82 SECTION II: MANAGEMENT ACCOUNTING CASES CASE 18 Foodco Restaurants A major component of these strategies is to examine existing chains to identify opportunities to improve cost effectiveness You have met with the general managers for the seven restaurant chains to intro- duce each of them to the cost-reduction project established by the board of directors. The basic information is available with Exhibits 1 to 7. In your discussions you wanted to understand the differences for sales and earnings, specifically between "company owned and managed" restaurants and those that are franchisee-managed and some- times franchisee-owned. You learn that franchisees invest their own money, which allows Foodco Restaurants to finance more rapid growth. You also learn from the general managers that the non-company-owned restau- rants are less successful, as their levels of sales and earnings per store are usually less than the "company owned and managed" units. Franchisees, it was explained, are less willing to adopt the latest practices learned by the company owned and man- aged" restaurants. When you ask for evidence of this sub-optimal performance, the general managers say that information is not systematically produced. Nevertheless, they all agree that restaurants not owned and managed by the company have inferior performance. Foodco Restaurants has joined a group of owners of restaurant chains, which has hired a consulting firm to benchmark the performance of restaurants. The project was started during last year, and consequently only sales and earnings (before amortization of property, plant and equipment and interest expenses) benchmarks are available by restaurant type. (Note: Consulting firms often approach companies to establish industry performance standards. Each of these companies submits its financial information to the consulting firms, which develop benchmarks for the various types of industry. The information submitted by each company is kept confidential, but the consulting firms are able to present benchmarks as external performance standards. This generally would create a desire among the participants, individually or in group, to hire these consulting firms to benchmark their performance.) As a leading Canadian firm, Foodco has a restaurant division called Foodco Restau- rants, which has seven branded restaurant chains. Foodco Restaurants has in the last five years completed acquisitions of various small restaurant chains. In the most recent year, acquisitions of restaurants accounted for 14 percent of the system growth. Exist- ing restaurants only delivered two percent growth. The board of directors wants future growth to come from existing brands. In addition to top line or sales growth, the board of directors wants to reduce costs. They suggested a company wide cost reduc- tion initiative Foodco Restaurants was established in 1883. It went through many changes to where it is now - one of Canada's largest restaurant operators. The seven operating chains or brands are as follows: Chicken Chalet, family/casual restaurant chain specializing in rotisserie chicken and barbecued ribs. Manny's, quick service restaurant chain serving hamburgers. Betty's Neighbourhood Bar & Grill, casual dining that provides guests with an inno- vative, varied menu featuring a fun environment. Dakota's Cookhouse, providing young families with fun, value and genuine hospital- ity featuring comfort foods a wilderness lodge setting. Overland Steakhouse, casual dining featuring seasoned steaks, fresh fish, etc. Good Cup, leading specialty coffee retailer delivering superior quality, service excel- lence, and coffee passion. Millstone Grill & Bar, casual upscale dining that provides guests with familiar food and beverages. Foodco Restaurants' strategies for growth are straightforward: Exhibit 1 Consolidated Statement of Earnings (S000,000s) Year T Year T-1 2,105 Systems sales" Gross Revenue 2.400 1.530 1,411 175 Earnings before the following Amortization of property, plant and equipment Interest expenses Earnings before income taxes Provision for income taxes Net income 148 57 7 84 9 100 20 25 59 Lever brands Drive geographic expansion Maximize supply chain leverage Increase organizational effectiveness Develop human resources. Revenue recognition: Gross revenues include revenues from Foodco owned and operated foodservice activities. These activities consist primarily of food and beverage sales. System sales includes gross revenues as noted, together with the revenue from all fran- chised activities 81 CASE 18: FOODCO RESTAURANTS/83 84/ SECTION II: MANAGEMENT ACCOUNTING CASES Exhibit 2 Exhibit 4 Earnings by Brand ($ millions) * Consolidated Balance Sheet ($000,000s) Year T Year T.1 Year T Year T.1 Assets Current Assets Cash Accounts receivable Inventorics Other current assets 66 35 33 3 101 51 28 18 198 418 49 125 840 91 69 29 15 204 399 49 120 762 Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone Interdivisional Total 71 43 38 8 3 6 11 (5) 3 8 (3) Property, Plant and Equipment Goodwill Brands and Other Intangible Assets 175 148 * Earnings before amortization of property, plant and equipment and interest expenses. Liabilities Current Liabilities Bankers acceptances Accounts payable, etc. 32 145 177 52 133 185 Long-Term Debt Other Long-Term Liabilities, etc. 202 83 285 160 66 226 Exhibit 5 Same Restaurant Sales Growth (percent) 462 411 Year Shareholders' Equity Capital Stock Retained earnings 33 345 378 31 320 351 T T-1 Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone's 1.2 1.8 (0.2) 0.7 (6.0) (0.3) 3.1 2.7 3.0 0.8 (2.4) ( (4.7) 4.0 0.8 840 762 Exhibit 6 Benchmark Results Per Restaurant Exhibit 3 System Sales, Gross Revenue by Brand ($000,000s) Earnings, % of sales Sales, $ millions , Foodco Unit Benchmark Foodco Unit Benchmark Year 1 Year T-1 System Sales Gross Revenue System Sales Gross Revenue Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone 3.96 1.37 3.34 4.15 4.69 0.82 12.2 3.50 1.10 3.00 3.90 6.50 1.10 15.00 9.6 8.9 10.2 3.6 0.4 1.9 3.9 8.7 8.4 8.6 8.3 8.5 7.9 8.9 Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone Interdivisional Total 740 482 371 222 75 312 280 (82) 2,400 393 212 268 191 75 155 280 (44) 1,530 704 457 322 151 62 238 204 (33) ) 2,105 393 234 243 118 62 176 204 (19) 1,411 * Earnings before amortization of property, plant and equipment and interest expenses. Exhibit 7 Restaurants by Type of Ownership Total Chicken Chalet Manny's Betty's Dakta's Overland Good Cup Millstone Company Owned Owned and Franchisee Franchisee Owned and Managed Managed and Managed 30 74 63 58 125 168 44 28 16 16 20 355 23 187 351 111 54 16 382 23 7 Total 272 206 646 1,124 The consulting firm was able to analyze the performance of Foodco Restaurants chains to determine whether "company owned and managed" restaurants were superior to the franchised restaurants. The consulting firm reported that there was not much difference between the performance means (sales and earnings) of the two types of restaurants. However, it noted that the variance was very large for these chains. There were a relatively large number of poorly performing restaurants among "company owned and franchisee managed" and "franchisee owned and managed" restaurants. Equally, there were a large number of exceptionally well-managed restaurants, with above-aver- age performance. Required You, the manager of management accounting, have been asked to scope out the project for reducing costs. Use the case approach to respond to the board of directors. 82 SECTION II: MANAGEMENT ACCOUNTING CASES CASE 18 Foodco Restaurants A major component of these strategies is to examine existing chains to identify opportunities to improve cost effectiveness You have met with the general managers for the seven restaurant chains to intro- duce each of them to the cost-reduction project established by the board of directors. The basic information is available with Exhibits 1 to 7. In your discussions you wanted to understand the differences for sales and earnings, specifically between "company owned and managed" restaurants and those that are franchisee-managed and some- times franchisee-owned. You learn that franchisees invest their own money, which allows Foodco Restaurants to finance more rapid growth. You also learn from the general managers that the non-company-owned restau- rants are less successful, as their levels of sales and earnings per store are usually less than the "company owned and managed" units. Franchisees, it was explained, are less willing to adopt the latest practices learned by the company owned and man- aged" restaurants. When you ask for evidence of this sub-optimal performance, the general managers say that information is not systematically produced. Nevertheless, they all agree that restaurants not owned and managed by the company have inferior performance. Foodco Restaurants has joined a group of owners of restaurant chains, which has hired a consulting firm to benchmark the performance of restaurants. The project was started during last year, and consequently only sales and earnings (before amortization of property, plant and equipment and interest expenses) benchmarks are available by restaurant type. (Note: Consulting firms often approach companies to establish industry performance standards. Each of these companies submits its financial information to the consulting firms, which develop benchmarks for the various types of industry. The information submitted by each company is kept confidential, but the consulting firms are able to present benchmarks as external performance standards. This generally would create a desire among the participants, individually or in group, to hire these consulting firms to benchmark their performance.) As a leading Canadian firm, Foodco has a restaurant division called Foodco Restau- rants, which has seven branded restaurant chains. Foodco Restaurants has in the last five years completed acquisitions of various small restaurant chains. In the most recent year, acquisitions of restaurants accounted for 14 percent of the system growth. Exist- ing restaurants only delivered two percent growth. The board of directors wants future growth to come from existing brands. In addition to top line or sales growth, the board of directors wants to reduce costs. They suggested a company wide cost reduc- tion initiative Foodco Restaurants was established in 1883. It went through many changes to where it is now - one of Canada's largest restaurant operators. The seven operating chains or brands are as follows: Chicken Chalet, family/casual restaurant chain specializing in rotisserie chicken and barbecued ribs. Manny's, quick service restaurant chain serving hamburgers. Betty's Neighbourhood Bar & Grill, casual dining that provides guests with an inno- vative, varied menu featuring a fun environment. Dakota's Cookhouse, providing young families with fun, value and genuine hospital- ity featuring comfort foods a wilderness lodge setting. Overland Steakhouse, casual dining featuring seasoned steaks, fresh fish, etc. Good Cup, leading specialty coffee retailer delivering superior quality, service excel- lence, and coffee passion. Millstone Grill & Bar, casual upscale dining that provides guests with familiar food and beverages. Foodco Restaurants' strategies for growth are straightforward: Exhibit 1 Consolidated Statement of Earnings (S000,000s) Year T Year T-1 2,105 Systems sales" Gross Revenue 2.400 1.530 1,411 175 Earnings before the following Amortization of property, plant and equipment Interest expenses Earnings before income taxes Provision for income taxes Net income 148 57 7 84 9 100 20 25 59 Lever brands Drive geographic expansion Maximize supply chain leverage Increase organizational effectiveness Develop human resources. Revenue recognition: Gross revenues include revenues from Foodco owned and operated foodservice activities. These activities consist primarily of food and beverage sales. System sales includes gross revenues as noted, together with the revenue from all fran- chised activities 81 CASE 18: FOODCO RESTAURANTS/83 84/ SECTION II: MANAGEMENT ACCOUNTING CASES Exhibit 2 Exhibit 4 Earnings by Brand ($ millions) * Consolidated Balance Sheet ($000,000s) Year T Year T.1 Year T Year T.1 Assets Current Assets Cash Accounts receivable Inventorics Other current assets 66 35 33 3 101 51 28 18 198 418 49 125 840 91 69 29 15 204 399 49 120 762 Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone Interdivisional Total 71 43 38 8 3 6 11 (5) 3 8 (3) Property, Plant and Equipment Goodwill Brands and Other Intangible Assets 175 148 * Earnings before amortization of property, plant and equipment and interest expenses. Liabilities Current Liabilities Bankers acceptances Accounts payable, etc. 32 145 177 52 133 185 Long-Term Debt Other Long-Term Liabilities, etc. 202 83 285 160 66 226 Exhibit 5 Same Restaurant Sales Growth (percent) 462 411 Year Shareholders' Equity Capital Stock Retained earnings 33 345 378 31 320 351 T T-1 Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone's 1.2 1.8 (0.2) 0.7 (6.0) (0.3) 3.1 2.7 3.0 0.8 (2.4) ( (4.7) 4.0 0.8 840 762 Exhibit 6 Benchmark Results Per Restaurant Exhibit 3 System Sales, Gross Revenue by Brand ($000,000s) Earnings, % of sales Sales, $ millions , Foodco Unit Benchmark Foodco Unit Benchmark Year 1 Year T-1 System Sales Gross Revenue System Sales Gross Revenue Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone 3.96 1.37 3.34 4.15 4.69 0.82 12.2 3.50 1.10 3.00 3.90 6.50 1.10 15.00 9.6 8.9 10.2 3.6 0.4 1.9 3.9 8.7 8.4 8.6 8.3 8.5 7.9 8.9 Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone Interdivisional Total 740 482 371 222 75 312 280 (82) 2,400 393 212 268 191 75 155 280 (44) 1,530 704 457 322 151 62 238 204 (33) ) 2,105 393 234 243 118 62 176 204 (19) 1,411 * Earnings before amortization of property, plant and equipment and interest expenses. Exhibit 7 Restaurants by Type of Ownership Total Chicken Chalet Manny's Betty's Dakta's Overland Good Cup Millstone Company Owned Owned and Franchisee Franchisee Owned and Managed Managed and Managed 30 74 63 58 125 168 44 28 16 16 20 355 23 187 351 111 54 16 382 23 7 Total 272 206 646 1,124 The consulting firm was able to analyze the performance of Foodco Restaurants chains to determine whether "company owned and managed" restaurants were superior to the franchised restaurants. The consulting firm reported that there was not much difference between the performance means (sales and earnings) of the two types of restaurants. However, it noted that the variance was very large for these chains. There were a relatively large number of poorly performing restaurants among "company owned and franchisee managed" and "franchisee owned and managed" restaurants. Equally, there were a large number of exceptionally well-managed restaurants, with above-aver- age performance. Required You, the manager of management accounting, have been asked to scope out the project for reducing costs. Use the case approach to respond to the board of directors