Scenario:
ABC Distribution has an opportunity to acquire the rights to distribute a new wine brand, Cedar Vineyards. The brand has sales and distribution in the marketplace from a smaller distributor. The VP who developed the relationship with Cedar asked you to evaluate the opportunity. Acquiring the brand requires an upfront expense of $1 MM.
Facts:
·
Immediate cash
required to get brand rights $1,000,000
· Cedar is willing to work at a 30% gross profit margin with ABC’s
· ABC has a 25% gross profit margin requirement
· The difference between the 30% margin (acceptable to Cedar) and the 25% margin (acceptable to ABC) can be used to pay down the
immediate cash
required to acquire the brand
· Cedar has a strong brand in the market and always retails at $20 with
ABC’s customers
· Cedar ships in a 12 pack case
·
ABC customers
require a minimum 20% gross profit margin and receive up to 35% when buying larger quantities
·
ABC customers
buy at three case quantities
o Customer Level 1 – 3 case quantity
o Customer Level 2 – 5 case quantity
o Customer Level 3 – 12 case quantity
·
ABC customers
market share by level is below
o Customer Level 1 – 15% share of market
o Customer Level 2 – 35% share of market
o Customer Level 3 – 50% share of market
· The brand has existed for five years, and ABC will get distribution rights at the beginning of year 6
Sales History
|
|
|
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ABC’s Acquisition
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|
Year
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
Year 7
|
Year 8
|
Year 9
|
Year 10
|
Cases
|
10,000
|
19,000
|
32,000
|
49,000
|
64,000
|
|
|
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Growth
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|
90%
|
68%
|
53%
|
31%
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|
|
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1) How many cases of Cedars do you forecast to sell in the next five years?
2) What should ABC pay (laid-in cost) for a 12 pack case of Cedar wine?
3) What does the pricing mix look like with three case quantity deal levels (3 cases, 5 cases, 12 cases), and how should ABC discount by quantity?
4) How long will it take to recoup the $1mm?
5) Is there a return on investment for the $1mm immediate cash based on your laid-in cost?