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
Italy-france? 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 pepsi-coke).
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, is a leading water bottling company, located in Greece,
which was founded in 1990. Its original activity includes the bottling of mineral
water from the homonymous source(Vikos) since 1992. Later, the company
enlarged its business adding the production of Sodas and other sweetened

drinks. Vikos distributes its products mainly inside its nation(Greece), but has
as well developing an export market, growing every year . vikos hare->exports

EPIROTIKI VIKOS SA
The firms activity

Epirotiki Vikos SA, is a leading water bottling company, located in Greece,

which was founded in 1990.
Its original activity includes the bottling of mineral water from the homonymous
source (Vikos) since 1992.
At first, Vikos owned just one plant named: VIKOS PLANT. As long as the firm
started to differentiate and enlarge its production, the opening of a new plant
named Kalpaki Ioannina in 2005 was indispensable.
Nowadays firms product differentiation became wide; the actual Vikos
production includes the following products:
Bottled water, either sparkling and plain.
Cool-tea
Soft drinks such as Colas, Orangeade, Lemonade and many others.
Coolers for refrigerating water.
Initially, Vikos shipped its products only in Greece through its logistic centers;
slowly its internationalization allowed the firm to increase its European exports
via well-organized distribution networks.
At the moment its main importers are: Germany, England, Cyprus and the
Balkans.
Vikos sales have been growing since 1992 (year of foundation), in 2006 it
became the Greek leader in bottling water with a market share of 22%.

The above graph proves that Vikos is a very prosperous firm. The average
growth from 1992 to 2012 has been 28.36%, nonetheless the Greek economic
crises started in 2008 is highly reflected in the sales growth model.
The growing Vikos sales are largely attributable to the fact that LIDL, which is a
discount company, is the only retailer for Vikos in the Greek large-scale
distribution of soft drinks.
Since the beginning of Greek crises, discount retailers tremendously raised
their sales due to the low prices that they guaranteed to the customers.
In 2011, according to Oinos website, LIDL became the third largest
supermarket retailer, preceded only by Alpha-Beta Vassilopoulos and Carrefour
Marinopoulos (which is the leading company). ----- -Third Factory?
Investments?
http://www.krasiagr.com/?p=51320 .

Daniel A. Bash
Valerio Fusco, detto O Saliernitan"

Matteo G. Palumbo

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.

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.

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 the case of euro). This could be
bad. In fact, the ability to print money grants the state the possibility to play
with interest and exchange 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(assuming prices are sticky, at least in the short term, and do not adjust
accordingly). 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 calculate
the expected return based on both the dividend(or interest rate) and the
expected depreciation of the currency.

So whats to do 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? Translated, was
someone more eager to invest into a Greek company, sound in the market,
now that he/she was less worried by possible depreciation of the currency?
Luckily enough, inside the document we found on the web and previously
quoted in 2, we discovered that in 2002(the year Greece joined the monetary
union), Vikos issued new equity capital up to 2,048,274. While we cant infer

causality, we can record some degree of correlation between the euro entrance
and the recapitalization. To sum up, we can state that the firm was able to
exploit the main incentives offered by both EU, in matter of import and exports,
and by EURO, through the issuance of new equity capital.
Convince investors: being vikos a unlisted problem, it is commonly harder to get rid of
stocks. Therefore, convincing investors to buy new equity by the company. We want to
underline that this issue can also be translated in the case that largest shareholders
bought the new share. The puzzle is always to have a comparison with alternative
investments.

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

The Greek economic crisis in a European context

In the European Union several events have happened in the past 5-10 years
that developed huge changes on several different aspects. In 2002, we
experienced the introduction of the Euro in many countries of the European
Union which had a strong influence on trade and economic policies in several
countries of the European Union. First of all, to enter the euro, each country
had to undertake important economic reforms, which were decided during the

Maastricht treaty in 1992. These reforms regarded very important aspects such
as keeping inflation and debt under control. The latter was the most difficult
task to achieve since the requirements were very strict, such as keeping the
account deficits lower than 3% of GDP and total debt below 60% of GDP.

Many countries had serious difficulties in reaching this targets, especially in

reducing the debt for the countries in which it was already very high. Our main
focus is to analyze the trends of Greece, who in the first 5-6 years after the
introduction of the Euro in 2002 had a very high growth rate (around 4-5% on
average), but together with this, the debt
and deficits were also increasing sharply
reaching very quickly unsustainable
levels. In 2009 Greece had a deficit to GDP
ratio of ( -15.6%), while the limit set by
the Maastricht treaty was only 3%, while
the debt to GDP level reached its peak in
2011 at 160% of GDP, almost triple the
limit set in Maastricht.
The question we ask is that how is it
possible that Greece didnt have any kind
of supervision until 2009, especially since
Greece wasnt even able to enter the Euro in 1999 for failing in reaching the
goals of Maastricht. When Greece entered the Euro in 2002 it had a deficit at
4.5% of GDP and its public debt at 104% of GDP, but the European commission
still allowed Greece to adopt the common currency. These numbers
unfortunately increased during the years with the debt reaching unsustainable
levels at the end of the decade. With the financial crisis in 2009, investors
started to fear that Greece wouldnt be able to meet its debt obligations, and
interest rate on bonds sharply increased forcing Greece to pay a higher interest
on its debt. Greeces debt to GDP ratio rose from 127% in 2009 of GDP to 161%
in 2011 and the European Union was forced to start a bailout plan for Greece
in 2010 of several billion euros in order to cover Greeces financial needs. In
exchange Greece agreed with the other member states to adopt several
austerity measures consisting especially in increasing taxes and drastically
cutting spending. These reforms caused an increase in unemployment, a
decrease in GDP which led to a decrease in domestic demand. With the
shrinking of the Greek economy, this makes it much more difficult to meet the
targets requested by the European union regarding debt and GDP since Greece
is still running budget deficits.

Now we can look at the European union as a whole. The European union is also
having some trouble with growth and deficits which have been increasing in the
past years. The countries who seem to have the most difficulties recovering
from the financial crisis seem to be the countries in the Eurozone, as we can
see according to Eurostat, the growth rate of EU28 is always higher than
EU17(euro area). There can be two differences for this. One can be that since a
country in not in the European union, it has the possibility of adjusting its
exchange rate and money supply according to its needs. The other reason can
be that the countries outside the euro area are developing countries, such as
Romania, Poland, Czech Republic, etc. are developing countries, so they grow
faster than modern economies such as Italy, France and Spain. The European
union as a whole had an average growth rate of -0.15% in the past five years;
in this context Greece has always been in last place in terms of growth, but
also for unemployment. As we said earlier Greece was forced by the other
members of the Union to adopt several spending cuts which have strongly
contracted Greeces economy. In the beginning of the adoption of the Euro,
Greece ran very large budget deficits which ended up making Greeces debt
unsustainable after a certain point on time which came shortly after the
financial crisis in 2008. Its average growth rate has been -4.34% since 2008
while in the rest of Europe the average growth has been close to zero. So
during the first five years of the adoption of the euro, Greece couldnt afford to
run these huge deficits, and this is what caused Greece to fall in such a deep
recession afterwards the unemployment reached a record high in December
2012 of 26%. The European Union is comprehensively disappointed about how
Greece performed economically in the past 10 years, but it seems like the
policies that the Union forced Greece to adopt to try to reduce account deficits
are not very effective, because it is very difficult to encourage firms to invest
while the economy is not consuming.

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. In the graph below, we plotted growth rate of Vikos sales
and compared to real GDP growth in Greece. We assume to be a consistent
comparison. We can appreciate how, even in times of financial and particularly

economic crisis, Vikos sales continued to increase positively, even if there has
been a growth slowdown, that could be partly due to lower income and
therefore consumption(well see later that it should have a very low effect) or
to a sort of steady state Vikos achieved in the home market. In order to be able
to excerpt additional quantity demand, Vikos has been increasing, in the last
years, the quantity of export(especially to Germany) and its also trying to
spread overseas. This could explain how the company was able to keep an
increasing sales trend despite the recession that hit Greece. (say how much
exports grew, something about foreign destinations: compare todays with
credit report)
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

2012

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 21% since 20063) 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 itself3. In fact Vikos decided
to get ISO4 (which are not required, but internationally recognized, quality
assurance) and HACPP5(optional for water) certificates when issuing new
bottles standards. In particular, in 1999, PVC was replaced by PET plastics and
the company was certified for quality with HACCP & ISO 9001; in 2003, the 1,0L
PET, glass shaped bottle was launched and the company was certified with ISO
14001 for Environmental Management.// France plastic lids microbiological
safeness/.

Greece Unemployment
Greece Unemployment

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

1.
2.
3.
4.
5.

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

http://www.iso.org/iso/home/standards/certification.htm
http://fsrio.nal.usda.gov/faq-page/haccp#t148n2499