SuperMart Case Study

This case study exercise is based on the supermarket industry –

SuperMart is a fictitious company that incorporates elements of events
and developments occurring in the supermarket sector. It has been
adapted and updated from an old CIMA case study for use at postgraduate
level.

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SuperMart - Case study information

Contents
Background to SuperMart ........................................................................................................... 4
SuperMart and GlobalStores - financial information for years ended during
2018 ................................................................................................................................................ 6
Sustainability ................................................................................................................................... 8
Preparation for a strategy meeting ......................................................................................... 9
The strategy meeting ................................................................................................................. 12
Exhibit 1 .......................................................................................................................................... 14
Summary financial statements circulated by Mohammad Hafeez, Financial
Director ........................................................................................................................................ 14
Exhibit 2 .......................................................................................................................................... 16
Basic financial data for the top 5 Europe supermarket groups for years ended
during 2018 ................................................................................................................................ 16
Exhibit 3 .......................................................................................................................................... 19
Memorandum – information systems and home shopping ....................................... 19
Your role as a consultant........................................................................................................... 20
Exhibit 4 .......................................................................................................................................... 20
Memorandum - Developing USA Operations .................................................................. 20
Exhibit 5 .......................................................................................................................................... 22
Memorandum - Home Shopping Operations .................................................................. 22
Exhibit 6 .......................................................................................................................................... 22
Memorandum - Future International Operations .......................................................... 22
Appendix A.................................................................................................................................. 23
Report - Assessment of Europe supermarkets .......................................................... 23
Exhibit 7 .......................................................................................................................................... 25
Memorandum - Update on current performance .......................................................... 25
Exhibit 8 .......................................................................................................................................... 25
Memorandum - The new earnings forecast .................................................................... 25

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Background to SuperMart
SuperMart Inc. was started in 1907 as a family grocery business and has now
grown to be a leading grocery retailer. In fact, prior to the development of
supermarkets, SuperMart was one of the world’s largest grocery retailer. It is
incorporated in the United States of America and has its head office in New York.
In the early days it prided itself on high quality produce and service levels, but as
markets grew and transport links became more efficient SuperMart found that it
had a competitive advantage on costs, as it was able to buy in more volume than
its smaller competitors. It retained the ethos of high quality and high levels of
service, but also managed to base its strategy on cost-leadership as the ever
increasing volumes provided significant buyer power in the industry.

The initial development of self-service groceries was ignored by SuperMart, which

regarded personal customer service as more important to its customers, and
viewed the potential labour savings as irrelevant. Its immense buying power led
to very satisfactory profits. However, developments in the USA moved in ways
that SuperMart did not anticipate. Labour became more expensive in conditions of
full employment with increasing legislation protecting employee rights. The
personal service on which SuperMart had prided itself was being priced out of the
market. The leverage of its vast buying power over domestic supplies became less
effective under successive legislation to prevent anti-competitive behaviour, which
constrained buying powers to reflect real differences in costs incurred by the
suppliers. Under this legislation, other customers could demand comparable
prices, unless the suppliers could show differences in cost arising from variations
in manufacture, packaging and distribution. Perhaps more important for the longer
term, customers regarded the new self-service stores as modern and preferable,
and the SuperMart stores as old-fashioned and dull.

GlobalStores, which is also incorporated and based in the USA, had originally been
a smaller rival of SuperMart, but had been an early developer of self-service
grocery stores. GlobalStores continued to innovate, developing larger stores. It
found that labour savings increased, and that a wider range of groceries and
general merchandise could be sold in these stores without excessive stockholding
costs. The customers liked this, and were also attracted by the first out-of-town
stores, which were even larger, and provided easy and free car parking for
customers, avoiding town centre congestion. Customers were no longer limited to
buying what they could carry away by public transport; they could, if they wished,
fill their cars.

GlobalStores continued to innovate in retailing, introducing additional facilities and

services into its stores, such as post office boxes, cash-point banking facilities,
baby-changing facilities, mother and baby parking facilities, home-delivery
service, special food counters, (such as fresh fish), in-store bakery, pharmacy,
coffee shop, restaurant, and gasoline filling stations. Customer loyalty was
fostered by offering loyalty discount schemes where points could be saved and
used against future purchases in store.

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The market in which GlobalStores and SuperMart operates changed into one in
which, with the development of a “one-stop shop” pattern, customers could buy
most or all of their weekly food and other regular requirements in a single visit.
The market comprises a large number of local catchment areas within which
customers can reach a supermarket in a relatively short time. In some cases,
these catchment areas overlap. Supermarkets tended to open up close to each
other to try and capture local trade, this increased competition and forced prices
and margins down. The larger supermarkets were able to use volume to increase
buyer power over suppliers, and frequently came under the scrutiny by the USA
Federal Trade Commission’s Bureau of Competition for abuse of power over
smaller suppliers. Supermarkets also realised that they were collecting useful
information about the demographics within the areas where they were located and
began to sell this information (de-personalised, i.e., no individual was identified)
to other companies, such as insurance companies. Later, as supermarkets
developed their own range of non-food products to include legal services,
insurance, and financial products they ceased to make the data available to other
companies, preferring instead to retain the information to develop their own
diversification strategies. However, supermarkets kept a keen eye on local
government counties and municipalities where housing projects were being
developed to attract certain types of people in to the area. Supermarkets were
very interested in monitoring housing plans that were developed to attract their
‘type of customer to an area’ and would themselves seek planning permission to
build a store in the area.

By the time that SuperMart started to assess developments by GlobalStores, and

recognised that the market for groceries may have changed, investors had been
attracted to GlobalStores because of its high growth rate and attractive margins.
GlobalStores used its resulting high share price to acquire several smaller groups,
and to raise new capital to continue to build out-of-town stores. Every time
GlobalStores reviewed its building programme, it commissioned larger stores.

SuperMart had responded to the developments by GlobalStores, and followed it in

converting stores to self-service, and in building out-of-town stores. But this was
initially done on an experimental basis, to see if there were genuine savings to be
achieved. Development did not occur on the same scale as, or with the speed of,
GlobalStores. SuperMart also followed GlobalStores in selling a much wider range
of products expanding beyond food items to include a range of non-food items.
SuperMart was late in introducing technology into the stores such as electronic-
point of sales checkouts and hence did not have access to the information that the
use of electronic loyalty card schemes could provide about the customers.
SuperMart has also been slow in implementing payment methods such as
‘proximity contactless cards’, which are growing in popularity with younger
shoppers. However, some of the more senior, older, shoppers are worried about
the cyber threat to their data security, so, in many of SuperMart’s markets, still
prefer to pay by more conventional methods. It also missed out on developing
efficient just-in-time delivery relationships with its suppliers, which meant that its

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cost base began to rise compared to that of competitors, and particularly that of
GlobalStores. Competitors such as GlobalStores had developed Planning and
Replenishment Inventory Management Systems in which suppliers were linked to
the planning systems of the stores so that the suppliers were aware of up-coming
promotions and would therefore be able to plan their own production processes
around the forthcoming requirement of its customers. This not only ensured an
efficient inventory system but also locked in suppliers and increased their
willingness to work closely with other members of the supply chain.

GlobalStores had, many years ago, overtaken SuperMart to become the largest
and most profitable supermarket group in the USA.

SuperMart and GlobalStores - financial information for years

ended during 2018
SuperMart GlobalStores
Sales $ 43.9 billion $ 211.4 billion
Profit after tax $ 1.43 billion $ 7.10 billion
Shares 900 million 4,700 million
Earnings per share $ 1.59 $ 1.51
Information as at 31 March
2019
Share price as at 31 March 2019 $ 34.96 $ 56.65
Price / Earnings ratio 22.0 37.5
Market capitalisation $ 31.46 billion $ 266.3 billion

One billion = 1,000 million

The last published quarterly “like for like” sales growth figures (that is, for
comparable stores, excluding new openings) show that GlobalStores is growing at
a rate of over 5% each year in these terms, whilst SuperMart is achieving under
2%. To this must be added the vast area of new sales space being built each year
by GlobalStores. It is also expanding overseas very rapidly, and is rumoured to be
likely to make further acquisitions. Supermarkets were also being criticised for
holding ‘land banks’, which is land they own that could be developed into a
supermarket. Supermarkets often purchased land simply to stop a competitor
building a store in the area. GlobalStores had a significant holding of land with
planning permission for development in areas where the target customer groups
were being encouraged to locate.

Analysts working for consumer organisations broadly agree that GlobalStores,

with its greater turnover leading to immense purchasing power, now buys more
cheaply than SuperMart. It can match selling prices or can sell even more cheaply
without damaging margins. Measurements of this are disputed, and confused by
the number of special promotions that GlobalStores normally operates to stimulate
customer interest. Measurement is also confused by quality issues; SuperMart

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targets more affluent customers than GlobalStores, and claims to place more
emphasis on quality. However, the recent decision for SuperMart to do price
comparisons with all of the major supermarkets has confused the customers (and
city analysts) into wondering what strategy SuperMart is operating in terms of
market positioning, i.e., is it adopting a strategy of low cost, or differentiation?
The low cost strategy view is based on the fact that SuperMart now issues
vouchers to customers that can be redeemed against future purchases, based on
the savings that customers would have made if they had shopped at other
supermarkets. SuperMart include the more recent low cost ‘discount’ providers
within the comparison supermarkets. A differentiation strategy, however, could
be applied, as SuperMart has many more ‘over-the-counter’ services, where
customers are served by a member of staff, rather than self-service from pre-
packaged goods. This obviously increases staffing costs of SuperMart.

A greater proportion of GlobalStores’ sales comes from very large out-of-town

GlobalStores, while a considerable proportion of SuperMart’s sales are generated
in smaller stores in central locations. GlobalStores is believed to have a
significantly higher spend per customer visit. An interesting trend has been
occurring over the last few years in that the ‘in-town’ stores are coming back into
fashion with many supermarkets, including GlobalStores, opening an increasing
number of what are known as ‘convenience stores’. These are smaller stores
located in-town and where SuperMart probably had an advantage in this area a
few years ago, GlobalStores is now threatening to overtake them in this market
as well.

SuperMart has also come under pressure from other fast-growing competitors,
which have either prospered by being more “up market”, in an era of growing
affluence, or have built very strong regional market shares. Some of these now
appear to be able to buy at least as effectively as SuperMart, and have a significant
number of ‘in-town’ convenience stores. The supermarket industry is currently
undergoing a change in terms of shopping habits. Growth in ‘click and collect’ and
online shopping has continued in most of the markets in which SuperMart
operates, but city analysts think that SuperMart has been slow to recognise this.
An innovation by some supermarkets is the growth of the ‘dark stores’. These are
located in cities on major traffic routes in and out of the city, typically used by
commuter traffic, and are stores designed to allow customers to collect their
shopping on their way home from work. Although these stores are not open to the
public for general shopping, they are set out like a normal supermarket, as this
enables a similar range of products to be stocked, and the store layout facilitates
the picking of goods by the staff who prepare the orders for collection by the
customers, who are able to ‘drive through’ and collect their shopping from a
collection point.

Another worrying trend is that foreign companies, those not previously operating
in the USA, have captured a significant segment of the low cost market. These
were quite small companies a few years ago but their growth rates have been very

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high such that they now pose a significant threat to the market share of the big
players, such as GlobalStores and SuperMart. These overseas companies have
announced large expansion plans to increase their share of the USA’s market and
they are using aggressive pricing and advertising tactics to gain market share,
which appears to be working.

Sustainability
The supermarket industry has been under fire from the media and consumer
groups in recent years, and the USA, like many countries has experienced a
growing concern with obesity within its population. The types of food sold by
supermarkets has been heavily criticised, as has the amount of packaging and
food wastage. SuperMart has attempted to respond by actively seeking ways to
reduce food wastage. However, problems with the supply chain and poor
information systems creating stock-outs sometimes encourages over ordering,
which then leads to high levels of food waste. Consumer bodies are quick to
highlight this, which exposes internal problems to the outside world. However,
sustainability is not just about food wastage and eating habits but involves close
working relationships with suppliers to reduce transport costs, production and
processing costs, packaging and food presentation. It is also about reducing the
carbon footprint throughout the whole supply chain and trading responsibly.
Recent government promises to legislate to ban the use of single use plastics in
packaging has sent shock waves through the industry.

GlobalStores has been producing a Sustainability and Corporate Social

Responsibility report for several years but SuperMart has not produced a separate
report, preferring to pay lip service to its polices in the Annual Report and
Accounts. However, SuperMart does have a sustainability policy which was put
together by Susan Paine, the VP Human Resources. In the overall summary it
talks about not just working to reduce food waste but to improve the health of the
nation by working towards offering healthier food options with less additives and
processed foods. The difficulty with this for SuperMart is that most members of
the executive management team see it as increasing the costs, and with the price
wars in the industry it is difficult to put this into practice and remain competitive
unless the whole industry adopts the same policy. There is then the danger that
consumers buy less if prices go up.

Working closely with suppliers is seen as a positive step in that it can reduce costs
through improved communication and increased efficiencies but unless suppliers
adopt similar policies and commitments to reduce carbon, change processing
practices, find new sustainable methods and materials for packaging, etc., it is
difficult to make it work in practice. SuperMart have found that it does not have
the buyer power it used to have and is not able to insist that suppliers adopt
sustainable policies if they wish to trade responsibly with SuperMart. There is a
danger that if SuperMart is too insistent it will make suppliers unwilling to work
closely with them if they feel they can make a higher margin by supplying

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SuperMart’s main competitors. Zhang Yixing, VP Operations, and Michael Chang,
Chief Purchasing Officer, are both in favour of sustainability, but not at the
expense of profitability, or making supplier relationships difficult.

Susan Paine (VP Human Resources) also included elements in the CSR report
about being a responsible employer and ensuring jobs were sustainable, and that
SuperMart would strive to make a positive social and economic contribution by
working closely with the local communities in which it operates.

As the reporting of its sustainable activities is limited now, SuperMart does not
have any specific performance measures or control systems in place to effectively
monitor the degree to which it is achieving any degree of sustainability in its
operations. However, Susan Paine is supported by the Chief Executive Officer,
Christiana Tasousa, that SuperMart should strive to be seen as a sustainable
company, i.e., one that takes its responsibility seriously.

Preparation for a strategy meeting

Jacob Standing, President of SuperMart, has asked the members of the Executive
Management Team at SuperMart to attend a meeting to review the current
strategy.

Heinrick Volkler is head of compliance and was formerly the partner within
SuperMart’s auditors with responsibility for SuperMart. He is concerned that, while
SuperMart’s accounts met all relevant standards, and presented no problems to
his former firm, he would have preferred a more conservative view to be taken on
certain issues. In particular, he is concerned that SuperMart appears to depreciate
investments in store fittings and information technology more slowly than
GlobalStores. The effect of this would be that the charge for depreciation to the
accounts is lower than GlobalStores which means that the lower profits of
SuperMart is even more worrying. Also, GlobalStores will potentially replace the
equipment more regularly than SuperMart adding to the problem that SuperMart
is seen as old-fashioned and out of touch with modern technology. He is also
concerned by differences in accounting for pension liabilities, as SuperMart has
proportionately many more long-service employees than GlobalStores. The
treatment of supplier payments and the early recognition of revenue, (e.g.,
recognising revenue at full sales price, and delaying the impact of promotional
discounts until payment is made to the supplier, which has the effect of distorting
revenues across accounting periods) by some of the competitors has also been a
cause for concern among city analysts and there is talk of a potential fraud case
being made against one particular competitor. Heinrick is confident that SuperMart
has accounted correctly for revenue and payments to suppliers, but he is
concerned that it could damage supplier relationships if the publicity raises
suspicion about the practices of supermarkets.

Christiana Tasousa is 60. She has been Chief Executive Officer (CEO) of SuperMart
for four years, the culmination of a lifetime working for the company. Her career

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had started as a trainee in a SuperMart grocery shop. She had risen from a store
manager to a regional manager, and eventually progressed, via Human
Resources, to the post of USA Retail Operations Manager, prior to becoming CEO.
She is well known locally as the President of a successful Major League Soccer
Club. She is known nationally as a past President of the Retail Business Federation,
and has often appeared on television to comment on possible regulation of the
industry, and new developments as well as being a strong supporter of women in
senior corporate positions and promoting opportunities for women in business.
She is concerned that the growth of GlobalStores continues to outstrip that of
SuperMart, but could not see any easy answer in terms of improving operations
in the USA. She liked the present SuperMart supermarkets just the way they were.
She was pleased she had been able to persuade the executive team last year to
increase job security and pension benefits for long-service employees. However,
she recognised that something had to be done to please the investors and raise
the share price. She thought she might have to re-consider her ideas, if changes
to the supermarkets could attract new customers into the stores.

Mohammad Hafeez had been appointed VP Finance two years ago, having
previously been an audit partner with the auditors, but not directly concerned with
the SuperMart audit. He found the accounting system to be rather old-fashioned.
He hoped to develop a new integrated system as part of any (much overdue)
information systems update. He understood the concerns expressed by Heinrick
Volkler regarding depreciation and pension liabilities. He felt uneasy in discussions
with the institutional investors and financial analysts, who were always seeking
“guidance” on likely future statements on profits, although profits had been stable
and predictable. When asked further questions about future plans, he did not
respond. The accounts for 2018 were still not finalised, but he had circulated,
before the meeting, a summary statement, showing very limited progress in a
difficult market. (This financial statement is given as Exhibit 1).

Zhang Yixing had been appointed as VP Operations Director - USA, four years ago.
He is responsible for controlling the stores through a structure of regional offices,
and has responsibility for sales policy and sales promotions in USA. Previously he
had been a Purchasing Manager for eight years. While he has been in the company
all his working life, he does not share Christiana Tasousa’s view of present
operations. If he had the opportunity to succeed Christiana Tasousa as CEO, he
would like to cut staff considerably and close many of the smaller stores. He would
like to carry out such a policy now, but sees no prospect of gaining support.

Victor Adebowale was appointed VP Information Systems two years ago. He had
previously held a similar position with a major European supermarket group,
where he had installed new advanced systems. He had been appointed by
SuperMart with the implied brief to modernise its systems, but he was uncertain
whether he could persuade the executive team to authorise the very considerable
investment required. Part of the problem related to the limited success to date of
the on-line home shopping development in USA. SuperMart had been very late

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into the home shopping market and was trying to catch up with the other
supermarkets who had much more experience of operating home shopping. In
fact, GlobalStores used to ‘sell’ their Internet shopping system to other
supermarkets, as it was deemed one of the best in the industry.

Michael Chang is Chief Purchasing Officer. He had moved into this role four years
ago after a career in purchasing with other major groups. He found that SuperMart
valued relationships with old established suppliers, and that other senior
managers tended to intervene to protect their old friends whenever he wished to
change suppliers. He felt that he was achieving little, and was tentatively looking
for a move to another group, that would allow him more latitude to make an
impact. He felt there was scope for reducing buying prices with a much stronger
approach to managing the supply chain. Even 1% would be very big money.

Amelie Poulain had joined SuperMart two years ago as the first person to hold the
appointment of VP International Operations. At 40 years, she was the youngest of
those to attend the meeting. Her career had been in supermarket management
and regional management, including three years in Canada. She found the present
overseas operations to be a “dreadful muddle”, with no clear strategy, and no
clear rationale for why the various investments had been made. Some investments
had been sound and traded profitably. Others were at best marginal. All were quite
small. While overall, they added up to 12% of SuperMart’s turnover, they
contributed less than 2% of the profit. SuperMart’s market share did not exceed
3% in any of the international markets in which it traded. Ideally, she would sell
most of the present overseas stores, retaining only the most profitable operations,
and then persuade SuperMart to make a major overseas investment. (Exhibit 2
includes information that Amelie has gathered about competitor stores in Europe).

Susan Paine had been recently been appointed VP Human Resources and had not
been involved before in a meeting such as that planned. She was uncertain of
quite what to expect, but was preparing papers on matters that concerned her, in
case there was an opportunity to raise them. In particular, she wished to raise the
case for a policy of allowing early retirement for some long-service employees to
provide scope to recruit younger staff, especially from ethnic minorities, even
though she did not think the CEO would be enthusiastic. She would also like to
get involved with SuperMart’s operations outside USA, to achieve a universal
employment policy. It appeared that in many countries, staff enjoyed far greater
job security and holiday entitlements than did SuperMart staff in USA. The
Government had also pushed for companies to increase the minimum wage to
what it referred to as a ‘living wage’. A competitor had recently stated that it was
going to increase its pay to employees to levels above the ‘living wage’ from next
year. Based on information that Susan’s staff had managed to find out through
industry contacts, if SuperMart followed this step it would add approximately $5m
to SuperMart’s wage bill. Susan also wanted to push the sustainable policies more
as, with the recent focus on these issues in the media, there was an opportunity
for SuperMart to differentiate itself from the market by promoting a sustainable

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approach as its key strategy - her feeling was that if they emphasised the Planet
and People elements, the Profit would follow.

The strategy meeting

The President outlined the problem of needing to raise earnings and show a
positive trend. He considered that greater growth was needed to boost the share
price and enable future rights issues.

The CEO, reporting on current trading, and short-term forecasts indicated that
like-for-like sales in the current quarter were expected to rise by up to 2%.
However, GlobalStores was showing a much stronger trend, and may be growing
by 5% to 7% each year in terms of like-for-like sales. Including the new stores
being built each year, GlobalStores is growing in total at well in excess of 15%
each year. SuperMart profits would probably be no more than static at best, and
may fall slightly. He regarded maintaining the dividend as a priority, even it if
meant restraining investment.

Heinrick Volkler commented that this could only lead to a further fall in the share
price.

The President then opened the meeting for wider discussion, seeking suggestions
for the way ahead.

The VP Operations – USA, stressed the problem of keeping the major

supermarkets within SuperMart up-to-date and constantly refurbished to compete
with GlobalStores. With the large number of stores, it was difficult to achieve the
target of modernising each store every seven years. If necessary to have sufficient
funds for this refurbishment, he was prepared to see the closure of some of the
smaller, older stores, though this would involve significant personnel
redundancies.

Both the CEO and the VP Human Resources stressed the importance of having due
regard for employees in difficult times, and protecting their interest as far as
possible. SuperMart had a deserved reputation as a good employer; this could
easily be lost.

Questioned by Heinrick Volkler, the VP Financial confirmed that some 20% of

SuperMart’s more than 2,000 stores in USA made no significant profit. The Chief
Purchasing Officer commented that the additional volume from this 20% of the
stores helped towards obtaining the best purchasing terms. The VP Operations –
USA, suggested that, without this volume, the number of suppliers could be
reduced and the supply chain simplified. He continued by saying, “If we have
learned anything from our exercises in activity based costing, it is that overheads
are driven by complexity. The more complex the operation, the more non-value
adding coordination costs there are. The way ahead is to focus on core products,
reducing the number of product lines and the number of listed suppliers. If we
force suppliers to compete to remain SuperMart suppliers, we could capture more

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of the value chain from our chosen suppliers, recovering our marketing costs and
our sales data costs.” He also noted that a major competitor, but not GlobalStores,
had recently announced that it was reducing the number of product lines stocked
so that they can compete more effectively with the growing rise of the discount
stores.

The VP Finance raised the question of whether pressure should be put on suppliers
to provide extended trade credit to finance refurbishment. Anne Marie McTavish,
an independent consultant who the President had invited to the meeting,
wondered whether the anti-trust authorities would accept this, but thought that it
could be possible, provided that the credit taken did not extend beyond that taken
by close competitors. This information was not available, and needed to be
investigated. The CEO and the Chief Purchasing Officer both commented on the
long-term loyalty and support of many suppliers who had worked with SuperMart,
in some cases for over fifty years.

The development of on-line home shopping was discussed. The VP Information

Systems stated that, after initial difficulties, the system was fully operational and
reliable, but major investment was required to achieve a ‘state of the art’ system.
He commented that it appeared that all key dates had been met, and that sales
targets had been achieved. The VP Operations - USA commented less favourably.
There were still significant numbers of queries and complaints that had to be
resolved with customers. The system costs and system support staff costs were
high. There was also the problem that using store staff to pick orders from
supermarket shelves placed irregular loads on store staffing; this was not
practicable when the stores were busy. Home shopping orders were then delayed,
which led to more queries and complaints. Questioned by the VP Information
Systems, he confirmed that the frequent delivery delays were caused by
operational and staffing problems in store, rather than information system
problems. There was a separate problem that also affected this issue. The basic
information on sales by product was still very slow, and Purchasing, waiting for
this information, was unable to prevent a high level of stock-outs. This problem
particularly affected special promotions and products sold at exceptionally low
prices which are widely advertised. He agreed to circulate a note of problems after
the meeting. (This is given as Exhibit 3.)

A related issue caused some inconclusive discussion. Both the VP Operations –

USA, and the VP Information Systems commented that, on their reading of the
original justification for on-line home-shopping, it should have been in profit by
the time present sales levels were reached, but that the current reports showed
significant losses. The VP Finance said that this was a matter of the allocation of
overhead costs for the information system and the stores. He was asked to provide
a clear report and a post audit report of the project for a subsequent meeting. It
was considered undesirable to proceed too far with this venture without knowing
whether it was profitable.

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The VP International Operations suggested that sales growth rates in a number of
countries were more attractive than those in USA, and that trading profits were
potentially significantly higher. Amelie considered that it would be sensible to go
for a major acquisition which was big enough to make a significant difference to
SuperMart’s earnings, rather than a series of small investments like the present
scattered SuperMart international operations. Challenged by both the CEO and
Anne Marie McTavish (independent consultant) on whether this was a high-risk
strategy, she commented that ‘doing nothing’ in USA also appeared to be a high-
risk strategy, with very limited possible outcomes. Amelie presented some brief
statistics on the market and the competing stores in Europe which presented
major opportunities to expand (Exhibit 2), and was asked to provide further data.

The question was raised as to who would manage the acquired company. The VP
International Operations stressed the need for good local management, by local
nationals, who understood local customers and tastes. She cited the saying, ‘Think
Global, Act Local’. The CEO stressed the desirability for top jobs to be held by USA
nationals to ease communication with head office.

Heinrick Volkler suggested that a major acquisition within the USA should be
considered. However, no one present had any clear ideas of potential acquisitions
or synergies. This was left for further investigation.

Summing up, the President commented on the need for all ideas to be followed
up for a further meeting as soon as more data was available. He stated that he
would discuss with the CEO what information would be immediately available for
prompt circulation, and a programme for collating further relevant information for
another meeting in two or three months’ time.

Exhibit 1
Summary financial statements circulated by Mohammad Hafeez, VP
Financial

SuperMart draft summary data for 2018 – subject to audit

Year ended 31 December 2018 2017 2016

2018 Draft Actual Actual
$ billion $ billion $ billion
Sales 43.9 41.5 38.4
Cost of goods sold 34.6 32.54 29.8
Gross profit 9.3 8.96 8.6
Store and administration 5.89 5.64 5.52
costs
Depreciation 0.92 0.91 0.79
Interest 0.35 0.34 0.37
Profit before tax 2.14 2.07 1.92

Graham S Pitcher - Management Accounting in Support of Strategy Page 14 / 26

Tax 0.71 0.68 0.63
Profit after tax 1.43 1.39 1.29

At 31 December 2018 2017 2016

$ billion $ billion $ billion
Non Current assets 7.56 7.4 6.96
Current assets 9.08 8.28 8.17
Less current liabilities 4.61 4.11 3.69
Net current assets 4.47 4.17 4.48
Total assets less current 12.03 11.57 11.44
liabilities
Non current liabilities 4.56 4.40 4.58
Shareholder’s equity 7.47 7.17 6.86
12.03 11.57 11.44

Graham S Pitcher - Management Accounting in Support of Strategy Page 15 / 26

Exhibit 2
Basic financial data for the top 5 European supermarket groups for
years ended during 2018
Supermarket A B C D E
group
Sales € 34.1 € 28.26 € 16.86 € 13.36 € 7.56
billion billion billion billion billion
Profit/(loss) after € 1.26 € 0.44 € 0.49 € 0.37 €(0.03)
tax billion billion billion billion billion
Shares 7,140 1,950 2,560 1,020 490 million
million million million million
Earnings per € 0.179 € 0.23 € 0.19 € 0.36 € (0.06)
share
Information at
31 December
2018
Share price at 31 € 3.40 € 5.40 € 3.65 € 5.20 € 1.67
December 2018
Price / Earnings 18.9 23.5 19.2 14.4 -
ratio
Market € 24.28 € 10.53 € 9.34 € 5.30 € 0.82
capitalisation billion billion billion billion billion

Exchange rate € = $ 0.86

Summary financial information at dates in 2018

Profit and loss accounts

Supermarket group A B C D E
€ billion € billion € billion € billion € billion
Sales 34.10 28.26 16.86 13.36 7.56
Profit before tax 1.75 0.71 0.73 0.52 (0.14)
Less Tax 0.47 0.27 0.24 0.15 (0.11)
Profit after tax 1.258 0.44 0.49 0.37 (0.03)

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Summary balance
sheet information
at dates in 2018
Supermarket group A B C D E
€ billion € billion € billion € billion € billion
Non Current assets 16.40 10.91 7.17 14.78 1.53
Current assets 2.76 6.04 1.66 3.74 0.94
Less current 7.21 7.09 3.84 4.38 1.07
liabilities
Net current (4.45) (1.05) (2.18) (0.64) (0.13)
assets/(liabilities)
Total assets less 11.95 9.86 4.99 14.14 1.40
current liabilities
Non current 3.25 1.81 0.92 7.88 0.24
liabilities
Shareholder’s equity 8.70 8.05 4.07 6.26 1.16
11.95 9.86 4.99 14.14 1.40

Statistics – Europe stores (figures for years ended during 2018)

Supermarket group A B C D E
Europe total stores 697 470 249 488 1,319
Supermarket Extra 297 304 242 160 0
stores*
Europe sales** € 29.8 € 20.2 € 16.2 € 12.8 € 7.56
billion billion billion billion billion
Employees 225 197 109 87 60
(thousands)

* Supermarket Extra stores are large out-of-town stores. The number is

included in the total number of stores above.
** Europe sales exclude sales to courtiers outside of Europe by the groups

Percentage of own brand products sold (figures for years ended during
2018)

Supermarket group A B C D E
Percentage of own 53 62 31 45 48
brand products sold

Latest quarterly data like-for-like sales

Supermarket group A B C D E

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Percentage 4.4 6.1 5.2 4.2 (5.1)
increase/(decrease)
in like-for-like sales
over 1 year

Total growth latest quarterly data

Supermarket group A B C D E
Percentage 9 8 12 7 (3)
increase/(decrease)
over 1 year
Estimated market 25 18 15 10 6
share %

Home shopping - Europe on-line sales (% of total sales)

2014 2015 2016 2017 2018 2019

forecast
0.9% 1.9% 3.5% 5.6% 7.3% 9%

Online sales as a percentage of total sales are at less than those in the USA, but
are growing rapidly. Most are made by supermarket A, with a store-based
distribution system. Other supermarkets are catching up quickly. In some cases,
dedicated warehouses are being used for order picking and delivery. One
supermarket group (not listed above) probably has some 15 to 20% of the on-
line market and sells itself as the online retailer of choice. Its market share is
growing as the appetite for online grocery shopping increases in Europe.

Graham S Pitcher - Management Accounting in Support of Strategy Page 18 / 26

Exhibit 3
Memorandum – information systems and home shopping
To: Executive Management Team (EMT), SuperMart
From: Victor Adebowale, VP Information Systems
Date:
Subject: Information Systems and Home Shopping

The present apparent losses on home shopping reflect some operational problems,
and some poor accounting.

The original proposals, assumed that picking (selecting from the shelves the items
ordered by customers and packing them) would be done in slack time by ‘free’
store staff. The cost was ignored in the home shopping proposal. Picking is done
on the basis of when staff have spare time, but is now charged to the home
shopping cost centres, thus reducing the costs of normal store operations. If
dedicated staff were engaged, it would cost the home shopping cost centre no
more than is charged by various stores, and picking would be done when required.
However, store managers would be under further pressure to control their overall
staff costs and would likely reduce the number of staff in-store. I understand from
the accounting staff that a technique of time driven activity-based costing may
provide a better costing of the operation.

The original proposals considerably underestimated the stock-out problem. This

has always existed, because the main stock control systems are over 10 years
old. The problem is made worse by the heavy use of special promotions,
advertising a limited range of products at low prices, which leads to erratic
demands on suppliers. The main accounting and stock control system is so slow
that the home shopping data is often used to ‘forecast’ the main system output,
especially in providing early indications of the success of the various promotions.

Queries arising from stock-outs have added significantly to system costs.

Customers complain if a product is out of stock and a substitute product is
delivered.

On present volumes, the home shopping is unprofitable, but this ignores any
customer gain achieved by internet shoppers also visiting stores. We know that
on average internet customers have a higher average income and spend more per
visit.

A more recent development utilised by several competitors is the use of ‘dark-

stores’. These are stores laid out like supermarkets and located in high-streets
and local areas where internet shopping is ‘picked’ and made ready for either
delivery or collection by the customer. These are popular with ‘click and collect’
customers. The layout makes the ‘picking’ of the goods easy but customer do not
enter the store, only access the ‘click and collect point’ which operates like a drive-

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through, hence the name, ‘dark-stores’. These have proved to be popular with
customers and efficient to operate by the supermarkets.

Information provided by the accounting department

$ billion
Sales 43.90
Cost of Goods sold (34.60)
Gross profit 9.30
Store running costs (1.18)
Delivery costs – online
sales (0.50)
Staff costs (2.55)
Marketing (0.86)
Website maintenance costs (0.50)
Administration costs (0.30)
Depreciation (0.92)
Operating profit 2.49
Interest (0.35)
Profit before tax 2.14

Number of SuperMart stores 2,663

Average number of customers per store is 4,500
Percentage of customers that shop online 25%
Percentage of staff involved in the online sales operation is 50% - note this is
because staff currently undertake activities in store as well as helping with the
online sales. There are no dedicated staff associated with the online sales
operation.

***************************************************************

Your role as a consultant

Various members of the executive management team (EMT) and senior managers
have been asked to put their proposals in outline form to the EMT for the next
strategy meeting. You have been engaged by the President, as a consultant, and
have been given copies of the various proposals made by the EMT members and
senior managers. These are documented as Exhibits 4 to 8 inclusive, and are
shown on the following pages. You have also received notes of previous strategy
meetings and related documents.

Exhibit 4
Memorandum - Developing USA Operations
To: EMT, SuperMart

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From: Zhang Yixing, VP Operations - USA
Date:
Subject: Developing USA Operations

I propose that we should simplify operations. I have estimated the effect of the
proposals on operating profits and my thoughts are as follows:

• Close down home shopping and focus on in-store high quality service. I
estimate that this would save approximately $1.1 billion of operating costs
each year, but we would also lose the gross margin (21%) on an estimated
$5 billion of sales (This considers that some customers may buy in-store as
well as online).
• Close all unprofitable stores or marginally profitable stores in USA. This will
mean shutting at least 400 stores with a present turnover of $2.9 billion
and total operating costs $0.8 billion per annum. One off closure cost
relating to building and staff redundancy would amount to $0.5 billion
during the first year of this proposed plan, as the stores are closed and
disposed of.
• Having closed many smaller stores, review head office functions, and see
what can be decentralised to the stores, and what else can be closed down
in head office – a target would be saving $0.05 billion a year.

To move forward we should:

• Set tough targets for Central Purchasing, to save at least $1 billion in the
first year, and $2 billion in each year from year 2, remaining at this level
from then onwards. They should be given freedom to change from the old
suppliers, and import more.
• Make small acquisitions in USA to grow the business.

My calculations on small acquisitions are that we could borrow and spend up to $1

billion in year one without upsetting the competition authorities. We could borrow
the money at 6%, as we would be acquiring property that the bankers would
regard as good security. (Note: this would be used as the marginal cost of capital
for the investment appraisal).

Prices for small store groups may be quite high – we may find ourselves paying
up to 30 times current after-tax profits. We should be able to produce rapid
increases in profit from better buying and stronger management, especially if we
free up management time by disposing of, or closing, our poorer stores.

I would set targets for earnings from acquired stores as follows:

• In the year of acquisition, having covered all reorganisation costs, to make

profits at 50% of pre-acquisition profits;
• In the next year, to make 150% of pre-acquisition profits;
• In the third year, and onwards, to make 200% of pre-acquisition profits.

To put this in figures, our investment of $1 billion would probably generate profits
of about $25 million before interest and tax. In the second year, we would make

Graham S Pitcher - Management Accounting in Support of Strategy Page 21 / 26

$75 million before interest and tax, and in the third year $100 million. Once the
benefit from the SuperMart brand and efficiency savings had filtered out this could
then grow at the same annual rate as SuperMart in year four onwards.

If this proved to be successful, we could make further similar acquisitions, adding

to profit. There are still plenty of good independent stores and small groups of
stores out there to buy as the families that own them want to sell up.

Exhibit 5
Memorandum - Home Shopping Operations

To: EMT, SuperMart

From: Victor Adebowale, VP Information Systems
Date:
Subject: Home Shopping Operations

I have again reviewed the current home shopping operation.

There is no point in closing down the present operation. There would be no real
saving, unless store staff could be reduced, which could be difficult, as many of
the stores with significant home shopping volumes are failing to meet their in-
store customer service standards. The software systems would have to be written
off at a cost of $50 million. I am told that there would be little or no loss on the
disposal of the delivery vehicles.

We have two development options:

1. Develop a better accounting and stock control system for the stores. This
could take one year to develop and install and cost up to $5 million to
implement in all SuperMart stores.
2. Develop a different approach to home shopping with dedicated warehouses
(picking centres) in selected locations, some of which could operate as
‘dark-stores’. This could provide a radically better service to customers, and
build up greater volume than the present in-store system could handle. This
would require an investment of at least $1 billion, would break-even in the
first year, and then produce profits before interest and tax of 10% of sales
per year. Estimated sales could be as much as $5 billion in the first year of
operation and achieve a 5% growth rate each year.

Exhibit 6
Memorandum - Future International Operations

To: EMT, SuperMart

From: Amelie Poulain, VP International Operations

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Date:
Subject: Future International Operations

I propose:

1. That most of the present international operations should be sold as soon as

feasible. The Canadian operations, which are modestly profitable, should be
retained. Others should be sold to anyone who will take on the staff
contracts, supplier contracts, and building leases. If all can be sold, this
would potentially release funds of approximately $1 billion as a one off cash
receipt in the first year. There would be a loss on the disposals of around
$500 million compared with the book values. There would be no significant
ongoing effect on SuperMart’s profit, although there will be exceptional
costs in the year of sales approaching $100 million. If the sale of any
operation is not feasible, it may be cheaper to continue trading than to
close, but this requires further investigation.
2. The preferred route forward is to invest in Europe. This may be ‘now or
never’. The market is highly concentrated. If any of the existing major
players are bought by GlobalStores, or possibly by some very large foreign
group, late entry may be very difficult. Both possible acquisitions, B or D,
are quite attractive in various ways. I would prefer to see the acquisition of
B.

I attach the report from StrategicsPartners, Merchant Bankers as Appendix A to

this document.

Appendix A
Report - Assessment of Europe supermarkets
To: Amelie Poulain, VP International Operations and Members of EMT
SuperMart
From: StrategicsPartners, Merchant Bankers, Europe
Date:
Subject: Assessment of Europe supermarkets.

The possible acquisition of supermarkets groups A, C and E have been reviewed

and rejected. A is too expensive; C is not feasible because of its ownership
structure; and E has major problems.

Supermarket group B, the market leader until a few years ago and the present
‘Number 2’, is a very solid business with a good reputation for quality and
customer service.

While it was always regarded as impregnable, with the large family holdings and
their involvement in management, it is understood, in the strictest confidence,
that this is about to change. A suitable cash (not shares) offer could enable the
family to unravel various family trusts and complex holdings and move away from

Graham S Pitcher - Management Accounting in Support of Strategy Page 23 / 26

the business. They may require supplementary agreements that protect various
employees for a period of years. The departure from the board of directors
(European equivalent of the EMT) of the family representatives would provide easy
scope for introducing new management, which would be essential. Although B’s
like-for-like sales have recovered in the last two years, it is obvious they are not
achieving the sales intensity of A, or the same standard of stock and logistics
management. B’s home shopping venture is very limited.

There is considerable scope for effective investment in new systems, and B has
considerable scope to extend existing stores, having a number of very large sites
that are not fully utilised. However, the family has decided that it does not wish
to invest any more in the business, and if more investment is needed, this is the
time to sell completely.

The only alternative proposition is Supermarket D. It is smaller than B.

You will know the Chief Executive of D – Alfredo Garcia – he used to work for you.
As we understand the matter, some four years ago you restructured, and
combined the two posts of VP Marketing, and VP USA Retail Operations, into the
new post of VP Operations - USA, which he did not succeed in obtaining. He then
left your employment. Subsequently he became CEO for two years of a smallish
supermarket group in Europe, and apparently increased profit there. In the two
years he has been CEO of D, he has certainly made an impact on profits and the
share price. He has followed a policy of special promotions successfully, but never
had the finances to modernise the stores.

We have provided below schedules giving our views of future sales and profits of
the two groups. We would recommend that an acquisition premium of 33% above
the current market capitalisation be assumed in preliminary calculations, although
it may not be as much in practice.

Figures for Europe

Forecast earnings per share

Supermarket B Supermarket D
€ €
Actual 2018 0.23 0.36
Broker forecast 2019 0.35 0.40
Broker forecast 2020 0.45 0.45
Broker forecast 2021 0.60 0.50
Broker forecast 2022 0.80 0.55
Broker forecast 2023 1.00 0.60

Graham S Pitcher - Management Accounting in Support of Strategy Page 24 / 26

Updated financial data for Europe Supermarkets B and D for the year
ended during 2018
Supermarket B Supermarket D
Sales € 28.26 billion € 13.36 billion
Profit after taxation € 0.44billion € 0.37 billion
Shares 1,950 million 1,020 million
Earnings per share € 0.23 € 0.36

Information at 31 March 2019

Supermarket B Supermarket D
Share price at 31 March € 6.27 € 4.92
2019
Price/Earnings ratio 27.3 13.7
Market capitalisation € 12.23 billion € 5.02 billion

Exchange rate assume € 1= $ 0.86

Exhibit 7
Memorandum - Update on current performance

To: EMT, SuperMart

From: Christiana Tasousa, Chief Executive Officer
Date:
Subject: Update on current performance

SuperMart’s current trading is not encouraging, and the outlook for the year is not
as good as it appeared in January. The VP Finance current forecast is that earnings
per share for 2019 will be materially below that for 2018 – possibly as low as $
1.25 compared with $ 1.59. This will not leave any dividend cover.

Exhibit 8

Having seen the memorandum from Christiana Tasousa, Jacob Standing

despatched a final note:

Memorandum - The new earnings forecast

To: EMT, SuperMart

From: Jacob Standing, President
Date:
Subject: The new earnings forecast

Graham S Pitcher - Management Accounting in Support of Strategy Page 25 / 26

I am most concerned by the memorandum from Christiana Tasousa, especially
the information on current trading. I do not like being surprised by bad news.
Better financial systems should enable us to anticipate problems.

When the markets are informed, as they must be, of the new earnings forecast,
there will be a sharp fall in the share price and a fall in the price/earnings ratio.
To maintain investor confidence, a clear and convincing statement of a plan to
improve earnings in the medium term will be essential. A P/E ratio of 20 is the
best that can be expected, and this would result in a share price of $25.
Maintaining even this share price probably depends, to some extent, on
speculation regarding a possible bid for SuperMart from a large foreign group. It
is known that some of these have looked at possible acquisitions in USA.

The city appears to view SuperMart as a defender – it’s time we began to think
more like a prospector.

End of case study

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