CASE 18 Foodco Restaurants 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 in 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: Lever brands Drive geographic expansion Maximize supply chain leverage Increase organizational effectiveness Develop human resources. 81 82 / SECTION II: MANAGEMENT ACCOUNTING CASES 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.) Year T. Exhibit 1 Consolidated Statement of Earnings (5000,000s) Year T Systems sales 2,400 Gross Revenue* Earnings before the following Amortization of property, plant and equipment Interest expenses Earnings before income taxes Provision for income taxes Net income 2,105 1,411 1.530 175 66 9 100 148 57 7 84 30 70 25 59 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, CASE 18: FOODCO RESTAURANTS/83 Year T-1 Exhibit 2 Consolidated Balance Sheet ($000,000s) Year T Assets Current Assets Cash 101 Accounts receivable 51 Inventories 28 Other current assets 18 198 Property, Plant and Equipment 418 Goodwill 49 Brands and Other Intangible Assets 175 840 Liabilities Current Liabilities Bankers' acceptances 32 Accounts payable, etc. 145 177 Long-Term Debt 202 Other Long-Term Liabilities, etc. 83 285 91 69 29 15 204 389 49 120 762 52 133 185 160 66 226 462 411 Shareholders' Equity Capital Stock Retained earnings 33 345 378 31 320 351 840 762 Exhibit 3 System Sales, Gross Revenue by Brand ($000,000s) Year T Year T. Gross Revenue System Sales Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone Interdivisional Total System Sales 740 482 371 222 75 312 280 (82) 2,400 393 212 268 191 75 155 280 704 457 322 151 62 238 204 (33) 2,105 Gross Revenue 393 234 243 118 62 176 204 (19) 1,411 1,530 84, SECTION II: MANAGEMENT ACCOUNTING CASES Exhibit 4 Earnings* by Brand ($ millions) Year T Year T.1 Chicken Chalet 71 66 Manny's 43 35 Betty's 38 33 Dakota's 8 3 Overland 3 3 Good Cup 6 3 Millstone 11 8 Interdivisional (5) Total 175 148 * Earnings before amortization of property, plant and equipment and interest expenses. Exhibit 5 Same Restaurant Sales Growth percent) Year 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 Exhibit 6 Benchmark Results Per Restaurant Sales, $ millions Foodco Unit Benchmark Earnings", % of sales Foodco Unit Benchmark 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 * Earnings before amortization of property, plant and equipment and interest expenses. Exhibit 7 Restaurants by Type of Ownership Total Company Owned Owned and Franchisee Franchisee Owned and Managed Managed and Managed 30 74 63 125 168 187 351 Chicken Chalet Manny's Betty's Dabas Overland Good Cup Millstone 16 28 16 20 23 54 16 382 23 7 355 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. CASE 18 Foodco Restaurants 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 in 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: Lever brands Drive geographic expansion Maximize supply chain leverage Increase organizational effectiveness Develop human resources. 81 82 / SECTION II: MANAGEMENT ACCOUNTING CASES 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.) Year T. Exhibit 1 Consolidated Statement of Earnings (5000,000s) Year T Systems sales 2,400 Gross Revenue* Earnings before the following Amortization of property, plant and equipment Interest expenses Earnings before income taxes Provision for income taxes Net income 2,105 1,411 1.530 175 66 9 100 148 57 7 84 30 70 25 59 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, CASE 18: FOODCO RESTAURANTS/83 Year T-1 Exhibit 2 Consolidated Balance Sheet ($000,000s) Year T Assets Current Assets Cash 101 Accounts receivable 51 Inventories 28 Other current assets 18 198 Property, Plant and Equipment 418 Goodwill 49 Brands and Other Intangible Assets 175 840 Liabilities Current Liabilities Bankers' acceptances 32 Accounts payable, etc. 145 177 Long-Term Debt 202 Other Long-Term Liabilities, etc. 83 285 91 69 29 15 204 389 49 120 762 52 133 185 160 66 226 462 411 Shareholders' Equity Capital Stock Retained earnings 33 345 378 31 320 351 840 762 Exhibit 3 System Sales, Gross Revenue by Brand ($000,000s) Year T Year T. Gross Revenue System Sales Chicken Chalet Manny's Betty's Dakota's Overland Good Cup Millstone Interdivisional Total System Sales 740 482 371 222 75 312 280 (82) 2,400 393 212 268 191 75 155 280 704 457 322 151 62 238 204 (33) 2,105 Gross Revenue 393 234 243 118 62 176 204 (19) 1,411 1,530 84, SECTION II: MANAGEMENT ACCOUNTING CASES Exhibit 4 Earnings* by Brand ($ millions) Year T Year T.1 Chicken Chalet 71 66 Manny's 43 35 Betty's 38 33 Dakota's 8 3 Overland 3 3 Good Cup 6 3 Millstone 11 8 Interdivisional (5) Total 175 148 * Earnings before amortization of property, plant and equipment and interest expenses. Exhibit 5 Same Restaurant Sales Growth percent) Year 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 Exhibit 6 Benchmark Results Per Restaurant Sales, $ millions Foodco Unit Benchmark Earnings", % of sales Foodco Unit Benchmark 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 * Earnings before amortization of property, plant and equipment and interest expenses. Exhibit 7 Restaurants by Type of Ownership Total Company Owned Owned and Franchisee Franchisee Owned and Managed Managed and Managed 30 74 63 125 168 187 351 Chicken Chalet Manny's Betty's Dabas Overland Good Cup Millstone 16 28 16 20 23 54 16 382 23 7 355 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