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EXPANSION VS PROFITABILITY

MONTE BIANCO

Deal Proposed by
WENJUAN YANG
VAIBHAV BAHL

CASE BACK GROUND


Caf Monte Bianco is a manufacturer & distributor of premium coffees in
Europe
Market downturn of 1998 forced the business leaders to manufacture
private labels for 2 supermarket chains in Italy.
The above decision though contrary to brand philosophy of manufacturing
premium coffees, contributed to the excellent financial performance for the
year 2000
The brand is considering expansion plans for manufacturing more private
labels to save variable costs and fill up the capacities during lean periods
The management is taking decisions based on profits without considering
the cash flow. The CEO asks the management to re evaluate all decisions
from the cash flow perspective.

KEY DIFFERENTIATORS
PRIVATE LABEL

PREMIUM COFFEE

Payment terms :90


days

Payment terms : 30 days

Can be stored as an
inventory for a long
time
No spend on
Marketing and
reduced R&D,
Admin expenses

To maintain freshness,
the through put is
quicker than private
label coffee
Requires huge
marketing and R&D
expenditure

TESTING FUTURE VIABILITY THROUGH


3 PLANS
Analysis of cash flow for the year 2000
PLAN A - To manufacture only private labels
PLAN B To maximize the sales mix to 80%
private and 20 percent premium coffee

INCOME STATEMENT
THE 2 PLANS
Income Statement for the year
ending Dec 31, 2001
(thousands of Italian liras)

Revenues
Private Brand
Premium brand

2000
56,112,408
9,934,848
46,177,560

Plan A
52,800,000
52,800,000
0

Plan B
88,194,400
42,486,400
45,708,000

Costs of goods sold*


Gross margin

33,233,867
22,878,541

44,764,800
8,035,200

61,021,552
27,172,848

Marketing expense
R&D expense
Selling expense
Administrative expense
Interest expense
Total expense

4,155,980
3,328,130
3,574,710
4,752,000
3,825,000
19,635,820

0
832,033
1,251,149
2,376,000
3,825,000
8,284,182

6,441,380
3,330,000
3,600,000
4,760,000
3,825,000
21,956,380

Profits
Taxes(40%)
Net profit

3,242,721
1,297,089
1,945,632

-248,982
0
-248,982

5,216,468
2,086,587
3,129,881

0.21

-0.03

0.34

* includes 2,593,700 depreciation


ROE

CASH FLOW
CASH FLOW
JAN
YEAR
2000

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

NET
INCOME

4006030 3682250 2936279 5021402 5015193 7010349 7494630 8083966 6316089 3177981 3350963 3458697 3872733

PLAN A

3692192

PLAN B

2154137

623989 -2454120 -2642294 -2064867

624559

317586

327412 -1299561 -3348935 -5873508 -6550082 -18647627

-583568 -4491573 -2176358 -1454097 2978251 4746406 7055944 5100976

-159004 -2197169 -3132932 5216468

CONCLUSIONS
PLAN A To go all private will make the company bankrupt as the
long credit terms will leave the company with no cash in hand
also since the margin in private label is very low, the company
bears loses
PLAN B If they maximize the production capacity with a 80%
private and 20% premium split, the cash flow is negative for half
the year but the company makes a profit with a positive ROE

RECOMMENDATIONS
We suggest the company should go towards a private label heavy
production mix.
This will feed the capacities in the lean period
The company can maintain a uniform annual supply as there are no
storage issues
The premium coffee from the production mix will add to the bottom
line

To maintain a healthy cash flow we suggest the company proposes


an option of bill discounting to the supermarket chains/private label
operators : where if Monte Bianco opens a long term vendor account
with these suppliers, it is liable for a quicker payment (30 days) with a
2% discount.
We propose the company push its suppliers towards accepting longer
payment terms on the account of offering a contract for being a long
term supplier.

Reference for Calculations


Please find the excel sheets in the attachment

THANK YOU