Brambles Limited: Introduction and Business Description
Discuss about the Macroeconomic Environment Determine Credit Risk.
The purpose of this report is to provide overall description of the business and the competitive business environment in which it operates. The company selected for this present report is Brambles Limited. Brambles Limited is the holding organization of Brambles Group and is an Australian Securities Exchange (ASX) listed company. Brambles limited is one of the biggest provider of the supply chain logistics group that is based on pooling unit- load equipment as well as other associated services (Christopher, 2016)This enterprise basically focuses on outsourced management of crates, containers and pallets. This organization is located in Sydney, Australia and is a kind of commercial &professional service business. This enterprise basically serves customers in fast- moving consumer products, beverage, fresh produce and other manufacturing industries, thereby counting numerous globe’s best brands among its consumers. Most of its customers are located in the Sydney but they also provide service to the customers across the globe through its website (Brambles, 2018). The business unit of Brambles is mainly focused on enhancing customer’s engagement as well as measuring customer’s satisfaction level in order to assure that its customer’s relationship continues to provide them competitive advantage.
Some of the major competitors of Brambles Limited are Iron Mountain Incorporated, ALGECO, Greystone Logistics Inc and so on. Iron Mountain Incorporated is an information and storage management service companies that is located in Boston, USA (Brambles, 2018 ). Algeco is the modular construction supplier and also manufactures modular structures and is headquartered in France. Greystone Logistics Inc manufactures as well as retails plastic pallets for different commercial applications and is headquartered in USA. All these competitors are more or less manufacturing similar products but are not serving similar customer base. The competitive business environment in which this company operates is likely to be closer to monopoly market structure. Monopoly refers to the market structure that is featured by single seller selling unique goods in the market. In this type of market structure, the seller usually faces no competition and is the sole retailer of products having no close substitute. The cost of products of Brambles limited such as pallets, crates, containers are higher relative to average income of the customers.
Since this company sells its products to the customers across the globe, it becomes difficult for them to sell their high cost products to all customers. The demand curve facing the firm is likely to be relatively inelastic. The price elasticity of demand curve that faces the firm operating in the monopoly market determines whether marginal revenue attained by monopolist is negative(inelastic demand) and positive(elastic demand) (Baumol & Blinder, 2015). This relation is vital for profit maximizing manufacturing decision which involves equality between marginal cost and marginal revenue. Since the products of this enterprise do not have such close substitutes, the demand for the product does not vary much owing to change in product price. However, this enterprise does not have elastic demand curve and thus is steeply sloping or inelastic.
Competitive Environment and Major Competitors
Mark up rule relates to the practice of pricing of a manufacturer with the market power in which the organization charges fixed mark up over the marginal cost. A firm having market powers do not choose the point on inelastic section of demand curve (Mankiw, 2014). As the demand curve facing the monopoly firm is relatively inelastic, the mark up will be larger than relatively elastic demand curve. This is shown in the diagram below:
There are four factors of production that are mainly required for the business, which involves- land, labor, capital and enterprise. For Brambles limited, these factors along with advanced technologies are also considered as other factors of production. Land mainly involves natural resources that are associated with natural resources that are utilized in production. Labor involves all those work which the laborers perform at each level of enterprise (Mankiw, 2014). Capital is generally made up of tools as well as machinery that are utilized for producing products and service. Enterprise refers to the organization which has been created for the commercial objective and business ventures. Technology is also considered as another factor that helps in improving the process of production.
Land is considered to be fixed and thereby unlikely to vary much according to the total amount of products manufactured or sold. On the other labor, capital are variable and hence unlikely to increase with increased production and sale.
The cost structure of Brambles limited involves- sales revenue, transport cost, plant operations, depreciation, net gains on PPE disposals, other operation expenditure, irrecoverable pooling and equipment provision expenditure. The fixed cost are small relative to variable cost as transport cost, other operation expenditure are variable cost while depreciation, equipment leases are fixed cost. This entity’s optimal size is medium as it has near about 14000 thousands employees in their branches.
Macro environment relates to the factors that are mainly external forces in activities of organization and hence do not concern immediate environment. Macro environment are basically the forces that indirectly impacts the organization’s working condition as well as operation. These factors are generally uncontrollable and thus the organization is incapable as well as powerless of exercising any kind of control over them. The macro environment involves trends in inflation, GDP (Gross Domestic Product), employment, monetary policy and fiscal policy. In addition to this, macro environment is also associated to common business cycle as opposed to specific business sector performance (Mankiw, 2014) The macro environment where the organization or industry operates affects its performance and hence the total amount of influence is based on how much the enterprise is dependent on health of economy (Makri & Papadatos, 2014). It also largely impacts the consumers directly, thereby impacting their willingness a well as ability to spend. Moreover, the business monitors the reactions of consumers to broad macro economic environment.
Market structure and Cost of Products
There are several factors in Australia’s macro-environment which affects the manager’s decision of the company. Demographic change, tax changes, trade barriers, new laws and changes in government policy are the examples of macro change (Taylor et al, 2014). All these macro environmental factors also impact the business operations of Brambles Limited. These macro environmental factors that influence this business are explained below;
Political environment of Australia- Political environment relates to stability of political environment and political parties attitudes. This generally manifest in specific nation’s government influence on the policies of tax or their involvement in the trading agreements. The Australian economy is the liberal –capitalistic democracy where the states interferes substantially in this nation through different roles. For example, the parliament also decides in setting up importation taxes that is aimed in protecting the economy or the environmental protection laws that is aimed at protecting natural heritage of this nation.
Australia has been considered as one of the safe destinations for investment. This country’s political as well as regulatory environment has been open, stable and progressive and thereby provides investors with high level of confidence as well as certainty. This nation’s strength as one of the investment destination mainly stems, in part, from the political system which has been analyzed as being largely effective in response to policy direction and economic challenges. The adaptability of the government policy of Australia with respect to variation in this nation has been ranked in top two countries. Likewise, effectiveness as well as transparency of government have also been rated highly. The benefit to Brambles Limited of the stable environment in politics flows right through the bottom line. Australia mainly host the rising economy that is-stable political business environment, skilled and multi-lingual labor force, competitive cost base and strategic time zone. However, these factors mainly provide sophisticated market as well as proper environment and thus enable Brambles to drive technology and innovation.
The economy of Australia has experienced more or less stable economic growth after the recessionary period. It has been estimated by the IMF that the GDP growth rate of Australia was 2.2% in the year 2017from the previous years. GDP (Gross Domestic Product) is one of the basic macroeconomic indicators that are used for measuring the health of the nation. Still this economy continued to be mainly driven by business but the households as well as consumer industry struggle amidst low growth in wages.
Factors of Production and Cost Structure
The inflation rate refers to the rate in which the price level of products and service increases and consequently decreases the consumers purchasing power of this nation’s currency (Argy & Nevile, 2016). The inflation level in Australia has been more or less stable even though it fluctuated over the last few years. In the last year, the inflation level in this country has been near about 1.9% while wages increased by 2.1%. The inflation rate was below the target rate of RBA (Reserve Bank of Australia) and hence the consumers purchasing power also increased over the past few years. However, increase in purchasing power increased the profit margin of the Brambles limited over the past few years.
Figure 1: Australia’s inflation rate
Source: (tradingeconomics.com 2018)
The unemployment rate refers to the share of workforce which is jobless with respect to total population of the nation. This macroeconomic indicator has been considered as one of the lagging indicators of the nation. According the figures reveled by the ABS (Australian Bureau of Statistics) reveals that the unemployment rate in Australia has been quite low ad ranges from 5.4% to 6.1% over the last five years (Argy & Nevile, 2016). Moreover, it has been reported by ABS that the underemployed people of this country increased at high rate. This in turn benefitted Brambles Limited to hire skilled laborers in business and improve the productivity in business. The Australia economy is now at the expansionary phase and this positively influenced the Brambles in improving their business operations.
Figure 2 : Unemployment rate in Australia
Source: (tradingeconomics.com 2018)
Currency rate refers to the rate at which one currency is being exchanged for another one. From the graph below, it can be seen that the AUD/USD exchange rate has declined over the last five years. Depreciation in exchange rate reduced the export price and hence this benefitted Brambles over the past few years. On the other hand, it made the imported goods of this nation highly expensive. As a result, Brambles benefitted from the decline in exchange rate during these years.
Over the coming years, the overall macroeconomic conditions faced by this organization are likely to more favorable. The economic growth of Australia will increase and the inflation as well as unemployment will also be lower, which in turn will further improve the business environment in this nation. This in turn will also improve the business operations and financial performance of Brambles limited.
As this nation is now at expansionary phase, it can be predicted that it will again enter into recessionary phase in future as per business cycle. During that period, the demand will likely to decrease even if the products are normal. The economic climate of the nations in which Brambles customers stay is likely to highlight well on sales in the business in the coming years. Furthermore, skill shortages might occur as the employment of Australia is forecasted to increase in future. Thus, Brambles might face several issues regarding getting access to labor, land , capital and other factors of production. This in turn is likely to adversely impact the future operating cost of this business. If Brambles exports its products to other nations, then depreciation in exchange rate will make the exports cheaper and hence this firm will attain benefit.
Brambles Limited defines sustainability as strategies as well as activities this Group usually adopts relative to the business environment, ethics, employees and the whole community. The sustainability framework of this company mainly focuses on the activities in three important areas: Better Communities, Better Planet and Better Business. Through innovative logistics as well as operation networks this company reduces its environmental footprint relative to the utilization of resources, waste and emission (Boudreau, Chen & Huber, 2008). This enterprise believes that it makes huge contribution to the sustainable business practices. Moreover, it also aims to implement sustainability in the process it makes business as well as the value proposition it provides to its customers, shareholders and workers. The business framework of this enterprise effectively combines sharing and circular economies. In the last year, Brambles network circulated near about 590 million reusable platforms through the system of near around 500,000 customers in more than 60 supply chains across the globe. Each time its customers select this company’s “share and reuse” solutions, the carbon emission gets reduced, saves raw material and waste is also avoided. “Share and reuse” facilitates the organization to move their products cost efficiently ad safely through several points inn supply chain and thus reduces environmental effects of one use packaging.
This company takes into account environmental stewardship corporate value and thus commits in environmental sustainability as well as driving efficiency in its supply chains Recall serve and CHEP. The production process involves recycling and reusing of wood in order to produce pallets and also recycling into other use such as- fuel. There are some other kinds of wood pallets which still remains in landfills (Seidel et al., 2010). In this case, CHEP avoids this issue by properly maintaining assets ownership and enforcing control system to assure that pallets are well – recovered and materials are also reused into other purpose. In addition to this, CHEP is also responsible lumber sourcing policy mainly supports natural resource replenishment. Few recent evidences reflects that utilization of CHEP pallets in products distribution reduces environmental impact of customers. CHEP and Recall however considers safety effect of its goods and services. It also reduces the impact of their production operations on environment, prevents pollution and also improves environmental performance (Brambles 2018 ). Thus, Brambles Limited mainly considers environment, safety and health on every decision that concerns the project development, selection of appropriate suppliers and manufacture of new goods and services. However, this company commits to achieve “Zero Harm” for improving customer’s safety as well as health by conducting R&D (Research and Development).
From the above facts, it can be said that the production procedure of Brambles Limited generates positive externalities. Externalities usually occur when manufacturing or consuming one product causes effect on the third parties. Third parties involve individuals, enterprise, owner, resource who do not have direct relation to transaction. Externality is of two kinds- positive and negative. Positive externality refers to the benefit which the third party enjoys owing to economic transaction. This type of externalities usually occurs when there is positive profit on both private as well as social level. In this case, R&D conducted by Brambles Limited is considered as positive externality. This in turn enhances profits of the organization and improves its performance. Positive production externality is the positive impact which originates due to production of products and service (Reisman, 2013). In case of Brambles, positive production externality occurs when use of supply chains helps in reducing environmental affect. This is explained in the diagram below:
Figure 3: Positive Production Externality
Source: (Mankiw, 2014)
The above figure reflects that equilibrium point occurs when MSC (Marginal Social Cost) becomes equal to MPC (Marginal Private Cost) where P*is the equilibrium price and Q* is the equilibrium quantity (Taussig, 2013). The positive externality occurs when MPC lies above MSC. Thus, it can be seen that social optimal production level occurs at Q* while there occurs underallocation of resources at Q1. Other benefits that can be taken from this that R&D leads to new technologies that is a by-product of production that other entities takes the benefit from. In addition to this, it also leads to innovation of new product which in turn benefits the business. Although firms mainly tries to protect its interventions, new technologies easily gets shared and thus generates huge benefits (Reisman, 2013). In order to take advantage of positive externalities, the government must adopt economic policies for promoting this. There are two main approaches of promoting this, which involves- increasing supply and enhancing demand for Brambles products and services.
From the above facts of Brambles, it can be seen that the consumption of the products produced by Brambles generates positive externalities. Positive consumption externalities refer to the positive impact on the third parties which mainly originates from consumption of products and services. The share and reuse solution of this enterprise highlights that their customers attains huge benefit by getting delivery of their products and services in less time. This is explained in the diagram given below;
Figure 4 : Positive consumption externality
Source: (Mankiw, 2014)
The above figure reflects that, the social benefit (SB) lies above the demand curve(D) as external benefit is not involved in demand curve. On the other hand, the social cost (SC) is equivalent to supply curve since there is no externality on manufacturing side. As a result, there occurs less supply of products (Taussig, 2013) In order to take advantage of this positive consumption externality, the government should reduce supply cost or private consumption cost, thereby subsidies should be given. In addition, they should also improve flow of information to the potential customers about the products produced by Brambles. Thus, this sustainable practice by this enterprise can have positive impact on their long term business viability.
Conclusion
From the above discussion, it can be concluded that Brambles limited has improved its business over the last few years. Their profit margin and financial performance increased over these years. In addition to this, Brambles sustainability practices increased their customers over the past five years. This company also focuses on providing their employees positive work environment as well as work life balance. Moreover, implementation of proper strategy also helps this company to improve its business operations. The macroeconomic environment of Australia also helps the business to do the work without facing any difficulty. In fact, other factors of production also provides them chance in innovating new products and services. This in turn attracts large number of customers and increases sales revenue.
References
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Australia Inflation Rate | 1951-2018 | Data | Chart | Calendar | Forecast. (2018). Retrieved from https://tradingeconomics.com/australia/inflation-cpi
Australia Unemployment Rate | 1978-2018 | Data | Chart | Calendar. (2018). Retrieved from https://tradingeconomics.com/australia/unemployment-rate
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