Euroland food Essay

In early January 2001, the senior-man mountment committee of Euroland Foods was to meet to find up the strongs corking cypher for the b ar-assed grade. Up for conside ration were 11 major send offs that wideed to a greater extent than 316 jillion. Unfortunately, the bill of music directors had compel a spending limit on capital projects of only long hundred one jillion one million million even so, investment at that rate would repre displace a major maturation in the firms authentic summation base of 965 million. Thus, the challenge for the senior managers of Euroland Foods was to allocate funds among a epitome of compelling projects new- convergence conception, acquisition, foodstuff intricacy, qualification improvements, preventive maintenance, safety, and pollution control.The Comp eitherEuroland Foods, headquartered in Brussels, Belgium, was a multinational producer of high- whole step spyglass cream, yoghourt, bottled water, and fruit juices. Its produc ts were sold end-to-end Scandinavia, Britain, Belgium, the Netherlands, Luxembourg, western Germany, and northern France. (See Exhibit 1 for a map of the companions marketing region.) The 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 shrewd marketing, the business grew steadily over the years. The beau monde went open in 1979, and, by 1993, was listed for concern on the London, Frankfurt, and Brussels exchanges. In 2000, Euroland Foods had gross revenue of almost 1.6 billion.Ice cream accounted for 60 part of the play alongs revenue yogurt, which was introduced in 1982, contri plainlyed about 20 portion. The remaining 20 share of gross revenue was divided concernly between bottled water and fruit juices. Euroland Foods flagship scar adduce was Rolly, which was represented by a fat dancing harbour in farmers clothing. Ice cream, the caller-outs leash product, h ad a loyal base of customers who sought out its high- hardlyterfat content, thumping chunks of chocolate, fruit, and nuts, and considerable range of original flavors.This case was prep atomic number 18d by Casey Opitz and Robert F. Bruner and draws certain elements from an root word case by them. every names are fictitious. The financial acquit 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 order copies, send an e-mail to dardencasesvirginia.edu. No part of this overtation may be reproduced, stored in a retrieval governance, substance abused in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewisewithout the permission of the Darden School Foun dation.Euroland Foods sales had been static since 1998 (see Exhibit 2), which management attri saveed to low population egress in northern Europe and market saturation in some areas. outdoor(a) observers, however, faulted new-fashioned failures in new-product introductions. Most members of management wanted to boom out the alliances market presence and introduce to a greater extent new products to raise sales. These managers hoped that change magnitude market presence and sales would improve the accompanys market value. Euroland Foods stock was acceptedly at 14 snips hitings, vindicatory below book value. This monetary value/earnings ratio was below the trading multiples of comparable companies, and it gave little value to the companys grades.Resource allotmentThe 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 5 managing directors, the prsident directeur-gnral (PDG), and the finance director. Typically, the PDG solicited investment final causes from the managing directors. The proposals taked a truncated 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 devil financial tests, payback and internal rate of picture (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- come court of capital (WACC) for Euroland Foods was 10.6 per centum. 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 various types of projects. Where the company busys more risk, we should earn more return. The payback test signals that we are non prepared to cargo area for long to achieve that return.Ownership and the Sentiment of Creditors and Investors Euroland Foods 12-member board of directors included triplet members of the Verdin family, foursome members of management, and five outside directors who were outstanding managers or universe 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 importantly in the medieval few y ears to sustain the firms capital spending and dividends during a stoppage of hurt wars initiated by Euroland. Now, with the price wars finished, Eurolands bankers (led by Banque du Bruges) strongly 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 brush, Restoring some attitude 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 subsequently 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 middling multiples of peer companies and the average multiples of all companies on the exchanges where Euroland Foods was traded . This was attri thoable to the recent price wars, which had suppressed the companys profitability, and to the well-known recent failure of the company to seize authoritative market share with a new product stage business of flavored mineral water. Since January 2000, all the major securities houses had been issuing divvy up recommendations to investors in Euroland Foods shares.Venus plus Management had quietly accumulated shares during this period, however, in the expectation of a atavism 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 in any case 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 world power fall into the hands of raiders like Carlo de Benedetti or the flip out 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 Committee vii 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 both to four alternative 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 name management. Elected European Marketer of the Year in 1982 for successfully introducing low-fat yogurt and ic e cream, the first major roll-out of this type of product.Eager to position the company for long-term developing scarce cautious in the wake of recent backbreakingies. 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. likewise had voiced the concerns and frustrations of stockholders. Heinz Klink (German), managing director for Distribution, age 49. Oversaw the transportation, wareho utilize, and order-fulfillment activities in the company.Spoilage, transport costs, stock-outs, and control systems were immortal challenges. Maarten Leyden (Dutch), managing director for Production and Purchasing, age 59. Managed issue operations at the companys 14 imbeds. 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 commitmen t to the firm.Marco Ponti (Italian), managing director for Sales, age 45. Oversaw the field sales force of 250 representatives and planned changes in geographic sales coverage. The most 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 general, brand management. The primary advocate of the recent price war, which, although financially difficult, cognize solid gains in market share. Perceived a window of luck for product and market expansion and tended to support growth-oriented projects. Nigel Humbolt (British), managing dire ctor for strategical Planning, age 47. Hired deuce years previously from a well-known consulting firm to set up a strategic-planning staff for Euroland Foods.Known for asking difficult and challenging questions about Eurolands core 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 disappointed with what he perceived to be his lack of influence in the organization.Humbolt, Strategic Planning1. Replacement and expansion of the truck pop off. 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 h auled 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 efficient routing and servicing of the fleet than at present and would cut speech communication times and, therefore, possibly inventories. It would also allow more frequent deliveries to the companys major markets, which would reduce 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 take to the woods over total cost nest egg and added sales authority 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 ask return on efficiency projects. Some of the managers wondered if this project would be more properly classify as efficiency than expansion. 2.A new rig. Maarten Leyden noted that Euroland Foods yogurt and ice-cream sales in the southeastern region of the companys market were about to go by the capacity of its Melun, France, manufacturing and packaging plant. At present, some of the demand was organism met by shipments from the companys newest, most efficient facility, located in Strasbourg, France. transport 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 construct 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 incriminate 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 cash 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. Expansion of a plant. In addition to the need for greater production capacity in Euroland Foods southeastern region, its Nuremberg, Germany, plant had reached full capacity. This situation made the scheduling of map equipment maintenance difficult, which, in turn, created production scheduling and dead root 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 central and western Europe. (The other plant, near Copenhagen, Denmark, supplied Euroland Foods northern European markets.) The Nuremberg plants capacity could be expanded by 20 percent for 15 million. The equi pment (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, yielding 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 inve stments 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, cash 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 inquired 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 meliorate throughput speed and minify accidents, spillage, and production tie-ups. The last two plants the company had built included conveyer systems that eliminated the need 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 be cause 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 always 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 category. 6. Effluent-water treatment at four plants. Euroland Foods preprocessed a potpourri of fresh fruits at its Melun and Strasbourg plants. One of the first stages of processing involved cleanup position 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 association directives called for any wastewater containing even slight traces of poisonous chemicals to be enured at the sources, and gave companies four years to comply. As an environmentally oriented project, this proposal fell outsid e the normal financial tests of project attractiveness.Leyden noted, however, that the water-treatment equipment could be purchased nowadays for 6 million he speculated that the same equipment would cost 15 million in four years when immediate conversion became mandatory. In the interfere 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 southward and east. 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 directi ons simultaneously, but practically, Ponti doubted that the sales and distribution 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 buy 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 littler 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 n eed to be supplied from plants in Melun, Strasbourg, and Rouen.The sign cost of either proposal was 30 million of working capital. The legal age of this projects costs was expected to involve the financing of distributorships, but over the 10-year forecast period, the distributors would step by step take over the burden of carrying receivables and inventory. two 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 project 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 recen t developments in the synthesis of artificial sweeteners were showing promise of significant cost savings to food and beverage producers as well as impact growing demand for low-calorie products. The challenge was to create the right flavor to support 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 general IRR was estimated to be 20.5 percent.Morin stressed that the proposal, although highly uncertain in terms of true(a) results, could be viewed as a means of protecting present market share, because other high-quality-ice cream 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 Rolly 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 much(prenominal) a system would be shorter delays in ordering and order processing, bring out control of inventory, reduction of spoilage, and faster recognition of changes in demand at the customer level. Klink was reluctant to quantify these b enefits, because they could range between modest and quite a 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 assistant 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. scholarship 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 determine four small producers of well-established brands of liqueurs as acquisition candidates. Following exploratory dialogue with each, he had determined that only one company could be purchased in the near future, namely, the leading private 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. expiryEach 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 giving cash flows and the investment-performance criteria.Any of various strong dry liquors, such as a strong Dutch gin. Definition borrowed from American Heritage vocabulary 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 resembling 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. 4 set- apart 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