Strategic Management Project Group K: Farai Midzi Georgina Venning Amina Parker Nontando Sokhela Juliana Heunis

08 Fall

SMP 2014

Interim Report 2: Ariel

ii

Glossary

AMPS: All Media and Product Survey LSM: Living Standard Measure Peri-Urban: landscape that exists in between rural and urban P&G: Procter and Gamble, a company that sells Ariel laundry detergent Unilever: A direct competitor of P&G that sell both OMO and Sunlight laundry detergent

Table of Contents

Glossary ......................................................................................................................................................................................................................................... ii

Introduction .................................................................................................................................................................................................................................. 1

1. The brand’s positioning across multiple consumer tiers ............................................................................................................................................ 1

2. The product forms available ................................................................................................................................................................................................ 2

3. Above and below the line media used to promote it ..................................................................................................................................................... 3

4. Different trade channels ....................................................................................................................................................................................................... 4

5. Consumer habits ...................................................................................................................................................................................................................... 5

6. Financial Statements (all explanations and calculations appear in appendix) ..................................................................................................... 7

Statement of Comprehensive Income (Income Statement) of Ariel for fiscal year 30th June ................................................................................ 7

Statement of Financial Position (Balance Sheet) of Ariel at 30 June ............................................................................................................................. 8

7. Financial Analysis ................................................................................................................................................................................................................... 9 Solvency ................................................................................................................................................................................................................................... 9

Figure 1: Solvency Results per Year......................................................................................................................................................................................................... 9 Liquidity ................................................................................................................................................................................................................................... 9

Figure 2: Liquidity Results per Year ........................................................................................................................................................................................................ 9 Profitability (Gross Margin on Sales) ............................................................................................................................................................................... 9

Figure 3: Gross Margin of Sales (per year) ......................................................................................................................................................................................... 10 Contribution Margin (according to Sales Mix) ........................................................................................................................................................... 10

Figure 4: Calculation of break even point ........................................................................................................................................................................................... 10

Conclusion .................................................................................................................................................................................................................................. 10

References .................................................................................................................................................................................................................................. 12

Appendix ........................................................................................................................................................................................................................................ a

Consolidated Financial Statements ........................................................................................................................................................................................ a Explanation of Statement of Comprehensive Income (Income Statement) of Ariel for fiscal year 30th June ............................................. a

1. Fiscal year: .................................................................................................................................................................................................................................................... a 2. Sales Income figure: ................................................................................................................................................................................................................................... a Figure 5: Sales Mix (Sales Income) ........................................................................................................................................................................................................... a 3. Cost of sales expense ................................................................................................................................................................................................................................. c Figure 6: Variable Manufacturing Costs (Cost of Sales) ................................................................................................................................................................... c Figure 7: Total Variable costs ..................................................................................................................................................................................................................... d Figure 8: Fixed Manufacturing Costs ....................................................................................................................................................................................................... d 4. Other Expenses ............................................................................................................................................................................................................................................ e Figure 9: Ariel Capital Requirements ...................................................................................................................................................................................................... g

Statement of Financial Position (Balance Sheet) of Ariel at 30 June.......................................................................................................................h 1. Assets .............................................................................................................................................................................................................................................................. h 2. Equity (Owner’s equity) ............................................................................................................................................................................................................................ i Figure 10: Retained Earnings calculation ............................................................................................................................................................................................... i 3. Liabilities ........................................................................................................................................................................................................................................................ j

Appendix 1: Consumer perceptions about Ariel......................................................................................................................................................... iii Appendix 2: People who would consider switching brands .....................................................................................................................................iv Appendix 3: Information people consult when switching brands ........................................................................................................................... v Appendix 4: Favourite detergent brands.......................................................................................................................................................................vi Appendix 5: AMPS statistics on detergent purchases .............................................................................................................................................. vii Appendix 6: AMPS showing income levels per household ..................................................................................................................................... viii Appendix 7: AMPS table indicating LSM levels .............................................................................................................................................................ix Appendix 8: Price of Ariel compared to other brands ................................................................................................................................................ x Appendix 9: Gender of people who purchase detergents .........................................................................................................................................xi Appendix 10: Low-involvement decision making process ..................................................................................................................................... xii Appendix 11: Consumers that are aware of Ariel being sold in South Africa ................................................................................................... xiii Appendix 12: How do consumers evaluate a brand ................................................................................................................................................ xiv Appendix 13: Washing techniques used ....................................................................................................................................................................... xv

1

Introduction

Based on the market research (conducted via both survey and AMPS) this report will

explain the consumer insights learned. Each section will give suggestions of how Ariel

could alter their marketing mix in order to obtain more customer value. Thereafter financial

statements will be presented and analysis on the figures be discussed to explain how the

suggestions made would likely impact on Ariel.

1. The brand’s positioning across multiple consumer tiers

The African continent is divided up into discrete African countries that can be separated by

their internal social and cultural diversity. For example, a single country like South Africa

encompasses approximately 54 million people of diverse cultures, origins, languages and

religions (Statistics South Africa, 2014). Thus, it is essential that Ariel identify the most

attractive markets and tailor their message to fit them, as they cannot be everything to

everyone. Below three consumer tiers will be discussed whilst suggesting how the

positioning strategies should be used to distinguish their products in order for it to occupy a

competitive place in the target consumer’s mind.

Tier 1 is comprised of middle and upper income consumers that have the highest

discretionary spending power of the three tiers. According to Nielsen, these consumers are

well-educated and willing to pay more for better quality consumer goods (Nielsen, 2012). In

order to reach these consumers Ariel needs to base their positioning strategy on quality,

efficiency and trustworthiness. Additionally, Ariel can implement a celebrity-driven

positioning strategy, whereby a celebrity endorses their product and creates brand

awareness.

Consumers in Tier 2 are made up of middle-income individuals that are married, act as the

head of the household, and mostly live in Peri-Urban areas (Nielsen, 2012). These

consumers, whilst concerned about product quality, are generally more concerned with

affordability (McKinsey South Africa, 2012). Thus, when positioning the brand to Tier 2

consumers Ariel should understand that price is very important to them. Additionally, Ariel

should take into account that Tier 2 consumers use either washing machine or hand

washing detergents, and position the relevant products for them.

2

Finally, Tier 3 encompasses low-income segments, with low-spending powers that are

uneducated and are least likely to buy expensive consumer goods (Nielsen, 2012). These

consumers’ purchase decisions are driven by affordability, availability and trust, and are

inclined to buy products on discount. That being said Tier 3 are the largest group of

consumers and are considerably brand loyal. Thus, they provide an opportunity to build a

lasting relationship that can yield lifetime-value returns (Nielsen, 2012). Hence, Ariel should

competitively position their products as affordable through offering promotions and free test

samples. Furthermore, Ariel could communicate the unique benefits of their products more

effectively through an increase in demonstrations and confirmation from current consumers

(through word-of-mouth advertising). It is suggested for this group to communicate the

product features through visual signs and symbols such as putting a picture of a person

washing clothes by hand on the front of the packaging so that they identify Ariel as

trustworthy. It should also be noted that these consumers, because they are so price

conscious, are likely to purchase smaller packets (to use for now when they need it) of

detergent rather than an expensive packet, which costs more per item (Byron, 2007).

2. The product forms available

Below is a description of the product forms that are available in the South African market,

as well as consumer insights obtained about these product offerings and the possible

consequences thereof. Arial have introduced four products to the South African market,

including the “hand washing powder, auto washing powder, washing liquid and

breakthrough innovation auto power capsules” (The Marketing Site, 2013).

The major benefits of these four offerings will now be addressed in turn. Firstly, Ariel’s hand

washing powder has been modified to ensure that it does not dry-out consumers’ hands,

whilst it still has all the power of their other detergents to clean clothes. Secondly, both the

machine-washing powder and liquid enable the consumer to add the correct amount of

detergent necessary per load, without wasting any. Lastly, the power capsules’ design

ensures that clothes get washed properly by containing “super-concentrated detergent,

stain removers and brighteners, respectively” (The Marketing Site, 2013).

While Ariel claims that their products clean and brighten effectively in just one wash, it was

however discovered via the market research conducted that there seems to be a disjunction

between the product’s value proposition (that it cleans clothes well) and what is delivered to

3

their consumers, as only 11% like the brand and think it cleans clothes well while 29% of

respondents did not know much about the product (as seen in appendix 1). This brand

proposition is something Ariel will need to reassure their consumers about through their

advertising and promotional efforts. For example Ariel should increase demonstrations and

give away small, free samples to let consumers see for themselves that it does work.

3. Above and below the line media used to promote it

According to the desk research (conducted in the initial phase of this research) Sub-

Saharan Africa is a patriarchal society, proving that gender roles are entrenched, with

women being responsible for domestic chores, and child rearing. Therefore it is vitally

important for the promotional messages disseminated by Ariel via above the line platforms

to target women. Through psychographic segmentation this promotional strategy would

target women who are mothers, wives, caregivers and homemakers. Although it is still a

patriarchal society, increasingly (in addition to their domestic roles) women in Sub-Saharan

Africa work or run small businesses. Therefore time for them is a matter of concern so the

‘one wash’ tagline would be key in attracting them and should be at the centre of the

promotional campaign. In order to disseminate this message a radio and television

campaign could be launched to raise awareness of the product, as well as how convenient

it is for working mothers, wives and caregivers.

In order to change consumer habits and persuade them to use Ariel, experiential learning is

required (and this could be conducted through below the line media). Using demonstrations

to showcase Ariel as a product would complement the above the line media whilst informing

consumers of the convenience of the product. Having in-store promotional demonstrations

would be a good way to show Ariel to consumers who were previously unfamiliar with it. At

the end of the demonstration, consumers could be given a sample to try at home. They

would then also be incentivised to share their Ariel experience on social media. This would

help in converting consumers who have not tried the product to do so. This promotional

strategy is in line with the market research conducted, which showed that people would

consider switching brands (appendix 2) and what information would enable them to switch

(appendix 3).

4

4. Different trade channels

This section will outline the different trade channels that exist in the three different regions

(specifically Nigeria, Kenya and South Africa) whilst explaining ways this could impact

product choice, sizing and pricing of the product. To ensure that Ariel provides the right

product, to the right consumer in each region they need to understand how the consumers

in each place differ (as mentioned in the consumer tiers’ section of this report) and tailor

their distribution to this. In respect of how distribution in each of the three regions differs,

Arial products are distributed as follows: Firstly, in Kenya and South Africa distribution

occurs through Hypermarkets and Supermarkets such as Woolworths and Pick n Pay,

meanwhile distribution occurs mostly through Shoprite in Nigeria. The second point of

distribution (popular in South Africa and Kenya) is through bigger Wholesalers and Cash

and Carry stores, who often then distribute to bulk buyers - as they are usually cheaper

than normal retailers - and to smaller Spaza Shops. The third distributer is High-Frequency

Stores (found in all three locations), which includes over the counter service executions and

forecourts in garages. Fourthly, Ariel distributes their products through Open Markets,

which (although similar to the High-Frequency Stores) is only popular in Nigeria.

Now that the distribution network has been addressed the section will go on to discuss how

distributors can impact product choice, sizing and pricing. First of all, the market research

highlighted that when it comes to product choice, OMO is the best selling detergent brand

in South Africa as 50% of the people sampled said that it was their favourite detergent

brand. However, what is even more interesting is that Sunlight was the second favourite (at

28%) and Ariel third with 10% (appendix 4). Considering the fact that Unilever’s Sunlight

and OMO brands have been in the South African market for so much longer than Procter

and Gamble’s Ariel (which has just been launched) these statistics seem justified. However,

it is important that Ariel realise that in addition to OMO, Sunlight is also another large

competitor. They should consider this when tailoring the promotion of their product.

Second, in terms of sizing of packages it was discovered from AMPS that almost 27 million

individuals did not purchase a single detergent product (dishwashing liquid/powder/tablets)

in a four-week time span. Instead it was discovered that only about 2.5 million people had

purchased a detergent in the past four weeks (appendix 5). That being said, the fact that

the majority of consumers do not purchase detergent products every month does not mean

that they don’t use detergents in this time but instead maybe suggests that their detergent

5

stocks last more than a month. This has an implication for Ariel in that they should consider

offering promotions on smaller packages of their products to these regions (in the hope of

getting consumers to purchase products more regularly and to prevent sales fluctuations).

Thirdly, with regards to pricing it is important to understand both income and LSM levels of

South African consumers (as this will impact how much the average consumer is willing to

spend on a detergent brand). It was discovered from AMPS that the majority of households

(roughly 7 million) have an income of 0 to 50 000 (appendix 6); whilst the majority LSM of

households fell between the 5-7 range (appendix 7). Combine these statistics to what was

discovered in the first section of this report, namely that the majority of African consumers

do not earn a lot of money and it becomes obvious that Ariel needs to determine their

pricing according to what their consumers can afford to pay, something they do through

"reverse engineering" (Byron, 2007), which involves first considering what a consumer can

afford to pay and then assigning a price accordingly. While this attempt is noble Ariel needs

to ensure their retailers are being as conscious and therefore they need to look for

distributers that are willing to promote their products at an affordable rate. This is the case

with Shoprite and Pick n Pay both of which give Ariel preference on their shelves (placing

them at eye-level). However, one does wonder if Woolworths (a shop that targets a higher

LSM) is a good decision for Ariel, which is considered to be cheaper than many other

brands on the shelf (as evidenced in appendix 8).

5. Consumer habits

In order for Ariel to create value for consumers and profits for Procter and Gamble (P&G),

the marketing strategist needs to understand the decision-making process and consumer

habits involved in making decisions. In terms of the consumers likely to purchase detergent

products early studies of consumer habits saw the wife as the dominant decision maker

involving household items (Koul, Sinha & Mishra, 2014). This trend was confirmed in the

market research, which confirmed that 60% of the detergent buyers were female and 40%

were males (appendix 9).

Next, when looking at the product choice and evaluative criteria involved in making that

choice, it was noted by Ghela (2006: 31) that detergent purchases fall under low-

involvement purchase category as consumer habits are informed by nominal or limited

decision-making process (appendix 10). Implying that once consumers are sufficiently

6

happy with their detergent of choice they will become brand loyal and have repeat

purchases.

On the other hand, limited decision-making involves “internal and external search with

fewer alternatives with employment of simple decision rules” (Ghela, 2006: 34). Market

research indicated that 81% of consumers in South Africa know that Ariel is sold locally

(appendix 11) and 69% of consumers in sub Saharan Africa would consider changing

bands (appendix 2) – which presents Ariel with an opportunity to market their product to

these prospective customers. In order to take advantage of this opportunity and gain a

competitive advantage Procter and Gamble needs to understand their consumers and the

fact that 58% of consumers in the market research indicated that post purchase evaluations

are done on social media (appendix 12).

Therefore, in order to change their perceptions of the brand Ariel need to educate these

people about the product (they could provide information flyers about Ariel with lots of

images on the pamphlet to make the instructions easier for the illiterate population). Next,

because of the importance placed on word-of-mouth advertising (as seen by the 22% of

people who claimed they would want a recommendation, in appendix 3) Ariel should use

recommendations (word-of-mouth) and opinion leaders (celebrities) to promote the product.

Thirdly, for those that don’t think Ariel cleans clothes effectively they should hand out free

samples. Finally, Ariel need to spend time updating their social media sites in order to

promote post-purchase evaluation and generate reassurance of the purchase.

In relation to product usage, it was discovered in the desk research that washing habits

vary in sub Saharan Africa. The overall market research found that 69% consumers wash

their clothes by machine, followed by 17% hand wash and the rest used other means

(appendix 13). This highlights how important it is to distribute the correct product to the

correct region, with the correct information displayed on the packet to make it easily

noticeable to consumers. Below is a projected income statement and balance sheet for

Ariel with the suggestions made throughout this report being taken into account. Thereafter

is a financial analysis based on what is found in the financials.

7

6. Financial Statements (all explanations and calculations appear in appendix)

Statement of Comprehensive Income (Income Statement) of Ariel for fiscal year 30th June

(All figures are in Rands)

2015 2016 2017 2018 2019

Sales Income 76 091 774 220,00 118 703 167 783,20 127 834 180 689,60 136 965 193 596,00 146 096 206 502,40

Less: Cost of Sales Expense 20 868 079 800,00 27 115 183 740,00 29 197 551 720,00 31 279 919 700,00 33 362 287 680,00

Less: 2% wastage allowance 417 361 596,00 542 303 674,80 583 951 034,40 625 598 394,00 667 245 753,60

Gross Profit 54 806 332 824,00 91 045 680 368,40 98 052 677 935,20 105 059 675 502,00 112 066 673 068,80

Less: Operating expenses 290 835 000,00 323 455 000,00 347 246 610,00 351 221 070,46 403 690 358,07

Marketing and selling expense 100 000 000,00 80 000 000,00 50 000 000,00 1 000 000,00 300 000,00

Distribution expense 100 000 000,00 150 000 000,00 200 000 000,00 250 000 000,00 300 000 000,00

Utilities expense 40 000 000,00 42 620 000,00 45 411 610,00 48 386 070,46 51 555 358,07

Insurance expense 1 000 000,00 1 000 000,00 2 000 000,00 2 000 000,00 2 000 000,00

Salaries and wages 8660000 8660000 8660000 8660000 8660000

Depreciation on Land and Buildings Expense 40 000 000,00 40 000 000,00 40 000 000,00 40 000 000,00 40 000 000,00

Depreciation on Vehicles Expense 1 175 000,00 1 175 000,00 1 175 000,00 1 175 000,00 1 175 000,00

Net Operating profit 54 515 497 824,00 90 722 225 368,40 97 705 431 325,20 104 708 454 431,55 111 662 982 710,73

Less: interest expense (at 7%) 33 238 100,00 33 238 100,00 33 238 100,00 33 238 100,00 33 238 100,00

Net Profit before taxation 54 482 259 724,00 90 688 987 268,40 97 672 193 225,20 104 675 216 331,55 111 629 744 610,73

Less: Taxation (at 28%) 15 255 032 722,72 25 392 916 435,15 27 348 214 103,06 29 309 060 572,83 31 256 328 491,00

Net Profit R39 227 227 001,28 R65 296 070 833,25 R70 323 979 122,14 R75 366 155 758,71 R80 373 416 119,73

8

Statement of Financial Position (Balance Sheet) of Ariel at 30 June

2015 2016 2017 2018 2019

Assets

Non-Current Assets

Land and Buildings - Carrying Amount 360000000 320000000 280000000 240000000 200000000

Vehicles - Carrying Amount 22325000 21150000 19975000 18800000 17625000

Current Assets

Inventory 3 130 211 970,00 4 067 277 561,00 4 379 632 758,00 4 691 987 955,00 5 004 343 152,00

Trade receivables 15218354844 23740633557 25566836138 27393038719 29219241300

Bank 2190104679 25704237190 58846932772 94510716672 R

132 678 130 753,08 15% of Cost of Sales

Total Assets R20 920 996 493,14 R53 853 298 307,51 R89 093 376 667,84 R126 854 543 346,44 R167 119 340 205,56 20% of Sales

Balancing Figure

Equity and Liabilities

Owner's Equity

Capital 50 000 000 50 000 000 50 000 000 50 000 000 50 000 000

Retained earnings 19 613 613 500,64 52 261 648 917,26 87 423 638 478,34 125 106 716 357,69 165 293 424 417,56

Non-Current Liabilities

Long-term Loan 474830000 524830000 524830000 524830000 524830000

Current Liabilities

Trade Payable 782552992,5 1016819390 1094908190 1172996989 1251085788

Total Equity and Liabilities R20 920 996 493,14 R53 853 298 307,51 R89 093 376 667,84 R126 854 543 346,44 R167 119 340 205,56

Retained Earnings 2015 2016 2017 2018 2019

Openings Balance 0 19 613 613 501 52 261 648 917 87 423 638 478 125 106 716 358 25% of Inventory

Profits in Current year 39 227 227 001 65 296 070 833 70 323 979 122 75 366 155 759 80 373 416 120

Less: Dividends 19 613 613 501 32 648 035 417 35 161 989 561 37 683 077 879 40 186 708 060

Closing Balance 19 613 613 501 52 261 648 917 87 423 638 478 125 106 716 358 165 293 424 418

9

7. Financial Analysis

The following brief financial analysis was performed in order to illustrate Ariel’s financial

stability and efficient financial management.

Solvency

By performing the following solvency ratios, it will display Ariel’s ability to pay its total

liabilities with its total assets

Solvency Ratio: assets – liabilities = net asset value

Figure 1: Solvency Results per Year

SOLVENCY RESULTS

2015 2016 2017 2018 2019

R16, 59 R34, 81 R54, 83 R74, 50 R93, 88

Thus, because the values are positive, this means that Ariel’s shareholders equity is

solvent.

Liquidity

The following liquidity ratio shows Ariel’s ability to pay its liabilities within the next 12

months, or as they become due.

1. Current Ratio: current assets ÷ current liabilities

2. Acid-test Ratio: (current assets – inventory) ÷ current liabilities

Figure 2: Liquidity Results per Year

LIQUIDITY RESULTS

2015 2016 2017 2018 2019

Current Ratio 26,7:1 53,3:1 82,1:1 109,3:1 135,1:1

Acid-test Ratio 22,7:1 49,3:1 78,1:1 105,3:1 131,1:1

These values display that Ariel is incredibly liquid, meaning they are able to pay their short-

term debts immediately, and without having to rely on inventory.

Profitability (Gross Margin on Sales)

Gross Margin: (gross profit x 100%) ÷ sales

10

Figure 3: Gross Margin of Sales (per year)

Gross Margin on Sales (per year)

2015 2016 2017 2018 2019

73,36% 77,81% 77,81% 77,81% 77,82%

The calculation of Ariel’s Gross Margin shows the increasing profit the company is making

by its primary trade, year-on-year. Therefore, through this financial analysis we can see

how efficient Ariel is being at reducing its cost of sales expense.

Contribution Margin (according to Sales Mix)

The following analysis shows the number of sales mixes that must be sold for Ariel to break

even.

Figure 4: Calculation of break even point

Income per sales mix 4680,9

Variable Cost 1281

Fixed costs 44400000

Contribution Margin per unit 3399,9

Break even point 13059,21

In order to calculate the contribution margin, Ariel’s variable costs (per one sales mix) were

deducted from the income per sales mix. Subsequently, the break-even point was

determined by taking Ariel’s fixed costs (per one sales mix) and divided by the contribution

margin per unit.

Conclusion

In conclusion this submission has discovered that considerable work still needs to be done

to educate people about the brand’s conception onto the market (e.g. through

demonstrations and giving away free samples), as 19% did not know it is sold in South

Africa (appendix 11). In addition to this consumers also need to be told more about the

product information itself (e.g. through flyers with images), as 29% of people say they know

little about the product (appendix 1). Next, Ariel need to continually garner positive

discussion about the product (through word-of-mouth advertising and a celebrity

endorsement) and reaffirm this positivity online via their website (to reassure consumers’ of

11

their choices in post-purchase evaluation). The financials were generated to explain the

impacts of the suggestions.

12

References

Byron, E. 2007. P&G's Global Target: Shelves of Tiny Stores. [Online]. Available from:

http://online.wsj.com/articles/SB118454911342967244 [2014, September 21]

Ghela, D, N. 2006. The purchasing behaviour in the detergent industry: A PMB case study

on the feasibility of starting a new detergent business venture. [Online]. Available from:

http://researchspace.ukzn.ac.za/xmlui/bitstream/handle/10413/1428/Ghela_DN_2006.pdf?s

equence=1. [2014, September 12].

Koul, S. Sinha, P, K. & Mishra, H, G. 2014. Decision Making Process for Bottom of the

pyramid consumers: A case of FMCG products.[Online]. Available from:

http://nmims.edu/NMIMSmanagementreview/pdf/april-may-14/decision-making-process-

bottom-of-the-pyramid-consumers-surabhi-piyush-and-hari.pdf [2014 September 12]. 30-35.

McKinsey South Africa. 2012. The rise of the African consumer. [Online]. Available from:

http://www.mckinsey.com/global_locations/africa/south_africa/en/rise_of_the_african_consu

mer [2014, September 13].

Nielsen. 2012. The Diverse People of Africa. [Online]. Available from:

http://www.nielsen.com/us/en/insights/reports/2012/the-diverse-people-of-africa.html. [2014,

September 12].

Statistics South Africa. 2014. Statistical release: Mid-year population estimates 2014.

[Online]. Available from: http://beta2.statssa.gov.za/publications/P0302/P03022014.pdf

[2014, September 12].

The Marketing Site. 2013. South Africans set new Guinness World Record as P&G

launches leading laundry brand ARIEL™.[Online]. Available from:

http://www.themarketingsite.com/news/31037/south-africans-set-new-guinness-world-

record-as-pg-launches-leading-laundry-brand-ariel [2014, Auguest 12].

a

Appendix

Consolidated Financial Statements

Having operation in three different countries will mean that a different company must be

established to operate in those countries. However, if all of those companies are

subsidiaries of a South African parent company, it is appropriate to consolidate all of their

financial information into one set of financial statements.

Explanation of Statement of Comprehensive Income (Income Statement) of Ariel for

fiscal year 30th June

1. Fiscal year:

Ariel said their fiscal year runs from 31 July-30 June therefore the projected income

statements and balance sheets have been created as at 30th June of each year.

2. Sales Income figure:

We produced a sales schedule and cost of sales schedule based on the sales mix. A sales

mix is what the estimated percentage split would be between auto-powder machine wash,

hand wash, capsules and auto liquid sales would if 100 units were sold. These figures were

then multiplied with the individual selling prices of each product as currently sold at Pick n

Pay, which sells to a target market that falls within the LSM 5-7 range.

Figure 5: Sales Mix (Sales Income)

SALES MIX (SALES INCOME)

Number of units Selling Price Income per Sales mix

Hand wash 20 35,9 718

Machine

wash 50 42,9 2145

Liquid 20 42,9 858

Capsules 10 95,99 959,9

Total 100 4680,9

The table above illustrates the amount earned in sales if one sales mix was sold (which

includes 100 units).

b

From this we need to take the population figures of each region into account as well as their

potential growth rate and estimated growth in market share: this will be done below.

The sales population for each year was calculated from a rounded estimate of the number

of people in each region and is as follows:

Population of South Africa: 52. 98 million (2013 statistic taken from Google)

Population of Kenya: 44. 35 million (2013 statistic taken from Google)

Population of Nigeria: 173.6 million (2013 statistic taken from Google)

Therefore total potential population from all three countries (52.98 + 44.35 + 173.6) =

270.93 million.

However, from the market research done in South Africa we assume that only 6% of people

will choose Ariel as their brand of choice therefore 270.93 million x 6% = 16.2558 million

are likely to purchase the product in 2015.

However, it is assumed (based on our own assumption) that there will be on average a

projected growth rate of 20% each year. A high growth rate has been used because whilst

Ariel is still trying to gain market share (especially in South Africa) in a few years’ people will

be more inclined to use Ariel. In addition to this due to the increased promotions and free

samples that will be handed out we expect the 6% consumer figure to increase at an

increment of 0.5% year-on-year, especially as 69% of people sampled said they would

consider switching brands (appendix 2) therefore the years 2016,2017,2018 and 2019 sales

figure will be as follows:

2016: 270.93 million x (1+20%) x 6.5% = 21132540

2017: 270.93 million x (1+20%) x 7% = 22758120

2018: 270.93 million x (1+20%) x 7.5% = 24383700

2019: 270.93 million x (1+20%) x 8% = 26009280

Now that we have the total potential target market figure inclusive of the growth rate and the

0.5% year-on-year increase in market share we will multiply this figure with the total income

taken from one sales mix to give us the total sales income per year.

2015: 16255800 x 4680,9 = 76 091 774 220,00

2016: 21132540 x 4680,9 = 98 919 306 486,00

2017: 22758120 x 4680,9 = 106 528 483 908,00

c

2018: 24383700 x 4680,9 = 114 137 661 330,00

2019: 26009280 x 4680,9 = 121 746 838 752,00

3. Cost of sales expense

Cost of sales expense is made up of the following three factors: direct material (e.g. the

cost of the actual powder), direct labour (e.g. any people involved in the production of the

product) and manufacturing overhead (which is inclusive of factory use, electricity,

telephone, depreciation of equipment and insurance).

So in order to calculate total cost of sales expense, you need to figure out what the variable

cost will be for each unit sold. This amount was then multiplied by the number of sales

mixes sold. After that you will then add in the total fixed costs (which do not change

according to quantity sold).

3.1. Variable Manufacturing Costs

Figure 6: Variable Manufacturing Costs (Cost of Sales)

VARIABLE MANUFACTURING COST

Number

of units

Raw

materials

(Per unit)

Logistics

Costs

(Per unit)

Total Per

Unit Cost

(Per Sales

mix)

Total variable

cost

(Per sales

mix) x 5%

import/export

duties

Hand wash 20 10 4 14 294

Machine wash 50 12 4 16 630

Liquid 20 9 8 17 189

Capsules 10 16 3 19 168

Total 100 1281

The table above explains how we calculated the total variable cost per sales mix inclusive

of the number of units, raw materials per unit, logistics costs per unit and finally the total per

unit cost per sales mix.

Import/export duty was included in cost of sales as it is a cost incurred to bring inventory

into its location and condition for sale. As per the given Ariel information, these duties are

d

5% of each product form: hand wash, machine wash, auto liquid and capsules. This 5%

was added onto the total variable cost per sales mix.

We will now multiply the total variable cost per sales mix figure (amount of one sales mix)

with the projected sales figures per year.

Figure 7: Total Variable costs

Estimated Number of Sales Mixes Sold Total Variable Costs

16 255 800 R20 823 679 800,00

21 132 540 R27 070 783 740,00

22 758 120 R29 153 151 720,00

24 383 700 R31 235 519 700,00

26 009 280 R 33 317 887 680,00

3.2. Fixed Manufacturing Costs

The fixed costs are calculated below.

Figure 8: Fixed Manufacturing Costs

FIXED MANUFACTURING COSTS

Number Cost per salary Total salary expense

Plant Technician 10 140 000 1400000

Manager's Salary 2 1 500 000 3 000 000

Depreciation 1 40 000 000 40 000 000

Total 44400000

Based on the total manufacturing cost (calculated in the table above) the total cost of sales

expense per year (which is made up from adding the total variable costs to the fixed cost)

are:

2015: 19 876 476 000

2016: 25 826 098 800

2017: 27 809 306 400

2018: 29 792 514 000

2019: 31 775 721 600

e

Additionally, depreciation is included in fixed manufacturing costs because the 'factory and

equipment' was used to manufacture your inventory. The cost of using that factory and

equipment is the depreciation. Therefore, it is appropriate to capitalise the depreciation to

inventory.

3.3. Wastage allowance

As per the Ariel brief, which states that there must be a 2% allowance for goods that are

unsalable, we calculated a 2% on cost of sales expense to cover this.

4. Other Expenses

4.1. Marketing and selling expenses

In 2015 the marketing and selling expense was R100 000 000, this figure was broken down

into:

The cost of broadcasting

Endorsements

Information flyers

Free samples

In the years that follow we believe the promotions will have generated enough brand

awareness in order to reduce the required marketing and selling expenses. Therefore, we

believe in 2016 the figure will go down to R80 000 000, by 2017 it will be R50 000 000,

2018 it will be R1 000 000 and in 2019 it will be reduced to R300 000. We are reducing the

expenses in the hope to increase profit generated in these years.

4.2. Distribution expense

As the production plant is located in South Africa there will be expenses incurred for

transporting the materials throughout Sub-Saharan Africa and to all the retailers and

distributors. For this reason we assumed that transportation expenses would be

R100 000 000. However, due to the increased sales in the following years we have

increased this figure by R50 000 000 year-on-year.

4.3. Utilities expense

Utilities expense includes water, electricity and gas. We believe these expenses will go up

according to inflation, which is at 6.55% per year.

f

4.4.Insurance expense

We assumed that Ariel would need to take out insurance on their entire inventory and

therefore have budgeted an insurance expense of R1 000 000 for year 1 and 2 and then

R2 000 000 for the next three years. This figure has increased as production levels in year

3, 4 and 5 increase by such a substantial amount to cover the sales figures.

4.5. Salaries and wages

The salaries for 2015, per country, are broken down as follows (as specified in the Ariel

financial brief)

Associate manager R320 000

Manager R700 000,

Group manager R1 200 000

Therefore total salaries and wages per country for 2015 = R2 220 000 per year

Seeing as this is a consolidated income statement, this figure should be multiplied by the

three regions. Thus, the total salaries and wages expense is R6 660 000. In addition to this,

Ariel has also budgeted for one associate director for, all three countries, at the cost of R2

000 000. Thus, making the total salaries and wages: R8 660 000.

4.6. Depreciation Expense

Land and buildings

To calculate straight-line depreciation you take the cost x depreciable percentage

The factory cost is R400 000 000 for the plant. According to the Ariel financial brief the

depreciation expense is 10% straight line. Therefore the depreciation is:

R400 000 000 x 10% = R40 000 000.

Vehicles

A single truck costs approximately R2 350 000 and assuming Ariel own 10 trucks to

transport the products the investment in vehicles will be R23 500 000. Assuming an

average useful life of 20 years on a truck it will mean that straight-line depreciation will be

R117 500 per truck; which is equal to R1 175 000 for all 10.

4.7. Interest Expense

According to the Ariel financial brief, interest expense is at 7%.

g

For business operations to occur Ariel has certain capital requirements that need to be met.

This involves needing to pay R400 000 000 in the first year to purchase the cost of the plant

in South Africa. Other capital requirements will include the following expenses: marketing

and selling expense, distribution expense, utilities expense, insurance expense and salaries

and wages. It is assumed that Ariel will incur 50% of all of the cash and cash equivalent

purchase expenses on credit. Thus, the total capital required is R522 610 000.

From this total capital required according to the Ariel financial brief they have R50 000 000

available in cash. Therefore, R472 610 000 will be debt capital raised. These figures are

calculated below.

Figure 9: Ariel Capital Requirements

CAPITAL REQUIREMENTS

Cost of plant in South Africa R 400 000 000

Cash and Cash Equivalent (50%) R 124 830 000

Marketing and selling expense 100 000 000 50% R 50 000 000

Distribution expense 100 000 000 50% R 50 000 000

Utilities expense 40 000 000 50% R 20 000 000

Insurance expense 1 000 000 50% R 500 000

Salaries and wages 8 660 000 50% R 4 330 000,00

Total Capital Required R 524 830 000

Less: Share Capital -50 000 000

Debt Capital raised R 474 830 000

The interest incurred by Ariel for the debt capital raised is R33 238 100 (R 474 830 000 x

7%). This figure stays the same for all 5 years as we assume Ariel will not be expected to

pay back the interest in this time.

4.8. Taxation expense

As per the Ariel financial brief, taxation is at 28% and is calculated on the Net Profit before

tax figure.

h

Statement of Financial Position (Balance Sheet) of Ariel at 30 June

1. Assets

1.1 Non- Current Assets

Land and Buildings

Both these amounts display the carrying amount based on the straight-line depreciation

calculation. These carrying values are a representation of the estimated current value of the

asset once the depreciation expense has been deducted. The calculations were as follows:

Land and buildings: R400 000 000 x 10% = R40 000 000

Making the carrying value for each year:

2015: R400 000 000 – R40 000 000 = R360 000 000

2016: R360 000 000 – R40 000 000 = R320 000 000

2017: R320 000 000 – R40 000 000 = R280 000 000

2018: R280 000 000 – R40 000 000 = R240 000 000

2019: R240 000 000 – R40 000 000 = R200 000 000

Vehicles: (R2 350 000 x10)÷20= R1 175 000

Making the carrying value for each year:

2015: R2 350 000 – R 1 175 000 = R22 325 000

2016: R22 325 000 – R 1 175 000 = R21 150 000

2017: R21 150 000– R1 175 000 = R19 975 000

2018: R19 975 000– R1 175 000 = R18 800 000

2019: R18 800 000– R1 175 000 = R17 625 000

1.2. Current Assets

1.2.1 Inventory

Inventory was calculated on 15% of cost of sales. 15% was selected as it is assumed that

P&G (Ariel’s parent company) tries to keep their cost of sales to a minimum in order to

allow for a higher gross profit. By keeping inventory a small portion of cost of sales, Ariel

will be able to have higher operating expenses, such as for Marketing and Selling.

i

1.2.2. Trade Receivables

These amounts were calculated as 20% of Ariel’s sales. This is because it is assumed that

Ariel allows 20% of their sales to be bought on credit. This strategy allows retailers and

consumers that cannot immediately afford to pay for the laundry detergent, as a result of

being in developing countries.

1.2.3 Bank

Bank is assumed to be the surplus of all of your assets after Ariel has used the cash from

debt and equity to purchase other required assets.

2. Equity (Owner’s equity)

2.1. Capital

According to the given Ariel financial statements, the company currently have R50 000 000

in cash available. Thus, it was assumed that this amount was share capital received from

investors.

2.2. Retained Earnings

Retained Earnings have been calculated for each year below.

Figure 10: Retained Earnings calculation RETAINED EARNINGS

2015 2016 2017 2018 2019

Openings

Balance 0 18 978 245 609 50 442 965 360 84 330 532 655 120 647 724 958

Profits

(Current

year)

37 956 491 219 62 929 439 501 67 775 134 589 72 634 384 608 77 460 464 165

Less:

Dividends 18 978 245 609 31 464 719 750 33 887 567 295 36 317 192 304 38 730 232 082

Closing

Balance 18 978 245 609 50 442 965 360 84 330 532 655 120 647 724 958 159 377 957 041

The opening balance is the balance brought forward from the previous year. It is assumed

that the company is starting up in 2015 and therefore has an opening balance of R0. The

profits in the current year are the Net profit calculated in the ‘Statement of Comprehensive

Income of Ariel for fiscal year starting 30th June’. It is assumed that Ariel pays out half of its

j

earning to its parent company (Dividends), the other half is retained for growth in the future.

Therefore, in order to get the Closing Balance, the dividend was deducted from the sum of

the Opening Balance and Profits in the current year.

3. Liabilities

3.1 Non-Current Liabilities

Long-term loan

It is assumed that Ariel is not going to increase their equity, as issuing more shares is not a

viable option. Therefore, Ariel will have to increase their debt, in the term of a long-term

loan. Ariel will not be expected to being repaying this loan immediately (not in the next 5

years) and therefore the value of the loan will not fluctuate. However, in 2015, the R50 000

000 was used to fund a portion of the debt.

3.2 Current Liabilities

Trade Payables

Trade Payables was calculated as 25% of inventory. In other words, Ariel purchases 25%

of their supplies on credit. This significant portion of inventory can be bought on credit as

Ariel’s parent company, P&G, is a well-established company and therefore banks and

suppliers will be more likely to allow for credit.

iii

Appendix 1: Consumer perceptions about Ariel

29%

2%

29%

11%

29%

What are your perceptions of ariel?

I don't know much about theproduct

I don't like the product andhad a bad experience using it

I know about the product buthaven't considered using it

I Like the brand and think itcleans clothes well

Neutral

iv

Appendix 2: People who would consider switching brands

31%

69%

Would you ever consider changing brands?

No

Yes

v

Appendix 3: Information people consult when switching brands

20%

22%

22%

18%

2%16%

How would you like to be encouraged to switch brands?

a free sample

A recommendation from afriend/family member

Information regardingproduct

Nothing, I wouldn't switch as Iam loyal to my brand

other

Promotions offered onproduct

vi

Appendix 4: Favourite detergent brands

10%

50%6%

28%

6%

What is your favourite detergent brand?

Ariel

Omo

Skip

Sunlight

Surf

vii

Appendix 5: AMPS statistics on detergent purchases

viii

Appendix 6: AMPS showing income levels per household

ix

Appendix 7: AMPS table indicating LSM levels

x

Appendix 8: Price of Ariel compared to other brands

Brand of detergent (all auto powder, 2kg bag)

Own brand OMO Ariel

Woolworths 68.95 68.99 66.99

Pick n Pay 49.99 49.99 42.90

An interesting observation to add to these figures was that the pricing employed by each

store varied and was at the sole discretion of the retailer

xi

Appendix 9: Gender of people who purchase detergents

60%

40%

Gender of the people who purchase detergents

Female

Male

xii

Appendix 10: Low-involvement decision making process

xiii

Appendix 11: Consumers that are aware of Ariel being sold in South Africa

19%

81%

Did you know Ariel is now sold in SA?

No

Yes

xiv

Appendix 12: How do consumers evaluate a brand

42%

58%

Do you prefer social media when evaluating a brand?

No

Yes

xv

Appendix 13: Washing techniques used

17%

69%

14%

How do you wash your clothes?

By Hand

In a machine

Someone Else does it