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Assess whether Innocent Drinks Ltd should have raised finance by selling a minority of its shares to shareholders, such as Coca-Cola. - Edexcel - A-Level Business - Question 2 - 2017 - Paper 2
Question 2
Assess whether Innocent Drinks Ltd should have raised finance by selling a minority of its shares to shareholders, such as Coca-Cola.
Worked Solution & Example Answer:Assess whether Innocent Drinks Ltd should have raised finance by selling a minority of its shares to shareholders, such as Coca-Cola. - Edexcel - A-Level Business - Question 2 - 2017 - Paper 2
Step 1
Reasons for selling shares
Answer
Innocent Drinks Ltd could consider selling shares to Coca-Cola for several reasons:
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Expertise and Support: Coca-Cola could provide valuable business advice and financial support, helping Innocent Drinks to expand its operations and potentially access new markets.
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Extended Distribution Network: With Coca-Cola's well-established distribution network, Innocent Drinks could efficiently launch its products in new territories and improve its market reach.
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Retaining Control: Selling a minority stake ensures that Richard Reed and other owners still maintain considerable control over the company, which might be necessary for preserving the brand's ethos.
Step 2
Reasons against selling shares
Answer
Despite potential benefits, there are significant downsides to selling shares to Coca-Cola:
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Loss of Independence: By accepting an investor like Coca-Cola, Innocent Drinks might face unwanted interference in decision-making, potentially leading to conflicts about the company's future direction.
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Profit Sharing: Accepting investment would require sharing profits through dividends with Coca-Cola, which could limit funds available for reinvestment into new products or machinery.
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Brand Image Risks: Associating with Coca-Cola could harm Innocent Drinks' image, especially if customers perceive it as a less wholesome brand. This negative association could deter existing customers and alienate employees who are committed to the company’s original values.
Step 3
Potential judgment
Answer
Ultimately, Innocent Drinks Ltd should have decided against selling shares to Coca-Cola. Although the funds could aid in expansion, sacrificing independence and compromising its brand integrity poses greater long-term risks. The decision to become a major shareholder led to Coca-Cola taking over completely by 2013, which undermined the initial vision of Innocent Drinks and limited future growth opportunities.