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MGCR 423 > AllTech > Flashcards

AllTech Flashcards

1
Q

Business description

A

▪ Founded in 1980, Alltech is a global producer and supplier of supplements for animal feed
▪ Employs 5,000 individuals to operate 100 manufacturing plants worldwide, selling to 120 countries
▪ Wholly family-owned business, emphasizing control
▪ Historically grew organically, but given recent changes in the industry (on-going consolidation, price sensitivity, increased competition), Alltech has also started to pursue inorganic growth
‒ 16+ acquisitions in 2017

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2
Q

short overview of company

A

Global producer and supplier of animal feed supplements revolutionizing the health and performance of consumers, animals, and plants through nutrition and scientific innovation

-focus on innovation-driven operations and relationship-driven sales model

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3
Q

AllTech problem statement

A

As a business operating in an industry facing augmented competition and ongoing consolidation, how should Alltech adapt its growth strategy and avoid competing on price so that they do not lose their competitive edge?

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4
Q

global feed market overview

A 
▪Global feed market valued at $460B
▪ 1975-2016, production of animal feed
increased from 290mm MT to over 1B MT 
▪▪▪ China and US accounted for 1/3rd of
total feed production volume
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5
Q

global supplement market overview

A

▪ Global Supplement market valued at $16B in 2013
▪ Difficulty for feed supplements to gain market acceptance
–>▪ Generally made by big corporations
▪ Companies usually capture 10-15%
EBITDA

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6
Q

what is driving growth for food supplement industry

A
  • growing global population
  • rising incomes and living standards
  • developing countries with large middle classes
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7
Q

What are the 4 main market trends?

A
  1. Industry consolidation (global decrease in Feed mills)
    ▪ Increasing competition and price sensitivity
    ▪ 2015-2016 number of global feed mills fell 7%
    –>▪ Led by government policies and generational shift
  2. Emerging digital technologies (Keenan’s Feeder wagon)
    ▪ Improve sustainability, safety, and efficiency of livestock farming
    ▪ Cloud-connected analytic technologies enables “precision” farming
    –>▪ Using robots to decrease labour costs
  3. Innovations in Formulations (alleviates pressures facing livestock industry)
    ▪ Improves animal welfare and food safety
    ▪ Reduces Green house gasses emissions
    ▪ More efficient use of feed crops
  4. Algae derived products (Alltech interested in replacement for fish oil)
    ▪ Substitute for fish oil and fishmeal
    ▪ Contains high omega-3 concentrations
    ▪ More sustainable than traditional fish oil
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8
Q

Opportunities

A
  1. Investing in automation
    - ->Small traditional mills are struggling to stay profitable, however large feed companies which invest in automation can achieve huge efficiency gains
  2. Vertical integration
    - ->vertical integration has blurred the lines between some of the links on the value chain. By integrating more of the value chain we see more efficient process
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9
Q

Threats

A
  1. Lack of education for farmers
    - ->Feed products are met with suspicion due to lack of product education for farmers. Need to understand price premium for products and their trade off
  2. over saturation of additives
    - ->More additive products have been added to the market than ever. Furthermore, there is less research being done than previously making it difficult in the market to differentiate products
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10
Q

Five forces: customer power

A 
•High
• Company is at mercy of buyers
->• Trust word of feed nutritionists
-> • Products need to have proven
track records
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11
Q

Five forces: rivalry

A
  • high
  • long period of time for products to reach market acceptance
  • high variability in supplement products
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12
Q

five forces: supplier bargaining power

A
  • low
  • feed: dependence of suppliers sale on the buyer
  • supplement: producer of own inputs (top of value chain)
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13
Q

five forces: threat of substitutes

A
  • High
  • Farmer reluctancy gives time for competitors to develop and launch me-too products
  • Low-cost substitutes undercutting sales of Alltech
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14
Q

five forces: threat of new entrants

A

▪ Low
▪ Need for high
R&D costs to compete with current market players

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15
Q

Key industry success factors

A
  • investing in automation
  • vertical integration
  • marketing and education
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16
Q

what is the value of vertical integration (the process)

A
  • purchase of feed companies
  • decreases price sensitivity
  • gain control in value chain
17
Q

value chain analysis: supporting factors

A

finance:
• Debt aversion due to risk averse nature of the management team
• Equity financing aversion due to private nature of the business and associated ownership dilution
• Acquisitions funded by consortium of banks
• Sales of 500M in 2010 and projected at 3B in 2018 should help the company meet its debt obligations

HR:
• Family-owned business means strong presence amongst management team and seniority-based hierarchy
• Founder’s biotech background fuels internal focus on innovative culture
• Ph.D. student program to benefit from researched-based competencies
• 5000 employees across the globe in 2017

18
Q

Value chain analysis: primary factors

A

Supply chain:
• Supplied mostly by fresh product and matter producers such as algae, yeast, amino-acids and organic compounds, all commodity like products
• Complex nature of product combined with required expertise keeps forward integration risk low for Alltech specifically

Operations:
• Supplement company based on differentiation approach, developing high quality, innovative and science- based supplements
• 100 manufacturing plants worldwide, allowing customization for local preferences and demand, and limits shipping costs
• 10% of gross revenue invested in R&D, fueling innovation

Distribution:
• Sell either to feed companies who directly add supplements to animal food, or mix companies who mix Alltech products with more generic supplements
• Worldwide distributor in 120 countries, exposure in both larger mature markets and emerging countries

Marketing
•Pricing strategy focused on differentiating properties of product, not high profit margins
• Price sensitive farmers make broad market acceptance of high price product difficult, hence focus on benefits of product versus competition
• Direct-to-farmer strategy and important client relationship management to secure benefit conscious client base

Follow-up:
• Studies perform to monitor effects and benefits of Alltech supplements to constantly improve product portfolio and offering
• Strong relationship management directly with farmers for feedback purposes and to lock in recurring revenue

19
Q

Strengths

A
  1. Innovation-driven opportunities
    • Ability to develop innovative and superior products is key competitive advantage for Alltech
    • High R&D investment (~10% of Rev.) helps company remain innovative industry leader
  2. Relationship Driven Sales Model
    • Close client relationship monitoring differentiates Alltech from competitors from farmers’ perspective
    • Sales model putting client needs at forefront helps secure long-lasting client relationship and recurring revenue
20
Q

Weaknesses

A
  1. Distribution channels
    • Main clients are mix and feed companies, which do not directly benefit from product properties
    • Inability to sell directly to farmers slows down product adoption
  2. Focused expertise
    • Lack of expertise in feed business might make integration challenging
    • Increased expertise in feed industry could allow better reach to farmer clients post- integration
21
Q

Business level strategy components

A
  1. Differentiation
    –> marketing is the fuel
    • Elevation of Alltech as a premium player
    • Investment in elegant offices and landscaping
    • Sponsored high-profile sporting events in Kentucky and Ireland
    • Held gatherings for customers to provide feed- science education
  2. Forward Integration
    –> Riding downstream
    • Purchasing feed companies to obtain direct sales relationship
    •Enlarges Alltech and its reach
    •Defensive rationale against other industry players consolidating
  3. Investments in R&D
    –> innovative machine
    •Early focus on technological improvements shifted to developing safer products
    •Creation of program for Ph.D. students
    •Healthy pipeline with yearly product launches
    • 10% of annual revenue
22
Q

Business-level critique

A

Differentiation
-strengths:
• Educating customers on feed-science may reduce the effects of nutritionists and increase farmer-level influence
-weaknesses
• Sponsoring sporting events does not appear to align with their customer base

Forward integration
-strengths
• Fixes direct sales relationship problem
• Reduces threat of low-cost substitutes
-weaknesses
• Capital intensive approach and requires taking on significant debt

Investments in R&D
-strengths
• Up-to-date innovative products
-weaknesses
• Capital intensive
• Nutritionists’ reluctance to promoting new products
• Profit timeline is lengthy
23
Q

corporate level strategy components

A 
Geographic diversification
-->portfolio approach
• Sales in 120 countries
• 100 manufacturing plants worldwide
•Map in Exhibit 10 with global locations
• Long list of products

Product bundling
–> solution selling
• Implemented in 2007
• Leverage diversification of product offering to sell bundled solutions
• Competitors don’t have the ability to match offerings
• Protects against replacement possibilities and erosion of margin

Horizontal Diversification
--> exploring markets
- and Life Sciences:
• Applied expertise and knowledge in nutrition and gene expression to enter new markets
- Beverages:
• 25 states – 8 countries
• Represent 15% of total revenue
24
Q

Corporate level critique

A

Geog diversification
-strengths:
• Alltech achieves high geographic diversification which reduces overall company risk
-weaknesses:
• Low exposure to forecasted higher growth markets
• High concentration in the U.S. – a declining market

Product bundling
-strengths:
• Successfully defends Alltech’s sales and market position
• Competitors can’t match offerings – competitive advantage
-weaknesses
• Competitors undergoing acquisition strategy will be able to replicate their offerings

Horizontal diversification
-strengths:
• Synergy creation through cross-selling
• Increased influence at the farmer level
• Possibility to spin off beverages and life sciences division
-weaknesses:
• Not experts in new markets
• May be stretching resources thin and firm’s focus can become misaligned

25
Q

business-level opportunity

A

Continue forward integration across geographies to increase sales – look into opportunities to reduce influence of nutritionists

26
Q

corporate-level opportunity

A

Capitalize on spin-off opportunity to increase exposure to growing markets and/or develop crop science division to achieve greater synergies

27
Q

mergers and acquisitions timeline

A

B: supports business-level
C: supports corp-level

1980-2011 (B)
-Growth through internal product innovation and marketing

2011+(B)
-Shifting focus to downstream integration

2011 (B)

  • US Feeds Acquisition
  • Rocky aftermath and customers reaction

2013 (B)

  • Lakeland Feed (US)
  • Bad news and doubt in equine customers

2013 (C)

  • Eastman Feeds (CA)
  • Successful implementation of solution selling

2015 (B+C)

  • Ridley’s (major producer of feeds, premixes, and supplements)
  • Controversial but solidified downstream position

2017 (B+C)

  • 16+ companies including Keenan
  • Downstream expansion (feed, tech and, premix)
28
Q

overall M&A effects and opportunity

A
  • 3million MT of feed
  • Strong downstream presence
  • Geographic diversification

Opportunity:
- Continue to use acquisitions to support the company’s strategy moving forward with a reasonable amount of debt while ensuring that value from synergies is being captured

MGCR 423 (20 decks)

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