Cafes Monte Bianco
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Executive Summary
Cafes Monte Bianco is a family-owned Italian manufacturer and distributor of premium coffee, which was founded in the in the early 19th century at Milan. Cafes Monte Bianco is famous for producing the finest coffee in Europe and has a good reputation of its taste and high quality. To maintain its good competitive advantage, Giacomo, CEO of Cafes Monte Bianco, spent two months each year on visiting coffee plantations to maintain good relationships with them. Besides, Cafes Monte Bianco emphasizes product development by keeping testing new flavors in its own laboratory. In 2000. Cafes Monte Bianco had an excellent financial performance, and manufacturing coffee of private brands had contributed a lot to the success. The prominent advantages of private brands are its stable market and inventory flexibility, whats more, private brands can fill up the idle capacity in the recession.
Therefore, the top management team hold two different opinions: a full transition to private brands and maintaining the status quo. Therefore, Giacomo had to decide how to allocate manufacturing capacity based on the analysis of pro forma financial statement of 2001.
Giacomo expanded the company aggressively by adding additional capacity. Based on our comprehensive analysis, if carrying out private-brand strategy, the capacity of 6,000,000 would all committed to the production of private brands. The new net income under the new strategy is expected to € 957,791,000, and cash flow is forecasted to (€ 1,063,686,000), which indicates that the profit of only producing private brands is much lower than that of manufacturing mix brands coffee. Because of 90- day credit policy for private brands retailers, it took long time to receive cash from customers. Thus, cash is not sufficient for daily operation. ROE ratio is decreased from 0.21 to 0.09, which implies Giacomo would earn less from his investment when Cafes Monte Bianco was moved to the private-brand strategy.
Consequently, we recommend Cafes Monte Bianco maintains its current strategy of mixing premium and private brands coffee and select two or three private brands distributors to supplement the shortfall demands in the premium brand offerings. There are several reasons to support our conclusion. Firstly, compared with its current strategy, profitability, cash flows and ROE are less under the strategy of manufacturing of private brands; Secondly, the premium coffee is the essence of Cafes Monte Bianco. Last but not the least, although private brands’ market is stable, retailers require consistent on-time service. Otherwise, they will shift to other competitors.