CERES GARDENING COMPANY CASE STUDY/G5P/B200 Executive Summary Ceres Company, backed by its innovative GetCeres program, has been capitalizing on a previously untouched segment of the organics market. In capturing a key demographic of consumers, those causal gardeners who demand instant gratification, rather than the extended gardening period, Ceres is eager to expand quickly to capitalize on this opportunity before its competitors. This strategy is putting extensive strain on the company’s resources and its relationship with suppliers.
The exciting growth in sales have eclipsed the company’s sustainable growth rate and Ceres is hampered by cash deficits.
Our team has identified three options for Ceres as it looks to move forward. Option A is to reduce growth to its desired sustainable growth rate by changing some key policies of the GetCeres program, primarily price, credit terms, and discount rate. Option B pursues the agenda of the CEO, who hopes to implement a plan of rapid growth by expanding Ceres’ retailing network.
This option includes a 35% increase in sales and our pro-forma statements (Exhibit 1) have identified a need for $2 million in additional financing, to be obtained by issuing new stock, cutting dividends, and further increasing leverage. Option C suggests merging with a cash-cow company, such as a nation-wide retailer. The synergies created will solve the distribution problems and increase market share. Our team suggests that Ceres should follow Option C and merge with a cash-cow company. This plan would follow a dual purpose: enable Ceres to make the most out of the industry trends and grow without risking bankruptcy.
More importantly it will capitalize on Ceres’ core competency and competitive advantage: quality products. I. PROBLEMATIQUE: The Ceres Gardening Company has experienced impressive growth and increasing revenues in recent years. Moreover, Ceres is competitively positioned in an expanding industry. The company has high goals for the years ahead, however, the CEO is concerned over the implications of pursuing an aggressive growth strategy on the company’s costs and financing needs. II. ANALYSIS A. Strategic Diagnosis: 1. Strengths: strong growth is sales, great reputation for quality 2.
Weaknesses: inadequate distribution system, extended payment terms and limits in long-term debt, seasonality of sales B. Financial Diagnosis 1. Profitability Ratios • ROE – Decrease from 23% to 16% due to the decline in Profit Margins and Asset Turnover while Leverage is increasing. Ceres is relying more and more on debt to finance its activities. • ROA – Decrease from 11% to 5%. The increase in capital expenditures is not generating proper returns. 2. Activity Ratios • Asset turnover, fixed asset turnover – decreasing. Inventory turnover – increases, consistent with the increase in sales. • Collection period- HIGH increase due to the relaxed credit policies of GetCeres. • Payables period – Increases dramatically from 36 to 98 days 3. Liquidity Ratios • Current ratio, acid test ratio – decrease in company’s’ short-run solvency. 4. Financial Leverage Ratios • Debt-to-assets – Increases as company is relying more on debt • Debt-to-equity – Increases as debt becomes more expensive 5. Cash conversion cycle – increasing by ~ 20% 6. Cash flow statements – Decrease in NOCF (from ~1700 to 800).
Not generating enough money from operating activities 7. Sustainable growth – Company is growing too fast. Based on 2005 we should be targeting 12% growth rate. We are at 25% growth. C. External Environment Analysis 1. Transactional Environment: Highly complex, can be analyzed from three perspectives: Ceres to suppliers: Ceres is relying heavily on trade-credit, threatening relations with suppliers Ceres to dealers: To boost sales Ceres loosened its credit policies and launched GetCeres Ceres to bank: Revolving line of credit, long-term debt, a number of limitations. 2.
Competitive Environment: The overall increasing trend of the industry is attracting new players privately held competitors and major gardening supply companies moving beyond conventional seeds and competing with Cerres in select organic lines. 3. Contextual Environment: The nature of the business is quite an innovative concept of social responsibility as the company is aiming to do well, while doing good. The industry is shaped by trends in organic awareness and it must focus its marketing efforts not only on its products but also on educating customers on going organic.
II. PRAXIS – Alternative Policy Options A. Ceres will switch to a more conservative, slow growth and marketing approach in response to increasing debt and decreasing cash flows. Our ratio analysis (Exhibit 2) has identified that the company is growing too fast and is putting considerable strains on its resources, raising the possibility of bankruptcy in the near future. The 2006 pro-forma statement calculates a 98-day payable period, with suppliers already angry at the 90-day period. Profit margins are decreasing and the plummet in NOCF is worrying (Exhibit 1).
The company is not generating enough business from operating activities and is debt financing. As a result of GetCeres, AGE, Inventory and AP have increased significantly more than sales, resulting in a lack of cash. All leverage and liquidity ratios (Exhibit 2) confirm that. Our first policy is to slow down growth to the sustainable growth rate, calculated at 12% based on the 2005 data so to generate more cash. That can be achieved by doing the following: Change GetCeres terms: – Decrease credit terms from 120 to 90 days. – Increase prices to decrease sales. – Change the discount rate from 15% to 10%. Do not expand in the retail segment anymore, but instead focus on the stable, slow-growing sector of the online business. – Cut down R&D expenses by reducing product line expansions. Our pro-forma statements project an increase in NOCF from $884 to $2184 (thousands), Cash Conversion Cycle reduced from 59 days to 25 days. B. Pursue an aggressive growth strategy on its own – aim for a 35% increase in sales. -AFN to pursue this policy is $2 million; still within bank limits (Exhibit 2) – Financing options: sell new stock; stop paying dividends, increase financial leverage. NOCF will increase from $886 to $1752 (thousands), however, the pro forma assumes that the company will manage to keep all its expenses in the same ratios. -The marketing strategy has to focus on increasing market share and the related costs for advertising, fending off competitors, training additional personnel and maintaining a credit-line to cover seasonal sales. C. Ceres should merge with a cash-cow (for e. g. a nation-wide dealer such as Home Depot) The synergies created will enable Ceres to pursue its currently planned strategy of rapid retail growth through aggressive marketing efforts and position itself as leader in the industry. Decrease in COGS: 15% decrease from past dealer discount part of GetCeres, reducing labor and marketing costs. – Reducing accounts receivables to maximum 30 days and reducing inventory. – Ability to focus on quality, product line expansion and developing the supplier network Costs and Benefits Option A: Slow down Growth Benefits: An adherence to its exemplary quality standards; Avoids bankruptcy while increasing profit margins; A decrease in its debt to equity ratio Costs: Significant loss in market share.
Option B: Expanding on its own Benefits: By continuing to increase both its dealer base and its shelf space within the base, Ceres stands to capture a significant and increasing share of the organic products market. Costs : Though it might be able to cover its needs for the next year, in the long-term Ceres will decrease in solvency and can grow bankrupt if not able to finance it’s growth; Will not be able to finance R&D expenses and can lose its competitive advantage; can threaten its relationship with suppliers;
Option C: Merging with a cash-cow Benefits: Opportunity to create synergies, expand market share and become leader in the industry; Ability to focus on quality, product line expansion and developing the supplier network; Still operating under Ceres company due to its known quality; Reduced marketing efforts; Costs: Giving up part of the control on the company Recommended policy: Option C Merging with a cash-cow Merging with a dealer will bring nation-wide presence for Ceres, solving its distribution-network problems.
It will enable the company to make the most out of the increasing trends in industry and position itself as the leader. Marketing efforts and labor costs are shared with the other company and Ceres can negotiate a deal to operate under the Ceres brand and to maintain control over certain core aspects of its business: quality, innovation, relationship with suppliers. Our team is confident that this policy is the only one that can simultaneously enable Ceres to take advantage of the increasing industry trends and in the same time, grow without the risk of bankruptcy.
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