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 worlds confectionery growth: Brazil, China, Colombia, India, Russia, South
Africa, Turkey and Vietnam.

Indian Chocolate market

Size- INR 58Bn

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 2 nd 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.

Sales
WHITE; 16%
DARK; 9%
MILK; 75%

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%)

3 Private
Equity
Funds(45%)

Pension
Fund(20%)

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

capital.

of the rating of Blue Wood will increase the cost of

Benefits of an FRM or ERM framework in Blue Wood

Low funding
risk and Low
WACC

Hedging against
price fluctuation
and other Risk

Improve
the
liquidity

Business
expansion And
growth

Less
volatility in
profit
margins

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 therto
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 our 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 our 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