Food and beverages

Coffee Industry Focused

Amber Liang 301275649

Anna Jiang 301244568
Chris zhang 301296638
Steven Xiao 301215889

Bus 419 D-100

Simon Fraser University
Table of content

The coffee market

Smucker’s

Starbucks

Nestle
Some coffee market facts
● Coffee is the second most traded commodity after oil

● People consume over 500 billion cups of coffee every year

● Coffee exporting industry alone is a 20 billion dollar industry

● There are only two types of coffee Arabica and robusta

Arabica and Robusta
Arabica

● Most common type of coffee

● More that 70% percent of coffee is Arabica
● It is considered to have better quality

Robusta

● Hardier
● Cheaper
● Most common seen in instant coffee
Factors that drive coffee price
Demand and supply

● Climatic factor

● Speculator factor

● Enterprise trading

● Political instability
Climatic Factor
Coffee output is highly depends on the weather condition

Rain has to fall just the right time

Sun has to shine just the right time

Speculator factor
coffee is the second largest traded commodity

the market activities of traders could cause significant effect on coffee price
Enterprise Trading
largest four companies purchase more than 50% share of the coffee produced
worldwide

If those companies decide to buy arabica coffee, the price of the arabica
coffee will increase
Political factors
Top five largest coffee producers account
about 65% of the coffee production world
wide

All those countries are developing

countries
JM Smuckers Company
Company Overview
• The J. M. Smucker Company, also known as Smucker and Smucker's, is an
American manufacturer of fruit spreads, ice cream toppings, beverages,
shortening, peanut butter, oils, and other products in North America.
• Smucker's headquarters are located in Orrville, Ohio.
• It was founded in 1897.
• CEO: Mark T. Smucker (May 1, 2016–)
Common
Stock
Business Segment
• U.S. Retail Coffee,
• U.S. Retail Consumer Foods,
• U.S. Retail Pet Foods,
• International and Away From Home.

Segments as a percentage of total net Revenues in 2018:

• U.S. Retail Coffee -28%

• U.S. Retail Consumer Foods - 27%
• U.S. Retail Pet Foods - 30%
• International and Away From Home - 15%
Business
Segment
Business Segment -
Coffee
 Financial Statement

• Consolidated Statements of Comprehensive Income

• Consolidated Balance Sheets

• Consolidated Statements of Cash Flows

Consolidated Statements of
Comprehensive
Consolidated Balance Sheets-
Assets
Consolidated Balance Sheets
Liabilities and Shareholders’ Equity
Consolidated Balance Sheets
Liabilities and Shareholders’ Equity
2018 Solvency Ratio

Total Asset:$15,301.2
Total Liability: $7410.1
Total Equity:$7891.1

● Total Debt-to-Equity = D / E = 93% ( High!)

● Debt Ratio = D / A = 48.43%
● Financial Leverage= A / E = 1.9
Consolidated Statements of Cash
Flows
Consolidated Statements of Cash
Flows
DERIVATIVE FINANCIAL INSTRUMENTS AND
MARKET RISK
JM Smucker is exposed to market risk related to changes in
● interest rates,
● foreign currency exchange rates,
● commodity prices.
Interest Rate Risk
● Exposed to interest rate risk with regarding existing debt consisting of fixed-
and variable-rate maturities.
● Interest rate exposure primarily includes U.S. Treasury rates, LIBOR, and
commercial paper rates in the U.S.
Foreign Currency Exchange Rates
Risk
● JM Smucker has operations outside the U.S. with foreign currency
denominated assets and liabilities, primarily denominated in Canadian
currency.
● JM Smucker exposure primarily includes the timing of transactions and the
movement of exchange rates.
● The fluctuations of foreign currency may affect operating results
Commodity Price Risk
● Raw materials are primarily commodities such as green coffee, peanuts, oils
and fats, protein meals, and plastic containers.
● Green coffee, certain oils, and certain protein meals are traded on active
regulated exchanges, and commodities price fluctuation is based on market
conditions, including
○ the supply and demand conditions
○ political and economic variables
○ weather
○ investor speculation
○ other unpredictable factors
Risk Management Relative to Interest rate
● Interest Rate Hedging

● Use derivative instruments to manage the changes of market value of

existing debt. Interest rate contracts,such as interest rate swap contract
can mitigate the risk associated with the underlying hedged item.

● Contract are designated for cash flow hedge and fair value hedge.
Risk Management Relative to Foreign Currency
Exchange Rates

● Foreign Currency Exchange Rate Hedging:

● Use foreign currency derivatives to manage the effect of foreign currency
exchange fluctuations on future cash payments in Canada, primarily related to
purchases of certain raw materials and finished goods.
● The contracts generally have maturities of less than one year.
Risk Management Relative to Commodity Price
● Commodity derivatives,including futures and options,to manage the price
volatility and reduce the variability of future cash flows related to anticipated
inventory purchases of key raw materials such as green coffee, oils, corn,
wheat, and soybean meal.
● The company also enters into commodity derivatives to manage price risk for
energy input costs, such as natural gas.
● Uses derivatives with maturities of generally less than one year.
Other Risk Factors and Uncertainties
in Operation

● To generate sufficient cash flow to meet;

● The availability of reliable transportation on acceptable terms;
● To implement and realize the full benefit of price changes;
● The impact of the timing of the price changes to profits and cash flow in a
particular period;
Other Risk Factors and Uncertainties
in Market
● The success and cost of marketing and sales programs and strategies
intended for product innovation;
● Competitive activity in the market, including competitors’ pricing practices and
promotional spending levels;
● The impact of accidents, extreme weather, and natural disasters;
● The concentration of certain of the businesses with key customers and
suppliers, including single-source suppliers of certain key raw materials and
finished goods, and the ability to manage and maintain key relationships;
Summary
JM Smucker is exposed to market risk related to changes in
● interest rates,
● foreign currency exchange rates,
● commodity prices.

Risk Management related to risks:

● Interest rates hedging, contract such as swap, cash flow hedge & fair
value hedge
● Foreign currency exchange hedging
● Commodities derivative with contracts and options
Starbucks Coffee
Starbucks-Company Overview
An American coffee company and coffeehouse
chain of roaster, marketer and retailer.

Founded in Seattle, Washington in 1971.

As of 2018, the company is operating in 75
countries with 28,218 locations worldwide.

Core product:
coffee, tea, beverages and fresh food items
Common Stock

Common Stock:
“NASDAQ” under
the symbol "SBUX."
Business Segment
Four operating segments:
1) Americas, U.S., Canada, Latin America

2) China Asia Pacific (“CAP”)

3) Europe, Middle East, Africa (“EMEA”)

4) Channel Development

Segments as a percentage of total net revenues 2017:

Americas (70%), CAP (14%), EMEA (5%), Channel Development (9%) Other (2%).
Revenue Components
Company-operated and Licensed Store Summary as of October 1, 2017

Company-operated stores accounted for 79% of total net revenues

Licensed stores accounted for 11% of total net revenues

Sales of consumer packaged goods comprised 8% of total net revenues

Foodservice accounts comprised 2% of total net revenues

Financial Statements

● Consolidated Statements of Comprehensive Income

● Consolidated Balance Sheets

● Consolidated Statements of Cash Flows

Consolidated Balance Sheet-Assets
Consolidated Balance Sheet-Liabilities
Financial Leverage & Liquidity
Financial Leverage

Total Asset:$14,365.6
Total Liability: $8908.6
Total Equity:$5457.0
● Total Debt-to-Equity = D / E = 1.63 ( High!)
● Debt Ratio = D / A = 62%
● Financial Leverage= A / E = 2.63

Liquidity

Current Ratio: Current Assets/ Current Liability=5283.4/4220.7=1.2518 >1

The availability of liquid assets to the company is good
Consolidated Statement of
Comprehensive Income
Cash Flow-Operating Activities
Cash Flow-Investing Activities
Cash Flow-Financing Activities
Risk Factors
● Economic conditions in the U.S. and international
markets
● Failure to preserve the Brand value
○ Starbucks success depends substantially on the value of the
brands
● Incidents involving food or beverage-borne
illnesses, tampering, contamination or mislabeling
○ whether or not accurate, as well as adverse public or medical
opinions about the health effects of consuming our products,
could harm the business.
Risk Factors
● Unauthorized access, use or theft of information
data Starbucks has of customer or employee
○ Starbucks proprietary or confidential information that is
stored in information systems or by third parties on their
behalf could impact the reputation and brand and expose
Starbucks to potential liability and loss of revenues.
● Material failure, inadequacy, interruption or
security failure of technology
○ Starbucks rely heavily on information technology in
operations, failure could harm their ability to effectively
operate the business
Foregoing Risks
● Not being successful in implementing important
strategic initiatives or effectively managing
growth
● Increases in the cost of high-quality arabica
coffee beans or other commodities
○ Or decreases in the availability of high quality arabica
coffee beans or other commodities
● Outside of control factors
○ Real estate costs, adverse outcomes of litigation, natural
or man-made disasters,etc.
Foregoing Risks
● Interruption of supply chain
○ could affect our ability to produce or deliver the
products
● Failure to meet market expectations for financial
performance and fluctuations in the stock
market
● The loss of key personnel or difficulties
recruiting and retaining qualified personnel
● Failure to comply with applicable laws and
changing legal and regulatory requirements
Risk Management
Primary market risk:

● Commodity price risk

● Foreign Currency Exchange Risk
● Equity Security Price Risk
● Interest Rate Risk
Commodity Price Risk
● Price volatility of green coffee
● Price volatility of dairy products
● Diesel, cocoa, sugar and other commodities

Starbucks use a combination of pricing features embedded within supply contracts

-fixed-price and price-to-be-fixed contracts for coffee purchases
-financial derivatives to manage the commodity price risk exposure

The potential impact as of October 1, 2017 to Starbucks future net earnings and other
comprehensive income (“OCI”) from changes in commodity prices.
Note: relates only to the hedging instruments
Foreign Currency Exchange Risk
● Cash flow volatility from foreign currency fluctuations

Starbucks enter into derivative instruments to hedge portions of cash flows of anticipated
revenue streams, inventory purchases, intercompany borrowing and lending activities and certain
other transactions in currencies other than the US dollar.

The potential impact as of October 1, 2017 to Starbucks future net earnings and other
comprehensive income from changes in the fair value of these derivative financial instruments due
to a change in the value of the U.S. dollar as compared to foreign exchange rates
Equity Security Price Risk
● Starbucks have minimal exposure to price
fluctuations on equity mutual funds and
equity exchange-traded funds within
trading securities portfolio. (Diversify the
risk)

Performed a sensitivity analysis and

determined that such a change would not have
a significant impact
Interest Rate Risk
● Long term debt
○ Starbucks utilize short-term and long-term financing
○ Use interest rate hedges to manage overall interest expense related to existing fixed-rate
debt, and to hedge the variability in cash flows due to changes in benchmark interest rates
related to anticipated debt issuances.

● Available for sale securities

○ They Comprise a diversified portfolio consisting mainly of investment-grade debt securities.
The primary objective of these investments is to preserve capital and liquidity.
○ Starbucks do not hedge the interest rate exposure on available-for-sale securities
■ performed a sensitivity analysis and determined that such a change would not have a
significant impact on the fair value of these instruments.
Risk Management

● Market price risk management policy.

● Monitor and limit the amount of associated counterparty credit risk

○ Which consider to be low risk for Starbucks.
Summary
● Interest Rates
○ Interest rate swap agreements to hedge the
variability in cash flows
● Foreign Currency
○ Forward and swap contracts to hedge position of
cash flow
○ Forward contracts to hedge the foreign currency
exposure
● Commodities
○ Futures contracts (Fixed price contract, to be fixed)
and collars to hedge the risk of commodity price
Nestlé
Nestlé - Company Overview
● Nestlé S.A. is a Swiss transnational food and drink company formed in 1905
by the merger of two big companies
● Nestlé is the world largest food company, measured by revenues since 2004
● Nestlé has 29 brands, 447 factories, operated in 189 countries and employs
around 339,000 people
Brand
Through Nestlé’s products and brands, Nestlé connects with people and their
pets millions of times a day and throughout their lives. Nestlé has more than 2000
brands, ranging from global icons like Nescafé and Nespresso to local favourites
like Häagen-Dazs.
Business Segment
Business Segment
Financial Statements

● Consolidated Balance Sheets

● Consolidated Statements of Comprehensive Income

● Consolidated Statements of Cash Flows

Consolidated Balance Sheet-Assets
Consolidated Balance Sheet-Liabilities
Consolidated Balance Sheet-Equity
Consolidated Statement of
Comprehensive Income
Cash Flows - Operating
Cash Flows - Investing & financing
Financial Leverage & Liquidity
2017 Solvency Ratio

Total Asset:$130,380
Total Liability: $67,603
Total Equity:$62,777

● Total Debt-to-Equity = D / E = 0.4216

● Debt Ratio = D / A = 0.203
● Financial Leverage= A / E = 2.077

Liquidity

Current Ratio: Current Assets/ Current Liability=32054/36054=0.892 <1

the availability of liquid assets to the company is not good
Risk Factors
● The Nestlé Group Enterprise Risk Management Framework (ERM)
○ A top‑down assessment is performed at Group level once a year to
create a good understanding of the company’s mega‑risks
○ A bottom‑up assessment occurs in parallel resulting in the
aggregation of individual assessments by all Markets and Globally-
Managed Businesses
● Health risks
○ Any major event triggered by a serious food safety or other
compliance issue could have a negative effect on Nestlé’s reputation
or brand image
Risks related to defined benefit plans
● Mortality risk:
○ the assumptions adopted by the Group make allowance for future
improvements in life expectancy. In order to minimise this risk,
mortality assumptions are reviewed on a regular basis

● Market and liquidity risks:

○ These are the risks that the investments do not meet the expected
returns over the medium to long-term. In order to minimise this
risk,the structure of the portfolios is reviewed and asset-liability
matching analyses are performed on a regular basis
Financial risks

Nestlé is exposed to a number of financial risks: credit risk, liquidity risk,

market risk (including foreign currency risk and interest rate risk, commodity
price risk and equity price risk).
Financial risks
● Credit risk
○ The methodology used to set the credit limit considers the
counterparty’s balance sheet, credit ratings, risk ratios and default
probabilities

● Liquidity risk
○ manage this risk by limiting exposures in financial instruments that
may be affected by liquidity problems and by maintaining sufficient
backup facilities
Financial risks
● Foreign currency risk
○ Transactional exposures arise from transactions in foreign currency.
They are managed through the use of currency forwards, futures, swaps
and options

○ Translation exposure arises from the consolidation of the financial

statements of foreign operations in Swiss francs, which is in principle,
not hedged.
Financial risks
● Interest rate risk
○ Exposed primarily to fluctuation in USD and EUR interest rates.
○ Managed based on duration and interest management targets set by
the ALMC through the use of fixed rate debt and interest rate swaps.

● Price risk
○ Price of green coffee, cocoa beans and other commodities necessary
for the manufacture
○ managed using a combination of derivatives (mainly futures and
options) and executory contracts
Financial risks

● Equity price risk

○ Exposed to equity price risk on investments
○ Diversifies its portfolios
Summary
Thank you!