A strong distribution network, sound balance sheet and effective marketing practices have helped Oman Refreshment Company (ORC) establish itself as a prominent player in the food and beverages industry. While the firm refuses to divulge any details on its current market share, an analyst pegs it at around 70 per cent in the cola segment.
The company, also known as PepsiCo Oman, was the only one among the listed food and beverages companies on the MSM to post a profit in the first quarter of 2010. ORC's Q1 net profit rose more than five times to RO282,700 due to better sales realisation and easing of prices of raw materials. The company had posted a loss of RO68,360 in the year-ago period.
This comes despite a 1.7 per cent drop in revenue, which fell to RO9.67mn in Q1 2010 and a 10.8 per cent decline in sales volume from the year-ago period. Net profit margin saw a growth of 2.92 per cent, compared with a decline of 0.62 per cent a year ago. As of Q1 2010, cash and cash equivalents carried forward stood at RO622,865.
ORC is engaged in manufacturing, filling and distribution of soft drinks and related products. It holds the franchise rights to fill and distribute the Pepsi range of carbonated soft drinks and Aquafina drinking water in the sultanate, distribution rights for Lipton Tea, Lays, Cheetos and Doritos snacks and production and distribution of Top Fruit juice.
The company, established as a joint stock firm in 1975, began operations with RO500,000 in fully paid up capital. It now has RO3mn issued shared capital, purely through stock dividends.
Financial Performance
Skyrocketing raw material prices and the long-drawn economic slowdown in recent years that affected consumer spending norms had resulted in the company posting a lower annual profit in 2009 compared to that of the previous year. "Last year we were badly hit by very high raw material prices such as that of sugar and aluminium (for the cans). We were also hit by the highly inflationary economic conditions. Because of this, we had a loss in the first quarter of last year, but later on the performance picked up," says Sheikh Hamoud al Hinai, managing director, ORC.
ORC closed the year to December 2009 with its net profit dipping 16.4 per cent to RO2.14mn from RO2.56mn in 2008. Revenue fell 1.7 per cent to RO42.79mn compared with RO43.54mn a year ago. Sales volumes dropped 10.5 per cent to 19.8mn cases in comparison with 22.1mn cases in 2008.
Decline in volume and turnover was due to marginal trade and consumer price increases in March 2009, as a result of the substantial increase in material cost and overhead expenses, say analysts. ORC has, however, managed to remain debt-free and sustain a sound balance sheet. For the year 2009, the company distributed 70 per cent in cash dividends. That followed a 50 per cent distribution for the year 2008.
"The financial position of the company, as revealed by the balance sheet, continues to exhibit strength. The company has a decent dividend track record," says Sameer Kattiparambil, financial analyst, Al Madina Financial and Investment Services.
The PepsiCo Edge
ORC has the exclusive franchise rights to distribute Pepsi and its related products that enjoy strong brand recognition in Oman. It has a substantial presence in the higher population density areas such as Muscat and in the Batinah and Sharqiyah regions. "The company continues to dominate the market in the soft drinks sector despite raw material and consumer price increase," says Mahmood al Bargouthi, financial broker, Global Trust Investments.
"End of the day, for any product, even if it is a strong international brand, you need to develop a local market for it. We feel brand value and a strong presence in locations across the country through an effective marketing and distribution network contribute to our edge in this industry," says al Hinai.
ORC is the largest distributor of PepsiCo products in Oman. The Coca Cola drinks are bottled and distributed by UAE distributors in the sultanate. The main contributor to ORC's revenue has so far been Mountain Dew, which is a drink that most Omanis identify themselves with. "A growing young population, a strong demand for carbonated beverages during the summer months and the brand image of Pepsi are the key growth drivers for the company," says Anil Kumar, senior vice president and head of research, Financial Corporation (Fincorp).
Challenges
While ORC has managed to outperform its peers in the sector and maintain a dominant market share in the food and beverages space, the firm continues to face challenges from fluctuating raw material prices. The company's 2010 profitability could be impacted by the volatile global market condition of commodities, especially the steep increase in the price of sugar, says al Bargouthi. He adds that ORC closely monitors the prices and forward cover commitment of various raw materials.
Kumar of Fincorp agrees that ORC's margins are susceptible to any rise in the price of sugar. "High prices of sugar in the previous year led to a lower profit margin despite an increase in average realised price. The company now has a hedge in place against a sharp rise in sugar prices using forward contracts."
Al Hinai from ORC remains optimistic on this front. "Inflationary pressures have eased to some extent. Prices of aluminium and sugar have come down marginally from their all time peak of last year, although not to their original levels. That has given us some relief. Apart from this, our marketing efforts have also paid off."
According to al Hinai, a major operational issue that ORC faces is in finding and retaining Omani talent though the company is well above the required Omanisation target set for the industry. "Despite paying more than the stipulated minimum salaries, local Omani staff doesn't stay around. There are issues at the lower level positions as we find it difficult to recruit and retain local workforce."
ORC has embarked on redeployment of resources and adoption newer technologies to improve overall efficiency and productivity to achieve profit and growth objectives. It recently adopted the Oracle Financials e-Business enterprise resource planning computer system and plant managing systems. The company has also introduced hand-held computer systems for sales and distribution to ensure efficiency and control in supply management by retrieving data on sales and availability of merchandise instantly, across all outlets in Oman.
Diversification Strategies
ORC is one of the oldest beverages companies in the industry, but with the emergence of new players, the company faces increased competition from juices and dairy products. Analysts attribute the drop in the company's sales volumes to pressure from competition.
To diversify its product portfolio to counter any adverse impact of competition, ORC added a juice filler in 2009 and ventured into its own juice brand, Top Fruit. It is supplied to schools under the Ministry of Education and has been accepted as a healthy fruit juice for children, says al Hinai. "ORC is pursuing the right strategy in broadening its product range with juices and energy drinks to counter competition and improve its margin," says Kumar of Fincorp.
Frito-Lays snacks, a significant contributor towards ORC's revenue, faces competition from local snack producers such as Ali Shaihani, which produces Chips Oman and Sohar Chips. Analysts feel the company may soon try to make its mark in other segments, having made its forte in carbonated drinks. "Going forward, there is a possibility to diversify their product mix apart from carbonated soft drinks," says Kattiparambil. He noted how ORC has introduced its own brands as well as imports and markets energy/sports drinks such as Gatorade and AMP.
Synergies exist with National Mineral Water, which is nearly half the size of ORC by sales, points out Kumar. "National Mineral Water has a recognisable product portfolio in bottled water which can easily complement the product range of ORC. A merger or an acquisition at an appropriate price may result in a near monopoly and significant cost savings for ORC." ORC officials declined to comment on merger and acquisition plans.
Outlook
While announcing the first quarter results for the current fiscal year, ORC said it remained focused on maintaining the existing market share as well as meet the sales forecast for the year. The outlook continues to be positive and ORC remains optimistic about the prospects for 2010. "Q2 results are expected to be better than last year," says al Hinai.
Al Bargouthi says the ORC's prospects continue to be positive, especially following the successful implementation of its new consumer prices of carbonated soft drinks and the effective expansion of the new range of products.
"Dividend yield is attractive at around 8.5 per cent. ORC has the highest gross margin in Q1 2010 at 26.2 per cent, as against its competitors Dhofar Beverages and Foodstuff, whose margin stood at 23.3 per cent and National Mineral Water at 16.7 per cent," says Kumar of Fincorp.
ORC's performance, despite headwinds on prices of raw materials and increased competition, is witnessing a steady improvement since the last two quarters. The company hopes to enhance and strengthen its market position in all of its products.
Ramya DilipKumar
© businesstoday 2010
