3. Dominant Economic traits of the industry (Handout 3)

4. What is competition how strong each competitive forces (5 forces) (Handout 3)

Cargills (Ceylon) PLC is engaged in the manufacturing of and trading in food and beverage, and distribution. The Company operates through four segments: food and beverages, wholesale distribution operation, photo processing and leisure. The Company operates a chain of supermarkets, convenience stores and a hyper market. It also manufactures, produces, processes and markets processed meats, dairy ice cream, milk, jams, cordials, sauces and beverages. It operates Kentucky Fried Chicken franchise restaurants in Srilanka, by processing of agricultural produce. Its subsidiaries include Cargills Distributors (Private) Limited, Cargills Quality Dairies (Private) Limited and CPC (Lanka) Limited, among others. On March 12, 2008, the Company acquired Millers Distributors limited.

Cargills at a Glance

Cargills (Ceylon) PLC is a Sri Lankan corporate established in 1844 and built on a strong foundation of values and ethics. Guided by trusted leadership it spearheads the sustainable development of the food industry in Sri Lanka.

Its continuous investment in retail has made the Cargills retail arm Cargills Food City the largest retailer in the island in all categories. Pursuing innovation and food safety its manufacturing brands Cargills Supremo and Cargills Finest (processed meats) Cargills Kist (processed fruits and vegetables) and Cargills Magic (ice cream and dairy products) lead sectoral growth. Its KFC franchise is the largest international restaurant chain in Sri Lanka. Through its marketing and distribution arm spread across the island Cargills distributes its manufactured brands as well as internationally renowned food and non-food brands.

The Cargills agribusiness model has gained global recognition for linking farmers and entrepreneurs to the market through a sustainable and inclusive value creation process.

Key business

1. Modern retailing2. Manufacturing3. Agri Business4. Restaurants5. Distribution

Subsidiary Companies

Cargills Quality Foods (Pvt) Ltd Cargills Distributors (Pvt) Ltd Cargills Quality Dairies (Pvt) Ltd Cargills Food Processors (Pvt) Ltd Cargills Food Services (Pvt) Ltd

CPC Agrifoods Ltd CPC Lanka Ltd Cargills Retail (Pvt) Ltd Millers Distributors Ltd

Cargills (Ceylon) Plc (Cargills) operates in the retail chain of food outlets. The company also engaged in food manufacturing and

restaurant chain sectors. Cargills operates through its ten subsidiaries. Cargills is the official franchisee for Kentucky Fried Chicken

(KFC) in Sri Lanka. It also provides distribution and FMCG manufacturing services. The company also offers discount sales to its

products. Cargills operates through its 116 outlets across 19 districts in Sri Lanka. Cargills is headquartered at Colombo, Sri Lanka

Pricing and availability are what drives the economy of the fast food industry. They effectively penetrate markets with advertising campaigns that cater to a whole range of demographics that make them a need in high demand in almost all US geographic locations. With specialized and highly focused franchise management and vast distribution channel they can be established themselves in a new community almost overnight creating instant revenue and jobs wherever demand is present.

Economic CharacteristicsOF THE FOOD AND DRUG RETAIL INDUSTRYIt is extremely important to understand what the dominant economic factors are in an industry in which you are participating. These factors have a very strong influence in determining the corporate strategies that a company will decide to implement. How can a corporation define and implement their corporate strategy without understanding the environment of the market they are in? They simply can not! The economic factors to be considered are as follows: market size, scope of competitive rivalry, market growth rate, number of rivals, number of customers, degree of vertical integration, economies of scales, resource requirements for market entry, and profitability of the industry. Each one of these factors will be defined in the following paragraphs.

The supermarket retail market is a $363 billion industry(sales 2000). Approximately $272 billion in sales, or 75%, is achieved by 25 companies with 16,000 stores. The total number of retail grocery stores total 127,000. It is obvious that the market share is dominated by a select few corporations. The largest company is Kroger (11% market share), followed closely by Albertson’s(9%), Safeway(6%), and Win

The number of rivals in this industry is becoming more important to recognize. According to

Progressive Grocer, supermarket sales have increased 5. Gross margins are approximately 2% greater for a supermarket when they have access to a distribution center. In closing, the supermarket industry is profitable. All indications in the research that I have done leads me to believe that sales have increased at the same pace in 2000 that it did in 1999. These companies manufacture some of their products in inventory. Because of the single-person and one-parent households, less people are frequenting the grocery stores and more people are eating out at restaurants. Kroger brand(private label) products account for approximately 25% of their grocery sales and almost 9% of drugs and general merchandise. Albertson"tms has acquired American Food to increase their market share in the West region. Kroger is the only major supermarket operator to implement a three-tier distribution system. As stated above, the top 25 companies capture 75% of the market. Safeway, SuperValu, and Kroger are the only companies that go even further upstream concerning vertical integration. They use these facilities to produce private label products.

The growth has been driven by increasing affluence and the rise of a middle class; the entry of women into the workforce; with a consequent incentive to seek out easy-to-prepare foods; the growth in the use of refrigerators, making it possible to shop weekly instead of daily; and the growth in car ownership, facilitating journeys to distant stores and purchases of large quantities of goods. The opportunities presented by this potential have encouraged several European companies to invest in these markets (mainly in Asia) and American companies to invest in Latin America and China. Local companies also entered the market.[12] Initial development of supermarkets has now been followed by hypermarket growth. In addition there were investments by companies such as Makro and Metro in large-scale Cash-and-Carry operations.

While the growth in sales of processed foods in these countries has been much more rapid than the growth in fresh food sales, the imperative nature of supermarkets to achieve economies of scale in purchasing, means that the expansion of supermarkets in these countries has important repercussions for small farmers, particularly those growing perishable crops. New supply chains have developed involving cluster formation; development of specialized wholesalers; leading farmers organizing supply; and farmer associations or cooperatives.

Cargills (Ceylon) entered the Business Today TOP 10 list a year ago at the tenth place and this year notched one place up to number nine. Having evolved from its original four department stores, Cargills (Ceylon) is today the fastest growing and largest retail chain in Sri Lanka. The company continues to invest in food and agriculture, and with the expansion of the retail outlets to 136 during the year, new opportunities were reportedly presented to more rural famers and entrepreneurs. The company is also actively participating in the revival of the Eastern Province with the opening of outlets in Batticaloa, Ampara and Trincomalee. At present Cargills has established its presence in 23 districts of the country.

 

Cargills (Ceylon) owns and operates its own manufacturing and distribution arm. The company also owns the KFC franchise in Sri Lanka, and it introduced the first KFC drive-thru in the South Asia region. During the year a full year of operation of Millers Distribution was brought under the fold of Cargills. An Island-wide reach and distribution capability of Millers is expected to help Cagills (Ceylon) further penetrate the market.

 

Turnover of the company during the year was Rs 16 billion and profit after tax was Rs 499 million.

Five forces analysis

Potential Competitors: Medium pressureo Grocers could potentially enter into the retail side.o Entry barriers are relatively high, as Wal-Mart has an outstanding distribution

systems, locations, brand name, and financial capital to fend off competitors.o Wal-mart often has an absolute cost advantage over other competitors.

Rivalry Among Established Companies: Medium Pressureo Currently, there are three main incumbent companies that exist in the same

market as Wal-Mart: Sears, K Mart, and Target. Target is the strongest of the three in relation to retail.

o Target has experienced tremendous growth in their domestic markets and have defined their niche quite effectively.

o Sears and K-Mart seem to be drifting and have not challenged K-Mart in sometime.

o Mature industry life cycle.

The Bargaining Power of Buyers: Low pressureo The individual buyer has little to no pressure on Wal-Mart.

o Consumer advocate groups have complained about Wal-Mart’s pricing techniques.

o Consumer could shop at a competitor who offers comparable products at comparable prices, but the convenience is lost.

Bargaining Power of Suppliers: Low to Medium pressureo Since Wal-Mart holds so much of the market share, they offer a lot of business to

manufacturers and wholesalers. This gives Wal-Mart a lot of power because by Wal-Mart threatening to switch to a different supplier would create a scare tactic to the suppliers.

o Wal-Mart could vertically integrate.o Wal-Mart does deal with some large suppliers like Proctor & Gamble, Coca-Cola who

have more bargaining power than small suppliers.

Substitute Products: Low pressureo When it comes to this market, there are not many substitutes that offer

convenience and low pricing. o The customer has the choice of going to many specialty stores to get their desired

products but are not going to find Wal-Mart’s low pricing. o Online shopping proves another alternative because it is so different and the

customer can gain price advantages because the company does not necessarily have to have a brick and mortar store, passing the savings onto the consumer.

Complementors: Low pressureo One complementor that exists for Wal-Mart is Sam’s Wholesale Clubs. Although the

same company owns this, it complements Wal-Mart by offering the same products in wholesale form, making the company more profitable.

o Suppliers of goods need to have innovative products to attract customers.o For the most part, complementors do not affect Wal-Mart’s business model.

An industry is a group of firms that market products, which are close substitutes for each other.

Some industries are more profitable than others. The answer lies in understanding the dynamics

of competitive structure in an industry. Considering today Sri Lankan chocolate market /

industry, we could see that there is huge competition between each chocolate manufactures

company. All are trying to become market leader, & try to capture the other’s market share. In

addition, we can see number of chocolate manufactures within the industry.

When we talk about the consumers of Sri Lankan chocolate market, everyone in Sri Lanka has

an uncontrollable sweet taste for chocolates and not for just one brand. Ever since its inception in

our country, Sri Lankan have gone out of the way to get the right kind of chocolates that would

provide them with the ultimate satisfaction; one that is the best in flavor, quality and texture.

Whether it is at a super store or a drug market, Sri Lankan fined it as easy as paying a couple of

rupees and attaining a bar or more of chocolate. Some even go to the extent of bringing back a

load of chocolate when they travel abroad on business or a holiday. That tells us how far Sri

Lankan people prefer to chocolate.

According to porter’s five forces, which are determined industry attractiveness and long- run

industry profitability. These five "competitive forces" are:

The threat of entry of new competitors (new entrants)

The threat of substitutes

The bargaining power of buyers

The bargaining power of suppliers

The degree of rivalry between existing competitors

New entrants to a industry can raise the level of competition , there by reducing its

attractiveness.

The treat of new entrants largely depends on the barriers to entry.in addition to that it depends on following factors.