QUESTION 2
What potential synergies can you think of between GB and HD?

   ANSWER 2

We are looking for a few responses similar to the ones below:

·                                 Lower costs

o                                                        Biggest opportunity likely in corporate selling, general, and administrative expenses (SG&A) by integrating corporate management

o                                                        May be some opportunity to lower food costs with larger purchasing volume on similar food items (e.g., beverages, deep frying oil), however overlaps may be low as ingredients are very different

o                                                        GB appears to have an advantage in property and equipment costs which might be leveragable to HD (e.g., superior skills in lease negotiation)

·                                 Increase revenues

o                                                        Sell doughnuts in GB stores, or some selected GB products in HD stores

o                                                        GB has much greater international presence thus likely has knowledge/skills to enable HD to expand outside of North America

o                                                        GB may have superior skills in identifying attractive locations for stores as its sales per store are higher than industry average, whereas HD's is lower than industry average; might be able to leverage this when opening new HD stores to increase HD average sales per store

o                                                        Expand HD faster than it could do on own–GB, as a larger company with lower debt, may have better access to capital

 

QUESTION 3
The team thinks that with synergies, it should be possible to double HD’s U.S. market share in the next 5 years, and that GB’s access to capital will allow it to expand the number of HD stores by 2.5 times. What sales per store will HD require in 5 years in order for GB to achieve these goals? Use any data from Exhibit 1 you need, additionally, your interviewer would provide the following assumptions for you:

Doughnut consumption/capita in the U.S. is $10/year today, and is projected to grow to $20/year in 5 years.

For ease of calculation, assume U.S. population is 300m.

ANSWER 3
Possible responses might include the following:

·                                 Market share today: $700M HD sales (from Exhibit 1) ÷ $3B U.S. market ($10 x 300M people) = 23% (round to 25% for simplicity sake)

·                                 U.S. market in 5 years = $20 x 300m = $6B

·                                 HD sales if double market share: 50% x $6B = $3B

·                                 Per store sales: $3B/2.5 (1000 stores) = $1.2M

Does this seem reasonable?

Yes, given it implies less than double same store sales growth and per capita consumption is predicted to double.

QUESTION 4
One of the synergies that the team thinks might have a big potential is the idea of increasing the businesses' overall profitability by selling doughnuts in GB stores. How would you assess the profitability impact of this synergy?

ANSWER 4
Be sure you can clearly explain how the assessment you are proposing would help to answer the question posed.

Some possible answers include:

·                                 Calculate incremental revenues by selling doughnuts in GB stores (calculate how many doughnuts per store, times price per doughnut, times number of GB stores)

·                                 Calculate incremental costs by selling doughnuts in GB stores (costs of production, incremental number of employees, employee training, software changes, incremental marketing and advertising, incremental cost of distribution if we cannot produce doughnuts in house, etc.)

·                                 Calculate incremental investments. Do we need more space in each store if we think we are going to attract new customers? Do we need to invest in store layout to have in-house doughnut production?

·                                 If your answer were to take into account cannibalization, what would be the rate of cannibalization with GB offerings? Doughnut cannibalization will be higher with breakfast products than lunch and dinner products, etc.

·                                 One way to calculate this cannibalization is to look at historic cannibalization rates with new product/offering launchings within GB stores

·                                 Might also cannibalize other HD stores if they are nearby GB store–could estimate this impact by seeing historical change in HD’s sales when competitor doughnut store opens nearby

QUESTION 5
What would be the incremental profit per store if we think we are going to sell 50,000 doughnuts per store at a price of $2 per doughnut at a 60 percent margin with a cannibalization rate of 10 percent of GB's sales?

Exhibit 2

Sales and profitability per store

 

Units of GB sold per store

300 thousand

Sales price per unit

$3 per unit

Margin

50 percent

 

 

Units of HD sold in GB stores

50 thousand

Sales price per unit

$2 per unit

Margin

60 percent

Cannibalization rate of HD products to GB products        

10 percent

Based on correct calculations, your response should be as follows:
Incremental profit = contribution from HD sales less contribution lost due to cannibalized GB sales

= 50K units x $2/unit x 60% margin – 300K units x 10% cannibalization x $3/unit x 50% margin

= $60K – 45K = 15K incremental profit/store