Grains Coffee Ltd Grains Coffee Ltd (GC) operates a chain of coffee shops in the West of England and Wales, serving pred
Posted: Tue Jan 18, 2022 12:57 pm
Grains Coffee Ltd
Grains Coffee Ltd (GC) operates a chain of coffee shops in the
West of England and Wales, serving predominantly ethically sourced
high-quality coffee, in addition to snacks and other beverages.
The UK coffee shop market is dominated by a few main brands who
account for approximately 70% of market share. The UK industry has
grown from almost nothing in the last few decades to over 10,000
outlets in 20X0 and it continues to expand. The main brands
that exist within the marketplace are very well known and well
established, however in recent years these large corporate
organisations have faced criticism on several fronts, including
potential underpayment of corporation tax, low wages paid to staff
and the use of questionable sources of supply.
GC was formed in 20X1 and the business model is built upon 3
main tenets, these are:
The owners have always been aware that the take-away side of the
business is where high margins can be made, and it has always been
a difficult balance of providing a comfortable environment with
modern facilities to entice customers in yet not wanting customers
to stay for long periods on one drink purchase.
At a meeting in May 20X5, between Will Brown (Retail and Stores
Director), and Harry Edwards (Managing Director), Will expressed
concerns that there had been decreased footfall around their coffee
shop locations. Will had been conducting research into mobile
coffee vans and identified a company, Cove Ltd, that specialises in
custom-build catering vehicles. To allow potential customers to
conduct market research, Cove Ltd, offers a standard equipped
vehicle to their potential customers for a two-week trial period
for free (except running costs such as consumables).
Harry gave Will the go-ahead to negotiate a trial run with these
mobile coffee vans, as he agreed with Will, that this would be a
great opportunity to explore a new venture.
During June 20X5 they used this mobile coffee van to locate at
some of the busier outdoor spots, and saw a significant increase in
their sales.
Will was keen to get the ball rolling on the purchase of some of
these custom-built vans, as he thought they would help increase
revenues and improve margins – at least for approximately 8 months
of the year when the UK climate is suitable for there to be enough
customers out and about. Unfortunately, Harry was not fully on
board, as although he saw the benefits and recognised that there
were pleasing gains to be made, he knew that a number of GC’s
premises needed refurbishment and as such, was unwilling to commit
funds to the acquisition of some mobile coffee vans at this stage.
He did, however, agree for Will to negotiate a short-term rental of
two coffee vans for the months of July – September 20X5 and for
Will to also obtain quotes from Cove Ltd for a custom-built coffee
van (Appendix 5).
In November 20X5, a senior staff meeting was held to discuss
company strategy and make plans for 20X6. Harry is concerned that
Lewis Root (Supply Chain and Purchasing Manager) is conducting
negotiations to source some cheaper non-sustainable coffee
supplies, and the potential negative impact this would have on the
long-term future of the company. As such, Harry is keen to ensure
the company stays true to its core values (Appendix 2) and that
these are incorporated into plans for the business.
The results for the latest Balanced Scorecard for GC (Appendix
3) were briefly discussed. One of the outcomes of the meeting was
identification of Critical Success Factors to underpin the balanced
scorecard approach that had been adopted by the company since its
inception:
Historically, GC has managed its capital expenditure using a
traditional approach via a capex budget, in that is sets a limit in
terms of how much it wishes to spend per annum and then allocates
expenditure to which ever projects provide the best return for the
company. The capex budget for the coming year has been set at
£600,000 and it is now looking to decided which projects will
deliver the most attractive return for the organisation.
There are currently 3 capital expenditure projects that being
evaluated, the details of which are given below:
Project 1 – Purchase of new mobile coffee vans
This investment would require an initial capital investment of
£250,000 and would generate post-tax incremental cash flows of:
Yr1
Yr2
Yr3
Yr4
Yr5
£56,000
£89,000
£112,000
£76,000
£57,000
The above cashflows are given in money terms and included any
relevant residual values.
Project 2 – Purchase and installation of new in-shop coffee
machines
To purchase and install the appropriate number of new coffee
machines would require an initial capital cost of £180,000 and
would result in incremental annual post-tax cashflows for
£70,000. However, these incremental operating cash inflows
have not yet been adjusted for inflation, the relevant inflation
rate has been determined as 1.8% per annum.
Project 3 – Refurbishment of current coffee shops (excluding
the purchase of new coffee machines)
The total cost of the planned refurbishment would be
£300,000. Due to the better facilities and increased appeal
of the newly refurbished shops, it is estimated that additional
operational cashflows of £102,000 would be generated for the next 5
years, before any further refurbishment would be required.
The incremental operational cashflows are expressed in nominal
terms.
GC Ltd evaluates all capital investment projects of this nature
using a money cost of capital at 8%.
Lewis (Supply Chain and Purchasing Manager) has a wealth of
experience within the coffee shop industry and has many contacts
from working with his previous employer. His knowledge and
experience are key reasons as to why Harry employed him.
Harry was instrumental in recruiting Lewis, and he sees him as an
integral member of staff in driving supply chain cost reductions
and efficiencies.
Lewis recently had a meeting with a potential new coffee
supplier, Strong Blend Ltd (SB). This potential new supplier
is a well know distributor within the industry, that has a
reputation for supplying cost effective solutions to large
multi-national chains. Lewis has developed a good friendship
with the Head of Business Development at the supplier, due to
working with them previously. The Head of Business
Development at SB (Sara Khan) is looking to expand their smaller,
independent customer base, and is therefore keen to build upon the
relationship she has with Lewis.
In an attempt to foster this connection, Sara has invited Lewis
to a large sporting event, with hospitality and entertainment
included. As a huge sports fan Lewis is looking forward to
this immensely.
SB is a large distributor within the industry, and as such, has
significant influence over its suppliers. The suppliers that
SB uses do not all have Fair Trade accreditation and therefore SB
cannot always guarantee that the coffee they are supplying is 100%
sourced as Fair Trade. Given the significant cost savings
that a contract with SB can provide to GC, Lewis believes that this
is a ‘gamble’ worth taking, as around 50% of the suppliers
to SB are Fair Trade accredited.
Gayle Vojic (Head of IT and Finance) has been tasked with
undertaking a cost-benefit analysis of entering into a new supplier
agreement with SB, and whilst the cost savings are undeniable, she
is very concerned about the less tangible impacts upon the
business. In a recent meeting with Lewis, he made it very
clear to Gayle that this new supplier contract is key to his own
personal success at GC, and he had verbally confirmed to Sara at
SB, that the signing off on the contract was ‘a mere
formality’.
Gayle recently performed a review of company sales over the last
few years, with a particular focus on analysis of product margins.
At the last management meeting, Gayle commented that “the business
could improve its results without the need to make fundamental
changes, but by promoting items that provide the best returns”.
Gayle has asked Lewis to determine what data is currently available
to allow products to be tracked from purchase to point of sale, and
whether GC would need to make any further investment to enable them
to have access to additional management information.
Harry has agreed with a request made by Gayle to appoint an
external advisor to support her and the rest of the GC team in
dealing with some of the issues being faced by the company.
You are A.N. Consultant, and have been appointed in this role as
external advisor to GC.
QUESTIONS
1) Outline the potential benefits to Grains Coffee LTD of
leasing an asset as opposed to purchasing an asset
outright?
2) With reference to the potential new coffee supplier , discuss
whether there are any concerns that give rise to ethical issues,
including any ethical threats , and advise Gayle Voijic on suitable
actions. Your answer should incluude the ethical framework of
ACCA
Grains Coffee Ltd (GC) operates a chain of coffee shops in the
West of England and Wales, serving predominantly ethically sourced
high-quality coffee, in addition to snacks and other beverages.
The UK coffee shop market is dominated by a few main brands who
account for approximately 70% of market share. The UK industry has
grown from almost nothing in the last few decades to over 10,000
outlets in 20X0 and it continues to expand. The main brands
that exist within the marketplace are very well known and well
established, however in recent years these large corporate
organisations have faced criticism on several fronts, including
potential underpayment of corporation tax, low wages paid to staff
and the use of questionable sources of supply.
GC was formed in 20X1 and the business model is built upon 3
main tenets, these are:
The owners have always been aware that the take-away side of the
business is where high margins can be made, and it has always been
a difficult balance of providing a comfortable environment with
modern facilities to entice customers in yet not wanting customers
to stay for long periods on one drink purchase.
At a meeting in May 20X5, between Will Brown (Retail and Stores
Director), and Harry Edwards (Managing Director), Will expressed
concerns that there had been decreased footfall around their coffee
shop locations. Will had been conducting research into mobile
coffee vans and identified a company, Cove Ltd, that specialises in
custom-build catering vehicles. To allow potential customers to
conduct market research, Cove Ltd, offers a standard equipped
vehicle to their potential customers for a two-week trial period
for free (except running costs such as consumables).
Harry gave Will the go-ahead to negotiate a trial run with these
mobile coffee vans, as he agreed with Will, that this would be a
great opportunity to explore a new venture.
During June 20X5 they used this mobile coffee van to locate at
some of the busier outdoor spots, and saw a significant increase in
their sales.
Will was keen to get the ball rolling on the purchase of some of
these custom-built vans, as he thought they would help increase
revenues and improve margins – at least for approximately 8 months
of the year when the UK climate is suitable for there to be enough
customers out and about. Unfortunately, Harry was not fully on
board, as although he saw the benefits and recognised that there
were pleasing gains to be made, he knew that a number of GC’s
premises needed refurbishment and as such, was unwilling to commit
funds to the acquisition of some mobile coffee vans at this stage.
He did, however, agree for Will to negotiate a short-term rental of
two coffee vans for the months of July – September 20X5 and for
Will to also obtain quotes from Cove Ltd for a custom-built coffee
van (Appendix 5).
In November 20X5, a senior staff meeting was held to discuss
company strategy and make plans for 20X6. Harry is concerned that
Lewis Root (Supply Chain and Purchasing Manager) is conducting
negotiations to source some cheaper non-sustainable coffee
supplies, and the potential negative impact this would have on the
long-term future of the company. As such, Harry is keen to ensure
the company stays true to its core values (Appendix 2) and that
these are incorporated into plans for the business.
The results for the latest Balanced Scorecard for GC (Appendix
3) were briefly discussed. One of the outcomes of the meeting was
identification of Critical Success Factors to underpin the balanced
scorecard approach that had been adopted by the company since its
inception:
Historically, GC has managed its capital expenditure using a
traditional approach via a capex budget, in that is sets a limit in
terms of how much it wishes to spend per annum and then allocates
expenditure to which ever projects provide the best return for the
company. The capex budget for the coming year has been set at
£600,000 and it is now looking to decided which projects will
deliver the most attractive return for the organisation.
There are currently 3 capital expenditure projects that being
evaluated, the details of which are given below:
Project 1 – Purchase of new mobile coffee vans
This investment would require an initial capital investment of
£250,000 and would generate post-tax incremental cash flows of:
Yr1
Yr2
Yr3
Yr4
Yr5
£56,000
£89,000
£112,000
£76,000
£57,000
The above cashflows are given in money terms and included any
relevant residual values.
Project 2 – Purchase and installation of new in-shop coffee
machines
To purchase and install the appropriate number of new coffee
machines would require an initial capital cost of £180,000 and
would result in incremental annual post-tax cashflows for
£70,000. However, these incremental operating cash inflows
have not yet been adjusted for inflation, the relevant inflation
rate has been determined as 1.8% per annum.
Project 3 – Refurbishment of current coffee shops (excluding
the purchase of new coffee machines)
The total cost of the planned refurbishment would be
£300,000. Due to the better facilities and increased appeal
of the newly refurbished shops, it is estimated that additional
operational cashflows of £102,000 would be generated for the next 5
years, before any further refurbishment would be required.
The incremental operational cashflows are expressed in nominal
terms.
GC Ltd evaluates all capital investment projects of this nature
using a money cost of capital at 8%.
Lewis (Supply Chain and Purchasing Manager) has a wealth of
experience within the coffee shop industry and has many contacts
from working with his previous employer. His knowledge and
experience are key reasons as to why Harry employed him.
Harry was instrumental in recruiting Lewis, and he sees him as an
integral member of staff in driving supply chain cost reductions
and efficiencies.
Lewis recently had a meeting with a potential new coffee
supplier, Strong Blend Ltd (SB). This potential new supplier
is a well know distributor within the industry, that has a
reputation for supplying cost effective solutions to large
multi-national chains. Lewis has developed a good friendship
with the Head of Business Development at the supplier, due to
working with them previously. The Head of Business
Development at SB (Sara Khan) is looking to expand their smaller,
independent customer base, and is therefore keen to build upon the
relationship she has with Lewis.
In an attempt to foster this connection, Sara has invited Lewis
to a large sporting event, with hospitality and entertainment
included. As a huge sports fan Lewis is looking forward to
this immensely.
SB is a large distributor within the industry, and as such, has
significant influence over its suppliers. The suppliers that
SB uses do not all have Fair Trade accreditation and therefore SB
cannot always guarantee that the coffee they are supplying is 100%
sourced as Fair Trade. Given the significant cost savings
that a contract with SB can provide to GC, Lewis believes that this
is a ‘gamble’ worth taking, as around 50% of the suppliers
to SB are Fair Trade accredited.
Gayle Vojic (Head of IT and Finance) has been tasked with
undertaking a cost-benefit analysis of entering into a new supplier
agreement with SB, and whilst the cost savings are undeniable, she
is very concerned about the less tangible impacts upon the
business. In a recent meeting with Lewis, he made it very
clear to Gayle that this new supplier contract is key to his own
personal success at GC, and he had verbally confirmed to Sara at
SB, that the signing off on the contract was ‘a mere
formality’.
Gayle recently performed a review of company sales over the last
few years, with a particular focus on analysis of product margins.
At the last management meeting, Gayle commented that “the business
could improve its results without the need to make fundamental
changes, but by promoting items that provide the best returns”.
Gayle has asked Lewis to determine what data is currently available
to allow products to be tracked from purchase to point of sale, and
whether GC would need to make any further investment to enable them
to have access to additional management information.
Harry has agreed with a request made by Gayle to appoint an
external advisor to support her and the rest of the GC team in
dealing with some of the issues being faced by the company.
You are A.N. Consultant, and have been appointed in this role as
external advisor to GC.
QUESTIONS
1) Outline the potential benefits to Grains Coffee LTD of
leasing an asset as opposed to purchasing an asset
outright?
2) With reference to the potential new coffee supplier , discuss
whether there are any concerns that give rise to ethical issues,
including any ethical threats , and advise Gayle Voijic on suitable
actions. Your answer should incluude the ethical framework of
ACCA