Case- CAFES MONTE BIANCO: Building

a Profit Plan

Submitted By- Group 12

Ashy Zacharia (pgfb1906)
Akhil Gangwar (pgfb1908)
Ayushi Tomar (pgfb1916)
Mayank Dhingra (pgfb1930)
Somya Dixit (pgfb1953)

CASE ANALYSIS
Café Monte Bianco (CMB) has the hard decision of determining their next
strategy. They are faced with a decision to either continue with their current
mix of private and premium coffees or switch to a lower cost all private brand
coffee. Giacomo is concerned about the perception of the company if they were
to switch to all private brands, however, if it is in the best interest of the
company to do so he is willing to explore that route. Since they are growing
rapidly, they need to determine which strategy is best. There are benefits and
drawbacks to both scenarios. Taking on the private brands only would create a
demand that can be consistent, full capacity can be utilized, inventory can be
maintained, and there are significant cost reductions. However, the cash flow is
damaging due to a delay of payment from retailers, and the margins on the
products are much lower than the premium brand.
Based on taking on private brands only, CMB’s financials would look as
follows:
Profit Wheel:
The projected income statement for the year 2001, based on exhibit 5 & exhibit 1 (for
Private Brand only) (all numbers are in thousand Italian liras)
Current Plan (Premium + New Strategy (Only
Particulars of CMB Difference
Private) Private Brands)
Revenues 5,61,12,408 5,28,00,000 -33,12,408
COGS 3,32,33,867 4,29,18,000 96,84,133
Gross margin 2,28,78,541 98,82,000 -1,29,96,541
-
Marketing expenses 41,55,980 - -41,55,980
R&D expenses 33,28,130 8,32,033 -24,96,097
Selling expenses 35,74,710 12,51,149 -23,23,561
Administrative expenses 47,52,000 23,76,000 -23,76,000
interest expenses 38,25,000 38,25,000 -
Total 1,96,35,820 82,84,182 -1,13,51,638
-
Profit 32,42,721 15,97,818 -16,44,903
Taxes (40%) 12,97,088.40 6,39,127.20 -6,57,961
NET PROFIT/LOSS 19,45,633 9,58,691 -9,86,942

The above projected income statement for the private brand shows the collective net profit of
958,691,000 Italian liras. The existing profit according to their current production strategy is
1,945,633,000 Italian liras.
Difference b/w the profits: - 986,942,000 Italian liras (negative sign shows the loss in the
new strategy)
Therefore, by implementing the strategy of production of only Private Brands Coffee Beans
Café Monte Bianco will occur losses of 958,691,000 Italian liras. The cost of the production is
also high in new strategy of Café Monte Bianco. Thus, the recommended action here should
be, Café Monte Bianco should continue with their production of both type of Coffee Beans,
the Private brands and Premium brands.

Cash Wheel:
Cafes Monte Bianco: Estimated Statement of Cash Flows
(For the year Ended Dec 31,2001)
all calculations are in Thousands of Italian Liras;
Cash flows from Operating
Activities
Operating Income (EBIT) 1,24,40,161
Depreciation Expense 2593700
Increase in A/R -10273133
Decrease in A/P -487331
 Decreased in Finished Goods 1148400
Decrease in Inventory (Raw
Material) 2907963
Net Cash Flow from Operating
Activities 83,29,760
Cash flows from Financing
Activities 0
Cash flows from investing activities 0
Net Cash Flow 83,29,760

Company Cash flow will be lower as the account receivables will be late because of the
private brand retailers ’90-days payment policy’. Whereas it was mentioned in the cash it will
hurt company’s credit line and they will be exhausting their credit line in the end of the year.
If company will be relying on more of a credit than cash, that will be hard earnings for the
company. It will be good if they do not switch their strategy and stick to their existing
strategy because this will give them better cash flows because of the 30 days payment policy
of premium brands retailers. It will also save the credit line of the company and company will
be getting more cash.

ROE Wheel:
Mixed (Premium + Private) Strategy:
ROE (Return on Equity) = a measure of profitability of the business in relation to the equity.
ROE= Net Income/Shareholder’s Equity
ROE= (1,945,632,000/9,465,869,000) *100
ROE= 0.20*100
ROE= 20%
New Strategy (Only Private):
ROE= (958,691,000/9,465,869,000) *100
ROE= 10.12%
Profitability Ratio = Net Income/Sales
Asset Turnover Ration = Sales/ Assets
Financial Leverage Ratio = Assets/ Shareholders Equity
New Strategy
Current Plan (Premium
Particulars of CMB (Only Private
+ Private)
Brands)
Profitability Ratio 3.47 3.05
Asset Turnover Ratio 1.26 0.91
Financial Leverage
Ratio 4.87 2.52
 ROE 0.2 0.1

As the above calculation shows, our ROE will get less if they change their strategy to
production for private brands only. The best advice here will be they should stick to their
current strategy and should produce both premium and private coffee brands.
With the new potential strategy, our Return on Equity decreases as well as our profitability
ratio, asset turnover ratio and financial leverage ratio. In making the calculations, I assumed
the expansion was already on the books as an asset, as well as, the debt taken out for the
expansion since nothing was mentioned regarding how the expansion was paid for or what
the current long-term debt was for. An increase in the asset turnover ratio was expected due
to the increase in capacity and the ability to hold coffee in inventory for private label. While
the financial leverage ratio did go down, I believe that is in a large part of not knowing what
A/P will be at the end of the year. Looking at the ROE, it appears last year’s strategy would
be more attractive to investors in comparison to the new proposed strategy.

Conclusion:
1. In conclusion, we would recommend Cafes Mount Bianco continue with their
current strategy of mix production of premium and private label coffee. Cafes
Mount Bianca could pick up three more private label retailers to make up the
shortfall in demand for their premium brand offerings.
2. With increased Capacity of production, they can also go for the option of
producing more of the private brands to cover their fixed costs, but they should
also sell premium brands because of the higher contribution margin of the
premium brands in profit. Contribution Margin is lowest for the Private Brand
Coffee Beans.

D C B BB A AA AAA
Sales per unit 8800 19500 26600 30000 35500 39000 42600
Variable Cost Per Unit 6600 12485 14275 16288 17791 19166 20441
contribution margin 2200 7015 12325 13712 17709 19834 22159