SPC Ardmona - Cost of Business Challenges and Bailout Troubles - Case Study Example

CRITICAL REPORT OF A BUSINESS CASE SPC Ardmona- Cost of Business Challenges and Bailout Troubles Introduction (150-200) SPC Ardoma or SPCA is Australia’s leading producer of processed fruits. It is a reputable and progressive food processing company-employing thousands of people and providing livelihood to fruit growers, agricultural suppliers, transport and logistics, services, and others. Coca-cola Amatil or CCA, an Australian-owned beverage company took over SPCA in 2005 and since then managed its fruit processing operation in Shepparton. In 2013, CCA asked the Federal and Victorian governments for $50 million financial assistance for consolidation and modernisation of SPCA. However, while the negotiations between the Victorian government and CCA is still in progress, the Federal government rejected the bailout request on grounds that CCA is a profitable company and more capable of helping SPCA. The Victorian government on the other hand in February or two weeks after the Federal government’s rejection made their decision and announced a $22 million bailout package for SPCA. Triple Bottom Line analysis and critical evaluation of the bailout decision using decision-making theories suggest that the Victorian government was at first encouraged by the significant social and economic effect of closing or moving SPCA. However, the decision in a later stage overlooked market trends and profitability of SPCA making it unsustainable even in short term. Case Study Summary (500-600) SPC Ardoma or SPCA was formed in 2002 after two Australian food companies (SPC or the Shepparton Preserving Company (founded in 1925) and Ardmona Fruit Products (founded in 1921)) merged in 2002 . Operating in Shepparton, SPC Ardoma manufacture canned and packaged fruits from Victoria’s Goulburn Valley and considered one of Australia’s leading businesses . In 2005, Coca-Cola Amatil or CCA, another Australian-owned company bought SPCA for $650 million. However, CCA was forced to spend another $200 million after it took over in order to upgrade the old and efficient SPC factories. CCA was also met by strong competition from importers dumping similar but cheap products in the Australia market and was strained to reduce production output and discharged a number of employees . A news report last October 2013 disclosed SPCA’s attempt to obtain a $50 million financial assistance from the Federal and Victorian governments but was told by the Abbott administration to show proof of global competitiveness to qualify . However, regardless of SPC’s readiness to comply with Federal government’s demands, its bailout appeal was completely rejected on grounds that businesses is government responsibility thus no taxpayers money should be allocated to SPC’s recovery . In an interview with Treasurer Joe Hockey, he expounded this “taxpayers’ money” issue by disclosing CCA as profitable company earning about $215 million in the first six months of 2013 and therefore in a better position to save SPC . A similar argument was used by Dar es Salaam (a city in Tanzania, Africa) government when it rejected Precision Air’s Sh52 billion-bailout appeal . The government according to was initially eager to help because Precision Air is Tanzania’s fastest growing airline but rejected the appeal after discovering that majority of Precision Airways share is owned by Kenya Airways - a successful and profitable airline company like CCA that earned 85.1 billion passenger revenues in 2013. Dissatisfied with the federal government rejection and in recognition of SPC’s economic contribution in the Goulburn Valley, the Victorian government decided to help SPC and save 5,700 employees from losing their jobs . Consequently, about two weeks after federal government’s rejection, the Victorian government entered a $100 million co-investment with CCA and released $22 million initial bailout money . The conditions of the bailout package include retention of minimum 500 full-time staff, CCA to contribute $78 million, and refund of all money invested if SPCA cease to operate within five years . Australian columnist Adele Ferguson of The Sydney Morning Herald perceived the bailout as Napthine government’s political strategy as it will benefit from CCA’s retention of 500 full-time staff and avoid the political implications of unemployment in the coming November 2014 election . It is important to note that CCA’s intention in acquiring SPC in 2005 according to , was to diversify and attract health consumers by adding processed fruit to its beverage brand but later discovered that SPC factories were old and inefficient for its diversification plan. Moreover, under the original proposal added, CCA was actually asking $140 million for retrofitting ($90 million from CCA, $25 million from Victorian government, and $25 million from the federal government) rather than bankruptcy or economic failure requiring immediate bailout. The above information suggest that both governments were perfectly aware of CCA’s true intention and financial capability but contrary to Federal government’s understanding of its priorities and obligations, the Victorian government ignored the facts and entered a co-investment agreement. Critical Evaluation of Victorian government’s bailout decision (1,200) Perceived Major Impact of Business Closure Contrary to Federal government line of thinking about the extent of its obligations in bailing out businesses, the Victorian government decision to grant a bailout package to SPCA may be initially influenced by its perceived major social and economic impact of business closure. This in particular is the various consequences of closing Australia’s largest and last remaining major food processor and packaging company employing thousands of workers . In practice, government bailouts according to , are mostly provided to large businesses that closure or bankruptcy can significantly affect the economy and therefore applicable to SPCA. For instance, when SPC moved to Indonesia because of cheap imports effect on sales and income, closure of SPC Ardoma’s factories will harm factory workers, farmers, fruit and vegetable growers, and food manufacturers . However, not all large businesses with major social and economic impact are qualified for a bailout This is because companies with unproductive business values, abusive, and repeatedly making bad business decisions are threats to stability and therefore unworthy of government bailout . For instance, HSBC and RBS’s bailout request in 2013 was rejected by the United States government on grounds that they have number of deficient capital planning practices, exhibited poor governance and weak internal controls . Similarly, the ability to make accurate decision is not merely determined by its preventive effect or increased likelihood of acceptable outcomes but choosing among various alternatives . Critical thinking according to , is an important component of rational and purposeful decision and therefore must be present in Victorian government bailout decision. This is particular is the ability to acquire information, generate alternative solutions, and weigh the advantages and disadvantages of available courses of action as discussed in the following sections, Triple Bottom Line Analysis of Bailout Decision The Victorian government’s bailout decision can be critically evaluated through Triple Bottom Line analysis where sustainability of a particular decision is determined in relation to people (social), planet (environmental), and profit (economic) . The people or social bottom line or outcome of the bailout decision may be measured by its contribution to social justice while planet or environmental outcome will weighed against the degree of environmental quality . The profit or economic outcome of the bailout decision on the other hand may be weighed against its contribution in making SPCA an efficient, productive, and profitable company . People The most prominent effect of the decision to provide financial assistance to SPCA’s modernisation is the preservation of people’s source of livelihood. In the report prepared by the Greater Shepparton City Council in 2013, data suggest that SPCA’s closure or withdrawal from its current site will render 360 Full Time Equivalent staff in Goulburn Valley region and 1,050 seasonal workers during the peak processing period jobless. Moreover, according to report further loss of around 640 jobs maybe expected through employment multiplier effect on associated businesses. These include fruit growers, packaging, agricultural suppliers, transport and logistics, vehicle and machinery maintenance, and services. For instance, there are about 331 non-fruit suppliers, 232 fruit growers’ contracts, and pack houses that rely on SPCA’s for livelihood thus approximately 560 businesses would be directly affected by SPCA’s withdrawal from the region. Planet In terms of environmental impact, SPC Adrmona is operating in Shepparton, which is in the centre of Goulburn Valley. Goulburn Valley, also known as the Food Bowl of Australia because 25% of Victoria’s agricultural products are produced and processed in the area . SPC Ardomona’s sources of fruit are mostly coming from Shepparton and nearby Invegordon, Bunbartha, Adrmona, Tatura and Kyabram. SPCA consume a total of 44.0 hectares of industrial land for its distribution centre, manufacturing and processing plant . The Greater Shepparton City Council report did not mention these plants environmental impact but according to , the food industry is generally energy-intensive and food processing produced larger quantities of waste. Similarly, growing fruits significantly impact the environment particularly water consumption, pollution caused fertilizer and pesticide, and soil erosion . Waste and by-products produced in food processing according to , can only affect the environment if not disposed carefully thus established technique and methods should be applied. However, effectiveness of techniques and methods is dependent on the age, scale, and location of the plant , and therefore may be problematic to old and efficient factories of SPCA. Examination of SPCA’s sustainability strategy reveals its commitment to APC or Australian Packaging Covenant, the framework for management and minimisation of environmental impacts specific to consumer packaging. In fact, it has an action plan for 2011 to 2016 and onsite recovery systems for recycling and used packaging at each manufacturing facilities and therefore has lesser environmental effect.. The bailout decision in relation to this element is therefore sustainable. Profit The Victorian government bailout decision should make SPCA an efficient, productive, and profitable company despite challenging economic conditions. These include reducing the impact of Australia’s high currency rate on global competitiveness, cheaper imported goods, declining export market volumes that resulted to downgrading of Mooroopna plant in 2011, reduction in supply contracts for regional growers, and cancellation of about 60 fruit growing contracts in 2013 . Considering the key challenges facing SPCA, the financial assistance for modernisation by analysis can reduce manufacturing cost through additional efficiency and productivity. However, since profitability is largely dependent on SPC Ardoma’s domestic and global competitiveness, it seems difficult to attain with continuous appreciation of Australian dollar . Data from Greater Shepparton City Council report suggest that the 58% increase in imported canned fruit’s market share was not caused by cheaper imports alone but drought, continuous appreciation of Australian dollar, increased in supermarket chains purchasing power, and decreasing exports market share . It is important to note that the primary reason CCA’s planned withdrawal of Shepparton operation and relocation to Indonesia is competition from cheap imports . The rising Australian dollar on the other hand reduced SPCA’s export to 10% while Australian consumers increasing patronage of imported private brands considerably reduced its income to the point that it has to downgrade, dismissed 150 employees, and consolidate manufacturing operations at Shepparton and Kyabram processing plants . This part element of the bottom line is largely ignored by the bailout decision and therefore not completely sustainable. TBL Result Summary Triple Bottom Line Analysis of the bailout decision suggests that although such decision benefits a large number of people, protect the environment, and improve efficiency and productivity, it is not entirely sustainable in terms of profit. The decision failed to notice main sources of SPCA’s difficulty and partly sustainable because it has short-term beneficial effects, preventive in nature and ignores the potential of other long-term alternatives. It is also irrational because it did not weigh the advantages and disadvantages of investing taxpayers’ money on a business with declining market share. Conclusion (250-300) SPCA certainly qualifies for government bailout as such large organisation employing thousands of people and source of livelihood for about 560 businesses including fruit growers, suppliers, transport, services, and others greatly contribute to the Australian economy. However, the Victorian government bailout decision seems to ignore some important facts about the nature of the bailout request. It was clear that SPCA’s is owned by CCA, a profitable multi-national organisation that is certainly more than capable and in a much better position to provide the required modernisation funds. However, the Victorian government disregarded this reality and even entered into a co-investment agreement using taxpayers’ money despite Federal government’s rejection. Another is the reality that the bailout money would only resolve CCA diversification needs and not SPCA’s actual difficulties regarding cheap imported products, appreciating Australian dollar exchange rate, and decreasing local and export market share. The beneficial impact of the bailout decision identified for People and Planet in the TBL appears credible in the sense that CCA as a large corporation with multinational tentacles have choices and more likely to withdraw its Shepparton operation and move to Indonesia if no bailout is provided. As evidenced by the conditions of the bailout, the Victorian government seems influenced by the political implications of unemployment and collapse of Australia’s iconic fruit processing company, therefore demand retention of at least 500 full time employees and refund of all payment made if the SPCA cease to operate within five years. These conditions actually reflect the value and quality of the Victorian government decision as the state government is in reality entered into risky venture with CCA, a large corporation that can easily refund the money, move the operation to Indonesia where it can effectively operate and make profit, and turn Goulburn Valley into a region of unemployed. References List Read More