Euroland food Essay Example for Free

Euroland nutrient EssayIn early January 2001, the senior- counsel committee of Euroland Foods was to meet to draw up the strongs chapiter budget for the unexampled year. Up for consideration were 11 major put ups that totaled more(prenominal) than 316 jillion. Unfortunately, the circuit card of directors had chatterd a spending limit on working capital go steadys of only 120 zillion even so, investiture at that rate would represent a major increase in the firms authentic asset base of 965 million. Thus, the ch entirelyenge for the senior managers of Euroland Foods was to allocate funds among a range of compelling finds current-product introduction, acquisition, market expansion, efficiency melioratements, preventive maintenance, safety, and taint control. The Comp bothEuroland Foods, headquartered in capital of Belgium, Belgium, was a multinational producer of high-quality ice picking, yogurt, bottled water, and fruit juices. Its products were sold throughout S candinavia, Britain, Belgium, the Netherlands, Luxembourg, western Germany, and northern France. (See Exhibit 1 for a social function of the partnerships merchandising region.) The keep conjunction was founded in 1924 by Theo verdin, a Belgian farmer, as an offshoot of his dairy business. Through keen attention to product development and designing marketing, the business grew steadily over the days. The participation went public in 1979, and, by 1993, was listed for trading on the London, Frankfurt, and Brussels exchanges. In 2000, Euroland Foods had gross revenue of almost 1.6 billion.Ice balm accounted for 60 percent of the confederations revenue yogurt, which was introduced in 1982, contri scarceed about 20 percent. The remaining 20 percent of sales was divided equally amid bottled water and fruit juices. Euroland Foods flagship defacement name was Rolly, which was represented by a fat dancing bear in farmers clothing. Ice cream, the companys rangeing product, had a l oyal base of customers who sought out its high- howeverterfat content, large chunks of chocolate, fruit, and nuts, and wide range of original flavors.This case was prepared by Casey Opitz and Robert F. Bruner and draws authoritative elements from an antecedent case by them. All names are fictitious. The financial support of the Batten Institute is gratefully acknowledged. The case was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.Copyright 2001 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To battle array copies, send an e-mail to emailprotected No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or inherited in any form or by any meanselectronic, mechanical, photocopying, recording, or other(a)wisewithout the permission of the Darden School Foundation.Euroland Foods sales had been static since 1 998 (see Exhibit 2), which direction attri yeted to low population growth in northern Europe and market saturation in some areas. Outside observers, however, faulted youthful failures in new-product introductions. Most members of management wanted to expand the companys market presence and introduce more new products to boost sales. These managers hoped that increased market presence and sales would improve the companys market value. Euroland Foods stock was currently at 14 times earnings, just infra book value. This price/earnings ratio was below the trading multiples of comparable companies, and it gave little value to the companys brands.Resource AllocationThe capital budget at Euroland Foods was prepared annually by a committee of senior managers, who then presented it for approval to the board of directors. The committee consisted of five managing directors, the prsident directeur-gnral (PDG), and the finance director. Typically, the PDG solicited investment proposals from t he managing directors. The proposals included a brief project description, a financial analysis, and a discussionof strategic or other qualitative considerations.As a matter of policy, investment proposals at Euroland Foods were subject to both financial tests, payback and internal rate of retrograde (IRR). The tests, or hurdles, had been established in 1999 by the management committee and varied according to the type of project MinimumIn January 2001, the estimated weighted-average personify of capital (WACC) for Euroland Foods was 10.6 percent. In describing the capital-budgeting process, the finance director, Trudi Lauf, said, We use the sliding scale of IRR tests as a way of recognizing differences in risk among the dissimilar types of projects. Where the company takes more risk, we should earn more return. The payback test guides that we are not prepared to wait for long to achieve that return.Ownership and the Sentiment of Creditors and Investors Euroland Foods 12-member board of directors included three members of the Verdin family, four members of management, and five outdoors directors who were prominent managers or public figures in northern Europe. Members of the Verdin family combined owned 20 percent of Euroland Foods shares outstanding, and company executives combined owned 10 percent of the shares.Venus Asset Management, a mutual-fund management company in London, held 12 percent. Banque du Bruges et des Pays Bas held 9 percent and had one representative on the board of directors. The remaining 49 percent of the firms shares were widely held. The firms shares traded in Brussels and Frankfurt.At a debt-to-equity ratio of 125 percent, Euroland Foods was leveraged much more highly than its peers in the European consumer-foods industry. Management had relied on debt financing significantly in the away few geezerhood to sustain the firms capital spending and dividends during a occlusion of price wars initiated by Euroland. Now, with the pri ce wars finished, Eurolands bankers (led by Banque du Bruges) powerfully urged an aggressive program of debt reduction. In any event, they were not prepared to finance increases in leverage beyond the current level.The president of Banque du Bruges had remarked at a recent board meeting, Restoring some strength to the right-hand side of the balance sheet should now be a first priority. Any expansion of assets should be financed from the property flow after debt amortization until the debt ratio returns to a more prudent level. If there are crucial investments that cannot be funded this way, then we should cut the dividendAt a price-to-earnings ratio of 14 times, shares of Euroland Foods common stock were priced below the average multiples of peer companies and the average multiples of all companies on the exchanges where Euroland Foods was traded. This was attributable to the recent price wars, which had suppressed the companys profitability, and to the well-known recent failure of the company to seize significant market share with a new product line of flavored mineral water. Since January 2000, all the major securities houses had been issuing sell recommendations to investors in Euroland Foods shares.Venus Asset Management had quietly accumulated shares during this period, however, in the expectation of a turnaround in the firms performance. At the most recent board meeting, the senior managing director of Venus gave a presentation in which he said, Cutting the dividend is unthinkable, as it would signal a lack of faith in your own future. Selling new shares of stock at this depressed price level is also unthinkable, as it would impose unacceptable dilution on your current shareholders. Your equity investors expect an improvement in performance.If that improvement is not forthcoming, or worse, if investors hopes are dashed, your shares might fall into the hands of raiders wish Carlo de Benedetti or the Flick brothers.1 At the conclusion of the most recent meeting of the directors, the board voted unanimously to limit capital spending in 2001 to 120 million.Members of the Senior-Management charge Seven senior managers of Euroland Foods would prepare the capital budget. For consideration, each project had to be sponsored by one of the managers present. Usually the decision process included a period of discussion followed by a vote on two to four alternate(a) capital budgets.The various executives were well known to each other Wilhelmina Verdin (Belgian), PDG, age 57. Granddaughter of the founder and spokesperson on the board of directors for the Verdin familys interests. Worked for the company her entire career, with significant experience in brand management. Elected European Marketer of the Year in 1982 for advantagefully introducing low-fat yogurt and ice cream, the first major roll-out of this type of product.Eager to position the company for long-term growth but cautious in the wake of recent difficulties. Trudi Lauf (Swiss), finance director, age 51. Hired from Nestl in 1995 to modernize financial controls and systems. Had been a vocal proponent of reducing leverage on the balance sheet. Also had voiced the concerns and frustrations of stockholders. Heinz K radio link (German), managing director for Distribution, age 49. Oversaw the transportation, warehousing, and order-fulfillment activities in the company.Spoilage, transport costs, stock-outs, and control systems were perennial challenges. Maarten Leyden (Dutch), managing director for Production and Purchasing, age 59. Managed production operations at the companys 14 corrects. Engineer by training. Tough negotiator, especially with unions and suppliers. A fanatic about production-cost control. Had voiced doubts about the sincerity of creditors and investors commission to the firm.Marco Ponti (Italian), managing director for Sales, age 45. Oversaw the field sales force of 250 representatives and planned changes in geographical sales coverage. The mo st vocal proponent of rapid expansion on the senior-management committee. Saw several opportunities for ways to improve geographical positioning. Hired from Unilever in 1993 to revitalize the sales organization, which he successfully accomplished.De Benedetti of Milan and the Flick brothers of Munich were leaders of prominent hostile-takeover attempts in recent years.Fabienne Morin (French), managing director for Marketing, age 41. Responsible for marketing research, new-product development, advertising, and, in superior general, brand management. The primary advocate of the recent price war, which, although financially difficult, realized solid gains in market share. Perceived a window of opportunity for product and market expansion and tended to support growth-oriented projects. Nigel Humbolt (British), managing director for Strategic Planning, age 47. Hired two years previously from a well-known consulting firm to set up a strategic-planning staff for Euroland Foods.Known for as king difficult and challenging questions about Eurolands warmness business, its maturity, and profitability. Supported initiatives aimed at growth and market share. Had presented the most aggressive proposals in 2000, none of which were accepted. Becoming frustrated with what he perceived to be his lack of curve in the organization.Humbolt, Strategic Planning1. Replacement and expansion of the truck fleet. Heinz Klink proposed to purchase 100 new refrigerated tractor-trailer trucks, 50 each in 2001 and 2002. By doing so, the company could sell 60 old, fully depreciated trucks over the two years for a total of 4.05 million. The purchase would expand the fleet by 40 trucks within two years. Each of the new trailers would be larger than the old trailers and afford a 15 percent increase in cubic meters of goods hauled on each trip. The new tractors would also be more fuel and maintenance efficient.The increase in number of trucks would permit more flexible scheduling and more efficien t routing and military service of the fleet than at present and would cut delivery times and, therefore, possibly inventories. It would also allow more frequent deliveries to the companys major markets, which would undertake the loss of sales caused by stock-outs. Finally, expanding the fleet would support geographical expansion over the long term.As shown in Exhibit 3, the total net investment in trucks of 30 million and the increase in working capital to support added maintenance, fuel, payroll, and inventories of 3 million was expected to yield total cost savings and added sales potential of 11.6 million over the next seven years. The resulting IRR was estimated to be 7.8 percent, marginally below the minimum 8 percent inevitable return on efficiency projects. Some of the managers wondered if this project would be more properly classified as efficiency than expansion. 2.A new coiffe. Maarten Leyden noted that Euroland Foods yogurt and ice-cream sales in the southeastern regio n of the companys market were about to exceed the capacity of its Melun, France, manufacturing and packaging plant. At present, some of the demand was being met by shipments from the companys newest, most efficient rapidness, located in Strasbourg, France. Shipping costs over that distance were high, however, and some sales were undoubtedly being lost when the marketing effort could not be supported by delivery. Leyden proposed that a new manufacturing and packaging plant be built in Dijon, France, just at the current southern edge of Euroland Foods marketing region, to take the burden off the Melun and Strasbourg plants. The cost of this plant would be 37.5 million and would entail 7.5 million for working capital.The 21 million worth of equipment would be amortized over 7 years, and the plant over 10 years. Through an increase in sales and depreciation, and the decrease in delivery costs, the plant was expected to yield after-tax property flows totaling 35.6 million and an IRR of 11.3 percent over the next 10 years. This project would be classified as a market extension. 3. elaboration of a plant. In addition to the wish for greater production capacity in Euroland Foods southeastern region, its Nuremberg, Germany, plant had reached full capacity. This situation made the scheduling of mo equipment maintenance difficult, which, in turn, created production scheduling and deadline problems.This plant was one of two highly automated facilities that produced Euroland Foods entire line of bottled water, mineral water, and fruit juices. The Nuremberg plant supplied primeval and western Europe. (The other plant, near Copenhagen, Denmark, supplied Euroland Foods northern European markets.) The Nuremberg plants capacity could be spread out by 20 percent for 15 million. The equipment (10.5 million) would be depreciated over 7 years, and the plant over 10 years. The increased capacity was expected to result in additional production of up to 2.25 million a year, yiel ding an IRR of 11.2 percent.This project would be classified as a market extension. 4. Development and roll-out of snack foods. Fabienne Morin suggested that the company use the excess capacity at its Antwerp spice- and nut-processing facility to produce a line of dried fruits to be test-marketed in Belgium, Britain, and the Netherlands. She noted the strength of the Rolly brand in those countries and the success of other food and beverage companies that had expanded into snack-food production. She argued that Euroland Foods reputation for wholesome, quality products would be enhanced by a line of dried fruits and that name association with the new product would probably even lead to increased sales of the companys other products among health-conscious consumers.Equipment and working-capital investments were expected to total 22.5 million and 4.5 million, respectively, for this project. The equipment would be depreciated over seven years. Assuming the test market was successful, cas h flows from the project would be able to support further plant expansions in other strategic locations. The IRR was expected to be 13.4 percent, slightly above the required return of 12 percent for new-product projects. 5. Plant automation and conveyer systems. Maarten Leyden also requested 21 million to increase automation of the production lines at six of the companys older plants. The result would be improved throughput speed and reduced accidents, spillage, and production tie-ups. The last two plants the company had built included conveyer systems that eliminated the unavoidableness for any heavy lifting by employees.The systems reduced the chance of injury by employees at the six older plants, the company had sustained an average of 223 missed-worker-days per year per plant in the last two years because of muscle injuries sustained in heavy lifting. At an average hourly total compensation rate of 14.00 an hour, more than 150,000 a year were thus lost, and the possibility alwa ys existed of more-serious injuries and lawsuits.Overall, cost savings and depreciation totaling 4.13 million a year for the project were expected to yield an IRR of 8.7 percent. This project would be classed in the efficiency crime syndicate. 6. Effluent-water treatment at four plants. Euroland Foods preprocessed a variety of fresh fruits at its Melun and Strasbourg plants. One of the first stages of processing bear upond make clean the fruit to remove dirt and pesticides.The dirty water was simply sent down the drain and into the Seine or Rhine Rivers. Recent European Community directives called for any wastewater containing even slight traces of poisonous chemicals to be treated at the sources, and gave companies four years to comply. As an environmentally oriented project, this proposal fell outside the normal financial tests of project attractiveness.Leyden noted, however, that the water-treatment equipment could be purchased today for 6 million he speculated that the same eq uipment would cost 15 million in four years when immediate conversion became mandatory. In the intervening time, the company would run the risks that European Community regulators would shorten the compliance time or that the companys pollution record would become public and impair the image of the company in the eyes of the consumer. This project would be classed in the environmental category.7 and 8. Market expansions due south and eastward. Marco Ponti recommended that the company expand its market southward to include southern France,Switzerland, Italy, and Spain, and/or eastward to include eastern Germany, Poland, Czechoslovakia, and Austria. He believed the time was right to expand sales of ice cream, and perhaps yogurt, geographically. In theory, the company could sustain expansions in both directions simultaneously, but practically, Ponti doubted that the sales and dissemination organizations could sustain both expansions at once.Each alternative geographical expansion had its benefits and risks. If the company expanded eastward, it could reach a large population with a great appetite for frozen dairy products, but it would also face more competition from local and regional ice-cream manufacturers. Moreover, consumers in eastern Germany, Poland, and Czechoslovakia did not have the purchasing power that consumers did to the south.The eastward expansion would have to be supplied from plants in Nuremberg, Strasbourg, and Hamburg. Looking southward, the tables were turned more purchasing power and less competition but also a baseer consumer appetite for ice cream and yogurt. A southward expansion would require building consumer demand for premium-quality yogurt and ice cream. If neither of the plant proposals (i.e., proposals 2 and 3) was accepted, then the southward expansion would need to be supplied from plants in Melun, Strasbourg, and Rouen.The initial cost of either proposal was 30 million of working capital. The bulk of this projects costs was exp ected to involve the financing of distributorships, but over the 10-year forecast period, the distributors would gradually take over the burden of carrying receivables and inventory. Both expansion proposals assumed the rental of suitable warehouse and distribution facilities. The after-tax cash flows were expected to total 56.3 million for southward expansion and 48.8 million for eastward expansion.Marco Ponti pointed out that southward expansion meant a higher possible IRR but that moving eastward was a less risky proposition. The projected IRRs were 21.4 percent and 18.8 percent for southern and eastern expansion, respectively. These projects would be classed in the market-extension category.9. Development and introduction of new artificially sweetened yogurt and ice cream. Fabienne Morin noted that recent developments in the synthesis of artificial sweeteners were showing promise of significant cost savings to food and beverage producers as well as stimulating growing demand for low-calorie products. The challenge was to create the right flavor to complement or enhance the other ingredients.For ice-cream manufacturers, the difficulty lay in creating a balance that would result in the same flavor as was obtained when using natural sweeteners artificial sweeteners might, of course, create a superior taste. In addition, 27 million would be needed to commercialize a yogurt line that had received promising results in laboratory tests. This cost included acquiring specialized production facilities, working capital, and the cost of the initial product introduction. The overall IRR was estimated to be 20.5 percent.Morin stressed that the proposal, although highly uncertain in call of actual results, could be viewed as a means of protecting present market share, because other high-quality-icecream producers carrying out the same research might introduce these products if the Rolly brand did not carry an artificially sweetened line and its competitors did, the Roll y brand might suffer. Morin also noted the parallels between innovating with artificial sweeteners and the companys past success in introducing low-fat products. This project would be classed in the new-product category of investments.10. Networked, computer-based inventory-control system for warehouses and field representatives. Heinz Klink had pressed unsuccessfully for three years for a state-of-the-art computer-based inventory-control system that would link field sales representatives, distributors, drivers, warehouses, and possibly even retailers. The benefits of such a system would be shorter delays in ordering and order processing, better control of inventory, reduction of spoilage, and high-speed recognition of changes in demand at the customer level. Klink was reluctant to quantify these benefits, because they could range between modest and quite large amounts.This year, for the first time, he presented a cash-flow forecast, however, that reflected an initial outlay of 18 million for the system, followed by 4.5 million in the next year for ancillary equipment. The inflows reflected depreciation tax shields, tax credits, cost reductions in warehousing, and reduced inventory. He forecast these benefits to last for only three years. Even so, the projects IRR was estimated to be 16.2 percent. This project would be classed in the efficiency category of proposals.11. Acquisition of a leading schnapps2 brand and associated facilities. Nigel Humbolt had advocated making diversifying acquisitions in an effort to move beyond the companys mature core business but doing so in a way that exploited the companys skills in brand management. He had explored six possible related industries in the general field of consumer packaged goods, and determined that cordials and liqueurs offered unusual opportunities for real growth and, at the same time, market protection through branding.He had identified four small producers of well-established brands of liqueurs as acquisi tion candidates. Following exploratory talks with each, he had determined that only one company could be purchased in the near future, namely, the leading one-on-one European manufacturer of schnapps, located in Munich. The proposal was expensive 25 million to buy the company and 30 million to renovate the companys facilities completely while simultaneously expanding distribution to new geographical markets. The expected returns were high after-tax cash flows were projected to be 198.5 million, yielding an IRR of 27.5 percent. This project would be classed in the newproduct category of proposals.ConclusionEach member of the management committee was expected to come to the meeting prepared to present and defend a proposal for the allocation of EurolandFoods caital budget of 120 million. Exhibit 3 summarizes the various projects in terms of their free cash flows and the investment-performance criteria.Any of various strong dry liquors, such as a strong Dutch gin. Definition borrowed from American Heritage Dictionary of the English Language, 4th ed.UVA-F-1356Exhibit 1EUROLAND FOODS S.A.Nations Where Euroland CompetedNote The shaded area in this map reveals the principal distribution region of Eurolands products. Important facilities are indicated by the following figures 1The effluent treatment program is not included in this exhibit. The equivalent annuity of a project is that level annual payment that yields a net present value equal to the NPV at the minimum required rate of return for that project. Annuity corrects for differences in duration among various projects. In ranking projects on the basis of equivalent annuity, bigger annuities create more investor wealth than smaller annuities.This reflects 16.5 million spent both initially and at the end of year 1. 4Free cash flow = incremental profit or cost savings after taxes + depreciation investment in fixed assets and working capital.Franchisees would gradually take over the burden of carrying receivables and inventory. 625 million would be spent in the first year, 30 million in the second, and 5 million in the third. 2View as multi-pages