CASE

It was a regular working day in April 2021, when four business partners gathered together for strategy session for their organization: Food for Thought (FFT).

Background:

FFT operated a chain of Quick Service Restaurants (QSR) in business localities in the GTA, Mississauga, Brampton, Oakville, Kitchener, Waterloo, and Cambridge. Their first outlet opened in 2007 in Vaughn and then continued to expand to other areas.

FFT outlets offered food and beverages for takeout and delivery only. There was no dine in option available. The rapid expansion of food delivery service provided a strong headwind for FFT. Since their outlets did not require a prominent location, the leasing costs were minimized.

The above factors contributed to the success and growth of FFT until Covid struck in early 2020. Most the revenue generated by FFT was from lunch items, afternoon snacks and early evening dinners consumed by clients working in their offices. With 90% of client working from home, the demand for such services almost disappeared overnight.

FFT had to downsize its operations, close outlets, and lay off nearly 60% of its workforce.

Positive news began to appear in April 2021 with the arrival of vaccines in Canada. Both the Federal and Provincial governments expressed confidence of vaccinating a majority of the population by Fall 2021 and allow restaurant businesses to function normally by November 2021.

About business partners

Sonia Jimenez (Sonia) is the Senior Vice President- Marketing. She spent over fifteen years with Fortune 500 companies in the Consumer-Packaged Goods sector. She developed multi channel marketing strategies for FFT which led to FFT being positioned as an agile, innovating enterprise.

Erin Smith (Erin) was the Corporate Chef of FFT. She spent nearly twenty years with leading hotel chains in Western Canada before taking on the current role in FFT. She displayed exemplary skills at developing new products which contributed to the profitability of FFT.

Noah Wiseman (Noah) was the Chief Financial Officer of FFT. He too came from a hospitality background, having worked with leading hotel chains in Toronto. His expertise was in Capital Budgeting and product costing, which worked well in conjunction with the culinary skills of Erin when new products were being developed.

Babatunde Jones (Tunde) was the Senior Vice President-Operations. His background was as a General Manager in Fast Food Outlets. With his exemplary people skills and ability to train new hires, FFT was able to hire operations staff with little or no experience and develop them to high performing team members. MGMT 8500: S23 -capstone -V20

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Reshaping business strategy

The four business partners set up their meeting with a view to re-orient their business strategy in the context of changes coming to how work would look like when the economy reopened after the pandemic. The goal was to develop a business model which would be relevant with the hybrid work model which was likely to be the norm once post pandemic recovery takes shape.

Sonia began the meeting with a discussion of what work would look like in the post-pandemic era. A typical client of FFT was between 25 48 years of age and worked in an office setting. Due to their clients workload and schedule, they preferred to buy food from a Quick Service Restaurant so that they could consume the food as and when their work schedule allowed for. With the hybrid work model, they would be attending office two or three days a week and work from home for the remainder.

The food consumption pattern would shift from consumption only in the office (pre-pandemic), to consumption both at office and home (post-pandemic). The question therefore was: how can FFT adapt to this change in consumer behaviour?

Erin thanked Sonia for her insight and began her discussion. She pointed out at this time, there was a very short time lag between food being prepared at FFT and being consumed by the client. The time lag possibly was no more than two hours. As a result, consumers were able to eat freshly prepared food which was packed to retain the attributes of the cooked meal till it reached the consumer.

She expressed opinion that the food production process needed a transformation. In addition to the food being prepared and delivered to the client for consumption, there would have to be a secondary process where food would be prepared and packed. The packed food would retain its original attributes for 48 hours. Therefore, a client could order two versions of the same meal the first, which could be consumed in the office within the next two hours and the second, the packed version, which can be taken home, kept in the refrigerator, and consumed on the following day.

Erin would come up with a list of menu items which could be cooked and packed. She requested Sonia to explore the possibility of building a new brand based on the packed meals.

At this point, Noah took over and pointed out that to implement this strategy, the following steps would be necessary:

• A new facility, where food preparation and food packaging would take place
• Benchmarking studies to analyze performance of similar companies
• Product costing and estimation of manufacturing volume to meet financial goals
• Multi-channel marketing of packed food
  • 1) Written report with the following content: Appendix1: Leasing Explain the calculations

Tunde, pointed out that implementing the above, would lead to several operational issues as well. In order to resolve these issues, it may be necessary to incur additional fixed expenses.

As a next step, they decided to retain the services of Conestoga Consulting (CC), a reputable consulting agency. The scope of work for CC would be to develop financial projections based on the above issues and provide a recommendation as to the best way forward for FFT. MGMT 8500: S23 -capstone -V20

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Initial meeting with Conestoga Consulting:

A group of five consultants met with the four business partners to develop a plan of action. It was decided that the consulting group will develop financial projections as requested and provide a report to FFT in two weeks.

Project work for Conestoga Consulting:

Issue #1: New facility for FFT

For acquiring the new facility, the consulting group wanted to evaluate both options of leasing the facility as well as an outright purchase. They gathered data which is presented in Appendix 1.

Issue #2: Benchmarking studies of similar companies

The consulting group decided to conduct a ratio analysis of two companies and compare trends across major ratios. This would allow them to provide feedback to FFT as to operating metrics they should follow in their new venture. Relevant data is presented in Appendix 2.

Issue #3: Product costing and estimation of manufacturing volume to meet financial goals

The consulting group wanted to develop a Contribution Margin Income statement and conduct a Cost-Volume-Profit Analysis so that the estimated manufacturing volume can be projected. If this estimated volume could be sold entirely, then the target profitability can be met. Relevant data is presented in Appendix 3.

Issue #4: Multi channel marketing of packaged food items

The consulting group wanted to develop calculations using the relevant costing model of Special Orders. They felt that, in order to maximize production capacity special orders, should be accepted. These orders would represent one-time sales opportunities of the products in a very high volume. Due to the high volume, client would have to be offered a price which is lower than the list price. Relevant data is presented in Appendix 4.

Required:

At the end of the two-week period, the consulting group would be meeting with the business partners. Prepare a report showing all the calculations and your recommendations for all the four issues. MGMT 8500: S23 -capstone -V20

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Deliverables:

• Your recommendations
• Appendix 2: Benchmarking Explain the comparisons of ratios you calculated against industry values
• Provide recommendations on how to improve three of them
• Appendix 3: CVP Explain your calculations
• Provide a recommendation
• Appendix 4: MCM Explain your calculations
• Provide a recommendation
• Formatting specifications: Executive summary (1 page)
• 1000 words maximum (excluding executive summary)
• Calibri or Arial font
• 11 point
• Line spacing 2
• Header and footer
• Cover page
• Table of Contents (formatted using MS Word)

1. 2) Excel Workbook showing calculations: Blank format is provided
2. Complete one Excel tab for each scenario

MGMT 8500: S23 -capstone -V20

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Appendix One (Construct or lease)

Objective: Should FFT lease or construct their own production facility Option 1: Construct Costs to incur: Buying land, construct building and getting ready for use (FFT has these funds available in their bank account today so no mortgage is needed) $ 1,200,000 Taxes, insurance, and repairs (per year) $110,000 Intended years of use 15 Projected market value in 15 years $ 1,250,000 Option 2: Lease Intended years of use 15 Deposit required today (this deposit will be returned to FFT when the lease contract is complete is 15 years) $ 100,000 Annual lease payment $ 160,000 Property taxes (annual) to be paid by FFT $ 15,000 Insurance (annual) to be paid by FFT $ 15,000 Required rate of return 10%

Methodology:

The consulting team is proposing to perform a NPV analysis and determine the benefit to leasing or construction.

Based on the analysis, they will recommend the preferred option (construction or leasing).

Appendix Two (Benchmarking studies)

Objective: To conduct ratio analysis of a comparable company (Waterloo Corporation) and compare with that of the industry. FFT Corporation Comparative Statements of Financial Position 31-Dec-20 Assets 2020 2019 Cash $ 50,000 $ 25,000 Accounts receivable 65,000 50,000 Merchandise inventory 60,000 70,000 Prepaid Expenses 55,000 30,000 Property, plant, and equipment 300,000 250,000 Total assets $ 530,000 $ 425,000 Liabilities and shareholders' equity Accounts payable $ 25,000 $ 30,000 Short-term bank loan payable 50,000 65,000 Bonds payable 150,000 160,000 Common shares 150,000 95,000 Retained earnings 125,000 75,000 Total liabilities and shareholders' equity $ 500,000 $ 425,000 FFT Corporation Income Statement Year Ended December 31, 2020 Net sales $ 350,000 Cost of goods sold 210,000 Gross profit 140,000 Expenses Operating expenses $ 40,000 Amortization expense 22,000 Interest expense 15,000 Total expenses 77,000 Profit before income tax 63,000 Income tax expense 20,000 Profit $ 43,000 Additional information for 2020: 1 Cash dividends declared and paid. $ 28,000 2 Net cash provided by operating activities in 2020 $ 82,000

Methodology:

• Based on the above information the consulting group will conduct ratio analysis for the specific ratios listed in the template.
  1. As a next step the group will compare the ratios calculated above with industry benchmarks. The benchmarks are indicated within brackets besides each ratio. o Current ratio (3 to 1)

1. o Quick ratio (2 to 1)
2. o Inventory turnover (3 times)
3. o Receivables turnover (8 times)
4. o Times interest earned (8 times)
5. o Deb to equity ratio (3 to 1)
6. o Profit margin (14%)
7. o Gross profit margin (38%)
8. o Days in inventory (110 days)
9. o Days in receivables (58 days)
10. o Return on assets (12%)
11. o Return on equity (14%)
12. o Cash current debt coverage ratio (1 time)