«Report to Board of Directors: Almarai» Essay Sample

Report to Board of Directors: Almarai

Introduction

Almarai is a dairy company at its core, and it is an industry leader in Saudi Arabia. It manufactures and trades in dairy, juice, bakery, and poultry products. It also deals with baby food products and other agronomic products (Audi Sadar 2012). The company’s distributions are arranged through distributor agency agreements and distribution centres. Almarai was founded in 1976, in Riyadh, Saudi Arabia. Its public listing took place in August 2005 (Sadi 2014). Its networks spread throughout the Arabian Peninsula. Almarai commands a significant market share in all the sectors where it operates. Its formation was built on making a transformation from the native dairy farming conducted in Saudi Arabia into a modern system of farming (Audi Sadar 2012). It introduced modernistic processing plants in order to satisfy the requirements of the rapidly increasing local market. Its management began reinvestment and restructuring to change from a decentralised into a centralised structure in the 1990s. Its first centralised processing plant started operating in 1996, and it replaced five plants, which were decentralised. In addition, Almarai replaced its ten decentralised small dairy farms creating four centralised large dairy farms. The company became a low-cost producer in the region (Audi Sadar 2012).

The company deals with various products. Its core business is in the dairy products and accounts for seventy-seven per cent of the sales in 2013 (Albilad Capital 2013). In the third quarter of 2014, the company’s earnings from its products were led by fresh dairy at forty-two per cent. As at the end of the third quarter of 2014, all the sales amounted to 9.3 SAR Billion. It is an increase from the 8.2 SAR billion made at the end of the third quarter in 2013 (Almarai 2014). Figure 1 indicates the percentages and performance of the company’s products in 2013. The fresh dairies from the company include flavoured, fresh, lactose-free, vetal milk. It also produces laban, vetal laban, as well as fresh and flavoured yogurt. It also produces long life products including whipping, cooking cream and long life milk. In addition, Almarai also produces butter. The bakery expands its products’ line including croissants. The poultry products in the company include whole birds and some selected cuts, which are packed in sealed trays to ensure that products meet the hygiene standards (Albilad Capital 2013).

In 2005, Almarai established its second CPP. In an expansion strategy, the company made whole acquisitions of the Western Bakeries Company Limited and the International Baking Services Company Limited. The acquisitions marked its entry into the bakery industry, hence, expanding its income base. The company has expanded its products in order to satisfy the growing market and keep competition at bay. It has also improved the health standards, nutrition, breeding, animal husbandry, and crop management (Rasooldeen 2012). The different products get released through five brands, which include Almarai, 7Days, L’usine, Nuralac, and Alyoum. Alyoum is the brand for the poultry products, while 7Days and L’usine represent the bakery products. The Nuralac trademark represents a formulation for nutritious baby food. Almarai is the key brand of the company, and it represents various food and beverage products (Almarai, 2015). All the brand logos are shown in figure 3, in the appendix. In the pursuit to understand the strategic situation of the company, this report will embark on an analysis of the exterior environment of the company. It will also conduct an internal examination to ascertain the company’s ability to deal with the opportunities and threats. In the end, the report will offer the recommendations for the future direction of the company’s development.

External Environment Analysis

Opportunities

Climatic Conditions

The company operates in a region that has severe climatic conditions. Most parts of the country experience dry climate and high temperatures dominate almost throughout the year (Sawahel 2013). Consequently, most people drink juices, dairy and other non-alcoholic beverages as part of their average daily liquid consumption. These are some of the products that Alamrai produces, which are nutritious and energising. The hot and dry climate increases the opportunities for the business to satisfy the demands of the people. Additionally, due to the hot and dry climate, desertification has become rife, and water is scarce. Often, people have to buy water and other liquid beverages to quench their thirst. Hence, when there is a product that quenches their thirst and provides nutritional value, its demand increases. The world is facing climatic change due to various factors including global warming. Consequently, Saudi Arabia’s climate is expected to get hotter and drier (Sawahel 2013). Hence, the climatic conditions favour the Almarai’s products and business strategy.

Improvement on Health Standards and Focus on Healthy Eating

Healthy eating and improvement of health standards has become a trend in Saudi Arabia. Individuals are focusing on products that will not have adverse repercussions on their health. WHO (2013) indicates the health trends in Saudi Arabia, showing that a significant percentage of the population engage in unhealthy eating habits. As a result, the people have established a culture of healthy eating. There is an increase in the demand for new products, which are in line with the population’s demand for healthy products. The company has an opportunity to produce these products that would initially increase its margins. The WHO (2013) report shows that people are aware of the impact of unhealthy eating; hence, creating demand for healthy food products, such as, Almarai Dairy products.

Large Number of Tourists Visiting Saudi Arabia for Hajj and Umrah

Saudi Arabia has the two holiest places in the Islamic religion, Mecca and Medina. Mecca is the divinest region in the Islamic religion as it is the place of birth of Prophet Muhammad. It is also the area where Prophet Muhammad received the first revelation of the Quran (Fathi 2011). On the other hand, Medina is the second holiest place in the Islamic religion as it is the burial site of Prophet Muhammad. It is the duty of every able-bodied Muslim to visit Mecca for the Hajj, no less than once in their lives. It occurs at a given time of the year and attracts more than three million Muslims (Fathi 2011). Moreover, there is the Umrah, and it is the time when Muslims visit the city of Medina. It attracts most people during the holy month of Ramadan (Fathi 2011). During this period, the tourists fuel demand for the food products made by the company. It is an opportunity for it to serve a large market and realise higher returns.

Expansion Opportunities in MENA Region

The MENA region offers an opportunity for the company to expand its operations. It is an area that has similar characteristics in relation to climate and culture of the people. Consequently, the people would enjoy the products made by the company. In addition, the countries in the region have various bilateral and multilateral free trade and other economic agreements, which offer the company an opportunity to expand its operations without major requirements or adjustments (OECD 2010). Therefore, the company can make strategies on controlling the markets on the international level, especially in the MENA region. The approach gets support from the similarities in the countries within the region.

 
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Rising Population in Domestic and Other Target Markets

The regions, where the company markets its products are experiencing an increase in population. Various factors including a reduction in the maternal mortality, increase in fertility rate and improvement in the standards of the living have improved the population in the MENA region and GCC region (IMF 2011). There is anticipation that the population in the MENA region will continue increasing in the near future, which provides an increase in the market base for the company’s products. Once the company takes the opportunity by expanding its marketing and production, it will also increase its returns.

Threats

Appreciation of the Euro and Major Currencies versus the Dollar

There has been an increase in the Euro and other major currencies versus the dollar, which could result in an increase in the price of feedstock cost. It results in lower profit margins as the Saudi Riyal is pegged to the US dollar. Most of the raw materials that the company uses are imported, and their price is highly reliant on the value of the currency. Hence, if the dollar loses its value, the Riyal also loses value. Consequently, the company’s profit margins will decrease.

Anticipated Water Shortage

As an implication of the change in climatic conditions in the world, Saudi Arabia is facing environment crisis. Climate change has led to desertification. In addition, Saudi Arabia is the largest country without a river (CIA 2015). Therefore, increased climate change may lead to a shortage in the availability of water, which is a fundamental raw material and commodity in the operations of Almarai Company. Such shortage may necessitate the company to import water from other countries or conduct the expensive process of desalinating the sea water. The limitation may pose numerous costs on the company; thus, reducing its revenues.

Risk of International Competition

Saudi Arabia is a country that attracts investors from all over the world. As a result of its high demand for food products, numerous international companies set up their companies in the country, while others export food products in the country. Since there is no limitation on the companies that can join the industry, Almarai may face increased competition in the future. In addition, it operates in different fields. If there is one stiff rival in each of the fields, the company is likely to lose substantial market share, as well as revenue. Competition may also be fuelled by the reduction on import duties on the products. Since the country is a new importer of most of the milk products, if there is a reduction in the import duty, competition from international suppliers could increase; thus, posing a challenge for the company.

Use of Subsidies of Oil May Impact in Almarai’s Market

Saudi Arabia’s economy is highly reliant in the exportation of oil. The country possesses about sixteen per cent of the globally estimated oil reserves. It is ranked as the largest oil producer (CIA 2015). Majority of the population is employed in sectors that depend on the oil production. Such industries deal with the production of crude oil, refining, and petrochemicals. Therefore, if the oil market reduces globally due to the use of substitute products, it may lead to high unemployment in Saudi Arabia. Consequently, the population may lose its purchasing power. Therefore, the company may lose significant purchase due to the people’s inability to afford its products.

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Limited Control on the Pricing

The company does not have the overall control over the prices of its products. The Saudi Arabian government has created limits and pressure on the ability of companies dealing with retail food products to dictate the prices (NCB Capital 2009). For instance, there is a limitation on the company’s ability to pass higher costs of production or raw materials to the customers. However, when the prices of commodities or the cost of production reduces, the government regulations create pressure on the business to lessen its prices.

Disease Outbreak

The company relies heavily on its herd of cattle for dairy produce. If there can be an outbreak of a disease, which can affect the herd, its dairy business can be hampered significantly. For example, such a scenario occurred in 2000 when an outbreak of Rift Valley Fever took place, and it led to the death of cattle and people (NCB Capital 2009). Therefore, such an outbreak poses a threat to the operations of the company. However, the company has strict quality control measures that reduce the risk of such occurrences and their impact. In addition, the company mitigates the risks by sourcing ninety per cent of its milk from its own herd (NCB Capital 2009).

Internal Capability Analysis

Diversification

The company has undertaken numerous measures that will enable it to cope with the threats, and embrace the opportunities. The company has diversified its business; hence, it caters for the majority of the growing population (Sadi 2014). The company is expected to use its dominant position in the dairy market as a launch pad into newer investments and business lines. It is also allocating more capital into the international expansion mainly in the North Africa region through its joint venture with PepsiCo (Agribusiness Insight 2014). The company’s principal business is fresh dairy in Saudi Arabia, and it is both dominant and well situated in the industry structure. The company has a strong position as it negotiates with retailers, who are its core customer base. Its involvement in the poultry, bakery and baby food industries cements its position as it offers more products to the population. In addition, it has set up ventures with other international companies, such as PepsiCo and infant formula producers (for example, Mead Johnson) in order to improve its influence in new markets (Agribusiness Insight 2014). In addition, it has also diversified its milk products to include fresh milk, yoghurts, and cheese. Almarai also get produced in various flavours and tastes. It has kept the company’s focus on its clients both within and out of Saudi Arabia. It assists the company in dealing with the increasing population and demand for the products.

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Innovation Strategy

In 2008, the company launched a strategy focused on innovation and dubbed it through Almarai Innovation Management. The goals of the strategy included the introduction of new products in high volumes. It would facilitate collaborations among different teams with various experts. Among the results of the strategy is the decision that was made for the implementation of the Stage-Gate®. Stage-Gate® is a widely used process of product development and management of portfolio methodology. In addition, the implementation of the solution provides the company with automation capabilities, and it furnishes progressive support for resource management and product portfolio (Sopheon 2010). In addition, the company benefits from the solution’s ability to enhance effective prioritisation of the projects dealing with product development. It also enhances broader adoption of the innovative processes, and the company can focus its resources on the opportunities that hold the most commercial potential. The same product has been implemented by other globally leading companies, such as PepsiCo, Burger King, Dr. Pepper, and SABMiller among others (Sopheon 2010). Consequently, the company is focusing its resources on viable projects, and it has become innovative in regard to the products released to the market, as well as entry into new markets.

Improved Packaging Technology

Almarai has also improved its packaging technology, and it has also integrated advanced distribution and manufacturing infrastructure that would increase its coverage. In order to ensure that it maintains consistency in the manufacturing process and reduction of product wastage, the company has invested in new Contitherm 123 cup filling and sealing machines. The machines offer efficiency in the packaging of the yoghurt with a capacity of 28,000 cups every hour (Ebdon 2013). It has raised the production capacity of the company to ensure that the market demand is met in time and at full scope. In addition, the company can produce and package large amounts of yoghurt on a short notice.

Growth Strategy

The business is executing a growth plan that focuses on doubling its business. Its concentration is on the extension of the market share of individual products. Its growth strategy has its base on three components, which include organic growth, new categories and geographic expansion. The organic growth has focused on ensuring that every product becomes dominant in its market, in addition, to increasing its production. It has been evident through the company’s diversification of milk products and expansion on production of bakery products. The company also imported about four thousand and six hundred cows from the United States of America to cater from increased milk demand. The infant formula is one of the new entries into the market by the company. It expresses company growth and investment in research and innovation (Albilad Capital 2013). The introduction of the infant formula emerged as a result of massive research in the industry and identification of a gap that needed to be filled. Geographic expansion has been witnessed in the acquisitions by Almarai of companies in other countries. For instance, in 2008, it acquired seventy-five per cent of Teeba in Jordan and one hundred per cent of the International Company for Agro Industrial Projects in Egypt (Albilad Capital 2013). The growth initiative is a continuous process that will ensure that the company reaches new regions and markets, hence, increasing its produce. The company’s third quarter performance report of 2014 indicates the sales that it has made in different countries as indicated in figure 2.

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Conclusion and Recommendations

The company has been on the market for almost four decades, and it has made an impact in the dairy industry in Saudi Arabia. In addition, it has expanded its operations by increasing its dairy products and venturing into new sectors. It has invested into the poultry and bakery industry, which has made a significant increase in its revenue. Furthermore, it has ventured into new geographical regions through acquisitions, including Egypt and Jordan. Last but not least, it exports its products to other countries to expand its incomes. The company has various opportunities and threats in the industry. For instance, the extreme hot and dry climate in Saudi Arabia and the GCC region creates a demand for liquid products, including milk, yoghurt and juices, which the company produces. The region also experiences an increase in population, which drives more people to form the market base. Saudi Arabia is also the home to two of the holiest cities in the Islamic religion. As a result, the country receives numerous tourists during the Hajj and Umrah festivals. However, it also faces several threats. For instance, climatic change may lead to a water shortage in the country. The company may be forced to export water, which can be very expensive.

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