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Client Goal: Should Great Burger acquire Heavenly Donuts as part of its growth strategy?Our clie nt is Great Burger (GB) a fast food cha in that competes head-o-head with McD on alds,Wen dys, Burger King, KFC, etc.Description of Great BurgerGB is the fourth largest fast food cha in worldwide, measured by the n umber of stores in operati on. As most of its competitors do, GB offers food and combos for the three largest meal occasi ons: breakfast, lu nch, and dinn er.Eve n though GB owns some of its stores, it operates un der the fran chis ing bus in ess model with 85 perce nt of its stores owned by fran chisees (in dividuals own and man age stores, pay fran chise fee to GB, but major bus in ess decisi ons (e.g., men u, look of store) con trolled by GB).McKi nsey studyAs part of its growth strategy GB has an alyzed some pote ntial acquisiti on targets in clud ing Heave nly Don uts (HD), a grow ing dough nut producer with both a U.S. and intern ati onal store prese nee.HD operates un der the fran chis ing bus in ess model too, though a little bit differe ntly tha n GB. WhileGB fran chises restaura nts, HD fran chises areas or regi ons in which the fran chisee is required to ope n a certa in n umber of stores.GBs CEO has hired McKin sey to advise him on whether they should acquire HD or not.QUESTION 1What areas would you want to explore to determ ine whether GB should acquire HD? ANSWER 1Some possible areas are given below. Great job if you identified several of these and perhaps others.?Sta nd alo ne value of HDoGrowth in market for dough nutsoHDs past and projected future sales growth (break dow n into growth in n umber ofstores, and growth in same store sales)oCompetiti on are there any other major n ati onal cha ins that are doing better tha nHD in terms of growth/profit. What does this imply for future growth?oProfitability/profit marginoCapital required to fund growth (capital in vestme nt to ope n new stores, worki ngcapital)?Syn ergies/strategic fitoBra nd quality similar? Would they enhance or detract from each other if marketedside by side?oHow much overlap of customer base ? (very little overlap might cause concern thatbra nds are n ot compatible, too much might imply little room to expa nd sales by cross-market ing)oSyn ergies (Hint: do not dive deep on this, as it will be covered later)Man ageme nt team/cultural fitoCapabilities/skills of top, middle man ageme ntoCultural fit, if very differe nt, what perce nt of key man ageme nt would likely be ableto adjust?Ability to execute merger/comb ine compa niesoGB experie nee with mergers in past/experie nee in in tegrat ing compa niesoFran chise structure differe nces. Detail“ dive ” in to fran chis ing structures. Wouldthese differe nt structures affect the deal? Can we man age two differe nt fran chis ing structures at the same time?The team started thinking about potential synergies that could be achieved by acquiring HD. Here are some key facts on GB and HD.Exhibit 1StoresGBHDTotal5,0001,020North America3,5001000Europe1,00020Asia4000Other1000Ann ual growth in stores10%15%Finan cialsGBHDTotal store sales$5,500m$700mPare nt compa ny reve nue$1,900m$200mKey expe nses (% sales)Cost of sales51%40%Restaura nt operati ng costs24%26%Restaura nt property & equipme nt costs4.6%8.5%Corporate gen eral & admi ni strative costs8%15%Profit as % of sales6.3%4.9%Sales/stores$1.1m$0.7mIn dustry average$0.9m$0.8mQUESTION 2What pote ntial syn ergies can you think of betwee n GB and HD?ANSWER 2We are looking for a few responses similar to the ones below:?Lower costsoBiggest opportu nity likely in corporate selli ng, gen eral, and adm ini strative expe nses(SG&A) by in tegrati ng corporate man ageme ntoMay be some opportu nity to lower food costs with larger purchas ing volume onsimilar food items (e.g., beverages, deep frying oil), however overlaps may be low as ingredients are very differe ntoGB appears to have an adva ntage in property and equipme nt costs which might beleveragable to HD (e.g., superior skills in lease negotiation)?In crease reve nuesoSell dough nuts in GB stores, or some selected GB products in HD storesoGB has much greater intern ati onal prese nee thus likely has kno wledge/skills toen able HD to expa nd outside of North AmericaoGB may have superior skills in ide ntify ing attractive locati ons for stores as its salesper store are higher tha n in dustry average, whereas HDs is lower tha n in dustry average; might be able to leverage this whe n ope ning new HD stores to in crease HD average sales per storeoExpa nd HD faster tha n it could do on own -GB, as a larger compa ny with lower debt,may have better access to capitalQUESTION 3The team thinks that with synergies, it should be possible to double HD s U.S. market share in thenext 5 years, and that GB s access to capital wiit trilowpand the number of HD stores by 2.5times. What sales per store will HD require in 5 years in order for GB to achieve these goals? Useany data from Exhibit 1 you n eed, additi on ally, your in terviewer would provide the followi ng assumpti ons for you:Dough nut con sumpti on /capita in the U.S. is $10/year today, and is projected to grow to$20/year in 5 years.For ease of calculati on, assume U.S. populati on is 300m.ANSWER 3You should always feel free to ask your in terviewer additi onal questi ons to help you with yourresp on se.Possible resp on ses might in clude the follow ing:Market share today: $700M HD sales (from Exhibit 1) $3B U.S. market ($10 x 300M people)=23% (round to 25% for simplicity sake)U.S. market in 5 years = $20 x 300 = $6BHD sales if double market share: 50% x $6B = $3BPer store sales: $3B/2.5 (1000 stores) = $1.2MDoes this seem reas on able?Yes, given it implies less than double same store sales growth and per capita consumption ispredicted to double.QUESTION 4One of the syn ergies that the team thi nks might have a big pote ntial is the idea of in creas ing the bus in esses overall profitability by selli ng dough nuts in GB stores. How would you assess the profitability impact of this syn ergy?ANSWER 4Be sure you can clearly explain how the assessment you are proposing would help to answer the questi on posed.Some possible an swers in clude:Calculate in creme ntal reve nues by selli ng dough nuts in GB stores (calculate how many dough nuts per store, times price per dough nut, times n umber of GB stores)Calculate in creme ntal costs by selli ng dough nuts in GB stores (costs of producti on,in creme ntal n umber of employees, employee trai ning, software cha nges, in creme ntal market ing and advertis in g, in creme ntal cost of distributi on if we cannot produce dough nuts in house, etc.)Calculate in creme ntal in vestme nts. Do we n eed more space in each store if we thi nk we are going to attract new customers? Do we n eed to in vest in store layout to have in-house dough nut producti on?If your answer were to take into account cannibalization, what would be the rate ofcann ibalizati on with GB offeri ngs? Dough nut cann ibalizati on will be higher with breakfast products than lunch and dinner products, etc.One way to calculate this cannibalization is to look at historic cannibalization rates with new product/offeri ng lau nchings with in GB storesMight also cannibalize other HD stores if they are nearby GB store ould estimate this impact by seeing historical change in HD s sales when competitorodeugfeirui nearbyQUESTION 6You run into the CEO of GB in the hall. He asks you to summarize McKinsey s perspective so far onwhether GB should acquire HD. Prete nd the in terviewer is the CEOvhat would you say?ANSWER 6You may have a slightly differe nt list. Whatever your approach, we love to see can didates come at a problem in more tha n one way, but still address the issue as directly and practically as possible.An swers may vary, but here is an example of a resp on se:?Early findings lead us to believe acquiri ng HD would create sig nifica nt value for GB, and thatGB should acquire HDoBelieve can add $15 thousa nd in profit per GB store by selli ng HD in GB stores. Thiscould mea n $50 millio n in in creme ntal profit for North America n stores (where immediate syn ergiesare most likely given HD has little brand presence in rest of world)oWe also believe there are other pote ntial reve nue and cost syn ergies that the teamstill n eeds to qua ntify?Once the team has qua ntified the in creme ntal reve nues, cost sav in gs, and in vestme nts, wewill make a recommendation on the price you should be willing to pay?We will also give you recomme ndati ons on what it will take to in tegrate the two compa niesin order to capture the pote ntial reve nue and cost sav in gs, and also to man age the differe nt fran chise structures and pote ntially differe nt cultures of GB and HD
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