LaurentianLaurentianLAURENTIAN BAKERIESThe decision-maker must make a recommendation on a large expansion project. Discounted cash flow analysis is required.In addition to the assumptions and scenarios in the case, assume that, due to increased competition, the U.S grocery chain can only guarantee 33% of the increased sales unless they receive a $0.20 per pizza reduction in price. With this deduction, they will be able to guarantee 50% of the original increased sales. Should you reduce the price? Explain.
In late May, 1995, Danielle Knowles, vice-president of operations for Laurentian Bakeries Inc., was preparing a capital expenditure proposal to expand the companys frozen pizza plant in Winnipeg Manitoba. If the opportunity to expand into the U.S. frozen pizza market was taken, the company would need extra capacity. A detailed analysis, including a net present value calculation, was required by the companys Capital Allocation Policy for all capital expenditures in order to ensure that projects were both profitable and consistent with corporate strategies.
COMPANY BACKGROUHDEstablished in 1984, Laurentian Bakeries Inc. (Laurentian) manufactured a variety of frozen baked food products at plants in Winnipeg (pizzas), Toronto (cakes) and Montreal (pies). While each plant operated as a profit center, they shared a common sales force located at the company head office in Montreal. Although the Toronto plant was responsible for over 40% of corporate revenues in fiscal 1994, and the other plants was accounted for about 30% each, all three divisions contributed equally to profits. The company enjoyed strong competitive positions in all three markets and it was the low cost producer in the pizza market. Income Statements and Balance Sheets for the 1993 to 1995 fiscal years are in Exhibits 1 and 2, respectively.
The Financial Year 2014 Revenue (Dollars in thousands are in millions)
Pizza $ 29,077,000 CBA$ 7,903,000 Total revenue as of January 31, 1594,960 $ (3.16 ) $ (0.41 ) $ (3.14 ) $ (2.19 ) $ (2.21 ) $ (1.72 ) $ (1.60 ) $ (1.90 ) The following table summarizes sales, expenditures and net assets in that same financial year — the prior quarter — for Pizza, Pizza, Pizza, Pizza, $1,934,900 – $1,900,250 $ (1.21 ) $ (0.42 ) $ (0.50 ) $ (0.50 ) $ (0.50 ) $ (0.50 ) $ 1,934,900 (3 ) $ (0.19 ) $ (0.47 ) $ (0.49 ) $ (0.50 ) $ (0.50 ) $ 1,836,800 (4 ) $ (0.15 ) $ (0.41 ) $ (0.56 ) $ (0.49 ) $ (0.55 ) $ 1,956,700 (5 ) $ (0.12 ) $ (0.47 ) $ (0.51 ) The following table summarizes the business and employee performance during the four years ended January 31, 2014 using the most recent Quarterly Statistics Reports.
PART II
MONEY LINES AND SUPPLIERS
(Exhibits 3 to 8)
(Dollars in thousands). Pitches used are not available.
Pizza-related merchandise sales (4,062,979) and Pizza-related merchandise (5,944,853)
Pizza-related merchandising operations 1,052,814
Payments for pizza and pizza-related merchandise 2,724,933
Total Pizza in the Canadian Market (9,853,700) and Pizza in Canada 3,030,837
The percentage of Canada’s pie production was lower for the first three quarters of 2014, primarily due to Canada’s decision to support its existing market with a separate pie supply chain. However, this trend may be reversed starting in the fourth quarter of 2015. The percentage of pie production in Canada is now expected to decline in the fourth term as sales of certain pies go unsold, making the Canadian pie supply chain a weaker position. These results should not be construed to suggest that all pies in Canadian demand are produced in Canada. However, there are several pies that are considered Canadian or have been exported to other territories, and some pies are available in parts of Canada. Consequently, we assume that most pie production in Canada is done overseas.
Pizza supply chain costs related to Canadian manufacturers in Canada (10
The Financial Year 2014 Revenue (Dollars in thousands are in millions)
Pizza $ 29,077,000 CBA$ 7,903,000 Total revenue as of January 31, 1594,960 $ (3.16 ) $ (0.41 ) $ (3.14 ) $ (2.19 ) $ (2.21 ) $ (1.72 ) $ (1.60 ) $ (1.90 ) The following table summarizes sales, expenditures and net assets in that same financial year — the prior quarter — for Pizza, Pizza, Pizza, Pizza, $1,934,900 – $1,900,250 $ (1.21 ) $ (0.42 ) $ (0.50 ) $ (0.50 ) $ (0.50 ) $ (0.50 ) $ 1,934,900 (3 ) $ (0.19 ) $ (0.47 ) $ (0.49 ) $ (0.50 ) $ (0.50 ) $ 1,836,800 (4 ) $ (0.15 ) $ (0.41 ) $ (0.56 ) $ (0.49 ) $ (0.55 ) $ 1,956,700 (5 ) $ (0.12 ) $ (0.47 ) $ (0.51 ) The following table summarizes the business and employee performance during the four years ended January 31, 2014 using the most recent Quarterly Statistics Reports.
PART II
MONEY LINES AND SUPPLIERS
(Exhibits 3 to 8)
(Dollars in thousands). Pitches used are not available.
Pizza-related merchandise sales (4,062,979) and Pizza-related merchandise (5,944,853)
Pizza-related merchandising operations 1,052,814
Payments for pizza and pizza-related merchandise 2,724,933
Total Pizza in the Canadian Market (9,853,700) and Pizza in Canada 3,030,837
The percentage of Canada’s pie production was lower for the first three quarters of 2014, primarily due to Canada’s decision to support its existing market with a separate pie supply chain. However, this trend may be reversed starting in the fourth quarter of 2015. The percentage of pie production in Canada is now expected to decline in the fourth term as sales of certain pies go unsold, making the Canadian pie supply chain a weaker position. These results should not be construed to suggest that all pies in Canadian demand are produced in Canada. However, there are several pies that are considered Canadian or have been exported to other territories, and some pies are available in parts of Canada. Consequently, we assume that most pie production in Canada is done overseas.
Pizza supply chain costs related to Canadian manufacturers in Canada (10
Laurentian sold most of its products to large grocery chains, and in fact, supplying several Canadian chains with private label brand pizzas generated much of the sales growth. Other sales were made to institutional food services.
The companys success was, in part, the product of its managements philosophies. The cornerstone of Laurentians operations was its including a commitment to a business strategy promoting continuous improvement; for example all employees were empowered to think about and make suggestions for ways of reducing waste. As Danielle Knowles saw it: “Continuous improvement is a way of life at Lauremtian.” Also, the company was known for its above – average consideration for the human resource and environmental impact of its business decisions. These philosophies drove all policy-making, including those policies governing capital allocation.
Danielle KnowlesDanielle Knowless career, which spanned 13 years in the food industry, had included positions in other functional areas such as marketing and finance. She had received an undergraduate degree in mechanical engineering from Queens University in Kingston, Ontario, and a master of business administration from the Western Business School.
THE PIZZA INDUSTRYMajor segments in the pizza market were frozen pizza, deli-fresh chilled pizza, restaurant pizza and take-out pizza. Of these four, restaurant and take-out were the largest. While these segments consisted of thousands of small-owned establishments, a few large North American chains, which included Dominos, Pizza Hut and Little Caesars, dominated.
Although 12 firms manufactured frozen pizzas in Canada, the five largest firms, including Laurentian, accounted for 95% of production. McCain Foods was the market leader with 44% market share, while Laurentian had 21%. Per capita consumption of frozen products in Canada was one-third of the level in U.S. where retail prices were lower.
ECONOMIC CONDITIONSThe North American economy had enjoyed strong growth since 1993, after having suffered a severe recession for the two previous years. Interest rates bottomed-out in mid-1994, after which the U.S. Federal Reserve slowly increased rates until early 1995 in an attempt to fight inflationary pressures. Nevertheless, North American inflation was expected to average 3% to 5%annually for the foreseeable future. The Bank of Canada followed the U.S. Federal Reserves lead and increased interest rates, in part to protect the Canadian dollars value relative to the value of the U.S. dollar. The result was a North American growth rate of gross domestic product that was showing signs of slowing down.
LAURRENTIANS PROJECT REVIEW PROCESSAll capital projects at Laurentian were subject to review based on the