Emerging Giant?

Irem GuneySam KishoreJebb RickettsWill RiveraAlec Rubin

Or Giant Failure?

Today’s Agenda

1. Grupo Bimbo Today2. The Bakery Industry3. Institutional Voids4. Success in Mexico5. Challenges Facing Grupo Bimbo6. Our Recommended Strategy

Grupo Bimbo at a Glance

Early History and Company Growth

• By 1940s, bakery workers in Mexico had started carrying out frequent strikes over labor conditions

• Deplorable hygiene• Bolillos (traditional artisanal bread) were sold only in bakeries• Bimbo saw opportunity in selling prepackaged bread as

alternative• Longer-lasting, convenient, and “sophisticated” bread made

with modern technology• Ads that featured an American, modern household

• Liberated women from demanding cooking chores• First modeled after Wonder Bread then purchased it• Extended from cities to the most inaccessible villages in Mexico

Grupo Bimbo Today

• Mexican multinational bakery

• Largest in the world• 4% global market share• Operations in Mexico,

US, Europe, & Latin America

• Known for over 100 bread and snack brands

Is Grupo Bimbo an Emerging Giant?

Emerging Giants: Strategies/organizations of firms in emerging markets differ from developed markets, as adapted to institutional voids (Khanna & Palepu, “Emerging Giants”)

The Baking Industry

Market Shares: Industry

The Baking Industry is divided into four major categories:

• Fresh and Frozen Breads• Cookies and Pretzels • Fresh and Frozen Cakes,

Pies, and Pastries • Tortillas  

Market Shares: Company

• Grupo Bimbo’s main competitors are:

2. The Kellogg Company 3. Mondelez International 4. Yamazaki Baking Company

• Conclusion: Market is highly fragmented where local artisanal bakeries dominate (especially in emerging markets)

Institutional Voids & Success in Mexico

Institutional Voids in Mexico & GB’s Response

• Void #1: Lack of enforcement of anti-trust laws• GB’s response: Able to integrate backwards into their

logistics network and gain 90% market share for the bread market

• Void #2: Unstable currency• GB’s response: Long-term debt comprised 74% of US$, 25%

CAN$, 1% Mexican pesos

• Void #3: Payment security• GB’s response: Creation of Red Qiubo, a digital transaction

platform, to further develop “mom and pop” retail channels through which GB products are sold

Success Factors in Mexico

• Late 1980s: Becomes exclusive producer and supplier of hamburger buns for McDonald’s

• 1990s: Introduced computers that modernized distribution systems to provide “just-in-time” delivery

• 1993: Buys 40% stake in Mexican-based Grupo Quan, the ice cream market leader in Mexico

• Becomes Mexico’s #2 flour producer by end of 1990s

• 2003: Acquires exclusive rights to distribute Wrigley gum in Mexico

Current Financial Situation

Overview of Financial Situation

• EPS: Downward trend (from 1.15 in 2010 to 0.75 in 2014)• Decreasing profitability

• Operating Margin: Downward trend (from 9.74 in 2010 to 5.51 in 2014) • Earning less and less each year per $ of sales

• ROE: Downward trend (from 12.68 in 2010 to 7.5 in 2014) • Becoming less efficient at generating revenue through equity

• ROA: Downward trend (from 5.51 in 2010 to 1.98 in 2014) • Becoming less efficient at generating revenue through assets

• D/E Ratio: Upward trend (from 0.78 in 2010 to 1.22 in 2014) • Increased financial leverage → relying more on debt to finance

operations • Current Ratio: Downward trend (from 1.25 in 2010 to 0.86 in 2014)

• Becoming less liquid and able to cover short-term debt with current assets

Summary Overall dismal financial outlook

Net Sales (By Region)/ Plants (By Region)

EBITDA Margins By Region

Region 2014 2013

Mexico 16.7% 15.7%

U.S. 6.1% 7.2%

Latin America 3.9% 0.6%

Europe -0.9% -3.8%

Firm-wide 9.85% 9.84%

Conclusion Mexico is the only region with strong operational performance

Destroying Economic Value

Grupo Bimbo’s Beta = .96Mexico’s Risk Free Rate = 7.2%Mexico’s Equity Market Risk Premium = 15%COE = .96 x .15 + .072 = .216 = 21.6%2014 ROE = 7.5%

U.S. Risk Free Rate = 4.2%U.S. Equity Risk Premium = 5.3%Mondelez COE = .7703 x .053 + .042 = 8.2% Mondelez ROE 2014 = 7.9%Kellogg COE = .5139 x .053 + .042 = 6.9%Kellogg ROE 2014 = 22.7%

Grupo Bimbo ROE < COE (greatly)Mondelez ROE < COE (barely)Kellogg COE < ROE

Bimbo Financial Performance: Regional ROE

2012 2013 2014

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

ROE

Mexico

USA

Europe

Latin America

Consolidated

Bimbo Financial Performance: Regional ROA

Bimbo’s Financial Performance Relative to Competitors

2012 2013 20140

0.1

0.2

0.3

0.4

0.5

0.6

Competitors' ROE

Mondelez InternationalYamakazi Baking CompanyThe Kellogg CompanyGrupo Bimbo

2012 2013 20140

0.02

0.04

0.06

0.08

0.1

0.12

0.14

Competitors' ROA

Mondelez InternationalYamakazi Baking CompanyThe Kellogg CompanyGrupo Bimbo

Recent Business Activities

Acquisition Hungry in the Past 10 Years

1945

2011

2014

2009

00s

90s

60s 70s80s

50s

2015

Canada Bread – Leader of the Canadian Market and Leader in Frozen Goods

Vachon – Leader in Snack Cakes in Canada

Supan – Leader in Ecuador

But… Acquisitions Provide No Utilization Benefits

Highly Leveraged Funding Acquisitions Through Debt

Family Empire (Not the Primetime TV Show)

Bimbo’s Current Plans Going Forward

Panrico’s Brands• More acquisitions (Panrico in Spain)

• Increased market penetration for packaged bread

• CEO Servitje: "From my perspective, if you want to be in any business today, you have to be close to what's happening in China. If we have global aspirations, we have to be in China“

• “In globalization, you can’t be a spectator. You either participate or you become a victim.”

Bimbo Trying to Change Eating Habits Delusional

Ironically…

Bimbo 10-Year Share Price Performance vs. IPC(1)

(%, Indexed to 100)

IPC

Source: Bloomberg1. Market data as of September 17, 2015. IPC: Index of the Mexican Stock Exchange

-100%

0%

100%

200%

300%

400%

500%

sep-05 sep-06 sep-07 sep-08 sep-09 sep-10 sep-11 sep-12 sep-13 sep-14 sep-15

407%

200%

28

And….

Conclusion

• Grupo Bimbo is a textbook example of a family-run company with a focus on empire building.• This leads to actions that are misaligned with

shareholder interests

• Strong performance in home market as well as large amounts of debt funds acquisitions

• Foreign acquisitions are not valuable; they are simply family assets in other currencies

• Stock value is based upon growth, but growth is unsustainable

Recommendations

• Scale down the firm and exit most global markets• Exit Iberia

• GB is currently acquiring Panrico in Iberia, and this is the exact opposite of what we recommend

• Exit Latin America • Further penetration in packaged bread markets is

highly unlikely• Sell off unprofitable brands• Utilize existing capacity and eliminate plants that are

not productive• Retain/expand operations in Mexico

Your Turn to Vote!

?2012 2013 2014

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

ROE

MexicoUSAEuropeLatin AmericaConsol-idated

Thank you!

Appendix- 3 Year Balance Sheet Figures

Appendix- Grupo Bimbo Board Members

Appendix- Global Brands

Appendix-Financial Information

Appendix- Currency Voids

Appendix-Local Notes Payable

Appendix- Institutional Voids: Unreliable Product Channels

Appendix- Institutional Voids: Intellectual Property Rights

Appendix- Market Penetration

Appendix- Net Sales

Appendix- Bimbo’s Global Operations

Appendix- Current Strategy

Appendix- Global Tax Rates

Appendix- Total Equity

Appendix- Total Liabilities

Appendix- Competitive Landscape