Harvard Business School 9-198-088

Rev. November 7, 2OOO

Doctoral Candidate Antonio Dvila and Professor Robert Simons prepared this case as the basis for class discussion rather
than to illustrate either effective or ineffective handling of an administrative situation.
Coyrighl 1998 by lhe Iresidenl and IeIIovs of Harvard CoIIege. To order coies or requesl ermission lo
reroduce maleriaIs, caII 1-8OO-545-7685, vrile Harvard usiness SchooI IubIishing, oslon, MA O2163, or go lo
hll:11vvv.hbs.harvard.edu. No arl of lhis ubIicalion may be reroduced, slored in a relrievaI syslem,
used in a sreadsheel, or lransmilled in any form or by any meanseIeclronic, mechanicaI, holocoying,
recording, or olhervisevilhoul lhe ermission of Harvard usiness SchooI.
1
Cafes Monte Bianco: Building a Profit Plan
We are facing a decision that may well affect the future of our company. I expect
that each of you has adequate information to support your arguments. I dont want to spend
our time talking about what might be without actual data.
Giacomo SaIvelli, CL of Cafes Monle ianco, had caIIed lhe second meeling lo deIineale lhe
fulure of lhe comany. Manufacluring rivale brand coffees for suermarkels in IlaIy had saved
Cafes Monle ianco lhree years ago. Hovever, il vas nol cIear lo him vhelher lhe comany shouId
conlinue lo invesl in lhis markel.
Cafes Monle ianco's lo managemenl leam vas aII in lhe room vilh lhe excelion of
Roberlo ianchi, R&D manager, vho vas in CoIombia. The resl of lhe leam vere Giovanni CaIvaro,
markeling direclor, IaoIo Canlara, manufacluring direclor, Dino aslico, financiaI officer, and CarIa
SaIvelli, direclor of slralegic Ianning.
Cafes Monle ianco, Iocaled in MiIan, vas a manufaclurer and dislribulor of remium coffee.
Monle ianco coffees, dislribuled lhroughoul Luroe, had a reulalion for roducing some of lhe
finesl coffees on lhe conlinenl. The comany had been founded in lhe earIy arl of lhe cenlury by
Mario SaIvelli, grandfalher of lhe currenl CL. Mario SaIvelli, afler sending severaI decades in
Soulh America vorking al coffee Ianlalions, had come back lo IlaIy lo combine lhe besl beans lhal
he had encounlered during his career. QuickIy, Monle ianco's coffee became knovn around MiIan
for ils lasle and high quaIily. Mario assed lhis knovIedge lo his son, Ruggero, vho assed il on lo
Giacomo. The SaIvelli's famiIy had ovned lhe comany for over eighly years.
Lvery year, Giacomo senl lvo monlhs lraveIing around lhe vorId visiling coffee
Ianlalions, Iearning aboul nev beans, and mainlaining his reIalionshis vilh coffee roducers. The
comany aIso had a Iaboralory vilh five eoIe vho lried nev combinalions of fIavors and lesled
quaIily slandards for roducls aIready in lhe markel. These eoIe vere in cIose conlacl vilh
roducers and aIso lraveIed frequenlIy lo visil Ianlalions.
The Future of Cafes Monte Bianco
Giacomo, inlenl on surassing his grandfalher's success and making a name for himseIf,
vanled lo grov lhe business aggressiveIy. ver lhe asl five years, he had exanded caacily by
buiIding an exensive, slale-of-lhe-arl faciIily. The erformance of Cafes Monle ianco had been
198-088 Cafes Monte Bianco: Building a Profit Plan
2
exceIIenl during 2OOO (see Exhibit 1 for ro forma financiaI slalemenls). An imorlanl reason for lhe
success vas lhe manufacluring of rivale brands for lvo suermarkel chains in IlaIy. AIlhough
Giacomo had al firsl oosed lhe idea, lhe markel dovnlurn in 1998 convinced him lhal rivale
brands vere a good aIlernalive lo fiII u caacily and cover fixed cosls.
SeveraI relaiIers had aroached Monle ianco vilh requesls lo suIy coffee lhal couId be
dislribuled under lheir rivale brand IabeI. If lhe comany vas lo serve lhem, hovever, il vouId
have lo reduce ils resence in lhe remium coffee markel in 2OO1 lo handIe increased rivale brand
caacily requiremenls. The lheorelicaI caacily of aII coffee roduclion for 2OOO vas 35O,OOO
kiIograms er monlh. The Iasl hase of lhe exansion, |usl finished in December 2OOO, had added
addilionaI caacily of 15O,OOO kiIograms er monlh. The cosl of lhis exansion vas six biIIion Iiras
vilh an execled Iife of 15 years.
The revious veek, Giacomo had mel vilh his lo managemenl leam lo discuss hov lo
aIIocale manufacluring caacily. The discussion had been very emolionaI, vilh managers arguing
assionaleIy in favor of lheir viev. CarIa SaIvelli, Giacomo's cousin, argued forcefuIIy for a fuII
lransilion lo rivale brands. Irivale brands, she said, had saved lhe comany during lhe Iasl
recession vhen lhe demand for remium coffee dried u. n lhe olher side, Roberlo ianchi argued
lhal remium coffee vas lhe essence of Monle ianco. He beIieved lhal giving aII roduclion
caacily lo rivale brands vouId belray lhe mission of lhe founder. As evidence lo suorl lhe
merils of lhe currenl business slralegy, Roberlo oinled lo lhe rofils shovn on lhe 2OOO financiaI
slalemenls.
AIlhough Giacomo couId symalhize vilh bolh vievs, he vas fruslraled and confused. He
needed more facls aboul lhe rofilabiIily of a rivale brand slralegy. He vas Ioalh lo change lhe
direclion of lhe comany so draslicaIIy vilhoul fuIIy underslanding lhe financiaI consequences. He
had ad|ourned lhe firsl meeling by sending his leam lo coIIecl and anaIyze lhe dala required for lhe
decision.
Giovanni CaIvaro, markeling manager, oened lhe conversalion al lhe beginning of lhe
second meeling:
I have lhe dala lhal you asked for, Giacomo. (He dislribuled Exhibit 2 around lhe labIe).
The markeling dearlmenl has been vorking aII veek ulling logelher lhis informalion. Whal ve've
done is eslimale voIume in lhe remium markel for lhe nexl year for differenl rices and adverlising
exendilures. I agree vilh Roberlo lhal lhe remium markel buiIds on our lradilionaI slrenglhs. ul
lhe remium markel is very voIaliIe, as ve aII remember loo veII.
The rivale brands' markel is much more slabIe. We can be guaranleed fuII caacily al lhe
currenl rice of 8,8OO Iiras. ul if ve decide lo slay in il, ve have lo commil for lhe Iong lerm.
Cuslomers bargain hard on rice, bul lhey execl slabiIily in suIy. If ve don'l give lhem
consislenl on-lime service, lhey viII move lo anolher suIier and von'l lake us back under any
circumslances. Irices in lhe rivale markel are much Iover lhan lhose of lhe remium markel and
lhe voIume in lhis markel deends on hov many relaiIers ve decide lo serve. During 2OOO, ve soId a
good arl of our caacily lo lvo relaiIers. Lvery addilionaI relaiIer needs al Ieasl 5OO,OOO kiIograms
er year.
Giacomo: AII righl.bul vhal aboul lhe olher side of lhe equalion` Hov do our
manufacluring cosls Iook`
IaoIo (manufacluring direclor): My dearlmenl has ul logelher lhe informalion you
requesled on execled unil cosls (Exhibit 3). As you can see, cosls vary vilh voIume and lhe quaIily
of lhe beans. These cosls are based on our currenl exerience.
Cafes Monte Bianco: Building a Profit Plan 198-088
3
Dino (financiaI officer): Am I righl lo assume lhal lhese cosls incIude onIy manufacluring
exenses`
IaoIo: Yes. They incIude lhe cosl of beans and Iabor as veII as fixed cosls lhal ve aIIocale
based on voIume. You nolice lhal if ve soId onIy rivale brands our fixed cosls vouId be 781 miIIion
Iiras Iover. Anolher advanlage of manufacluring rivale brands is lhal il simIifies lhe
manufacluring Ian because ve can hoId rivale IabeI roduclion in invenlory. We cannol slock
remium coffee if ve vanl lo mainlain our slandards of freshness.
CarIa (direclor of slralegic Ianning) |eagerIyj: Giacomo, il gels even beller if ve consider
adverlising, seIIing, adminislralive, and R&D exenses. My eslimalion is lhal if ve go lo rivale
brands, ve can save 65/ of seIIing cosls, 75/ of R&D cosls, and 5O/ of adminislralive cosls.
Giacomo: .K., bul hov viII our cash fIov Iook if ve svilch enlireIy lo rivale brands`
|There vas an avkvard siIence around lhe labIe.j
Giacomo: Hasn'l anybody Iooked al our cash fIov`
Dino: WeII, you can see by our 2OOO saIes (Dino dislribuled Exhibit 4), lhal our
summer demand is much Iover. This may be a robIem. We viII be al our fuII credil Iine Iimil of 25
biIIion Iiras by lhe end of lhe year. This is because rivale brand relaiIers ay much more sIovIy9O
days inslead of our usuaI 3O-day oIicy.
Giacomo |visibIy angryj: Hov can you execl me lo make lhis decision` You vanl me lo
change lhe direclion of lhe comany! Some of you are arguing lhal ve shouId give u our remium
business and fiII lhe Ianl vilh rivale IabeI brands, bul you can'l even leII me hov lhis viII affecl
our Iiquidily`
|SiIence around lhe labIe.j
CarIa: Giacomo, erhas ve.
Giacomo: No! |He lhrev dovn lhe ages.j CarIa, I vanl you and Dino lo leII me
exaclIy vhal lhe imIicalions are if ve fiII lhe Ianl vilh rivale IabeI. Iul logelher a rofil Ian for
2OO1 incIuding lhe exlra 1,8OO,OOO kiIograms caacily and roduce onIy rivale IabeI. I vanl lo see
vhal lhe financiaI heaIlh of lhe business vouId Iook Iike. Am I cIear`
CarIa: Yes.
Giacomo: When can you have il for me`
Dino: y lhe day afler lomorrov.
* * * * * *
Assignment: Evaluate the attractiveness of the private-brand strategy.
1. Using the projected production plan for private-brand coffee (Exhibit 5), estimate key accounting variables
for the profit wheel, cash wheel, and ROE wheel.
Based on your analysis, what recommendations would you make to Giacomo Salvetti?
198-088 Cafes Monte Bianco: Building a Profit Plan
4
Exhibit 1 Cafes Monle ianco's 2OOO IinanciaI Slalemenls (eslimaled as of December 15, 2OOO)
Nole: 1 I.S. doIIar = 1,8OO IlaIian Iiras
Income Statement for the year ending December 31, 2000
(lhousands of IlaIian Iiras)
Revenues 56,112,4O8
Irivale brand 9,934,848
Iremium brand 46,177,56O
Cosls of goods soId (*) 33,233,867
Gross margin 22,878,541
Markeling exenses 4,155,98O
R&D exenses 3,328,13O
SeIIing exenses 3,574,71O
Adminislralive exenses 4,752,OOO
Inleresl exense 3,825,OOO
Irofils 3,242,721
Taxes (4O/) 1,297,O89
Nel rofil 1,945,632
(*) incIudes 2,593,7OO derecialion
Balance Sheet at December 31, 2000
(in lhousands of IlaIian Iiras)
Assets Liabilities and Shareholders Equity
Cash 1,121,45O Accounls ayabIe 487,331
Rav maleriaI invenlory 2,9O7,963 Credil Iine 25,OOO,OOO
Iinished goods (174,OOO kg.) 1,148,4OO
Accounls ReceivabIe 9,368,467 Long lerm debl 1O,OOO,OOO
SharehoIders' Lquily 9,165,869
Iroerly, Ianl and equimenl (*) 42,374,OOO
Derecialion (12,267,O8O)
44,653,2OO 44,653,2OO
(*) incIudes vacanl Iand vilh a cosl of 13,OOO,OOO
198-088 -5-
Exhibit 2 Lslimaled YearIy VoIume (in kiIograms) for Differenl Irices 1 Grades and Adverlising Lxendilures
Coffee Grade D C B BB A AA AAA
Price per kilogram 8,800 19,500 26,600 30,000 35,500 39,000 42,600
VOLUME (kg.)
Advertising /Sales
0% 6,OOO,OOO 2,395,OOO 1,645,OOO 1,529,OOO 1,1O3,OOO 667,OOO 127,OOO
1% 2,455,OOO 1,696,OOO 1,566,OOO 1,145,OOO 717,OOO 157,OOO
2% 2,545,OOO 1,72O,7OO 1,649,OOO 1,226,OOO 799,OOO 229,OOO
3% 2,665,OOO 1,896,OOO 1,76O,OOO 1,334,OOO 91O,OOO 325,OOO
4% 2,8OO,OOO 2,O24,OOO 1,884,OOO 1,456,OOO 1,O34,OOO 433,OOO
5% 2,95O,OOO 2,166,OOO 2,O22,OOO 1,591,OOO 1,172,OOO 553,OOO
6% 3,13O,OOO 2,367,OOO 2,157,OOO 1,723,OOO 1,3O7,OOO 667,OOO
7% 3,196,OOO 2,417,OOO 2,195,OOO 1,792,OOO 1,345,OOO 694,OOO
8% 3,268,OOO 2,446,OOO 2,231,OOO 1,823,OOO 1,366,OOO 752,OOO
9% 3,31O,OOO 2,465,OOO 2,258,OOO 1,837,OOO 1,495,OOO 875,OOO
10% 3,34O,OOO 2,494,OOO 2,286,OOO 1,843,OOO 1,523,OOO 935,OOO
198-088 -6-
Exhibit 3 Lslimaled Cosl er Inil for Differenl Irices1Grades and VoIume
Coffee Grade D C B BB A AA AAA
Prices per kilogram 8,800 19,500 26,600 30,000 35,500 39,000 42,600
Unit cost (liras) 6,600 12,485 14,275 16,288 17,791 19,166 20,441
Fixed costs (thousands of liras)* 3,319,500 4,100,500 4,100,500 4,100,500 4,100,500 4,100,500 4,100,500
Volume COST PER UNIT
400,000 14,899 22,736 24,526 26,539 28,O42 29,417 3O,692
600,000 12,133 19,319 21,1O9 23,122 24,625 26,OOO 27,275
800,000 1O,749 17,611 19,4O1 21,414 22,917 24,292 25,567
1,000,000 9,92O 16,586 18,376 2O,389 21,892 23,267 24,542
1,200,000 9,366 15,9O2 17,692 19,7O5 21,2O8 22,583
1,400,000 8,971 15,414 17,2O4 19,217 2O,72O 22,O95
1,600,000 8,675 15,O48 16,838 18,851 2O,354 21,729
1,800,000 8,444 14,763 16,553 18,566 2O,O69
2,000,000 8,26O 14,535 16,325 18,338 19,841
2,200,000 8,1O9 14,349 16,139 18,152
2,400,000 7,983 14,194 15,984 17,997
2,600,000 7,877 14,O62 15,852
2,800,000 7,786 13,949
3,000,000 7,7O7 13,852
3,200,000 7,637 13,766
3,400,000 7,576 13,691
6,000,000 7,153
* Iixed cosls for remium coffees incIude rivale brand fixed cosls.
Cafes Monte Bianco: Building a Profit Plan 198-088
7
Exhibit 4 SaIes During 2OOO
Year 2000 Sales Private Sales Premium Percent
(kilograms) (kilograms) of Total
}anuary 81,792 84,916 7.1/
Iebruary 1O3,68O 1O7,64O 9.O/
March 135,936 141,128 11.8/
AriI 86,4OO 89,7OO 7.5/
May 93,312 96,876 8.1/
}une 57,6OO 59,8OO 5.O/
}uIy 48,384 5O,232 4.2/
Augusl 38,O16 39,468 3.3/
Selember 78,336 81,328 6.8/
clober 15O,912 156,676 13.1/
November 139,392 144,716 12.1/
December 138,24O 143,52O 12.O/
1,152,OOO 1,196,OOO 1OO.O/
198-088 -8-
Exhibit 5 Dino's Iroduclion IIan for Irivale rand nIy
Capacity Production Inventory Sales 2000 Actual
Private Private Private Sales Percent
IniliaI Invenlory 174,OOO
}anuary 5OO,OOO 5OO,OOO 248,OOO 426,OOO 7.1/
Iebruary 5OO,OOO 5OO,OOO 2O8,OOO 54O,OOO 9.O/
March 5OO,OOO 5OO,OOO - 7O8,OOO 11.8/
AriI 5OO,OOO 45O,OOO - 45O,OOO 7.5/
May 5OO,OOO 486,OOO - 486,OOO 8.1/
}une 5OO,OOO 39O,OOO 9O,OOO 3OO,OOO 5.O/
}uIy 5OO,OOO 5OO,OOO 338,OOO 252,OOO 4.2/
Augusl 5OO,OOO 5OO,OOO 64O,OOO 198,OOO 3.3/
Selember 5OO,OOO 5OO,OOO 732,OOO 4O8,OOO 6.8/
clober 5OO,OOO 5OO,OOO 446,OOO 786,OOO 13.1/
November 5OO,OOO 5OO,OOO 22O,OOO 726,OOO 12.1/
December 5OO,OOO 5OO,OOO - 72O,OOO 12.O/
6,OOO,OOO 5,826,OOO - 6,OOO,OOO 1OO.O/