Bluewood ERM

Enterprise Risk Management

Blue Wood Chocolates

Submitted By (Group-6)

Overview

Global chocolate industry revenues reached record US$117bn in 2014. Rising demand driven by emerging markets – and recovery in US, where chocolate market grew in 2013, for the first time in five years.

Eight markets drive 70% of the world’s confectionery growth: Brazil, China, Colombia, India, Russia, South Africa, Turkey and Vietnam.

Indian Chocolate market

Size- INR 80 Bn (2013)

CAGR of 15% over the last three years

Expected size to be  INR 122bn in 2019

80% consumption of chocolate come from the Urban India

Mondelez dominate by 62% market share while nestle in 2nd largest player on 18%

The chocolate industry can be segmented by the type of ingredients which is used to produce the chocolates. This includes dark, milk and white chocolates.

MILK75%

DARK9%

WHITE16%

Sales • Milk chocolate is most popular category, contributing 75% of the total sale

• Cadbury is the market leader in the milk chocolate segment

• Dark chocolate ranks 3rd with only 9% market share, however it is the fastest growing segment

Source: Valuenote

Chocolate industry Value chain

COMPANY OVERVIEW Blue Wood is a U.S based producer of bulk chocolate which is used in other final

products and also supply specialty private label products to a variety of companies.

Founder and Chairman-John Ferguson Senior

Current CEO- John Ferguson Junior

Customers-retail businesses, distributors and food processors

Sales- 75% domestic & 25% international( Canada, Mexico, UK and Eurozone)

Sources Cocoa from producers in Brazil, Ecuador, Costa Rica and Dominican Republic as well as U.S based importers.

Other major ingredients sugar and milk are sourced from U.S producers.

Ownership Structure of Blue Wood

John Ferguson

Senior and Family (20%)

Pension Fund(20%)

3 Private Equity

Funds(45%)

Senior employees and private investors(15

%)

• The private equity funds came with the expectation of leaving within maximum of five years.

• The private equity funds considered Ferguson Junior to be a weak CEO who is dominated by his father.

• The private equity funds were not able to exit because of the low valuation of the company and its IPO.

Reasons• Funds were paid out as dividends rather than being

reinvested internally.• No steps were taken to improve corporate

governance and risk management.

PROBLEMS FACED

Volatile and unpredictable financial results in the last couple of years. Blue Wood have to pay high price for sugar and milk as compared to

its foreign competitors. Little communication and coordination between functional

departments of the company. Blue Wood was on the verge of breaking its interest coverage in the

upcoming quarter. Difficulty faced by the new CFO in dealing with the board members. The problems and challenges to be faced in implementation of the

ERM framework.

Risks Faced by Blue Wood

High demand for chocolate can lead to supply shortage of Cocoa and hence can lead to increase in prices.

Maturity of debts can lead to liquidity crisis Fluctuations in currency exchange Increasing Debt ratio as private equity managers are ready to exit Quality control regulations by U.S FDA. Contingency liability of $10million Fair trade prices for cocoa can increase cost. High dependency of Cocoa on weather and politics. Highly competitive market.

What are the prospects and consequences for the Blue Wood if it carries on the way it has been?

Liquidity risk will get converted into funding risk. Difficulty in meeting future uncertainties. Contingent liabilities may turn up into serious problems in

the future. Lack of relevant purchasing strategies for cocoa and sugar

can result in losses as the prices are highly volatile. Downgrading of the rating of Blue Wood will increase the

cost of capital.

Benefits of an FRM or ERM framework in Blue Wood

Hedging against price fluctuation and other Risk

Improve the liquidity

Low funding risk and Low WACC

Less volatility in profit margins

Business expansion And growth

Challenges in Implementing

ERM for Blue Wood John Ferguson Senior was completely against implementation of ERM.

As the new CFO is fairly new to her role, implementing ERM would require a lot of explanation from her side.

If not implemented successfully, implementing ERM would be taken up as bureaucratic exercise.

Requires considerable commitment of resources and is time-consuming.

Will sometimes require significant changes to the way people work.

Strong leadership and clear commitment from senior levels is essential.

Reporting must be timely and insightful, in order to support proactive decision making.

Management of operational risk is often particularly difficult.

Embedding ERM throughout the company is a major undertaking.

Should A CRO be Appointed No organization can afford to stand pat with its existing risk management capabilities;

therefore, every organization should evaluate how it can improve its risk management.

As in the Blue Wood, Sally Holton was not confident to develop a comprehensive ERM framework so therefore, A CRO should be appointed.

CRO facilitates the execution of ERM process and infrastructure.

The CRO supports the board (or a designated board committee), the CEO, the executive committee (or a designated risk management committee) and business unit and support unit managers.

Vital that the top management acknowledge and understand risks within business operation and give their support thereto

Split the operation into project and recognize as well as manage risks by project base.

Weekly meetings or project meetings should be to communicate risks to the rest of personnel.

Hedging the exposure to commodity risk Yes, Commodities should be hedge to reduce the risk of price volatility,

A separate ERM committee should be appoint to manage, monitoring and evaluating the hedging programme,

Things need to be hedge:

Cocoa supply,

currency prices,

Interest rate coverage

Time Horizon- 9-12 months

Use of value at risk (“VAR”) computation to estimate the potential loss due to fluctuation in the prices of instruments

Instruments: A mix of options and forward contract(Cocoa, sugar)  Currency exchange forward contracts, futures, options and

swaps(Currency risk) Interest rate swap(Interest rate cash flow ) Hedging of credit risk arising due to Derivatives  local currency denominated debt to hedge non-U.S. net

investments against adverse movements in exchange rates

Other risk to be consider

• highly competitive industry

• Changes in laws and regulations could increase costs

• Unanticipated business disruptions 

• Operation in emerging markets expose to political, economic and regulatory risks

•  unable to hire or retain and develop key personnel

• risks related to consolidation of retail customers

• fail to manage changes in relationships with significant customers or suppliers

•  required to recall products or be subjected to product liability claims

•  subject to legal or tax claims or other regulatory enforcement actions.

• Failure to maintain effective internal control over financial reporting