CERES GARDENING COMPANY CASE STUDY/G5P/B200
Ceres Company, backed by its innovative GetCeres program, has been capitalizing on a previously untouched segment of the organics market. In capturing a key demographic of consumers, those causal gardeners who demand instant gratification, rather than the extended gardening period, Ceres is eager to expand quickly to capitalize on this opportunity before its competitors. This strategy is putting extensive strain on the company’s resources and its relationship with suppliers. The exciting growth in sales have eclipsed the company’s sustainable growth rate and Ceres is hampered by cash deficits. Our team has identified three options for Ceres as it looks to move forward. Option A is to reduce growth to its desired sustainable growth rate by changing some key policies of the GetCeres program, primarily price, credit terms, and discount rate. Option B pursues the agenda of the CEO, who hopes to implement a plan of rapid growth by expanding Ceres’ retailing network. This option includes a 35% increase in sales and our pro-forma statements (Exhibit 1) have identified a need for $2 million in additional financing, to be obtained by issuing new stock, cutting dividends, and further increasing leverage. Option C suggests merging with a cash-cow company, such as a nation-wide retailer. The synergies created will solve the distribution problems and increase market share. Our team suggests that Ceres should follow Option C and merge with a cash-cow company. This plan would follow a dual purpose: enable Ceres to make the most out of the industry trends and grow without risking bankruptcy. More importantly it will capitalize on Ceres’ core competency and competitive advantage: quality products.
The Ceres Gardening Company has experienced impressive growth and increasing revenues in recent years. Moreover, Ceres is competitively positioned in an expanding industry. The company has high goals for the years ahead, however, the CEO is concerned over the implications of pursuing an aggressive growth strategy on the company’s costs and financing needs. II. ANALYSIS
A. Strategic Diagnosis:
1. Strengths: strong growth is sales, great reputation for quality 2. Weaknesses: inadequate distribution system, extended payment terms and limits in long-term debt, seasonality of sales B. Financial Diagnosis
1. Profitability Ratios
• ROE - Decrease from 23% to 16% due to the decline in Profit Margins and Asset Turnover while Leverage is increasing. Ceres is relying more and more on debt to finance its activities. • ROA - Decrease from 11% to 5%. The increase in capital expenditures is not generating proper returns. 2. Activity Ratios
• Asset turnover, fixed asset turnover - decreasing. • Inventory turnover – increases, consistent with the increase in sales. • Collection period- HIGH increase due to the relaxed credit policies of GetCeres. • Payables period – Increases dramatically from 36 to 98 days 3. Liquidity Ratios
• Current ratio, acid test ratio - decrease in company’s’ short-run solvency. 4. Financial Leverage Ratios
• Debt-to-assets – Increases as company is relying more on debt • Debt-to-equity – Increases as debt becomes more expensive 5. Cash conversion cycle – increasing by ~ 20%
6. Cash flow statements – Decrease in NOCF (from ~1700 to 800). Not generating enough money from operating activities 7. Sustainable growth – Company is growing too fast. Based on 2005 we should be targeting 12% growth rate. We are at 25% growth.
C. External Environment Analysis
1. Transactional Environment: Highly complex, can be analyzed from three perspectives: Ceres to suppliers: Ceres is relying heavily on trade-credit, threatening relations with suppliers Ceres to dealers: To boost sales Ceres loosened its credit policies and launched GetCeres Ceres to bank:...
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