British American Tobacco (BAT) is a global tobacco company ranked second largest worldwide and operating in over 50 countries. Despite recording revenues of 15.4 billion pounds and 4.9 billion pounds before tax earnings and issuing a 47.5 pence dividend per ordinary share, risks abound and the company has identified several risk factors, which may upset its growth, key among them is the growth of illicit cigarette trade (Reuters.com, 2014). Notably most of the other risks identified contribute to increase in the illicit trade risk. Globally the volume of illicit trade in cigarettes currently stands at 12% of consumption, and it is expected to rise in the next ten years. Illicit trade is normally in the form of trafficked original products or counterfeit products. The major driving factors are abrupt and inconsistent hiking of excise taxes and duties, strict regulations by governments to reduce smoking, low purchasing power and lack of or weak enforcement on counterfeits. Illicit trade has a direct and long-term effect on the company’s organic revenue growth. It leads to low sales volume, reduced earnings, weekend pricing power, and eroded brand equity (www.merchantcantos.com/, 2014).
GlaxoSmithKline (GSK) is a international pharmaceutical company, leading in consumer health and nutrition products. With a prospective P/E of 11 and a 5.4% divide yield forecast, the company is expected to post 5.5 billion pounds before tax profits and 27 billion pounds in revenues (Markets.ft.com, 2014). GlaxoSmithKline risk analysis shows there are more than 22 risks facing the company, but the major risk facing GSK is reputational damage, occasioned by reports on allegations of unethical practices in China. At the height of the China scandal, sales volume went down by 61% and share prices dropped. GSK has been founded guilty and fined US $489 Million (Plumridge and Burkitt, 2014). Despite having the financial muscle to withstand the shocks of such scandals, reputational damage erodes investor's confidence as well with long-term effects and it is the hardest risk to manage (CFO, 2014).
References
CFO, (2014). Reputation: The Hardest Risk to Manage. [online] Available at: http://ww2.cfo.com/risk-management/2014/04/reputation-hardest-risk-manage/ [Accessed 9 Nov. 2014].
Markets.ft.com, (2014). GlaxoSmithKline PLC, GSK:LSE financials - FT.com. [online] Available at: http://markets.ft.com/research/Markets/Tearsheets/Financials?s=GSK:LSE [Accessed 9 Nov. 2014].
Plumridge, H. and Burkitt, L. (2014). GlaxoSmithKline Found Guilty of Bribery in China. [online] WSJ. Available at: http://online.wsj.com/articles/glaxosmithkline-found-guilty-of-bribery-in-china-1411114817 [Accessed 9 Nov. 2014].
Reuters.com, (2014). British American Tobacco PLC (BATS.L) Financials | Reuters.com. [online] Available at: http://www.reuters.com/finance/stocks/financialHighlights?symbol=BATS.L [Accessed 9 Nov. 2014].
www.merchantcantos.com/, M. (2014). British American Tobacco - Illicit trade. [online] Bat.com. Available at: http://www.bat.com/ar/2011/business-review/key-group-risk-factors/illicit-trade/index.html [Accessed 9 Nov. 2014].
