenience stores and the second largest to the hospitality distribution channels. Growth in its market share of the supermarket channel has also been strong over recent years, in particular through its well known still water brand ‘Olympus’. The company also holds significant market share in the sparkling water segment, having obtained the Australian license for Eau de Vivre, the worlds leading sparkling water brand. One of the areas of focus for Butlers is innovation for all its beverages. This includes a large of number of soft drinks such as flavoured mineral waters, flavoured milks and fruit juices. Its broad product offering that includes complementary snack products, has been leveraged to achieve strong sales in convenience stores and through vending machines. 2. 2 Hydrate Water Pty Limited Hydrate Water is a privately owned company that originated in 1993 in Queensland. The company has access to natural springs in Queensland, New South Wales and Victoria, and a long term agreement with key water utilities in these states to access water when required. It distributes nationally from ISO 9002 quality accredited manufacturing facilities in Queensland, New South Wales, Victoria and Western Australia. The company has products in the sparkling and still water segments. The products include energy drinks, fruit juices and a limited range of high quality carbonated soft drinks. It is also the manufacturer of the leading brand of still water, H2O, that is sold through the supermarket distribution channel. Hydrate is seeking a stronger presence in convenience channels. Its business model focuses on using its funds to support retailers so that the retailers can offer promotions, rather than spending on direct consumer advertising. The company has recently begun investigating the use of scanned retail data to monitor sales trends and adjust production volumes accordingly. This investigation into scanning data is due to having run out of inventory at the end of last financial year when the manufacturing plant was closed for annual cleaning and maintenance. As a result, the company had lost some market share. A number of the company’s water products are targeted to the sporting and energy drink consumer. One of its best known brands, ‘Viva! ’, has a 72 per cent market share in sports water products. Hydrate Water has been able to leverage the high brand recognition of ‘Viva! ’ to successfully introduce flavoured water. Similarly, Hydrate Water sells the leading brand in sparkling mineral water and has again leveraged this brand by introducing a number of flavoured mineral waters, including diet drinks. Both these initiatives have resulted in above average market growth for the company. The company is particularly well known in the industry for its packaging innovation and engineering design capability. Hydrate Water developed ‘Pop Tops’ – small plastic bottles that were very successful with young children as they fit perfectly into lunch boxes and have the advantage of being re-sealable. The ‘Pop Top’ range increased its bottling turnover by 50 per cent. This product won the coveted Australian dietician award for ‘Best New Product’ when launched. It also received the Australian Health Foundation endorsement for its diet drinks. In addition, the company has been commended by dieticians for promoting products that address the increasing concerns of childhood obesity linked to CSDs. Hydrate Water was also the first company to introduce stackable bulk water packs for sale through supermarkets. The management team at Hydrate Water have extensive industry experience, having a collective 80 years in the industry between them. Operations manager, Simon Miles, is well regarded in the industry and is currently the chairman of the Bottled Water Institute of Australia. Current owner, Jack Wells, has indicated he wishes to retire in the next five years, and has been grooming Simon Miles as his successor. An offer for acquisition was received from International Beverages last year, but Wells turned down the offer as he did not want to sell the Australian business he established to an international company. Page 14 of 21 2. 3 International Beverages Limited International Beverages is the wholly owned subsidiary of a large multinational company and sells fruit juices, energy and sports drinks, water and soft drinks. Its initial entry into the Australian market was through fruit drinks. During the industry consolidation in the 1990s, the company entered the bottle water manufacturing industry through acquisition. Through its parent company, International Beverages has the licence to sell the world’s leading brand of bottled still water Aqua Grande, in Australia and New Zealand. The company also sells the imported sparkling water brand San Vitale one of the most popular mineral waters bottled at the source. This product, in particular, has given the company a strong share of the hospitality channel. Company growth has been driven by new product development and product extensions which have leveraged existing capabilities and focussed on specific consumer requirements. The company’s latest successful product launch is calcium enriched water targeted at aged care facilities and nursing homes for women at risk of osteoporosis, a bone degeneration disease. 2. Fountain Springs Pty Limited Fountain Springs is a Sydney based company that has access to a naturally rising spring located in the Snowy Mountains in southern New South Wales. To date, the company has been unable to secure distribution and shelf space in major Australian retail outlets. This is because its product range is limited to only two pack sizes, 600ml and 2 litres. An export strategy was th erefore developed with the assistance of the Australian Trade Commission (Austrade). Fountain Springs is now Australia’s largest exporter of spring water and better known overseas than in Australia. In the past two years, the company’s bottled water exports have grown sales revenue significantly, having secured a contract with the major UK supermarket chain Besco. Growth is also expected through its expansion into UK convenience stores and petrol station channels which is planned for later this year. The UK was the first export market for Fountain Springs where it was able to leverage the perception of Australia as ‘clean and natural’. Since developing this UK market, the company has also been successful in developing business in the Middle East, South East Asia and the United States. Given the cost of transport to these export markets, Fountain Springs has a niche strategy and sells only premium grade water in the 600ml and 2 litre pack size at a higher price. However, market research shows that there is still very low consumer awareness of its products and brand in Australia. To raise awareness, a cause-related marketing strategy has been adopted. Under this program, the company donates a percentage of its profits to partner charities in its chosen markets. This has been central to the growing market awareness of the company in its selected markets. It leverages the networks and relationships of its partners to develop new business and sales. As a result of the company’s success in overseas markets their brand ‘Aqua Caliente’ is now being stocked in selected school canteens in Australia as a natural alternative to sugar laden CSDs and fruit juices. Given Fountain Springs did not have the capability to distribute directly to schools, it entered a distribution arrangement with a school food provider. The company also altered its cause-related marketing strategy whereby it would donate a proportion of all bottled water sales in each canteen to the school. The money was to be used by the schools to purchase new equipment or facilities for the school. Despite the success of its export strategy, the company has had mixed financial results over the past few years. This has been largely due to set up costs associated with its export business and distribution arrangements in the UK. It is rumoured that the company is in financial difficulty. Rumours abound that bankers have been requesting monthly audits of the cash position so that the company can maintain its line of credit. In addition, it is believed that its major UK supermarket customer, Besco, is demanding price reductions therefore squeezing margins for the company. Poor hedging of foreign exchange transactions with the company’s UK debtors has also contributed to its declining financial position. Page 15 of 21 D. Australian Beverages Limited (ABL) 1. History Australian Beverages Limited (ABL), formerly known as Australian Soft Drinks Limited, commenced operations in 1937. The antecedent 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 non-carbonated 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 Limited upon listing on the Australian Stock Exchange (ASX) in 1996, to reflect the broader beverage base of the business. In the years since its ASX listing, ABL has adopted a multi-beverage strategy wherein its 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 in 2004. It aims to strengthen distribution relationships with convenience stores and hospitality channels. These developments have resulted in ABL’s revenue composition to change from 90 per cent CSD-based in 2000 to 68 per cent CSD-based in 2009. The aim is to further reduce dependence on CSDs by 2015. ABL intends to increase its market share of non-CSD beverage products so that CSDs will represent less than 50 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 the 2007 to 2012 period: ? offer a wide 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 argest competitor in this market. This goal will be achieved by: ? offering a wider range of products; ? increasing per capita consumption of non-alcoholic beverages through product and packaging innovation; ? expansion into new non-CSD beverage categories; ? extend key customer relationship capabilities and grow product availability. This goal will be achieved 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; ? aintain world best practices throughout the company’s operations to deliver cost discipline, low cost leadership and timely responsiveness to changing market demand; and ? ensure that the company’s operations are environmentally and economically sustainable. 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. 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. Page 16 of 21 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 be able to operate in all product areas. 3. Business operations ABL is currently the second largest competitor in t