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Strategic Management Project
Group K:
Farai MidziGeorgina Venning Amina ParkerNontando SokhelaJuliana Heunis
SMP 2014
Interim Report 2: Ariel
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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
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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: .................................................................................................................................................................................................................................................... a2. Sales Income figure: ................................................................................................................................................................................................................................... a
Figure 5: Sales Mix (Sales Income) ........................................................................................................................................................................................................... a3. Cost of sales expense ................................................................................................................................................................................................................................. c
Figure 6: Variable Manufacturing Costs (Cost of Sales) ................................................................................................................................................................... cFigure 7: Total Variable costs ..................................................................................................................................................................................................................... dFigure 8: Fixed Manufacturing Costs ....................................................................................................................................................................................................... d4. Other Expenses ............................................................................................................................................................................................................................................ eFigure 9: Ariel Capital Requirements ...................................................................................................................................................................................................... g
Statement of Financial Position (Balance Sheet) of Ariel at 30 June.......................................................................................................................h 1. Assets .............................................................................................................................................................................................................................................................. h2. Equity (Owner’s equity) ............................................................................................................................................................................................................................ iFigure 10: Retained Earnings calculation ............................................................................................................................................................................................... i3. 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
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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.
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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
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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).
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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
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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
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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 fr ee
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.
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6. Financial Statements (all explanations and calculations appear in appendix)
Statement of Comprehensive Income (Income Statement) of Ariel for fiscal year30th June
(All figures are in Rands)
2015 2016 2017 2018 2019
Sales Income 76 091 774 220,00 118 703 167 783,20 127 834 180 689,60 136 965 193 596,00 146 096 206 502,40Less: 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 31 256 328 491,00Net 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
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atement of Financial Position (Balance Sheet) of Ariel at 30 June
2015 2016 2017 2018 2019
sets
n-Current Assets
nd and Buildings - Carrying Amount 360000000 320000000 280000000 240000000 200000000
hicles - Carrying Amount 22325000 21150000 19975000 18800000 17625000
rrent Assets
entory 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
de receivables 15218354844 23740633557 25566836138 27393038719 29219241300
nk 2190104679 25704237190 58846932772 94510716672R
132 678 130 753,08 15% of Cost of Sales
tal 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
uity and Liabilities
ner's Equity
pital 50 000 000 50 000 000 50 000 000 50 000 000 50 000 000
tained 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
n-Current Liabilities
ng-term Loan 474830000 524830000 524830000 524830000 524830000
rrent Liabilities
de Payable 782552992,5 1016819390 1094908190 1172996989 1251085788
tal 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
tained Earnings 2015 2016 2017 2018 2019
enings Balance 0 19 613 613 501 52 261 648 917 87 423 638 478 125 106 716 358 25% of Inventory
ofits in Current year 39 227 227 001 65 296 070 833 70 323 979 122 75 366 155 759 80 373 416 120
ss: Dividends 19 613 613 501 32 648 035 417 35 161 989 561 37 683 077 879 40 186 708 060
sing Balance 19 613 613 501 52 261 648 917 87 423 638 478 125 106 716 358 165 293 424 418
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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 12months, 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 82,1:1 109,3:1 135,1:1Acid-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
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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 concept ion 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
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their choices in post-purchase evaluation). The financials were generated to explain the
impacts of the suggestions.
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record-as-pg-launches-leading-laundry-brand-ariel [2014, Auguest 12].
http://online.wsj.com/articles/SB118454911342967244http://online.wsj.com/articles/SB118454911342967244http://researchspace.ukzn.ac.za/xmlui/bitstream/handle/10413/1428/Ghela_DN_2006.pdf?sequence=1http://researchspace.ukzn.ac.za/xmlui/bitstream/handle/10413/1428/Ghela_DN_2006.pdf?sequence=1http://researchspace.ukzn.ac.za/xmlui/bitstream/handle/10413/1428/Ghela_DN_2006.pdf?sequence=1http://nmims.edu/NMIMSmanagementreview/pdf/april-may-14/decision-making-process-bottom-of-the-pyramid-consumers-surabhi-piyush-and-hari.pdfhttp://nmims.edu/NMIMSmanagementreview/pdf/april-may-14/decision-making-process-bottom-of-the-pyramid-consumers-surabhi-piyush-and-hari.pdfhttp://nmims.edu/NMIMSmanagementreview/pdf/april-may-14/decision-making-process-bottom-of-the-pyramid-consumers-surabhi-piyush-and-hari.pdfhttp://www.mckinsey.com/global_locations/africa/south_africa/en/rise_of_the_african_consumerhttp://www.mckinsey.com/global_locations/africa/south_africa/en/rise_of_the_african_consumerhttp://www.mckinsey.com/global_locations/africa/south_africa/en/rise_of_the_african_consumerhttp://www.nielsen.com/us/en/insights/reports/2012/the-diverse-people-of-africa.htmlhttp://www.nielsen.com/us/en/insights/reports/2012/the-diverse-people-of-africa.htmlhttp://beta2.statssa.gov.za/publications/P0302/P03022014.pdfhttp://beta2.statssa.gov.za/publications/P0302/P03022014.pdfhttp://beta2.statssa.gov.za/publications/P0302/P03022014.pdfhttp://www.themarketingsite.com/news/31037/south-africans-set-new-guinness-world-record-as-pg-launches-leading-laundry-brand-arielhttp://www.themarketingsite.com/news/31037/south-africans-set-new-guinness-world-record-as-pg-launches-leading-laundry-brand-arielhttp://www.themarketingsite.com/news/31037/south-africans-set-new-guinness-world-record-as-pg-launches-leading-laundry-brand-arielhttp://www.themarketingsite.com/news/31037/south-africans-set-new-guinness-world-record-as-pg-launches-leading-laundry-brand-arielhttp://beta2.statssa.gov.za/publications/P0302/P03022014.pdfhttp://www.nielsen.com/us/en/insights/reports/2012/the-diverse-people-of-africa.htmlhttp://www.mckinsey.com/global_locations/africa/south_africa/en/rise_of_the_african_consumerhttp://www.mckinsey.com/global_locations/africa/south_africa/en/rise_of_the_african_consumerhttp://nmims.edu/NMIMSmanagementreview/pdf/april-may-14/decision-making-process-bottom-of-the-pyramid-consumers-surabhi-piyush-and-hari.pdfhttp://nmims.edu/NMIMSmanagementreview/pdf/april-may-14/decision-making-process-bottom-of-the-pyramid-consumers-surabhi-piyush-and-hari.pdfhttp://researchspace.ukzn.ac.za/xmlui/bitstream/handle/10413/1428/Ghela_DN_2006.pdf?sequence=1http://researchspace.ukzn.ac.za/xmlui/bitstream/handle/10413/1428/Ghela_DN_2006.pdf?sequence=1http://online.wsj.com/articles/SB118454911342967244
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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 30 th 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 718Machine
wash50 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).
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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
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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
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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 153 151 720,0024 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
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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.
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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%.
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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 RequirementsCAPITAL 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 expense1 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.
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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) tr ies 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.
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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
Balance0 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:
Dividends18 978 245 609 31 464 719 750 33 887 567 295 36 317 192 304 38 730 232 082
Closing
Balance18 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 ComprehensiveIncome of Ariel for fiscal year starting 30th June’. It is assumed that Ariel pays out half of its
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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.
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Appendix 1: Consumer perceptions about Ariel
29%
2%
29%
11%
29%
What are your perceptions of ariel?
I don't know much about the
product
I don't like the product and
had a bad experience using it
I know about the product but
haven't considered using it
I Like the brand and think it
cleans clothes well
Neutral
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Appendix 2: People who would consider switching brands
31%
69%
Would you ever consider changing
brands?
No
Yes
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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 a
friend/family member
Information regarding
product
Nothing, I wouldn't switch as I
am loyal to my brandother
Promotions offered on
product
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Appendix 5: AMPS statistics on detergent purchases
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Appendix 6: AMPS showing income levels per household
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Appendix 7: AMPS table indicating LSM levels
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Appendix 8: Price of Ariel compared to other brands
Brand of detergent (all auto powder, 2kg bag)
Own brand OMO ArielWoolworths 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
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Appendix 9: Gender of people who purchase detergents
60%
40%
Gender of the people who purchase
detergents
Female
Male
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Appendix 10: Low-involvement decision making process
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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
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Appendix 12: How do consumers evaluate a brand
42%
58%
Do you prefer social media when
evaluating a brand?
No
Yes
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Appendix 13: Washing techniques used
17%
69%
14%
How do you wash your clothes?
By Hand
In a machine
Someone Else does it