Grains Coffee Ltd

Grains Coffee Ltd (GC) operates a chain of coffee shops in the West of England and Wales, serving predominantly ethically sourced high-quality coffee, in addition to snacks and other beverages.

The UK coffee shop market is dominated by a few main brands who account for approximately 70% of market share. The UK industry has grown from almost nothing in the last few decades to over 10,000 outlets in 20X0 and it continues to expand. The main brands that exist within the marketplace are very well known and well established, however in recent years these large corporate organisations have faced criticism on several fronts, including potential underpayment of corporation tax, low wages paid to staff and the use of questionable sources of supply.

GC was formed in 20X1 and the business model is built upon 3 main tenets, these are:

• Providing quality products and service to the local community
• Being consciously locally and globally aware
• Striving for sustainable and ethical business growth

The owners have always been aware that the take-away side of the business is where high margins can be made, and it has always been a difficult balance of providing a comfortable environment with modern facilities to entice customers in yet not wanting customers to stay for long periods on one drink purchase.

At a meeting in May 20X5, between Will Brown (Retail and Stores Director), and Harry Edwards (Managing Director), Will expressed concerns that there had been decreased footfall around their coffee shop locations. Will had been conducting research into mobile coffee vans and identified a company, Cove Ltd, that specialises in custom-build catering vehicles. To allow potential customers to conduct market research, Cove Ltd, offers a standard equipped vehicle to their potential customers for a two-week trial period for free (except running costs such as consumables).

Harry gave Will the go-ahead to negotiate a trial run with these mobile coffee vans, as he agreed with Will, that this would be a great opportunity to explore a new venture.

During June 20X5 they used this mobile coffee van to locate at some of the busier outdoor spots, and saw a significant increase in their sales.

Will was keen to get the ball rolling on the purchase of some of these custom-built vans, as he thought they would help increase revenues and improve margins at least for approximately 8 months of the year when the UK climate is suitable for there to be enough customers out and about. Unfortunately, Harry was not fully on board, as although he saw the benefits and recognised that there were pleasing gains to be made, he knew that a number of GCs premises needed refurbishment and as such, was unwilling to commit funds to the acquisition of some mobile coffee vans at this stage. He did, however, agree for Will to negotiate a short-term rental of two coffee vans for the months of July September 20X5 and for Will to also obtain quotes from Cove Ltd for a custom-built coffee van (Appendix 5).

In November 20X5, a senior staff meeting was held to discuss company strategy and make plans for 20X6. Harry is concerned that Lewis Root (Supply Chain and Purchasing Manager) is conducting negotiations to source some cheaper non-sustainable coffee supplies, and the potential negative impact this would have on the long-term future of the company. As such, Harry is keen to ensure the company stays true to its core values (Appendix 2) and that these are incorporated into plans for the business.

The results for the latest Balanced Scorecard for GC (Appendix 3) were briefly discussed. One of the outcomes of the meeting was identification of Critical Success Factors to underpin the balanced scorecard approach that had been adopted by the company since its inception:

• Longterm profit growth;
• Retention of staff, with minimal use of casual workforce, to ensure our customers experience is of the highest standard;
• Offering innovative products and services to keep our customers engaged;
• Give back to our customers and our communities, and,
• Be authentic in adopting a sustainable approach to business.

Historically, GC has managed its capital expenditure using a traditional approach via a capex budget, in that is sets a limit in terms of how much it wishes to spend per annum and then allocates expenditure to which ever projects provide the best return for the company. The capex budget for the coming year has been set at 600,000 and it is now looking to decided which projects will deliver the most attractive return for the organisation.

There are currently 3 capital expenditure projects that being evaluated, the details of which are given below:

Project 1 Purchase of new mobile coffee vans

This investment would require an initial capital investment of 250,000 and would generate post-tax incremental cash flows of:

Yr1 Yr2 Yr3 Yr4 Yr5

56,000 89,000 112,000 76,000 57,000

The above cashflows are given in money terms and included any relevant residual values.

Project 2 Purchase and installation of new in-shop coffee machines

To purchase and install the appropriate number of new coffee machines would require an initial capital cost of 180,000 and would result in incremental annual post-tax cashflows for 70,000. However, these incremental operating cash inflows have not yet been adjusted for inflation, the relevant inflation rate has been determined as 1.8% per annum.

Project 3 Refurbishment of current coffee shops (excluding the purchase of new coffee machines)

The total cost of the planned refurbishment would be 300,000. Due to the better facilities and increased appeal of the newly refurbished shops, it is estimated that additional operational cashflows of 102,000 would be generated for the next 5 years, before any further refurbishment would be required. The incremental operational cashflows are expressed in nominal terms.

GC Ltd evaluates all capital investment projects of this nature using a money cost of capital at 8%.

Lewis (Supply Chain and Purchasing Manager) has a wealth of experience within the coffee shop industry and has many contacts from working with his previous employer. His knowledge and experience are key reasons as to why Harry employed him. Harry was instrumental in recruiting Lewis, and he sees him as an integral member of staff in driving supply chain cost reductions and efficiencies.

Lewis recently had a meeting with a potential new coffee supplier, Strong Blend Ltd (SB). This potential new supplier is a well know distributor within the industry, that has a reputation for supplying cost effective solutions to large multi-national chains. Lewis has developed a good friendship with the Head of Business Development at the supplier, due to working with them previously. The Head of Business Development at SB (Sara Khan) is looking to expand their smaller, independent customer base, and is therefore keen to build upon the relationship she has with Lewis.

In an attempt to foster this connection, Sara has invited Lewis to a large sporting event, with hospitality and entertainment included. As a huge sports fan Lewis is looking forward to this immensely.

SB is a large distributor within the industry, and as such, has significant influence over its suppliers. The suppliers that SB uses do not all have Fair Trade accreditation and therefore SB cannot always guarantee that the coffee they are supplying is 100% sourced as Fair Trade. Given the significant cost savings that a contract with SB can provide to GC, Lewis believes that this is a gamble worth taking, as around 50% of the suppliers to SB are Fair Trade accredited.

Gayle Vojic (Head of IT and Finance) has been tasked with undertaking a cost-benefit analysis of entering into a new supplier agreement with SB, and whilst the cost savings are undeniable, she is very concerned about the less tangible impacts upon the business. In a recent meeting with Lewis, he made it very clear to Gayle that this new supplier contract is key to his own personal success at GC, and he had verbally confirmed to Sara at SB, that the signing off on the contract was a mere formality.

Gayle recently performed a review of company sales over the last few years, with a particular focus on analysis of product margins. At the last management meeting, Gayle commented that the business could improve its results without the need to make fundamental changes, but by promoting items that provide the best returns. Gayle has asked Lewis to determine what data is currently available to allow products to be tracked from purchase to point of sale, and whether GC would need to make any further investment to enable them to have access to additional management information.

Harry has agreed with a request made by Gayle to appoint an external advisor to support her and the rest of the GC team in dealing with some of the issues being faced by the company. You are A.N. Consultant, and have been appointed in this role as external advisor to GC.

QUESTIONS

1) Outline the potential benefits to Grains Coffee LTD of leasing an asset as opposed to purchasing an asset outright? 2) With reference to the potential new coffee supplier , discuss whether there are any concerns that give rise to ethical issues, including any ethical threats , and advise Gayle Voijic on suitable actions. Your answer should incluude the ethical framework of ACCA