Need stakeholder analysis, swot analysis and pestle analysis for the below case study-

Bella Beverages Inc.

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Bella Beverages Inc.

Overview

Bella Beverages Inc. (BB) is a Canadian company traded on the TSX Venture

Exchange. BB's business is the development, production, distribution, and sale of nonalcoholic

beverages. The company produces high-quality juice beverages and soft

drinks, more than half of which are sold in Canada (55%) and the rest in the United

States. Most end purchasers of BB products are health-conscious individuals aged

19-30.

The company was founded eight years ago by Hani Jafeer and Cindy Snin, former

executives in the hospitality industry. Jafeer saw an opportunity to take advantage of the

increasing consumer interest in health drinks by designing a company to focus on that

niche market. He assumed the role of President and Chief Executive Officer (CEO).

Snin joined him as Chief Financial Officer (CFO) and was instrumental in effecting the

operational start-up, particularly in hiring the other key executives. Together, the

founders worked well as a team.

Executive Team and Organizational Structure

A summarized organizational chart for the business is provided as Exhibit 1.

Hani Jafeer is President and CEO. Before founding BB, he was Vice-President,

Marketing of a large hotel chain, having worked his way up from a front-desk role

through various positions in sales, restaurant management, and conference

coordination. At the time of incorporation, Jafeer was driven by his initial vision to see

products developed, marketed, and sold in stores. However, since the achievement of

this goal, he has shown less initiative to move forward. Now 54 years old, he seems

content with the current business model and does not make decisions in haste.

Reporting to him are both an executive and an administrative assistant as well as the

CFO, and all of the vice-presidents.

Jafeer will be President and CEO until his planned retirement on March 31, 2013. He

will continue to be Chairman of the Board thereafter. A new President and CEO will

have to be found according to the specifications provided by the board of directors.

Cindy Snin has left BB to take an executive position with a hotel chain. Kerry Vance,

CMA, was hired as her replacement on January 23, 2011. Reporting to the CFO are the

director of Human Resources (HR), the controller, the manager of Management

Information Systems (MIS), and the general (non-production) purchasing department.

Suzie Carpet is Controller. She has an undergraduate degree in biology and worked in

the finance department for a large biotech company prior to coming to BB three years

ago. She recently completed the CMA Professional Program. Reporting to her is the

production facility's accountant who is assisted by two analysts.

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Amy Lu is Director, Human Resources. She is a 16-year veteran in the HR field, having

spent the last six years with BB. She has a Certified Human Resource Professional

(CHRP) designation and fairly extensive experience with unions. Her department is

responsible for payroll, hiring and terminating staff, as well as union relations.

Ronald Rone is the MIS Manager. He is considered a technology expert. He earned a

community college diploma in computer science and gained progressively wider

experience in four different companies before joining BB a year ago. The company's

systems have been running reliably since his appointment as Manager.

Santina Marella, Vice-President (VP), Sales, has an MBA in Management. In her

current role, her primary responsibility is to secure sales, which she does effectively by

motivating the sales representatives to pursue orders aggressively in the retail

environment. Reporting to her is the director of sales, who manages most of the day-today

functions.

John Van Besmin, Vice-President, Marketing, holds an MBA degree majoring in

Marketing from a Canadian university. He has had a great deal of experience, having

worked in a variety of positions in the supermarket industry before being sought out by

BB three years ago. His department's responsibility is to drive consumer, rather than

store, demand for BB product. Reporting to him is the director of marketing, who

manages most of the day-to-day functions.

Claude Lemieux, Vice-President, Bottling, is an experienced beverage industry

executive. Prior to joining BB, he was employed by one of the large cola bottlers in a

number of senior positions. He is a mechanical engineer by profession. Reporting to

Lemieux is the manager responsible for production purchasing.

As Vice-President, Distribution, J.N. Garphite is responsible for the movement of BB

product from the end of the production line to a final destination. The warehouse

personnel in remote locations report to him through regional distribution heads. Garphite

is not in favour of outsourcing any facets of the business, having lost his job when one

of his previous employers embraced this type of strategy.

The President and CEO receive an annual salary of $250,000 as well as a bonus of 2%

of pre-tax income. Each VP receives $160,000 plus a bonus based on personal

performance relative to objectives. This remuneration is in addition to stock option

grants.

The senior management team meets weekly to discuss operational and strategic

issues.

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Board of Directors

BB's board of directors consists of seven individuals and meets the independence

requirements of the TSX Venture. Each director owns at least 20,000 shares of the

company.

Hani Jafeer is Chairman of the Board.

Jason Lee is President of the General Canadian Insurance Company. He has been a

member of the board since 2009.

Cynthia M. Boopell is Vice-President and General Counsel of Reed Paper Inc., a large

pulp and paper company. She was elected to the board in 2009.

Jack Ross, formerly President and CEO of Tentail Communications Inc., a publicly

traded telecommunications company, is retired. He became a member of the board in

2010.

Arturo Mindaro is President of Canada Restaurants Inc., a large, fast-food restaurant

franchisor that is owned by a wealthy Canadian family. Mindaro was elected to the

board in 2010.

Pierre Melanon is the founder and president of Wall Suppliers Inc., a chain of stores

that sell high-end home decorating supplies. He was elected to the board in 2010.

Asha Sharma is a wealthy philanthropist and a member of one of the richest families in

Ontario. She joined the board in 2011.

The board of directors meets quarterly and has formed three committees - audit,

compensation, and environment. The audit committee consists of Lee, Boopell, and

Sharma. The compensation committee consists of Mindaro, Ross, and Sharma. Jafeer,

Melanon and Lee make up the environment committee.

Products

BB produces and sells four brands of juice and four brands of soft drink. The proprietary

recipes for these eight products were developed by researchers on contract in the

company's first year. All of the beverage names are trademarked in both Canada and

the United States.

Pear Supreme consists primarily of concentrated pear juice, a hint of lemon juice, and

other natural and artificial flavourings. Apple-Berry Special is a pure fruit punch,

containing apple, cranberry, strawberry, and blackberry juices. Fruit Zest is a mixture

of apple and pineapple juices. Caribbean Punch Plus is made from the juice of six

different Caribbean fruits.

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BB soft drink products are unique in the industry because they contain either real fruit

juice or other natural ingredients. Mango-Plus Pop contains the juice of a particular

type of mango, grown in a remote area of Mexico. Minnesota Spruce Beer is nonalcoholic

and made from the outer twigs of the spruce tree, ginger root, and molasses.

Limextreme contains a rare grade of lime juice, bought from a supplier in Mexico.

Orangola Pop contains frozen concentrated orange juice, known as FCOJ in the

industry.

The juice and soft drink recipes are kept strictly confidential in order to prevent

duplication of the beverages by a third party. Ingredients, but not amounts, are listed on

the product containers. Care is taken to avoid the mistake of listing all the ingredients

and proportions in any document. Only three employees have access to the full recipes,

including quantities.

In the early years, BB won product innovation awards, such as the 2004 Canadian

Beverage Industry Association New Product Award for Pear Supreme juice brand and

the North American Beverage Manufacturers' Healthy Innovation award in 2005 for

Mango-Plus Pop. In 2008, the company dropped one original product, Lemon Sour

Supreme, a soft drink that did not sell well. Currently, the company is not developing

new flavours and has no department for research and development (R&D).

Most of the fruit juices and sweeteners that BB uses as raw ingredients are

commodities with defined market prices. The company sweetens most of its drinks with

liquid glucose/fructose. Diet versions of the soft drinks, comprising of approximately

25% of the sales volume, are sweetened with aspartame. Other important ingredients

are carbon dioxide, natural flavours, sodium benzoate (to preserve freshness), and citric

acid. For Mango-Plus Pop, BB buys concentrated juice from whichever grower has

the lowest price that particular season. In an effort to resolve some of their business

problems, the 11 Mexican growers of that particular type of mango recently banded

together to stabilize and increase the market price.

The company sells its products in plastic bottles of different sizes, ranging from 330 ml

to 1 L. In total, there are 42 stock-keeping categories for the eight beverages. The

bottles are manufactured by three different arm's-length entities. In jurisdictions in which

the bottles are not recyclable, BB must contribute to the government or industry blue

box program. This cost is included in the standard cost of the bottle.

Five years ago, a New York firm was contracted to design the bottles. The result was a

very attractive, colourful, and memorable design that has good consumer recognition, is

used for every size, and allows for a distinction in style between juice and soft drink

bottles. The distinctive, stylized BB logo found on all bottles is trademarked in both

Canada and the United States.

Labels are not imprinted on the bottles; printed plastic labels are used instead. All bottle

labels state, "returnable for deposit where required by law", and all such regulations are

Bella Beverages Inc.

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observed. Bottles destined for the Canadian market carry bilingual labelling, as required

by law.

Typically, the products are shrink-wrapped in cardboard flats of 12 or 24 bottles for

shipping to the retailer. Generally, there is little loss due to puncture during

transportation. The retailer can sell the beverages individually (at a higher price) or in

any numeric combination, either chilled or unchilled.

The company's products are shelf-stable and do not require refrigeration. Although an

expiry date of one year from bottling is printed on the labels, the products are drinkable

for up to two years under normal conditions.

In a recent Canadian study, 11.3% of the consumers surveyed recognized the BB logo

and could name one of the company's branded beverages. In consumer taste tests, all

of the BB soft drinks and juices have been ranked in the top 20% of the products

sampled.

For each product, the company aims to earn a gross profit on materials of at least 70%.

Sales and cost data for 2011 are found in Table 1. All measures have been converted to

8-oz. (227-ml) servings for comparison purposes. The cost of materials represents a

weighted average standard cost for the year and includes the cost of the juices,

sweeteners, bottles, cardboard flats, and wrapping. Standard costs substantially

approximate actual costs for the year.

Table 1 - Beverage Statistics for 2011

8-oz. (227-ml)

Servings Sold

Avg.

Price ($)

Total Sales

($)

Average

Materials

Cost ($)

Material

COGS ($)

BB Soft Drinks

Mango-Plus Pop 16,514,588 0.1863 3,076,668 0.0688 1,136,204

Minnesota Spruce Beer* 13,789,456 0.1863 2,568,976 0.0532 733,599

Limextreme Pop 15,478,956 0.1863 2,883,730 0.0543 840,507

Orangola Pop 12,478,526 0.1863 2,324,749 0.0544 678,832

58,261,526 10,854,123 3,389,142

BB Juices

Caribbean Punch Plus 14,845,333 0.2430 3,607,416 0.0587 871,421

Fruit Zest 13,145,585 0.2430 3,194,377 0.0602 791,364

Apple-Berry Special 14,785,895 0.2430 3,592,972 0.0586 866,453

Pear Supreme 11,478,748 0.2430 2,789,336 0.0579 664,620

54,255,561 13,184,101 3,193,858

Total 112,517,087 24,038,224 6,583,000

*branded in the U.S. as Manitoba Spruce Beer

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Sales

Sales of BB juices are strongest in Western Canada, Ontario, and Quebec. Sales of soft

drinks are spread across the country, roughly corresponding to population density. U.S.

sales are concentrated in the contiguous states that border Canada. The business is

somewhat seasonal, with 40% of sales occurring from May to August.

The company has decided not to enter the beverage fountain market, which is

dominated by the large cola companies, but currently sells bottled products to all areas

of the retail market. The highest sales of soft drinks are made to supermarkets. Juices

are sold primarily to club stores, although convenience store chains are also strong

buyers of juice products. Customers may only return products that are defective.

Sales representatives are scattered across Canada and serve specific sales territories.

Customers fax their orders to the central order desk at the head office, where the

information is entered into the accounting system. Convenience stores without fax

machines place orders by telephone to their respective sales representatives who, in

turn, fax the orders to the head office.

Most major retailers try to earn a specific gross margin on beverages. This places

pricing pressure on the manufacturers. BB has adjusted prices from time to time in

response to competitive pressures but, rather than meet a competitor's price head on,

prefers to offer additional marketing incentives to customers. The company sells all of

its juice brands for the same price, even though there are differences in cost, because

this simplifies the process for all concerned. The same is true for all lines of BB soft

drinks.

Marketing

Consumers of all ages purchase BB beverages. However, the company has found that

consumers aged 19-30 purchase larger amounts, primarily because of the trendy image

of the drinks. As a result, this age group is considered to be the main target market.

The advertising budget allows for short advertisements on selected radio stations and

full-page, colour advertisements in magazines aimed at the target market. These costs

make up the company's indirect marketing expenditures.

Since BB does not sell directly to the consumer, the company provides stores with

incentives to stock BB products and display them prominently. These direct marketing

expenditures include the cost of in-store displays and flyer advertising. In general,

convenience stores tend to require less marketing support. Various consumer

promotions are also undertaken, such as bottle cap prizes and other giveaways. In

addition, the company provides stores with product samples and organizes sampling

booths at festivals and other events that draw large crowds.

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Marketing initiatives sometimes originate at the local level. For example, in the spring of

2011, the company's juices were not selling very well in a certain large city in Western

Canada. The sales representative, believing that a display program would be effective

in pulling product through, sought approval for this type of initiative from the marketing

department. For two months, there was much discussion on both sides as to whether or

not this expenditure was justified, mainly because the budget is insufficient to cover

these types of expenses. Finally, the marketing director verbally authorized the three

largest retailers in the city to create prominent cardboard displays in conjunction with

large orders of BB juices. The retailers were to deduct the costs of this initiative from

their next payments to BB. The program was a success and sales of the juices

increased.

Unfortunately, such initiatives can cause problems when authorization is poorly

managed and the marketing expenses incurred by retailers are poorly tracked.

Sometimes, because of a lack of communication, BB's Accounts Receivable (A/R)

department first learns about the program when the related receivable is short paid.

Often, retailers neglect to include the required copies of paid invoices to justify their

deductions, causing difficulties for BB's controller. In addition, the sales representatives,

whose remuneration includes a commission of 1.2% of sales, are unhappy with the

approval process - both the time and effort involved and the lack of control - because it

limits their ability to earn additional income.

Table 2 contains a summary of BB's direct marketing expenditures for 2011.

Table 2 - Summary of Direct Marketing Expenditures in 2011

Juices Promotional displays $ 187,485

Flyer advertising 345,888

Shelf space charges 354,789

Other programs 102,485

$ 990,647

Soft drinks Promotional displays $ 365,485

Flyer advertising 378,548

Shelf space charges 378,595

Other programs 301,222

$1,423,850

Head Office

BB's head office is located in an industrial park on the outskirts of a mid-sized city in

central Canada. All functions except production, warehousing, and remote sales and

distribution are housed here. The head office facility, including parking, occupies 39.2%

of the 2.1-hectare (5.2-acre) site. Purchased nearly eight years ago, the land has a

book value of $450,000 of which $176,400 is for the head office land and $273,600 is

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for the vacant land. Due to changes in the local area, the value of the land has

increased a great deal and the municipal taxes paid by the company on the excess land

are significant.

The company is currently holding this vacant land for capital appreciation. The company

has classified this as an investment property (under IFRS) and therefore the vacant land

is reported at fair market value at each reporting date. Any changes in the fair value are

reported in the profit for the year. The vacant land had a market value of $2 million at

December 31, 2011.

Production

The production facility is located 25 km away from the head office, just outside the city.

The plant is a converted pea-canning factory that was built over 20 years ago and

includes ample warehouse space.

BB's production equipment includes storage tanks, freezers, bottlers, pasteurizers,

palletizers, de-palletizers, conveyors, and case packers. A combination of new and

used equipment was purchased when the company was founded.

The purchase of the production facility was financed with a loan from the Resident Bank

of Canada. The loan is repayable over 15 years at $311,121 per annum and the interest

rate on the loan is 6.4%.

The company tries to minimize inventory through just-in-time production and accurate

prediction of volumes. Because the time required to produce the company's products is

rather short, inventory levels are fairly low compared with those of other manufacturers.

BB's manufacturing team uses an MRP (Manufacturing, Resources, and Planning)

system. This provides critical information for decision making with respect to production

scheduling, re-ordering of raw materials, etc.

BB uses municipal tap water in its production process. Although the water is considered

to be of very good quality, it is filtered by the company to improve its taste and purity.

The facility has passed all government inspections in the last four years.

Production employees work from 8:00 a.m. to 4:00 p.m. and can produce approximately

130 million beverage servings per year. The plant has an excellent safety record, of

which Lemieux is proud. Overtime is rare and is paid at time and a half.

The 2011 incurred costs of the facility are set out in Table 3. According to the plant

accountant, the costs for management and indirect labour are fixed, as well as twothirds

of the facility expenses. The remaining facility costs vary in proportion to

production volume.

Bella Beverages Inc.

CMA Canada 9

Table 3 - Production Costs Incurred in 2011

Management salaries and benefits $ 314,355

Supervisory salaries 547,635

Indirect labour 574,296

Depreciation of plant 47,957

Depreciation of equipment 382,483

Facility costs 814,500

Direct labour 3,081,869

Supplies 358,115

Total $6,121,210

Distribution

BB has seven distribution centres across Canada and six in the United States. Each

centre rents a small warehouse or a portion of a larger, third-party warehouse. A longdistance

trucking company is engaged to ship the beverages from the plant to the

warehouses.

Each distribution centre has operating leases for between one and five trucks in order to

make regular deliveries. The accounting system prints out a time-minimized, daily

delivery schedule as well as the orders. For smaller customers, such as convenience

stores, the driver is required to both deliver and shelve the product. In larger stores,

shelving is done by the store's employees.

Human Resources

BB's head count by department is set out in Table 4.

Table 4 - Head Count

Number of

Employees

CEO's office 3

Finance 21

Distribution 28

Sales 27

Marketing 18

Production 105

Total 202

In the region in which the production facility is located, there is a plentiful supply of

labour. All production workers below the level of supervisor are represented by the

United Food and Commercial Workers Union and, although they complain, are relatively

content with their circumstances. They are paid reasonably well, given their skill level

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and the job base of the region. Relations with the union are neither good nor bad.

However, four years ago there was a two-week strike. The current collective agreement

expires on October 1, 2013. It is expected that the union will be demanding a pension

plan in its next collective agreement.

Generally, the company's non-unionized workers are happy with their working

conditions and pay. BB offers a standard benefit plan with life, long-term disability,

accidental death, and health and dental insurance coverage. There is a growing

expectation that the company will establish a pension plan - either a defined benefit

plan or a defined contribution plan - in the near future. The director of human resources

is considering going ahead with such a plan in lieu of raises for the next two years.

Financial Information

As required for Canadian publicly traded companies, Bella Beverages converted to

international financial reporting standards (IFRS) with a transition date of January 1,

2010. Consequently, the company has reported using IFRS for 2010 and 2011. The

major changes on adoption of IFRS are related to classifying the vacant land as

investment property. The accounting for investment properties requires that the land be

reported at fair value at each reporting period, with changes in fair value reported in the

current period's profit or loss. As a result of this change, the value of the land was

increased from its book value of $273,600 to $1,750,000 on January 1, 2010, along with

a recognized deferred tax liability of $221,460. The net impact to retained earnings as at

January 1, 2010 was $1,254,940. The deferred taxes are on the taxable capital gain

portion of the increase in value and therefore the rate applied is 15% (50% of 30%). On

December 31, 2010, the land value increased by $100,000 to $1,850,000, resulting in

an increase in the related deferred tax liability of $15,000 and a net impact on profit of

$85,000.

The TSX Venture regulations stipulate that the company must report its results quarterly

to shareholders and the public. BB's quarter-ends are March 31, June 30, September

30, and December 31.

BB uses the Gold Standard accounting system for all financial reporting. The system

has order-processing, accounts receivable, accounts payable, and general ledger

capabilities.

Bella Beverages Inc. is the parent company of a U.S. subsidiary, Bella Beverages

(U.S.A.) Inc. (BBU), incorporated in the state of Delaware. The subsidiary employs 27

people in sales and distribution. All sales to U.S. customers are recorded through BBU

and its books and records are kept in Canada. Transfer prices between parent and

subsidiary are based on an Advanced Pricing Agreement approved by the Canada

Revenue Agency so that there is no risk of re-assessment. The operations, assets, and

liabilities of BBU are consolidated with those of the parent company and inter-company

sales are eliminated. In this document, all references to BB are to the consolidated

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business, except as otherwise noted. Both the subsidiary and the parent company have

the same functional currency which is the Canadian dollar.

The finance department prepares an annual, flexible budget with a detailed, one-year

outlook and a higher-level, three-year outlook. The budget is updated quarterly. Three

years ago, the budget was overly optimistic with respect to the level of sales. The

budgets for 2010 and 2011 were fairly accurate, but failed to anticipate the price change

for certain juice inputs.

The company carries all standard insurance as well as product liability and tampering

insurance. This last coverage protects a company in the event of deliberate interference

with its product, such as in the Tylenol incident of 1982.

BB's policy is to invest in only those projects that are likely to produce an after-tax rate

return of 10%.

BB uses a well-known third-party payroll service at a cost of pennies per employee per

pay.

The year-end financials, as publicly distributed, are presented in Exhibit 2.

Statements of Financial Position

Cash consists of cash in the bank, less outstanding cheques.

Accounts receivable consist of trade receivables from customers. Generally, selling

terms are net 30 days. However, the large retailers do not pay on a timely basis, and

they ignore discounts and interest penalties because of their leverage.

Inventory consists of raw materials (primarily juice concentrates, sweeteners, and empty

bottles) and finished products. There is no work in process at year-end because there is

no production on December 31.

Prepaid expenses include such items as warehouse rent and insurance.

The amount reported for net property, plant and equipment consists of the head office,

the plant building and its equipment, and computer hardware and software. These are

reported net of depreciation, which is calculated using the straight-line method over the

estimated useful lives of the assets.

Investment property represents the vacant land that is adjacent to the head office.

Accounts payable and accrued liabilities include trade payables and miscellaneous

accruals such as vacation pay liabilities.

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Deferred income taxes are primarily due to the difference between accounting

depreciation and capital cost allowance.

Statements of Comprehensive Income

Revenues represent the net amount received from the sale of product.

Salaries are reported under the appropriate department headings. Cost of sales

includes the cost of raw materials, direct labour, and factory overhead at standard cost,

which closely approximates the actual cost. Marketing and promotional costs are

expenditures (including salaries) related to sales, marketing, and product promotion.

Distribution and selling costs are the costs and salaries associated with storing product

outside of the production facility and delivering it to the customer. General and

administrative costs of the company include all other costs and salaries that are not

included in the amounts above.

Interest expense is shown as a separate item and includes bank fees, interest on line of

credit and long-term loan.

Depreciation is calculated using the straight-line method, over the estimated useful life

of the related asset.

The change in value of the land relates to the change in the fair value of the land over

the year.

Earnings per share are calculated based on the weighted average number of shares

outstanding. Diluted earnings per share consider the impact of stock options. Usually,

the two types of earnings per share differ by less than half a cent. As a result, the

reported values are the same.

The company's consolidated income tax rate is effectively 30% for the future years.

Banking

Since inception, BB's banker has been the Resident Bank of Canada and a good

relationship has been maintained with the account manager. The company has both a

Canadian dollar account and a U.S. dollar account with the bank in Canada, as well as

a U.S. dollar account with the bank's affiliate in the United States.

In the past, the Resident Bank has provided loans for equipment and a mortgage on the

head office. At the present time, according to the bank, an $850,000 loan could be

advanced against the mortgage-free head office facility alone (assuming the unused

land was sold) and up to $2.4 million against both the facility and the land.

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Currently, the company has $2.5 million of unused borrowing capacity in its operating

credit facility. This is margined by 50% of inventory and 75% of collectible receivables,

less statutory prior claims.

Shares and Stock Options

BB obtained its listing on the TSX Venture in April, 2006, through a $2.6 million initial

public offering (IPO). The company was sponsored by Term Sheet Securities Inc., a

TSX member and lead underwriter. The offering price was $1.10 per share and the

funds were used to help purchase the production facility (previously rented), pay off the

mortgage on the head office, fund marketing initiatives, and increase cash reserves.

BB is now considering whether or not to seek a listing on the Toronto Stock Exchange

(TSX).

The share price increased during the first two years but has flattened since then (see

Table 5).

Table 5 - Share Price

2011 2010 2009 2008

Year-end share price $2.80 $2.90 $2.60 $2.80

Only common shares have been issued (see Table 6). The shares held by the founders

were released from escrow and became freely tradable three years after the IPO. Since

the 2011 year-end, no new shares have been issued. Jafeer remains the largest

shareholder.

There are 80,000 stock options outstanding, all held by VPs and at various exercise

prices. The compensation expense related to these stock options is accounted for under

the international financial reporting standards for stock-based compensation. However,

the charges are minor and are captured under the annual expenses of the respective

departments.

Table 6 - Shareholder Data at December 31, 2011

Number Dollars

Average Exercise

Price/Share

Common shares issued

and outstanding 4,578,555 $3,662,844 -

Number of shareholders 252 - -

Stock options outstanding 80,000 - $1.20

On a typical day, between 30,000 and 40,000 shares of BB stock change hands. This is

a rather low trading volume and indicates little market demand. As a result, it is difficult

for shareholders to liquidate their shares and employees have become less motivated to

exercise their stock options.

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Currently, no market analysts review the company's stock. Term Sheet Securities Inc.

originally committed to do so but filed only two reports, because the stock traded very

thinly after the IPO. BB has been unable to attract a lot of attention in the markets and

issues an average of two press releases per year, apart from quarterly earnings

announcements. The company has paid a dividend only once, in 2009.

Global Soft Drink Industry1

The global soft drinks market grew at a steady rate during the period 2005-2009, as a

result of steady sales growth in the bottled water, functional drinks, and RTD tea and

coffee categories. The overall market growth is expected to decelerate in the

forthcoming five years.

The global soft drinks market generated total revenues of $440.3 billion in 2009,

representing a compound annual growth rate (CAGR) of 3.5% for the period spanning

2005-2009. In comparison, the Americas and Asia-Pacific markets grew with CAGRs of

2.8% and 4.8% respectively, over the same period, to reach respective values of $188.3

billion and $91.1 billion in 2009. Market consumption volumes increased with a CAGR

of 3.8% between 2005 and 2009, to reach a total of 398.7 billion litres in 2009.

Carbonates sales proved the most lucrative for the global soft drinks market in 2009,

generating total revenues of $187.2 billion, equivalent to 42.5% of the market's overall

value. In comparison, sales of bottled water generated revenues of $83.3 billion in 2009,

equating to 18.9% of the market's aggregate revenues and this was followed by Juices

which generated revenues of $71.4 billion, equivalent to a 16.2% of the market's

aggregate revenues.

The Americas accounted for 43.9% of the 2009 global soft drinks market value. Europe

accounted for a further 36.3% of the global market and Asia Pacific accounted for

19.8% of the global market

The performance of the market is forecast to decelerate, with an anticipated CAGR of

3.0% for the five-year period 2009-2014, which is expected to lead the market to a value

of $511.6 billion by the end of 2014. Comparatively, the Americas and Asia-Pacific

markets will grow with CAGRs of 2% and 5.2% respectively, over the same period, to

reach respective values of $207.5 billion and $117.2 billion in 2014. The market's

volume is expected to rise to 465.4 billion litres by the end of 2014, representing a

CAGR of 3.1% for the 2009-2014 periods.

Supermarkets and hypermarkets form the most significant distribution channel in the

global market. The presence of big supermarket chains increases buyer power. Players

in this market may opt for an integrated business, in which they sell ready-to-consume

drinks to retailers, or they may adopt a business model in which they sell raw materials

(concentrates) to a network of bottling companies, which may be independent

1 Datamonitor. (July 15, 2010). Soft Drinks. [Industry Profile]. Retrieved from Lexis Nexis database.

Bella Beverages Inc.

15

companies or owned to some extent by the players. New entrants must contend with

the global reach and strong brands enjoyed by the incumbents, although niche markets

such as smoothies can still be exploited. There is no great threat posed by the soft

drinks' substitutes except from traditional coffee and tea or homemade juices.

The soft drinks market will be analyzed by taking manufacturers such as The Coca-Cola

Company or PepsiCo as market players, distributors and retailers as buyers and

producers of packaging, soft drinks ingredients and other raw materials as suppliers.

The global food and drink retail market is concentrated in terms of distribution channels,

with the key distribution channel being supermarkets/hypermarket (47.9% of the market

volume). The leading players generate most of their revenue from the production of

concentrates, which are sold to bottling companies. Some bottlers are independent,

others are owned by the big-name manufacturers described usually as 'partners' and

'customers'. The bottlers are licensed to convert purchased raw materials into soft

drinks, packaged with the manufacturers' branding, and distribute the ready for sale

commodities to buyers within a particular sales territory. Although majority of bottlers

are free to make their own business decisions, the close ties between manufacturers

and bottlers means that food and beverage retailers are arguably the more significant

buyers from the point of view of market players. The consolidation degree in the food

and beverage retail markets varies considerably from country to country. The majority of

the soft drinks market in Europe is highly concentrated. However, developing

economies are characterized by fragmented food and beverage markets such as China.

Consumers in this market are likely to be strongly influenced by brand as retailers are

forced to stock brands popular among consumers. This is strengthened by the broad

differentiation of the market's products.

Primary inputs for soft drinks manufacturers include concentrates, a range of natural

and synthetic sweeteners such as corn syrup and refined sugar (sucrose), aspartame,

and similar ingredients. Some of these commodities, although available from several

sources, are subject to price fluctuations. Others (e.g. aspartame) are available from

only one or two major players. However, even in these cases, there are usually

substitutes available. For example, if aspartame becomes expensive or unobtainable

then it can be substituted by saccharine and other similar products. Water, which is the

major input, may raise the concerns of multinational players, especially in some

countries, where water scarcity is a risk factor for their business. The power of

packaging manufacturers is growing since there is a growing demand for more

consumer friendly form of packages. Advertising and marketing agencies also play

significant role in the brand building process in the soft drinks market. Years of

consolidation have left the advertising industry highly concentrated in most countries.

The consumers in the US and European countries are switching to low sugar and

sodium products, which requires certain different production methods.

Players in the global soft drinks market try to distinguish their products to some extent

by stressing their health benefits (especially for juices and functional drinks) and taste.

Although it would be difficult for a new entrant to compete with the brand strength and

reach of existing players, it may be possible to achieve small-scale success stressing a

Bella Beverages Inc.

16

unique production method or nutritional benefits. Even if a new player opts for a

business model in which much of the production process is performed by bottling

partners under license, there will still be a need to invest in manufacturing capacity in

order to produce the concentrates. This will generally be fairly capital-intensive and

restrict market entry to players. However, market niches can be exploited by new

entrants. For example, the UK company developed fruit smoothie products whose brand

stressed purity and freshness of ingredients. There is also a trend of moving away the

primary target audience such as the under 15 year olds and focus on all age groups,

giving the new entrants the opportunity to fill the niche. This, together with the expected

shift towards fruit juice, enhances the chance of market entry.

The substitutes for soft drinks primarily include traditional tea and coffee, and

homemade juices to name a few. Leading players tend to have diverse product ranges,

which reduces the threat posed by substitutes. For example, Nestle is a major player in

the coffee market as well as a range of soft drinks, such as mineral water. Switching in

the sense of allocating more shelf space to the substitutes may be advantageous in cost

terms. This may be especially beneficial in countries where electricity is relatively

expensive like in India.

The global soft drinks market is fairly fragmented, with the leading players such as The

Coca-Cola Company, PepsiCo and Nestle collectively accounting for 42.7% of the

market volume. This indicates that some smaller players may be still successful in this

market. The ease of exit depends to some extent on the business model of the

company. A company which manufactures ready-for-consumption soft drinks in a single

integrated process will need to dispose of assets such as specialized equipment in

order to exit the market. On the other hand, a company of the same size that operates

in conjunction with a network of bottling partners will tend to have fewer assets, and exit

is therefore easier. As this model is adopted by the two leading players, rivalry in the

global market is correspondingly reduced.

Board of Directors' Meeting

At the January 16, 2012 meeting of the board of directors, the year-end financial results

were approved for release. However, the Board felt that a close look at the company's

strategic and operational issues was needed. With the imminent departure of Jafeer and

a replacement not yet chosen, the Board recommended that a senior insider take a

fresh look at the current issues. Therefore, the directors asked Kerry Vance and his

team to develop a comprehensive report advising them about the strategic and

operational issues facing BB.

The Board is concerned about BB's earnings per share (EPS). Any proposal should

examine the impact on the EPS, since the Board would like to commit to growing the

EPS 10% annually.

Kerry Vance and his team have worked together with the senior management team of

BB to formulate potential growth opportunities and have outlined the key operational

Bella Beverages Inc.

17

issues facing BB. The following paragraphs summarize their notes from a series of

interviews with the senior management team.

New Developments

Athlete Promotion

BB's marketing vice-president has been looking into the possibility of an endorsement

campaign involving a high-profile athlete who is a good fit with the company's target

market. This would be a major marketing effort. Van Besmin's team sent out a request

for proposal in December 2010 and received replies from three large public

relations/advertising firms. In an extensive review process involving many meetings, the

proposal put forward by Loud Mouth Promotions Inc. (LM) was selected. The Marketing

department has presented the LM program to senior management for approval. The

cost of the program and the related financing are delaying the final decision. A summary

of the proposal is contained in Exhibit 3.

Bottled Water Venture

On January 12, 2012, Jafeer was evaluating a 0.8-hectare (2-acre) parcel of farmland

for a potential bottled water venture. This tract of land contains an excellent spring,

known as Claravay Spring, that could support a water-bottling business. The property is

located in central Canada, 212 km from the company's production facility, in an area

that is primarily farmland. The owner currently takes water from Claravay Spring and

allows local people to do so as well, without charge.

Chemical analysis revealed that the farm's spring water is exceptionally pure. The flow

at the head of the spring is fairly consistent at the rate of 280-290 litres per minute.

Twenty-five BB employees were asked to taste the water in a blind test, comparing the

spring water with local tap water and 10 major brands of bottled water. Twenty-three of

the employees rated the Claravay Spring water as "far superior" in taste.

A consulting firm was hired by BB to perform an analysis of the water-bottling venture in

conjunction with one employee from each of the Marketing, Sales, and Bottling

departments. The executive summary of their findings is presented in Exhibit 4.

Brand for Sale

In December 2011, the president of Wonder Snacks Inc. (WS) approached BB about

purchasing its soft drink line for $2.8 million, all for the equipment. On analysis of the

equipment, it was determined that the remaining life is only five years. The Wonder line

is composed of four specific brands of naturally flavoured soft drinks. The sales volume

of these brands has been steady for six or seven years.

WS is in the business of selling ice cream and other frozen snack products but

purchased the line of soft drinks from a third party 11 years ago. Recently, the company

Bella Beverages Inc.

18

examined its core competencies as part of the strategic planning process and decided

that the drinks do not fit with the company's future direction. The larger beverage

companies are not interested in purchasing the Wonder line because the brands lack fit

with their current products and the size of the business is insignificant relative to their

own operations. Non-beverage companies are not interested because they lack the

necessary distribution channels.

Exhibit 5 contains information regarding sales volume, production costs, and promotion

costs for the Wonder drinks in 2011. Santina Marella believes that the same level of

sales could be achieved using BB's existing sales and distribution network. However,

she does not favour brand diversification and believes that BB should work instead to

maximize sales of its own products. Claude Lemieux determined that manufacturing

costs in BB's plant would be comparable, but with a $250,000 set-up cost and ongoing

maintenance. John Van Besmin says that promotional costs would be about $300,000

higher than Santina's data indicates. Garphite maintains that incremental distribution

costs would be about 5%. Transaction costs for the purchase would be approximately

$25,000.

Private Label Production

In January 2012, the company was approached by a large, east coast supermarket

chain, Jeezy's Inc. The chain would like to have BB produce under private label three

brands of juice labelled as Jeezy's Fruit Zest. Jeezy will provide the recipe and BB will

produce and distribute the product.

The estimated annual volume is 4,000,000 servings and the length of the initial

agreement would be one year, which could be renewed depending on how the product

performs. The proposal is that Jeezy would pay $0.19 for each serving of the private

label product. During 2011, BB's juice sales to Jeezy's Inc. amounted to 1,301,245

servings. BB estimates that it currently spends $50,000 on promotional costs related to

Jeezy. Under the new arrangement, there would be a new manager that would work

solely with Jeezy and would cost $150,000 annually.

Possible Sale of Bottling Plant

Lemieux has recently approached the other members of the BB management team with

an offer to purchase the company's bottling facility for $5,000,000. This management

buyout (MBO) would apply only to the assets and exclude any inventory. Lawyer

transaction fees for BB if the sale went ahead, are estimated to be about $45,000.

Lemieux said that the new entity would provide BB with a long-term supply agreement.

The new entity would select its own sources for the raw materials, but would maintain

the current quality. The price for the same mix of container sizes would be based on

total 2011 production costs (including depreciation but excluding raw materials) divided

by 2011 production volume, less 25%, for the first 150,000,000 servings, and four cents

per serving thereafter. This price would apply for three years. Lemieux would guarantee

Bella Beverages Inc.

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to provide volumes of up to twice the 2011 production level, with the minimum being

90% of the 2011 level.

Lemieux has arranged tentative financing to support the purchase. This involves term

financing with a bank and some third-party private equity. Lemieux says he plans to be

much more aggressive with the union and to increase production volumes in order to

cover the fixed costs.

Other Developments

1. The board is concerned about the potential adverse market reaction to the news of

Jafeer's imminent departure. The board feels that the HR department needs to

accelerate their search for a new CEO to mitigate the risk of a share price decline.

The board also wants to see a formalized plan on CEO selection and succession

planning.

2. Amy Lu has recommended a change to BB's organizational structure. She believes

that the current functional structure is a contributing factor to the stagnant growth

that BB has experienced over the years. She believes that functional organizational

structure has caused poor coordination between functional specialties, slow

response to organizational problems, open conflict between departments and a

neglect of customer needs. She believes that BB needs an organizational structure

that will improve the coordination between the functional specialties and increase the

response time to develop new products.

3. Recently, BB commissioned an appraisal of the production facility by a licensed

commercial real estate appraiser and a commercial equipment appraiser. The land,

plant, and equipment were valued at $5.05 million, assuming an orderly sale.

4. Some executives of the company would like to sell the soft drink line of products.

5. An executive with Fries Snacks approached BB with a proposal for a co-branding

agreement. Under her proposal, consumers could buy one 330 ml bottle of

Limextreme and one 70 g package of Fries Lime Chips for 60% less than the total

of the regular prices for these products. The snack boasts an 11% market share in

the exotic chips segment. The Limextreme bottles would carry a small sticker

touting the offer and BB would pay $120,000 in advertising costs related to the

program. The length of this agreement would be three months and the estimated

sales volume is 400,000 units.

6. On November 13, 2011, a retail customer reported that a BB salesperson had failed

to keep a delivery promise, which had resulted in severe inconvenience to the

customer. On December 11, 2011, GrocCo. Inc. reported that a store manager had

been suspended for accepting a $400 payment from a BB salesperson to place BB

products on the best-positioned shelves in the beverage section of the store. As a

result of these and a number of other incidents in 2011 and early 2012, BB's

Bella Beverages Inc.

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management team has decided that something must be done about work ethics in

the company.

7. Over the last year and a half, the cost to produce Mango-Plus Pop has been

increasing with the price of the key input, mango juice from a special type of mango

grown in Mexico. Currently, the mango juice costs 2.3 cents per serving. The

sweetener is an additional 1.2 cents per serving.

8. The company is considering implementing a new pension plan for its management

and employees. The Board would like to understand the impact on the financial

statements depending on whether or not a defined benefit or a defined contribution

plan is adopted. This information is also necessary to prepare for the upcoming

union negotiations.

REQUIRED:

Assuming the role of Kerry Vance and his team, develop a comprehensive report to the

Board of Directors, complete with analysis and recommendations as to the strategic

direction the company should take to address their stagnant performance and to

improve their profitability.

Bella Beverages Inc.

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Exhibit 1

Summarized Organizational Chart

Bella Beverages Inc.

President and CEO

(becomes vacant

April 1, 2013)

VP, Marketing

J. Van Besmin

VP, Sales

S. Marella

Chief Financial Officer

K. Vance

VP, Bottling

C. Lemieux

VP, Distribution

J.N. Garphite

Director,

Marketing

Director,

Sales

Director,

Human Resources

A. Lu

Controller

S. Carpet

Management

Information Systems

R. Rone

General

Purchasing

Manager,

Production

Purchasing

Bella Beverages Inc.

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Exhibit 2

Historical Financial Information

Consolidated Statements of Financial Position

As at December 31

2011

IFRS

2010

IFRS

2010

C-GAAP

2009

C-GAAP

2008

C-GAAP

Assets

Current Assets:

Cash and equivalents $ 2,478,000 $ 901,222 $ 901,222 $ 48,444 $ 11,478

Accounts receivable 2,965,524 2,982,394 2,982,394 2,937,252 2,980,673

Inventory 1,334,486 1,328,446 1,328,446 1,326,501 1,389,356

Prepaid expenses

and deposits 174,785 159,785 159,785 167,885 164,785

6,952,795 5,371,847 5,371,847 4,480,082 4,546,292

Net property, plant

and equipment 7,164,712 7,750,909 8,024,509 8,586,870 9,145,319

Investment property 2,000,000 1,850,000 0 0 0

Total Assets $16,117,507 $14,972,756 $13,396,356 $13,066,952 $13,691,611

Liabilities and

Shareholders' Equity

Current Liabilities:

Accounts payable

and accrued liabilities $ 1,728,079 $ 1,600,616 $ 1,600,616 $ 2,139,955 $ 2,208,070

Current portion of

long-term loan 311,121 311,121 311,121 311,121 311,121

2,039,200 1,911,737 1,911,737 2,451,076 2,519,191

Deferred income taxes 515,746 446,335 209,875 154,042 110,186

Long-term loan 3,733,446 4,044,567 4,044,567 4,355,688 4,666,809

Total liabilities 6,288,392 6,402,639 6,166,179 6,960,806 7,296,186

Shareholders' Equity:

Capital stock 3,662,844 3,630,611 3,630,611 3,602,003 3,566,342

Retained earnings 6,166,271 4,939,506 3,599,566 2,504,143 2,829,083

9,829,115 8,570,117 7,230,177 6,106,146 6,395,425

Total Liabilities and

Shareholders' Equity $16,117,507 $14,972,756 $13,396,356 $13,066,952 $13,691,611

Bella Beverages Inc.

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Exhibit 2 (cont'd)

Consolidated Statements of Comprehensive Income

For the years ended December 31

2011

IFRS

2010

IFRS

2010

C-GAAP

2009

C-GAAP

2008

C-GAAP

Revenues $24,038,224 $23,978,444 $23,978,444 $23,850,488 $23,785,771

Cost of sales 12,589,873 12,588,683 12,588,683 12,497,656 12,392,387

Gross profit 11,448,351 11,389,761 11,389,761 11,352,832 11,393,384

Expenses:

Marketing and promotion 3,557,657 3,356,982 3,356,982 3,315,218 3,377,579

Distribution and selling 3,004,778 3,021,284 3,021,284 2,957,461 2,949,436

General and

administration 2,692,281 2,805,478 2,805,478 2,885,909 2,830,507

Interest expense 292,422 314,916 314,916 337,410 359,904

Depreciation 210,036 205,835 205,835 202,895 202,265

9,757,174 9,704,495 9,704,495 9,698,893 9,719,691

Operating income 1,691,177 1,685,266 1,685,266 1,653,939 1,673,693

Change in value of land 150,000 100,000 0 0 0

Profit before taxes 1,841,177 1,785,266 1,685,266 1,653,939 1,673,693

Income taxes - current 545,002 534,012 534,012 535,023 481,827

Income taxes - deferred 69,410 70,831 55,831 43,856 103,966

Total taxes 614,412 604,843 589,843 578,879 585,793

Net Profit for the Year $1,226,765 $1,180,423 $1,095,423 $1,075,060 $1,087,900

Earnings per share $0.27 $0.26 $0.24 $0.23 $0.24

Diluted earnings per share $0.27 $0.26 $0.24 $0.23 $0.24

Bella Beverages Inc.

24

Exhibit 3

Athlete Promotion

Executive Summary - Athletic Endorsement Proposal for Bella Beverages Inc.

Loud Mouth Promotions Inc. (LM) has developed this proposal based on the needs

analysis submitted by BB.

BB is looking for a major advertising campaign to give its line of juices and soft drinks a

high-profile connection to a successful, young, popular, and charismatic athlete in order

to drive sales to the next level. BB has informed us that its primary target market is

consumers aged 19-30 and management has asked for a one-year proposal.

After carefully considering the athletes with whom we have contracts, we propose Bobo

Buckets as the centrepiece of the program. Bobo has been considered one of the top

10 athletes in his sport (soccer) in each of the last three years (according to the Sports

Rag poll for 2009, 2010, and 2011). He is single, handsome, and 28 years old. He has

never had negative press for any reason and has no other major endorsement

contracts. Focus groups of individuals aged 19-30 (put together by LM) consistently

raved about Bobo's personality and energy. Bobo is equally popular with males and

females.

Our proposal includes additional spending on in-store product displays, billboard

advertising, a one-year radio campaign, changes in BB's website and product labelling.

The labelling costs would amount to about one half a cent per serving.

The costs of the program are as follows:

Fee to LM $ 300,000

Athlete's fee 2,500,000

Promotional displays 400,000

Radio spot development 45,000

Radio spot fees 440,000

Billboards 650,000

Website changes 20,000

Total costs $4,355,000

Based on our extensive experience with similar promotions and our analysis of BB's

brands and business, we estimate that growth in sales volume of 20%-30% over the

2011 revenues can be expected in the first year of this program and 10% of this 2011

increase in revenues can be achieved in the following year. The company currently has

the capacity to handle this estimated increase in sales.

Bella Beverages Inc.

25

Exhibit 4

Water Venture

Executive Summary - Analysis of Bottled Water Venture Based on Claravay

Spring Purchase

We believe this to be an excellent opportunity for the company.

We looked at seven other springs currently for sale within 400 km of BB's plant.

Considering only the flow of water in litres per minute, the cost of obtaining water from

Claravay Spring is approximately one-third lower than the corresponding cost for water

from the other springs. Proximity to the plant and the superior taste of the water are

additional factors in Claravay's favour. The water was tested in a laboratory and no

trace of biological or chemical contamination was found.

Unfortunately, the old house and farm buildings are decrepit and would have to be

removed. We have discussed the situation informally at the appropriate levels and we

believe that there would be no serious impediments to obtaining the necessary

government approvals.

The venture's upfront costs are estimated as follows:

Cost of land $1,840,000

Transaction costs 65,000

Drilling costs 48,000

Property cleanup 40,000

Collection and tanks 840,000

Legal and other 25,000

Total costs $2,858,000

The collection and tanks equipment will qualify for capital cost allowance at the rate of

20%. The other costs are part of the land costs. It is expected that the equipment will

last for 10 years.

To ensure that the same plant machinery could be employed for bottling juice, soft

drinks, and water, the current bottle sizes (330 ml to 1 litre) would be used. Bottle

colouring and labelling would be altered so that the product appears different from the

juice and soft drink lines but is clearly recognizable as part of the BB brand.

Production and distribution costs, including the cost of an independent trucker delivering

the water to the plant, are estimated as follows:

Bella Beverages Inc. Practice Board Report

26

Cost per

Bottled Water

Bottle $0.014

Bottling 0.033

Other packaging 0.010

Shipping and distribution 0.005

Total cost $0.062

The bottled water could be sold through BB's existing channels to the same markets in

Canada and the United States. The target market would be health-conscious individuals

aged 20-60.

Our sales forecast is 50 million servings in the first year, at an average of CDN $0.16

per serving. About half the sales would be to the U.S. market. (We assume that the

Canadian dollar will remain around par with the US dollar for the forecast period.) It is

expected that number of servings sold each year will increase annually as follows over

the forecast period:

Year 2 Year 3 Year 4 Year 5 Years 6 to 10

8% 6% 5% 5% 3%

The maximum number of servings that can be produced in a year by the plant is 70

million. A pessimistic estimate would be to only sell 40 million servings in year 1, with

similar growth assumptions as above. (At this reduced level of production, costs would

be the same as produci