Background of Heaven Pizza

Tom and Jerry are best friends. They were spending their free time crafting delicious pizzaspassing them out to friends and family, and building a grassroots fan base around town. When the operation outgrew the family kitchen, Tom and Jerry applied for a small business loan. With it, they bought a small pizza factory and produce high-quality pizzas. The factory has a 60,000 square-foot facility. A couple years ago, as demand for the pizzas grew to a national market (thanks to the companys Facebook account), the co-owners hired a new Controller to help them continue to grow and stay profitable. Now they just landed their largest grocery store yet. In 2019, the company had $6.1 million in sales revenue and is on track to do $9.3 million this year.

Heaven Pizzas uses natural and organic ingredients. Tom and Jerry love getting feedback from their fans and are always testing new recipes based on suggestions or grocer suppliers needs.

Naturally, Tom and Jerry cant reveal their recipes, but they have provided some details on how the pizzas are made. Most pizzas go through a general four-step process: mixing, filling, baking and packaging. Heaven Pizzas makes five different crusts mixed in large batches, and fillings are produced in smaller batches depending on the production schedule. Next, crusts are filled with, well, the filling and placed on trays for baking (15 to 25 at a time depending on size). After theyve cooled for an hour, pizzas are decorated, sliced, packaged and labeled and placed on pallets to freeze until shipped. It takes about a week to complete a pizza product order and the plant uses just-in-time production methods. The goal is to produce a pizza every five seconds.

The plant currently has capacity to do $1 million in sales per month, but with additional investments in ovens, mixers and workstations (for about $500,000) it could increase to $1.5 million. October through December tends to be a higher volume period (with increased demand for holidays like Thanksgiving and New Years), resulting in Heaven Pizzas getting roughly 60% of its business during that time period. Because of the rush, the plant runs overtime and weekend shifts as needed to get the product to its suppliers. The owners believe the labeling process significantly slows down production time.

Since contaminated food would lead to a visit by the Health Department (and possibly shutting down the factory), there are at least three sanitation workers on duty at all times. Generally, there are 3-4 warehouse workers on duty to handle the shipping, receiving and storage of raw materials and finished product. The plant typically runs two shifts per day with two production supervisors assigned to each shift.

Heaven Pizzas have eight salaried workers and approximately 50 hourly employees. Hourly employees typically worked 40 hours per week. In the past, it was assumed that labor costs for the company did not change with sales volume, and some months were profitable and some were not. Currently, Heaven Pizzas managers adjust labor hours up or down depending on the demand for pizzas and try to keep the projected labor near 20% of sales.

The company currently bases pricing decisions on the three Cs: cost, consumer and competition. As a bare minimum, the company wants to achieve a target 17% gross profit margin (or higher) on cost, but Tom and Jerry consider what a consumer is willing to pay the most important factor in pricing. They want to be sure to keep Heaven Pizzas competitive with other companies.

Notes to Selected Financial Data

Raw Materials: Includes main ingredients and flavor additives. Main ingredients are relatively higher cost items such as flour, sugar, eggs, nuts and fruit that appear on the package label. Flavor additives are relatively low-dollar cost items and a small part of the weight of the pizza such as spices, dyes, salt, and certain oils that dont always appear on the package label.

Bakery labor: The cost amount consists of 22% supervisory salaries and taxes and the rest hourly workers. Bakery labor workers are organized into four categories: production line (mixing, filling and baking), packaging, sanitation and warehouse (all included as part of cost of goods sold).

Administration Salaries: Includes taxes and benefits for the Vice President of Operations, the Controller, Human Resources Manager and two administrative support people.

Supplies: Includes supplies relating to production, packaging and decorating, sanitation and warehouse (think: adhesive, pastry bags, spatulas, scrapers, icing pens, gloves and so on).

Freight & Shipping-In: The costs of shipping raw ingredients and other materials to the factory from suppliers.

Freight & Shipping-Out: The costs of shipping finished products to customer locations and distribution centers.

Utilities Electricity: Approximately 10% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume.

Utilities Gas (ovens): Approximately 5% for administrative office and the remainder for the factory. The factory portion varies somewhat with production volume.

Water: All for the factory and varies proportionately with production volume.

Repairs & Maintenance: All for the factory.

Rent expense: The factory uses about 85% of the total square footage of the building and the remainder is for the administrative office.

Telephone & Internet: All for the administrative office.

Co-owners salary: Tom and Jerry.

Brokers commissions: Generally 4% of sales.

The company has been conducting strategic planning discussions on the future of Heaven Pizzas and is considering two major acquisitions.

Option 1

Purchase Henrys Steakhouse. Up to now, Heaven Pizzas has focused on selling pizzas as a wholesaler to restaurants and grocery store chains. Tom and Jerry were approached by the chains management group about whether they would be interested in buying their five underperforming restaurants and operate them under the Henrys Steakhouse name. Henrys Steakhouse is known for its excellent steak dinners and service but has struggled to expand its menu to compete with the many dining options available to consumers. The key idea with this acquisition is that adding Heaven Pizzas outstanding dessert offerings would make the new restaurant an appealing destination for both dinner and dessert. To help prepare for the upcoming initial negotiations, Tom and Jerry have asked you to review the 2019 performance report for the chain (see Table 2). It is estimated that average price per meal would increase 12% with the new desserts and require an investment of $10 million.

Table 2: Henrys Steakhouse 2018-2019 Performance Report

2018 Actual		2019 Actual
Customer Volume	1,066,000	1,105,000
Net Sales	$10,523,440	$10,508,520
Cost of Sales:
Food	$6,340,206	$6,362,772
Total Labor	$995,160	$1,000,480
Cost of Sales	$7,335,366	$7,363,252
Gross Profit	$3,188,074	$3,145,268
Other Operating Expenses:	$2,270,665	$2,222,835
Operating Profit	$917,409	$922,433
Other Data:
Average Operating Assets	$7,500,000	$7,500,000
Food Costs: % variable	100%	100%
Total Labor Costs: % variable	70%	70%
Other Op. Expenses: % variable	60%	60%

Question: Comment on the non-financial factors that managers need to consider for buying the Steakhouse. (e.g. strategy, customers, operation, employees, suppliers, management, risk and opportunity etc. Any other non-financial factors are acceptable)

(Tip: Read the background information, think what the impact on companys non-financial factors is if the company buy the steakhouse)