Marketing Strategies for Central and Eastern Europe by Stewart Arnold Petr Chadraba Reiner Springer

Author:Stewart Arnold, Petr Chadraba, Reiner Springer [Stewart Arnold, Petr Chadraba, Reiner Springer]
Language: eng
Format: epub
ISBN: 9781315195940
Google: nAaFtAEACAAJ
Publisher: Taylor & Francis
Published: 2017-01-15T01:03:06+00:00

The cases

Glass Bottle Factory (GBF)

The firm, situated in a Golden Ring city in Russia, manufactured glass bottles for customers in Georgia (brandy), Kirov (fruit juices), Moldova (brandy) and Moscow (soft drinks). The equipment was rather old and maintenance costs formed 31 per cent of production costs. Orders requested were 300 million units and annual production was 125 million units. Sales were 5.7 million US$. Bottles were sold for 4 cents (0.33 litre) and 6.5 cents (0.5 litre) and world prices for bottles were 10 to 12 cents a bottle. For soft drink manufacturers the bottle price was 4 per cent of the retail price of the filled bottle and for brandy bottlers 1 per cent of the retail price of the filled bottle. Balance sheet valuation of the company was 1.6 million US$, however, a Federal revaluation of the company gave its value as 7.5 million US$. Profit before tax and interest payments was 0.89 million US$ (15.6 per cent). Long term debt was zero and short term debt 0.16 million US$.

At first glance, an attractive, profitable company. On closer inspection the company is fragile. This fragility comes from the customer base. Glass bottles are heavy, easily broken and of low value. They are therefore not widely traded, yet GBF was supplying to distant Georgia and Moldova. If these customers are rational they will switch to more local suppliers. If they are irrational customers then they will go out of business. The soft drink manufacturers in Moscow are likely to suffer from increasing competition. Moscow is the largest city in Europe and the obvious entry point for powerful soft drink manufacturers who will introduce varied packaging forms - PET bottles, cans and cartons. These additional forms are lighter and more resilient than glass bottles - customer benefits that the Moscow firm will have to deliver if it is to survive. The major strategic problem for GBF is identifying the customers who will survive and who will find it economic to source glass bottles from GBF. GBF refused to accept orders to supply 175 million bottles (140 per cent of last year’s production) so there is the potential to select customers to replace those whose future as GBF customers appears uncertain.

GBF’s management, however, were concerned about the high cost of maintenance of the production lines. Their efforts were focused on the acquisition of two new bottling lines from an Italian manufacturer at a cost of 4.5 million US$ each. This would increase capacity for 0.5 litre bottles from 27 million to 96 million bottles per year at the cost of the loss of six months production. In a full year revenues would increase by 4.14 million US$ with an additional profit of 2 million US$ before tax and finance charges to fund the investment. Leaving tax aside GBF would have to give up all the additional profit for more than four years to simply repay the capital. Paying an interest rate of 10 per cent it would take seven years to repay principal and capital utilising all the profit increase.

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