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The Humble Pies management team was once again impressed with your team’s recommendations on the investment opportunities. For various reasons, the company decided to invest in the new labeling machine and not pursue the national fast food chain RFP. However, since receiving your recommendations, the company has been conducting strategic planning discussions on the future of Humble Pies and is considering two major acquisitions.
Option 1
Purchase Pete’s Steakhouse. Up to now, Humble Pies has focused on selling pies as a wholesaler to restaurants and grocery store chains in the mid-Atlantic region. Linda and Taylor were approached by the chain’s management group about whether they would be interested in buying their five underperforming restaurants and operate them under the “L&T’s Steakhouse” name. Pete’s Steakhouse is known for its excellent steak dinners and service but has struggled to expand its menu to compete with the many dining options available to consumers in the mid-Atlantic region (primarily, the Carolinas and Virginia). The key idea with this acquisition is that adding Humble Pies’ outstanding dessert offerings would make the new restaurant an appealing destination for both dinner and dessert. To help prepare for the upcoming initial negotiations, Linda and Taylor have asked you to review the 2013 performance report for the chain (see Table 2). It is estimated that average price per meal would increase 12% with the new desserts and require an investment of $10 million.
Option 2
The second option is to purchase and operate a factory in Knoxville, Tennessee which would double Humble Pies’ current production volume. There is an existing food production facility in Knoxville in a location that is well positioned on distribution routes and provides proximity to a whole new market of restaurants and grocery chains. The asking price for the factory is $7.5 million and includes existing equipment. About half the machinery could be used by Humble Pies, but would also require an investment of $2.5 million in additional equipment with a 10-year average life to provide the same capacity as the current factory. It would take about six months to get the new plant up and running. Estimated sales for the first three years after it opens are $4 million, $6 million and $10 million, respectively. Variable expenses are expected to have about the same behavior and relationship to sales as the current facility. Fixed expenses would be about the same amount per month as the current factory.
Use the following as a guide when making your recommendations:
1. Assess performance for Pete’s Steakhouse in terms of expected return on investment (ROI) and residual income. What were the major factors that contributed to the difference between profits from 2012 to 2013? What does this analysis suggest for Humble Pies?
2. Assess the viability and profitability for the Knoxville factory including its expected ROI and residual income. What does this analysis suggest for Humble Pies?
3. Comment on the strategic, technical, behavioral and risk factors that are relevant to this decision. What does this analysis suggest for Humble Pies?
4. What action do you recommend for Humble Pies at this time?
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