Monte Bianco 531sx

EXPANSION VS PROFITABILITY

MONTE BIANCO

Deal Proposed by – WENJUAN YANG VAIBHAV BAHL

CASE BACK GROUND Café Monte Bianco is a manufacturer & distributor of coffees in Europe Market downturn of 1998 forced the business leaders to manufacture private labels for 2 supermarket chains in Italy. The above decision though contrary to brand philosophy of manufacturing coffees, contributed to the excellent financial performance for the year 2000 The brand is considering expansion plans for manufacturing more private labels to save variable costs and fill up the capacities during lean periods The management is taking decisions based on profits without considering the cash flow. The CEO asks the management to re evaluate all decisions from the cash flow perspective.

KEY DIFFERENTIATORS PRIVATE LABEL

COFFEE

Payment :90 days

Payment : 30 days

Can be stored as an inventory for a long time No spend on Marketing and reduced R&D, expenses

To maintain freshness, the through put is quicker than private label coffee Requires huge marketing and R&D expenditure

TESTING FUTURE VIABILITY THROUGH 3 PLANS Analysis of cash flow for the year 2000 PLAN A - To manufacture only private labels PLAN B – To maximize the sales mix to 80% private and 20 percent coffee

INCOME STATEMENT THE 2 PLANS Income Statement for the year ending Dec 31, 2001 (thousands of Italian liras)

Revenues Private Brand brand

2000 56,112,408 9,934,848 46,177,560

Plan A 52,800,000 52,800,000 0

Plan B 88,194,400 42,486,400 45,708,000

Costs of goods sold* Gross margin

33,233,867 22,878,541

44,764,800 8,035,200

61,021,552 27,172,848

Marketing expense R&D expense Selling expense istrative expense Interest expense Total expense

4,155,980 3,328,130 3,574,710 4,752,000 3,825,000 19,635,820

0 832,033 1,251,149 2,376,000 3,825,000 8,284,182

6,441,380 3,330,000 3,600,000 4,760,000 3,825,000 21,956,380

Profits Taxes(40%) Net profit

3,242,721 1,297,089 1,945,632

-248,982 0 -248,982

5,216,468 2,086,587 3,129,881

0.21

-0.03

0.34

* includes 2,593,700 depreciation ROE

CASH FLOW CASH FLOW JAN YEAR 2000

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

NET INCOME

4006030 3682250 2936279 5021402 5015193 7010349 7494630 8083966 6316089 3177981 3350963 3458697 3872733

PLAN A

3692192

PLAN B

2154137

623989 -2454120 -2642294 -2064867

624559

317586

327412 -1299561 -3348935 -5873508 -6550082 -18647627

-583568 -4491573 -2176358 -1454097 2978251 4746406 7055944 5100976

-159004 -2197169 -3132932 5216468

CONCLUSIONS PLAN A – To go all private will make the company bankrupt as the long credit will leave the company with no cash in hand also since the margin in private label is very low, the company bears loses PLAN B – If they maximize the production capacity with a 80% private and 20% split, the cash flow is negative for half the year but the company makes a profit with a positive ROE

RECOMMENDATIONS We suggest the company should go towards a private label heavy production mix. This will feed the capacities in the lean period The company can maintain a uniform annual supply as there are no storage issues The coffee from the production mix will add to the bottom line

To maintain a healthy cash flow we suggest the company proposes an option of bill discounting to the supermarket chains/private label operators : where if Monte Bianco opens a long term vendor with these suppliers, it is liable for a quicker payment (30 days) with a 2% discount. We propose the company push its suppliers towards accepting longer payment on the of offering a contract for being a long term supplier.

Reference for Calculations Please find the excel sheets in the attachment

THANK YOU