ECON10162 Applied Economics

Introduction:

Breville is an Australian based manufacturer of small home appliances. They are well-known sandwich toaster making company. At present, the company operates its business in international market by exporting their products in China, South Africa, Brazil, Israel and Mexico (Brevillegroup.com 2018). The chief products of this company are kettles, toasters, contact grills, pressure cookers, bread makers, deep fryers, microwave ovens, and blenders and so on. The ASX listed Breville Group of Australia has possessed this Breville brand. There are some other companies, which are undertaken by this group. The Breville group owns the Ronson appliances in their home country. Other brands under Breville group are Solis, Stollar and Gastroback. In 2013, the Braville group has launched their new business line in United Kingdom with a new brand name. Kambrook is another famous brand for kitchen product products of this group. This brand is well-known in Australia and New Zealand. This brand name is called Sage^TM, endorsed by Heston Blumenthal. The group has taken over the Aquaport business from an Australian company to create their new product segment. The chief product development centre of Braville group is situated in Sydney.

Breville is a publicly listed company of Australia. A suitable bar diagram can represent the net profit of this company from 2006 to 2016. This net profit indicates difference between revenue and income tax.

Represents the trend of net profit of Breville from 2006 to 2016. Those data are calculated from June end of each month. This trend shows that the company has faced lose in during 2014 and 2015. However, in 2016 it has recovered its financial condition.

Vulnerability:

The company has two types of cost structures. These are fixed cost and variable cost. The average total cost (ATC) is the sum total of those average fixed costs (AFC) and average variable cost (AVC). For a company, AFC include costs associated with machinery, capital, salaried labour and raw materials. On the other side, a company bears variable cost to enhance their production function further. When a firm reaches to its maximum production capacity, only variable cost will operate (Saebi and Foss 2015). However, before that situation, fixed cost will be high. As fixed will increase, the vulnerable situation will occur more. Type 1 of vulnerability represents fixed cost and quasi-fixed cost of this company. Type 2 of vulnerability includes variable cost of this firm.

The company’s fixed cost includes depreciation and amortisation expense, net finance cost and research and development cost (Nowak 2016). On the other side, variable cost of this company includes cost of sales, net foreign exchange loss, other product related costs and total employee benefits expenses. The overall cost trend of Breville from 2006 is shown below.

Shows almost a stable total fixed cost of Breville, irrespective of the amount of production. Therefore, the company will face a downward slopping average fixed cost (AFC). Hence, the company has reached to its maximum production capacity (Boardman, Greenberg, Vining and Weimer 2017). On the other side, as the company is expanding their level of production, average variable cost (AVC) will also decrease. Hence, average total variable cost (ATC) will decline, as well.

Breville is increasing their scale of production with new technology and with new brand names. The company has also maintained return on equity more than 20% on an average. Hence, the company is facing a lower cost structure compare to their level of profit return. The average fixed cost for each unit of output will reduce. The average variable cost will increase at a slower rate. Hence, average total cost will also increase at a slower rate.

Market Exposure:

Market demand and GDP development:

The company is producing kitchen appliances and exporting those products in various countries. As present, the demand of those products is increasing significantly, all over the world. Hence, market revenue of Breville is high (Brevillegroup.com. 2018). Total amount of company revenue, since 2006, can represent this situation clearly. Total revenue consists of sales of income and income from commissions.

The revenue trend of Breville is drawn. This diagram states that the demand for Breville’s products has increased since 2006 (Brevillegroup.com 2018). The company has earned increasing amount revenue since 2015, due to increasing amount of product sales.

On the other side, the gross domestic product (GDP) of Australia, since 2006 to 2016, has drawn in the below diagram. By analysing this trend of GDP, income elasticity of Breville’s products will be obtained.

In the above diagram, Australia’s GDP growth rate has fluctuated significantly. During 2008 and 2009, The GDP of Australia declined sharply. However, after that, the country has recovered its GDP. The revenue trend of Breville also fluctuated in the same direction. Hence, country’s GDP affected the demand of Breville.

Margin Risk:

Braville faces a highly competitive market. There are many well-known companies, who produce small domestic appliances with different cost structures. Higher amount of commodity prices affect the financial outcomes of this company.

The company can overcome this risk by protecting their intellectual property rights. Moreover, a well-known brand value will also help this company to reduce risk. On the other side, the company can introduce new products and can extend variability of their products within its cost structure. The company can also expand their business by maintain a good relation with their long-term suppliers.

Interest rate risk:

Breville is expecting its interest rate risk on its cash balances, borrowings and derivative financial instruments. The company’s policy is to maintain its interest rate risk, applying a mix of variable and fixed rate debt where applicable. Facilities related to cash advance have fixed-interest rates of short-term with1 to 3 months of maturities . Hence, they are expected to face interest rate risk within the financial year.

At the end of June 2016, the group did not have any borrowings at a fixed interest rate. All borrowings are exposed to floating rates.

Marker competition:

Due to huge competition, Breville’s annual profit declined in 2013. After that, this profit rate was decreasing continuously, since 2015. There are various large and small companies, who produce kitchen appliances, in the world market. For the same product, some well-known companies are charging lower-price compare to Breville. The net profit was declined by 4.3% between 2014 and 2015 (Brevillegroup.com 2018). Moreover, strengthening U.S dollar also affected the cost pattern of this company. Rising level of costs help the company to increase its cost level. Breville owns popular brands like Kambrook and Ronson. However, 2014 and 2015 were very difficult and challenging year for them. Various discount stores are trying to sale their own home products with cheap prices and trying to capture markets of Kambrook and Ronson.

However, increasing level of product prices and cost efficiency cannot completely offset the negative volume of product and currency impact. Its other brands help the company to increase the company revenue. In U.K, Sage brand has promoted its new products with well-known persons and helped them to earn double amount of revenue. On the other side, Breville performed strongly in North America, during 2014 and 2015. They earned more than 24% of total revenue compare to previous year (Brevillegroup.com 2018).

Performance comparison:

Breville’s strong competitors are Samsung, DeLonghi and Sharp. They also provide kitchen appliances in international market. The company operates their business on multiple dimensions. They sell microwave like Breville. Samsung is a multinational conglomerate of Korea. De’Longhi is an Italian company. This company sells various kitchen aplliances, all over the world. Breville’s performance can be analysed based on performance of those companies. For small kitchen appliances, no brand could dominate every category of kitchen appliances. This is true for Breville as well. For each category, individual company dominates the market. Price is not the chief factor that determines the demand of those companies. By comparing gross margins of each company, performance of Breville can be analysed.

The gross margin of De’Longhi was high since 2008. Breville was a strong competition with Samsung during this period. However, not all products of Breville and Samsung are equal.

Business strategy of Breville for 2008 and 2009:

In 2008, the chief objective of the company was to expand their business in international market. Except this ongoing transformation, the group’s chief intension was to increase the share of the company in a relatively mature market of Australia. Moreover, it wanted to grow sustainable earnings and sales in international markets (Brevillegroup.com 2018). Breville decides to continue their investment in their core brand. The company continued to invest for improving infrastructure.

 In 2009, the company faced a tough time. Due to instable foreign exchange rates and product prices, the company faced various difficulties. As a result, the company decided to reduce their operating costs and maintained the working capital. However, the company kept its strategic focus by doing investment on product design and innovation. They did it to capture the changing financial and consumer market conditions (Brevillegroup.com 2018). Breville did various structural changes and leadership composition to make a better future.

Breville chiefly focuses on revenue generation and marketing activities. The company also applies its global strategy to control its other brands and brand partners, worldwide.

Macroeconomic Exposure:

Foreign currency exchange risk:

The company may face transactional exposure. The chief reason behind this is that the customers pay in U.S dollar for buying products of this company. Transactional exposure indicates the risk that any company can face because of international trade. When a country is dealing with other countries through international trade, it can face losses due to fluctuation of international trade. In 2016, the company faced $ 162,000 amount of net foreign exchange loss. However, in 2017, the company has faced more amount net foreign currency loss (Brevillegroup.com 2018). The amount was $ 345,000.

The company also faces translational exposure due to its international earnings. For making company report, the company needs to convert huge portions of its earning in US dollars into Australian dollar. This type of risk exposure affects a company’s assets, liabilities, equities or income due to changing exchange rate. As the company denominates a portion of its income, equities, liabilities or assets in U.S dollar, this type of exposure occurs.

Some strategies can help a country to protect them from this transaction exposure, during international trade. When a company can indentify that exchange rate are changing, it apply hedging strategy. By applying this strategy, the company set forward rates for future transactions. This further fixes a particular exchange rate. Moreover, it eliminates the transaction risk of a company (Brevillegroup.com 2018). The company can also reduce the risk level from translation exposure through hedging. A perfect treasury policy needs hedging of a part of expected purchases for 18 months in advance.

Legal factor:

There are various countries, which do not have enough legal framework and governmental institutions for strongly protect the intellectual property rights of Breville. Hence, it is important for that country to evaluate carefully legal structure of any country before entering into a market. Breville should consider some important legal factors before into a market. These legal factors are law related to discrimination, employment, health and safety. The company should also consider anti-trust law of a country related to retailing industry, copyright, intellectual property law and data protection (Brevillegroup.com 2018). If the Breville Group Limited does not evaluate those factors carefully then other competitive companies can easily steal its secret information.

Protection:

Capital:

Breville tries to maintain a strong capital base. This policy will further help the company to maintain its creditor, investor and market confidence. This will also help this company to maintain a sustained position so that it can develop its business in future. The board of Breville always seek to maintain a balanced situation between the higher returns with possible higher levels of borrowings and the security and advantages afforded by a well capital position. The board also regularly monitors on the company’s compliances and gearing ratio with debt covenants. Breville’s gearing ratio, for the 2015 and 2016, were nil as the company was in a net cash position (Brevillegroup.com. 2018). The gearing ratio implies as net borrowings of Breville group by its capital employed.

Technology:

Technology is an important factor of any company to expand their business further. Breville is adopting new technologies to meet increasing demand of its customers. The company has developed various kitchen appliances with new and different technologies (Brevillegroup.com. 2018). This further helps the company to compete with its competitors. This new technology also helps a Breville to maintain its value chain all over the world.

Breville, with its upgrading technologies, supply different types of kitchen appliances. These are juicers, mixers, blenders, coffee makers and food processors. The cost structures of Breville’s products are almost same with its competitors’ products (Kandachar 2017).  However, some products have higher technologies compare to other same products. The company charges higher prices for this product, as well.

Go-to-market transformation:

This transformation programme of Breville helps the company to improve their relations with customers from every aspect. This program has three basic pillars. These are every screen, the last few feet and culture of launch. The company has a mobile site that helps their customers to know anything about the company. This site helps customers to make a perfect cup of barista-quality coffee at their home (Brevillegroup.com. 2018). The company provides promotional videos, recipes and coffee making process to help their customers. Breville launches various new products and delivers to their retail shops. However, before that, the company provides a brief overview of that product in their website.

E-Market strategy of Breville:

At present, e-market helps a company to expand their business. The company can increase its number of customers. Breville also uses e-market to increase their business. There are large numbers of customers in the world, who generally prefer to order products through online. Breville also has chosen internet to sell their products (Turban et al. 2018). For this reason, Breville has appointed Jim Clayton, chief executive of consumer technology, to enhance their internet based customers. Breville uses various online e-shopping portals to sale their products. However, it does not develop any mobile apps.

Market Expansion:

The Breville Group is applying new strategies to expand their business in the world market. For this, they have applied some strategies and chiefly focusing on acceleration growth of the company. Breville is increasing their market size by improving effectiveness of their geographic footprint and g-to-market. Secondly, they are new channels into its appropriate existing markets by driving greater penetration. Lastly, Breville is supporting its distribution partner to expand quickly.

To support their accelerate growth, the CEO of this company said that the company is taking a centralised strategy. Under this strategy, firstly, the company is planning to roll out a worldwide functional organisation structure. Secondly, they are hiring a COO and Go-to-market officer. Thirdly, the company is adjusting resource allocation (Brevillegroup.com. 2018). This will accelerate the development of chief new products. Moreover, they are adding resources including Internet of Things, to their research and development (R&D) team. Fourthly and most significantly, the company is allocating their marketing spend for different segments of their market. This allocation is based on the individual country level and global level optimisation. Breville starts to implement their selling and operation process (S&OP), all over the world. Moreover, they are continuing to roll out their group-wise application stack.

Global economic shock:

During global economic shock, the U.S economy will increase. By cutting tax and spending on infrastructure, the business sector will improve. However, the economic condition will slow down. The reason behind this slow down is Brexit and political instability in Europe. Commodity prices will increase continuously and inflation rate will be very high. Moreover, the value of US dollar will be high (Ndou, Gumata and Ncube, 2018). As a result, uncertainty will be appeared in international market. As Breville operates their business all over the world, it will be affected by this global economic crisis. The company has its branches in Europe. Due to Brexit and political disturbances, the market will be negatively affected and the value of euro currency will fall. However, the company manages to adjust their financial statements in AUD. Hence, they will not face any loss due to fluctuation of exchange rate crisis (Brevillegroup.com 2018). On the other side, the company will face a god market condition in US. Hence, the company will focus more on this market. Product development and innovation of new products are the chief motive of this company to compete with other firms and earn revenue.

Strategic hell of Breville:

The company is developing new products with new technologies. Moreover, it charges average costs for its products like other companies. This strategy gives a competitive environment for this company. Moreover, Breville is enhancing their product varieties. The company is also trying to reduce their costs structures by developing their productivity level with new technologies. Moreover, strong supply chains will also help them to expand their markets. On the other side, the company is facing large scale of economy and decreasing rate of cost structures (Rothaermel 2015). This will further help them to maintain a balanced price structure for their products. Breville is also taking various steps to reduce all risks related to market exposures by adopting various strategies. There go-to-market transformation strategy is also helping the company to expand their business from Australia to all over the world. Hence, Breville is no longer facing any strategic hell. All strategies, taken by this company, are good for them. Moreover, those strategies will help them to compete with other companies.

Overall Analysis:

In 2016, both revenue and EBIT of Breville Group has increased. This outcome is good as it operates under a highly competitive and challenging environment, all over the world. This growth has occurred due to new designs and development of products. The group also earned revenue for each country. In North America, the amount has increased by 24.0% in Australian dollar. This growth has occurred by releasing new products and sustained performance of old and existed products, basically in the cooking and beverage categories. On the other side, the revenue in Australia and New Zealand (ANZ) was low compare to previous year. In 2016, ANZ earned $ 242.6 million (Brevillegroup.com 2018). The company introduced new products with updated designs in this part, as well. However, it could not increase their revenue level in 2016. It happened due to high competition and Breville’s products were insufficient to compete with those companies. In U.K, the company performed consistently. For rest of the world, the company’s revenue has increased by 4.3% in AUD.

The group’s EBIT has increased due to strong performance in North America.  As a result, EBIT in this part has increased by 36.9% in AUD. Moreover, this growth compensated the ANZ segment. The reason behind decreasing EBIT in ANZ was due to negative margin impact for strengthening USD and a strongly competitive market. For rest of the world, EBIT of this group has increased by 8.4% (Brevillegroup.com 2018). Under the perfect leadership of the group’s CEO, Breville has strong position to growth in international market as it has some chief strategic levers to execute under the transformation program. The company is making its strong base for future competition with increasing development cycle, worldwide product launches, go-to-market process, group-wide business application and end-to-end transformation.

The transformation program of this company is based on three main strategic levers. These are transition into a global with innovation-driven company of products, market enhancement and optimisation and global performance with scale efficiency.

Conclusion:

Breville is a multinational well-known company. It provides modern kitchen appliances to its customers. The company was established in Australia. The company has developed various kitchen appliances with new technologies. Those modern appliances provide restaurant like foods to its customers. Moreover, those products are savings. Hence, the demand for Breville’s products is increasing over the last few years. The Breville Group has also faced some risks related to its market exposure and macroeconomic exposure. The company has also taken protections to overcome those risks. Hence, Breville does not face any strategic hell. However, the company faced some losses during devaluation of Australian currency.

Reference:

Boardman, A.E., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2017. Cost-benefit analysis: concepts and practice. Cambridge University Press.

Brevillegroup.com. 2018. (no title). [online] Available at: https://brevillegroup.com/

Data.worldbank.org. (2018). GDP growth (annual %) | Data. [online] Available at:

https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2016&locations=AU&start=2006

Kandachar, P. and Halme, M. eds., 2017. Sustainability challenges and solutions at the base of the pyramid: Business, technology and the poor. Routledge.

Ndou, E., Gumata, N. and Ncube, M., 2018. Global Economic Uncertainties and Exchange Rate Shocks: Transmission Channels to the South African Economy. Springer.

Nowak, E., 2016. Cost control and its role in controlling company operation. Prace Naukowe Uniwersytetu Ekonomicznego we WrocÅ‚awiu, (441).

Rothaermel, F.T., 2015. Strategic management. McGraw-Hill Education.

Saebi, T. and Foss, N.J., 2015. Business models for open innovation: Matching heterogeneous open innovation strategies with business model dimensions. European Management Journal, 33(3), pp.201-213.

Turban, E., Outland, J., King, D., Lee, J.K., Liang, T.P. and Turban, D.C., 2018. Marketing and Advertising in E-Commerce. In Electronic Commerce 2018 (pp. 361-401). Springer, Cham.

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