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Plan

• Big picture• Company’s snapshot• Strengths & weaknesses• Developing new strategies• Risk & sensitivity analysis• Financing• Conclusion

Team line-up

Volodymyr LozovyiOleksa Stepaniuk

Liliia MurzaievaBorys Trofimov

Company’s goal: increase profitability and decidewhether the 80% value-added strategy makessense, taking into consideration all currentcircumstances

Key question: elaborate the Hungerit’s strategyfor future development and opportunities ofexpansion into new markets, given thecompany’s financial and organizationalcapabilities

Developing new strategies Sensitivity analysis & financing

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Company’s snapshot Strengths & weaknesses

Big picture

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Step 1Market place

Instrument: 4 C’sProductsInstrument: 4 P’s

Financial analysis:key ratios

Company’s snapshot

Step 2

• Determine strengths & weaknesses ofthe company based on the findingsfrom the previous step

• Develop strategies aimed to improverevealed company’s weaknesses &profitability

Step 3

Two main strategies are considered:• Enter into a new market• Develop a new product

In addition we argue why the 80% value-addedstrategy does make sense

Step 4

We run the sensitivity test in order toselect the best strategies for the short-and the long-run.


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Company analysis: market place & products

3

CustomersCost

Competition Channels

4 P’s

• product mix:80% fresh, frozen poultry, 20% pre-cooked products • vertically integrated business:own hatcheries, 8 farms,3processing plants.

Production• well-known brand in EU due to supply of high-quality products• recent development of new distinctive packaging

Promotion

• relatively lower prices at foreign markets• no power to influence market prices because of small size• pressure from large retailers at domestic markets

• large retailers, small shops and “factory shops” in Hungary• large retailers in 35 countries• presence of competitors on both domestic and foreign markets

PlacePrice

• fresh poultry: all kinds of households • pre-cooked products: economically active population.• partial loss of high-income consumers due to recent stop of foie gras production

Customers

CustomersCost

Competition Channels

4 C’s

• market share:5th largest domestic supplier,2nd largest exporter• competitors:4 main domestically,4 main worldwide • tendencies: M&A in industry, expansion by low-cost Brazilian producers

Competition

• direct sales to retailers throughout Hungary• sales through brokers and traders internationally

Channels

• main component -cost of feed (70% of costs)• facilities along the rail line –minimization of transportation costs• upward trend in wages rates and feed prices

Costs

2008• turnover: € 130 million• number of employees: 1’450

Developing new strategies Sensitivity analysis & financingCompany’s snapshot Strengths & weaknesses

Company analysis: finance

1991• turnover: € 3 million • number of employees: 150

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0

10

20

30

2004 2005 2006 2007 2008E

Export

Domestic sales

Other

46%53%

52% 57%50%

40% 40% 39% 36% 41%

Hungerit was demonstrating stable growth of sales during 2004-2007 years primarily due to the increase in export…

…however, EBITDA margin and return on assets fluctuated from year to year and remained relatively low…

0,0%

5,2%7,8%

6,7%

2,4%0,2%

5,0%4,0%

5,5%

-7,1%

2004 2005 2006 2007 2008E

EBITDA margin

Return on assets

50%

55%

60%

65%

70%

2004 2005 2006 2007 2008E

… primarily because of upward trend in the material prices

Diagram 1. Hungerit's Revenue2004..2008, HUF millions

Diagram 2. EBITDA margins & return on assets dynamic, %

Diagram 3. Material cost-to-Sales, %

+ two lines for microwaveable products

+ slaughtering and minimal processing lines

merging of 3 plants

+ 3rd breaded products line

privatization of the 1st plant

+ chopping line,molding machine,vacuum-pack. line

+ wrapping, boiling, smokinglines

1989-1991

1991

1993

1996

2001

2003

2007

4


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What strategy to choose to level the weaknesses?

5

Strengths• free access to the EU market• high-quality products (meet the quality standards for the EU), low cost of production• sophisticated R&D team• contemporary vacuum-packaging line (the shelf live of fresh products – 16 days)• well-known brand in the Eastern Europe• flexibility of production capacities• highly effective management

Ways to improve• focus on niche strategy, HQ goods, high profitability:

• enter into the new markets• developing new pre-cooked products

Weaknesses• impossibility to sway own pricing policy in Hungary and abroad• existence of much bigger competitors• low cost foreign poultry imports • low sale price to large retailers• 30% lost of revenue via foie gras• future increase in labor costs

Restrictions• maximal outside funds is € 1.5 million• new production line is required to be expanded• price regulations

• Taking into account the revealed weaknesses, in the long-run company should move towards nichestrategy:

• produce mostly HQ goods• retail them in the areas with high GDP per capita

• For this purpose we consider the following strategies: enter a new market & developing a new product


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Entering a new market

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Table 1. Markets. Comparative analysis

Western EU Eastern EU CIS

Current and future market

• mature market• cons. growth: +3.9% per year• prod. growth in ’08..’17: +4%• high GDP per capita

• emerging market• market growth in ’94..’07: +82% • cons. growth: +3.9% per year• prod. growth in ’08..’17: +4%• average GDP per capita

• emerging market• market growth in ‘94..’07: +46% • low GDP per capita

Competitorsand barriers to entry

• current competitors: large companies with HQ goods• potential competitors: even larger ones, because of further M&A• barriers: Hungary is a EU member• market regulation: predictable

• potential competitors:Brazilian & Indian companies expansion• barriers: possible protectionism politics• market regulation: unpredictable

How to become a player/ channels

• collaborating with on-linegrocery stores : use larger wholesale price• reduce number of brokers by contacting large networks

• use brokers and traders: minimal transport costs• use large retail networks: larger revenues

• All of these markets are worth entering, however individual strategy should be developed for each


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Developing a new product

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Factor Value-added vs. Fresh

Profitability more sophisticated manufacturing provides higher profits

Customers rising urban population prefers precooked production because it saves time

Competition non-EU producers possess lower costs: have advantage in crude foodstuffs niche

Table 2. Products type. Pros and cons

• Hungerit can evolve in two directions: develop value-added or fresh production• In each case it must choose between: premium or middle quality of products

Table 3. Products sector. Comparative analysis

Factor Premium sector Middle sector

Product development

create new products, use our flexibleproduction line to develop individual products

introduce existing ideas for 2009

Market strategy

replace “lost” foeigras customers

expand in the developing markets of new-EU members

Customers upper-middle,higher class

middle class

• Company should concentrate on value-added niche• It makes sense to supply product which has highest demand, so products should be differentiated by markets: premium quality for Western Europe & middle quality for Eastern Europe and CIS countries


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How do our strategies response to the most common risks?

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Type of risk Premium sector in Germany Middle sector in Eastern EU Middle sector in CIS

Recession move to middle sector, enlarge proportion of cheaper production

no changes; poultry is one of the cheapest sorts of meat; recession will have no or will have positive effect

Big competitor enters market

market is developed; entry of new HQ players is unlikely

Brazil is already in this market (CIS) thus, in the long-run demand for our middle class poultry will fall; firm should shift to growing premium class

Customers preferences change, misidentify taste

develop new products, make use of flexible production line

middle class production is classical and common for European countries, so change in preferences has low probability

Changes in market regulation policy

predictable and auspicious for EU-members unpredictable; stop sales & move to another market

Table 4. Sensitivity analysis


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What is the best way to finance the company’s growth?

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• All of the developed strategies require new value-added production facilities to be launched• The total cost of this launch is being estimated in the range of 3’000’000 and 4’000’000 Euro

Option Amount of borrowing Pros and cons

Bank loan 1’500’000 Euro both risks & interest are small

Factoring & forfaiting 60 days payments delay from supermarkets ensures accounts receivables up to 10’000’000 Euro

• risks are small• interest rate is likely to be small because of growing CAR and decreasing Debt-to-Equity ratio

IPO significant • risk of upcoming recession• costly• time consuming

M&A significant • risk of upcoming recession• due to a small size can be acquired only

Bonds significant • high premium • limited solvency

Table 5. Financing opportunities

• Summing up all the above we came to the conclusion to take a bank loan of 1’500’000 Euro and fillthe lacking part using a factoring & forfaiting option


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Conclusion

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• The company should concentrate mostly on value-added products because of:• higher margins• better perspectives• less competition

• The company is advised to operate in three markets:• Western EU via current channels as well as develop connections with on-line stores• Eastern EU via brokers and supermarkets• CIS via brokers and supermarkets

• Financing:• 1’500’000 Euro bank loan• 2’500’000..3’500’000 Euro factoring

• Implement the following strategies:

Short-run

• premium quality for Western EU• middle quality for Eastern EU & CIS

Long-run

• premium quality for Western EU• mostly premium & somewhatmiddle quality for Eastern EU & CIS

Documents

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