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Performance Management — Practice Case 6
Case (120 minutes)
David Zey established Zey Super Foods Inc. (ZSF), a grocery store, 20 years ago in the
ural town of Carstairs, Alberta, just north of Calgary. As his business grew, David
opened two more stores in the neighbouring towns of Didsbury and Olds. Today is
March 30 and you, CPA, have been hired by David to provide consulting advice on a
number of issues he is concerned about.
ZSF has managed to generate strong profits for a number of years. Selling groceries at
a reasonable price and offering quality service allowed ZSF to build a strong base of
loyal clients. In addition, David attributes his success to keeping store spaces smaller,
which increases shopper efficiency and keeps overhead down. His customers
appreciate a boutique shopping experience and the ability to buy local and organic
products, for which demand is increasing.
However, in recent years, ZSF has experienced increasing competition from larger
chains that are able to offer lower prices. As a result, customers have become very
price sensitive and cost management has become extremely important.
David is concerned about the future profitability of the company, including its strengths,
weaknesses, opportunities, and threats. Beyond that, he wants to know what the
company’s key success factors are and how he can measure the company’s
performance against these factors. In particular, he is wondering which factors he
should primarily focus on to ensure long-term viability of the company.
Performance Management — Practice Case 6 Case
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David relies on his two sisters and one
other-in-law to manage the three stores. He
appreciates being able to take a step back from the business and empower his family to
manage the individual stores. However, this has been causing some tension in the
family, as his one sister doesn’t believe she is being fairly compensated. David would
like advice on setting up a performance evaluation system. He provided information on
the organization to assist you (Appendix I).
In recent years, Carstairs has become a commuter town for Calgarians. To take
advantage of the new growth, the town of Carstairs has approved the development of a
new residential subdivision, Rive
end, which also includes a commercial centre. The
developer would like a national grocery chain to open in the centre, but the town council
has insisted that ZSF, as a locally-owned merchant, be given right of first refusal for the
space. David would like you to analyze this opportunity and provide advice on whether
to proceed (Appendix II).
Your response should be no longer than 3,600 words, excluding any Excel files.
Performance Management — Practice Case 6 Case
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Appendix I
Organizational information
David provided the following information for the December 31 fiscal year end:
Location Carstairs Didsbury Olds
Industry
average*
Store managers Jack Shepherd
(David’s
other-in-law)
Jennifer
Shepherd
(David’s sister)
Janice Zey
(David’s sister)
Annual sales $2,650,200 $5,877,400 $2,316,000 $6,000,000
Net income $50,020 $100,105 $51,280 $139,800
Population 4,077 9,184 5,268 N/A
Retail space 1,251 m2 3,130 m2 912 m2 2,000 m2
Inventory
turnover
XXXXXXXXXX.24
Fixed indirect
cost variance
(1,199) (1,543) 1,443 425
Employee
turnover
54% 49% 23% 30%
*Industry average of independent stores
The store managers are given free rein to manage their stores. David sets the markup
on the grocery items, but the managers are responsible for all other aspects of the
usiness, including sales and discounting items.
David pays each manager $100,000/year as a salary. Three years ago, at the urging of
Jack, David implemented a simple bonus structure, offering the managers a bonus
ased on a percentage of sales.
Lately, David has found that in spite of increasing sales, ZSF’s net income isn’t growing
at the same rate. He expected some contraction in profits due to pressure from
competition, but the decline is worse than he expected. In addition, when examining
information from his customer loyalty program, ZSF seems to be losing some of its
epeat customers. He isn’t sure why this is happening and would appreciate your
insights.
Recently Janice came to David with concerns about her bonus. She explained that she
is working harder than Jack and Jennifer but is receiving a smaller bonus and didn’t
elieve this was fair.
David agrees that the bonus system needs to be revised, especially with the potential of
a new store opening. However, he isn’t sure what to do. He wants the bonus to
incentivize his managers to work toward the key success factors that have made his
usiness a success. He is wondering how he can get the managers to balance all
factors of the business (and not just focus on the financial aspects, or just on sales).
Performance Management — Practice Case 6 Case
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Appendix II
Rive
end opportunity
Lease agreement
• The lease agreement for this store will be 30 years, and annual lease costs are
expected to be $175,000.
• An upfront payment of $25,000 is required to cover ZSF’s share of costs incu
ed to
promote the centre’s opening.
• Initial leasehold improvements are expected to be $125,000.
• The space is 4,500 square metres.
Sales probabilities
The Rive
end developer predicts that the subdivision will largely be populated by
people who cu
ently work and live in Calgary. The demographics are expected to
include young families and couples. They are often health conscious but are used to
shopping in large big box stores in Calgary neighbourhoods.
Year 1 projected sales for this new store vary depending on whether residents change
their prefe
ed shopping location from Calgary to Rive
end. The probability of residents
immediately changing their prefe
ed shopping location to the Rive
end store is
estimated to be 60% (with 40% probability that they will continue to shop in Calgary
efore or after work).
If all residents were to change their shopping location to the Rive
end store, revenues
are estimated to be $8,000,000. It is expected that sales will increase by 5% each year
for the next five years.
To increase customer acceptance of the shopping centre, the developer has been trying
to entice a high-profile department store chain to open a store in Rive
end. The
customer appeal of such a department store is expected to cause the projected sales
for the centre’s grocery store to increase by 10%. Unfortunately, similar new shopping
centres have only had a 35% success rate in attracting a high-profile department store.
Cost information
David believes that the gross profit margins and variable cost relationships for the
Rive
end store would be similar to the Didsbury store. David evaluates return by using
ZSF’s WACC of 6%, and an effective tax rate of 25%. In addition, he believes the fixed
costs (aside from lease costs provided above) will be proportional to the Didsbury store.
David estimates fixed costs will increase by 2% per year, excluding the lease for the
new premises.
Performance Management — Practice Case 6 Case
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Appendix II (continued)
Rive
end opportunity
Results from the Didsbury location for the December 31 fiscal year end are as follows:
Sales $ XXXXXXXXXX,877,400
Cost of sales XXXXXXXXXX,643,146
Gross profit XXXXXXXXXX,234,254
Fixed operating and occupancy expenses:
Wages XXXXXXXXXX,452
Advertising XXXXXXXXXX,425
Administration XXXXXXXXXX,000
Rent — building XXXXXXXXXX,300
Ga
age removal XXXXXXXXXX,250
Insurance XXXXXXXXXX,500
Repairs and maintenance XXXXXXXXXX,500
Utilities XXXXXXXXXX,000
Total fixed operating and occupancy expenses XXXXXXXXXX,427
Variable operating and occupancy expenses:
Wages XXXXXXXXXX,380
Grocery bags, packaging supplies, delivery XXXXXXXXXX,250
Total variable operating and occupancy expenses XXXXXXXXXX,630
Earnings before interest and taxes $ XXXXXXXXXX,197