Cott Corporation

1. General Economic Outlook

Cott Corporation earned its revenue mainly from United States, Canada and U.K. Its revenue from these countries accounted for 97.83% and 98.62% in 2003 and 2002 respectively. However, the company tends to increase its operation in Mexico as a result of its acquisition in..... Therefore, our discussion will be based on 4 countries as mentioned above.

1.1 Global Economic Outlook

From economic in bubble stage in 2000 to the adverse effects of the September 11, 2001 terrorists attack on the U.S and the subsequent wars in Afghanistan and Iraq, the SARS outbreak in Canada and China in 2001-3.

Over the past year, the global recovery has become increasingly well established, with global GDP growth now projected to average 5 percent in 2004, the highest for nearly three decades as shown in figure 1. The year has also experienced the emergence of new economy, notably, China, India and Brazil.

However, the IMF has expected that the global expansion, while still solid, will likely be weaker than earlier expected; the balance of risks has shifted to the downside with further oil price volatility a particular concern. While progress is being made, it is generally limited; leaving the world significantly more vulnerable to the shocks it will inevitably face in the future. In all, the world economy has strong economic prospects and steadily grow in the next 5 years.

Economic Outlook

To gain a clear perspective on the direction of these countries, we analyzed several important economic indicators: real GDP growth, long term and short term interest rates in the US. and UK., consumer price index, population growth. Besides these indicators, we analyzed other important indicators that we considered to have a direct impact on Beverage and bottling industry such as the cost of aluminium and crude oil prices.

Here, we demonstrate both the historical data and forecast data provided by World Market Advanced country analysis and forecast. The forecast methodology is attached in appendix 1

Real Gross Domestic Product (GDP)

By examining Real Gross Domestic Product (GDP) we are able to obtain a measure of real economic growth (excluding inflation). In 2000, their GDP growth rates were 5.23%, 6.57%, 3.86% and 3.66% for Canada, Mexico, United Kingdom and US respectively and then dropped significantly (as shown in the graph) a result of the economic slowdown in the US and the September 11 tragedy. After 2001, the economy started to recover and almost reached the levels seen prior to the slowdown; this could be attributed to an increase in investor confidence in the financial markets and to the tax cut policy implemented in the US to stimulate domestic household spending. Nevertheless, the trend of real GDP growth seems to be steady in the future.

Interest rate

Interest rates are very important indicator for Cott Corporation especially short term interest rate because the company just swapped its debt from long-term debt to short-term debt. It is also important in that the company is trying to expand by acquisition and to do so; it needs both equity and debt financing. Currently, the company has its debt both in US and UK ; therefore; we have chosen to use US and UK in both long term and short term. As shown in Figure..., there was a significant decrease in US interest rate after the tech bubble in 2000. For the past years, both rates in the US are increasing while rates in UK is quite stable. According to WMRC, the rates are expected to rise relatively in the future at around 4% per annum for short-term and 5-6% per annum for long-term interest rate

Inflation

The inflation rate we have used is the percentage change in the yearly Consumer Price Index (CPI) for advanced and developing countries, published by the International Monetary Fund (IMF) because the world market does not provide consumer price index information. The trend has shown that the inflation rate for advanced countries is relatively decreasing from year to year since 2003 and quite stable for developing countries. Therefore, we do not anticipate that the average consumers' level of real income will decrease much over the next 5 years.

Exchange rate

We present percent change year over year of period average in exchange rate of local currency to US$. We believe this indicator is important as Cott corporation's revenue and operation are in other countries apart from United States. The exchange rate will affect the financial performance of the company and directly affect the consolidated financial statement because the result has to convert to US. dollar. As shown in the figure..., Both Canada and United Kingdom currencies will continually appreciate against US. dollar.

Implication for Cott

Based on the general indicator it would seem as though in the short term the economy is growing from the recession with a high level of real GDP growth of 5%. However, with the continuously increase in oil price may hold the overall economy from going well as expected. Moreover, the exchange rate for both UK and Canada that continuously appreciate against US may affect consumption by consumer and the operation of the company.

Overall, we expect that the economic will grow at stable rate with relatively increase for the next 5 years.

Beverage and bottling industry

For beverage and bottling industry, the cost of acquiring and converting aluminum and PET resin constitutes the majority of bottlers' packaging costs. Packaging costs represent approximately 45% of bottlers' cost of sales and a substantially greater percentage of Cott's approximately 80-90% of cost of sales. As a result, we demonstrate the change in aluminium spot prices and crude oil spot prices which directly affect gross profit of the beverage and bottling company.

In 2004, the price of these key commodities rose considerably. The charts which follow show the historical market price for aluminum and crude oil, the major determinant of PET resin costs. However, the commodity price is expected to decrease relatively in 2005.