Strategic perspectives and opportunities of Carlsberg Group
In the past decade, increased focus has been kept on the brewing industry owing to market consolidation. Carlsberg, in an acquisition period, has proven to be one of the biggest breweries in the world. One of the primary benefits of the organization is to go through the crisis with sound results owing to operating margins and growth. It is noteworthy to mention that financial statement is an organized statement, which is developed to know the financial position, disposal of surplus, operating performance, cash position, movement of short-term assets and total fund position (Barr and McClellan 2018). Financial statement analysis is the investigation of past financial data by using various financial tools like ratio analysis, trend analysis and common size analysis.
The above-stated statements help in generating such information deemed to be valuable for the organization and ensuring the earnings quality. The primary purpose of evaluating the financial records is to analyze the present performance of the organization along with estimating the future potential and risk appetite of the organization. Carlsberg has been involved in the Danish culture since the middle of the 19th century at the time Jacob Christian Jacobsen established the brewing firm. The most recognized products of the organization include Tuborg, Carlsberg Pilsner, Kronenbourg and Pilner (Carlsberg 2018). The assignment would discuss the various strategic perspectives and opportunities and financial analysis based on which final recommendations would be recommended to the management of Carslberg Group. In addition, comparison is made with its main competitor, Heineken, for evaluating the profitability position.
Carlsberg operates by utilizing a global strategy, which means that it considers beer firstly for the domestic market and it sells the same globally having only low local customization. This clearly sheds light on the fact that the beers sold fulfill a global need and it does not face adequate competition and hence, no pressure is imposed upon the organization to minimize its cost structure (Bekaert and Hodrick 2017). This tends in centralizing the beer development functions like research and development in home nation along with forming marketing and manufacturing functions in the operating nations.
By using the global strategy, profit growth and sales could be increased by entering new markets along with selling in the current markets (Brigham et al. 2016). This is accomplished, as it is involved in exporting products to places such as South America, in which no breweries are present and in few cases with the help of licensing agreements like Tetley and Charrington by providing them the brewing rights and bottling Carlsberg beer in lieu of a royalty fee. The organization has established joint ventures with a Hong Kong brewery and Scottish & Newcastle. The organization has merged with its Danish competitor along with Ruborg and Orkla of Normay (Buehlmaier and Whited 2018).
Carlsberg penetrates into these markets at a cautious and lower pace by utilizing the partner services and the intention is to avoid risk and information costs along with certain uncertainties like trade barriers related to foreign engagement. The organization is involved in protecting its market share in the home market, as operating in foreign nation takes the business away from its rivals by providing customers with other choices (Reid 2018). In addition, the competitors know that they would encounter the identical response, if they attack the domestic market (Cornwall, Vang and Hartman 2016).
Methodology
With the help of trend analysis, it becomes possible to evaluate the financial information of an organization for specific periods. The intention is to compute and assess the percentage change from one period to the next (Edwards 2014). The trend analysis of Carlsberg for the four years is provided as follows:
The above table clearly illustrates that the net revenue of Carlsberg has started to decline after 2015, while the cost of sales has followed the similar pattern like that of net revenue. Thus, this decline in cost of sales has resulted in increase in gross profit by 0.20% in 2017. In terms of administrative expenses, the organization has managed to minimize its administrative expenses by 6.57% in 2017, which implies that it has controlled this expense item despite the top line growth. Along with this, the organization has minimized its selling and distribution expenses and thus, it has contributed to improved profitability (Finkler et al. 2016). However, the organization has experienced a significant rise in expense related to special items, due to which Carlsberg has experienced a massive fall in net margin by 57.48% in 2017.
From the above table, it is clear that the invested capital for Carlsberg has declined in the year 2018. The total assets of the organization have fallen by 1.97% in 2017 due to significant decline in the values of intangible assets and trade receivables. Moreover, reduction could be observed in property, plant and equipment, as it has disposed off a part of the same for increasing its cash base. On the other hand, decrease in equity could be observed in the year 2017 due to increase in reserves and fall in retained earnings. On the other hand, there is increase in non-current liabilities due to rise in long-term borrowings and other liabilities. However, there is decline in current liabilities by 26.57% in 2017 due to massive fall in short-term borrowings and provisions. As a result, there has been decline in total liabilities by 11.63% in 2017.
The common-size analysis comprises of the indexed numbers with net revenue base about the posts from the income statement and invested capital in the form of base for the related posts of the balance sheet statement (Grant 2016).
As per the above table, Carlsberg allocates 33%-36% of net revenue to its cost of sales. In 2017, there has been decline in cost of sales percentage owing to the falling prices of raw materials. It has been identified that Carlsberg has initiated efficiency programs by concentrating on procurement for exploiting the economies of scale extensively (Irimia-Dieguez, Medina-Lopez and Alfalla-Luque 2015). On the other hand, there has been increase in operating profit, as the same is between 9%-10.5% of the total revenues over the years. This implies that the organization has earned operating income over the years. However, there has fallen in net margin as percentage of revenue due to increase in cost of special items and financial expenses. Therefore, Carlsberg has to undertake certain measures for improving its profitability position in the operating markets.
Results and Analysis
From the above table, it is apparent that in all the years, the intangible assets cover maximum portion of the non-current assets of Carlsberg followed by property, plant and equipment. In case of current assets, the maximum portion includes trade receivables and inventories, which implies the presence of adequate demand in the market for Carlsberg. In case of equity, the maximum portion includes retained earnings and reserves and the latter is observed to increase over the years, while the former is seen to be declining over the years. In case of liabilities, long-term borrowings and short-term trade receivables constitute of maximum portion and this implies that the organization has focused on raising maximum funds through debt.
Gross profit ratio is a type of profitability ratio that helps the investors in interpreting how efficiently the companies use their materials and labors for effective production and selling (Heikal, Khaddafi and Ummah 2014). It can be seen from the above figure that there is increase in the gross profit of Carlsberg from the year 2015 to 2017. Same trend can be seen in case of Heineken as the company has been able in increasing their gross profit from 2015 to 2017. However, in spite of being in the same industry, the gross profit position of Carlsberg is better than Heineken. The reason for Carlsberg is the proportionate increase in the gross profit and sales of the company. In case of Heineken, the main reason behind the increase in gross profit is the continuous increase in both sales and gross profit of the company.
Net profit ratio is considered as another major profitability ratio and this ratio helps the investors in measuring what percentage of the sales are left over after the payment of all business expenses (Dahmen and Rodríguez 2014). According to the above figure, high fluctuation can be seen in the net profit ratio of Carlsberg from the year 2015 to 2017. 2015 registered net loss for Carlsberg and it was improved in 2016; but decrease in this profit can be seen in 2017. In case of Heineken, decrease in net profit can be seen in 2016 and it increased in the year 2017. However, Heineken does not register net loss in the last three years. It needs to be mentioned that fluctuations in the net profit of both the companies affected the profitability position of them in the recent years. However, when comparing between Carlsberg and Heineken, it can be seen that the net profit position of Heineken is better than that of Carlsberg due to the absence of any net loss. Apart from these, increase in the operating expenses for the companies is another reason for the decrease in the net profit position in the recent years.
Return on Capital Employed (ROCE) is another important profitability ratio that helps the investors in interpreting the efficiency of the business organizations in generating profit from their capital employed from the comparison between net operating profit and capital employed (Agbada and Osuji 2013). It can be seen from the above discussion that there has been increase in ROCE of Carlsberg from the year 2015 to 2017. At the same time, fluctuation in this ratio can be seen for the same period for Heineken. It shows the superiority of Carlsberg in using their capital employed than Heineken. Increase in the operating profit in the recent years along with decrease in the current liabilities can be considered as the prime reason for the increase in this ratio. On the other hand, fluctuations in certain aspects like operating profit and total assets is the main reason for the fluctuation in the ROCE of Heineken.
Financial Position and Performance of Carlsberg Group
The investors consider inventory turnover ratio as a major efficiency ratio as this ratio shows the efficiency of the companies in inventory management; it also shows how many times a company can clear their inventory during a year (Agha 2014). According to the above figure, there is an increase in this particular ratio for Carlsberg from 2015 to 2017; that is 44.28, 45.52 and 46.92 respectively. This increase indicates towards the increased capability of the company to clear the inventory and it can reflect in the increase in the sales of them. It also indicates towards the fact that there has been increase in the power of the company in converting their inventories in cash. Increase in these aspects can be considered as the increase in the efficiency of the company.
Accounts payable turnover ratio is considered as another major ratio that helps the investors in determining the efficiency of the companies in the management of trade payable payments. More specifically, this particular ratio helps the investors in assessing the company’s ability in paying off their average accounts payable in a year (Ikpefan et al. 2014). It can be seen from the above figure that trade payable days are increasing in 2017 from 2015. In case of Carlsberg, it can be said that the company is currently able in making the payment to their trade payable twice in a year. It is expected for the companies to have greater trade payable days than the trade receivable days as it helps them in paying off the trade payables with the trade receivables.
Accounts receivable days is considered as one of the major efficiency ratios that helps the investors in measuring the ability of the companies in turning their accounts receivable into cash during a specific accounting period. In other words, this ratio helps in interpreting how many times a business can collect their accounts receivable during a specific year (Bastos and Pindado 2013). It can be seen from the above figure that Carlsberg has been able in reducing their debtors collection time in 2017 from 2015; and this aspect indicates towards the increase in efficiency of the company in the collection of their trade debtors in speedy manner. It also shows good liquidity position of Carlsberg due to the increased ability of Carlsberg in converting their accounts receivable into cash. At the same time, Carlsberg can pay off their accounts payable with their accounts receivable as accounts receivable days are less than the accounts payable days.
Dividend payout ratio is considered as one of the major investment ratios for the investors as it helps them in measuring the percentage of the net income of the companies distributed to the company shareholders in the form of dividend during a year. Investors have a particular interest in this ratio as this ratio shows them whether the companies are paying a reasonable portion of their income to the investors (Oladipupo and Okafor 2013). It can be seen from the above figure that there has been increase in this ratio in the year 2017 from 2015 for Carlsberg. Due to the presence of net loss in the year 2015, Carlsberg was not able to pay their investors with dividends. However, improvement in this situation can be seen in 2017 and 2016 with the improvement in the net profit for the company. The above figure also shows fluctuation in this ratio that is not good for the company. According to the investors, a consistent dividend payout ratio is more important for the companies that high or low as it shows the steadiness in the company’s profitability.
Relevant Key Financial Ratios
Price earnings ratio is another major investment ratio for the investors as it establishes the relationship between the stock prices of the companies with the earnings per share. According to the above figure, major fluctuations can be seen in this particular ratio for Carlsberg. In the recent years, high price earnings ratio indicates towards the growth in the stock of Carlsberg in the recent years. However, low price earnings ratio indicates towards the undervaluation of the stock price of Carlsberg due to the lower trade of the stocks of the company (Prasetyorini 2013).
Current ratio can be considered as one of the major liquidity ratios of the companies as it helps the investors in the measurement of the ability of the companies in paying of their short-term liabilities with their current assets. Investors consider it as an important ratio as the short-term liabilities are due within the next year. According to the above figure, there have been some fluctuations in the current ratio of Carlsberg that makes the liquidity position of the company ineffective (Parsian and Shams Koloukhi 2014). It implies that Carlsberg can pay off only 61 percent, 49 percent and 56 percent of their current liabilities with their current assets. Increase in the current assets of Carlsberg in the recent years can be considered as the prime reason for this. It is expected for the company to have 2 as current ratio so that they can pay off their current liabilities twice with their current assets.
Quick ratio or acid test ratio is considered as another crucial liquidity ratio that helps the investors in assessing the ability of the companies in paying off their current liabilities with only quick assets. Quick assets are the assets that can be converted into cash within 90 days or shorter period (Nobanee and Al Hajjar 2014). It can be seen from the above figure that Carlsberg has witnessed fluctuation in the quick ratio in the last three years. In the current position, Carlsberg would be able to only pay off 46 percent, 38 percent and 43 percent of current liabilities with the help of quick assets; and it is not the favorable liquidity situation for the company as they should be able in paying off the current liabilities at least once. Decrease in cash and cash equivalent can be considered as one of the major reasons for this inefficient liquidity position of Carlsberg.
Interest coverage ratio is considered as an essential ratio that helps the investors in measuring the ability of the companies for making interest payment on term debts in timely manner (Baños-Caballero, García-Teruel and Martínez-Solano 2014). As per the above table, decrease in this ratio can be seen in 2016 from 2015; but 2017 registered increase in this ratio. It implies that Carlsberg has made 5.58 times, 3.81 times and 4.18 times more earnings than their interests payment in 2017, 2016 and 2016 respectively. Increase in EBIT and decrease in the interest expenses can be considered as the major reasons for the increase in Carlsberg’s ability to make more interest payment in the recent year.
Comparing Carlsberg Group and Heineken
Debt to equity ratio is an important gearing ratio for the companies that help the investors in comparing the company’s total debts to the total equity. More specifically, it helps the investors in assessing the percentage of company financing comes from term debts and shares (Anantharaman, Fang and Gong 2013). It can be seen from the above figure that Carlsberg has registered decrease in debt to equity ratio in the year 2017 from 2015; and decrease in both total liabilities and total equity can be considered as the prime reason for this. However, it needs to be mentioned that Carlsberg use debt financing for collecting capital for their business than the equity capital. This aspect makes the business of the company highly leveraged and increases the interest expenses of the company.
It needs to be mentioned that the beer industry of Denmark is a major industry and it contributes majorly towards the economic development of the country. In the year 2016, there was a major growth in the volume of the beer industry; and after this growth, it was expected that the growth would be continued in the year 2017. However, slight decrease in the total volume sales can be seen in the year 2017. In the year 2017, growth in volume of the non-alcoholic beer can be seen for the straight fifth year. One of the major reasons for this strong growth in the volume of non-alcoholic beer is the trend of health and wellness awareness among the people of the country. In the recent years, the beer companies are witnessing major difficulties due to the notorious unstable weather of Denmark. In this situation, the beer companies of Denmark are adopting the strategy to widen their product portfolio with the inclusion of wide range of both the premium as well as craft beer (Saunders 2014).
The people of the country have the tendency to stay away from the beaches due to poor weather as they prefer to go to bars; and this aspect has increased the sales of craft beers. The presence of two major beer companies can be seen in the beer industry of Denmark, which has covered three quarters of the total sales volume in the year 2017; they are Carlsberg and Royal Unibrew. The main reasons for the huge success of these two companies are their brand recognition and customer loyalty. It can be seen that the private label beer companies are continued to lose the market share. It has been predicted that there will not be any major shift in the demand and supply in this industry in the coming years. However, considering the increased demand of specialty beer and microbrew beers, it can be said that there will be entrance of small breweries in this beer market.
It is inherent from the above analysis that Carlsberg has experienced an increase in profit margin over the past three years. Hence for improving the profitability position of the organization, the following recommendations would deem to be beneficial:
Conclusion
Removal of unnecessary products and services:
The management of Carlsberg needs to identify the profitable products and hence, it needs to keep its focus on the same. More precisely, the management is required to ascertain if the unprofitable products are dropped completely or they need to be reviewed for further improvements (McKinney 2015).
Reviewing current pricing structure:
Increasing product prices could be a terrifying prospect, a small rise in prices could have considerable impact on gross income. Hence, accurate costing of products is significant. The management of Carlsberg Group needs to be involved in regular review of the product costing and accordingly, the prices could be adjusted (Vogel 2014).
Deficiencies could be observed in the liquidity position of Carlsberg as well for which the following recommendations would be fruitful to the organization:
Early submission of invoice:
Carlsberg needs to submit its invoices within a shorter period to the customers. With the increase in trade receivables and rapid collection of credit sales, the current ratio would improve, since there would be increase in cash base (Petty et al. 2015).
Controlling overhead expenses:
As observed from the analysis of the income statement, it could be cited that Carlsberg has incurred additional operating expenses due to which its profit level has decline sharply. Hence, the organization needs to find some ways to minimize its costs by spending less on marketing expenses for retaining more profits.
Conclusion:
The above discussion clearly makes it apparent that Carlsberg operates by utilizing a global strategy, which means that it considers beer firstly for the domestic market and it sells the same globally having only low local customization. When comparing between Carlsberg and Heineken, it can be seen that the net profit position of Heineken is better than that of Carlsberg due to the absence of any net loss. Apart from these, increase in the operating expenses for the companies is another reason for the decrease in the net profit position in the recent years. In addition, Carlsberg has registered decrease in debt to equity ratio in the year 2017 from 2015; and decrease in both total liabilities and total equity can be considered as the prime reason for this.
However, it needs to be mentioned that Carlsberg use debt financing for collecting capital for their business than the equity capital. This aspect makes the business of the company highly leveraged and increases the interest expenses of the company. Therefore, certain recommendations have been provided to the organization so that it could enhance its overall financial condition by increasing sales and cash base by tightening the customer payment terms. The management of Carlsberg needs to identify the profitable products and hence, it needs to keep its focus on the same. It has been predicted that there will not be any major shift in the demand and supply in this industry in the coming years. However, considering the increased demand of specialty beer and microbrew beers, it can be said that there will be entrance of small breweries in this beer market. Carlsberg needs to submit its invoices within a shorter period to the customers. With the increase in trade receivables and rapid collection of credit sales, the current ratio would improve, since there would be increase in cash base.
References
References:
Barr, M.J. and McClellan, G.S., 2018. Budgets and financial management in higher education. John Wiley & Sons.
Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University Press.
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.
Buehlmaier, M.M. and Whited, T.M., 2018. Are financial constraints priced? Evidence from textual analysis. The Review of Financial Studies, 31(7), pp.2693-2728.
Carlsberg., 2018. Carlsberg. [online] Available at: https://www.carlsberg.com/ [Accessed 24 Nov. 2018].
Cornwall, J.R., Vang, D.O. and Hartman, J.M., 2016. Entrepreneurial financial management: An applied approach. Routledge.
Edwards, D., 2014. The Link Between Company Environmental and Financial Performance (Routledge Revivals). Routledge.
Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for public, health, and not-for-profit organizations. CQ Press.
Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
Irimia-Dieguez, A.I., Medina-Lopez, C. and Alfalla-Luque, R., 2015. Financial management of large projects: A research gap. Procedia Economics and finance, 23, pp.652-657.
McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-CLIO.
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.
Reid, W., 2018. The meaning of company accounts. Routledge.
Saunders, A., 2014. Financial markets and institutions. McGraw-Hill Higher Education.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
Zietlow, J., Hankin, J.A., Seidner, A. and O’Brien, T., 2018. Financial management for nonprofit organizations: Policies and practices. John Wiley & Sons.
Carlsberggroup.com., 2018. Annual Report 2017 [online] Available at: https://carlsberggroup.com/media/22523/carlsberg-as_annual-report-2017.pdf [Accessed 23 Nov. 2018].
Carlsberggroup.com., 2018. Annual Report 2016 [online] Available at: https://carlsberggroup.com/media/10899/carlsberg-group-annual-report-2016.pdf [Accessed 23 Nov. 2018].
Carlsberggroup.com. 2018. Annual Report 2015 [online] Available at: https://carlsberggroup.com/media/5256/carlsberg_as_annual_report_2015.pdf [Accessed 23 Nov. 2018].
International, E., & International, E., 2018. Beer in Denmark . Euromonitor.com. Retrieved 24 November 2018, from https://www.euromonitor.com/beer-in-denmark/report
Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.
Dahmen, P. and Rodríguez, E., 2014. Financial literacy and the success of small businesses: An observation from a small business development center. Numeracy, 7(1), p.3.
Agbada, A.O. and Osuji, C.C., 2013. The efficacy of liquidity management and banking performance in Nigeria. International review of management and business research, 2(1), pp.223-233.
Agha, H., 2014. Impact of working capital management on Profitability. European Scientific Journal, ESJ, 10(1).
Ikpefan, O., Folashade, O., Agwu, E. and Odunaike, D.A., 2014. Working capital management and profitability of the manufacturing sector: An empirical investigation of Nestle Nigeria Plc and Cadbury Nigeria Plc.
Bastos, R. and Pindado, J., 2013. Trade credit during a financial crisis: A panel data analysis. Journal of Business Research, 66(5), pp.614-620.
Oladipupo, A.O. and Okafor, C.A., 2013. Relative contribution of working capital management to corporate profitability and dividend payout ratio: Evidence from Nigeria. International Journal of Business and Finance Research, 3(2), pp.11-20.
PRASETYORINI, B.F.F., 2013. Pengaruh ukuran perusahaan, leverage, price earning ratio dan profitabilitas terhadap nilai perusahaan. Jurnal Ilmu Manajemen (JIM), 1(1).
Parsian, H. and Shams Koloukhi, A., 2014. A study on the effect of free cash flow and profitability current ratio on dividend payout ratio: Evidence from Tehran Stock Exchange. Management Science Letters, 4, pp.63-70.
Nobanee, H. and Al Hajjar, M., 2014. An Optimal Cash Conversion Cycle.
Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.
Anantharaman, D., Fang, V.W. and Gong, G., 2013. Inside debt and the design of corporate debt contracts. Management Science, 60(5), pp.1260-1280.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
