Three weeks have passed since the television documentary was broadcast. During that period, Pizzatime closed all restaurants until they could be resupplied with freshly-made dough that had been made from flour that had been sourced from a new supplier.
You have received the following email:
From: Matt Spot, Finance Director
To: Financial Manager
Subject: FW: sales downturn
Hi,
I need your advice. Our restaurant managers are complaining that their bonuses are affected by the ongoing downturn in sales since the documentary. I have forwarded just one email to you, which is typical of the comments that I have been receiving. We need to decide on the following:
Should we relax the profit targets for restaurant managers' bonuses for this quarter on the grounds that costs and revenues are effectively beyond the restaurant managers' control?
Assuming that we decide to do so, how would be go about setting realistic targets?
Looking forward, beyond the present concerns about the documentary, should we consider linking the restaurant managers' bonuses to a balanced scorecard approach? What would the implications of that be?
Regards
Matt
From: Sally Collins, Jaytown Restaurant Manager
To: Matt Spot, Finance Director
Subject: sales downturn
Hello Matt
I have been manager of the Jaytown Restaurant for the past three years. During that time, I have regularly beaten sales targets and my restaurant has been highly placed in rankings based on customer feedback. I have enjoyed the challenge of working in this capacity for Pizzatime, but I am concerned that my reputation is going to be damaged by the current downturn ever since that terrible documentary was broadcast.
As a manager, I receive a salary and a quarterly bonus that is based on the profitability of my restaurant. I have always received the maximum bonus in the past, but I am unlikely to receive any bonus at all for this quarter. My restaurant was closed for four days while we were waiting for fresh dough. Our takings were down by over 40% in the first week after we reopened. Things have improved gradually since then, but only very slightly.
The quarterly bonus is a significant part of my income. I have to beat the targeted profit to earn any bonus at all. I only get the maximum bonus if I exceed the target by 20%. That is clearly not going to happen this quarter and it won't happen for the remainder of this year unless the targets are reduced in response to the crisis.
If you compare my position with that of a franchise owner then it is really unfair. The franchisees don't have a capped bonus, they get to keep as much profit as they can earn from their restaurants. They are also protected against downturns because their costs are smaller to match their reduced revenue. For example, Pizzatime does not permit me to lay off any of the staff in my restaurant, but I know that lots of the franchisees have done so since the documentary was broadcast.
I look forward to hearing from you.
Sally Collins
Jaytown Restaurant Manager
Pizzatime
You have received the following email:
From: Matt Spot, Finance Director
To: Financial Manager
Subject: all-day opening proposal – CONFIDENTIAL
Hello
I have just had an interesting meeting with Bilal Mukherjee, our Marketing Director. Bilal has been thinking of ways to put our restaurants to work during the day. At present, most of our restaurants are closed all morning and the afternoon between the end of lunch and the start of the evening rush. We are all well aware of the rapid growth of coffee shops in I-land over last 12 months; please see the attached newspaper article.
Bilal believes that we should open our restaurants to sell snacks, coffees, and light meals from early morning until early evening, with the exception of lunchtime when we would offer restaurant meals, so we wouldn't be interfering with our core business.
The main issue is the surprising expense required to start this venture. We would have to invest heavily in advertising and other promotions and would also need to seek separate permission from local government. Finally, we would have to buy a sophisticated coffee machine and equipment to heat and serve hot snacks for each restaurant. Our restaurants are equipped to cook pizza, not hot breakfast. Needless to say, we can't just buy the equipment and plug it in.
We will have to adapt our premises to make space for the new equipment. Bilal is suggesting that we introduce more family-friendly seating areas, removing a number of tables and replacing them with sofas and a toy kitchen area for young children to enjoy.
Bilal is concerned that the heavy outlays on advice for the local government applications, along with the significant investment in property, plant and equipment, will mean that this venture will have a very low accounting rate of return (ARR) for the first year. I rarely look beyond the net present value of a project, but he may have a point.
Please reply as soon as possible on the following:
Firstly, is this proposed all-day opening venture consistent with our strategic objectives?
Secondly, draft an explanation that I can take to the Board on possible reasons why the project's forecast ARR in the first year is so poor. Are forecast ARR results likely to give a good indication of the overall performance of the venture?
Matt
The Finance Director stops you in the corridor and says the following:
"I have been asked to convene a working party that will report to the Board. The working party's remit is to make a recommendation concerning the proposal that Pizzatime should enter the home delivery market. This will be a major expansion of our business. The idea has come from Marketing and Bilal seems very keen on getting the Board to proceed. In fact he's even had one of his staff produce these flyers. Have a look at this!
I would like you to draft a paper for me that covers the following:
Is this proposal consistent with Pizzatime's current strategy?
What will be the difficulties associated with predicting the profitability of this new sales channel? What decisions will we have to make about the delivery method and location of preparation facilities before we start to analyse potential profitability?"
Forecast financial statements for the year ended 31 December 2016
You have received the following email:
From: Monica Lall, Chief Executive
To: Financial Manager
Subject: projected profits
Hi,
The controversy over Town Logistics continues. The Board is feeling a little sensitive to criticism over their management of Pizzatime's relationship with the company. With that in mind, I have had the Finance Director prepare a set of forecast financial statements, which I have attached to this email.
The new home delivery service will have been fully operational for almost six months by the year end. The service has already been hugely successful and has significantly increased both revenue and profit.
The directors' bonuses are linked to reported revenue according to the financial statements. As a retail organisation, our survival depends on sales revenue. Also, our restaurant managers' revenue targets are based on total revenue, including home delivery sales, although many of them have refused to accept responsibility for these sales.
I need your advice on two matters:
The first is that we are planning to argue that the shareholders should take comfort from these figures and should relax and allow the Board to manage Pizzatime without undue interference. Do you agree that these figures show that the Board is excelling?
Can we argue that the present directors' bonus scheme continues to align our interests with those of the shareholders? On a related matter, is the refusal of the restaurant managers to accept responsibility for home delivery sales justified?
Regards
Monica Lall
Chief Executive
Pizzatime
You have received the following email:
From: Matt Spot, Finance Director
To: Financial Manager
Subject: new menu
Hello
As a first stage in its development plans the Board have decided that Pizzatime must develop a new menu that uses top quality ingredients. The menu will include many more healthy and lower calorie options. This project has been given a high priority and we need to start researching and planning the new menu straight away.
I am considering organising some big data research to give us greater insight into our customers' requirements. For example, it would help us find out how important fresh ingredients, the use of local produce and fewer processed meat products are to our customers. I realise that many customers are trying to lose weight and it would also be interesting to know what type of weight loss programmes they are using and what foods are permitted under each one.
I need your help on this one. Please email me your thoughts on the following:
Firstly, what sources of competitor and customer analysis should we use when drawing up a new menu? Please include the possibility of using big data and look at other useful sources of information.
Secondly, what are the downside risks to Pizzatime of introducing a new menu and are they worth taking?
Matt
Comparative results for Pizzatime and Pizza2Go
You have received the following email:
From: Monica Lall, Chief Executive
To: Financial Manager
Subject: benchmarking and growth ideas
Hi,
As you will already be aware, in 2015 our annual growth in both earnings and revenue was well below the target of 10%. This has clearly been a disappointment to our shareholders and we need to take rapid action to rebuild market confidence and avoid a fall in our share price. I would value your input on this one.
You will also see, from the financial data in the attachment, that our competitor, Pizza2Go, has reported higher growth and also a higher ROCE and I need to be able to explain these figures to our analysts. It would be really helpful to understand what they mean in terms of shareholder returns. The earnings growth figures are particularly disappointing, especially as Pizza2Go has shown such strong growth.
I need a response to this email as soon as possible that:
• Analyses the financial data in the attachment and explains what the ROCE and earnings growth figures mean in terms of the relative success of the two companies and returns to shareholders. I notice that we have a much higher gross profit margin and approximately the same earnings yield. Is it possible that the ROCE and earnings growth figures are misleading and that we are actually performing better than Pizza2Go?
• Suggests ways in which we could improve profitability. Use Porter's value chain model as your base.
Regards
Monica Lall
Chief Executive
Pizzatime
