CASE STUDY: ALPHA MINERAL WATER LIMITED
Introduction
Alpha Mineral Water Limited is one of the many companies producing bagged and bottled mineral water. The company was established in 2010 and has grown rapidly. Mr. Kwasi Kwakye has served as the managing director since the inception of the company. He is an accomplished entrepreneur and has received many awards both at home and abroad.
The Industry
The competition in the bagged and bottled water industry revolves around pricing as each producer attempts to use penetration pricing strategy in order to capture maximum market share. Most of the materials used in the industry are imported.
A decade ago, the industry had few players. Currently, there are numerous companies with low exit rate. The industry for most part of its existence, has remained unregulated and does not require huge initial capital. Since the inception of production of bagged and bottled mineral water, the government has been battling rubber pollution in major urban centres. The drainage systems are often choked with used plastic materials, which are not biodegradable. To address this menace, government is considering a special tax to raise money to clear the waste. Again, a bill is before parliament which when passed into law would require all to use biodegradable materials for packaging their products.
Based on the concern expressed by the government over the years, a new body known as Plastic Waste Regulatory Authority was set up early 2015 to regulate the industry. The regulator is expected to enforce certain minimum standards to sanitise the industry and minimise the effect of its activities on the environment. This measure, according to the experts, will restrict new producers entering the sector.
The bagged and bottled mineral water produced is sold to corporate bodies in the form of water dispensers and bottled water. Also, they supply water to households and retailers through key distributors. The margins of the key distributors are very low and only make reasonable profit on huge volumes. As a result, the key distributors tend to resist any price hikes by the producers. The past experience shows that anytime price increases, demand slows down as alternative sources of drinking water are sought by consumers. Again, some bulk distributors who perceive producers as raking in so much profit have ventured into production of bagged and bottled water in the past. Corporate clients are also cutting their expenditure on water. There are some companies that have commenced importation of bottled mineral water for their own use.
Most of the companies in the industry depend on only two sources of water – Ghana Water Company (GWC) or bore hole. The industry water demand constitute 8% of GWC output. The producers have also not formed any association to deal with issues affecting them collectively. The water supply is increasingly becoming erratic, unreliable and very expensive with the withdrawal of government subsidies, further squeezing the margins of the sector. The working conditions of most of the workers in the sector is nothing to write home about and it has been difficult negotiating for better conditions, since they did not belong to any labour union. However, with the passage of the new labour law, it has become easier for the workers to join existing labour unions. As a result, most of the workers now belong to Industrial Workers Union.
The producers within the sector have a fair share of the market and no single company dominates the market. The market survey conducted indicates that the highest market share of the leading companies is 10%.
Expansion Plans
Alpha Mineral Water Ltd currently has presence only in Accra and its surrounding settlements. The company is proposing to expand its operations to four regional capitals in the country. The details of the proposed investment is presented as follows:
The company has estimated investment outlays of GH¢200,000 fixed capital items. This outlay includes GH¢25,000 to be expended to acquire the land for the factory. The rest of the amount will be incurred on water processing and packaging plant that will be depreciated on straight-line basis over five years with scrap value. At the end of fifth year, the company will sell off the assets for GH¢60,000. Additional initial investment is expected to be made in receivables and inventory of GH¢50,000 and the short-term payables of GH¢20,000 will be generated by the project. No further investment would be made in working capital during the project life and the initial investment would be recouped at the end of the fifth year.
The Board of Directors have tasked the Finance Director to advise the Board on whether to lease or buy the plant using a bank loan.
The company could purchase the plant for cash using a bank loan on which the current rate of interest is 20% before tax. The trade-in value is GH¢20,000. If the plant is purchased, the company can claim tax depreciation allowance of 25%, on a reducing balance basis over the plant’s five year life.
The company could lease the plant under an agreement which would entail payment of GH¢52,000 at the end of each year for the next five years. The tax authorities allow lease payment for tax purposes.
The corporate rate of tax is 25% and tax is payable one year in arrears. The company’s required rate of return is 15%.
Required:
a) Assess the general environment in which Alpha Mineral Water Ltd operates. (12 marks)
View Solution
Technological Factors
The technological factors raised include the following issues:
- Use of biodegradable plastic – the passage of law requiring the use of environmentally friendly biodegradable plastic reflects improvement in the technology as far as plastic is concerned. The industry rely heavily on plastic as one of its core inputs in the production process.
- Efficient and state of the art – since the industry compete on the price basis it implies that the participants operate on low-cost leadership strategy which calls for efficient production process. This means that the industry needs cutting edge technology as far as its production process is concerned in order to lower cost and achieve competitive advantage.
Political factors
The political factors relate to the actions and policies of the government and other political actors such as opposition political party activism. The case before us raises a number of political issues worthy of consideration. - Removal of subsidies – this will result in higher cost of living in the economy. It will raise cost of doing business in the Alpha Mineral Water Ltd and will also affect households and individuals. This will make the countries businesses less competitive compared to other foreign business that may be enjoying subsidies from their governments.
- Political instability – removal of subsidies is likely to result in agitations and demonstrations from the citizens who are likely to feel the negative impact in terms of increase cost of living. Any such political upheaval will have negative consequences for the economy as a whole.
- Taxation policy – The government appears to have appetite for taxes. It has introduced a bill in parliament, if passed into law, require companies to use biodegradable plastic as well as considering introduction of special tax to deal with plastic pollution. This will further worsen cost of doing business in the economy and will make businesses less competitive.
- Establishment of Industry regulator – setting up of the industry regulator to deal with hitherto unregulated industry will have implication for the cost of doing business in the economy.
Legal factors
These factors deal with various laws government passes to deal with the conduct of business in an economy. In this particular case the following legal issues arise: - Special Tax – The government is considering the introduction of special tax to raise necessary funds to deal with the plastic waste challenge facing the urban centres. This is a major threat to the industry operators as this will result in higher cost of production with limited chance to pass on the effect to the consumers due to price sensitivity.
- Labour laws amendments – since the new law reduces the hiring period of casual labourers from 18 to 6 months and also make it easier for the workers to join trade unions imposes further cost of doing business in the economy. Unionised workers can demand for high salaries and also hiring more workers on permanent basis withal its related costs.
- Law setting up regulator for the industry – this is perceived to limit rate of new businesses entering the industry and existing ones may face high demands on them.
Environmental Factors
These factors relates to how the natural or physical environment is affected by the actions and activities of businesses. - Pollution of environment – the case clearly state how the used sachet and bottles are becoming a nuisance to the environment. The plastic are not biodegradable.
- Floods – choked drains have resulted in serious floods that affect lives and property in the urban centres.
- Pollution of water bodies – serious pollution of environment can affect waters bodies dotted around the country and can even affect their long term sustainability.
- City Authorities budget – high cost of running the cities.