The company located in Milan, Italy.
It was found by Mario Salvetti as a manufacturer and distributor of premium finest coffees. The company faces a hard decision that may affect their future. The company wants to know whether or not they should keep working in the same investing. An important meeting was there among the top management team’s members to discuss the future of the company. The company’s performance was good in 2000. Profit was shown at the financial statement. Giacomo Salvetti the CEO of the company needs to decide which to choose as the business strategy for the company: 1) Keep working in the premium coffee market.
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2) Transfer to the private brands market.
The current capacity of the coffee production in 2000 was 350,000 K/M , with added additional capacity of 150,000K/M. The cost of the additional units was 6 billion liras. More facts about the profitability and the liquidity were required beside the cash flow and the profit plan to quantify strategic alternatives and to help in making this decision. The idea of changing was not easy to the CEO to accept without a clear image of the financial consequences. The report was provided by the marketing manager showed that the premium market is very volatile.
On the other hand, the private brands market is more stable. (Full capacity at the price of 8,800 liras). Price is lower in the private market than the premium. The volume is depending of the number of retailers. ( Every additional retailer need at least 500,000 K/Y). The report was provided by the manufacturing director showed that costs are different in each amount of the volume and quality of beans. These costs include the cost of beans, labor and fixed cost. The company is able to save 65% of selling costs, 75% of R&D costs and 50% of administrative costs, if they choose the private brands market.(Director of strategic planning). Private brands’ retailers will pay slowly- 90 days instead of 30 days. (Financial officer).
I took the sales price as the current price 8,800 liras. Most of the expenses are decline compare to what they were in 2000 beside also the profit. Marketing expenses were no longer there because the marketing percentage became 0% in this volume of the private market. The reason of having this decline is the gross margin of the private market comparing to the margin of the premium market. Sales price and cost in private market are less than what they are in the premium market. Cash flows are not stable during the year. It looks vary from quarter to another. In the cash flows, the retailers will pay in 90days (3months) period of time as what it is in the private market. The cash opining was 50% in the first month and 25% in next 2 months. The other expenses were divided by the 12 months equally.
Variable and selling costs are showing in page(5).
I don’t recommend the full transition to private market. The profit will be lower than what it is even if it is less volatile. There is no reason for the company to lose its premium market if the profit is low, too. I would support the chance of mixing the premium and the private markets together, because of the profitability there.