Review the information and financial statements provided below to gain an understanding of potential investment initiatives that would be supportable by management. Describe the intent of the mission statement from the annual report, and prepare a SWOT analysis (strengths, weaknesses, opportunities, and threats). Based on your SWOT analysis, assess and explain in detail if America Coffee House is currently delivering on its mission statement.
America Coffee House Limited (ACH) started out as a breakfast diner over 70 years ago in the heart of Texas that was known for its bottomless coffee and cheap food under the original name Bob's Breakfast. Due to the popularity of the coffee, the firm started to expand nationally with cafés under the America Coffee House banner over the next several decades, as well as breakfast locations. The firm entered Canada in 1993, opening up over a hundred cafés under the "Canada Coffee House" banner.
Due to increasing competition from North American competitors Denny's and IHOP, ACH struggled in the nineties, filing for bankruptcy and closing down hundreds of its breakfast locations in North America, reorganizing, and ultimately emerging from bankruptcy in 1999. The company was eventually bought out by a private equity firm in 2001. The private equity firm needed to take on a substantial amount of debt at the time of the buyout to purchase all the outstanding shares of ACH.
Under privatization, the company started to expand outside of North America, as it closed down substantially all of its American and Canadian breakfast locations. The company also started selling its coffee beans, ready-to-serve coffee powder, and bakery products (muffins, cupcakes, etc.) in grocery chains. Thus, America Coffee House had become a coffee provider and wholesaler, moving away from its roots as a breakfast chain.
In 2006, the brand saw a resurgence in popularity in North America with increasing demand for stand-alone café locations. ACH started to rollout cafes again, building a loyal fan base for its affordable coffee. During this time, the company rebranded with a new mission statement:
"Our mission is to be American families' favorite affordable coffee provider, providing high quality services for our guests and communities through cutting-edge innovation and partnerships."
The company went public in 2007, and is now trading under the ticker ACH on the New York Stock Exchange.
Discussion with Chief Executive Officer (CEO)
Susan Matthews, CEO, joined ACH seven years ago during the initial new expansion plans. She has over 25 years of experience in the food and beverages (F&B) industry, including stints at the executive level at Loblaws, Denny's, and Dave & Busters. She entered ACH after four years as a Vice President of operations at Starbuck's.
Ms. Matthews has reached out to you to help her assess the current financial and strategic state of America Coffee House, evaluate some investment proposals, build a financial forecast for 2018, and evaluate tax consequences of an asset disposal.
"The next few years are going to be transformational for America Coffee House," Ms. Matthews said. "Consumer preferences have been changing, especially the Millennial segment, which is responsible for 70% of our sales. Millennials are becoming more active and more health conscious. Because of this trend, there is greater demand for organic products and healthier alternatives, which is why we are shifting are menu to meet this demand with more smoothies, less sugary coffee drinks, and additional low-calorie food offerings."
"Younger customers are also very politically and socially active, and are quick to use social media to reprimand any companies that do not have a more sustainable operation or viewpoint. We made an ethical commitment back in 2011 to evaluate all of our suppliers to make sure fair trade was being enforced to protect coffee farmers. This move has resonated with millennials and prevented any brand backlash, but has also led to increasing costs for our products."
"Rental rates have also been increasing, with rent being included in the cost of goods sold, leading to a negative impact on our gross margins. We are renegotiating with some of our key landlords to reduce rental rates in our mall locations, and I believe we will be able to reduce rents, due to our value as a traffic driver in these malls, which have had a high exit of retailers in recent years."
In 2017, ACH ended up with a loss for the first time since going public in 2007.
"Our current brand position as an affordable coffee provider prevents us from raising prices to offset higher supplier costs and increasing competition," explained Matthews. "We have a low market share, due to our scale back during our bankruptcy crisis, and we don't have the financial flexibility or power to survive another year or two of losses, especially with our growing debt. I am hoping that changing our menus to be more gourmet or premium, with higher margins, will lead to long-term profitability."
ACH has also been following behind other competitors, like Starbucks, in terms of digital and mobile integration. Starbucks mobile applications allow customers to order ahead of time for later pickup, as well as giving Starbucks the opportunity to engage with customers through promotions, coupons, loyalty rewards, and frequent messages. ACH has no mobile integration, but is considering investing in a mobile app to match the growing demand for online integration for food and beverage companies.
"Some of our market research has also shown that consumers want more diverse product offerings," said Ms. Matthews. "Our competition has been introducing more breakfast options, frozen yogurt, and even marijuana products to increase traffic to stores. We are considering some of these options, although we want our focus to still be coffee and caffeine-related products."
"I need you to examine our current mission statement and determine if we are fulfilling it, as well as what needs to change in order for the mission statement to align with the potential future positioning of the company."
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