Assignement is due in 12 hours ar 11 pm US ET on 11/18/2018 company case study analysis The Pantry inc, General Environment, VRIO, Five Forces, Balance Sheet and Income Statement Discussion, Ratios, and Dupont Analysis
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ThePantryPresentation-11.pptxMelissa Reid, Rola Kanawaty, Nate Ogden,
Alessandra Scorcioni & Baylee Caudill
The Pantry
Polygonal business template with infographic elements [Online image]. (2017). Retrieved August 15, 2018 from http://www.freepik.com
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1
Agenda
Today’s presentation is on the Case Study of The Pantry, a company in the convenience store industry. Our group will review the company, identify the problems from the case study, provide a industry analysis of the general environment and five forces and look at the financial analysis for the company. We will then discuss the potential alternatives to the current business strategy and discuss which of these alternatives we are recommending for implementation. At the end we will open the floor for questions.
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Company Overview
Problem Identification
Strategic Analysis
Alternatives
Recommend/ Implement
Conclusion
Questions
Company Overview
379 Stores
Mr. Peter Sodini
Growth by Acquisition Strategy
Two Year Recession
Mr. Terrance Marks Marketing and Branding Strategy
The Pantry is a convenience store business that started out with just 379 stores (Powell, Martin, Roland, & Lawlor, 2012). In 1996, Mr. Peter Sodini implemented a growth by acquisition strategy, increasing the number of stores to 1,670 by 2010 (Powell et al., 2012). Now a major competitor in the industry such as 7-Eleven, Alimentation Couche-Tard and Casey’s General Stores, The Pantry had to deal with a two year long recession which revealed a potential flaw in the financing of the acquisition strategy. Mr. Sodini retired and Mr. Terrance Marks took over as CEO (Powell et al., 2012). Marks came with a background at Coca-Cola Enterprises and brought several of his former executives with him (Powell et al., 2012). Under his leadership, a new business plan relied heavily on a marketing and rebranding strategy in hopes a brand loyalty would prove more recession stable.
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Problem Identification
Leadership change after 13 years under one CEO
From 1996 to 2009, Mr. Sodini
From late 2009 to present, Mr. Marks
New business strategy
Growth by Acquisition
Marketing and Branding
$165M Four Quarter losses FY10
Anticipate $12M loss 1QFY11
Costly Marketing and Branding Strategy
Problem Identification
Management oversight, including …
Heavy regulation of …
Aggressive...
Hostility...
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Industry Analysis – General Environment
Tobacco &
Fuel Consumers
Tobacco &
Fuel Consumers
Recession &
Interchange Fees
Tobacco &
Fuel Taxes
Point of Sale (POS)
& Fuel Pricing Software
The General Environment of an industry are factors of forces and conditions outside of the company’s control. However, a successful company will be able to identify changes in the environment and react accordingly.
Demographic: The Pantry’s demographic environment is based primarily on both tobacco and fuel consumers. Fuel products account for 75% of the company’s gross revenue, but only 30% of its gross margin (Powell et al., 2012). Of the remaining 25% gross margin, The Pantry’s tobacco sales make up 40% (Powell et al., 2012). A reduction in either group of the consumers would provide a severe impact to The Pantry’s Gross Margin.
Sociocultural: The Social Cultural environment is also based on tobacco and fuel consumers. With more than 95% of The Pantry’s locations providing fuel products with on-site storage, environmental impact of the company is a major concern (Powell et al., 2012). Below grade storage containers have potential for ground contamination if the containers are not properly maintained and inspected. But society doesn’t just focus on the environment but also the health of individuals. A social move to quit smoking through state funded cessation programs affects consumers across all age groups that could impact sales.
Economic: In the economic environment, successful companies should have a stable business strategy to withstand large down swings in the economy. For The Pantry, as with most convenience stores in the industry, hinge profits on a high volume, low profit margin product, gasoline. Increases in petroleum prices result in a lower profit margin. This profit margin is reduced further when consumers pay for fuel with credit cards. For every credit card transaction, the store has to pay an interchange fee to credit and debit card companies (Powell et al., 2012).
Political: The political and legal environmental factors include taxes and for The Pantry, this would be fuel and tobacco taxes. As funding needs increase for roadway improvements or increases healthcare costs, most governments respond with taxes on fuel and tobacco. Increased fuel consumption means roadways are more congested leading to more maintenance and repair. Governments see fuel is an attractive source for taxation. The states are also concerned with healthcare costs increasing, especially those ailments related to tobacco use. Again governments target the source and tax tobacco.
Technological: Companies have started to rely heavily on computers and software systems to analyze a company and provide insight for potential revenue sources or losses. The Pantry has already invested in fuel pricing software and researched Point of Sale software that would help identify high sales or profit margin merchandise trends.
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Strategic Analysis – Porter’s Five Forces
Moderate to high
High
High
High
High
Industry Competitors
“The convenience store industry is marked by high level of fragmentation and saturation, making competition for consumer dollars intense” (Powell, Martin, Roland, Lawlor, 2012). The rivalry of The Pantry, INC is considered strong as Pantry is competing along with three of the largest convenience stores in the United States; 7-eleven, Alimentation Couche-Tard and Casey’s General Stores. Each company has a different strategy that creates a competitive advantage over rivals. In 2011, 7-eleven had the fourth place for best franchise in North America (Entrepreneur, 2011), Alimentation Couche-Tard is the second largest independent convenience store in North America and finally in 2010, Casey’s achieved a net profit margin twice the average of the whole industry. Competing with a convenience store is not limited and doesn’t exclude those from other industries to enter the market, as previously discussed that the industry is highly fragmentated. For example, club and mass-merchandise store begun to provide fuel services, which intensify the competition with convenience stores’ limited products.
The Threat of New Entrants
The threat of new entrants is strong due to the ease of entrance to the convenience store industry. Business is very appealing even for small to medium operators, selling basic and essential products in store, overhead is not high, and low number of employees with a minimum salary is required to run this operation. Moreover, loyalty is irrelevant to most convenience stores unless they offer a reward program. New entrepreneurs fell comfortable to enter and exit the market (Convenience Stores in the US, 2010, p.27).
The Threat of Substitute Products
The threat of substitutes products in the Pantry is high. The availability of the majority of the products and services provided by Pantry in other grocery stores, clubs and mass-merchandise stores, elevate the threat of substitute. For example, Walmart and Sam’s club are operating their own gas station with lower prices per gallon in front of their warehouse, which attracts customers to consume their product.
The Bargaining Power of Buyers
Due to the huge market, consumers have the absolute decision of choosing where to go for grocery and motor fuel. Specially, on the highway when a vehicle is running out of gas customer will stop by the first and the nearest convenience store that provides gasoline services. The bargaining power of buyer in Pantry is high.
The Bargaining Power of Suppliers
The Pantry bargaining power of suppliers is moderate. Pantry has its own brand that brings about 60% of its in-store merchandise and the rest 40% is received via third party distributors such as Coca-Cola, Budweiser & Frito-Lay.
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Industry Competitors
Threat of New Entrants
Power of Buyers
Threat of Substitutes
Power of Suppliers
Strategic Analysis – VRIO
| Competency | Valuable? | Rare? | Difficult to imitate? | Without substitutes? | Organized to Exploit? | Implications for Competitiveness? |
| Multi-State Network | YES | YES | YES | YES | YES | Sustained Competitive Advantage |
| Private-Label Merchandise | YES | YES | YES | NO | NO | Temporary Competitive Advantage |
| Marketing Mix | YES | NO | NO | NO | NO | Competitive Parity |
| Sale-Leaseback Model | NO | NO | NO | NO | NO | Competitive Disadvantage |
Multi-State Network
The Pantry’s multi-state network of convenient stores is the companies greatest and only sustained competitive advantage. The assets are valuable, tangible, heterogeneous, immobile, rare, and the company is organized to exploit. The multi-state network of over 1600 convenient stores is what the company needs to capitalize on in order to survive their over leveraging via the sale-leaseback model to ensure a successful and healthy future for the company (Lawlor et al. 2012.).
Product Mix and Delivery
Pairing well with the multi-state network, The Pantry has a great mix of in-store products, fuel price calculating software, strategic/diverse locations, and upwards of 240 company owned and operated quick service restaurants under well-known brands. This Product mix and product delivery via the diverse and strategic locations makes this resource a temporary competitive advantage. The reason for the resource being a temporary competitive advantage compared to a sustained one is the lack of organization at the time. The company was still not in a position to organize the employees quickly and exploit the resource effectively. (Lawlor et al. 2012.).
Private-Label Merchandise
As stated before, a majority of The Pantry’s merchandise, 60%, comes from one grocery wholesaler and the remainder from big-name third-party vendors. Because of this, The Pantry has begun developing private-labeled merchandise to offset its reliance on their wholesaler. While certainly an improvement, The Pantry has not created the brand necessary for this resource to be rare or difficult to imitate. There is a multitude of substitutes and the company is not organized to exploit. This resource is a competitive parity. (Lawlor et al. 2012.).
Sale-Leaseback Model
Much of The Pantry’s success was due to the quick acquisition of convenient stores on a large scale. Total store count increased from 379 to roughly 1670 stores in 14 years via 90 acquisitions. This growth was feasible because of the “sale-leaseback financing model, which involves packaging one or more assets, selling them to a finance company, and then securing fixed, long term leases to remain in the facilities” company (Lawlor et al. 2012.). While effective, this method has some obvious flaws, the biggest being the large amount of debt a company accumulates using this method. Long term debt commitments totaled more than 1.2 billion by 2010 company (Lawlor et al. 2012.). While being an important financial model to The Pantry’s overwhelming success up to the financial crash of 2008/2009, it has now become a competitive disadvantage for the company.
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Financial Analysis Income Statement
| Income Sheet | Sep 30 2010 | Sep 24 2009 | Sep 25 2008 | Sep 27 2007 | Sep 28 2006 |
| Revenues: | |||||
| Merchandise | $1,797,860.00 | $1,658,926.00 | $1,636,711.00 | $1,575,922.00 | $1,385,659.00 |
| Fuel | $5,467,402.00 | $4,731,205.00 | $7,358,915.00 | $5,335,241.00 | $4,576,043.00 |
| Total Revenue | $7,265,262.00 | $6,390,131.00 | $8,995,626.00 | $6,911,163.00 | $5,961,702.00 |
| Cost and operating expenses: | |||||
| Merchandise cost of goods sold (exclusive of items shown seperately below)\ | $1,190,396.00 | $1,071,842.00 | $1,041,474.00 | $989,894.00 | $867,717.00 |
| Fuel cost of goods sold (exclusive of items shown seperately below) | $5,202,717.00 | $4,419,861.00 | $7,096,648.00 | $5,110,545.00 | $4,294,839.00 |
| Total costs and operating expenses | $7,415,364.00 | $6,219,586.00 | $8,855,722.00 | $6,793,646.00 | $5,762,657.00 |
| Income (loss) from operations | -$150,102.00 | $170,545.00 | $139,904.00 | $117,517.00 | $199,045.00 |
| Total other expense | -$86,781.00 | -$85,276.00 | -$92,833.00 | -$73,829.00 | -$55,693.00 |
| Income (loss) before income taxes | -$236,883.00 | $85,269.00 | $46,071.00 | $43,688.00 | $146,352.00 |
| Income tax benefit (expense) | $71,268.00 | -$31,178.00 | -$17,492.00 | -$16,956.00 | -$57,154.00 |
| Net income (loss) | -$165,615.00 | $54,091.00 | $28,579.00 | $26,732.00 | $89,198.00 |
Much of the Income Statement is difficult to interpret without some relative ratios. We will discuss some notable trends that can be noticed via the profit ratios but note that these ratios can be seen in table 3 and discussed in the respective ratio section. The year over year change in total revenue was 15.93%, 30.16%, -28.96%, 13.7% from years 2006-2010 respectfully. This volatility tells us little about the company’s health and a more in-depth study will be needed to tell us any important trends. The gross profit margins for merchandise has been steadily 33.8% - 37.4% for the 5 years and a bit more volatile with 3.6% - 6.6% for fuel. With the net income being such a small percentage of gross sales, as noted in the Income statement section, it is extremely important to monitor these numbers. The most recent 2010 gross profit margin numbers have been particularly low and should be a focus in the upcoming year. (Lawlor et al. 2012.).
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Financial Analysis Balance Sheet - Assets
| ASSETS | Sep 30 2010 | Sep 24 2009 | Sep 25 2008 | Sep 27 2007 | Sep 28 2006 |
| Current Assets: | |||||
| Cash and Cash equivalents | $200,637.00 | $169,880.00 | $217,188.00 | $71,503.00 | $120,394.00 |
| Receivables (net of allowance for doubtful accounts) | $92,118.00 | $92,494.00 | $109,050.00 | $84,445.00 | $68,064.00 |
| Inventories | $130,949.00 | $124,524.00 | $132,248.00 | $169,647.00 | $140,135.00 |
| Prepaid expenses and other current assets | $21,848.00 | $18,142.00 | $12,706.00 | $14,662.00 | $18,783.00 |
| Deferred income taxes | $11,468.00 | $14,959.00 | $14,845.00 | $10,594.00 | $8,348.00 |
| Total Current Assts | $457,020.00 | $419,999.00 | $486,037.00 | $350,851.00 | $355,724.00 |
| Property and Equipment, net | $1,005,152.00 | $1,028,982.00 | $990,916.00 | $1,025,226.00 | $745,721.00 |
| Other Assets | |||||
| Goodwill | $403,193.00 | $634,703.00 | $627,653.00 | $584,336.00 | $440,681.00 |
| Other intangible assets | $6,722.00 | $29,887.00 | $32,564.00 | $34,802.00 | $12,496.00 |
| Other noncurrent assets | $24,363.00 | $405,884.00 | $31,560.00 | $34,224.00 | $33,285.00 |
| Total Other Assets | $434,278.00 | $1,070,474.00 | $691,777.00 | $653,362.00 | $486,462.00 |
| Total Assets | $1,896,450.00 | $2,519,455.00 | $2,168,730.00 | $2,029,439.00 | $1,587,907.00 |
Split between two slides:
The 5-year analysis of the balance sheet gives us a more detailed and important look into The Pantry’s health regarding assets and liabilities. Although much of the Balance sheet is difficult to interpret without their perspective financial ratios, see table 3, we can look at the accumulation of Assets for the company. The total Assets have decreased from 2009 & 2010 showing a potential offloading in order to free up some needed cash. The Assets vs liabilities still looks healthy comparing 1,896450 total assets in 2010 to the 1,316,607 total other liabilities. This shows the company to be in a strong state with their assets vs liabilities but with the need for extra cash and a negative income year on the books, the company should begin looking into slowing their growth and improving their operating ratios as discussed later on in the financial ratio section. (Lawlor et al. 2012.).
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Financial Analysis Balance Sheet - Liabilities
| LIABILITIES AND SHAREHOLDERS EQUITY | Sep 30 2010 | Sep 24 2009 | Sep 25 2008 | Sep 27 2007 | Sep 28 2006 |
| Current Liabilities | |||||
| Current maturities of long-term debt | $6,321.00 | $4,317.00 | $27,385.00 | $3,541.00 | $2,088.00 |
| Current maturities of lease finance obligations | $7,024.00 | $6,536.00 | $5,322.00 | $5,348.00 | $3,511.00 |
| Accounts payable | $144,358.00 | $140,730.00 | $171,216.00 | $192,228.00 | $139,939.00 |
| Accrued compensation and related taxes | $14,736.00 | $22,804.00 | $20,217.00 | $15,739.00 | $19,676.00 |
| Other accrued taxes | $31,748.00 | $25,164.00 | $27,226.00 | $24,416.00 | $27,440.00 |
| Self-insurance reserves | $29,687.00 | $30,904.00 | $33,775.00 | $32,873.00 | $29,898.00 |
| Other accrued liabilities | $37,866.00 | $31,386.00 | $39,936.00 | $40,812.00 | $34,978.00 |
| Total Current Liabilities | $271,734.00 | $261,841.00 | $325,077.00 | $316,957.00 | $257,530.00 |
| Other Liabilities: | |||||
| long term debt | $753,020.00 | $769,563.00 | $819,115.00 | $746,749.00 | $602,215.00 |
| Lease finance obligations | $450,312.00 | $458,509.00 | $459,711.00 | $452,609.00 | $240,564.00 |
| Deferred income taxes | $38,388.00 | $109,260.00 | $90,708.00 | $74,667.00 | $72,435.00 |
| Deferred vendor rebates | $10,212.00 | $17,392.00 | $20,875.00 | $23,937.00 | $23,876.00 |
| Other noncurrent liabilities | $64,675.00 | $70,415.00 | $63,685.00 | $60,692.00 | $54,280.00 |
| Total Other Liabilities | $1,316,607.00 | $1,425,139.00 | $1,452,794.00 | $1,358,654.00 | $993,370.00 |
Split between two slides:
The 5-year analysis of the balance sheet gives us a more detailed and important look into The Pantry’s health regarding assets and liabilities. Although much of the Balance sheet is difficult to interpret without their perspective financial ratios, see table 3, we can look at the accumulation of Assets for the company. The total Assets have decreased from 2009 & 2010 showing a potential offloading in order to free up some needed cash. The Assets vs liabilities still looks healthy comparing 1,896450 total assets in 2010 to the 1,316,607 total other liabilities. This shows the company to be in a strong state with their assets vs liabilities but with the need for extra cash and a negative income year on the books, the company should begin looking into slowing their growth and improving their operating ratios as discussed later on in the financial ratio section. (Lawlor et al. 2012.).
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Financial Analysis Ratios
| Ratio Analysis | |||||
| 2010 | 2009 | 2008 | 2007 | 2006 | |
| Liquidity | |||||
| Current Ratio | 1.68 | 1.60 | 1.50 | 1.11 | 1.38 |
| Quick Ratio | 1.20 | 1.13 | 1.09 | 0.57 | 0.84 |
| Cash Ratio | 0.74 | 0.65 | 0.67 | 0.23 | 0.47 |
| Profitability | |||||
| Gross Profit Margin | 12.00% | 14.06% | 9.53% | 11.73% | 13.40% |
| Operating Profit Margin | -2.07% | 2.67% | 1.56% | 1.70% | 3.39% |
| Net Profit Margin | -2.26% | 0.85% | 0.33% | 0.38% | 1.48% |
| Return on Assets (ROA) | -8.65% | 2.51% | 1.36% | 1.29% | 5.57% |
| Return on Equity (ROE) | -53.24% | 11.58% | 7.59% | 7.39% | 26.23% |
| Leverage | |||||
| Equity Ratio | 0.16 | 0.22 | 0.18 | 0.17 | 0.21 |
| Debt Ratio | 0.84 | 0.78 | 0.82 | 0.83 | 0.79 |
| Debt to Equity Ratio | 2.91 | 1.95 | 2.54 | 2.65 | 2.20 |
| Equity Multiplier | 6.16 | 4.61 | 5.57 | 5.74 | 4.71 |
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Financial Analysis: DuPont
| DUPONT RATIOS | Sep 30 2010 | Sep 24 2009 | Sep 25 2008 | Sep 27 2007 | Sep 28 2006 |
| Operating Efficiency | -0.023 | 0.008 | 0.003 | 0.004 | 0.015 |
| Asset Efficiency | 3.831 | 2.536 | 4.148 | 3.405 | 3.754 |
| Financial Leverage | 6.155 | 5.393 | 5.563 | 5.736 | 4.712 |
| ROE | -0.538 | 0.116 | 0.073 | 0.076 | 0.265 |
Some significant notes from the DuPont analysis is the operating efficiency and financial leverage for 2010 see Table 4 for reference. The operating efficiency is negative 2.3% for that year with a financial leverage ratio of 6.16. This negative operating efficiency was the largest cause for the net loss of 2010. This is an accumulation of costs that exceed the gross sales for the company. While each line item varied from year to year, a few were particularly important regarding the loss of income over the course of the year. Two-line items of note of note were a $230,820 Goodwill cost that did not occur under any other year, an increase in other impairment charges by 34,000 (a 1,639% increase from the previous year). With that said, the ROE calculated was a -.54 compared to the positive ROEs the previous four years, ranging from .07 to .26. (Lawlor et al. 2012.).
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Alternatives
Reduce or limit future Goodwill:
Sell off assets with potential future goodwill impairment
Add value to assets with potential future goodwill impairment
Implement POS system that provides information on existing products with high revenue source
Limit major overhauls and rebranding to stores with high profit margin.
Status Quo – Do Nothing
After review of the DuPont analysis, we have come up with four alternatives:
Because a majority of the operating cost creating the huge net loss was from Goodwill impairment, it is vital to evaluate alternatives that will reduce or eliminate future goodwill impairments. Since goodwill impairments are the difference between purchase price and market value, we need to insure the market value is not less than purchase price. Because of the recession, The Pantry owns property whose market value may never return to purchase price. If there are properties that have no potential to recover, it is recommended to sell of before the market value can drop further. However if there are properties with potential to add through renovations or upgrades to recapture the goodwill impairment, one alternative is to reinvest and increase the property market value.
The second alternative to look is the POS system that Marks recommended. This tool would be key to evaluate where potential revenue sources can increase or where losses are costing the company to maintain the merchandise.
Marks started his marketing strategy with a company wide rebranding. The third alternative would look at limiting the rebranding to only the stores that are currently turning a profit. Those stores are more financially stable to recoup the investments.
As with any analysis, status quo is always an option. Marks could choose to do nothing and ride out the effects of the recession. While the recession clearly had an impact that The Pantry was not able to survive unscathed, the potential to rebound from the recession and recoup the losses is a feasible possibility, no matter how small.
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Short Term
Mid Term
Long Term
Recommendations/Implementation
Implement POS system update and review the merchandising/sales analysis
Review store by store analysis for individual profit or loss
Start major overhauls and rebranding of the profitable stores
Sell off non-profitable stores or stores that continue to lose market value
Maintain status quo for stores that are profitable
After review of the all the alternatives, we suggest a combination of all four. In the short term, Marks should prepare for action by implementing the POS company wide. This will provide valuable information necessary to make the key decisions moving forward. The Pantry should also provide individual store analysis to determine where to focus their future efforts or where to cut and run.
After the POS system is in place and time has elapsed to collect data and individual store evaluations have been completed, Marks should start target major overhauls and rebranding of profitable stores.
Lastly, when the recession has cleared and economy is recovering, Marks should re-evaluate all the stores again. Any that remain non-profitable should be sold or closed. The remaining profitable stores should be left to continue recovery and increased market value.
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Conclusion
A more market stable business strategy to weather any future downturn in the economy
Pay down debt to obtain better financing agreements
Obtain more relevant merchandising information with POS systems
Cut market losses for non-profitable stores
Focus improvements on profitable stores
In closing, Marks inherited a company faltering in the current economy following a two year recession. His marketing plan, while in normal operating conditions, may have provided successful growth. However he had to account for market value losses in all of the existing assets acquired under his predecessor following the long term recession. Moving forward, Marks needs to ensure that all acquisitions or operating costs are adequately financed and that the Pantry isn’t so heavily leveraged in order to weather future recessions.
Future strategies should include ways to reduce debt and improve the debt ratio so financing the future improvements are with better financing options.
Sell of any non-profitable store and cut losses before any more market devaluations affect the bottom line.
Focus company wide improvements on the profitable stores so that investments can be recovered with revenues.
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Questions
?
Introduction –
Company Overview – Alessandra Scorcioni
General Environment – Melissa
Five Forces – Rola Kanawaty
Financial Analysis – Nate Ogden
Alternatives –
Recommendations/Implementations –
Conclusion -
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