Bestfoods bestfoods recipe for risk ith future volume

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Unformatted text preview: BESTFOODS’ RECIPE FOR RISK ith future volume growth in North America and Western Europe limited to 3 percent at most, executives at Bestfoods (now a unit of the Anglo-Dutch conglomerate Unilever) decided to look for more promising markets. Whereas other food manufacturers were hesitant to take the international plunge, Bestfoods took its popular brands, such as Hellman’s/Best Foods, Knorr, Mazola, and Skippy, where the growth was— emerging markets like Latin America, where the company could grow at a rate of 15 percent a year. At the time it was acquired by Unilever, Bestfoods derived about 22 percent of its revenues outside the United States and Western Europe, producing mayonnaise, soups, and other foods for 110 different markets at 130 manufacturing plants worldwide. Bestfoods’ international expansion succeeded because the company developed ways to incorporate the risks and rewards of its foreign investments into project analyses. These risks included exchange rate and political risks, as well as tax and legal considerations and strategic issues. First, it increased its familiarity with the foreign market by partnering with other companies whenever possible and by developing local management and experience. From this knowledge base, Bestfoods was willing to take calculated risks. Working with consultants Stern Stewart, developers of the economic value added (EVA®) model, the company created its own analytical model to set discount rates for different markets. Some companies attempt to quantify the risk of foreign projects by arbitrarily assigning a premium to the discount rate they use for domestic projects. Executives who rely on this subjective method may overestimate the costs of doing business overseas and rule out good projects. Unlike these companies, Bestfoods took the time to develop specific costs of capital for international markets. To incorporate the benefits of diversification for a multinational company like Bestfoods, the company adapted the capital asset pricing model (CAPM...
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