Page 1 of 8 PAM006 Strategic Financial Project Shropshire Teas Case Study The project Shropshire Teas is a mid-sized private company based in the UK. Their primary business is blending, packaging, marketing and selling tea to the UK retail market. Shropshire Teas is unsure of where it is heading strategically in the near future and has contracted you as a consultant to provide guidance through a five year business plan report. The company's management team welcomes your identification of and insight into potential (and viable!) strategic options. The management team is open to considering a range of strategies that may strengthen their core activities, and/or diversify their product range, and/or enter overseas markets, or and/or perhaps consolidate the company's activities. In order to complete this project you will need to analyse the competitive environment, research market trends, examine the company's financial position, explore alternative strategies, assess risk, and then build your business plan, and present your plan in a report. Note: Shropshire Teas is a fictitious company created for the purpose of this assignment. The market Tea is by far the most popular hot drink in the UK, with over 160m cups being drunk every day, more than twice the consumption of coffee. Teabags account for 96% of the cups drunk.Page 2 of 8 In recent years there has been a slow, steady decline in black tea sales as younger consumers have turned to the more fashionable coffee, and the health conscious have switched to green teas and herbal teas. The market remains very large despite this decline, and is estimated to be worth over £600m a year in retail sales, of which over £400m is sales of the standard product. The popularity of alternative teas – green teas, fruit and herbal teas – has grown rapidly as sales of the standard black tea have declined. All the major producers, including market leaders Tetley and their main rivals PG Tips, now sell ranges of these alternative infusions. The market for green teas is now estimated to be growing at over 10% a year and the market for fruit and herbal infusions by 8% a year. The coffee retail market has been innovative in recent years with a focus on the coffee shop environment and building a youthful trendy image. This more up-market image has in turn supported premium pricing. Despite the rise of the alternative tea market, tea has been much less successful than coffee in establishing a distinctive modern image. The company Background Shropshire Teas – "The Taste of Shropshire" – is a long established private company. It started life in 1963, when the founder started blending teas for his customers in her grocery store in Shrewsbury. The tea proved so popular that she set up Shropshire Teas to market and sell her blend of light fresh black tea more widely. Product range The company produces four main product lines from its factory on an industrial estate at Telford, a large town in Shropshire, close to the motorway network and with fast rail access to the UK's second city, Birmingham. The main product categories are:  Own label tea bags for major UK supermarket chains  Own label / bulk pack tea bags for smaller retail chains and caterers  Shropshire Gold Blend Tea – their own branded premium black tea product  Specialty teas – green teas and decaffeinated teas  Fruit infusions While the company is best known for Shropshire Gold Blend, 60% of their sales revenues currently come from sales of tea bags to the major supermarket chains who sell them under their own brand label. The most recent breakdown of sales is detailed below.Page 3 of 8 The company's supermarket sales are on three year contracts, won by competitive tender. Margins are low, but they provide a reliable cash flow without associated ongoing promotion and merchandising costs. One contract is due for renewal by competitive tender in 2 years' time. The other was only recently signed and has three years to run. The contracts include a 20% discount on Shropshire Teas' standard pricing. The company can earn better margins on its own branded products and would like to grow these so as to become less reliant on the renewal of the large supermarket contracts. It sees particular growth opportunities in the specialist and fruit tea sectors, where the market is growing strongly, but volumes are smaller than the sales of Shropshire Gold Blend tea bags. The most recent breakdown of sales is detailed below. The company prides itself on its environmentally friendly reputation. All teas are sourced from Fair Trade suppliers and the tea bags are at least 80% biodegradable. Production Tea is blended, bagged and packaged at the factory. The company has a single production site, which contains both the factory and the company sales and administration offices. The company owns the site and values the property at cost in the balance sheet. Shropshire Teas has production plant and equipment sufficient to produce a notional 6.5 million Kg of standard own brand tea bags per year. Actual production depends on the product mix. The table below shows the relative production capacities of the various product ranges.Page 4 of 8 By diverting production capacity from low margin standard tea bags to the Shropshire branded products, the company can improve gross margins, but has to balance this against the reduction in total production. Actual capacity rarely reaches the notional maximum and depends on workforce productivity. The company believes that more operator training and higher hourly pay rates could improve productivity, but with low margins are reluctant to increase the cost base. Tea production equipment has a five year life, and is depreciated at 20% per year. The company policy is to replace one fifth of their equipment each year. They also added 500,000 Kg of new capacity in 2014. Inventory management The company decides on the production capacity mix at the start of the year. Raw tea and packaging supplies are ordered regularly throughout the year, with company policy of maintaining raw material stock levels at least 10% of annual consumption. Stocks of finished goods are currently running at historically low levels. The rapid increase in market demand for green teas, decaffeinated teas, and fruit and herb infusions and the capacity constraints in the factory have led to the business selling all that it can produce in 2015/16. Treasury management Shropshire Teas has outstanding long term debt of £7.84 million. The company has a good relationship with its bank and so long as the business remains profitable is under no pressure to reduce the debt. Should the business wish to raise further funds for expansion then it may be able to raise further long term loans at attractive interest rates, and also has the option to raise more equity capital. In both cases, the executives will first need to prepare a convincing business plan to justify the new investment. The business has cash to meet its short term working capital needs, and a Current Ratio (current assets / current liabilities) in excess of 4 as at the last balance sheet date.Page 5 of 8 The Planning Spreadsheet You will be provided with a business planning spreadsheet for Shropshire Teas. Note that this is intended to help you to build a 5 year financial plan for your business and to explore alternatives. Unlike Icarus, this is not a simulation. You have access to all the calculations on the spreadsheet including the underlying parameters and the market forecast models. You can amend any of the calculations, relationships and reports in the spreadsheet to best meet your own business planning needs. But be conscious of the consequences of any changes you make on the outputs within the associated tabs. Dashboard Tab The dashboard provides a summary of the business plan key figures. Decisions Tab On the Decisions Sheet, you can input prices for each of the product lines. These prices will be used on the "Curves" sheet to forecast the impact of price changes on demand for your products. You can also input decisions on the annual allocation of production resources. Currently the company uses its plant so as to produce 75% of its output (in Kg) as unbranded standard tea bags, primarily for the supermarket own label market. The planning spreadsheet also forecasts the impact of your marketing on demand (see "Curves" sheet). Use the Decisions sheet to input the % of previous year revenues that you want to invest in merchandising, promotions, sponsorship and other marketing activities. Note that this marketing spend is focused on the Shropshire Teas brands. You do not actively market or promote the own label products.Page 6 of 8 You can also use the Decisions sheet to increase the production capacity, and to change the production staff pay and training levels. Again, the "Curves" sheet will then estimate the effect of these decisions on factory productivity. Curves Tab The Curves sheet contains the models of the demand curves for the products as well as the effects of marketing spend and production decisions. The shapes and range of the curves are based on past trends and independent market research. However, the past an only be a rough guide to the future, and so you are able to amend these curves to reflect your own research into the market and the anticipated impact of your business plans. The example below shows the curve for the price sensitivity of the supermarkets. You can change the shape of the curve by amending the three parameters in the white box, which set the gradient and range for the curves. Try different values and observe the effects. Note also that these curves will be less reliable for major changes in decisions. For example, if you were to double your prices to supermarkets you will probably sell nothing at all, whereas the mathematical curve may still show some residual sales. So, always apply your own judgement and common sense when interpreting the results. Reports Tabs The spreadsheet model contains a number of reports for the past three years and projected for the five years of the business plan. Including:  Financial statements – P&L, Balance Sheet and Cash Flow Statement  Sales analysis by product line  Demand by product showing the impact of pricing and marketing decisions on demand  Production statistics and inventory levels by product line  Economy and Market Trends Parameters Tab The Parameters sheet contains the base data on which your business plans are built, including the production capacity of the factory plant, base costs, and past and forecast market trends. You willPage 7 of 8 probably not wish to change these parameters, but you can do so for future years, so long as you can justify your changes in your business plan. Calcs Tab The Calcs sheet contains the main spreadsheet calculations, applying the information in the parameters and decisions sheets to create the business planning outcomes that are then reported on the Reports sheets. Use the Calcs sheet to drill down into the numbers and get a better understanding of how they are derived. The years 2013 to 2016 are of course past history and should not be changed, but you can amend and add to the calculations of the future numbers if you believe that is necessary to reflect your business strategy in full. Your Individual Final Project Case Study Task - Requirements: To complete this assignment you are required to produce a 4,000 - 4,500 word business plan report suitable for consideration by the management team of Shropshire Teas in the context of the strategic challenges facing the company. In producing this report you should: a) Identify, explore and evaluate alternative strategies for developing the Shropshire Teas business. b) In undertaking a) above research the relevant 'real world' industry, market and business environment for this case study Shropshire Teas is situated in. You should use a combination of relevant real world primary and/or secondary research to provide the basis upon which your strategic choices are made. c) Arising out of a) and b) above set out a compelling five year business plan report designed to enhance shareholder value. You may use your own definition of shareholder value but must explain and justify it. The plan may identify a range of strategies for consideration but should ultimately put forward your recommendation with evidenced justification. d) Identify specific KPIs to assist in measuring to what degree shareholder value is being enhanced. e) Review your proposed plan, and identify and assess the key risks within it. You will be supplied with a financial planning spreadsheet for Shropshire Teas once you have committed to taking on the case via the MPAcc VLE selection tool: https://accountancy.elearning.london.ac.uk/course/view.php?id=34§ion=1 The deadline for selecting your case study will be Sunday 13th November 2016 at 8pm (2000hours) GMT. Once your selection has been made, it will be locked in and cannot be changed. If you do not select a case study you will be randomly allocated any one of the case studies. After the selection deadline, an administration process will take place before the financial planning models are released to students. This should happen the same day and you should be able toPage 8 of 8 download the relevant planning spreadsheet according to your selection, on the Sunday night (UK time) via the MPAcc VLE in the Final Project section. Final Project Submission deadline: Monday 12th December 2016 by 1pm (1300 hours) GMT