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 | | | | ABC’s Acquisition | |
| 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 | | | | | |
| Growth | | 90% | 68% | 53% | 31% | | | | | |
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?