Epirotiki Water Bottling SA Vikos

Main points to discuss:

GENERAL TRADE BARRIER DEFICIENCIES IN EUROPE:
Import plastics and lids from Italy and france(is costs in Greece higher/lower in Italyfrance? Is this good for wikos but bad for domestics?): positive facts about imports to
survive(find materials at lower price).
Exports: abilty to exploit their position, since Greece has lots of water sources(contrary
to germany). Also makes low cost (ggod quality) soft drinks alternatives(to pepsicoke).
EURO ENTRANCE:
In 2002, equity increase. While euro could weaken nation position(unable to print
money, unable to depreciate currency), the strength of the euro exchange rate makes
investing more profitable. Despite we can tell whether they were foreign or domestic
investors, they both would have had an incentive to invest(background on investment
choice with currency depreciation). So, in case Greece was lead outside Europe, this
could be bad news for Vikos.
EVER SINCE GROWING SALES:
Possible coincidence with barriers fade. Slower during last period? No, maybe
association with ability to keep costs low (both imports and minimum employment
required(140) for this kind of company, heavily relying on machines). Comparison with
greek GDP: since water is an Utility, it is a required good non substitutable. Further,
good marketing choices as pointed out by (greekproducts.com), by caring about bottle
design; intuition to add vikos to their name(nice place with pure water source),
everything tomake the product appealing. ISO standard ensurance. Right
investments.
WHAT ABOUT GOING PUBLIC? Did they already satisfied demand of investors? Overall
greek position may, however, lead to mistrust of foreign investors, while Greek people
are probably unlike to be willing to invest a lot. Btw, financial market operations, could
expose company to higher risk(which nowadays is more-less zero and made good
profit ever since). It has already largest market share. Whats the aim of going public??
Maybe just become a european leader(since makes discount products, maybe not the
scope of the company) but would have to face directly huge companies. Maybe this
would be possible if Vikos continues to grow strongly, increases constantly exports!

EPIROTIKI VIKOS SA
The firms activity
Epirotiki Vikos SA, is a

Europe effect
The EU and the currency area

One main aspect we are willing to analyze is the firms European perspective.
In particular we want to try and assess the impact on Vikos, of the Greece
entering the European union in 1981 and joining the common currency
area(EURO) in 2002. In particular, we will deal first with trade barriers
deficiencies for what concerns EU; for CA we are interested in the assessment
of how a strong currency influenced the water bottling company, mainly
dealing with exchange rates(N.B. since this two subjects are highly
complementary, itll be hard, and nonsense, to keep the two paragraphs
completely discerned).

EU effect
-

Basic background

In the EU's single market (sometimes also called the 'internal market')
people, goods, services and money can move around the EU as freely as
they do within a single country instead of being obstructed by national
borders and barriers as they were in the past.1
Since Greece has been a state member of the EU since 1981, Epirotiki Vikos
has always been able to exploit the above quoted fact. In economic terms, we
can resume the statement as lack of trade barriers. This implies that there is
(usually) no fee in importing or exporting goods or services within the European
union. The advantages are quite clear: about imports, companies are able to
buy at best(lower) price on the market production goods(raw materials) and
employment. For exports, firms are able to cover unsatisfied(or say, excess)
demand in other countries. This is basically an enhancement of competition at
international level, useful to stimulate the economy. (appendix, positive
consumers surplus due to import+exports, i.e. lower marginal
productivity(cost) -> lower prices, in the overall market)

How is the firm involved?

Of course, Epirotiki Vikos SA took immediately advantage of the previous

benefits: to lower marginal costs and subsequently offer a lower price to
consumer, it relies on production materials import. Mainly France and Italy in
fact, provide E.V. with plastics and lids2. This is one of the factors which has
granted the company to become quickly not only a leading company in the
domestic market(largest market share3 in Greece), but also to be competitive
abroad. E.V. is in fact also active in the export market both in the EU(Germany,
Belgium, UK) and outside(Russia). In particular, the firm serves about 15% of
the German demand for bottled water. (More about investments abroad is
discussed in FDI section).

What about Greece?

Despite the many improvements that the entrance in the EU brought to

Greece, we want to try and advance some contingent effects related to trade
barriers deficiencies. On the one hand, it is true that consumer in the whole
Union will have a positive consumer surplus due to price fall. Still there could
be some total welfare loss for the single country. In fact a lot of competition
could set in a bad position domestic(Greek) possible supplier for plastics. One
firm will then do better(Vikos) one firm will maybe suffer. While we dont think
this is an explanation for European(Greek in particular) economic crisis, we
shall infer a common knowledge, which is, a lot of competition can make shut
down factories. Sounds like Darwins principle.

EURO effect
Thinking about European perspective, the common currency, plays a
fundamental role. which The EURO, which began circulation in 1999, was
adopted by Greece since 2001 but effectively printed and solely
distributed(official retirement of Drachma) in early 2002. Here, well first
introduce all the theoretical tools to later imply consequences on Vikos.
-

Basics

Talking about currency, we shall introduce the exchange rate as main driver of
our analysis. Briefly, we define the (nominal) exchange rate as the price of
domestic currency in terms of foreign currency. An appreciation of exchange
rate is an increase in price, while depreciation is a decrease.
-

Playing with exchange rates:

When entering a currency area, were basically joining a fixed exchange rate
regime(even if theoretically not completely correct), leaving a floating exchange rate
regime. Further, a nation loses the ability to print money on their own(money supply is
decided by ECB, in th case of euro). This could be bad. In fact, the ability to print
money grants the state the possibility to play with interest rate. In particular, to
make goods and services more attractive for foreign buyers, they can inject a high
amount of money, causing a depreciation of their currency, creating an incentive to
buy from abroad. The bad part about this, is that longer term investors(i.e. not
immediate buyers) will suffer from this situation. In particular, when investors have to
choose between domestic and foreign investment, they will take into account not only
the interest(that in this case we consider to be asubstitute for dividend paid) but also
the depreciation of the currency.

So what is the correlation with Epirotiki Vikos SA?

When beginning this project, one of us* came up with a proposition: May Euro have positively
influenced investment towards the firm?. Was someone more eager to invest into a Greek company
since investors did not have to worry about currency depreciation?
In 2002, Vikos issued new equity capital up to 2,048,274 due to increasing paid-up capital.
An increase in paid-up capital, according to the controlling shareholders and owners, results in a
clear increase in confidence regarding the firms activities. Not surprisingly, the year 2002 was
characterized by huge investments by VIKOS SA.
While we cant infer causality, we can record some degree of correlation between the euro entrance
of Greece and the recapitalization of the firm.
According to the new market capitalization and to the economic analysis that we provided on the
raising confidence, we draw a short conclusion.
The stable interest rates due to Euro and the increasing confidence(?) spread over the European
continent, gave VIKOS shareholders incentives to invest(shareholders do not invest in that sensethats about managers). in a third production line in the Zagorohoria district through a large
repurchase of shares(dove avete letto che fanno un repo?).
!? Therefore, in first instance, VIKOS shareholders reacted with great enthusiasm to the common
currency area. Its nothing about enthusiasm, I dont even understand what you mean.

*wholl be left anonymous, to avoid egoism and inside disputes.

The economic crisis in Greece

The economic crisis has hit quite strongly Greece. Show some figures of debt and
GDP, various sectors downward trend or shutdown.

Greece Unemployment
20
18
16
14
12
10
8
6
4
2
0

Greece Unemployment

Inflation
5
4.5
4
3.5
3

Inflation

2.5
2
1.5
1
0.5
0
2005

2006

2007

2008

2009

2010

2011

2012

How does Vikos compare?

In 2009, Vikos president, declared in an interview that the crisis would not have hit his
company significantly, pointing out that water is a commodity of first necessity and
underlying he good quality of vikos. Indeed, looking at figures of growing sales and
high profits in the last years, ep. Vikos seems not to be affected at all. Lets try to get
deeper in the analysis
-

Commodity of first necessity

Intuitively, water(in general) is essential for living. In economic theory, we can say that
consumption(and demand) for water is independent of income: this means that as
income declines water consumption will diminish only if we dont have any luxury
good to leave from our bundle(i.e. were left demanding only necessity goods)or if
disposable income is too low to buy enough water. We could then define the demand
for water as rigid, where elasticity, dP%/dQ% , tends to zero.

Perfectly inelastic demand

Really Un-substitutable good?

In reality, there are different kind of water. The main competitor of vikos is not
anyway, another brand of bottled water(as the firm is leader in the Greek market,
holding a share of 26%) but it is (or could have been) tap water. Less costly, direct
service at home. So why didnt this substitution really happened*?Here we have to
consider quality. In particular, it seems like tap water in Greece is not considered very
safe, as theres been some controversial in the chemical analysis of some sources. On
the contrary, the firm has invested and improved its position in this respect, granting
quality patent both for their materials(plastics, lids) and for the water itself 3.
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%

Greece RGDP

Vikos sales growth

10.00%
5.00%
0.00%
-5.00%
-10.00%
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

*This assumption comes from the fact that unit sold increased, as stated before

1. http://europa.eu/pol/singl/
2. CreditInfo Hellas, Credit Report, EPIROTIKI BOTTLING COMPANY S.A. BIKOS, 2008
3. www.water.gr

2012