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DR. GEORGE WEBSTER
EXECUTIVE EDUCATION
FOOD MARKETING
ST. JOSEPH’S UNIVERSITY

VALUE CREATION
IN
THE FOOD INDUSTRY
•
What is value creation?
•
What are the drivers of value creation ?
•
How do we measure value creation?
2

WHAT IS VALUE CREATION?
• Process
• Involves decision making
– Financing
– Investing
– Operating
• Includes all stakeholders
3

• BALANCE SHEET - a statement of position at a point in time
– Shows what we own and what we owe
– Of particular interest to the CFO
•
INCOME STATEMENT - a statement of value creation over time
– Measures how well we operated
– Of particular interest to the CEO
•
CASH FLOW STATEMENT - puts operations on a cash basis
– Gives sources and uses of cash
– Of particular interest to the COO
4

BALANCE SHEET- FACSIMILE COMPANY
DECEMBER 31, 19XX
ASSETS
CURRENT ASSETS
LIABILITIES & O.E.
CURRENT LIABILITIES
Cash 3000 Accts. Payable 2000
Accts. Rec. 2000 Wages Payable 1000
Inventory 8000 13000 Rent 1000 4000
LONG TERM
P & E 25000 Long Term Debt 7000
Other 4000 OWNER’S EQUITY
TOTAL 29000
LONG TERM
Common Stock 5000
Ret. Earnings 26000
TOTAL 31000
TOTAL ASSETS 42000 TOTAL LIAB. & OE 42000
5

INCOME STATEMENT- FASCIMILE CO.
FOR THE YEAR ENDED 12/31/XX
NET SALES
LESS: COST OF GOODS
GROSS MARGIN
LESS: OPERATING EXPENSES
55000
35000
20000
Salaries 5000
Rent Expense 1000
S.,G., & A. 4000 10000
OPERATING PROFIT
LESS: INCOME TAX (.40)
NET INCOME AFTER TAX
10000
4000
6000

STATEMENT OF CASH FLOWS-FASCIMILE
CO.
FOR THE YEAR ENDED 12/31/XX
• CASH FROM OPERATIONS
Net Income 2000
Depreciation 500
•
CASH FROM INVESTING ACTIVITIES
Capital Expenditures 5000
2500
Acquisitions 15000 (20000)
• CASH FROM FINANCING ACTIVITIES
Issuance of Long Term Debt 700
Sale of Common Stock 11500
Cash Dividends 400 11800
•
NET CHANGE IN CASH (5700)

HOW WE MEASURE VALUE
CREATION
•
ROI - Return on investment
•
ROE - Return on equity
•
EPS - Earnings per share
•
EVA - Economic value added
8

WHAT ARE THE DRIVERS OF
VALUE?
•
EFFECTIVENESS - How much revenue do we generate from the assets we have?
•
EFFICIENCY - How well do we use the assets we own?
•
LEVERAGE - How much debt do we have in the capital structure?
9

EFFECTIVENESS =
Total Sales
Total Assets
A&P -1998 =
$10,262,199,000
$$2,995,253,000
A&P - 1998 Effectiveness is 3.43
A&P - 1996 Effectiveness is 3.50
10

EFFICIENCY =
Net Income
Total Sales
A&P 1998 =
$63,586,000
$10,262,199,000
A&P - 1998 Efficiency is .0062
A&P - 1996 Efficiency is .0057
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LEVERAGE =
Total Assets
Owner’s Equity
A&P -1998 =
$2,995,253,000
$926,632,000
A&P - 1998 Leverage is 3.23
A&P - 1996 Leverage is 3.50
12

RETURN ON EQUITY =
Net Income
Owner’s Equity
(Effectiveness) X (Efficiency) X (Leverage)
Sales
Total Assets
X
Net Income
Sales
X
Total Assets
Owner’s Equity
A&P 1998 ROE = $63,586,000 / $926,632,000 = .069
= 3.43 X .0067 X 3.23 = .069
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RETURN ON INVESTMENT =
Net Income
Total Assets
ROI =
Net Income
Sales
X
Sales
Total Assets
ROI = Net Margin X Asset Turnover
A&P 1998 ROI = .0062 X 3.42 = .02
A&P 1996 ROI = .0057 X 3.50 = .02
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• FINANCING - the process of obtaining capital for the business
•
INVESTING - the process of asset acquisition to operate the business
•
OPERATING - using resources to maximize shareholder wealth
15

HOW WE MEASURE VALUE
CREATION
(Effectiveness) X (Efficiency) X (Leverage)
Sales
Total Assets
X
Net Income
Sales
X
Total Assets
Owner’s Equity
(Asset Turnover) X (Net Margin) X (Degree Financial Leverage)
Investing Operating Financing
FIO MODEL
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EARNINGS PER SHARE =
Earnings
Shares of Common
Stock Outstanding
A&P 1998 EPS = $1.66
A&P 1996 EPS = $1.50
• Market Measure
• Unambiguous
• Represents per Share Value Creation
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EBIT = OPERATING PROFIT/ SALES
EBIT measures operating profitability including depreciation
Average for cohort group = 6.4%
18

EBIT - A&P
EBIT = $144,215,000/ $10,262,199,000 = .01
BEST PRACTICE FOR COHORT GROUP IS
ALBERTSONS ;
EBIT = .083
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EBITDA = Operating Profit before
Depreciation/ Net Sales
EBITDA measures operating profitability excluding depreciation.
Industry average = 4.87%
Average for cohort group = 4.5%
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EBITDA = 378,451,000/ 10,262,199,000 = .037
BEST PRACTICE FOR COHORT GROUP IS
ALBERTSONS ;
EBITDA = = .061
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NET MARGIN = NET INCOME/ SALES
Net Profit Margin measures the portion of the firm’s sales dollar remaining after it pays all expenses
Industry average = 1.22%
Average of cohort group = 2.3%
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NET MARGIN = $63,042,000/$10,262,199,000 = .62%
BEST PRACTICE FOR COHORT GROUP IS
ALBERTSONS
NET MARGIN = 3.52%
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RETURN ON TOTAL ASSETS = NET INCOME
TOTAL ASSETS
MEASURES THE ABILITY OF A COMPANY’S
COMBINED EQUITY CAPITAL AND DEBT
SECURITIES TO GENERATE PROFITS
Industry average = 3.64%
.
Average of cohort group = 7.1%
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RETURN ON ASSETS = $63,042,000/$2,973,679,245 = .0212
BEST PRACTICE FOR COHORT GROUP IS
ALBERTSONS
RETURN ON ASSETS = .099
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RETURN ON EQUITY = NET INCOME/ OWNER’S EQUITY
RELATES COMPANY EARNINGS SPECIFICALLY
TO THE RESOURCES PROVIDED BY ITS OWNERS
Industry average = 16.03%
Average of cohort group = 29.7% (with Kroger)
Average of cohort group = 22.5% (w/o Kroger)
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RETURN ON EQUITY = $63,042,000/ $926,632,000 = 6.9%
BEST PRACTICE FOR COHORT GROUP IS
AHOLD
RETURN ON EQUITY = 30.22%
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ASSET TURNOVER = NET SALES/TOTAL ASSETS
ASSET TURNOVER IS USED TO MEASURE THE FIRM’S ABILITY
TO USE ITS ASSETS TO GENERATE SALES
Industry average = 2.98 TIMES
Average of cohort group = 3.05 TIMES
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ASSET TURNOVER =$10,262,199,000 /$2,973,679,245 = 3.42
BEST PRACTICE FOR COHORT GROUP
IS;
KROGER
ASSET TURNOVER = 4.38
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DEBT TO EQUITY = TOTAL LIABILITIES/ TOTAL EQUITY
THE DEBT-TO-EQUITY RATIO INDICATES THE DEGREE OF
DEPENDENCE ON CREDITORS, RATHER THAN OWNERS, IN
PROVIDING FUNDS TO OPERATE THE BUSINESS.
Industry average = 3.17 TIMES
Average of cohort group = 3.16 TIMES
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DEBT TO EQUITY = $ 2,068,620,000/ $926,632,000 = 2.23
BEST PRACTICE FOR COHORT GROUP
IS;
ALBERTSONS
DEBT TO EQUITY = 1.16
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CURRENT RATIO = CURRENT ASSETS/ CURRENT LIABILITIES
CURRENT RATIO INDICATES THE ABILITY OF A COMPANY TO
MEET ITS CURRENT OBLIGATIONS
Industry average = 1.05
Average of cohort group = .96
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CURRENT RATIO = $1,217,000,000/ $955,130,000 = 1.27
BEST PRACTICE FOR COHORT GROUP IS;
FOOD LION
CURRENT RATIO = 1.40
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QUICK RATIO = (CURRENT ASSETS - INVENTORY)
CURRENT LIABILITIES
QUICK RATIO MEASURES THE RELATIONSHIP BETWEEN
CASH, CURRENT RECEIVABLES,AND MARKETABLE
SECURITIES TO CURRENT LIABILITIES. IT INDICATES A
COMPANY’S ABILITY TO DISCHARGE ITS CURRENT
OBLIGATIONS WITHOUT THE NEED TO SELL OFF
INVENTORIES.
Industry average = .32
Average of cohort group = .28
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QUICK RATIO = ($1,217,227,000 - $882,229,000)/ $$955,130,000 = .31
BEST PRACTICE FOR COHORT GROUP IS;
PUBLIX SUPERMARKETS
QUICK RATIO = .66
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GMROI = GROSS MARGIN/ AVERAGE INVENTORY
GMROI COMBINES BOTH GROSS MARGIN PERCENT
AND INVENTORY TURNS INTO ONE NUMBER.
Industry average = 466%
Average of cohort group = 360%
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GMROI = $3,169,070,000/ $882,229,000 = 223%
BEST PRACTICE FOR COHORT GROUP
IS;
SAFEWAY
GMROI = 426%
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CASH CONVERSION CYCLE = INVENTORY CONVERSION
PERIOD + RECEIVABLES COLLECTION PERIOD - PAYABLES
DEFERRAL PERIOD.
THE CASH CONVERSION CYCLE THUS EQUALS THE LENGTH
OF TIME THE FIRM HAS FUNDS TIED UP IN ITS CURRENT
ASSETS.
Average of cohort group = 10 days
Assumes a 30 day payables deferral period.
Cash conversion cycle - A&P = 32 days
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Retailer Producer Distributor
ACTIVITY
Inventory Turnover 10.61 5.32 14.2
Receivables Turnover 100.3 12.24 27.21
Total Asset Turnover 3.05 1.21 3.99
PERFORMANCE
Net Margin (%) 1.22 10.76 1.47
Return on Assets (%) 3.64 13.13 4.91
Return on Equity (%) 29.7 38.40 14.06
LEVERAGE
Total Assets/ Equity 4.16 3.09 3.39
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•Measures real profitably- on a cash basis
•Measures the cost of equity- not shown on balance sheets
•Cost of equity is its opportunity cost- what the investors could do in their next best alternative
•Capital includes long term debt, preferred stock, and common stock
•Cost of capital is its weighted average
40

ECONOMIC VALUE ADDED =
[Net Operating Profit After Tax - After Tax Dollar Cost of
Capital]
Net Operating Profit After Tax = Operating Profit - Income Tax
After Tax Dollar Cost of Capital = Cost of Capital (%) X Capital
Cost of Capital = Weighted After Tax Cost of Capital
Capital = Total Capital Employed = Common and Preferred
Stock + Long Term Debt
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NET INCOME AFTER TAX = $63,586,000
LESS: COST OF CAPITAL - $111,196,000
EQUALS: ECONOMIC
VALUE ADDED ($47,610,000)
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Company Name Economic Value Added
Safeway $431,000,000
Kroger $(47,000,000)
Coca-Cola $782,000,000
Nabisco $(1,926,000,000)
RichFood $2,000,000
NashFinch $(18,000,000)
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