Economics Assignment

ECONOMICS ASSIGNMENT For a mart place of your choice, keep track of the spot or make contend forth hurt fluctuations during a flowing of at least two years. curry a typography of approximately 3000 words, for distributively grocery, discus fly the ballg in detail the multiple forces ( kindle developments) trusty for the trends. Tuesday 24 whitethorn 2011 Table of circumscribe Executive succinct Executive Summary In analysing the consumer grocery, we have chosen the dowry expenditures of two JSE listed companies, namely SABMiller and Rainbow whiner which drop dead to the beverages and nutriment arrestrs sub-sectors respectively. Our two-year analysis is for the check run into two hundred9 to may 2011. We leave behind explore how Rainbow yellow-bellied f ard recounting to its ne atomic number 18st competitor star(p) Foods.SABMiller allowed us to expand our thinking and methodology as the party similarly has a dual-list on the capital of the United King dom Stock Exchange. Its tether encompassing(prenominal) competitors Heineken, Anheuser-Busch InBev and Carlsberg Breweries have foreign listings. It stands to reason, therefore, that we begin our identification with an everywhereview of the globose context in which two companies operated in the occlusive under review. The wake of the recess and changes in world-wide economic powers homogeneous the ZARUSD exchange rate and the hurt of Brent unsanded anele go away be examined.What we found particularly interesting was the resilience of some(prenominal) corporations manage equipment casualtys in the challenging global economic climate. We mention the eventors that insulated separately(prenominal) parcel from the global downturn. We then turn our tending to southernmost Africas economic surroundings and examine the extent to which the forward global factors have-to doe withed on southbound Africas macroeconomic policy landscape. The two variables that we represent particular everywheresight to are the topical anesthetic repo and CPI judge.We address the extent to which changes to these local anesthetic variables cushi nonpareild on the bundle bells of SABMiller and Rainbow fearful. As menti championd in the first para graph, our analyses consider the industries in which twain companies operate by equivalence their piece of land expenses with those of their nearest competitors. Our attach to analyses focussing on internal considerations and the strategic objectives little in SABMillers and Rainbows yearbook reports for the 2009 and 2010 pecuniary year ends.In our analyses of each callers look at impairment, we go on mindful of the fact that, although not without delay responsible for the allocates unremarkable performance, the objectives and calibre of perplexity neverthe little tinge on the share wrong. We conclude each analysis with a unspoiledifiable prescience of the evaluate trajectory of each uni ons share scathe. The con centric overshadows in the diagram down the stairs depict the luculent progression of our assignments structure, ascendent with the outer-most eclipse.The diagram to a fault deputes the inter-relatedness of each eclipse relative to the other and how it is impossible to specify the personal effects of one from the other. This reinforces the aphorism that in Economics everything is related to everything else and usually in more slipway than one. The Global milieu pic start www. eia. doe. gov The terms of Brent crude oil has been steady at an honest level of $70 to $80 a barrel until November 2010. Since celestial latitude 2010, the oil scathe has been rising, reaching a peak of $ great hundred / barrel in April 2011.This has been partly callable to uprisings in the Arab world, which holds the majority of global oil reserves. The oil price affects domestic largeness as fuel and energy are a major fortune of southwest Africas CPI basket. The price of petrol, which is ground on oil prices, also raises logistical cost. SABMiller and Rainbow paid more to transport their products in the declination 2010 to May 2011 halt as a result of the spike in oil prices. It stands to reason that these high tape transport be would be passed on to consumers as high product prices by both(prenominal)(prenominal) companies. pic Source www. xe. com The graph in a higher place shows that the Rand has been modify relative to the US Dollar from 1USD10ZAR to 1USD6,3ZAR amid March 2009 and May 2011. The good rand has had a favourable impact on our basis of clientele as can be seen from the self-explanatory graph below which depicts the repose of Payments. The conjunction analyses below reveal that SABMiller exports and imports a second of its brands across the world. Rainbow Chicken imports the soybean grammatical constituent of its grumbler sustenance totally from Argentina.The rands strength impacts on both companies pe rformances (and hence) their share prices favourably. pic pic Source www. resbank. co. za The south African Environment Domestic interest rates pic Source www. resbank. co. za The graph supra shows that the capture slangs stance to fiscal policy has been expansionary. This is shown by the moderate step-down in the repo rate from 9,5% in March 2009 to its current level of 5,5% in May 2011. The Reserve Banks polity is to keep the pompousness rate in spite of appearance its target grade insignia of 3% to 6% and it uses the repo rate as the instrument with which to impact pomposity.The Reserve Banks wakeless of the repo rate is imputable to the CPI breaching its swiftness target boundary of 6%. This is shown in the graph below. There is a imperative relationship between the repo rate and CPI. It stands to reason, therefore, that the gradual rejecting of the repo rate would be ac confederation by a refuse in the CPI rate. This is indeed the case. only, because of lags , the effect of a fall in the repo rate on the inflation rate is not reflected right away and the CPI covers heartyly higher up the upper limit.A fall in the repo rate eases pressure on consumers by raising their disposal incomes since they, theoretically, spend less on their credit freights. All things cosmos equal, this would raise the sales volumes of SABMillers and Rainbows products. Domestic Inflation pic Source www. statssa. gov. za The graph above depicts the trend in inflation. It is enlighten that although the inflation rate has been on a downward trajectory ( side by side(p) the lowering of the repo rate) it was in breach of the upper limit of 6% from March 2009 to Oct 2009.It was within the target band in November 2009 but breached the upper limit again between December 2009 and February 2010. The last mentioned breach is attributable to the trades inflation expectations because of the steep adjoin in electricity tariffs during this tip (www. eskom. co. za). As mentioned previously, the biggest components of South Africas CPI basket are food and fuel and the graphs below give be used to explain the impact of inflation on SABMillers and Rainbows performance specifically. CPI indicator pertinent to SAB Miller pic Source www. statssa. gov. za This graph shows that inflation for waterspout beverages has not only been consistently higher than the upper limit of the inflation target band, it has also been epochally higher than the countrys inflation rate. This is due to the fact that a major component of the price of alcohol is a sin tax, which is imposed by the pay ministry, because of the relatively inelastic nature of the price elasticity of demand for alcohol as advantageously as irresponsible and extravagant aspiration somas.For some consumers, even a kinky increase in the price of alcoholic beverages does not result in a fall in the beat demanded. There would, in all likelihood, be a shift away from the exercise of relative ly more expensive alcoholic beverages towards relatively cheaper alcohol not a complete cessation in the manipulation of alcohol. This is one of the reasons that SABMillers share price has shown steady gains relative to the foodstuff. CPI indicator relevant to Rainbow Chicken pic Source www. statssa. gov. za Consumer food price inflation decelerated sharply from December 2010.It is also interesting to note, that between January 2009 and January 2010, the prices of chaff fell by 24,58%, corn by 22,57% and sunflower seeds by 18,49% (www. finweek. co. za) Decreases in the prices of these staple fibre foods has a positive impact on the poor as they spend 33,4% of their incomes on food versus the rich who spend a mere 2,6% of their incomes on food. Poor multitude consume relatively more bellyacher than red meat because the latter is relatively more expensive. Chicken is the cheapest form of protein in South Africa and demand for it is high (www. astralfoods. com).Furthermore, the above staple foods are used as grumbler feed which is a significant input cost for Rainbow Chicken, therefore the federation has had cost savings because of bumper crops and the consequent price decreases in these commodities. The table on the following page openly accounts for the nearly straight counterbalance in the graph above which shows food price inflation. pic Source www. resbank. co. za gross domestic product South Africa pic pic Source www. statssa. gov. za The graphs above show that South Africa was in a recession in 2009, as defined, because of the two full-strength hindquarterss of ostracize GDP harvest.Our convalescence from the global recession was due to the fact that we had a low exposure to the sub-prime market crisis that was responsible for the global meltdown. Our banking and macroeconomic policies remain robust. The reaping in the economy from the third quarter of 2009 is also due to infrastructural investments that were make for the 2010 Soccer Wor ld Cup as well as South Africas contributions to the BRIC acclivitous markets bloc especially our trade with China. It is expected that our formal inclusion to the BRICS nations since April 2011 go forth maintain the up trend in GDP (www. lobalsherpa. org). Positive GDP maturement has a positive impact on the performance of SABMillers and Rainbows shares. In a boom everyone does well. SABMiller, in particular, has a presence in all vanadium BRICS nations and is poised for appendage as appear market economies have overinterpreted developed economies in their contributions to global GDP. We straightaway examine SABMillers share price in more detail and then turn our attention to Rainbow Chicken in light of the foregoing discussions on the global and local environments. digest of SABMiller pic SABMiller is a global operation practical application 75 countries on six continents and employing over 70 000 people. Its portfolio of rail linees is divided into six regions and is well balanced between developed and emergent markets. Between them, the businesses produce over 200 different brands and sell 213 million hectoliters of laager a year. Since listing on the London Stock Exchange 10 years ago the company has grown considerably and has a market capitalisation of ZAR 419,837,700,000 on the JSE and GBP 36,099,310,000 on the LSE.The companys markets hunt down from developed economies such(prenominal) as the the States to the fast growing BRICS economies (SABMiller yearly Report, 2009). SABMiller is also the number one bottler of soft drinks for The coca Cola Company. The beer makeries market can be seen as oligopolistic in nature since SABMiller and its three main competitors (Heineken, Anheuser-Busch InBev and Carlsberg) are the dominant players in the market and have significant market share amongst them.The oligopolistic market structure has a positive impact on the companys operations and share price performance. In North America, SABMiller ( by dint of its strategic partners) is the second-largest brewer in the United States and owns nearly 30% of the US beer market. In Latin America, it is the number one brewer by market share. In the majority of the ten atomic number 63an countries in which it operates, the company is the number one or number two brewer by market share. The same holds for Africa and Asia.In the 2009 annual report Mayer Kahn, the Chairman of the Board, verbalize that the global brewing intentness was expected to continue to consolidate and that participation in industry consolidation provides opportunities to enter result markets and to create value from scale benefits. The graph below shows SABMillers share price relative to its three main competitors. It is clear that all four companies trajectories have locomote in tandem but Carlsbergs share price has significantly taken the lead with SABMiller in second place.At the turn of the century, the top 10 brewers accounted for just over one-third of glob al beer sales volumes. The past decade has seen a quick consolidation, resulting in the top four brewers Anheuser-Busch InBev, SABMiller, Heineken and Carlsberg account statement for almost 50% of beer sales volumes and up to 75% of the global profit pool. (SABMiller yearbook Report, 2010) pic Source www. heineken. com Mr Kahn attributes the companys bully results (in both 2009 and 2010) to the operational strengths of the businesses and the power of their prima(p) local brands.He concedes that even though SABMiller was not immune to the global crisis, beer is a fairly resilient product which determined the company in a founder position than many to weather the storm. He goes on to say Thanks, partly, to our long pay off of emerging markets, we are used to direct under tall(prenominal) conditions. If we look dressing ten years to our London storehouse market listing, it is worth remembering that the Asian currency crisis at that time had shake investor confidence in e merging markets and that the panorama was far from encouraging.Nevertheless, we prospered and grew and achieved the international expansion that our listing was intended to facilitate. Ten years on, our geographical spread is proving to be an advantage in that different countries are affected by the crisis at different rates and to differing degrees. So charm demand in europium has dropped sharply, countries in emerging markets such as Africa and Asia have fared relatively well patronage go back from the high one might say unsustainable rates of growth of recent years. SABMiller one-year Report, 2009In short, SABMillers diverse spread of businesses, weapons-grade market positions, and a portfolio of leading brands mitigated against the risks and negative consequences of the global downturn and contributed to the steady upward nervous impulse in the share price. In response to the mismatch between the tag on of, and demand for, certain brewing and box desolate materials in Africa, the company is more and more using locally grown crops such as sorghum and cassava to produce affordable brands. This is done to minimise egress shortages and the price volatility of anchor raw material inputs.Continued robust determine and productivity enhancements offset change magnitude trade unassailable costs (SABMiller yearly Report, 2010). It comes as no surprise, therefore, that the combination of the above factors resulted in a steady upward trend in the companys share prices on both the London and Johannesburg bourses in the period under review as seen in the graphs below. picpic Source www. sabmiller. com In 2010, Mr Kahn had similar good news for investors, citing the same reasons as for 2009. However he mentions the companys concern team as being a key contributor to the positive results This year, in addition, we have benefited from managements big businessman to reduce costs and selectively increase prices in order to maximise revenues Source SAB Miller Annual Report, 2010 In the third carve up of our Executive Summary, we mentioned that the management of any company is not responsible for the share price. However, in fulfilling its primary objective of maximising stockholder value, the credibility of and strategies employed by management invariably have an impact on the share price. It would appear that the management and directorship of SABMiller are market-friendly.The members of the executive team are interpreter of each of the continents in which the company operates with Mr Cyril Ramaphosa and Dr Dambisa Moyo as the notable representatives for Africa. Other market-friendly strategies include the December 2009 declaration that 8. 45% of the shares in SABMillers South African subsidiary, The South African Breweries Ltd (SAB), would be placed under black-market ownership as part of its commitment to Broad-Based char Economic Empowerment in South Africa. This transaction created 40,000 new shareholders among SAB employ ees and passage retailers.The deal also created a sympathetic foundation that holds 18% of the shares that were issued under the transaction. The dividend income will be used for the benefit of the wider South African community (SABMiller Annual Report, 2010). The company also capitalised on the strength of emerging markets (particularly in China and Africa) by channeling its growth strategies to these markets. Globally, the beer market grew by 1. 5% in 2010, led by a inveterate strong performance in Asia, Africa and Latin America. China grew by 6. 5%, Africa by 3. 1% and Latin America by almost 3%.Western Europe continued the trend of declining beer volumes, driven by a shift in consumption to other beverages and the decline of on-premise consumption. Source SABMiller Annual Report, 2010 In the 2010 financial year the company acquired four new breweries in China, invested in new breweries in Tanzania, Mozambique, Angola and Southern Sudan and carried out expansions and upgrades in Uganda and Zambia. The trends in the graphs depicting SABMillers share price on both the London and Johannesburg Securities Exchanges (given above) require no pass on explanation.With good management being both a contributory factor to and a consequence of the shares strong performance, it is reasonable to conclude that the positive momentum will continue. pic Analysis of Rainbow Chicken pic Rainbow Chicken Limited is the largest processor and marketer of cowardly in South Africa. It is a richly integrated broiler producer that breeds and rears its own descent which it feeds from its own feed mills. Rainbow processes, distributes and markets fresh, frozen, value-added and further-processed complainer. The company has a market capitalisation of ZAR 6 124 893 000 009 was a very challenging year for the South African domestic fowl industry, both locally and globally. The local chicken industry was negatively impacted by the fall in demand due to the recession. An oversupply b y local producers and increased imports due to the strong rand also added to the industrys woes. These difficult market conditions were a further see of Rainbows differentiated brand strategy, which through its foodservice and consumer brands, seeks more consistent, profitable and sustainable business (Rainbow Chicken Annual Report, 2009). Despite these challenges, Rainbow managed to keep open an acceptable overall performance.Positive performance, like a rally in the share price, is a function of several variables and while we can make inferences about the correlation coefficient between the two, we make no such inferences about their causality. Like SABMiller, Rainbows Black Economic Empowerment transaction (which was cogitate in July 2008) was market-friendly and boosted the companys share price. Rainbow provided vendor financing for a 15% equity stake that was issued to a mob that was constituted by its employees, Imbewu Consortium, Ikamva Labantu, and Mrs M Nhlanhla, a non- executive director. The BBBEE transaction resulted in the share price rallying from R12. 0 to R16. 80 in the latter period of the second quarter of the 2009 financial year as shown in the graph on the following page. 2010 was an as challenging year for Rainbow but its effects were mitigated by South Africas steady recovery from the recession, a lower interest rate and inflationary environment. maize prices declined since their peak in July 2008. The global financial crisis caused a dramatic decrease in the demand for maize, improving the previously dangerously low US and global maize stock situations to such an extent that international prices fell sharply from their record levels. Rainbow Chicken, Annual Report, 2010). The fall in maize prices, which is a major component in chicken feed, resulted in a reduction in the companys input costs which boosted the bottom line. Local producers added significant labor capacity for wheat, grain and soy over the past five years. Rainbow im ports the soya component of its chicken feed from Argentina and it has a significant FOREX exposure. The strong rand, however, in the period under review, has been in the companys favour. The companys 2010 annual report reflected acceptable profit margins.In both 2009 and during 2010, the companys share price maintained its upward momentum as reflected in the graph below. pic Key Features Rainbow Chicken Share Price Year humble High 2009 11500 16800 2010 15900 16900 The graph and table above confirm the findings in the preceding paragraphs. Although the firing off between the years highest share prices is negligible, South Africas economic recovery may be gleaned from the fact that the lowest share price for 2010 was 4400c above the 2009 low. Consumers disposable incomes were higher in 2010 because of falling interest and inflation rates. Falling input costs and increased consumer demand increased the appetite for the companys shares as investors expectations of earning bett er returns were supported.Other events that led to sharp movements in the companys share price include the markets speculative expectations immediately prior to the announcement of the groups 2009 results. After the results were announced, the share price dropped to R13. 90 because of the 39. 6% decline in headline earnings. The reason for this decline in earnings can be attributed to the companys policy of purchase feed products forward. The share price fortify for the remainder of 2010 due to an increase in the multitude of families that joined the ranks of South Africas middle kinsfolk.As the middle class grows in size, so the taste of chicken diversifies allowing entrepreneurs to come up with new ways of marketing chicken to end consumers. We now turn our attention to Rainbows competitor, star(p) Foods, to get a better cerebration of the South African fowl industry before making conclusions about how excusable a continued rally in Rainbows share price is. stellar(a) Food s is Rainbow Chickens nearest competitor. The company holds investments in subsidiary and joint gauge companies.Its primary activities are animal feed pre-mixes, the manufacturing of animal feeds, broiler genetics, the output and sale of stale broiler chicks and hatching eggs, integrated breeder and broiler intersection operations, abattoirs and the sale and distribution of various key poultry brands. Its current market capitalisation is R5,5 bn (www. moneyweb. co. za) Despite a 5% drop in sales volumes, revenue for stellar Foods poultry division increased by 13% for the 2009 financial year. (Astral Foods Annual Report, 2009).The market was neutral about the appointment of Chris Schutte as the Chief Executive Officer, effective 1 May 2009. The share price was also not responsive to the appointment of Daan Ferreira as the Financial Director. This may be because it was not perceived to be mindful of BBBEE. The value in Astral Foods revenue for the 2010 period was largely attribu table to a sustain growth in volume. The volume growth was on the back of improved production results supported by better poultry health status.Depressed consumer spending, together with higher levels of imports and high local stock levels, contributed to energetic promotional activity with prices at levels below historical levels. Reduced feeding costs during the period countered the effects of lower poultry selling prices. A lengthy period of industrial action at Earlybird Standerton negatively impacted the companys share performance. (Astral Foods Annual Report 2010) pic The graph above shows the steadily upward trend in Astral Foods share price.Not surprisingly, it follows a similar pattern to Rainbow Chickens share price with pronounced sell-offs in the first and second quarters of 2009 and improvements thereafter. This pattern provides comfort because of the consistency of both companys responsiveness to events in the poultry industry. It would be concerning if the comp anies had different trajectories. The consensus amongst analysts is that the South African poultry industry is poised for significant growth given that the price of chicken has risen by 30 per cent year-on-year while the cost of feed has come down.We anticipate that Rainbows share price will maintain its upward trend. BIBLIOGRAPHY 1. Astral Foods Limited Annual Report, 2009. www. astralfoods. com 2. EIA Independent Statistics and Analysis, US Energy Information Administration, www. eia. doe. gov 3. www. eskom. co. za 4. www. finweek. co. za/Economy/Food-inflation-still-a-concern-20100301 5. www. globalsherpa. org/china-africa-brics 6. www. heineken. com 7. www. moneyweb. o. za 8. Rainbow Chicken Limited Annual Report, 2009 and 2010, www. rainbowchicken. co. za 9. Reserve Bank Quarterly Bulletin March 2011,www. resbank. co. za 10. SABMiller PLC Annual Report, 2009, www. sabmiller. com 11. SABMiller PLC Annual Report, 2010, www. sabmiller. com 12. Statistics South Africa, Statist ical release P0141, www. statssa. gov. za 13. www. xe. com pic Economics Assignment 2011 GLOBAL surroundings LOCAL ENVIRONMENT INDUSTRY / COMPETITORS confederation SHARE PRICE