Company Overview

Discuss about the Management Control Systems to CSR Strategy.

The concerned report deals with the strategic financial and overall analysis of Coffeecups Ltd which is major coffee based Retail Company headquartered and settled in U.K. The company deals with a wide variety of coffee products and apart from being a coffee retailer, the company also focuses on selling coffee to its customers across various public platforms like schools, colleges, office buildings and bookstores. The Company primarily operates under two wings, one concerned with the retail section of distribution of coffee to prospective dealer and sellers and the direct selling to its customers across various public platforms as mentioned above. Apart from their coffee service, they also provide a wide range of cold drinks to its customers. The company has a deep regard for its employees and customers. They ensure that their customers receive the highest quality of coffee every time they approach Coffeecups.  Of late the company has been facing a financial crunch, earnings have fallen and it has caused a 25% decrease in the projected profit of the third quarter. As a result of which, the company is facing a financial dilemma because of its stalled investments which have hampered its operations and profits. In this report, the company’s financial officer has come up with three options to guide the company, which have been analysed in detail and the best option has been prescribed.

Coffeecups has over 600 locations across Europe and U.K. They offer wide range of products right from high quality whole beans to a variety of chocolate chip muffins, pastries and coffee beans. They sell directly to their customers approaching their stores as well as they operate as a retailer. They even offer food services to colleges, hotels, businesses and even universities. They have also started catering to the demands of cold coffee requirements of their customers because of the increasing warmer climate of the United Kingdom.

• The company has the foremost objective of transforming into the most recognised and valued coffee brand across Europe and U.K.
• Objective of expanding its business operations to US.
• To ensure that the shareholders of the company receive the maximum returns.

Coffeecups take employee policies, welfare and development very seriously. They know the worth and the importance of their employees. They offer exemplary services to their employees. Their specific policies about their employees have been described below:

1. They treat them as their very own and fondly call them as their ‘partners’ rather than employees. They are considered to be their ‘heart and Soul’ of their company.
2. Coffeecups provide free coffee and tea to its employees, who work for 20 hours a week or more. Even, if an employee is not a coffee fanatic, he or she may avail free tea as an alternative.
3. The company also provides share ownership to their employees, which also serves as a useful incentive to the employees.
4. The company believes in giving back to its employees and its stakeholders. As a result of which, they ensure that they receive healthy dividends to their shareholders.

The capital structure of the company has been provided below:

The company has always given due importance to both the most widely used financing techniques of a company; financing through equity and financing through debt. As a result of which, the company gives due importance in the usage of both. As of now, the company derives its funds through these two techniques of both debt as well as equity. The percentage of spilt is of 60% and 40%. The cost of equity financing is estimated at 8% and the cost of debt before tax is estimated at 13.5%. 

Capital Structure

2015 has proved to be a very successful year in the company’s history. In 2015, the company was successful in opening 200 new stores. The year 2015 was exceptional for Coffeecups in many ways. This was the part of the company’s European expansion strategy. In this very year, the company’s all time profit had a record increase and stood at £75million.

The company’s third quarter earnings had a significant amount of fall which had resulted in a 25% decrease in the projected earnings and profits. This was the first financial downfall of profits in the history of the company after the incorporation of the company, back in the year 1984.

The company had performed an initial investigation to derive the cause of this sudden fall in the profits of the company. After the primary investigations, it was concluded that the earnings may have had a slip because of the company’s preoccupation with the activities related to brand development with the synergies with other products.  It was even estimated from the meeting of the board members that net cash inflow could increase by a further £17,000 per year per shop if the company developed this area. The company’s MD believes that through their tie up and investments with NASDA supermarket, the company would be benefitted in the form of new store openings.

Effective management control evaluates and monitors the different aspects of the working of Coffeecups. The management ensures that goals of the company are met by efficient use of the resources of the company at the company’s disposal. It is done by the management by engaging in the following:

• Planning of tasks of the various coffee related activities.
• Coordinating the tasks from the beans purchase till the final distribution to the customers.
• Effective decision making and ensuring flow of information.

A successful coffee company employs the best possible management control system in order to ensure better all-round performance and profitability. It employs the following procedures to ensure this:

• Efficient marketing control: – The Company ensures that an effective marketing strategy is in place in the organisation, which fosters the growth in the marketing arena. Efficient social media presence, following the latest trends and proper management is vital in this regard.
• Forecasting and decision making: – In case of coffee companies, forecasting acts as important benchmarks for long term planning and operations. They use this procedure in order to estimate the allocation of budget for the upcoming period based on the forecasting made from time to time.
• Ensuring better quality control: – Control of quality occupies the loftiest position in the service industry. Management incessantly ensures that the beverage companies like coffee work 24*7 in order to maintain their standards in terms of quality control.
• Effective supply chain management: – Ensuring top notch management of supply chain is necessary for any service industry company be it coffee or any other beverage. From the supply of beans seeds till the procurement of other necessities like milk, everything should be perfectly executed in a time bound manner.

A diagrammatic explanation of the management control system has been provided below:

Coffeecups has to ensure that an effective management control system is placed in its organisational epicentre to arrest its financial crunch an achieve success (Arjaliès and Mundy, 2013). In this entire structure, the following internal working takes place, which acts as the primary engine for its MCS. The steps include making important decision regarding the company’s requirements in terms of its objectives and targets, followed by the process of control management action, where the performances are measured and consequently decisions are taken for the necessary changes and implementation.

A successful company, be it a coffee company or any other requires cost accounting in association with management control. Cost’s significance cannot be downplayed, although it makes an impact over the company’s results but not as large as that of managerial control. It is a much broader concept than cost accounting. Its scope includes costs measurement and taking actions for cost control, but managerial control includes every aspect of an organisation’s operations, including cost control. Therefore, it could be concluded that for long term sustenance both play a major role and cannot be sacrificed for one and another.

Successful Year and Recent Financial Challenges

In any business venture the need for continuous innovation is the need of the hour. Innovation in coffee industry involved change in terms of quality, health factor and the overall sustainability of the industry. Entrepreneurship is no more a nascent term in today’s world (Forbes.com, 2018). Coffee has been instrumental in creating many good entrepreneurs since a long period of time. Howard Schultz had set the trend of becoming a coffee entrepreneurs by founding Starbucks and the trend has continued till today.

 The main innovations in the coffee arena include:

• Innovation in agricultural practices has enabled better production of coffee beans.
• Ernesto Illy has been successful in rewarding its best producers from the top three countries in order to motivate them to provide top quality coffee beans (Illy, 2018).
• Paper packaging has been initiated in the American market by Illy. This has been exemplary and other coffee companies must take note in this regard.

Entering into business ventures and partnerships have been done by major coffee companies. The most notable venture of recent time has been the coming together of Tata Global Beverages and Starbucks for opening of coffee outlets in India. It has been carried out to exploit the business opportunities in a developing economy like India. Starbucks, Pepsi and Unilever have ventured into the tea category recently (Tataglobalbeverages.com, 2018). All these ventures have been entered into with the strategic aim of expansion of markets and profitability.

The company must follow an inclusive dividend policy. A proper balance should be followed in terms of cash retention and dividend distribution. . The board of directors have to decide a proper dividend policy which is in sync with the profit retention policy of the company. If funds need to be kept aside for future projects and contingencies or if shareholders want a quick return on their investment. Coffeecups must keep in mind these kind of goals of both the management as well as the owners. A proper sync should be the aim in deciding these policies.

There is a close relation between the prices of inputs and the stock prices of coffee companies. When the coffee prices are low, their shares prices tend to increase and vice versa. The case today is more of the latter one, where the stock prices have fallen. Various economists have said that the companies were purchasing coffee at a slower pace than before despite falling coffee prices as the company adopt a cautious approach in the case of buying highest quality coffee.

In the case of equity and debt source of financing, the concerned company must be wise enough to choose the correct financing procedure to fund its operations and existence. The company must strike a balance between the two. The traditional approach states that no debt issue should be made, instead funds should be collected through equity because the payment of dividends depends on the company. In case of the modern approach, the affinity towards debt is more and is therefore considered because of the tax benefits available. In this case a proper synergy should be maintained and a mixture of both equity and debt should be used.

Management Control and Cost Accounting

The company is now in rejuvenation mode and it must tread carefully in the future. It must take into account certain important factors which influence the profitability of the coffee companies worldwide. Some of these factors have been explained below:

• Consumer Dynamics: The tastes and preferences of customers continuously change and this is one of the most important factors which influence the profitability of coffee companies (Scholar.harvard.edu, 2018). Their wants, demands and drinking habits constantly change and are dynamic in nature. Coffeecups must ensure that it is catering to the changing trends of its customer needs and wants.
• Technology: The advance of technology has been one of the most important boons to the business world. The companies which have been able to adopt the newest technologies in its workplace has been at a profitable position. Starbucks has been quiet successful in it. Starbucks has been able to achieve customer service efficiency by introducing automatic espresso machines. Starbucks has served an exemplary service in terms of ensuring customer satisfaction, by driving and implementing the marketing campaign of, “delivering beverages in under three minutes’. Coffeecups must strategize its plans and take technological help to drive its business forward.
• Threat of substitutes: The increasing threat of substitutes has become a menacing threat to Coffeecups and its primary business of coffee (Matzler, 2013). Restaurants, foods, beverages, cold drink, and other eating outlets providing a wide variety of food to its customers have become a massive threat to Coffeecups.
• Changing lifestyles: Today customers have become increasingly health conscious. The consumers today have understood the implications of excessive coffee intake. They have started to shift towards healthier alternatives such as fruit juice and other healthier alternatives which are available in the market.

• Increased goodwill among customers: Coffee companies have been recently following a responsible way of producing and serving coffee to their customers. Their stores are introducing as well as preaching the increased use of recycling and reduction of wastage. Moreover, their stores promote community goodwill amongst its employees as well as customers. This has improved the goodwill of these companies amongst the customers.
• Location and aesthetic appeal: One of the most important reasons for the success of the coffee companies and their respective cafes is because of their strategic locations, beautiful settings as well as their aesthetic setup which ensures round the clock customers thronging to their premise. They target premium, high traffic, high visibility locations near a variety of settings, including downtown and suburban retail centres, office buildings, university, campuses and in some of the selected rural and other off highway locations across the world.
• Diversity of product mix: Product mix is one of the most fascinating things which are offered by coffee companies across the globe. They always experiment with their products and come up with new and improved products to satisfy the new and dynamic needs of their customers (Kolk, 2013).  As a result of which, they regularly offer a wide range of portfolio to their customers.
• Brand expansion and network distribution: The coffee companies all over the world take their brand name very seriously. In this ultra-competitive world, brand recognition and expansion is the need of the hour. This is one of the most strategic core competencies of the coffee industry. Starbucks and other coffee giants have one of the strongest brand images and as a result of which they can leverage their business in various horizontal lines of business (Starbucks Coffee Company, 2018). . All these companies, offer a wide distribution channels to reach every nook and corner of the world.
• Unwavering employee maintenance and loyalty: Coffee companies in the industry have always highlighted the importance of employees. These components of beverage industry have strived to maintain the welfare of their employees. With growing discontentment among employees of other industry, in need for better compensation and sound workplace, coffee industry strives to work for their overall benefits. For example, Starbucks has been exemplary in this regard, by becoming the first company to offer stock options to their part time employees. They also uphold the need for training and rigorously devote a minimum of 24 hours of training to their employees. They teach the intricacies of coffee making, efficient servicing towards customers, various nuances retail marketing are taught in this period. As a result of which, Starbucks enjoy a fugal 60 % employee attrition rate, when the industry average being 140%. These activities acts as trendsetters in this industry, which even compels other companies to follow them up.

Option 1: This alternative is about investment in opening stores with the NASDA Supermarkets. After calculating the cumulative cash flows, it has been seen that the cash flow remains negative till the sixth year of the NASDA undertaking. Only after the sixth month, the company becomes successful in recovering its initial costs which consisted of investment costs, staff salary, research and development and other expenses. After the sixth year, Coffeecups starts earning an excess revenue amounting 8, 75,000. In the worst case scenario, the company might not be able to recover its investment during the ten year period of the investment. In this case, it would not be wise, on the part of the company to continue with this investment collaboration with NASDA Supermarkets. As a result of which, the company would not be able to meet its objective of establishing cafes with the assistance of NASDA Supermarkets. The NPV in the case of the branding is very good, amounting to 6, 58, 94,530, so it can be concluded it is a better deal. This should not be abandoned.

In the second option, the company tends to increase its turnover by investing in opening the Casa or the de-luxe model. The analysis of each of these two models have been provided below:

The average life span of the Casa model is eight years before it requires serious remodelling or innovation and in the case of de-luxe is ten years. As these projects are of unequal life years and are mutually exclusive nature, as a result of which replacement method should be used.  In case of the Casa model, the NPV stands at 3, 53, 83,021 and the internal rate of return is 35% which is more than the rate of return expected from the De-luxe model which stands at 31%. Moreover the NPV is comparatively less than the Casa one as it is only 1, 02,588.84. Moreover, the company in case of De-luxe model has to be financed with an 11% loan, which will eventually have a bad impact on the returns expected from the adoption of this model. Thus in this case, the company with the higher IRR must be chosen, which Casa model is in this case. Moreover the most recent coffee in the United Kingdom is Costa and it has grown steadily for a long period of time overtaking Starbucks in the process (Costa.co.uk, 2018).

Innovation in the Coffee Industry

Option 3: This alternative focuses into discontinuing operations and markets in the UK and refocus on European market. This would generate a cash of about $63 million and it would cost about $14 million. It would be shared over a period of three years. The NPV is 4,14,55,257. The company’s objective is to maximise the profits of itself, if this closure takes place, the prospective future cash flows from the opening of markets in the UK would come to an abrupt end. As a result of which, the company’s profitability objective would be compromised. When the NPV is being compared with branding it stands at 6,58,94,530 which is more than the NPV of the closure.  The shareholder’s objective as a result of which would not be maximised as it is in conflict with the company’s objective.

Conclusion:

In this project a detailed financial review of Coffeecups has been done. In particular the various alternatives which were chalked out in the board meeting of the company had been discussed. Opening of outlets with NASDA, creation of Casa or de-luxe style of shops and discontinuing operations in the UK market, all had been investigated. On careful analysis, it can be concluded that the NASDA investment is the best of them all as after the sixth year, the company would recover its investment and would eventually start earning revenues from the 7^th year onwards.

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