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AJANTA PACKAGING
CASE ANALYSIS
Section E
Akanksha Gupta (ABM13027)
Ankit Shakyawar (PGP32203)
Akanksha Gupta Saurabh Gond (PGP31111)
Ankit Shakyawar
Saurabh Gond
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Summary
Ajanta Packaging, a leading manufacturer of glass bottle, is facing a tough competition from
other substitute products in the packaging industry. Packaging industry is a growth driven
industry providing opportunities to companies in the sector, but recently there has been a
change in the industry and it is moving from the traditional packaging to flexible packaging
due to various benefit associated with it. Since Ajanta flagship product is glass bottles, the
changing environment poses a challenge to the company in terms of slow growth and
dwindling profits. The case analysis examines the factor associated with this change and try
to identify the key issues in the glass bottle industry. The purpose of the analysis is to help
Dipankar Aggarwal in taking a decision whether to diversify in new packaging material or
not. Based on some evaluation criteria, three options are compared. Further analysis is done
through capital budgeting and internal rate of return method. The three options are evaluated
in terms of the risk associated with each option and what will be the managements strategy
for tackling the risks. It is recommended for Ajanta Packaging to diversify into PET industry
and tap into growing market. Instead of investing heavily in PET bottle manufacturing, it is
advised to start with 10% PET and 90% glass packaging products. Since the customer base in
glass packaging is already established, Ajanta Packaging should maintain its key competence
and expand into new product with caution. As it will build competence in new packaging
material, it can aggressively pursue to capture share of packaging industry.
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1.Statement of the Problem
The case outlines the dilemma faced by the protagonist and attempts to resolve the same.
Ajanta Packaging is in business of manufacturing of glass bottles and is one of the prominent
supplier of packaging material to Indian Made Foreign Liquor industry, Beer packaging,
pharmaceutical industry and soft drinks market. However, in recent time, there has been shift
from the usage of glass packaging to different durable and low-cost packaging solutions. The
packaging industry is undergoing vital changes due to technological advancements, change in
consumer behaviour and change in consumption pattern of packaging material. In current
scenario, many companies has switched from glass packaging to PET bottles, Tetra Pak
cartons, flexible packaging and other innovative solution. In such situation, Dipankar
Aggarwal in in a fix regarding the decision to upgrade from essentially glass based to newer
innovative and cost effective variants. He feel that a level of saturation has arrived in glass
packaging industry. On the one hand, the customers need more innovative and cost-effective
solution while on the other hand, the manufacturers have to provide these solution with less
cost and maintaining profitability to remain competitive in the market. The case accesses the
changing market dynamics in a comprehensive manner and its impact on the future of Ajanta
Packaging whose flagship was glass-manufacturing.
Exhibit 1
The exhibit 1 demonstrate that since 2008, the sales turnover of Ajanta Packaging has
increased continuously year on year basis mainly due to increase in price of the product.
However, the operating profit has remained almost constant or declined marginally during
few years. Dipankar has to decide whether to carry on with the existing product range and
exploit the decline in industry with more customers of glass bottle on board or enhance
product range with more PET-bottle varieties. In case Ajanta decides to carry on with current
product portfolio and customer, a big question remains over the future growth prospect of the
company. In case Dipankar decides to diversify in new product portfolio of PET bottles and
target new customers and market, he needs to decide the best strategy of achieving the
objective and understand the implication of decision on current business. The timing of the
decision is very critical and Dipankar has to decide that judiciously.
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industrial machinery and other hardware needing transportation. In recent time, the
emergence of E-commerce also contributed to high demand of innovative and cost-effective
solutions. At present, Indian packaging industry stands at US$ 14 billion and is growing at 15
percent over last few years. This growth rate is expected to double in next two years. Due to
presence of prosperous FMCG sector, the food and beverage segment is largest contributor to
the packaging industry. The growth in the packaging industry in India is mainly driven by the
food and the pharmaceutical packaging sectors. The large and growing Indian middle class,
along with the growth in organized retailing in the country are fuelling growth in the
packaging industry. Another factor, which has provided substantial stimulus to the packaging
machinery industry is the rapid growth of exports, which requires superior packaging
standards for the international market. With this the need for adopting better packaging
methods, materials and machinery to ensure quality has become very important for Indian
businesses.
2.1 Classification in Packaging Industry
2.1.1 Functions of Packages
Exhibit 2
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Aseptic Packaging Moisture Proof Packaging
Retortable Packaging Blister Packaging
Shrink Packaging Skin Packaging
Strip Packaging Tamper Evidence
Packaging
Others
III. By Contents
Food Packaging Drug Packaging
Cosmetics Packaging Liquid Packaging
Powder Packaging Clothing Packaging
Toiletry Packaging Dangerous Packaging
Others
IV. By Materials
Rigid Packaging
Bottle, Metal Can
Wooden Box
Metal Box, etc
Semi Rigid Packaging Flexible Packaging
Carton Box Paper, Plastic
Plastic Bottle Film, Alu- Foil
Cellophane
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Soft Drink
Beer
Beer
Pharmaceuticals
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3.Key issues in Glass-bottle industry
3.1 Rise of the substitute
A number of substitutes has emerged in recent times PET bottles are now replacing glass
bottles and aluminium cans are used in beer, soft-drinks and juice industries in India. New
packaging material in form of Tetra Pak cartons has been used by many companies. Around
the world, the cartons manufactured by Tetra Pak (based in Lund, Sweden) has begun being
used for non-alcoholic beverages. Tetra Pak is preferred medium for packaging cheap liquor
sold in 180 millilitre quantity. These substitutes has adverse impact on the growth prospect of
Ajanta Packaging whose profits primarily came from glass bottles.
3.2 Emergent PET Bottle Industry
Because of light weight, clarity, toughness and inertness to oxygen and carbon dioxide,
Polyethylene terephthalate (PET) bottle has gained acceptability in various industries such as
soft drink, mineral water, FMCGs, pharmaceuticals, agrochemicals, wine and liquor, and food
sector companies. Glass bottles have high breakage rate and high cost, so PET bottles has
manage to replace glass bottles considerably. PET bottles are preferred by consumers for its
convenience, ease of use, light weight and sturdiness while marketer favour plastic for its
light weight, cost effective, product safety and possible innovative package designs. Retailers
switched to PET bottles as they are easy to stack and unbreakable. Increasing consumption of
packaged, frozen and processed food led to demand for PET packaging. Other factor include
growing Indian middle class and the growth of organized retailing in India. PET bottles are
increasingly accepted for their enhanced economies of production, reduced chances of
breakage, easier recyclability and reduced transportation costs. It is expected that share of
plastic packaging in total market will increase due to unique feature such as novel package
design for enhanced brand differentiation and crystal-clear transparency.
High inflation in recent time has led to rise in prices of raw material which directly result in
increasing cost of glass bottles and make them less attractive compared to other packaging
material such as plastic and Tetra Pak cartons. For Ajanta Packaging, purchase prices has
increased, reducing the profit margin for the company. Other operational expenses such as
warehouse rental, interest and freight led to immense pressure on profitability.
3.4 Price War
A price war is being going on among the major players in the highly competitive glass bottle
industry. Suppliers are slashing prices in order to win over other companies clients and
increase their market share. This price war has led to the decline in the profit margin of the
glass bottle industry. Many customers of Ajanta Packaging have started negotiating prices
before placing new orders, contributing to further fall in profitability of Ajanta Packaging.
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4.Analysis and Recommendation
4.1 Evaluation Criteria
o Profitability: It captures the ability of the firm to generate profit. It is defined as what
is left of the revenue after it pays all the expenses associated with the operation of the
firm.
o Potential achievability: The options available with Ajanta Packaging have objective of
achieving profitability targets. Option will be evaluated whether those objectives can
be achieved within defined time framework.
o Potential affordability: Any option will need some financials for its implementation.
The Ajanta Packaging will need to have sufficient operating capital and need to find
the source of fund either in form of loan or issuing of common stocks.
o New Infrastructural Requirement: If Ajanta Packaging decides to diversify in PET
packaging, it will have to procure new machinery and set up a new plant for
manufacturing of PET bottles. Each option will have some specific capital investment
associated with it.
o Long term feasibility: Each option will be evaluated on the basis of long-term
feasibility and its long term implication. The future growth of the packaging industry
is very critical for going with any option.
4.2 Possible Options
4.2.1 Status Quo
Continue with 95% glass and 5% other packaging material production. This shall incur no
additional cost on Ajanta and it also gives Ajanta to be a leader in the declining glass industry
where other market players are leaving the sinking ship. But the industry is at a decline and
Ajanta cannot capitalize on it for long because of the changing consumer trends. Glass
packaging materials are costly. The trend is shifting towards flexible packaging material
which are cheaper, lighter and have lower freight costs. The growth prospects of Ajanta stand
jeopardized in this option.
4.2.2 Increased production of PET (10%): (Producing 10% PET and
90% glass)
Initially increasing the production of PET to 10% can give a head start for further tapping the
potential of this industry and shall also protect the revenue of Ajanta by remaining a large
player in the glass industry. It could open up ways for product diversification which is
supposed to be the future of packaging industry.
4.2.2 Increased Production of PET (20%): (Producing 20% PET and
80% glass)
Tapping aggressively into the new market might be beneficial but reducing ones share in the
existing market where Ajanta is a leader doesnt seem a profitable option. Understanding the
demands and consumer behaviour of new market also takes time. Ajanta can wait for a few
years so that once the glass bottles demand has declined it can shift further to production of
glass bottles more than 10%. Infrastructural requirements are also needed for such mass scale
production which can be only developed with time.
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4.3 Screening Options:
Assessing what each option means on the basis of the evaluation criteria:
Exhibit 4
Screening Options Option 1: Option 2: Option 3:
Status Quo 10% PET 20% PET
90% Glass 80% Glass
Since packaging industry has shown vital changes globally it is very important to respond to
these changes so that Ajanta doesnt become obsolete with time. Ajanta has been offering
quality and cost effective packaging and is currently the market leader. To maintain that
position its imperative to shift to flexible packaging solution. Ajanta is already producing
PET. Further increasing its production and checking the consumer response to it by starting at
10% can be a cost effective option. This will also not jeopardize Ajantas already loyal
customer base of loyal glass customers. Slowly they can also be pitched the new PET
products and their responses can be checked. PET will also attract new customers. The
FMCG, Pharmaceutical and IMFL (Indian made Foreign Liquor) is already showing a
shifting trends towards flexible packaging systems. These sectors are the primary target
markets for Ajanta. Hence starting with a 10% production of PET seems a viable option.
The market share for glass packaging industry is 11% of the total packaging industry. Ajanta
owns 95% of this 11% for becoming a leader in the entire packaging industry diversification
is a must. Diversification will also be a strategic alignment with the already existing values of
Ajanta like providing low cost, high quality packaging. Further lowering costs is not possible
in glass industry because of the growing cost of raw materials. As is shown in Exhibit 1, the
operating profit has stayed constant even after increasing the sales turnover.
4.4 Recommendations
1) Ajanta Packaging should diversify itself into PET industry to tap into the growing market
segment. It can start with 10% PET and 90% glass packaging products. Further within 2
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years it can expand its manufacturing base and aggressively produce and market PET
products.
2) Slowly shifting focus from glass packaging to PET would be a better strategy than not
shifting at all or completely abandoning the glass packaging industry.
3) Ajantas core competencies lie in its loyal customer base. Hence taking the customers
along with the changing trends is important. Introducing the customers to PET and other
flexible packaging systems is necessary.
4) Ajanta needs to focus not only on PET but also on paperboard, foam and paper
packaging alternatives. In order to foster that funds need to be allocated to Research and
development in order to develop new packaging alternatives in rigid and flexible
packaging materials.
5) Also to throw risk out of the operations system the strategy of Ajanta has been to procure
and maintain a diversified supplier base. This strategy is expected to be upheld.
Produce
test
designs
Revise
package
designs
Get
translation
s for
designs
Arrange
Translation
s
Conduct a
test run
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Production Process improvement
Efficiency Process design
6.Conclusion
The project team recommends that Ajanta should go forward with the option of producing
10% packaging PET. The packaging demand is derived demand driven market where the
primary players are FMCG, IMFL and pharmaceuticals. The IMFL is growing at a rate of
29%, FMCG especially soft drink market at 5-6% which are sold in returnable bottles,
pharmaceuticals at 15% the need to expand into new market horizons is imperative.
Also with declining glass industry market and shrinking margins, market development and
product development are the need of the hour.
The company needs to be aggressive in its commitment to research and development,
creating innovative product and cooperate when needed. By taking strategic decisions to
improve its future Ajanta will have to prosper and thrive in the fast paced changing trends of
packaging industry.
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(All figure are in $ Year 1 Year 2 Year 3 Year 4 Year 5
million)
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7.2 Internal Rate of Return
1+r
C= At / t =1
Where, At = Net Cash Flow in Year t, C = Initial Cost of Project, and n = life of the project.
Thus solving previous example,
47,40,000 51,00,000 54,96,000 59,31,600 1,34,10,760
------------ + ------------ + ------------- + ------------- + ----------------- + = Rs. 2,00
(1+ r*)1 (1+ r*)2 (1+ r*)3 (1+ r*)4 (1+ r*)5
Solving for r* we get r* = 0.179 or 17.9 percent. The decision rule is that if r* is greater
than the Cost of Capital, the investment should be made.
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8.References
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