Our client is SuperBurger, a fast food chain that operates in the same class as McDonalds, Wendy's, Burger King and so on. They're the fourth largest fast food chain worldwide in terms of number of stores in operations. SuperBurger owns some of its stores, but 85% of its stores are owned by franchisees. As part of its growth strategy, the company has analyzed some potential acquisition targets including Tasty Donuts which is a growing doughnut producer active in the US and internationally.
The client asked us to help him decide whether he should acquire the company or not.
This case is made to be interviewer-led. Therefore the interviewer should guide the candidate through the interview.
Through questions from the interviewer, the candidate is tested on problem-solving skills, so the entire case will have a question/answer format.
Short Solution (Expand) (Collapse)
The following framework/structure provides an overview of the case:
1. What areas would you want to explore to determine if SuperBurger should acquire Tasty Donuts?
- Look into the possible value of Tasty Donuts to SuperBurger.
- If there is a strategic fit between the two and if synergy can be realized by combining firms & operations.
- Capabilities of SuperBurger to pull this off - have they done this before.
2. Assume we want to dig a bit deeper into the possible value of Tasty Donuts to SuperBurger, how would you approach it?
- Growth potential in the market for doughnuts.
- Historic & projected sales growth for SuperBurger and Tasty Donuts.
- What the competition is doing?
- Required capital to acquire Tasty Donuts and other viable options to reach growth for SuperBurger.
3. We've started thinking about potential synergies that could be achieved post-acquisition. What synergies do you think that can be realized based on key data.
- There could be an opportunity to save on G&A expenses by combining management locations/functions.
- Savings on cost of sales per unit due to larger volumes being purchased.
- Growing sales by selling doughnuts in SuperBurger stores.
- SuperBurger is larger outside the US which Tasty Donuts can leverage on.
- SuperBurger is bigger and has more capital to help Tasty Donuts grow.
- Superburger has greater sales per store, which means they could be better at finding better locations - this skill can be transferred to Tasty Donuts.
4. The client thinks that with these synergies it should be possible to double the market share of Tasty Donuts in the US and increase their US stores by 2.5 times in 5 years. What sales per store will Tasty Donuts require in 5 years to achieve these goals? Assume that doughnut consumption is now $10/person and will grow to $20/person in 5 years and that US population is 300 m. You can also use data from Table 1 & 2.
- Current market size is: $10*300 m=$3 b.
- Tasty Donuts market share is $700 m/$3 b= 25%.
- US market in 5 years is: $20*300=$6 b.
- Tasty Donuts market share will be doubled which is roughly 50%.
- Number of stores will grow to: 1,000*2.5=2,500 stores.
- Sales per store will be: $3 b/2,500=$1.2 m.
5. Another form of synergy that could be valuable is the sale of doughnuts in SuperBurger's stores. How would you approach calculating/assessing the impact of this on profitability?
- Calculate the total extra revenue SuperBurger would earn.
- Calculate the extra costs it has to incur to sell the dougnuts.
- Calculate additional capital investments to make the stores ready for sale of doughnuts.
- Calculate the effect of possible cannibalization of SuperBurger products.
6. What would the extra profit per store be if we sell 60,000 doughnuts per store at a price of $3 and a 70% margin along with a cannibalization rate of 15% of SuperBurger sales?
- Currently, SuperBurger sells 350,000 units per store.
- Sales price per unit is $3.50.
- Margins are 60%.
- Doughnut sales will generate $126,000 in extra profits: (60,000*$3*70%)=$126,000.
- However, we lose 15% of existing SuperBurger sales which are: (350,000*$3.50*60%)*15%=$110,250.
- Additional profit per store is: $126,000-$110,250=$15,750 per store.
7. What would you recommend so far to our client?
- TD's acquisition can deliver good value and so far it seems like a good idea.
- We can add around $15,000 in extra profits to each store of SuperBurger.
- There are additional opportunities to expand TD internationally.
- Other cost & revenue synergies are still busy being quantified.
- Can you think of factors that could fail such an acquisition even when synergies in revenue & costs can be achieved?