CASE STUDY 4 Revised
CASE STUDY 4 Revised
CASE STUDY 4 Revised
CASE STUDY
ADVANCED ACCCOUNTING
SUBMITTED TO:
LOUIE ARTH REYES
SUBMITTED BY:
Aquino, Mary Claire C.
Cabaya, Eula C.
Crisostomo, Meryl
Enriquez, Pauline C.
Magno, Franz Catherine S.
Magparok, Catherine
Orate, Rhealy B.
I. BACKGROUND OF THE CASE
Oriflame was founded in 1967 in Sweden by the brothers Jonas and Robert of
Jochnick and their friend Bengt Hellsten, with the dream to "give people the
opportunity to benefit from good skin care and attractive cosmetics products
inspired by the natural beauty that the world associates with Sweden." They
started by selling their products directly into the homes of Swedish
consumers, and soon thereafter, abroad, with the help of independent sales
consultants. In 2009, the firm sold around 600 million units of Swedish beauty
products in 62 countries (of which 12 were served via franchising agreements)
located in four geographic regions: "CIS & Baltics" (Commonwealth of
Independent States, including Russia), "EMEA" (Europe, the Middle East,
and Africa), Latin America, and Asia. In 2009 emerging markets accounted
for roughly 90% of the firm's €1.3 billion sales (see Exhibit 1 for Oriflame's
2008 and 2009 financials). According to Oriflarne's management, the
founders' respect for people and nature was still reflected in its operating
principles and its social and environmental policies. Oriflame supported
numerous charities worldwide and was a cofounder of the World Childhood
Foundation. Oriflame's value proposition focused on delivering natural, value-
for-money cosmetics within categories such as Skin Care, Color Cosmetics,
Fragrance, Personal & Hair Care, and Accessories & Wellness (see Exhibit 2
for sales by category). Consequently, the company was competing in a global
cosmetics, personal, and hair market, estimated at €250 billion in 2009,
against large multinationals such as American Procter & Gamble, Anglo-
Dutch Unilever, German Beiersdorf, and French L'Oreal. Oriflame also faced
formidable competition on its direct-selling market segment. U.S.-based Avon
was Oriflame's main competitor across the globe (see Exhibit 3 for both firms'
organic growth figures). The American firm was more than five times4 bigger
in revenues than its Swedish challenger, chiefly due to a broader product
offering and geographic reach. Other direct-selling competitors, also of U.S.
origin, were Mary Kay and Amway. In addition, depending on the location,
direct-selling competition also came from significant local competitors, such
as Kalina in Russia, and Natura and Esika in Latin America. Magnuss
BrannstrOxn, Oriflame's CEO, summarized the company's global competitive
position: "In the CIS we are already the No. 1 beauty company selling direct
and we are among the top five to top 10 in most European countries. In Asia,
we are in a good position, but in Latin America we are far away."5 Oriflame
reported in compliance with the International Financial Reporting Standards
(IFRS) as adopted by the European Union. Since 1999 Oriflame reported the
consolidated results of its subsidiaries at group level in euros, mainly because
the group was incorporated in the Eurozone and incurred the majority of its
costs in this currency. Each national entity was operating in a local functional
currency that reflected the underlying circumstances relevant to that entity.
According to the lEFRS,6 each subsidiary then translated its results and
financial position to be presented in euros.
IV. CONCLUSION
Oriflame is a globally traded company. As it continues to look across
borders to be the best among its competitors, it is more exposed to FX
volatility. Its business model magnified it from FX losses exposure. More
than half of its cost is incurred other than euros. It could use other
financial instruments such as derivatives to alleviate the hits as it would
take quiet some time to effectively mitigate its exposure. It must review its
internal hedging policies and procedure in that way it can be certain that it
could mitigate its exposure. There are other types of derivatives that
Oriflame may use to hedge the FX exposure aside from forward contract
which includes future contract, option, swap, and the like. Since the
potential translation gains and losses were never hedged, investors in
Oriflame are mainly exposed in translation exposure. It is better to hedge
this potential translation gains and losses to mitigate the risks that the
investors are exposed to.