Cases in Financial Management Essay
Cases in Financial Management
Founded in 1984 Laurentian Bakeries Inc. operates in the industry of manufacturing a vast variety of frozen baked products within their three operating plants in Montreal, Winnipeg and Toronto. The operating plants produce items such as frozen pizza in Winnipeg, MB, pies in Montreal, QC and Cakes in Toronto, ON- with each representing 30%, 30% and 40% of the total revenue stream respectively. The buyers for this company include large institutional clients such domino’s pizza, etc. which have a significantly higher level of power whereas the seller of the products consists of several food producers which have a relatively low level of power.
With the cost of setting up a plant of this scale being high, substitute products will also remain high in the market causing the overall profit margin to be low. With the company’s ongoing effort for continuous improvement Danielle Knowles (VP of operations) proposed to expand one of the operating plants in Winnipeg-which was based on the opportunity if the company expanded into the U.S. market.
The statement of the problem is how Danielle Knowles will prepare a capital project expenditure proposal to expand the company’s frozen pizza plant in Winnipeg; which is consistent and in line with the company’s capital allocation policy. The proposal should also satisfy the company’s continuous effort for improvement, identification of lost opportunities, satisfaction of HR and environmental impacts and provide sufficient ROI.
The strengths of the company are clearly visible through the company’s effective operations and reputable image in the industry. Being one of the top five in the industry, Laurentian Bakeries has established themselves as a dominant player in the market; however, with a shortage in capacity it can potentially overpower the strengths due to its negative impact on the company. This includes a decrease in sales and potential decreases in retailer support.
Nevertheless, with the acknowledgement of a capacity shortage and an opportunity to expand and grow in the U.S. market the company seems to be in good standing. Moving aside to a different area amongst the competition, all the products are similar which indicate there is heavy competition. The presence of numerous suppliers makes this industry highly competitive, as a result, there is high aggression amongst competitors. This is a leading factor that indicates this is not an attractive business to be in.
* Danielle Knowles has experience in the food industry for 13 years. This is a great benefit for the company, because she is able to use her knowledge and experience and apply it for Laurentian Bakeries in order to improve operations or even avoid errors. This in return can potentially save the company from incurring additional expenses. * Danielle has her Master’s in Business Administration which indicates that she is educated and has the credentials to maintain her position as the VP of operations. Also, Danielle is able to use that knowledge and apply it to everyday operations of the company. * Laurentian has above average consideration for human resource and environmental impacts.
This benefits the company to the extent that it creates a public awareness which shows their commitment to the community which in return can potentially be used as a marketing tool to attract more sales. * Laurentian company is one of the five large firms that produce frozen foods dominating 21% of the market. This indicates that they are a dominant player in the market and have survived many difficulties from various competitions. * Well established and profitable company which indicates that they have survived one full economic cycle and have withstood their competition. * The company has a diversified revenue stream with three operating plants located in major cities which are not as risky as a single revenue stream. * All three segments are profitable.
* Low cost pizza producer which is helping to expand into the US. Market.
* Laurentian Bakeries has an integrated workforce such as sales, marketing, etc. for all of their operating plants.
* Shortage of capacity. If this weakness is not dealt with the company can face losses in their sales because of the shortage. This in return lowers the overall profit of the company and can potentially decrease buyers if they cannot meet the demand due to the shortage. * Class 1 products are too risky and by taking such a great risk any wrong doing can have a negative impact on the company.
* Arrangement to supply large U.S. based grocery chain with private label brand. If the opportunity is taken to its advantage the company can potentially see higher figures in sales and profits. * Since U.S. pizza consumption is 3x bigger than the Canadian segment the overall US market is bigger which can potentially lead to a higher market share. * Within N.A. the economy is recovering modestly and is expected to grow. This indicates that consumer spending on discretionary items such as food products will remain strong.
* Inflation is forecasted to remain between 3-5%. This may cause interest rates to rise causing the cost of capital to increase higher than its current level. Capital projects such as expansion may suffer. * North American growth rate of gross domestic product slowed down which may lower the company sales. * Threat of new entrants will increase competition and is always a factor that makes the sales aggressive. * Health Conscious consumers will potentially affect sales due to the products offered by Laurentian Bakeries are considered “unhealthy.” With on-going health awareness the products offered by Laurentian Bakeries might not meet the changing demand of consumers.
Porter’s Five Forces
* Mixed Power.
* There are two types of buyers: large institutional buyers such as domino’s pizza & pizza pizza as well as large retailers. Thousands of smaller clients have less power because of their current low clientele base.
* Low Power.
* Pizza suppliers distribute production to pizza stores, restaurants and grocery chain stores. Since there are numerous suppliers in the market for ingredients such as cheese, flour, vegetables, etc. they have low power.
Barriers to Entrant
* Due to high capital costs, skilled workforces, environmental regulations, high distribution channels, entry into this industry is high.
Threat of Substitute
* The products offered by Laurentian such as their Pizza can be made at home or even purchased fresh from fast food restaurants. Also they can easily be substituted for other products such as calzone, sandwiches, tacos, etc.
* There is high competition for the items offered by Laurentian Bakers. Competition for their pizza baked items can easily be substituted through franchised restaurants such as Pizza Pizza, Boston Pizza, Pizza Hut, etc. also competition is high through other companies offering the same goods. In addition, this company is also competing against other food products rather than frozen pizza alone.
Laurentian Bakeries is seeing a cash increase from $6.2 million in 1993 to almost double its value of $13.1 million in 1995. At the same time long term debt for the company has increased by $7.23 million which indicated that Laurentian Bakeries is funded by its long term debt and has not utilized its
cash and therefore has incurred additional interest expenses. Moving over to the sales figures, Laurentian Bakeries has seen an increase of 11% from 1993-95; however, net income is flat which indicates that their COGS and operating expenses have also risen almost at the same pace as sales. This setback has no advantage to the shareholders.
1. Continue original plans to continue expansion in Winnipeg.
2. Build a plant in U.S. to cater to that market.
3. Buy an existing plant.
4. Expand the Toronto plant as it is the strongest plant for the company.
By carefully analyzing all the alternatives, we recommend alternative one as the best fit solution to this company due to it being most practical at the company’s current situation. We strongly believe that continuing original plans to expand in Winnipeg is the beneficial solution for the company as they already produce the same type of products and have the additional land to carry forward the expansion, because this plant is a low cost producer and is ideal to utilize the U.S private label sector. In addition, this alternative is beneficial because it is consistent with the company’s overall objectives. Given the discount rate of 18% and a $5.2 million capital investment the NPV of the expected cash flow is positive.
Moreover, recommendation one is the best suited for this company because: * There is land readily available in Winnipeg. This can save the company some money in terms of the expansion because these will incur less of an expense due to Laurentian owning the extra land space. * Building a plant in U.S. will require a lot of capital, additional expenses for hiring, training, etc., and potential change in production, management or other techniques due to different regulations in U.S. * Expanding in Toronto will also require additional capital and additional time to hire and train the workforce to produce the pizza products which aren’t produced in the Toronto facility.