Euroland\'s Foods the Euroland Food

Euroland's Foods

The Euroland Food company has been a prominent player in the dairy and water market in Europe for the past two decades. Due to current market shifts and new competition, however, the company is struggling to grow. Even worse, a recent attempt at increasing the market share resulted in serious debt for the company. With shareholders becoming anxious and a limit on spending for the 2001 financial year, the company must be creative in implementing new expansion strategies that will impact both existing markets and ideally open new markets as well. This report seeks to clarify and examine the current options for market expansion in the company as stated in the proposals of the various project board members.

The current evaluation system for all projects requires that two thresholds be met, an IRR and a payback time frame. Traditionally, projects that did not meet these goals were rejected; however, given the current dissatisfaction stemming from the shareholders, the board is willing to consider other options for evaluation as well. In order to aid the board in this evaluation, the first data analysis offers the two traditional hurdles. The second data analysis reviews other issues such as company goals and the effectiveness of each project in meeting the current issues.

Issue Statement

The main issue is what proposals the senior management committee should present to the stockholders for the 2001 financial year to revive the company's stalemated profits, reduce the high debt percentage, and compete with increasing market competition. Along with this issue are concerns regarding the board's flexibility in evaluating each proposal as well as the current spending limit for this calendar year. The final issue is to decide whether to offer a dividend or reinvest profits for the year into the company.

Data Analysis

Project 1- Expansion of Truck Fleet: The overall amount to be spent on this project is 33 million dollars. This suggestion does not pass the IRR test, as its IRR is only 7.8% and 8% is required. It also fails the payback test as payback would take 7 years as opposed to the required 4.

Project 2- New Plant: This project suggestion meets the company's IRR standard of 10%, but fails the maximum payback of 5 years, doubling the time for payback.

Project 3- Expansion of the plant: This proposal is to expand a plant in Germany that has already reached its maximum capacity. This project reaches the company's required IRR of 10% with payoff taking 7 years, which is two years higher than the required five.

Project 4- Development and roll-out of snack foods: This proposal is to produce a new line of dried fruit products under the Euroland Foods brand name. The total cost of the project is 27 million. This project meets the required IRR of 12% for new products but exceeds payoff time by one year.

Project 5- Plant automation and conveyer systems: This project is to modernize the lines of six older plants. This suggestion falls under the efficiency section and meets the efficiency hurdle coming in at 8.7%. While it does not reach the payoff goal of 4 years, it is arguable that it should be categorized under safety, as it will reduce the amount of injuries.

Project 6- Effluent-water treatment at four plants: This project is an environmental project in response to legislation that requires all the plants to modernize their water purification systems to remove potential toxins before dumping water. There are no tests for this proposal.

Project 7 and 8- Market expansion southward and eastward: This project is to expand into the southern and eastern European markets. The cost will be 56.3 million with the IRR's being the highest of any project at 21.4 and 18.8%. Payback figures are unknown, but the regions do show promise.

Project 9- Development and introduction of new artificially sweetened yogurt and ice cream: This project will cost the company 27 million with an IRR of 20.5%. Payback is unknown, but it looks promising.

Project 10- Networked control system: This proposal would cost 22.5 million initially. The IRR is acceptable at 16.2%. This update would be outdated within three years and require additional investment after that. Payoff is unknown.

Project 11- Acquisition of a leading schnapps brand and its facilities: This project successfully meets the IRR and the payback goals.

Alternative Analysis

Project 1: The expansion of truck fleet proposal would serve two primary purposes within the company. It would allow for greater efficiency in deliveries by expanding the total fleet by 40 trucks and it would cut delivery times and allow greater flexibility for deliveries. This project will in no way increase the company's profit. This will reduce the amount spent on delivery, thus aiding in paying off the company's debt sooner. Finally, this project will not assist with market competition.

This project is being offered by Heinz Klink, the managing director for distribution, so his proposal is in direct alignment with his specialized area within the company and his knowledge of company functioning. While the overall cost for the project is high compared to other project suggestions, it is something that will need to be done eventually and it will greatly expand the company's truck fleet, which could permit some experimental expansion into new areas of Europe before jumping into a full expansion.

Project 2: This project is offered by Martin Layden, one of the toughest forecasters and financial bargainers on the board. Martin is also the most in-tune with the expectations and needs of the shareholders, so his requests are likely in line with those expectations. The request is to build a new plant in France to aid in production which has nearly reached its limit. The market is high in France and is showing signs of continuing growth, which means that a new factory would be beneficial to the area. Additionally, the plant is estimated to produce after-tax cash flows of 35.6 million within the next ten years, which would drastically aid in reducing debt. Finally, Euroland has already established a solid name in the region, so there is little to no market competition but plenty of room for expansion.

This would also offer the benefit of providing a modernized plant in France and take the burden off the Melun and Strasbourg plants. This proposal shows promise in an area where the market is already very healthy and will most likely continue to grow with increased capacity.

Project 3: This proposal is also by Layden to expand a plant that is at capacity. Currently the plant is no longer functioning efficiently and costing the company money. The plant is producing popular products within a market that will continue growing. This project will produce increased profit for the company with a 2.25 million production increase. So, it is well worth considering.

Project 4: This project was suggested by Fabienne Morin who has an excellent track record with the company regarding projecting excellent market expansion and growth-oriented projects. Fabienne's last suggestions gained the company a huge market share. This proposal has the potential to result in high profits and a new market for the company. Euroland Foods already has a good name for high quality nutritious products, so the expansion into dried fruit is directly in line with the goals and mission of the company. This proposal also has great potential for putting an end to the stalemated sales and could greatly aid in the prompt payoff of the company's debt. While this project's estimated payoff does exceed the company's standards by one year, it still seems like of the most viable options.

Project 5: This is another suggestion by Leyden, whose specialty and training is engineering. This proposal would increase efficiency of the plants that are being updated, resulting in overall savings for the company. This proposal will in no way aid in ending the stalemate or improving our share of the market. Leyden's one strongest argument for this proposal is that it will reduce the number of injuries and decrease possible liability for work-related injuries.

Project 6: This project should be done, no argument. Our company's entire reputation rests on producing healthy, nutritious food for the public. Should this image be in anyway damaged, it would be seriously detrimental to the company as a whole.

Project 7 and 8: This proposal is given by Marco Ponti who has an excellent rack record with the company. Marco's proposal would expand the company into new markets which should directly impact the stalemate. New markets could potentially lead to a greater payoff and decreased debt. The only issue is that the company would be competing with the new area's other producers. This suggestion met all the other requirements, so it looks as though it would greatly pay off and be in alignment with the goals of the company.

Project 9: This proposal has some potential, but could also be damaging to the company's overall image. While reduced-calorie products do have potential, artificial sweeteners are very controversial. In fact, the European Union has banned many artificial sweeteners in the passed due to the health risks. So, putting the Rolly name on a product that is potentially unhealthy could do serious damage to the company's overall message.