Client Goal: Should Great Burger acquire Heavenly Donuts as part of its growth strategy?

Our client is Great Burger (GB) a fast food chain that competes head–to-head with McDonald's, Wendy's, Burger King, KFC, etc.

Description of Great Burger
GB is the fourth largest fast food chain worldwide, measured by the number of stores in operation. As most of its competitors do, GB offers food and "combos" for the three largest meal occasions: breakfast, lunch, and dinner.

Even though GB owns some of its stores, it operates under the franchising business model with 85 percent of its stores owned by franchisees (individuals own and manage stores, pay franchise fee to GB, but major business decisions (e.g., menu, look of store) controlled by GB).

McKinsey study
As part of its growth strategy GB has analyzed some potential acquisition targets including Heavenly Donuts (HD), a growing doughnut producer with both a U.S. and international store presence.

HD operates under the franchising business model too, though a little bit differently than GB. While GB franchises restaurants, HD franchises areas or regions in which the franchisee is required to open a certain number of stores.

GB's CEO has hired McKinsey to advise him on whether they should acquire HD or not.

QUESTION 1
What areas would you want to explore to determine whether GB should acquire HD?

YOUR ANSWER
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ANSWER 1

Some possible areas are given below. Great job if you identified several of these and perhaps others.

·                                 Stand alone value of HD

o                                                        Growth in market for doughnuts

o                                                        HD's past and projected future sales growth (break down into growth in number of stores, and growth in same store sales)

o                                                        Competition – are there any other major national chains that are doing better than HD in terms of growth/profit. What does this imply for future growth?

o                                                        Profitability/profit margin

o                                                        Capital required to fund growth (capital investment to open new stores, working capital)

·                                 Synergies/strategic fit

o                                                        Brand quality similar? Would they enhance or detract from each other if marketed side by side?

o                                                        How much overlap of customer base? (very little overlap might cause concern that brands are not compatible, too much might imply little room to expand sales by cross-marketing)

o                                                        Synergies (Hint: do not dive deep on this, as it will be covered later)

·                                 Management team/cultural fit

o                                                        Capabilities/skills of top, middle management

o                                                        Cultural fit, if very different, what percent of key management would likely be able to adjust

·                                 Ability to execute merger/combine companies

o                                                        GB experience with mergers in past/experience in integrating companies

o                                                        Franchise structure differences. Detail “dive” into franchising structures. Would these different structures affect the deal? Can we manage two different franchising structures at the same time?

The team started thinking about potential synergies that could be achieved by acquiring HD. Here are