Business case study

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case: Hershey case in TURKEY ( economic part only )

please follow the guideline and the sample that have provided. do not need cover page and tablet, only focus on the Economics Discipline.

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HERSHEY CASE IN TURKEY Economics Discipline 1. Evaluate the economic conditions of the country for the past 10 years; pay particular attention to the most recent data. Indicators to be discussed: a. GDP growth rate b. GDP per capita c. Unemployment rate How would you characterize the economic performance of the country in recent times? Is it conducive to Hersey entering the market or expanding its presence? 2. Recognize the state of the foreign sector: a. Identify the exchange rate regime in the country and evaluate its performance since 2006. Collect information on recent sociopolitical or economic events that may affect the exchange rate and discuss your findings. b. Evaluate the performance of the balance of payments since 2006. Is the state of the balance of payments sustainable? How would you characterize the overall condition of the foreign sector? Sources: IMF: http://www.imf.org/external/index.htm World Bank: http://www.worldbank.org/ Federal Reserve Economic Data (FRED): https://fred.stlouisfed.org/ OECD: http://www.oecd.org/about/ and various websites including www.tradingeconomics.com 3. Trade agreements and disputes a. Identify trade agreements that may be relevant for Hershey. b. Identify ongoing or past trade disputes that may be relevant for Hershey. Sources: WTO: https://www.wto.org/ 1. Return on Equity 2. Price to Earnings ratio Team 5: South Africa Megan Lee, Guannan Wang, Marinda Delgado, Talib Habib, Jonathan Vazquez Table of Contents Introduction Accounting Economics Marketing Management Conclusion Hershey’s Background • Founded by Milton Hershey in 1894 • Based in Hershey, Pennsylvania • 6th biggest confectionary in the world • Largest confectionary in the US • Net Income 2016: $720,044,000 Accounting Ratios Hershey’s Industry Return on Equity 76.80% 60% Return on Assets 13.24% 5.49% Net Profit Margin 9.67% 10.65% Assets Turnover 1.41 0.64 Economics: GDP Annual Growth Rate Economics: GDP Growth Rate Comparison US Inflation Rate South Africa Inflation Rate Unemployment Rate Marketing: Demographics Population: 54.3 Million 1.02 males per 1 female 46.41% under age 25 41.44% between 25 & 54 12.15% age 55 or older https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html Social System 70% < 6000 Rand ($456) Middle Class: ≈ 18% $426.29 to $3044.96 1 Rand = 0.08 USD 1 USD = 13.14 Rand Education Literacy Rate = 94.6% Gross Enrollment = 19% Disproportionate Invest. Unequal results Language IsiZulu 22.7% IsiXhosa 16% Afrikaans 13.5% English 9.6% 8 other languages 38.2% Political & Legal Constitution Democracy ANC - 1994 Social Reform & Corrupt April 7 protests Pravin Gordhan Management: Global Confectionery Industry Top 6 Global confectionery companies, based on annual revenue #1 Mars Inc. #2 Mondelez Int. #3 Ferrero Group #4 Nestle SA #5 Meiji Holdings #6 Hershey’s Hershey’s Global Presence 80% of Hershey’s Sales are in North America Confectionery in South Africa ValueValue Share Share of in 2016 Mondelez - 36% Nestle - 23% Tiger Consumer Brands - 8% Lindt & Sprungli - 6% 4 companies hold 73% of the country’s confectionery value share Global Strategy to Enter South Africa Strategic Partnership with a local confectioner Benefits: ● Smaller investment and less risk Greenfield Strategy ● Less resistance from local competition ● Opportunity to introduce Hershey’s brand to S.A. ● Measure consumer reaction to brand and products ● Share resources such as R&D, MKT & Distribution ● Easier to implement Localization Strategy Hershey’s Mission Statement T “To continue Milton Hershey’s legacy of commitment to consumers, community and children, providing high quality products while conducting business in a socially responsible and environmentally sustainable manner”. How do you maintain integrity in foreign markets? ● Conducting due diligence when creating contracts with suppliers, manufacturers and any type of business outsourcing and partnerships. ● Monitoring internal and external activities AND intervening in a timely manner when quality or performance affects the values or mission of the company. Conclusion Hershey’s in South Africa? Group 5 05/17/2017 Table of Contents Executive Summary……………………………………………………………………….3 Accounting………………………………………………………………………………...5 Economics…………………………………………………………………………………8 Marketing……………………………………………………………………………...…12 Management……………………………………………………………………………...16 Appendix…………………………………………………………………………………20 References………………………………………………………………………………..34 2 EXECUTIVE SUMMARY South Africa is often considered the land of hope. Marred by its history of brutal racial divisions of Apartheid that ended in 1991, the struggles between the socioeconomic classes still exist. Although on the surface South Africa has transformed itself to be “rainbow nation” where citizens are equal and coexist regardless of color, the recent economic turmoil and political instability is causing the citizens of South Africa to create divisions based on color and economic status. Even with all this mess, the future of South Africa can still be salvaged to sustain its one-of-a kind vibrant culture, natural resources, beautiful landscapes and the success of its citizens. This report will provide an analysis of whether if The Hershey Company should expand its product to be sold in South Africa. Our decision has been concluded by analyzing a plethora of data, ratios, and concepts ranging from subjects as Hershey’s 10K, South Africa’s GDP analysis, demographics, current political landscape, and the confectionary industry already established in South Africa among other sources of data. All the data and info will not only be included in the body of this paper, but also in the appendix at the end. In its entirety, all the information was necessary to weigh the pros and cons to make our decision. Hershey is the 6th largest confectionary company in the world and the largest confectionary company in the United States. By no mistake, Hershey enjoys the ability to lead industry averages in aspects like Return on Equity (76.8% vs 60%), Return on Assets (13.24% vs 5.49%), Assets turnover (1.41 vs 0.64) among others. It is a small enough company where it can focus its attention to being the best but a large enough company to compete with the like of Cadbury and Ferrero. As one of the most socially 3 responsible corporations, any country that Hershey does business with will be given a boost in their society. From using certified and sustainable cocoa, Hershey averts any risk of underpaying their suppliers for its raw materials. Because the confectionary industry is very competitive and the health of The Hershey Company is strong, it is imperative that Hershey needs to expand to attain market share from a country that is outside of the US. Even though Hershey is looking to expand, the question remains whether if South Africa is an ideal country to do business with. Looking at from an economics viewpoint, South Africa has a declining GDP and GDP per capita, high unemployment rate (26%) and an average inflation rate. However, the foreign direct investments (FDI) are increasing and the exchange rate of USD to RAND is high (1USD=13RAND); the dollar goes further. If there is to be any investment, it would be relatively cheap to establish a physical presence. However, factors like a declining GDP and a high unemployment rate suggest the economy of South Africa to be in a condition that will not support a product that needs discretionary income. But with many FDI and its decreasing balance of payments, South Africa might have the capability to reinvent itself in the future. The present-day South Africa’s economy might not be strong but it has very interesting aspects about who Hershey’s can market towards. South Africa has a booming population of around 54 million people but when Hershey is to segment the population it wants to target, it will have a very difficult time. There are 12 official languages spoken in South Africa; English is the 4th most spoken (9.6%). The top 3 languages are spoken by primarily low-income people. The education system is terrible with only 19% of the population who can go to college, attend. Around 70% of the population is considered low-income and live on the equivalent of $456/month. On April 7, nationwide protests 4 broke out to oust President Jacob Zuma because of his firing of the finance minister that ultimately led to South Africa’s credit rating to be considered junk. With so much political upheaval, it is a clear sign to stay away from the country. We have established that present-day, it is not a wise decision to go into South Africa based on their declining economy and political unrest. But all hope is not lost; South Africa has a bright future. Our recommendation is to wait 10-years to see if the investments in South Africa yield good results. If they happen to do so, a strategic alliance with Mondelēz International’s Cadbury would be a wise choice. Cadbury owns 36% of market share in an industry where 4 companies (Cadbury, Nestle, Tiger, Lindt & Sprungli) own 73% of market share. By creating a strategic alliance that closely resembles how Hershey manufactures and sells Cadbury products in the US, Cadbury would own the rights to manufacture and sell Hershey products in South Africa. This is only if the health of South Africa improves and becomes a viable option for Hershey to expand. ACCOUNTING The required financial ratios (Figure 1) and the explanations of each ratio (Figure 2) are outlined in the appendix near the end of the paper. Please refer to those as it will heavily complement the ideas presented here, and provide an overall financial view of The Hershey Company. The data of our findings were significantly sourced from Hershey’s most recent 10K. Inventories The value of Hershey’s inventory is based on either the lowest cost or the market value. Hershey has separate methods to estimate the value of their US and international 5 inventories. For the year ending on Dec 31, 2016, most of the value of the US inventory, which is about 54% of their inventory, uses the method of last-in, first out (LIFO). The remaining amount of US and international inventory uses the method of first-in, first out (FIFO). As of Dec 31, 2016, the value of their inventory using the method of LIFO is $402,919. On Note 16, it stated that an adjustment was made to show the excess of inventory value using LIFO. Depreciation Hershey uses straight-line depreciation regarding the cost of their property, plant, and equipment. Straight-line depreciation is calculated by the cost over their estimated useful life. For instance, Hershey’s machinery and equipment has an estimated useful life of 3 to 15 years, whereas a building which has an estimated useful life of 25 to 40 years. For the year ending on Dec 31, 2016, Hershey’s total depreciation expense was $231,735; in that year, maintenance and repairs also occurred. Interest was also accumulated for the construction of new facilities and production lines. Impairment assets (items less than book value) may not be recoverable. Assets held for sale or disposals are reported at the lower amount of fair value minus the cost to sale. Investments In 2016, Hershey continued their investment with corporations for developments that qualified for them to receive federal historical and energy tax credits. All their investments are reported under the Consolidated Balance Sheet using the equity method. Tax credits are also recognized as a tax expenses once it is documented, and it is recorded to show the remaining value of the future tax benefit. For the year ending in Dec 31, 2016, the investment tax benefit Hershey recognized was $52,342, when the equity 6 investment was written-down as $43,482. To show the recognition of the tax benefit, it can be found under other (income) on the Consolidated Statement of Income. Effective Tax Rate When comparing Hershey’s income tax rate for the year 2015 and 2016, we can see that there is a big difference in taxes. For 2016, we can see that the income tax rate was 34.5%, whereas in 2015 the rate was 43.1%. The tax rate was higher in 2015, because there were “non-deductive goodwill impairment charges”. According to Hershey’s 10K report, for the year 2016, Hershey had more tax benefits from “manufacturing deductions, research and development and investment tax credits, and a favorable foreign rate differential relating to cocoa procurement operations.” Transfer Pricing in South Africa According to the Government Gazette, effective as of October 28, 2016, South Africa Revenue Service (SARS) made changes to the policy regarding transfer pricing documentation requirements. The new policy Notice No. 1334, under Section 29 of the Tax Administration Act, requires South African companies with “cross-border relatedparty transaction” to provide additional documentation if they have a combined amount of more than 100 million Rand per year. If they have reached the limit, additional documentation requirements will cover all individual cross-border transaction that exceeds 5 million Rand starting on or after October 1, 2016. Some requirements include, “the description of ownership structure”, “business operation summary”, “copies of any contracts or agreements”, and “cash flow statements”. All South African companies must maintain and records these documents. 7 ECONOMICS South Africa, just like many countries that are trying to be more developed, is growing; the population rate in millions has grown at an average of 1% per year for the last ten years, but other aspects of the country have not been growing as much. Recently, their gross domestic product growth rate and gross domestic product per capita have declined. The consumption and investments of South Africa have decreased, the unemployment rate, policy interest rate, and exchange rate have all increased, and the inflation rate has stayed relatively the same, bringing more hardship to this third world country in the recent years. The gross domestic product is a primary indicator to see how an economy is doing by representing all the goods and services, and affixing a dollar amount to it. The gross domestic product (GDP) has been decreasing in South Africa; the economy is not growing by any means. last ten years there is data showing of (in $Billion) 299.42 for 2007, 286.77 for 2008, 295.94 for 2009, a drastic increase of 375.35 in 2010, 416.42 for 2011, and began to steadily decline again in 2012 with a GDP of 396.34, 367.59 in 2013, 351.31 in 2014, and 314.57 in 2015. Information for the GDP for 2016 nor 2017 is available. Figure 3 shows the date in a graph that explains numbers of the decreasing GDP. The GDP growth rate measures how fast the South African economy is growing; in this case, declining. Comparing a quarter of the country’s economic output, Figure 4 shows a representation of the annual growth rate for South Africa; most years resembles the United States. However, since 2014, South Africa has seen a dismal growth rate. Many sectors like mining and manufacturing are posting low numbers leading to a 8 decrease in the overall GDP growth rate. South Africa needs to depend on its established industries to do well so it may develop others. GDP per capita is calculated by dividing South Africa’s GDP, adjusting to inflation, and dividing by the population. Figure 5 shows an ultimate low in 2009 of (in USD) 7248.4 followed by a steady increase for the next 6 years. The increase coming in 2010 with 7362.8, to 7494.3, 7546.8, 7606, 7610.7, and ending with 7585.8 in 2015. Data from 2016 is not available. Although we don’t have data for 2016, we can assume that it has decreased due trends that we have seen in other parts of the data. Still high yet signaling of a decrease is alarming because standard of living and the productivity/efficiency is going down. The unemployment rate in South Africa has been drastically different every year and exceptionally high for the last 10 years. Figure 6 shows the different unemployment rates. Employment grew in few sectors including, the community and social services, transportation, manufacturing, agriculture, trade and private households but decreased drastically in mining and construction. This is one of the most important indicators showcasing if people can hold down a job. The chart shows over 26% of the population do not have a job in 2016. This explains less contribution in the GDP per capita and hence the loss of purchasing power in the overall decline of the GDP. Inflation rate in South Africa in the past 10 years has declined almost half of what it was. In the last few years, the rate has stayed between 4% and 6%; except for in 2009 it had dropped to 3%. Figure 7 the average and the drastic lows. The inflation rate is healthy where the prices of products aren’t being effected so much. Inflation and deflation can both hurt the economy. The rate over the years has achieved to be very 9 beneficial for the citizens of Africa as it has almost decreased by half within 5 years. The exchange rate in South Africa has increased steadily for the last 10 years. Figure 9 shows how Africa has increased its exchange rate and Figure 10 compares it to the United State exchange rate. Just recently, the exchange rate in South Africa has decreased because of the political dilemma that had started in 2016. Pravin Gordhan, the finance minister, had unveiled government spending cuts, a civil service job freeze, and some moderate tax rises. Gordhan’s actions were because he wanted to stop the country spending money/resources that it couldn’t afford, and did not want to borrow money that South Africa could not pay back in the future. His goal was to increase the credit rating for South Africa so that interest rate would not increase. An article by Newsweek written on October 17, 2016 states that there was also a power struggle between Jacob Zuma, the president of South Africa, and Pravin Gordhan because he is being investigated for fraud. Recently, Zuma fired Gordhan and led to nationwide protest for the firing of the president. The balance of payment for South Africa since 2006 has been sustainable. The value in 2006 was 30.238 million and has dropped down to 19.136 million in the last ten years. But there was a 19% increase in the 2010 compared to 2009 which is the largest increase South Africa has had. Figure 11 and 12 shows the data and the value of South Africa’s balance of payments and includes the change percentage per year. These numbers prove that South Africa balance of payments as slightly declining every year as a good sign that the economy in this part is doing okay. The overall condition of South Africa’s foreign sector is as steadily increasing both foreign direct investments (FDI) have been stable for the last three years as shown in 10 chart Figure 13; and South Africa’s foreign exchange reserve has also increased in the last ten years but just recently has kept a steady pace with not much increase since 2014 also shown in chart Figure 14. The more FDI that South Africa is being involved in, the better outlook for the country of its investment in the future. Three important trade agreements that may be relevant to the expansion of Hershey’s moving into South Africa: Southern Africa Development Community (SADC) Free Trade Agree ...
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prof_mikewillims
School: University of Maryland

Attached.

Economic Discipline in
Turkey

Turkey - GDP

Turkey’s GDP Growth Rate

Turkeys GDP Per Capita

Turkey’s GDP Growth Rate

Turkey Inflation Rate


[Surname] 1
Name
Professor
Economic Discipline in Turkey
Despite the ongoing political instability, the economy of Turkey has seen general
macroeconomic stability. This is attributed to prudent fiscal policy which has kept public debt
and budget deficits in check. Inflationary pressures have continued to be on the rise, however,
the country’s financial sector remains to be competitive and stable. Predictions of economic
growth in Turkey have been greatly affected by political events in the country that erupted in
mid-2016 against key challenges that include ignorance of the rule of law and lack of
transparency in the government. The country’s judicial system has also become more prone to
political influence.
The gross domestic product (GDP) measures national income and output for a particular
country’s economy. The gross domestic product equals to the total expenditures for all final
goods and services produced within the country in a given period of time. The GDP in Turkey
was worth 857.75 billion US dollars in 2016. The GDP value of Turkey represents 1.38 percent
of the world economy. In 2006 Turkey’s GDP was 550,796 billion US dollars, in 2007 it was
675,010 billion US dollars, 730,337 billion USD in 2008, it declined to 614,554 billion USD in
2009, rose again to 731,168 billion USD in 2010, it then realized a steady rise of 774,754 in
2011, 788,863 in 2012, and 823,234 in 2013 before dropping to 798,429 in 2014. We do not
have data for 2015. From the data we acquired, Turkey is having a growth in its GDP because as
in 2016, Turkey’s GDP was worth 857.75 billion US dollars. This will be beneficial to Hershey’s
as it seeks to enter the Turkish market. Its products have an ass...

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