Business Policy and Strategy SWOT analysis

Strategic Management Cases

Domino’s Pizza, Inc., 2013

www.dominos.com , DPZ

Based in Ann Arbor, Michigan, Domino’s is the largest pizza delivery company in the USA having a 22.5 percent share of the pizza delivery market. Domino’s digital ordering channels include online ordering at www.dominos.com, mobile ordering at http://mobile.dominos.com, and ordering on iPhone, Kindle Fire, and Android apps. More than $2 billion of Domino’s pizza is ordered online annually. There are more than 10,300 Domino’s stores in over 70 countries. Domino’s had sales of over $7.4 billion in 2012, with $3.6 billion of that coming from the USA.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

Growing up in foster homes most of their childhood, Tom Monaghan and his brother James borrowed $900 in 1960 to purchase a mom-and-pop pizza store in Ypsilanti, Michigan, named Domi-Nick’s. After trading his brother James a Volkswagen Beetle for his half of the business in 1961, Tom changed the store name in 1965 from Domi-Nick’s to Domino’s Pizza Inc. The company experienced steady growth during the 1960s, and by 1978, there were 200 Domino’s stores in the USA. During the 1980s, the company expanded rapidly both in the USA and internationally. By the end of the decade, Domino’s had more than 5,000 stores in the USA, Canada, United Kingdom, Japan, Australia, and Colombia. By 1998, there were more than 6,000 Dominos, with 1,500 located outside the USA. Tom Monaghan retired in 1998 and sold 93 percent of the company (worth $1 billion) to Bain Capital Inc. In the six years following the sale, Domino’s enjoyed great success under Bain Capital and in 2004 Domino’s became a publically traded company on the New York Stock Exchange under the ticker symbol DPZ. The initial stock price was $16 per share and placed a value on the company at more than $2 billion (double the price Bain paid).

Domino’s changed its 49-year-old recipe at year end 2009 and started a heavily advertised marketing campaign called “new inspired pizza.” Domino’s stock price appreciated from around $8 a share at the start of 2010 to $60 in mid-2003. Fueled by the new recipe and new products, Domino’s celebrated its 50th anniversary in 2010 and was awarded best pizza chain in 2010 and 2011 by Pizza Today magazine, marking the first time ever that the same pizza chain had received the award in consecutive years. Domino’s CEO Patrick Doyle was named the best CEO of 2011 by CNBC. Domino’s was recently ranked number 1 in Forbes magazine’s “Top 20 Franchises for the Money” list.

About 96 percent of Domino’s stores are owned by franchisees. There are very few company-owned Domino’s stores.

Corporate Philosophy and Mission Statement

Domino’s does not have a stated vision statement, but the company mission statement is as follows: “Exceptional franchisees and team members on a mission to be the best pizza delivery company in the world.” Domino’s “guiding principles” are based on the concept of one united brand, system and team:

• • putting people first;

• • striving to make every customer a loyal customer;

• • delivering with smart hustle and positive energy; and

• • winning by improving results every day. (2012 Annual Report)

Organizational Structure

As indicated in Exhibit 1, Domino’s has 11 top executives, mostly executive vice-presidents (EVPs). It appears that Domino’s operates from a functional organizational structure with Doyle being “where the buck stops,” although for a firm of this size, a divisional or strategic business unit type structure by region (or by franchised versus company owned) may be more effective in promoting delegation of authority, responsibility, and accountability.

EXHIBIT 1 Domino’s Organizational Chart

Business Segments

Domino’s provides financial information for four key business segments: (1) domestic company-owned stores, (2) domestic franchise stores, (3) domestic supply chain, and (4) international. Note in Exhibit 2 that the largest revenue-generating segment is the domestic supply chain with more than 50 percent of all revenue. Note also the large revenue numbers for the relatively few company owned stores, because each Domino’s domestic franchisee owns his or her own store(s) and reports their revenues on their own personal financial statements rather than Domino’s. From franchisees, Domino’s reports only the royalties and advertising fees it receives from franchisees as revenue. The financial data for the international supply chain centers are included in the international division, not under the domestic supply chain division. Also note in Exhibit 2 the slight revenue decline in 2012 for domestic company-owned stores.

Exhibit 3 reveals that for 2012, Domino’s international stores had the highest growth in revenue, followed by U.S. company-owned stores. However the sales growth among all three segments slowed in 2012.

Exhibit 4 reveals that Domino’s growth in number of stores is highest outside the USA, with the actual number of company-owned stores in the USA falling to 388. About 10,000 employees work for Domino’s, but counting all workers for all franchisees, this number is closer to 205,000.

EXHIBIT 2 Finances by Segment (in millions)

Source: Company documents.

Note: Domino’s 2012 year ended 1-31-13.

EXHIBIT 3 Same Store Sales Growth (Percent)

Source: Company documents.

EXHIBIT 4 Growth: Total Number of Domino’s Stores

Source: Company documents.

Domestic Supply Chain

Domino’s domestic supply chain supplies franchisees with dough, vegetables, ovens, uniforms, and much more, enabling better control, pizza consistency, and timely delivery of products. This backward integration strategy enables Domino’s to offer pizza at lower prices and allows store managers to focus on store operations rather than mixing dough on site, prepping vegetables, and bargaining with independent suppliers for ingredients. Domino’s has 16 regional doughmanufacturing and supply chain centers and leases a fleet of more than 400 trucks to aid in delivering products to stores twice a week. However, Dominos’ franchisees are not required to purchase supplies from Domino’s, but interestingly more than 99 percent do purchase all its supplies from the company’s domestic supply chain segment. To ensure this division remains viable, Domino’s provides profit-sharing incentives to franchisees to buy its products from Domino’s. In addition to the 16 domestic supply chain centers, Domino’s also operates 6 supply chain centers outside the USA.

Domestic Stores

The company’s domestic stores division includes a network of 4,540 stores operated by 1,026 franchisees and 388 company-owned stores in the USA. Domino’s desires to have all of its stores owned and operated by franchisees, but if certain stores are underperforming, Domino’s often will purchase these stores in hopes of turning them around and then refranchising them at a later date. Domino’s uses company-owned stores as test sites for new products, promotions, new potential store layout improvements, and as test sites for prospective new franchisees.

Although the typical franchisee of Domino’s operates 4 stores, the nine largest franchisees operate more than 50 stores, including the largest domestic franchisee that operates 135 stores. Currently, Domino’s has 1,077 different domestic franchisees with the average franchisee being in Domino’s system for an impressive 14 years. Much of this longevity can be attributed to Domino’s requiring prospective franchisees to manage a store for 1 year before entering into a long-term contract with Domino’s. Domino’s feels this system is unique to the pizza industry and provides a competitive advantage over rival pizza firms.

International Division

Domino’s has 5,327 franchise stores outside the USA. The company’s international revenues as a percent of total revenues increased to 13.0 percent in 2012, up from 11.2 percent in 2010. Exhibit 5 provides is a breakdown of Domino’s stores in the top 10 markets, which account for more than 75 percent of all Domino’s international stores. Note that the United Kingdom has the most Domino’s of all countries, followed by Mexico. Among the company’s six “international” supply chain centers, four of these are in Canada, one is in Alaska, and one is in Hawaii. (It is unclear why Domino’s categorizes Alaska and Hawaii as international). As with Domestic franchisee stores, most of the company’s revenue in the international division comes from royalty payments and advertising, as well as the sales of food and supplies to certain markets (predominantly Canada, Alaska, and Hawaii). Note in Exhibit 5 the rapid growth in Domino’s stores in India, Turkey, and Japan. The largest Domino’s franchisee outside the USA operates 911 stores.

EXHIBIT 5 Top 10 Countries Where Domino’s Are Located

Source: Company documents.

Internal Issues

Domino’s has a vertically integrated supply chain where they have backward control to some extent over many of its supplies such as dough, veggies, equipment, and uniforms and forward control over around 400 retail stores that are company owned. Domino’s offers little to nothing in terms of healthy food options on the menu, such as salads or fruit. Although this approach enables Domino’s to focus exclusively on pizza, this practice also increases the firm’s vulnerability to the increasingly health-minded customer and possible government mandates for fast-food restaurants to stop using certain ingredients and preservatives, and potentially forcing all restaurants to label all nutrition information on the menu at the point of sale. Such a law would not be favorable to Domino’s.

Domino’s attributes much of its success to an incentive-based system for franchisees in which it actively shares in profits through increasing demand for new stores and through purchasing supplies from the Domino’s supply chain. Domino’s individual franchisee stores and company-owned stores also enjoy a simple and effective store layout enabling pizza delivery and carryout orders to be processed and executed efficiently as compared to many competitors. Unlike Domino’s, many rival pizza firms use a dine-in business model, which is much more costly than Domino’s strategy. Competitive advantages such as these make Domino’s an attractive franchisee option in the quick-service restaurant (QSR) market because overhead and investment is generally cheaper than competing firms.

Sustainability

Sustainability refers to the extent that an organization’s operations and actions protect, mend, and preserve rather than harm or destroy the natural environment. Many firms today develop an annual sustainability report, similar to an annual report, to reveal to stakeholders its actions and commitment to sustainability. However, Domino’s does not produce an annual sustainability report nor does the company have a sustainability statement on its website.

Advertising and Sales Force

Dominos domestic stores contributed 5.5 percent of all retail sales to support national and local advertising campaigns. Domino’s expects this rate to remain unchanged for the foreseeable future. Much of those monies are devoted to mass-mail flyers promoting specials at the local Domino’s.

Domino’s Pulse Point-of-Sale System

To maximize efficiencies and provide timely financial and marketing data, Domino’s requires all stores to install and use its PULSE system that now exists in all company-owned stores and 98 percent of franchisee-owned stores. The system enables touch-screen ordering that improves order accuracy and efficiency and provides the driver with directions and the best route to take for multiple deliveries, saving time and money. In addition, the PULSE system better enables Domino’s to ensure it receives full royalties from all transactions in what is often a cash business, assuming the franchisees are honest and always use the PULSE system when receiving orders.

Finance

Domino’s recent income statements and balance sheets are provided in Exhibits 6 and 7, respectively. Note that Domino’s revenues increased 2.6 percent in 2012 and the firm’s long-term debt rose slightly to $1.53 billion. Note the company has zero goodwill on its balance sheet.

EXHIBIT 6 Domino’s Pizza, Statements of Income (In thousands, except per share amounts)

Source: 2012 Form 10K, p. 50.

EXHIBIT 7 Domino’s Pizza, Balance Sheets (In thousands except share and per share amounts)

Source: 2012 Form 10K, pp 48-49.

Competitors

Competition in both the USA and international pizza-delivery and carry-out business is extremely intense, with Pizza Hut (owned by Yum Brands) being the largest competitor in the industry. Pizza Hut’s revenues are more than 60 percent greater than Domino’s. Papa John’s and Little Caesars are also fierce rivals in the industry. In fact, Little Caesars was listed as the fastest-growing pizza chain in 2010, with revenues up 13.6 percent over 2009, followed by Pizza Hut’s 8 percent increase and Domino’s 7.2 percent increase. In addition to the three main rivals, Domino’s faces intense competition from many local mom-and-pop pizza stores, frozen pizzas from the grocery store, as well as hundreds of non-pizza fast-food options. Pizza Hut, Domino’s, and Papa John’s account for 51 percent of all consumer spending on pizza delivery stores in the USA, with the other 49 percent coming from regional or mom-and-pop establishments.

Internationally, Pizza Hut and Domino’s are the main players in the industry, but various countries have numerous national companies and thousands of mom-and-pop pizza and Italian restaurants vie for business as well. As with the domestic market, some customers consider local pizza stores to offer better quality products than large chains and are willing to pay marginally higher prices for this perceived quality.

Another competitor is Pizza Inn Holdings, Inc., based in The Colony, Texas. Pizza Inn owns 10 stores and franchises out 300 more stores.

Pizza Hut

A division of Yum Brands, Pizza Hut is based in Plano, Texas, and operates more than 7,200 restaurants in the USA and more than 5,600 restaurants internationally in more than 90 countries. In contrast to Domino’s, almost all Pizza Huts are dine-in restaurants. Pizza Huts serve pan pizza, as well as its thin n’ crispy, stuffed crust, hand tossed, and sicilian. Other menu items include pasta, salads, and sandwiches. Pizza Huts offer dine-in service at its famous redroofed restaurants, as well as carryout and delivery service. About 15 percent of all Pizza Huts are company-operated, whereas the remaining stores are franchised. The world’s largest fast food company, YUM Brands also owns and operates Kentucky Fried Chicken (KFC), Long John Silvers, and Taco Bell. Pizza Hut is Domino’s major pizza rival outside of the USA.

Papa John’s International, Inc.

Headquartered in Louisville, Kentucky, and founded in 1985, Papa John’s operates 3,883 pizza restaurants with 3,255 of these being franchisee-owned and 628 being company-owned stores. Papa John’s has restaurants in all 50 U.S. states and 32 foreign markets. The company currently has 16,500 full-time employees and markets its pizza under the slogan “better ingredients, better pizza.” Between 2001 and 2012, Papa John’s was ranked number one (by the American Customer Satisfaction Index) among national pizza chains for 10 of the 11 years during this period. The company reported revenue of more than $1.2 billion for year-end 2011, and consistent with the industry, it shows no revenue allocated to research and development. Papa John’s carries $75 million in goodwill on its balance sheet; founder and CEO John Schnatter owns more than 20 percent of the chain. Papa John’s offers several different pizza styles and topping choices, as well as a few specialty pies such as The Works and The Meats. Papa John’s stores typically offer delivery and carryout service only.

Exhibit 8 provides a comparison between Domino’s and Papa John’s. Note that Domino’s appears to generate more revenue with less employees, but that is not true because employees at franchised stores are not Domino’s employees. Pizza Inn’s 57 employees work at company-owned restaurants, not franchised stores.

Pizza Inn Holdings, Inc.

Pizza Inn is a relatively small chain of franchised quick-service pizza restaurants, with more than 300 locations in the USA and the Middle East. Pizza Inns offer pizzas, pastas, and sandwiches, along with salads and desserts. Most locations offer buffet-style and table service, whereas other units are strictly delivery and carryout units. The chain also has limited-menu express carryout units in convenience stores and airport terminals, and on college campuses. Pizza Inn’s domestic locations are concentrated in more than 15 southern states, with about half located in Texas and North Carolina.

Little Caesars

Headquartered in Detroit, Michigan, and privately held, Little Caesars is famous for its advertising slogan, “Pizza! Pizza!” which was introduced in 1979. The phrase refers to two pizzas being offered for the comparable price of a single pizza from competitors. In November 2010, Little Caesars introduced Pizza! Pizza! Pantastic, denying that the return of “Pizza! Pizza!” had any relationship to the recent success of Domino’s. Little Caesars operates under its parent Little Caesars Enterprises and is estimated to be the fourth largest pizza chain in the USA. Little Caesars operates in 30 foreign countries.

External Issues

EXHIBIT 8 A Comparison Between Domino’s and Papa John’s

EPS, earnings per share.

Source: Company documents.

Domino’s competes in the Quick Service Restaurant (QSR) pizza category, which consists of two categories: 1) delivery and 2) carry-out. Delivery revenues for the industry in 2012 were $9.6 billion, up only slightly the last few years. The delivery portion accounts for 30 percent of the total QSP pizza revenues. However, the carry-out portion of the industry grew revenues from $14.1 billion in 2011 to $14.6 billion in 2012. Domino’s is the market leader in delivery and second largest in carry-out. Outside of the USA, pizza delivery is underdeveloped, with Domino’s and one rival being the only firms.

Nutrition Concerns

An area of concern for all fast-food establishments, including pizza stores, is the growing health-minded customer, as well as the growing pressure from government agencies to label all products with nutrition information. There have been battles between the restaurant industry and government agencies for many years, but much like the tobacco industry (in respect to labeling its products). It appears the war is close to being lost for the restaurant industry. Domino’s itemizes nutrition information on its website, but forces the customer to add the calories for crust, sauce, cheese, and topping, and then divide by the number of slices to derive the total calorie count per slice. After doing the calculations, one large slice of hand-tossed pepperoni pizza for example has 300 calories and 12 grams of fat, and there are 8 slices in a pizza. To complicate matters for restaurants such as Domino’s, it is difficult to provide accurate nutrition labels when there can be an almost endless combination of ingredients on a pizza. For example, someone may order a large sausage pizza with onions and olives whereas someone else might order extra cheese and tomatoes. Having to print out nutrition labels for all these combinations would be quite costly as opposed to a restaurant like McDonald’s where it can print the nutrition label on the Big Mac because there is uniformity in ingredients and the label is understood to be for the base item. However, Domino’s PULSE system could possibly be adjusted to resolve this potential issue.

Chipotle Mexican Grill claims to only use meat and dairy products from free-ranging cattle, as opposed to cattle injected with growth hormones. Domino’s Pizza markets its pizzas as having gluten-free crust. This is an attempt to win over health-conscious customers, comply with government regulations, and make current customers feel a little less guilty about eating pizza. The tug of war between customers, governments, lawyers, and the restaurant industry on health issues is likely to continue for some time.

In response to these challenges, many restaurants have opted for healthy menu options. Wendy’s, for example, has promoted several meal combinations that contain less than 10 grams of fat. All of these items were originally on its menu, just not marketed in that manner. Wendy’s has added side salads and fruit to help cut down on calories, fat, and sodium. Subway is also famous for marketing its products as healthy alternatives to other fast-food options. Domino’s, and many pizza competitors, offer few to no menu options for the health-conscious consumer.

Barriers to Entry

Barriers to entry are relatively low for the restaurant industry, but rivalry (competitiveness) among firms is exceptionally high. One large contributing factor for the low barriers to entry is many small entrepreneurs can open mom-and-pop establishments and bypass the franchise fees, royalties, selection process, and so on of owning a franchised restaurant and lease an existing building relatively cheap. However, even avoiding high fixed costs, variable costs are often high and small-scale entrepreneurs are not able to compete with larger franchise stores, who can better negotiate pricing on food, packaging, and other supplies. In the QSR industry, the bargaining power of consumers is quite powerful, availability of restaurant options in most places is abundant, and consequently there is intense price competitiveness among rival firms. Even if you are sure you want pizza for lunch or dinner, you likely have many options.

Economic Factors

The current landscape in the QSR business is a bimodal population distribution with a large population of bargain-minded customers seeking deals on cheaper end fast food options, and another population of more affluent consumers targeting middle to higher-end restaurants. Domino’s is well positioned strategically to target the first group of consumers because there are many more of them; Domino’s often has excellent sales and discounts to target this group.

Among the subset of customers who are value shoppers, many of these are also shoppers of quality and are willing to wait in line a little longer or pay a little more for better quality food products. Domino’s has recently capitalized on this well with the introduction of its artisan pizzas and new recipes (or higher quality products) for its crust, sauce, and cheeses. In addition, Domino’s offers many pick up specials. Although an inconvenience over delivery, many customers in today’s climate are willing to tolerate a degree of inconvenience that they historically were not if they can get a better deal.

Similar to Domino’s, many restaurant owners in the fast-food industry have experienced stronger growth in international markets than domestic markets. This trend is expected to continue, especially in China and other developing nations because many U.S. fast-food options are still novel, even in Europe. According to the S&P Industry Surveys, QSRs are expected to see a sales increase of 3 percent in 2012 and orders to increase 1.5 percent as a result in large part of consumers trading down to cheaper restaurant alternatives. There also is a steadily growing international appetite for U.S. fast food and an improving global economy. These positive trends are expected to continue into 2013 and should bode well for Domino’s with its strong international presence.

Ethics and Corporate Citizenship

Domino’s has two extensive “Code of Ethics” documents on its website: one statement for its employees and one statement for its executives. The documents outline matters such as: conflicts of interest, how to report unethical conduct, fair dealing with all employees, compliance with laws, proper way to use company assets, and much more.

In addition to Domino’s Code of Ethics statements, the company is noted for its corporate citizenship record in particular with St. Jude Children’s Research Hospital. Since 2006, Domino’s has donated more than $12 million to St. Jude and has hosted pizza parties for patients and its families on St. Jude properties.

In 1986, Domino’s launched its Pizza Partners Foundation with a mission of “team members helping team members.” The foundation is 100-percent funded by team member and franchise contributions and has disbursed nearly $12 million to aid team members facing crisis situations such as fire, illness, or other personal tragedies.

The Future

As CEO Doyle and his management team contemplate the future direction of Domino’s, it has much to consider. Should the firm continue its aggressive market development strategies and accept the risk associated with expanding into markets it has little expertise operating within? What new geographic locations or regions should Domino’s focus? Should Domino’s simply follow Pizza Hut’s international rollout of stores? How would this expansion affect the corporate structure of Domino’s? Would restructuring by geographic division and thus establishing offices in Asia, the Middle East, and South America better enable them to manage these more risky environments? Can Domino’s afford this financially? Should Domino’s consider offering salads or a line of healthy menu options? Should Domino’s purchase trucks to deliver its products rather than incurring such heavy leasing expenses?

Domino’s needs a clear three-year strategic plan. Prepare this document for the company.

Spirit Airlines, Inc., 2013

www.spirit.com , SAVE

Headquartered in Miramar, Florida, Spirit Airlines competes in the ultra-low cost carrier (ULCC) airline industry in the USA, Caribbean, and Latin America. Spirit offers some of the lowest fares in the industry, usually up to $100 less than competitors and sometimes as cheap as $9 plus taxes and fees. Spirit targets customers who are paying for their own travel rather than business-class customers. Spirit charges passengers fees of up to $45 for a carry-on and checked bags. Everything on a Spirit flight costs, including water and snacks, selecting a seat, and maybe soon even to get off the plane before others. Spirit charges a fee of $5 to passengers who have their boarding passes printed by the check-in agent. Spirit’s weight limit for checked luggage is 40 pounds per bag, charging $25 for the first 9 extra pounds, and up to $100 for bags approaching 100 pounds. Despite the fees, thousands of customers are loyal to Spirit because of its lowpriced tickets. Spirit has reconfigured all its planes for high-density seating. For example, their A319 planes seat 145 passengers, 25 more than the same plane being used by United.

Spirit currently has more than 200 flights a day and serves 52 airports with 4 focused airports consisting of Chicago, Dallas Ft. Worth, Detroit, and Las Vegas. Other Spirit hubs are Ft. Lauderdale, Myrtle Beach, and Atlantic City. Spirit has a fleet of 43 Airbus aircraft and employs more than 3,033 full-time employees, but is rapidly adding flights, planes, employees, and customers. Spirit leases planes rather than buys planes.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

Spirit Airlines was founded in Michigan as Clipper Trucking Company in 1964, and in 1974, the company changed its name to Ground Air Transfer, Inc. The company operated this way for nine years until 1983 when it became a passenger airline called Charter One. Charter One specialized as a tour operator taking customers to such locations as Atlantic City, Las Vegas, and the Bahamas. In 1990, Charter One received its Air Carrier Certificate from the Federal Aviation Administration allowing air charter operations. In 1992, Charter One changed its name to Spirit Airlines, Inc. and increased its destinations to include such cities as Fort Lauderdale, Detroit, Myrtle Beach, Los Angeles, New York, and many more.

Spirit’s average fleet age is 4.5 years old, the third youngest airline, fleet in the Americas after Virgin America and the Mexican airline, Volaris. Big front seats are available on all Spirit aircraft, although they are sold as an upgrade and not as a distinct class of service. These seats are wider because of its two-by-two configuration, whereas the standard economy seats feature a three-by-three configuration.

Spirit added about 50 new destinations in 2012, all at rock-bottom fares. Spirit packs 178 seats on its A320 aircraft jets that usually have 150 seats. Most airlines offer at least three more inches of legroom in the aisles of their planes as compared to Spirit. Spirit is financially doing great, but it does have critics, such as Jami Counter, senior director of SeatGuru, which informs travelers about airline cabin features. Jami says “Spirit is as bare-bones as bare-bones can be, basically stripping everything from the flight experience and charging for anything they view as an add-on. And part of that is cramming as many seats in the plane as possible. The flight experience is probably the worst in the USA.”

Vision and Mission

Spirit’s president and CEO, Ben Baldanza, says: “Our vision is to make sure the customer who can’t afford to pay current airline prices has an option to still travel.” The CEO goes on to say that “Whenever we add a new market or a new service, we always try to price that market at lower than the prevailing fares in that market to bring back some people who’ve been priced out.”

Spirit does not have a mission statement, but its company slogan is: “The Ultra Low Cost Airline for the Americas.”

EXHIBIT 1 Spirit Airlines’ Organizational Chart

Source: Based on company documents.

Organizational Structure

Spirit appears to operate from a functional organizational structure as illustrated in Exhibit 1. Note the absence of any women among top management and the absence of any divisions (segments), although the company does provide a revenue breakdown by United States versus Latin America. Perhaps executives not listed in Exhibit 1 report to the chief operations officer (COO) as division heads.

Internal Issues

Statement of Ethics and Governance

Spirit has a detailed Code of Ethics provided on its website that pertains to all directors, officers, and employees. The code provides all the standards expected of Spirit employees and reveals how to report violations and what to do if an employee is not sure of how to address a particular problem. The code also clearly outlines acceptable conduct with employees, customers, and business suppliers, conflicts of interest, dealings with the government, and considerably more. In addition to the Code of Ethics, Spirit also provides detailed corporate governance guidelines. Issues such as the size of the board, level of independence the board should have, director-selection processes, term limits, responsibilities, compensation, access to senior management, and much more is included in the document. Spirit has standing committees to address issues such as audits, finance, violations of ethics, and compensation.

In April 2012, citing the airline’s strict refund policy, Spirit Airlines would not issue a refund to dying veteran, Jerry Meekins, who chose to purchase a nonrefundable ticket though other options were available. The 76-year-old Vietnam veteran and former Marine tried to get his $197 back after learning his esophageal cancer was terminal and being told by his doctor not to fly from Florida to Atlantic City. The decision caused outrage among veterans’ groups and the general public, some of whom threatened to boycott Spirit unless a refund and apology were issued. On May 4, Spirit CEO Ben Baldanza apologized for how the situation was handled and announced that he would personally refund Meekins’ ticket and that the airline would make a $5,000 donation to the Wounded Warrior Project in Meekins’s name.

Segment Data

As indicated in Exhibit 2, Spirit provides revenue data in two categories: Domestic and Latin America. Note the 103 percent growth in the domestic segment from 2009 to 2012 compared to 29 percent growth in the Latin American segment. Spirit’s domestic revenues were 86 percent of all revenue in 2012, up from 80 percent in 2009. No single international market accounted for more than 4 percent of total revenue.

Current Strategies

Spirit’s low cost leadership strategy, or ULCC as it is referred to in the industry, allows customers to purchase only what items they deem necessary. Spirit markets themselves as offering transparent pricing and does not consider themselves a no frills airline, but rather a frills-for-fee airline. Spirit offers the same amenities as higher cost airlines if the customer wishes to purchase the amenities. Spirit’s strategy is analogous somewhat to discount carrier Ryanair’s strategy in Europe.

EXHIBIT 2 Spirit’s Revenues by Category (in thousands)

Source: Company documents.

By charging for bags, drinks, and food, Spirit is able to keep costs low, generate extra revenue for these items, and reduce weight, which reduces fuel consumption. Charging for bags encourages customers to pack lighter and perhaps get by with less expensive carry-on bags as opposed to checked bags. This allows quicker turnaround times at airport gates. In addition to the cost savings, nonticket revenue is an important component of Spirit’s business model because customers, according to Spirit’s research, seem less price-sensitive to drinks, pillows, and even bags than ticket prices. Since 2006, Spirit’s nonticket revenue has increased 800 percent as a result in part to bag and drink fees, but also through the $9 fare club subscription service, Spirit credit card, and the sale of advertising to third parties on Spirit’s website and on-board aircraft.

Spirit’s strategic plan is to aggressively expand geographically (market development) and gain more market share (market penetration) in the United States, Caribbean, and Latin America. Many travel destinations in the Caribbean and Latin America have historically only been served by large carriers charging relatively higher prices. But many cost-minded flyers visit these areas, so there is substantial room for growth in these markets.

To support Spirit’s expansion strategy, the company has on order 106 Airbus 320 aircraft with delivery ranging from 2012 through 2021 as well as spare and replacement engines that are on order between 2012 through 2018. Spirit expects to take delivery of seven aircraft in each of 2013, and 2014, and then 10 airplanes in 2015, and an additional 75 planes between 2016 and 2021. Spirit’s use of the A320 over the A319 enables the carrier to configure the planes to hold 178 passengers as opposed to 150 on the smaller A319 that rival carrier Jet Blue primarily uses.

Locations

Spirit currently operates more than 200 flights a day to 50 different airports throughout North America, the Caribbean, and Latin America. Approximately 54 percent of all flights are to or from the home base in Fort Lauderdale, and a large percentage of the balance originate from Detroit, Las Vegas, Atlantic City, Chicago, Orlando, and Myrtle Beach. Global operations include service to Canada, Mexico, all of Central America, Colombia, Peru, and much of the Caribbean. However, many of the global flights are seasonal, and even the flights that are year round, many only fly once or twice a week to these locations. Spirit’s single largest airport is Ft. Lauderdale/Hollywood, with over 20 percent of all Spirit flights operating to or from Ft. Lauderdale.

Marketing

Spirit focuses on direct marketing to price-sensitive consumers rather than focusing on higher end business travelers. Spirit actively promotes its lowest fares in the industry business model. Sprit spends a paltry 0.2 to 0.5 percent of total revenues on advertising for customers who pay their own way and spends nothing on corporations, government agencies, or other business-class travelers. Spirit relies heavily on repeat customers, word-of-mouth, and its email distribution systems that consist of more than five million e-mail addresses. In addition, Spirit also heavily markets its $9 club online, in radio and TV advertisements, in airport kiosks, and in flight promotions.

A striking weakness for Spirit is its lack of a marketing alliance within the airline industry. Competitors such as Delta, American, and US Airways all have alliances with other airlines enabling them to share codes, combine frequent-flier programs, aid in connections, and much more. Lack of affiliation with an alliance puts Spirit in a competitive disadvantage, particularly on international routes, and may partially explain why this area of the business is not growing as fast as the domestic segment.

Finance

Spirit’s recent income statements and balance sheets are provided in Exhibits 3 and 4 respectively. Note the 13.2 percent operating profit margin in 2012. Note that Spirit’s non-ticket revenue increased to 41 percent of revenues in 2012 from 36 percent the prior year.

EXHIBIT 3

Source: 2012 Form 10K, p. 60.

Competitors

The airline industry is highly competitive on price, flight schedules, newness and roominess of aircraft, amenities, and frequent-flier programs just to name a few. In recent years, many airlines have participated in alliances and mergers; Southwest and AirTran merged in 2011 and United and Continental merged in 2010, allowing them greater liquidity and access to capital that smaller airlines such as Spirit and Jet Blue do not have. Alliances such as OneWorld, SkyTeam, and Star Alliance allow larger and regional airlines to share marketing relationships, increase destinations, access to restrictive markets, and provide the ability to use cheaper air craft to service small markets. Currently, Spirit does not engage any type of alliance, which gives Spirit much more flexibility in pricing, policies, and procedures. Spirit’s single largest overlap in routes is with American Airlines at 60 percent.

Southwest and JetBlue no longer have the lowest airline prices. Spirit, along with Allegiant Air and Frontier, now has the legitimate claim as the industry’s lowest-cost flyers. Spirit spokeswoman Misty Pinson says that her airline aims to have a total fare that is at least 25-percent lower than any other available ticket price for any route that Spirit serves. Not even a glass of water is free on Spirit, but no carrier in the USA beats Spirit on ticket price.

EXHIBIT 4 Spirit’s Balance Sheets

Source: 2012 Form 10K, p. 61.

The airline industry is somewhat easy to enter as airlines such as Spirit lease some or all of its aircraft. Even a restaurant company such as Hooters was able to lease planes, hire pilots, staff, and make a go at the industry. Of course, in the end, Hooters was forced to divest its airline business and stick to its niche of serving chicken wings, beer and sports.

EXHIBIT 5 A Financial Comparison of Spirit with American and JetBlue

Note: EPS is earnings per share; P/E, price-to-earnings ratio.

Perhaps the most competitive aspect in the airline industry is ticket price because many carriers use the same airports and customers generally have options regarding which carrier to fly with. Anyone can search various travel sites such as Orbitz and Priceline.com to easily determine the most attractive prices and routes. Despite airlines’ efforts to conserve fuel by charging for bags, thus reducing weight, airlines readily admit, albeit two-faced, that carrying extra passengers as opposed to having an empty seat does little to impact the overall fuel cost of the trip. The incremental extra cost of selling unused seats can be drastically offset by selling the seats even at a perceived steal for the customer. Spirit has its “red light sales” in which the company provides many flights for as cheap as $9 and many others for less than $50 one-way. Selling the seats even at these discounted fares can add tremendously to net profit at the end of the year as opposed to letting the seat remain vacant.

The three principle competitors for Spirit on domestic routes are American Airlines, Delta Airlines, and JetBlue Airways. Approximately 60 percent of Spirit destinations also are serviced by American and Delta; American and JetBlue are the main competitors in the Caribbean and Latin America. Note in Exhibit 5 that Spirit has fewer employees and revenue than either American or JetBlue, but Spirit has the highest earnings per share (EPS).

American

AMR Corporation, headquartered in Fort Worth, Texas, in conjunction with AMR Eagle Holding Corporation, operates about 3,400 daily flights to more than 250 cities and 50 different countries around the world. Once the largest airline in the world, AMR now trails both Delta and United Continental in total U.S. market share. As a result of declining market share from lack of an effective strategic response to changing market conditions, AMR entered a voluntary reorganization under Chapter 11 bankruptcy in November of 2011. Interestingly enough, US Airways stock tripled the same day AMR formally declared Chapter 11, signaling that investors thought US Airways may now acquire AMR cheaply. As of July 2013, AMR and US Airways were still two separate companies, but a pending merger is still expected by many investors and analysts. If a successful merger takes place as expected in late 2013, the new company, American Airlines Group, will be the largest airline in the world, even larger than Delta and United Continental in U.S. market share.

JetBlue Airways

Headquartered in Long Island City, New York, JetBlue operates approximately 700 daily flights to 22 different states, Mexico, the Caribbean, and Latin America. Starting in November 2012, the airline also began serving Grand Cayman Island, bringing the total different Caribbean destinations served to 23. The company operates several aircraft including 120 of the same Airbus A320s that Spirit operates, but in addition JetBlue also uses 49 Brazilian-made Embraer 190 aircraft. In addition to providing some of the best rates in the industry, JetBlue also provides some of the best in-flight entertainment in the industry with its voice communication, satellite television and radio, wireless data links, and more.

As part of its environmentally friendly policies, JetBlue discontinued disposable headphones in 2008 and encourages customers to bring their own. Furthering its sustainability strategy, JetBlue also markets the following: (a) using only one engine to taxi, (b) using ground power instead of engines at the gate for air-conditioning, (c) using the latest GPS technology to develop more efficient routes, (d) using lighter seats and LED lighting, (e) not offering in-flight magazines to save paper, and many more ecofriendly options. Critics suggest the true intent of these moves by JetBlue is to cut costs similar to other airlines.

Delta Airlines

Headquartered and founded in 1924 in Atlanta, Georgia, Delta provides service to 342 destinations in 61 different countries via a mainline fleet of approximately 700 aircraft. In addition to its Atlanta hub, Delta also operates hubs in Amsterdam, Cincinnati, Detroit, Memphis, New York–JFK, Paris, and Tokyo.

In 2011, Delta was named the world’s most admired airline company by Fortune magazine and the “Top Tech-Friendly USA Airline” by PCWorld magazine. In addition to these accolades, Delta has an industry-leading global network with the markets it serves. As the founding member of SkyTeam global alliance, Delta furthers is presence around the globe and has joint ventures with Air France–KLM and Alitalia Airlines in Italy. Delta’s SkyMiles program is the largest frequent-flier program in the world and is supplemented with BusinessElite and more than 50 Sky Clubs in airports worldwide.

External Issues

Oil Prices

One of the largest absorbers of revenue in the airline industry is the cost of fuel. About 26 percent of all air-carrier revenue is used to pay the fuel bill. Back in 2008, a whopping 36 percent of revenues went toward fuel when oil hit an all time high of $147 a barrel and jet fuel was $4.32 gallon. Jet fuel today is much lower as oil prices have dropped significantly from its highs a few years ago.

One possible way to counter volatile fuel prices is to purchase futures contracts to hedge against rising prices by accepting a price at what the firm hopes is lower than the price will be at the time the fuel is needed. During the economic downturn, many airlines stopped hedging because it expected fuel prices to decline, and most benefited tremendously from this strategy. However, as the market rebounded and oil again resumed its uptrend, many airlines started to participate in hedging once again and for most the results were disastrous.

Labor

Labor is either the largest or second-largest expense for the airlines depending on the current price of oil. Labor accounts for a fairly consistent 20 to 25 percent of total revenue each year and is divided into several areas: flight crews (pilots and engineers), flight attendants, ground service, maintenance, customer service, and dispatchers. Most employees belong to one of a dozen major unions that plague the airline industry. A few examples are the Association of Flight Attendants, Air Line Pilots Association, and the Association of Machinists and Aerospace Workers. It is not uncommon for the airline to be in discussion with several unions at one particular time and negotiations can extend upward of two years. However, strikes are not that common because the law in the USA requires labor disputes to be submitted to the National Mediation Board and a “cooling off period” must pass before the strike can be enacted.

Spirit currently has 54 percent of its total workforce represented by labor unions, up from 52 percent the prior year. This is problematic for Spirit because the cost of labor could increase drastically based on labor decisions with other airlines, and there is also the risk a large percent of the 46 percent of employees not represented by unions may join a union. Spirit has reduced its labor costs as a percent of total operating costs to 19.1 in 2012, down from 19.6 and 22.0 the prior years. Spirit now has 3,033 employees, including 680 pilots.

Ancillary Fees

Although Spirit views its frills-for-fee strategy as customer friendly, many customers disagree and get irate. However, Spirit is by no means the only airline to implement these ancillary fees and it appears these fees are here to stay. In 2010 the U.S. airline industry collected $8 billion in baggage, drink, food, and other fees not associated with the price of a ticket, up 47 percent from 2008. Although many customers are not happy with the fees, most are willing to pay the extra and airlines who have attempted to differentiate as a high-end, high frills airline have experienced little growth in customer loyalty from this approach. The only exception is for business class travelers who purchase higher priced seats and are more profitable on balance for the airline. But the number of business-class travelers is declining. Some airlines wave all extra fees for business-class travelers.

Increased Taxes

As governments look to increase their own revenues, airlines have been targeted as potential revenue streams. The USA has put new taxes into place that are embedded into all airplane ticket prices at the time of purchase. Spirit and others airlines have fought for disclosure of these taxes and are now able to separate the taxes and fare prices, but the tax often exceeds the actual ticket price at Spirit.

The Barack Obama administration has recently proposed two new taxes on the airline industry. The first addition would be a $100 departure tax to all flights leaving a U.S.-based airport. The second proposed tax is to increase the “passenger security tax” from $2.50 per passenger to $5 and then triple the current tax to $7.50 by 2017. The taxes are expected to impose a $36 billion burden on flights in the USA over the next 10 years. Interestingly, in the previous 10 years, the best year ever for domestic airlines, the airlines posted a profit of $3.6 billion, which is the exact amount of the annual tax burden purposed by the Obama administration.

Environmental Issues

Airlines face increasing pressure to be more proactive in combating greenhouse gasses and noise pollution. Some organizations such as the European Union have even imposed further penalties and restrictions on carbon emissions. To combat this concern, airlines to their credit have invested in more fuel-efficient designs of planes and engines and have marketed these changes to their customers. Critics suggest airlines are only undertaking these measures as a means to cut their own fuel burden and have little regard for the environment as a whole.

One interesting aspect on this front is the increased usage of biofuels (cooking oil) in conjunction with jet fuel. United Airlines has experimented using 40 percent biofuel and many other airlines have experimented using 20-percent biofuel blended with jet fuel. Biofuel can perform as good or better than 100-percent jet fuel and can drastically reduce emissions and possibly increase fuel economy. However, biofuels remain much more expensive and full implementation of supplementing with biofuels is still several years away.

Stranded Passengers

The Department of Transportation (DOT) in the USA has a rule that provides protection for passengers stuck on the tarmac for domestic flights. The rule is that airlines must not force passengers to remain on the aircraft for more than three hours. Exceptions are when it would be too disruptive to return to the gate or for security or safety reasons. The rule was established after several flights forced passengers to endure sitting on the tarmac with no toilets, food, or drink for extended periods of time. In 2011, American Eagle was fined $900,000 ($27,500 per passenger) for several lengthy tarmac delays. The rules have had one apparently unintended but yet easily foreseeable consequence of increased flight cancelations if there is a risk of a three-hour delay. In 2012, a domestic flight from the east to the west coast could expect to generate revenues upward of $100,000, assuming 250 passengers. However a $27,500 fine per customer for a delay would impose a penalty of $6.9 million. It is this risk-to-reward ratio being out of balance that sometimes causes airlines to cancel fights (which there is no penalty for) and ultimately force what would be a three-hour delay into a much longer delay for the passengers.

Future

Spirit has committed to ordering many new planes so the primary strategic decision for the company is what cities and countries to add to its destination list. How many flights per day should be offered to various cities from various other cities? Should Spirit expand to more Latin American and South American countries and which ones would be best when? To go along with expansion, the company needs both a marketing plan and a human resources plan to support growth. Spirit is actually doing so well financially that the firm could, if desired, seek to acquire another airline, perhaps an airline based in Mexico or Brazil. And there is no reason why Spirit could not penetrate Canada and even the USA with more flights to more cities.

Prepare a three-year strategic plan for Spirit given its existing commitments to purchase or lease additional planes annually for the next five years.

Buffalo Wild Wings, Inc., 2013

www.buffalowildwings.com , BWLD

Headquartered in Minneapolis, Minnesota, Buffalo Wild Wings (BWW) is the largest chicken wing–based sports bar in the USA. BWW offers a welcoming atmosphere, open layout catering to families, sports enthusiasts, and chicken wing lovers. The typical store offers 20 to 30 different beers on draft and tap, up to 10 projection TV screens, and up to 50 smaller TVs for people to watch sporting events.

BWW specializes in traditional bone-in chicken wings and boneless chicken wings complimented by its 16 different wing sauces. BWW also sells burgers, other finger foods, and alcoholic beverages. The typical restaurant offers a diverse selection of beers, wines, and liquor options. As of year end 2012, BWW operated 891 stores of which 381 were company-owned and 510 were franchisee-owned. The company expects to increase its total number of restaurants by 105 in 2013 and approximately by the same amount in 2014. The typical restaurant is between 4,000 and 10,000 square feet and costs around $2 million to build, including the land, building, appliances, etc. Each has 50 high-definition flat-screen TV’s and 10 large projection screen TV’s. Takeout orders comprise 14 percent of BWW sales.

In their company-owned restaurants, BWW employs 25,500 people, 2,800 full-time and 22,300 part-time, which it calls team members. Five of the top nine executives are females including the CEO, Sally J. Smith. BWW operates its 817 stores in 48 U.S. states and Canada. BWW opened five new restaurants in 2012 on the parking lots of big-box retail stores such as Home Depot. BWW expects to have 1,500 restaurants in the USA and Canada by 2016, and many of them will be in vacant space of Sears stores, parking lots, and malls.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

In 1981, James Disbrow, from Buffalo, New York, along with friend, Scott Lowery, went looking for a Buffalo-style chicken wing restaurant around the campus of Kent State University in Ohio while judging a figure skating competition. Unable to find a satisfactory restaurant in the area similar to what they knew was good from back home, the concept of opening Buffalo Wild Wings and expanding this tradition of Buffalo, New York, to other areas of the country was born. The first restaurant named Buffalo Wild Wings & Weck or BW3, was opened in Columbus, Ohio, in 1982 near the campus of Ohio State University. In 1991, BWW began its franchising program and in 2003 the company completed its initial public offering.

Vision and Mission

BWW refers to its mission statement in its code of ethics, but the firm does not provide an explicit mission or vision statement on its website or its annual report. However, BWW does provide its “concept and business strategy” as follows:

• Continue to strengthen the Buffalo Wild Wings brand

• Deliver a unique guest experience

• Offer boldly-flavored menu items with broad appeal

• Create an inviting, neighborhood atmosphere,

• Focus on operational excellence,

• Open restaurants in new and exciting domestic markets and new countries and

• Increase same-store sales, average unit volumes and profitability.

EXHIBIT 1 BWW’s Organizational Design

Source: Company documents.

Organizational Chart

As indicated in Exhibit 1, BWW appears to operate from a divisional by geographic region structure.

Internal Issues

Statement of Ethics and Governance

BWW has two statements of ethics: one for regular employees and one for executives. For employees, the Code of Ethics provides an overall standard for ethical conduct in conjunction with what is viewed today as ethical business behavior. The statement also provides the following: (a) how to report violations of conduct, (b) extensive personal conduct policies, (c) conflicts of interests, (d) protecting trade secrets, (e) disclosure of financial data, (f) environmental impact, and much more. The executive code of ethics is similar to the document for employees. Both codes of ethics stress doing the job to the best of one’s ability and seeking help before making a decision on any matters of which the employee is not sure of.

BWW provides a well-detailed corporate governance document for view on its website. This document stresses all key issues related to the governance of BWW, including but not limited to: board size, board leadership policies, selection of new directors, retirement, compensation, and stock ownership policies.

Business Segments

As indicated in Exhibit 2, 22 percent of BWW’s revenues come from alcoholic beverages. Not included in the chart but important to note is that 13 percent of BWW’s sales come from takeout orders, an area in which BWW states it does not try to compete on and do not consider takeout wing establishments its primary competitors. But 13 percent is quite large and may be a growth area for the company in the future.

Exhibit 3 reveals strong revenue growth for BWW’s company-owned and franchised stores over the last three years. Revenue from company-owned stores increased 34 percent in 2012. Exhibit 4 reveals average revenue per store. Note that franchised stores are outperforming company-owned stores on average, but this is partly the result of BWW repurchasing underper-forming franchised stores.

EXHIBIT 2 A BWW Revenue-by-Product Percentage Analysis

Source: Company documents.

EXHIBIT 3 BWW Revenue Analysis: Company Owned versus Franchised Restaurants

Source: Company documents.

EXHIBIT 4 BWW’s Average Revenue per Restaurant

Source: Company documents.

Strategies

BWW is currently employing both market penetration and market development strategies and plans to have around 1,500 restaurants within the next several years, nearly double what they currently own. BWW is considering adding locations outside its current two countries: USA and Canada. The company also expects to maintain its 60–40 split of franchised-owned to company-owned stores. Opening new stores especially in new countries would create additional risks, such as limited brand awareness, supply chain issues, unknown competitors, and much more. BWW is considering expanding into international markets via joint ventures with an established global brand.

Exhibit 5 reveals BWW growth over recent years. Note in 2012 the 19 percent growth in company-owned stores and 2.4 percent for franchised stores.

Marketing and Advertising

EXHIBIT 5 BWW’s Growth: Number of Restaurants

Source: Company documents.

Since its inception in 1982, BWW has specialized in offering a unique brand experience for guests with the wide array of 6 award-winning sauces, beer variety, conveniently located TVs, a great social and sporting atmosphere, and though not acknowledged by the company, sex appeal with young attractive female waitresses. BWW instituted Tablegating at its restaurants in 2011 to promote sporting events, good food, beverages, and fellowship among fans. BWW maintains a year-round advertising presence but increases this advertising around its peak seasons, generally NCAA football in the fall and NCAA basketball in the spring. Each BWW franchise pays a royalty fee of 5.0 percent and an advertising fee of 3.5 percent of restaurant sales.

Finance

In 2011 alone, BWW built 50 new company-owned stores and repurchased 18 franchised stores. Exhibits 6 and 7 are the financial statements for BWW. Note net income increased 13.6 percent from 2011 to 2012. Note on the balance sheet that BWW currently has $32 million in goodwill, up from $17 million in 2011.

EXHIBIT 6 BWW’s Income Statements

Source: 2012 Form 10K, p. 38.

EXHIBIT 7 BWW’s Balance Sheets

Source: 2012 Form 10K, p. 37.

Locations

BWW’s home office in Minneapolis consists of 48,000 square feet and is under a lease that terminates in 2017 with an option to renew for another five-year term. BWW has 891 restaurants in 49 different U.S. states and 7 additional restaurants in Ontario, Canada. Exhibit 8 provides the top 10 U.S. markets ranked by total number of BWW restaurants. Note that Texas has the most BWWs, followed by Ohio. Exhibit 9 reveals that approximately 43 percent of all BWW restaurants are located in Midwestern states. The Northeast, West, Canada, and other world locations are still relatively untapped by BWW.

Restaurant Franchise Operations

Approximately 59 percent of all BWWs are franchised and owned and operated by the franchisee. Franchises fees range from $25,000 to $42,500 depending on the owner’s restaurant experience and the number of stores he or she currently operates. The general lease is typically for a 20-year initial term with the possibly to renew subject on certain conditions that the company does not specify.

In addition to the initial start-up costs, franchisees also pay royalty fees of 5 percent on all restaurant sales, with an additional 3.5 percent of sales revenue being attributed to advertising. There is a provision in all contracts whereby BWW can increase the fees by 0.5 percent once every three years. It is unclear from company documents whether this would amount to a 5.5 percent fee or a 5.025 percent fee. BWW does not expect to enact this provision in the next two years.

EXHIBIT 8 BWW’s Top 10 U.S. States (Number of Stores)

Source: Company documents.

EXHIBIT 9 BWWs’ by U.S. Region (2011)

Source: Company documents.

Competitors

In the competitive restaurant industry, BWW is attracting customers based on taste, quality, service, and ambience. Primary competitors include Hooters, T.G.I Friday’s, Chili’s, Applebees, and many regional and mom-and-pop sports bars across the USA and Canada. In addition to sports bars and chicken wing-themed establishments, BWW does not consider quick-service restaurants (QSR), such as McDonald’s and Kentucky Fried Chicken, as competitors, nor surprisingly quick takeout chicken wing establishments. This corporate view is surprising because many quick-service chicken wing stores can offer much lower prices than BWW because its overhead is significantly less. Recall that 13 percent of all BWW sales are derived from takeout customers. This 13 percent can somewhat be considered a gift because BWW does not promote its takeout business with volume discounts, “tailgate specials,” or any other marketing strategy.

Exhibit 10 provides a financial comparison of BWW with DineEquity (owner of Applebees’s) and Brinker International (owner of Chili’s). Note that BWW has the highest price-earnings ratio but has the lowest revenues among the three.

T.G.I. Friday’s

With about 1,000 locations worldwide, T.G.I. Friday’s (often shortened to “Friday’s” in most countries, and stylized “FRiDAY’S”, or “T.G.I.s” in the United Kingdom and the Republic of Ireland) is a U.S. restaurant chain focusing on casual dining, similar to BWW. T.G.I is owned by the Carlson Companies, a privately-held firm, so financial information is difficult to obtain about T.G.I Friday’s. The company name, however, is taken from the expression TGIF, which stands for “Thank Goodness It’s Friday,” although some recent television commercials for the chain have also made use of the alternative phrase, “Thank God It’s Friday.” The company is known for its red-striped canopies, brass railings, Tiffany lamps, and frequent use of antiques as dècor.

Hooters

HOA Restaurant Group (Hooters), based in Atlanta, Georgia, was founded in 1983 in Clearwater, Florida, and currently operates more than 430 franchise restaurants in more than 27 different countries, and additionally, the company operates 160 stores. The theme and concept of Hooters has changed little over the last 30 years and chicken wings is a main product served. The typical Hooters restaurant experience includes the sex appeal of female waitresses, jukebox-style music, sports on television, and a menu that focuses around chicken wings, but also includes seafood, salads, and sandwiches. Around 68 percent of all Hooters sales are derived from food and nonalcoholic beverages, 28 percent from beer or other alcoholic beverages, and 4 percent from merchandise, such as Hooters calendars and appeal.

EXHIBIT 10 A Financial Comparison of BWW with Brinker International and DineEquity

EPS, earnings per share; P/E, price-to-earnings.

Source: Company documents.

Applebee’s

Founded in 1976 as the International House of Pancakes (IHOP) and based in Glendale, California, with 640 full-time employees, DineEquity today operates both Applebee’s Neighborhood Grill and Bar and IHOP. As of year-end 2011, the company operated 1,842 Applebee’s franchise restaurants in the USA and 16 different foreign markets and 177 additional company-owned restaurants. There were 1,535 IHOP-franchised restaurants in the USA and 5 in foreign markets and 10 company-owned IHOP restaurants. DineEquity has experienced a 40-percent decline in revenues from $1.4 billion in 2009 to $1.0 billion in 2011.

The Applebee’s segment of DineEquity competes with BWW by serving chicken wings, burgers, and other bar finger foods along with alcoholic and nonalcoholic beverage items. Applebee’s also sells steaks, its most popular item, and have begun a new fresh menu offering new chicken, seafood, and salads in an attempted to capitalize on a healthier-minded consumer. In addition to the historical similarity in food times with BWW, Applebee’s also markets itself as a neighborhood bar and grill and provides a limited sports bar atmosphere around the bar area during times of significant sporting events. New CEO Mike Archer of Applebee’s is currently reducing the pop culture feel of Applebee’s decor, adding healthier items such as its less-than 500-calorie menu, so it has yet to be determined how close of a competitor of BWW Applebee’s will remain.

Chili’s

Founded in 1975 as Chili’s in Dallas, Texas, Brinker International operates both Chili’s Grill & Bar and Maggianos’s Little Italy. As of year-end 2011, Brinker operated 1,534 Chili’s and 45 Maggiano’s. The company has restaurants in all 50 states and in more than 30 countries. The company experienced an 18-percent decline in revenues from $3.2 billion in 2009 to $2.7 billion in 2011. The Chili’s segment most closely competes with BWW offering many similar food items, alcoholic beverages, and a care-free atmosphere. However, Chili’s does not incorporate a sports bar aspect into its stores.

External Issues

Chicken wing prices in 2012 increased 62.8 percent over the prior year to an average price per pound of $1.97. Chicken wings accounted for 27 percent of BWW’s cost of sales in 2012, up from 19 percent the prior year.

Domestic Economy

Unemployment is hovering just above 8 percent and interest rates are low but banks are not readily lending. Consumers continue to pinch pennies. “Dining out easily can be postponed, so many restaurants are a “very visible indicator” of what’s happening in the economy,” says Malcolm Knapp, a New York-based consultant who created the Knapp-Track Index and has monitored the industry since 1970. “Amid declining confidence, consumers don’t have the appetite to eat away from home as frequently,” he said. The USA is facing more than $600 billion in higher taxes and reductions in defense and other government programs in 2013. U.S. retail sales are weakening, and consumer sentiment, measured by the Bloomberg Comfort Index, is declining. “It doesn’t feel like we’re out of a recession for many middle-class American households,” Knapp said. In what’s become an “allocation nation,” consumers must choose between different categories of discretionary spending, and dining out is “very sensitive” to changing habits.

Commodity Prices

BWW does not engage in any form of futures contracts for purchasing wings, instead purchasing at market prices and accepting the volatility that comes with that strategy. BWW acknowledges this problem and is actively looking for a long-term pricing agreement but has yet to come to agreement with any provider of chicken wings. Also, most BWW supplies are provided by third parties, leaving BWW with limited little control over its supply chain. Failure to deliver chicken wings, sauce, paper products, beverages, and such on time could severely impact its business.

Future

BWW is one of the fastest-growing restaurant chains in the USA and also one of the hottest stocks for investors. The company’s strategy to focus on chicken wings, beer, sports, and attractive waitresses continues to be a winning business model. Perhaps the most important challenge facing BWW is with its expansion policy. The company expects to double its total stores in the next three to four years. CEO Sally Smith is currently faced with continuing expansion in stronghold markets in the Midwest and Southeast or exploring markets in the Northeast, West, Canada, and other international markets. BWW has two franchise development agreements for restaurants in the Middle East and Puerto Rico.

BWW lacks control over its supply chain and has no real futures contracts in place to hedge against volatile chicken wing prices. Should CEO Smith actively establish contracts with chicken producers to buy chicken wings on a futures contract? Are there other backward integration strategies CEO Smith could pursue to help protect against untimely delivery, poor quality, or volatile pricing of supply chain products?

Another strategic issue facing BWW is its neglect of the takeout business. Although the company focuses on selling a casual sporty dining environment, many sports fans enjoy watching games at home, tailgating at the event, or even just enjoying a day at the lake or beach. Currently BWW does not offer any type of marketing package or takeout options for this customer group, rather it expects the customer to pay full menu dine-in prices with little price discount for volume purchases. However, with 13 percent of sales, and a much larger percent of food sales because takeout typically does not include alcohol, there is an opportunity to grow this business.

Develop a three-year strategic plan for CEO Sally Smith at BWW.

Rite Aid Corporation, 2013

www.riteaid.com , RAD

Headquartered in Camp Hill, Pennsylvania, and incorporated in Delaware, Rite Aid is the third-largest retail drugstore chain in the USA based on both revenue and number of stores. Rite Aid operates 4,623 stores in 31 states and the District of Columbia and has 89,000 associates, of which 13 percent were pharmacists, 43 percent were part-time, and 26 percent were members of a union. Rite Aid’s fiscal 2013 year ended on March 2, 2013.

Rite Aid stores sell prescription drugs and other merchandise, dubbed “front-end products” such as over-the-counter medications, beauty products, cosmetics, household items, beverages, snack foods, greeting cards, seasonal merchandise, and much more. Currently prescription drugs account for 67.6 percent of revenue, whereas front-end products account for 32.4 percent of revenue. The average size Rite Aid store is 12,600 square feet with 61 percent of the stores free standing and 40 percent built into another building such as a strip mall. Approximately 52 percent of stores include a drive through, 24 percent include a one-hour photo and 47 percent include a General Nutrition Corporation (GNC) store inside.

Although performing poorly and in financial trouble, Rite Aid tries to distinguish itself from other drugstores with its wellness + loyalty program, plus their private brands that account for 18.3 percent of front-end sales, and a strategic alliance with GNC, the leading retailer of vitamin and mineral supplements. In the prior fiscal year that ended March 1, 2012, Rite Aid private brands comprised 17 percent of sales. However, CVS and Walgreens, as well as pharmacies in mass discounters such as Walmart and Target, are crushing Rite Aid, which needs a clear strategic plan and turnaround strategy to survive the next few years.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

Rite Aid opened its first store in 1962 as Thrift D Discount Center in Scranton, Pennsylvania. Thrift D Discount Center grew rapidly and in 1968 changed its name to Rite Aid Corporation and was listed on the American Stock Exchange only to switch to the New York Stock Exchange in 1970. The company grew rapidly and by 1972 operated 267 stores in 10 different states, and by 1981, was, and remains to this day, the third-largest drugstore chain in the USA. When Rite Aid celebrated its twenty-fifth year in operation in 1987, the company continued its acquisition and market penetration strategy by acquiring 420 stores in 10 different states plus the District of Columbia, bringing the total number of Rite Aid stores to 2,000, at that time the nation’s largest drugstore chain based on total stores.

In 1995, Rite Aid acquired Perry Drug Stores in Michigan and a year later acquired Thrifty PayLess Holdings, the largest drugstore chain in the western USA. Also in 1996, Rite Aid entered the Gulf Coast market with the acquisition of Harco, based in Alabama and then acquired K&B Inc. based in New Orleans. Rite Aid formed a strategic partnership with GNC whereby the two companies have cobranded a line of vitamins and nutritional supplements called PharmAssure that are sold in both Rite Aid and GNC stores nationwide.

In 2007, Rite Aid acquired (for more than $4 billion from Canadian drugstore chain Jean Coutu), the U.S. drugstore chain named Brooks and Eckerd. This acquisition established Rite Aid as the largest drugstore chain on the East coast, and all 1,850 Brooks and Eckerd stores were renamed and rebranded as Rite Aid; but the acquisition left Rite Aid heavily in debt and with redundant stores in some areas.

Today, Rite Aid is clinging to its position as a distant third (behind CVS and Walgreens) in the U.S. retail drugstore business. Unprofitable and operating more than 4,700 drugstores in about 30 states and the District of Columbia, Rite Aids fills prescriptions (about two-thirds of sales) and sells health and beauty aids, convenience foods, greeting cards, and other items, including some 3,000 Rite Aid brand private-label products.

Vision and Mission

According to its website, Rite Aid’s mission statement is:

• “To be a successful chain of friendly, neighborhood drugstores. Our knowledgeable, caring associates work together to provide a superior pharmacy experience, and offer everyday products and services that help our valued customers lead healthier, happier lives.”

The company has no stated vision statement.

Organizational Structure

Rite Aid appears to use a divisional-by-geographic region organizational structure as portrayed in Exhibit 1. Doing business only in the USA, Rite Aid has five divisions: Southern, Northeast, Mid-Atlantic, Western, and New York City Metro. Note in Exhibit 1 that the division heads are lower levels of top management, which may be a problem. For example, do the executive vice-president’s noted in the chart have authority and responsibility over the division senior vice-president head persons. Note also that there are only three women among the top 31 executives.

Internal Issues

Statement of Ethics

Rite Aid has two separate Codes of Ethic posted on its website. One code reinforces the overall commitment of Rite Aid and its associates, board of directors, and the companies that do business with Rite Aid, whereas the second code is principally targeted for the chief executive officer (CEO) and senior officers within the company. Rite Aid’s Codes of Ethics provide guidelines for many workplace issues including but not limited to: associate privacy, equal employment and discrimination, sexual and other forms of harassment, environmental policies, safety in the work place, drugs and alcohol, weapons in the work place, and much more. The Code of Ethics also establishes conditions of ethical behavior for the company as a whole. Some examples discussed in the code are: dealing with suppliers, dealing with conflicts of interest, receiving and giving gifts, confidential information and trade secrets, document records, and insider trading. The code also describes in detail how to function with integrity in respect to honest advertising, fair billing of prescription drugs, and product safety. Finally the Code of Ethics discusses interaction with local, state, and the national government, mainly focusing on gifts to politicians, political contributions, and lobbying activities.

Segment Data

Rite Aid provides data for four unique business segments. As indicated in Exhibit 2, prescription drugs account for approximately 68 percent of sales. It is interesting that titles of the company executives do not indicate a divisional-by-product structure so apparently there is none. Front-end products (all products that are not prescription drugs) account for the balance of 32 percent of revenue. Approximately 17 percent of the company’s front-end sales can be attributed to private branded products; Rite Aid plans to increase the offerings of Rite Aid branded products in 2013–2015.

Properties

Rite Aid does no business outside the USA. Rite Aid’s store size varies depending on location with stores in the East averaging 11,100 square feet per store and stores in the West averaging 19,500 square feet for an overall average of 12,600 square feet. Exhibit 3 provides a breakdown of the store count for the top 10 states in which Rite Aid operates. Note that the only western state in the top 10 in store count is California. Note also that no state added stores in fiscal 2013. Exhibit 4 reveals further attributes about Rite Aid stores.

More than 4,400 of Rite Aid stores, or approximately 94 percent are under noncancelable leases with terms of 10 to 22 years. Rental payments are set at comparable fair market rates and certain leases also require additional payments based on sales volumes, reimbursement for taxes, maintenance, and building insurance. Rite Aid outright owns 259 stores and also owns its corporate headquarters a 205,000-square-foot building in Camp Hill, Pennsylvania, and leases another building more than 366,000 square feet in neighboring Harrisburg. Rite Aid in addition owns or leases 17 distribution centers across the USA that average approximately 425,000 square feet, and, for some reason, owns a 55,800-square-foot ice cream manufacturing facility in California.

EXHIBIT 1 Rite Aid’s Organizational Structure

Source: Chart constructed based on company documents.

EXHIBIT 2 Rite Aid’s Revenue Breakdown

Source: Company documents.

EXHIBIT 3 Rite Aid Locations

Source: Company documents.

EXHIBIT 4 A Profile of Rite Aid Stores (March 2012)

Source: Company documents.

Current Strategies

Rite Aid’s strategy is to become the neighborhood destination for health and wellness for all Americans. The company in fiscal 2013 converted 500 more stores to their wellness format. Rite Aid’s Wellness and Loyalty Program, established in April 2010, allows customers to accumulate points on purchases in both front-end products and prescription drugs by achieving Bronze, Silver, and Gold levels. Rite Aid has more than 25 million members enrolled in the program. Currently 74 percent of front-end sales and 68 percent of prescriptions are filled by members of the program. Members also tend to do more business with Rite Aid on both front-end items and prescription drugs.

In addition to the new Wellness and Loyalty Program, Rite Aid has increased the number of immunizing pharmacists to 11,000 to cover all Rite Aid stores and in fiscal 2013 administered 2.4 million flu shots. The 2.4 million was up 60 percent from 1.5 million the prior year. Rite Aid also actively promotes its private brands and currently has more than 3,000 different Rite Aid brands, many that Rite Aid considers its “price fighter” or best value for the money.

Also helping to increase same-store sales is Rite Aid’s partnership with GNC. Rite Aid has more than 2,100 GNC stores located within Rite Aid stores and a commitment to open additional stores by December 2014.

Technology

Rite Aid’s information system allows customers to fill or refill prescriptions at any Rite Aid in the country. The system provides pharmacists with warnings of possible drug interactions. Customers can order its prescriptions over the Internet or telephone through Rite Aid’s automated-response system. Efficiency derived from the use of technology allows Rite Aid’s pharmacists to spend more time consulting and advising customers on supplementary products that the customers may find useful and creating a friendly atmosphere leading to more customer loyalty. Customers may also place orders on both the iPhone and Android platforms.

Suppliers

Rite Aid is currently under a contract with McKesson Corporation to deliver both brand-name and generic pharmaceuticals. About 91 percent of all prescription drugs are purchased through McKesson, leaving Rite Aid dependent on McKesson for timely supplying drugs. Rite Aid’s contract with McKesson expires in March 2016. About 80 percent of all generic drugs are purchased directly from the manufacturer. Front-end products are purchased through numerous other manufacturers.

Marketing

In fiscal 2013, Rite Aid’s marketing and advertising expense was $336 million, down from $369 million the prior year, mostly as a result of weekly circular advertising flyers focusing on price promotions to drive customers to stores. The ads also promote the firm’s Wellness and Loyalty Program, market the Rite Aid private-branded products, and try to convince consumers that Rite Aid should be its first choice for health and wellness products.

Finance

Rite Aid is highly leveraged with more than $5.9 billion in long-term debt, so debt financing is not a good option for the company going forward. A large portion of the company’s cash flow is dedicated to servicing debt. Even with all of its acquisitions over the years, Rite Aid’s goodwill remains $0 so that is good, but Rite Aid’s stock price has been less than $3 per share for five years and is still $3 as of 8-15-13, so equity financing is also not an attractive financing option. The low stock price could also make the company vulnerable to a hostile takeover, but the large debt and negative stockholders’ equity may reduce this concern. If a firm’s stock value drops below the minimum New York Stock Exchange listing price, then the security could be delisted from the exchange.

Rite Aid’s relationship with Canadian pharmacy chain Jean Coutu Group (through the acquisition of Brooks Eckerd), which controls 25 percent of the voting power, also hinders Rite Aid’s financial position. Based in Longueuil, Quebec, Canada, Jean Coutu owned Eckerd when Rite Aid made that acquisition. Jean Coutu today operates about 400 franchised stores in Quebec, New Brunswick, and Ontario. In April 2012, Jean Coutu sold on the open market 56 million shares of Rite Aid. That sell was part of Jean Coutu’s initial $234.4 million stake in Rite Aid. Jean Coutu would be a rival if Rite Aid expanded to Canada. What is there to prevent even a firm such as CVS from buying Jean Coutu’s bulk amount of Rite Aid common stock?

Rite Aid’s current income statements and balance sheets are provided in Exhibits 5 and 6, respectively. Note the $118 million earnings in fiscal 2013, coming off bad losing years.

Competitors

There are more than 44,000 drugstores in the USA with slightly more than half of these stores belonging to chains and the rest being independent mom-and-pop operations. Mail-order drug companies such as www.drugstore.com, as well as large discount firms such as Walmart, significantly erode potential sales for Rite Aid. Prescription drug sales, where around 60 percent of drugstore sales originate from, total about $150 billion annually and are expected to increase as the economy improves, baby boomers age, a strong drug pipeline, and the introduction of healthcare reform.

Walgreens, CVS Caremark, and Rite Aid are the three-largest drugstore chains in the USA by store number and revenues, respectively. These top three chains represent 47 percent of total retail drugstore sales and 63 percent of the retail chain drugstore sales. With 37 percent of the retail chain drugstore sales not coming from the big three, there remains room for acquisitions for the big players if they chose that strategy. Historically, Rite Aid has been the acquirer, but its weak financial condition now makes it more likely that they would be acquired.

Note in Exhibit 7 that Rite Aid generates more revenue per employee than Walgreens but less than CVS. The key statistic in Exhibit 7 however is that Rite Aid’s two major rivals are financially stable.

EXHIBIT 5 Rite Aid’s Income Statement (All amounts in thousands except per share amounts)

EPS, earnings per share.

Source: 2013 Form 10K, page 63.

EXHIBIT 6 Rite Aid’s Balance Sheet (All amounts in thousands except per share amounts)

Source: 2013 Form 10K, p. 62.

EXHIBIT 7 A Financial Comparison of Rite Aid, Walgreens, and CVS

EPS, earnings per share.

Walgreens

Founded in 1901 and based in Deerfield, Illinois, Walgreens operates 7,900 drugstores in all 50 states, the District of Columbia, and Puerto Rico. With more than 176,000 full-time employees and sales of more than $72 billion, Walgreens is the largest drugstore in both sales and number of stores in the USA. The company is a full-fledge brick-and-mortar drugstore offering a full pharmacy and front-end products as well as one-hour photo services.

In 2011, Walgreens was involved in an ongoing dispute with Express Scripts, its pharmacy benefit manager (PBM), over contractual renewal terms. Walgreens had informed its customers that it is no longer part of the Express Scripts network. However in July 2012, the companies resolved their dispute, so Express Scripts now continues to supply Walgreens with the necessary prescriptions. During the lag though, Walgreens was not able to service customers whose prescription plans are managed by Express, thus costing Walgreens many of its Express-reliant customers and losing not only prescription sales to these customers but also front-end sales. Despite the July agreement, Walgreens still fears Express possibly merging with Express’ largest competitor, Medco Health Solutions, which could severely hurt Walgreens’ position in obtaining the necessary prescriptions depending on the terms of the new agreement, which are not made public.

Walgreens recently expanded into Europe through its $6.7 billion acquisition of 45 percent of Alliance Boots GmbH in Germany. This acquisition could have large potential benefits for Walgreens in the months ahead. Some analysts, however, contend that Walgreens paid too much for Alliance and should not move to acquire the remaining 55 percent of that company. The acquisition supposedly brings cross benefits to both companies whereby Walgreens gains exposure to an international market, helping it create a network of stores globally, and the deal allows Alliance Boots to enter the U.S. market, which it was eying for the past 10 years. The combined entity is supposed to be one of the biggest drugstore businesses with about 11,600 stores across 12 countries with more than 170,000 pharmacies, hospitals, and health centers.

CVS Caremark

Founded in 1892 in Woonsocket, Rhode Island, CVS operates 7,352 retail drugstores, 570 MinuteClinics, 31 retail specialty pharmacy stores, 12 specialty mail-order pharmacies, and 4 mail-order pharmacies. CVS offers many of the same products chief competitors Walgreens and Rite Aid offers, including prescription drugs, over-the-counter drugs, food, snacks, beauty products, and one-hour photo services.

In 2007, CVS acquired Caremark RX, (a PBM), in a backward integration strategy, although many experts questioned the synergy and benefits of such an alliance. One of the main concerns was that PMBs aim is to reduce costs for the consumers whereas a retail store aim is to maximize sales. Within the first two years of the merger, CVS experienced a loss of more than $4 billion in PBM business to competitors. However, starting in 2010, CVS began to experience a profit from the merger, picking up a $575 million contract with a retirement system in California, a $9 billion annual contract with Aetna Inc., and a $3 billion in sales from federal employees’ plans.

Mail-Order Drugstores

Mail-order drugstores and pharmacies are the fastest-growing format in the drugstore industry. They vary from simply providing vitamins and supplements to providing over-the-counter drugs cheaper, to providing full prescription needs. Its main customer is people with an ongoing condition such as diabetes that have ongoing treatment needs. Typically, mail-order stores will fill prescriptions in up to a 90-day supply instead of the typical 30- to 60-day supply drugstores use. Brick-and-mortar drugstores offer lower duration supplies hoping to entice customers to purchase other front-end products while in its stores, but the convenience of online shopping with products mailed to the customer’s house, the reduction of copays from receiving fewer prescriptions per year, and often overall lower prices because overhead of mail-order stores is considerably less, is expected on balance to hurt brick-and-mortar stores. Some stores such as CVS have expanded into the mail-order business, but CVS maintains more than 7,000 retail stores.

External Issues

People globally are getting older, so the consumption of prescription and nonprescription drugs is expected to increase quite dramatically in the years ahead, benefiting drugstore companies such as Rite Aid. The Affordable Care Act was recently upheld in the USA, benefiting drugstores. Although Rite Aid competes only in the USA, emerging economies globally are also purchasing more and more prescription and nonprescription drugs because those societies strive to become healthier. As Rite Aid’s rivals such as Walgreens gain economies of scale doing business outside the USA, that trend hurts Rite Aid. Increasing penetration of cell phones and wireless devices globally also is spurring consumers to purchase more medicines and vitamins.

There is a general trend in the USA and elsewhere toward greater awareness of healthiness as well as information on how to stay healthy. This trend helps drugstores. Corporate wellness programs are gaining widespread acceptance in the business world and this too helps drugstores. But competition is exceptionally intense, so a clear strategic plan is essential to gain and sustain competitive advantage in a growing industry with growing numbers of consumers.

Generic Drugs

Hundreds of prescription drugs have recently become generic or even over-the-counter after their patents have expired. The Food and Drug Administration provides patent protection to drug companies so those firms can recover research and development costs and eventually make a profit without the risk of competition. However, when the patents expire, generic companies can market the same chemical drug at fractions of the cost to the consumer. Despite their lower sales prices, generics now account for about 78 percent of all prescriptions filled and yield a much higher gross margin for pharmacies than brand-named drugs. The average generic drug price is less than $40 whereas the average brand-name drug is about $155. About $98 billion in prescription sales will lose patent protection by 2015, resulting in an estimated $26 billion in sales from generic drugs and greatly benefiting drugstores such as Rite Aid, but of course the task is to best attract and keep customers who have many choices and thus great bargaining power.

Greater Convenience

To compete with mail-order stores, traditional drugstores are increasing the number of freestanding stores with drive-through pharmacies and investing in technology that fills prescriptions. Many drugstores are now open 24 hours a day, but the pharmacy and 1-hour photo aspects are generally only open during normal business hours.

To provide customers greater convenience, Walgreens recently added a line of grocery items. This strategy appears to be working well for Walgreens, so analysts expect Rite Aid and CVS to follow suit in the coming months or years, perhaps sooner than later.

Store Brands

Focusing on low cost-minded customers, many drugstores now have developed their own store-branded products and even offer deep discounts through their rewards programs for customers who purchase their respective brands. CVS for example has recently launched “Just the Basics” brand with more than 100 items targeted at value-minded customers. This product line currently makes up more than 17 percent of CVS front-end sales. CVS plans to further increase its private-branded products. In addition to CVS, Rite Aid has its “price fighter” store brands that total to more than 3,000 individual products. Much like generic drugs, these products are cheaper for the consumer but offer larger margins for the corporation. Store branding is expected to be a main strategy of all players in the drugstore industry.

New Healthcare Laws

In 2008, approximately 46 million Americans lacked health insurance. With the passage of the Affordable Care Act, an additional 32 million formally uninsured Americans will now be covered. It is estimated that the Affordable Care Act will cost more than $938 billion over the next 10 years, leaving many opportunities for retail drugstore operations. By 2019, it is expected that health insurance will be available for 95 percent of all Americans, up from 85 percent in 2012.

The Future

Rite Aid’s big problem is high indebtedness, which stifles the firm’s ability to make strategic moves and creates high interest expenses. Rumors are beginning to surface that Walgreens may be interested in acquiring Rite Aid to compete better against CVS. Although a deal would help Walgreens grow, it would also saddle the company with Rite Aid’s debt.

Even if Rite Aid would consider a friendly takeover by Walgreens, a clear strategic plan would be essential for Rite Aid’s shareholders to recoup its investment in the firm. Even in a hostile takeover attempt, a clear strategic plan would be vital for Rite Aid shareholders.

Best Buy Co., Inc., 2014

www.bby.com , BBY

Headquartered in Richfield, Minnesota, Best Buy Co., Inc. is the world’s largest consumer electronics retailer with 1,400 stores that carry phone products, computers, televisions, appliances, cameras, and much more. In addition to its product line, Best Buy also offers service contracts, extended warranty, and product repair. Best Buy Co., Inc. is the parent company of Best Buy, Five Star, Future Shop, Pacific Sales, Geek Squad, CinemaNow, Magnolia Audio, and The Phone House stores. With 165,000 full-time employees, Best Buy is struggling to reinvent itself amid fierce competition from Apple and Amazon. A huge problem for Best Buy is that people shop there to get educated and then buy online at cheaper prices.

The brick-and-mortar business model is in severe trouble, especially for retailers that do not sell perishable goods (such as Best Buy and RadioShack). With the popularity and cost effectiveness of online shopping, coupled with a lack of sales taxes and not having the expense of operating large stores, online retailers have a huge competitive advantage. Best Buy stores serve as showrooms for online retailers. Best Buy has expensive long-term leases on its buildings and those leases must be honored, unless the firm goes into bankruptcy, which some analysts say is inevitable, especially without a clear strategic plan going forward. Best Buy’s fiscal 2013 ended on February 1, 2013.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

Founded in Saint Paul, Minnesota, in 1966, Best Buy (then named Sound of Music) was started by Richard Schulze and Gary Smoliak. After acquiring two small stores in 1967, the Sound of Music went public in 1969, and enacted an employee stock option plan. By 1970, the Sound of Music hit $1 million in annual revenues.

The name Best Buy first originated in 1981 after a tornado hit a store in Roseville, Minnesota, resulting in a major sale dubbed as “Best Buy,” which subsequently became an annual event, and in 1983 Sound of Music officially changed its name to Best Buy Co., Inc. After the name change, Best Buy increased average store selling space and began offering a wider range of products, many of them at discounted prices.

During the 1990s, Best Buy continued to grow, hitting the $1 billion mark in annual revenues. Best Buy launched bestbuy.com in 2000 and acquired the Canada-based electronics chain Future Shop in 2001. Future Shop still operates under its original name and still operates independently from Best Buy. Best Buy acquired Geek Squad, the 24-hour computer support taskforce in 2002 and opened its first Canadian Best Buy store in Ontario in the same year.

In 2006, Best Buy’s common stock closed at an all-time high of $59.50 and in 2008 the chain opened its 1,000th physical store in the Mall of America, one of the largest malls in the world, located in Bloomington, Minnesota. Best Buy continued international expansion in 2008 by opening stores in Puerto Rico, Mexico, and Shanghai, China. In 2009, the company opened stores in Turkey and the United Kingdom. Best Buy planned to expand heavily into the United Kingdom (UK) when the company hired Brian Dunn as its CEO. Dunn had started at Best Buy 25 years previously as a salesperson and was widely liked by all rank-and-file workers at the time of the appointment because they viewed Dunn as “one of their own.” Sluggish growth of sales in the United Kingdom led to Best Buy closing 11 Best Buy Europe stores in 2011.

Best Buy CEO Brian Dunn resigned in 2012. Less than a month later, founder and chairman Schulze was forced to resign, partly because he did not reveal that CEO Dunn, who is married, had an inappropriate relationship with a 29-year old subordinate female employee, which is violation of the company’s Code of Ethics. Dunn allegedly misused company funds in conjunction with the relationship. Schulze was replaced by Hatim Tyabi in mid-2012. George Mikan III became Best Buy’s CEO in late 2012. Schulze, age 71, offered about $10 billion or $25 per share to buy Best Buy and take the company private. He already owns 20 percent of the company’s stock. Shareholders and analysts are skeptical of Schulze’s offer. In August 2012, Hubert Joly was hired as CEO, but the company’s stock was down another 10 percent in response to the announcement.

Vision and Mission

Best Buy does not have a written vision statement. The company’s mission statement is as follows:

• Our formula is simple: we’re a growth company focused on better solving the unmet needs of our customers—and we rely on our employees to solve those puzzles. Thanks for stopping.

Organizational Structure

Best Buy currently uses a divisional-by-geographic region organizational structure. As noted in Exhibit 1, the company has a chief administrative officer rather than a chief operating officer for the divisional heads to report.

Segments

Best Buy operates under two distinct business segments: domestic and international. The domestic segment includes all states, districts and territories of the USA, including Puerto Rico. The international segment includes all of Canada, China, Mexico, and Europe. Best Buy reports domestic revenues of $33.3 and $37.6 billion in fiscal 2013 and 2012, respectively, and international revenues of $11.7 and $11.9 billion in 2013 and 2012, respectively. For 2013, approximately 26 percent of total revenue was from domestic operations.

Despite Best Buy claiming and presenting data based on geographic region, it is possible that Best Buy is in fact a strategic business unit (SBU) structure with the two geographic regions serving as the two distinct SBUs. However, the executive titles provided in Exhibit 1 suggest a purely divisional-by-geographic structure rather than an SBU.

Domestic

There were 1,056 U.S. Best Buy stores at fiscal year-end 2013, and 409 U.S. Best Buy Mobile Stand-Alone stores. During fiscal 2013, Best Buy closed 47 U.S. Best Buy stores while opening 105 U.S. Best Buy mobile stand-alone stores.

Within the domestic segment, Best Buy further breaks down the SBU by products and services and assigns employees to distinct leadership teams for each respective product and service. Teams are empowered to determine the most effective ways to market products and services through Best Buy’s channels, retail stores and online, and call centers. Further, Best Buy breaks down its domestic SBU into six different revenue categories: consumer electronics, computing and mobile phones, entertainment, appliances, services, and other.

Consumer electronics includes items such as TVs, e-Readers, navigation products, cameras, mp3 players, musical instruments, home theater systems, and much more. Computing and mobile phone segment includes items such as: notebook and desktop computers, tablets, monitors, phones, phone subscription plans, storage devices, printers, and random office supplies. Entertainment segment includes video gaming hardware and software, DVDs, CDs, and computer software. Best Buy’s appliances category includes both large and small household appliances. The service category includes: service contracts, extended warranties, product repair, installation of home theater systems, and much more. Exhibit 2 reveals the percentage of revenue in each domestic product arena. Note all the negative numbers.

Exhibit 2 reveals that consumer electronics has been in a steady decline for each of the last two years. Much of the decline can be attributed to soft market for TVs and the overall declining prices of TVs. The overall TV market is much weaker than the most recent 5.4 percent decline indicates because this number would have been much worse if not for the high customer interest in e-Readers.

At fiscal year-end 2013 (March 1, 2013), there were 872 Carphone Warehouse stores and 1,517 Phone House stores in Europe, while in Canada there were 140 Future Shop stores, 72 Best Buy stores, and 49 Best Buy Mobile stores. In China there were 211 Five Star stores, and in Mexico there were 14 Best Buy stores. Computing and mobile phones experienced a 6-percent increase in same-store sales from fiscal 2011, primarily from tablets and mobile phones.

EXHIBIT 1 Best Buy’s Organizational Structure

EXHIBIT 2 Best Buy’s Revenue by Product

Source: Company documents.

The entertainment segment continues to experience significant same-store declines as a result primarily of the decline in the video gaming industry and decline in sales of music and movies because many more people are downloading music offline and watching movies through outlets such as Red Box, Netflix, and Time Warner Cable’s movies on demand.

Best Buy attributes the increase in appliances to promotional sales, but the slowly improving housing market in some parts of the country could explain this increase.

International

The United Kingdom and Ireland only have Carphone Warehouse stores, whereas mainland Europe only has the Phone House Stores. Canada is home to Future Shop, Best Buy, and Best Buy Mobile stand-alone stores. China is the exclusive home to only Five Star stores. In fiscal 2013, Best Buy introduced its Best Buy Express concept in Mexico. Best Buy Europe opened 122 new stores in fiscal 2013 while closing 126 other stores. Outside the USA and Europe, Best Buy opened 40 new stores and closed 21 in 2013.

Internal Issues

Statement of Ethics and Governance

Best Buy has a detailed Code of Ethics on its website, addressing the culture at Best Buy, outlining ethical behavior expected of all constituents of Best Buy, and detailing how to report violations of ethical behavior. In the wake of the embarrassing resignation of Dunn and Schulze’s dismissal, the current Code of Ethics provided on Best Buy’s website (several months after the dismissals) begins with a letter from former Dunn addressing the code and thanking all employees and constituents of Best Buy for their ethical behavior.

In 2010, two years before the ethical fiasco with Dunn and Schulze, research company Management CV Inc., disclosed several questionable issues, which as of 2012 are still an ongoing problem according to Management CV Inc. For example, Best Buy paid Schulze $1 million in 2011 to rent two stores he owned with one of these leases running through 2018. Schulze’s daughter, the founder of Best Buy Children’s Foundation, currently works as both the chairwoman and CEO of this foundation with a base salary of $242,000 and bonuses of approximately $120,000 annually. Her husband also has worked with Best Buy. A contract with Phoenix Fixtures, Schulze brother’s business, has led to spending more than $70 million in fixtures for stores from 2008 to 2012. In addition, Best Buy has paid close to $4 million for chartered aircraft owned by Schulze Trust. The questionable ethics is not limited to the Schulze family either because there have been many contracts between Best Buy and businesses that have connections with Best Buy board members.

EXHIBIT 3 A Breakdown of Best Buy Stores

Source: Company documents.

Properties

Exhibit 3 below reveals a three-year trend for domestic stores in each of Best Buy’s various segments. Many customers do not even know Best Buy’s traditional stores offer mobile devices and service plans.

At fiscal year-end 2013, Best Buy had 1,503 domestic stores, up from 1,447 the prior year—and had 2,876 international stores, up from 2,861 the prior year. Exhibit 4 reveals the top-five markets based on store count in the domestic segment, and Exhibit 5 reveals the total number of stores in the international segment.

Suppliers

Best Buy’s largest supplier is Apple, followed by Samsung, Hewlett-Packard, Sony, and LG Electronics, which together represent 45 percent of total merchandise purchased. Best Buy could possibly be subject to significant revenue reductions if any one of these top five suppliers were unable to or chose not to continue to provide products to Best Buy. Best Buy does not have long-term contracts with suppliers, but the company does not foresee any problems in the future with suppliers not being able to meet the demands of Best Buy. Without long-term contracts, Best Buy is more flexible regarding which suppliers to do business with, but the fact is a supplier such as Apple is also a competitor and could potentially crush Best Buy if desired.

EXHIBIT 4 Number of Best Buy Stores in the Five Top U.S. States (Fiscal 2012)

Source: Company documents.

EXHIBIT 5 Number of Best Buy Stores Outside the USA

Source: Company documents.

Finance

EXHIBIT 6 Best Buy’s Income Statements

Source: 2013 Form 10K, p. 60.

All amounts in millions of U.S. dollars except per share amounts.

EPS, earnings per share.

EXHIBIT 7 Best Buy’s Balance Sheets

Source: 2013 Form 10K, p. 61.

All amounts in millions of U.S. dollars except per share amounts.

EXHIBIT 8 Best Buy Operating Statistics

Source: Company documents.

Current Performance

Exhibit 8 reveals recent operating statistics for Best Buy. Note the fiscal 2013 comparable store sales decline of 2.9 percent.

Competition

Stores such as Walmart, the world’s largest retailer, and Costco are expanding their selection of TVs, notebook computers, cameras, mp3 players, and other electronic devices at prices typically lower than traditional merchants in the industry such as Best Buy. Online shopping at Amazon.com, overstock.com, eBay, and other online merchants creates a rough ocean for firms such as Best Buy to navigate.

Many retailers are entering overseas markets especially in Asia. For example, Office Depot generates close to 30 percent of their sales overseas, whereas Best Buy generates 27 percent and Staples generates 22 percent of sales. Amazon.com generated 44 percent of 2012 sales from outside the USA. Many brick-and-mortar retailers are adding services such as in-home installation as a way to differentiate themselves from online merchants and Walmart. Also, many retailers are focusing on sustainability as a means of differentiating their business as many of the products and services are the same. Best Buy was recently named one of the greenest companies in the USA. Many retailers are expanding their marketing of gift cards. Research reveals that many customers who enter the store with a gift card often spend more than the card amount. In addition, after several years of a gift card full amount not being used, companies are allowed to assume the card’s unused credit as assets on their financial statements.

Exhibit 9 gives a quick synopsis of Best Buy and two of its many rival companies. Note that Amazon has one-third the number of Best Buy employees yet generates roughly the same revenue. Amazon’s revenue-to-employee ratio reveals how they dominate in terms of cost efficiencies, price, and convenience. Best Buy’s market capitalization is a fraction of both Walmart and Amazon’s. RadioShack is a huge competitor to Best Buy and both companies are arguably on the brink of financial disaster.

Amazon

Amazon.com, an online retailer, operates worldwide focusing on price, convenience, selection, and timely delivery. Founded in 1994 as an online bookseller, Amazon has expanded its product line over the last decade and formed agreements with other retailers to sell their products under the Amazon.com name. Amazon is also the manufacturer and seller of the Kindle e-reader that allows customers to instantly order many books for $9.99. In 2011, Amazon experienced a 56-percent increase in electronic sales following an electronic merchandise growth rate of 66 percent in 2010.

EXHIBIT 9 A Synopsis of Best Buy and Two Rival Firms

Historically, Amazon reinvested most of profits, and even took on extra debt, to further expand the Amazon footprint. In recent years Amazon has begun to pay down debt and even hoard cash. For example, at year-end 2009, Amazon had $3.2 billion in cash on their balance sheet, and by year-end 2011, the company had $5.3 billion. Amazon reports $0 long-term debt over the three-year period of 2009 to 2011. Retained earnings have increased from $172 million in 2009 to a staggering $1.9 billion by year-end 2011.

One potential area of concern for Amazon is the large amount of goodwill on their balance sheet. As of 2011, Amazon had $1.9 billion in goodwill up from $1.2 billion in 2009. Some of Amazon’s recent purchases include Zappos.com, an online shoe store, and Quidsi, the parent company of diapers.com and soap.com. Amazon also acquired LoveFilm a European-based company similar to Netflix. As Amazon continues to purchase firms to further diversify its business, it needs to be mindful of potentially paying too much as indicated by the nearly $2 billion in goodwill on its balance sheet.

Amazon is pursuing forward integration by quietly installing large metal cabinets, called Amazon Lockers, in hundreds of grocery, 7-Eleven, and drugstores that accept the packages for customers for later pickup. This strategy especially dispels the concern of urban apartment dwellers, who fear they will miss an Amazon delivery or have their item stolen. This strategy also combats a growing problem of thieves following UPS and FedEx trucks and stealing packages at doorsteps. Amazon has lockers in the USA and United Kingdom. This strategy entails Amazon emailing customers a code to open the locker holding their merchandise. Curtailing failed deliveries is essential for Amazon because otherwise consumers might actually make their purchase in a Best Buy brick-and-mortar store. Amazon pays a small fee each month to store owners where it has lockers.

RadioShack Corp.

Although struggling to survive, RadioShack, like Best Buy, is a huge consumer electronics goods and services retailer with about 4,475 stores in the USA, Mexico, Puerto Rico, and the U.S. Virgin Islands. RadioShack’s operations include Target Mobile, dealer outlets, RadioShack de Mexico, and RadioShack.com. RadioShack operates 1,496 Target Mobile centers and has a network of 1,091 RadioShack dealer outlets, including 33 located outside of North America. The company recently discontinued its kiosks segment.

RadioShack’s stock price has continuously dropped of late to about $3.00 per share in October 2013 as company revenues and profits have plummeted. The company suspended its dividend payment in 2012. People want RadioShack (and Best Buy’s) products, but they simply make their purchase at Amazon, eBay, Target, Costco Wholesale, or Walmart.

RadioShack is another electronics brick-and-mortar retailer on a fast decline in the face of online shopping. The company has more than $500 million in cash and equivalents, and its next debt repayment of $375 million is due in August 2013. By suspending its dividend, the company will save $50 million per year to help cover its interest expenses, which only totals $31 million within the next year. Beyond interest and debt, and like Best Buy, RadioShack is contractually obligated to pay its leases and product and marketing agreements, which within the next year total $195 million and $316 million, respectively. Also like Best Buy, RadioShack’s credit has recently been downgraded to junk status. It still has $390 million available of a $450 million revolving credit facility through early 2016 to help it survive. The company’s CEO, Jim Gooch, says RadioShack “will focus on cellphones and tying together its brick-and-mortar stores with its website.” Analysts say that is way too vague of a strategic plan and is way too little too late for the company to survive.

Walmart

Walmart, founded in 1945 in Bentonville, Arkansas, has more than 2.2 million full-time employees and operates retail stores, restaurants, supermarkets, supercenters, warehouse clubs, apparel stores, and much more. If there is any product someone wants, Walmart likely offers the product at an attractive price point. The company emphasizes low prices and provides flat screen TVs, phones, mp3 players, cameras, notebook computers, and many other electronics at prices typically lower than Best Buy. In addition to electronics, Walmart is so diversified, especially with its grocery business, that it is able to withstand downturns in the economy better than most retailers. Currently, Walmart operates more than 10,000 retail stores under 69 different brand names in 27 different countries.

External Issues

Internet Shopping

With tax-free benefits still present for online sales, coupled with convenience, lower prices, and more variety, online sales are increasing at a much rate faster than traditional retail sales. Online sales could reach 15 percent of total retail sales by 2015. These numbers still leave the majority of retail sales to brick-and-mortar establishments.

Currently there is no state sales tax on many Internet purchases in the USA. This savings can provide consumers who buy and sell products online from a central location up to a 10-percent price advantage over rival firms who have brick-and-mortar locations in the respective state of the transaction. However, there is growing sentiment among U.S. politicians to even this playing field, and it is expected that states could receive a $23 billion windfall from taxed sales on the Internet. Many states financially need the money badly. Taxing Internet sales would make it more likely consumers would patronize local stores rather than buying off the Internet. This would be especially true for firms such as Best Buy who sell many higher ticket priced items. For example, a $500 notebook computer purchased in state and local township with 8 percent combined sales taxes would cost a consumer an extra $40 in tax, so removing this potential $40 savings from online sales should benefit stores such as Best Buy.

Even if the tax-free environment on most Internet transactions is removed, firms such Best Buy still face an uphill battle with online merchants. Amazon.com for example offers free shipping on many orders more than $25 and in addition offers the same product from many different merchants allowing customers to price check easily and conveniently. In addition, customers can view product reviews and comments from users of the products as part of their research. Furthering the online threat for brick-and-mortar establishments such as Best Buy is the increased use of smartphones for price checking while shopping in brick-and-mortar stores. Forrester Research reports there were 82 million smartphones in the USA in 2010 and this number is expected to increase to 159 million by 2015. Ironically, the mobile phone that Best Buy is betting so heavily on in the future is also the device that allows customers to price shop competing firms for other products while shopping in Best Buy.

Customers often will visit a store such as Best Buy to talk to experienced sales people and to view the products before purchasing elsewhere. This was one of the contributing reasons why Best Buy did not work in China. Chinese customers simply used Best Buy as an information agent and purchased elsewhere.

Social Media

A 2011 Social Media’s Impact on Customer Engagement report revealed that more than 70 percent of firms say they are no longer are able to avoid using social media in its marketing and communications with customers. Forrester Research reports that Best Buy and Amazon.com are two of the most proactive companies when using and implementing social media into their business operations. For example, Best Buy aids consumers through Twelpforece, where customers can send a tweet about consumer electronics problems to an account that is shared by 2,500 Best Buy employees. Amazon’s success with social media is based largely on its ratings and reviews from customers, providing both Amazon and potential customers meaningful information in pricing, quality, and features of the products offered. Although social media may seem as burdensome to some corporations, failure to take full advantage of this technology will likely leave corporations at a distinct disadvantage with rival firms.

Future

Regardless if Schulze or someone else acquires Best Buy or the firm continues to operate on its own, a clear, detailed strategic plan will be essential for the firm to navigate such turbulent water ahead. Walmart and Amazon especially continue to take market share from Best Buy, and many other firms too are joining in the fray. If the company is not real careful, it will go the way of its former rival Circuit City and be forced to eventually liquidate. Some analysts ponder who will declare bankruptcy first, Best Buy or RadioShack, arguing that the writing is on the wall for both firms, unless an effective strategic plan can be formulated and implemented pronto.

Assist new CEO Hubert Joly in developing a strategic plan for Best Buy.

Publix Super Markets, Inc., 2013

www.publix.com

Headquartered in Lakeland, Florida, Publix operates grocery stores in Florida, Tennessee, Georgia, and South Carolina. More than two-thirds of Publix’s 1,069 stores are in Florida. With 158,000 employees, Publix is the largest employee owned supermarket in the USA. Publix’s employees today own about 31 percent of the company, which is still run by the George Jenkins family as an employee stock ownership plan (ESOP) company. Free Wi-Fi is available in all Publix grocery stores, both for customers and employees. Publix emphasizes service and a family-friendly image rather than low price. Publix’s slogan is “Where Shopping Is a Pleasure.”

Publix’s sales for the second quarter of 2013 were $7 billion, a 3.8 percent increase from last year’s $6.8 billion. Comparable-store sales for Q2 of 2013 increased 2.1 percent, while net earnings were $400.9 million, compared to $381.6 million in 2012, an increase of 5 percent. On August 1, 2013, Publix’s board of directors increased the company’s stock price from $26.90 per share to $27.55 per share. Publix stock is not publicly traded and is made available for sale only to current Publix associates (employees), members of its board of directors, and founders of the company.

Like its rivals, Publix stores sell dairy, produce, deli, bakery, traditional food items, meats as well as typical health, beauty products that can be found in a grocery store. Many Publix stores also have pharmacy, sushi bars, cafes, a bank, and floral segments. Currently ranked number 67 on Fortune magazine’s list of 100 Best Companies to Work For and is ranked number 6 on Forbes’ list of America’s Largest Private Companies, Publix is the largest private company in Florida ranks number 106 among all Fortune 500 companies. Publix is the fourteenth-largest U.S. retailer.

Publix rival Supervalu reported sales down 4.3 percent in the third quarter of 2012, and rival Safeway also reported falling sales, as those companies (and Publix) struggle to compete with dollar stores, drugstores, and mass-market retailers, such as Walmart, all of whom are expanding their grocery departments and offering lower prices than conventional supermarkets. Supervalu, with its network of 4,400 supermarkets, reported a third-quarter 2012 loss of $111 million compared to a year-earlier profit of $60 million.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

In 1930, George Jenkins left a secure job in the middle of the Great Depression to open the first Publix Foods grocery store in Winter Haven, Florida. Mr. George, as everyone called him, understood the need for high morale in the workplace and initiated a profit-sharing plan and ESOP that is still present in Publix today. Chairman and founder, Mr. George began offering stock to Publix employees the same year he opened the first store.

By 1940, Publix stores were revolutionary in the sense they had air-conditioning, florescent lights, eight-foot wide isles, pumped in music, cold cases for frozen foods, donut and flower shops, and even electric doors. Other dècor included glass, marble, and stucco. People would travel for many miles to shop at the Publix “food palace.” In 1945, Publix purchased 19 All American food stores and subsequently converted them into Publix stores to meet rising demand. In the 1950s, Publix moved their headquarters to Lakeland, Florida, and built a large distribution warehouse there as well.

Throughout the 1960s, Publix expanded over the entire state of Florida and by 1974 had reached $1 billion in sales and then $5 billion by 1989. In 1991, Publix opened a supermarket in Savannah, Georgia, and a distribution center in Lawrenceville, Georgia. Publix soon expanded into South Carolina and Alabama, and in 2002 opened the first Publix grocery store in Tennessee. In 2009, Publix opened its 1,000th store becoming only one of five U.S. grocery retailers to operate more than 1,000 stores.

In its history, Publix has never had a layoff of employees. The company has a tuition employee reimbursement program originally designed for degree-seeking students. This benefit has recently become available to Publix employees taking individual courses or technical training, including online courses. The program is available to all Publix employees who work an average of 10 hours per week for six months.

Internal Issues

Vision and Mission

Publix’s vision is “to become the premier provider of quality grocery items for American families.” The company’s mission statement is:

• Our Mission at Publix is to be the premier quality food retailer in the world. To that end we commit to be:

• • Passionately focused on Customer Value,

• • Intolerant of Waste,

• • Dedicated to the Dignity, Value and Employment Security of our Associates,

• • Devoted to the highest standards of stewardship for our Stockholders, and

• • Involved as Responsible Citizens in our Communities.

In contrast, Kroger’s mission is as follows:

• Our mission is to be a leader in the distribution and merchandising of food, pharmacy, health and personal care items, seasonal merchandise, and related products and services.

Supervalu is a major competitor to Publix. Supervalu’s mission is:

• We will provide America’s Neighborhoods with a superior grocery shopping experience enhanced by local expertise, national strength and a passion for our customers.

Organizational Structure

As illustrated in Exhibit 1, it appears that Publix operates from a functional organizational structure. Note there are no regional presidents by state or region or type of store. Some analysts contend that Publix is too large an organization to still be operating from a centralized, functional design. Although executive titles in Exhibit 1 do not reflect a divisional structure, some researchers say Publix is organized into four divisions: Miami, Atlanta, Lakeland, and Jacksonville.

EXHIBIT 1 Publix’s Organizational Chart

Facilities Location

Publix has leases to open new supermarkets in North Carolina in 2014. Exhibit 2 reveals where Publix’s facilities and stores are located. In total, Publix operates more than 48-million square feet of supermarket space with supermarkets varying in size from 28,000 to 61,000 square feet. Typically Publix supermarkets are located in strip shopping areas, and most of these stores are leased but the company has some standalone stores. Publix operates 1,069 supermarkets, eight distribution centers, and six manufacturing facilities. Almost all their distribution and manufacturing facilities are located in Florida and a few in Georgia. Among the six manufacturing plants are three dairy plants, two bakeries, and one deli plant. To aid in control and cost reduction, Publix is backward integrated with more than 72 percent of all products (based on cost) being delivered through Publix distribution centers. Publix is not dependent on any one or few suppliers for any meaningful amount of total sales. Publix is more backward integrated than most grocery chains with their private label items such as dairy and bakery being manufactured solely by and for Publix.

Sustainability

Publix is building more energy-efficient stores, minimizing water use, offering reusable shopping bags, and working with suppliers on more environmentally friendly packaging options. Publix emphasizes for employees to pack more items per bag and this program has helped reduce the total bags used per day by one million. Publix sold more than 21 million reusable bags priced at $0.99 each between 2007 and 2012. Publix offers customers options for bagging groceries: choosing paper, plastic, or reusable bags. Publix’s annual total recycling rate is about 50 percent with 221,900 tons of cardboard, 8,800 tons of plastic, and 3,200 tons of mixed paper being recycled annually. Publix Pharmacy customers return more than 2.8 million vials for recycling annually.

Awards

Publix has won many local, regional, and national industry and philanthropic awards. Some recent awards are:

• • One of the “100 Best Companies to Work For” (1998-2012), Fortune

• • One of the “Best Places to Work in IT” (2005-2010), Computerworld

• • One of the “Best Companies to Work for in Florida” (2009), Florida Trend

• • Sustainability Excellence Award (2009), Supermarket News

• • One of the “Most Admired Companies” (1994-2009), Fortune

• • “Green Grocer” Award (2008), Progressive Grocer magazine

Advertising

In 2012, 2011, and 2010, Publix spent $208 million, $202 million, and $192 million respectively on advertising.

EXHIBIT 2 Where Are Publix Stores Located?

Source: Company documents.

Segments

Publix’s Form 10K does not provide a by-segment breakdown of revenues or profits by any division or region, except to say that their (a) grocery segment contributes 85 percent of revenue and its (b) other segment provides 15 percent, and those percentages have not changed much in recent years. Although not disclosed in the Form 10K, Publix actually has segments and regions as described in this section.

Apron’s Cooking School

Publix operates seven Apron’s cooking schools, located in Boca Raton, Jacksonville, Plantation, Sarasota, Tampa, Tallahassee, Florida, and Alpharetta, Georgia. Classes are geared toward all cooks wanting to expand their repertoire and feature renowned chefs, authors, and cooking celebrities, as well as experienced cooking instructors. The classes are designed to teach skills including basic techniques and wine pairing. Publix also offers classes for children ages 8 to 12, with separate classes for 13- to 18-year olds and adults.

Publix GreenWise Markets

Publix GreenWise Markets is a concept the company introduced in response to the increase in the number and profitability of health food stores. GreenWise Markets were created to increase awareness of nutrition and focus on organic and natural items. These stores are similar to the Whole Food Market chain. Most regular Publix stores have a GreenWise section, but the first standalone GreenWise Market grocery store opened in 2007 in Palm Beach Gardens. These stores include salad and hot bars.

Publix Sabor

Publix operates six stores, branded “Publix Sabor” (sabor is Spanish for “flavor”), which cater to Hispanic Americans living in Florida and offer products for Hispanics. Four Publix Sabor locations are in the Miami area, one is in Orlando, and a sixth in Palm Beach opened in the summer of 2012. Publix Sabor locations have bilingual English-Spanish employees, open seating cafès, and a wide selection of hot foods. Publix offers cafes and hot foods because many Hispanic Americans grew up in foreign cities, which had open public squares where people socialize and eat.

Pharmacy

Publix’s first in-store pharmacy was opened in 1986 in Altamonte Springs, Florida. By 1995, one-third of Publix stores had a pharmacy and today, approximately 81 percent of Publix stores include a pharmacy. Publix Pharmacies consistently ranked number one for customer satisfaction among supermarket pharmacies in several surveys conducted by independent research companies.

Publix offers several types of free antibiotics to its customers. Customers must have a prescription; they are given a maximum of a two-week supply. These medications include amoxicillin and ampicillin and even penicillin. Publix also offers another free prescription, metformin, for Type II Diabetes, the generic of Glucophage. In August 2011, Publix began offering Lisinopril, a angiotensin-converting enzyme inhibitor that is used to prevent, treat, or improve symptoms of high blood pressure, certain heart conditions, diabetes, and certain chronic kidney conditions, as another free prescription. Customers can get a 30-day supply of this vital prescription for free at any Publix Pharmacy. Publix also offers free flu shots to associates (employees) and shots for $20 for their family member(s).

DVD Kiosks

In September 2009, Publix reported it started adding Blockbuster DVD rental kiosks to its stores, with the movie rentals starting at $1 per day. In 2010, Publix completed its rollout of Blockbuster Express kiosks to its stores.

Publix Pix and Publix Liquors

Publix operates 11 Publix Pix gasoline-convenience stores. Locations are limited during the trial basis of the concept. In addition is Publix Liquors, a stand-alone liquor store. The liquor sales will be in an area accessed via an entrance separated from the supermarket, as required by local laws. The company is modeling this after many other grocery chains. Currently, all Publix Pix locations are adjacent to a Publix Super Market. Publix opened its first stand-alone liquor store in 2009 in Orlando.

Finance

Publix’s Stock

As an ESOP, Publix’s common stock is not traded on any of the established securities exchange markets. As of February 5, 2013, there were 7.7 million shares of Publix stock outstanding. With no open market providing daily stock transactions there is no clear market value for the stock so the board sets the stock price based on several factors including (a) state of the economy, (b) comparisons of similarly publically traded companies, and (c) after an analysis of Publix’s own financial statements. Publix paid a cash dividend on common stock of $0.89 in 2012, $0.53 in 2011, and $0.46 in 2010. Although not obligated to pay dividends, the board foresees paying comparable cash dividends in the future, on June 1 of each year.

Publix offers stock to its associates through three programs: Profit plan (ESOP), purchase plan, and 401(k) plan. The profit plan generally gives an associate who has worked 1,000 hours in an anniversary 7 to 10 percent of the regularly pay earned in the form of free stock the following March 1. An associate must work three years to be vested in the plan. The plan is at no cost to the associate. Publix associates may buy the stock outright in the purchase plan, however there is a six-month restriction on buying stock once it is sold. Publix matches 50 percent of 3 percent of eligible wages through the 401(k) plan, up to $750 per year in matched contributions. Publix offers stock to its board of directors through a separate plan.

Income Statements

Publix’s recent income statements are provided in Exhibit 3. Note that the company’s revenues increased 1.9 percent in 2012 to $27.5 billion whereas net income increased 4.0 percent to $1.55 billion.

Balance Sheets

Publix’s recent balance sheets are provided in Exhibit 4. Note that the company has zero goodwill, which is good, and overall is in excellent financial condition.

EXHIBIT 3

Source: 2012 Form 10K, p. 24.

EXHIBIT 4 Publix’s Balance Sheets (000 Omitted)

Source: 2012 Form 10K, p. 23.

Competition

Amazon is getting more and more into the online grocery business, initially in California but now moving east rapidly towards Publix’s territory. The grocery store business has low margins given the intense price competition, high food inflation, and high spoilage of inventory. Competitors include national and regional grocery stores, super centers, drugstores, specialty stores, convenience stores, and even restaurants. Most firms attempt to compete on either price, or selection of high-end goods. Location also is a driving factor in competition but usually after price for most customers. Publix competes with national chains Kroger, Supervalu, Safeway, Costco, and Walmart. In addition, regional competitors include BI-LO, Winn-Dixie, Ingles, Piggy Wiggly, and Fresh Market. Food Lion recently closed 113 underperforming stores, including all its Florida and Kentucky stores, and rebranding some others as part of their new market strategy.

Publix has grown faster and been more profitable than Winn-Dixie Stores and BI-LO, two major rival grocery store chains that are also headquartered in Florida. In March 2012, Winn-Dixie became a wholly owned subsidiary of BI-LO Holdings. At that time, BI-LO moved its headquarters from Greenville, South Carolina, to Winn-Dixie’s headquarters site in Jacksonville, Florida. Together, Winn-Dixie and BI-LO operate 690 grocery stores in eight southeastern states, with heavy emphasis in Florida.

Exhibit 5 reveals comparative competitive information for Publix versus several rival grocery chains. Note that Publix trails the three rivals in revenue per employee, which is not good, but Publix’s earnings per share leads all rivals, which is good.

Kroger

Kroger is a major competitor to Publix and is doing great. The company increased its dividend payout by 30 percent in late 2012. Kroger operates 2,435 grocery stores in 31 states, with half of these having fuel centers. Founded in 1883 and headquartered in Cincinnati, Ohio, Kroger has more than 330,000 employees. Kroger also operates department stores, drugstores, jewelry stores, convenience stores, and service stores. Kroger manufactures certain food items for their grocery store business. Kroger is a well-diversified company, offering 15 different branded grocery stores, two “price-impact warehouse” food stores, Fred Meyer department stores, four market place stores, six convenience stores, four jewelry stores, and three service stores that include Kroger finance, and The Little Clinic.

One of the world’s largest retailers, Kroger’s banner name businesses include City Market, Dillons, Jay C, Food 4 Less, Fry’s, King Soopers, QFC, Ralphs, and Smith’s. Kroger owns and operates 789 convenience stores, 337 fine jewelry stores, 1,109 supermarket fuel centers, and 38 food-processing plants in the USA. Recognized by Forbes as the most generous company in the USA, Kroger supports hunger relief, breast cancer awareness, the military and their families, and more than 30,000 schools and grassroots organizations in the communities it serves. Kroger contributes food and funds equal to 160 million meals a year through more than 80 Feeding America food bank partners.

EXHIBIT 5 Comparative Information Among Grocery Chain Firms

EPS, earnings per share.

Source: Company documents.

Kroger has self-use health screening kiosks in almost all locations nationwide. Assessments include blood pressure, weight, body composition, BMI, color vision, and the ability to upload blood glucose numbers and other biometric results. “Our customers tell us they want to make healthy choices but don’t always know where to start,” said Matthew Feltman, Kroger’s health strategy coordinator. “We’re pleased to expand the availability of Kroger HealthCENTERs to help customers take their first steps toward overall health and wellness.” Kroger customers will be able to create personal health record accounts, which they can access at any time at Kroger.com, to chart their progress. They will also have access to health information and solutions designed to help them in their personal health and fitness goals.

Supervalu

Supervalu is a major rival to Publix, but it is not doing so well. In late 2012, Supervalu initiated a cost-reduction program, reduction of capital expenditures, and also suspended its quarterly dividend. In addition, Supervalu closed 60 underperforming stores, including 38 in its retail food reporting segment and 22 Save-A-Lot locations. The largest cuts will come from the Albertsons chain, which will shut 27 locations. Supervalu had revenue of $36.1 billion in its fiscal 2012, but it has endured three consecutive years of declining revenues.

Supervalu operates under the brand names Acme, Albertsons, Farm Fresh, Save-A-Lot, and several others. Supervalu has more than 4,000 stores with more than 1,300 being hard discount stores. Approximately 1,900 stores were independently owned and 798 had an in-store pharmacy. Supervalu’s footprint stretches across the USA including Alaska, but the bulk of all stores are in the Eastern USA. Founded in 1871 and headquartered in Eden Prairie, Minnesota, Supervalu has 130,000 employees.

Supervalu has been struggling since 2007 when their stock price was an all-time high of just under $50. In the fall 2012, the stock price was near $2. Much of the decline can be attributed to a failed acquisition strategy when the firm acquired Albertsons grocery store and a logistics company during the height of the stock market run-up in 2005 and 2007. Goodwill for Supervalu totaled $6.9 billion in 2008 and $3.7 billion in 2010 but dropped to $800M in 2012. However, Supervalu paid way over fair value for their acquisitions and today is a highly leveraged company with debt to equity ratio of 98 compared to 1 for the industry average. Also, inventory turnover, an extremely important ratio when dealing with perishable goods, is 12 for Supervalu compared to 18 for the industry and 19.8 for Publix.

Safeway

Safeway is a major rival to Publix. Safeway operates more than 2,000 food and drugstores across North America under the brand names Safeway, Vons, Randalls, Tom Thumb, Genuardi’s, and Carrs. Safeway also operates floral, pharmacy, coffee shops, and fuel centers within their grocery and drugstores. The company also operates 156 food stores in Mexico with a 49-percent interest in Casa Ley, S.A. de C.V. Headquartered in Pleasanton, California, Safeway was founded in 1915 and has 178,000 employees.

Safeway recently divested its gift card business, Blackhawk Network Holdings, in a planned initial public offering (IPO). Spin-offs generally benefit a firm’s stock price because the parts of the original firm are usually valued more than the whole. Safeway’s stock price to earnings ratio of 8.6 in September 2012 is below Kroger’s 21.5, Whole Foods Market’s 41.3, Harris Teeter Supermarkets’ 19.4, and The Fresh Market’s 47.7.

External Issues

Food Inflation

Unlike most retailers, food retailers measure financial performance based on gross profit margin as opposed to gross profit dollars. The difference can be attributed to the volatile price of foods, which are subject to droughts, insect plagues, and high or low inflation. For example, food inflation only rose 0.3 and 0.5 percent in 2010 and 2009, respectively, but rose 6.4 and 4.2 percent in 2008 and 2007, respectively. However, in 2011, food prices rose 6.2 percent with partly the result of an 11-percent rise in fats and oils, 9 percent in dairy, and 7.4 percent in meats and eggs. Inflation or even deflationary constraints are a common battle among food retailers. Excessive heat or cold or severe droughts can lead to rapid rise in food prices.

Consumers are cutting back on discretionary purchases even among grocery items. Customers are visiting grocery stores more often but are buying less at each visit because their visits are targeted at finding items on sale or promotions. A related trend that may benefit Publix is that customers are increasingly buying store-branded products instead of the more expensive brand names. However, customers are also increasingly trading down to lower-priced dollar stores for food items. Well-off customers still have money, however, and have not altered their shopping habits as much as the average customer.

Natural and Organic Foods

Focusing more on natural and organic food is one viable strategy to counter higher food inflation and less disposable income among customers. Typically, customers who purchase natural and organic foods are loyal customers who believe in the perceived benefits of such a diet and are less willing to accept adequate substitute products. Most customers of natural and organic foods belong to a higher income bracket, and in 2010, foods in this category rose 7.7 percent whereas overall grocery items only rose 1.0 percent. Currently, however, organic foods only account for around 2 percent of total food sales worldwide, but the market is growing at a much faster rate than the overall grocery market both in both developed and undeveloped nations. This is somewhat surprising considering organic foods typically range between 10 to 40 percent more than their respective nonorganic products.

Interestingly, the United Kingdom’s Food Standards Agency recently stated that although consumers may elect to purchase organic fruits, vegetables, and meats for their perceived health benefits, research so far does not support in any way that these foods are more nutritious than nonorganic counterparts. Nevertheless, with the growing health-minded public, increasing offerings of organic and natural foods should remain a viable strategy and component to any food-related business.

Labor Costs

Labor costs are one of the greatest operating costs for supermarkets, accounting for more than 50 percent of total operating expenses. Part of the expense can be attributed to the unionization of many supermarket chains but even without a union, supermarkets must strive to keep labor costs low just to breakeven.

In-Store Dietitian

Hy-Vee is the only grocery chain in the country that posts a registered dietitian in almost every one of its 235 stores. In rural areas, some of its more than 190 dietitians serve a cluster of stores. A phenomenon sweeping the grocery business is to capitalize on growing consumer awareness of the role food plays in health and wellness and to find new ways to fend off competition from specialty markets like Whole Foods, and even big-box stores such as Walmart. “There’s been an explosion of interest in having a dietitian among grocery store retailers in the last three or four years,” said Annette Maggi, chairwoman of the supermarket subgroup of the food and culinary professionals practice group at the Academy of Nutrition and Dietetics and a consultant to the retail and food manufacturing industries. Jane Andrews at the grocery chain Wegmans is the most renown of supermarket dietitians, becoming the first dietitian on its staff in 1988 and now supervising a team of six. Other regional chains like Meijer, Giant Eagle, Bashas’, and H-E-B also have dieticians. Kroger, which already has dietitians on staff, is adding more of them to its King Soopers chain in the west. Publix might should consider this new feature.

A reasonable question is how can a grocery store calculate the financial return on its investment in dietitians. Grocers increasingly find that dietitians bring customers into stores, offering in-store consultations and store tours with customers, holding cooking classes, assembling take-home meals, taking biometric screenings, doing presentations in schools, businesses, and civic events, working with merchandisers, helping set up community gardens, assessing products for nutritional value, and a variety of other things. The dietitian’s role is expanding, said Phil Lempert, a grocery industry expert and author of the blog Supermarket Guru. “The field of nutrition is getting more and more complicated,” Mr. Lempert said. “Merchants used to buy on price and promotion, but you can’t buy that way any more with all the product claims. You need someone around who understands whether products can really deliver, whether they’re safe.”

The Future

Publix plans to open 24 new supermarkets in 2013. Many analysts contend that traditional grocery retailers such as Publix may not survive long term because big-box grocery stores such as Walmart are offering groceries at significantly lower prices, largely to drive traditional grocery chains out of business. Also, pharmacies such as Walgreens, CVS, and Rite Aid are increasingly selling groceries at cost to drive traffic into the stores. Furthermore, discount chains such as Family Dollar, Dollar General, and Dollar Tree are taking more and more business from traditional grocery store chains. For these and other reasons, the grocery chains that are most diversified, such as Kroger, are doing best.

Publix is trying to diversify further, conducting trials of various boutiques, including a cologne and perfume fragrance department, in conjunction with Camrose Trading. Publix is experimenting with a gourmet deli at its Lake Mary Collection store in Lake Mary, Florida. Publix has grown rapidly for much of their existence but the world is changing more rapidly now. Should Publix continue to expand across the Southeast, entering new markets where customers may have never heard of Publix and have no brand association with the company? Or would it be better for Publix to focus on increasing store locations and attracting customers in their current markets? Which of Publix’s segment businesses, if any, should the firm add more of in the future, and why?

Publix is a well-known ESOP company with only employees having the opportunity to purchase stock. Is it time for Publix to list their stock for public sale on an exchange? With the low margins in the industry, would this enable Publix to more effectively finance operations? With the growing trend in heath conscious customers, should Publix increase their organic and natural food offerings and attempt to attract this style of customer and build more GreenWise Market stores? How rapidly and where (if anywhere) should Publix add new stores?

JPMorgan Chase & Co., 2013

www.jpmorganchase.com , JPM

Headquartered in New York City, JPMorgan & Chase (JPM) is a financial holding company that competes worldwide, serving customers for more than 200 years, making it one of the oldest financial intuitions in the USA. Considered to be the largest bank in the USA, JPM has total assets of more than $2.3 trillion and employs more than 240,000 people in more than 60 countries around the globe. JPM’s stock is one of the 30 components of the Dow Jones Industrial Average. The hedge fund unit of JPM is one of the largest in the USA.

JPM in mid-2013 announced plans to stop trading in physical commodities, but in August 2013, JPM purchased the over-the-counter business in commodity derivatives of Switzerland’s UBS AG. The deal excluded precious metals and index-based trades, but included hedge positions on financial exchanges. Zurich-based UBS is closing the majority of its commodities “flow” trading business involving raw materials and financial derivatives as part of its slimming down and laying off 10,000 employees.

JPM operates under two principle brands, (1) JPMorgan and (2) Chase. The JPMorgan brand focuses on large multinational corporations, governments, wealthy individuals, and institutional investors. The Chase brand is further divided into two distinct segments: (1) consumer business and (2) commercial banking business. The Chase consumer business includes such businesses as traditional bank branches, ATMs, credit cards, home finance, retirement and investing, and merchant services among others. The Chase commercial banking business includes such areas as business credit, corporate client banking, commercial term lending, and community development. The two JPM brands overlap so much in terms of regions and products that the company does not report revenues or income by the two brands.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

Dating back to 1799, JPM is one of the oldest financial institutions in the world. The heritage of the House of Morgan traces its roots to the partnership of Drexel, Morgan & Co., which in 1895 was renamed J.P. Morgan & Co. Arguably the most influential financial institution of its era, J.P. Morgan & Co. financed the formation of the United States Steel Corporation, which took over the business of Andrew Carnegie and others and was the world’s first billion-dollar corporation. In 1895, J.P. Morgan & Co. supplied the United States government with $62 million in gold to float a bond issue and restore the treasury surplus of $100 million. In 1892, the company began to finance the New York, New Haven, and Hartford Railroad and led it through a series of acquisitions that made it the dominant railroad transporter in New England. Although his name was big, Morgan owned only 19 percent of Morgan assets. The rest was owned by the Rothschild family following a series of bailouts and rescues attributed by some to Morgan’s stubborn will and seemingly “nonexistent” investment savvy.

In 2004, JPM merged with Chicago-based Bank One Corp., bringing on board current chairman and Chief Executive Officer (CEO) Jamie Dimon as president and Chief Operating Officer and designating him as CEO William Harrison, Jr.’s successor. Dimon’s pay was pegged at 90 percent of Harrison’s. Dimon quickly made his influence felt by embarking on a cost-cutting strategy, and replaced former JPMorgan Chase executives in key positions with Bank One executives—many of whom were with Dimon at Citigroup. Dimon became CEO and chairman of JPM in 2006.

JPM has acquired more than 1,200 financial institutions over its life. Several key acquisitions during the last 20 years include in 1991 Chemical Banking Corp., the second largest bank in the USA and in 1995, First Chicago Corp., the largest bank in the Midwest. The acquisition responsible for the current name of the company was in 2000 when J.P. Morgan & Co. merged with The Chase Manhattan Corp. In 2010, JPM acquired Cazenove, an advisory and underwriting joint venture established in 2004 in the United Kingdom. Since 2010, JPM has refrained from making acquisitions that had historically been its trademark.

Internal Issues

Vision and Mission

JPM does not list a formal mission statement, but the company vision statement is:

• At JPMorgan Chase, we want to be the best financial services company in the world. Because of our great heritage and excellent platform, we believe this is within our reach.

Organizational Structure

Some analysts contend that JPM has organizational design problems because there are numerous CEOs, no presidents, dual-title individuals, lack of a clear JP Morgan-versus-Chase dichotomy, and overall, too many top-level executives. As best as can be determined, the existing organizational chart for JPM is given in Exhibit 1. Note that Jamie Dimon is both chairman of the board and CEO, a practice being shunned by more and more by corporations.

In 2013, the company replaced its Chief Financial Officer, Doug Braunstein, with Marianne Lake, who is now one of the most powerful women on Wall Street. Lake joins asset-management chief Mary Erdoes as the only two women on the bank’s elite 14-member operating committee.

Ethics Issues

JPM has an extensive Code of Conduct and Code of Ethics posted on its website. Part of the company’s code of conduct says in part: “The Code is based on our fundamental understanding that no one at JPMorgan Chase should ever sacrifice integrity—or give the impression that they have—even if they think it would help the firm’s business.” The company’s code of ethics is more lengthy, and says in part: “The purpose of this Code of Ethics is to promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of the firm’s financial books and records and the preparation of its financial statements.”

Despite having extensive ethical-based statements, JPM has had its fair share of ethical issues over the years. In January 2011, JPM admitted that it wrongly overcharged several thousand military families for their mortgages, including active-duty personnel in Afghanistan. The bank also admitted it improperly foreclosed on more than a dozen military families; both actions were in clear violation of the Service Members Civil Relief Act, which automatically lowers mortgage rates to 6 percent and bars foreclosure proceedings of active-duty personnel. The overcharges may have never come to light were it not for legal action taken by Marine Capt. Jonathan Rowles, a fighter pilot. Both Captain Rowles and his spouse Julia accused Chase of violating the law and harassing the couple for nonpayment.

In April 2012, hedge fund insiders became aware that the market in credit default swaps was possibly being affected by the activities of Bruno Iksil, a trader for JPM, referred to as “the London whale” in reference to the huge positions he was taking. Heavy opposing bets to his positions are known to have been made by traders, including another branch of JPM that purchased the derivatives offered by JPM in such high volume. Early reports were denied and minimized by the firm in an attempt to minimize exposure. Major losses of $2 billion were reported by the firm in May 2012 in relationship to these trades and updated to $4.4 billion on July 13, 2012. The disclosure, which resulted in headlines in the media, did not disclose the exact nature of the trading involved, which remains in progress and as of June 28, 2012, was continuing to produce losses that could total as much as $9 billion under worst case scenarios. The item traded, possibly related to CDX IG 9, an index based on the default risk of major U.S. corporations, has been described as a “derivative of a derivative.” On the company’s emergency conference call, JPM CEO Jamie Dimon said the strategy was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored.” The episode is being investigated by the Federal Reserve, the Securities and Exchange Commission (SEC), and the FBI.

Strategy

JPM strategies revolve around the areas of (a) international expansion of its wholesale business and global corporate bank, (b) small business growth, (c) commodities, (d) growth in branch network, and (e) growth in private client business.

EXHIBIT 1 JPM’s Organizational Chart

Source: Extrapolated based on executive titles given on the corporate website.

JPM’s international expansion strategy aims to increase the firm’s global presence through an aggressive international expansion plan. JPM is focused on expanding its asset management, investment bank, and treasury and securities services segments in Asia, Latin America, Africa, and the Middle East. Additionally, slowly expanding into newly emerging or even frontier markets, JPM’s clients in this expansion plan include multinational corporations, sovereign wealth funds, and public entities. In 2008, JPM had approximately 200 clients in Brazil, China, and India combined, but by 2012, the number of clients in these nations had expanded to 800. By 2017, JPM is expected to have more than 2,000 clients in these nations.

U.S. small businesses remain a central focus of the Chase arm of JPM. In 2011 alone, Chase provided more than $17 billion of credit to domestic small businesses, up 52 percent from 2010, indicating Chase believes the economic recovery is robust enough to tolerate any short-term downward pressures. The $17 billion of credit in 2011 makes Chase the number-1 Small Business Administration (SBA) leader nationwide for the second straight year. In addition, JPM is also the number-1 SBA lender to women- and minority-owned businesses. To help facilitate growth in the small business arm, JPM has added more than 1,200 relationship managers and business bankers since 2009 and anticipates an aggressive hiring of bankers for the foreseeable future.

With the 2011 acquisition of Sempra, JPM is currently one of the top-three firms in the world in commodity dealings. Growth from 2011 to 2012 grew by 10 percent to bring total commodity clients to more than 2,200, as well as increased commodity packaging and selling to existing clients. JPM expects commodity demand to increase with the growth of emerging markets and anticipates increased business in the various commodity asset classes the firm currently offers.

Surprising to some, JPM is actively growing its physical branches despite many predictions from outside pundits who suggest that brick-and-mortar branches are a relic of the past. JPM’s own research suggests however that although 17 million JPM customers do much of their banking business online, they still value a face-to-face conversation when it comes to taking out a mortgage, applying for a credit card, or seeking general financial advice in a physical branch location. Currently 45 percent of Chase credit cards and 50 percent of retail mortgages are sold on site at branch locations.

Segments

Within its two brands, JPM operates under seven major business segments as indicated in Exhibit 2, with respective revenues given. Note that JPM’s revenues have been declining in three of the seven segments.

Exhibit 3 provides a breakdown of JPM revenues and net income over the geographic regions where the bank does business. Note that North America accounts for 81 percent of revenues and 86 percent of net income. Note also the dramatic drop in North American revenues in 2011 associated with a dramatic increase in associated net income.

Investment Bank

Within JPM’s investment bank segment, $8,303 million of the $26,274 million was derived from noninterest sources, with the balance of $17,971 derived from interest sources. Clients of the investment bank division include corporations, financial institutions, and government and institutional investors. Investment bank activities include advising on business strategy and structure, raising capital though debt or equity, derivative instruments, prime brokerage, and research.

Exhibit 4 provides a geographic breakdown of JPM’s investment bank segment. Note the decline in revenue from North America and Asia and Pacific, but the increase in revenue from other areas globally. Total 2011 net income from this division totaled $1,678 million.

Bonds trading is an important part of JPM’s Investment Bank. A Wall Street Journal article (11-2-12, p. C3) reported that JPM’s 12.3 percent market share in the USA in bonds trading was the largest among all banks, followed by Deutsche Bank (10.5 percent), Barclays (9.9 percent), Bank of America (9.6 percent), and Goldman Sachs (8.3 percent). A part of fixed-income operations, bond-trading is risky business. That is why UBS AG recently exited the bond-trading business to focus its investment bank on less-risky businesses such as advising on mergers and stock underwriting.

EXHIBIT 2 JPM’s Financial Results by Segment (in millions $)

EXHIBIT 3 JPM’s Revenues and Net Income by Region Globally (in millions)

Source: Annual Report, page 300.

EXHIBIT 4 JPM’s Investment Bank Revenue Breakdown by Region (in millions)

Source: 2011 Annual Report, page 84.

Retail Financial Services

JPM’s retail financial services segment accounts for about 27 percent of 2011 net revenues with $10,405 million of the segments, $26,538 million being derived from noninterest sources, with the balance of $16,133 derived from interest sources. The retail financial services segment includes: bank branches, ATMs, mortgages, real estate, among others. JPM customers have access to more than 17,200 ATMs and 5,500 bank branches. The Chase business segment currently services more than 8 million loans in 23 states and services more than $150 billion of mortgage originations each year.

Exhibit 5 provides a breakdown of businesses within JPM’s financial services segment. Note the decreases in both revenue and net income in 2011.

Card Services and Auto

JPM’s credit card services and auto segment accounted for about 19 percent of 2011 net revenues with $4,892 million of the segments, $19,141 million being derived from noninterest sources with the balance of $14,249 derived from interest sources. The segment accounts for more than $132 billion in credit card loans with over 65 million open credit card accounts, making JPM one of the largest credit card issuers in the USA. JPM customers can also obtain financing through 17,200 auto dealerships and 2,000 schools and universities. Exhibit 6 provides a breakdown of businesses within JPM’s credit card and auto segment. Note the reduction in revenues but increase in net income over the last three years.

Finance

JPM earned an all-time record of $19 billion in net income in 2011, up 9 percent from the previous record of $17.4 billion the prior year. The company’s net income would have been considerably more, except for losses from the JPM mortgage business. Mortgage losses are expected to continue for a while longer, but the bulk of JPM bad mortgages have already been absorbed.

JPM’s recent income statements are provided in Exhibit 7. Note the unusual decline in revenue associated with the increase in net income.

EXHIBIT 5 JPM’s Retail Financial Services Revenue Breakdown by Product (in millions)

Source: 2011 Annual Report, page 85.

EXHIBIT 6 A Breakdown of JPM’s Credit Card Business (in millions)

Source: 2011 Annual Report, page 94.

JPM reinstated its annual dividend of $1.00 per share in April of 2011 and increased it to $1.20 a share in April of 2012. Although JPM’s goodwill has remained the same over the last three years, total goodwill of $48 billion indicates a history of paying more than fair market value for many acquisitions. JPM’s long-term debt is declining as shown in Exhibit 8.

EXHIBIT 7 JPM’s Income Statement (in millions)

Source: Company documents.

Competition

Banks are seemingly everywhere on every corner and online. Some analysts say bank products and services are becoming more and more like commodities, all being similar. An interesting note is that foreign banks have not yet penetrated into the U.S. marketplace. But online banks are proliferating.

JPM competes with literally hundreds of banks but a few key rivals are showcased in Exhibit 9. Note that JPM has higher revenue per employee and earnings per share (EPS) than Bank of America or Citigroup.

Bank of America

Headquartered today in Charlotte, North Carolina, and having total assets exceeding $2.5 billion, Bank of America is the second largest U.S. bank, trailing only JPM, and is the largest bank according to number of employees. Bank of America has a relationship with 99 percent of the Fortune 500 companies and 83 percent of the Fortune Global 500. The 2008 acquisition of Merrill Lynch made Bank of America the world’s largest wealth management corporation and a major player in the investment banking market.

As of May 2012, Bank of America served more than 5,700 banking centers and had more than 17,000 ATMs serving customers in more than 150 countries and had branches in more than 40 countries. During 2011, Bank of America began laying off an estimated 36,000 people, contributing to intended savings of $5 billion per year by 2014. In December 2011, Forbes ranked Bank of America’s financial health 91st out of the nation’s largest 100 banks and thrift institutions. Bank of America will cut around 16,000 jobs in a quicker fashion by the end of 2012 as revenue continues to decline because of new regulations and a slow economy. This will put a plan one year ahead of time to eliminate 30,000 jobs under a cost-cutting program called Project New BAC. Bank of America generates 90 percent of its revenues in its domestic market and continues to buy businesses in the USA. The core of Bank of America’s strategy is to be the number-one bank in its domestic market. It has achieved this through key acquisitions.

EXHIBIT 8 JPM’s Balance Sheets (in millions)

Source: Company documents.

Citigroup

Citigroup was formed on October 9, 1998, following the $140 billion merger of Citicorp and Travelers Group to create the world’s largest financial services organization. The history of the company is comprised of many acquired firms such as the City Bank of New York (later named Citibank) in 1812; Bank Handlowy in 1870; Smith Barney in 1873, Banamex in 1884; and Salomon Brothers in 1910.

EXHIBIT 9 A Synopsis of Large Banks

Source: Company documents.

Based today in New York City, Citigroup is a diversified financial services holding company broken down into two segments, Citicorp and Citi Holdings, providing global banking, advisory services, derivative services, brokerage, and much more. Citigroup today is the largest banking enterprise in the world based on geographic coverage with operations in 140 nations and more than 16,000 offices worldwide.

On Tuesday, March 13, 2012, the Federal Reserve reported Citigroup as one of the 4 financial institutions, out of 19, that have failed its stress tests. The tests make sure banks have enough capital to withstand huge losses in a financial crisis like one Citigroup faced in 2008 and early 2009 when it almost collapsed. The 2012 stress tests determine whether banks could withstand a financial crisis with unemployment at 13 percent, stock prices cut in half, and home prices decreased by 21 percent from current levels. According to Citi and the Federal Reserve stress test report, Citi failed the stress tests because of Citi’s high capital return plan and its international loans rated by the Federal Reserve to be at higher risk than its domestic U.S. loans. Citi gets half their revenues from its international businesses. In comparison, Bank of America, which passed the stress test and did not ask for a capital return to investors, gets 78 percent of its revenue in the USA.

Wells Fargo & Co.

Founded in 1852 and headquartered in San Francisco, Wells Fargo is a nationwide, diversified, community-based financial services company with $1.4 trillion in assets. Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs, the Internet, and has offices in more than 35 countries to support the bank’s customers who conduct business in the global economy. With more than 265,000 employees, Wells Fargo serves one in three households in the USA. Wells Fargo was ranked number 26 on Fortune’s 2012 rankings of the largest corporations in the USA. Wells Fargo’s vision is to satisfy all our customers’ financial needs and help them succeed financially.

As most large banks retreat from the trading business, Wells Fargo is expanding. The fourth-largest U.S. bank says it can earn solid returns in investment banking while taking little risk for itself. It is focusing on services that its corporate lending customers need, such as stock and bond underwriting and merger advice. For investors, it is looking at areas such as processing futures and swaps trades.

The Wells Fargo Securities unit is relatively small now, but in a few years, the unit could account for twice as much of the firm’s revenue, an estimated 10 percent compared to its current 5 percent, Deutsche Bank analyst Matt O’Connor wrote in a report in May 2012. For JPM, Bank of America, and Citigroup, that percentage is closer to 20 to 25 percent. A much bigger proportion of Wells Fargo’s revenue comes from traditional commercial and retail banking businesses: residential mortgages, lines of credit for corporations, and so on.

Online Banks

Online banks are growing rapidly in number and taking market share from large banks. The website http://www.mybanktracker.com/best-online-banks rates more than 30 online banks in the USA in terms of having low fees, low interest rates, excellent technology, and great customer service. Exhibit 10 reveals in rank order the top 18 Internet Banks in the USA. Note that Ally is number 1 and E*TRADE is number 18.

EXHIBIT 10 The Best Online U.S. Banks (1= best, 18 = least best)

Source: Based on info at http://www.mybanktracker.com/best-online-banks.

External Issues

Regulatory Reform

Following the 2007 to 2009 financial crisis, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 that affects all aspects of the financial industry. Provisions include: prohibition of proprietary trading, restrictions on who can own hedge funds, establishing the Financial Stability Oversight Council, elimination of the Office of Thrift Supervision, and much more. The new regulations are expected to greatly increase the fees all financial institutions must pay. Provisions of Dodd-Frank aim to avoid situations in which large banks (such as AIG and Citigroup) are bailed out by the government because they are “too big to fail.” Dodd-Frank did ease public perception and opinion of the financial crisis and may in fact apply to middle-size firms. However, recent research reveals that the largest institutions are so interconnected worldwide that, should a similar financial situation arise again, world governments again would be forced to save these behemoths. It is expected that there will be more than 14,000 new regulatory requirements enacted by 2015.

Mobile Payments

One of the hottest topics and business challenges facing banks today is the advent of mobile payment systems and the new competitors that enter the market associated with these payment systems. Bank Technology News even stated in 2012 that credit and debit cards used today are soon headed to the museum to be replaced by a linkage of mobile, Web, and point of sale options. As of 2012, there were more than five billion mobile phone users in the world, with more than 70 percent of the world’s population having a mobile phone, yet only half the world’s population having a bank account. Juniper Research reports that the market for global payments should exceed $600 billion by 2013. Businesses such as Intuit’s GoPayment are already available for the Apple iPhones and Android platforms.

Near Field Communications (NFC) is allowing customers to pay for products using their mobile phones at retail stores. Big players such as MasterCard, American Express, Visa, eBay, and Google are also establishing mobile payment systems. Traditional banks such as JPM perhaps need to form strategic alliances to participate in this new arena because less people will be using cash, checks, and plastic cards to perform their business transactions.

Mortgage Business

As of 2012 there were 76 million homes in the USA with 52 million of these homes having a mortgage, and 4.7 million of these homes in a delinquent state. Around 2.5 million of the delinquent homes are worth less than their mortgage and around 10 million homeowners who are not delinquent are paying mortgage notes that are worth less than their home. About 25 percent of these homes are expected to go into default because homeowners either cannot afford to continue paying or are simply unwilling to pay more for a home than it is worth.

Future

Going up and up on fees much like the U.S. Postal Service Office, are large banks on permanent decline? The Wall Street Journal (9-12-12, p. A1) reported that the percentage of Americans who own checking accounts dropped from 92 to 88 percent between 2010 and 2011, whereas the number of Americans who own a major credit card dropped from 74 to 67 percent, and those who own a major debit or check card dropped from 78 to 66 percent. In other words, Americans are using traditional banks less and less. In fact, the article reports that 8.2 percent of the nation’s households, nearly 12 million, are managing their finances without a bank. Bank overdraft fees, according to the article, cost Americans $31.6 billion in 2011. Consumer behavior is definitely shifting from bank credit and debit cards to prepaid debit cards offered by both NetSpend and Green Dot. Pew Charitable Trusts estimates the total dollars that flow through prepaid debit cards will reach $201.9 billion in 2013, up from $28.6 billion in 2009.

A movement called “Bank Transfer Day” emerged in November 2011. In February 2012, J.D. Power & Associates reported that customers of large, regional, and mid-sized banks were defecting at a higher rate because of frustration over factors such as fees and poor customer service. According to their survey, 9.6 percent of customers said they had switched to a new banking provider within the last year, compared to 8.7 and 7.7 percent in the previous two years. The main beneficiaries of the defections are credit unions and smaller banks, which experienced an average increase of 10.3 percent in the acquisition of new customers, versus 8.1 percent a year previously. In March 2012, the National Credit Union Administration reported that credit unions added 1.3 million members in 2011, hitting a record 91.8 million. Online banks are also gaining and increasingly sustaining competitive advantage over large banks.

Cash Advance Centers Inc. is the largest payday lending company in the USA and is widely being used now in lieu of doing business with a bank. That company reports that 22 percent of its customers earn more than $75,000, so the point here is that avoiding bank fees and such is becoming popular not only with individuals of lower incomes but also with people of medium incomes.

JPM needs a clear strategic plan for the future. Help JPM’s top managers by preparing a recommended strategic plan for the company.

Walt Disney Company, 2013

www.disney.com , DIS

Headquartered in Burbank, California, Walt Disney Company (Disney) and its subsidiaries compete in the entertainment and media broadcasting industry worldwide. Serving customers for nearly 100 years, Disney is a diversified conglomerate, owning ABC, ESPN, theme parks, cruise lines, and more. As a member of the DOW 30 and the world’s largest media conglomerate, Disney owns ABC television and cable networks such as ABC Family, Disney Channel, and ESPN (80 percent). Disney owns 8 television stations and 35 radio stations as well as Walt Disney Studios that produces films through Walt Disney Pictures, Disney Animation, and Pixar. Disney’s Marvel Entertainment is a top comic book publisher and film producer. Disney owns and operates huge cruise boats, as well as 14 popular theme parks around the world.

Disney’s earnings in Q3 of 2013 equaled the prior year’s number, while revenue increased 4 percent, led by Disney’s theme parks, resorts, and cable networks such as ESPN. For Q3 of 2013, Disney earned $1.85 billion, on revenue of $11.6 billion, up from $11.1 billion. Revenue at Disney’s parks and resorts grew 7 percent to $3.7 billion. Cable networks revenue grew 8 percent to $3.9 billion, led by ESPN, A&E and U.S. Disney channels. A laggard, Disney’s broadcast revenue was unchanged at nearly $1.5 billion. Overall, Disney’s media networks business grew 5 percent to $5.4 billion. For Q3 of 2013, Disney’s movie studio revenue fell 2 percent to $1.6 billion, due to poor results from the movies “The Lone Ranger” and “Iron Man 3.”

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

Walt Disney and his brother Roy arrived in California in the summer of 1923 to sell a cartoon called Alice’s Wonderland. A distributor named M. J. Winkler contracted to distribute the Alice Comedies on October 16, 1923, and the Disney Brothers Cartoon Studio was founded. Over the years, the company produced many cartoons, from Oswald the Lucky Rabbit (1927) to Silly Symphonies (1932), Snow White and the Seven Dwarfs (1937), and Pinocchio and Fantasia (1940). The company name was changed to Walt Disney Studio in 1925. Mickey Mouse emerged in 1928 with the first cartoon in sound. In 1950, Disney completed its first live action film, Treasure Island, and in 1954, the company began television with the Disneyland anthology series. In 1955, Disney’s most successful series, The Mickey Mouse Club, began, and the new Disneyland Park opened in Anaheim, California.

Disney created a series of releases from 1950s through 1970s, including The Shaggy Dog, Zorro, Mary Poppins, and The Love Bug. Walt Disney died in 1966. In 1969, Disney started its educational films and materials. Another important time of Disney’s history was opening Walt Disney World in Orlando, Florida, in 1971. In 1982, the Epcot Center opened as part of Walt Disney World. The following year, Tokyo Disneyland opened.

After leaving network television in 1983, Disney introduced its cable network, The Disney Channel. In 1985, Disney’s Touchstone division began the successful Golden Girls and Disney Sunday Movie. In 1988, Disney opened Grand Floridian Beach and Caribbean Beach Resorts at Walt Disney World along with three new gated attractions: the Disney/MGM Studios Theme Park, Pleasure Island, and Typhoon Lagoon. Filmmaking soon hit new heights as Disney led Hollywood studios in box-office gross for the first time. Some of the successful films were: Who Framed Roger Rabbit, Good Morning Vietnam, Three Men and a Baby, and later, Honey, I Shrunk the Kids, Dick Tracy, Pretty Woman, and Sister Act. Disney moved into new areas by starting Hollywood Pictures and acquiring the Wrather Corp. (owner of the Disneyland Hotel) and television station KHJ (Los Angeles), which was renamed KCAL. In merchandising, Disney purchased Childcraft and opened numerous highly successful and profitable Disney Stores.

By 1992, Disney’s animation reached new heights with The Little Mermaid, Beauty and the Beast, and Aladdin. Also that year, Disneyland Paris opened. During the 1990s, Disney introduced Broadway shows, opened 725 Disney Stores, acquired the California Angels baseball team to add to its hockey team, opened Disney’s Wide World of Sports in Walt Disney World, and acquired Capital Cities/ABC.

From 2000 to 2007, Disney created new attractions in its theme parks, produced many successful films, opened new hotels, and built Hong Kong Disneyland. Disney acquired Pixar in 2006, Marvel in 2009, and launched Disney Dream, a new cruise liner in 2011. Newer Disney initiatives include the April 2011 groundbreaking of Shanghai Disney Resort at a price tag of $4.4 billion and expected opening day slated for sometime in 2015. In February 2012, Disney finalized acquisition of UTV Software Communications, an Indian entertainment company. In October of 2012, Disney announced plans to acquire Lucasfilm, producers of the popular Star Wars movies. The acquisition is expected to cost $4.05 billion. Disney plans to release Star Wars Episode VII in 2015.

Internal Issues

Vision and Mission

Disney’s vision is “to make people happy.”

Organizational Structure

As indicated in Exhibit 1, Disney operates using a strategic business unit (SBU) organizational structure that consists of five diverse, but all family entertainment segments: (1) media networks, (2) parks and resorts, (3) studio entertainment, (4) consumer products, and (5) interactive media. The president, chief executive officer, and director of Walt Disney is Robert Iger. There is no chief operations officer (COO) in the Disney hierarchy, but Andy Bird, Chairman of Walt Disney International, functions like a COO.

Segments

Disney provides segment revenue and operating income for each of their five SBUs. Exhibit 2 displays the three most recent years of revenue and operating income per Disney SBU, along with a percentage change for each of the last two years. Note that total consolidated revenues and operating income increased in 2012 and 2011, albeit at a decreasing rate during the most recent period. Note that the consumer products and the interactive media segments are small compared to media networks and parks and resorts.

Media Networks

Media networks is the largest Disney SBU in both revenues and operating income, accounting for 45 percent of all revenues in 2012. Revenue growth in 2012 came from increased affiliate fees, higher advertising rates, increased viewership of ESPN programs and the shows Castle, Once Upon a Time, and Revenge. The positive growth was limited by lower home entertainment revenues from programs such as Lost and lower Disney Channel viewership. Production costs increased as college sports, as well as NFL, MLB, NBA, and Wimbledon were able to negotiate more lucrative contracts. For example, the Southeastern Conference (SEC) signed a deal with ESPN in 2008 for $2 billion for 15-year rights to broadcast football and men’s and women’s basketball games. However, with the 2012 additions of Texas A&M and Missouri to the SEC, the previous contract is contractually renegotiable and a new, much more expensive, contract is expected in the near future.

With media networks, Disney owns and operates the ABC Television Network that reaches 99 percent of all U.S. households. This segment also includes ABC-owned Television Stations Group, ABC Studios, Disney Channels Worldwide, ABC Family, SOAPnet, Disney ABC Domestic Television, Disney Media Distribution, Hyperion, and Radio Disney network. The ABC Television Network operates more than 220 affiliated stations across the USA. Disney channels worldwide consists of 94 kids and family entertainment channels available in 169 countries and 33 languages. ABC Family is a mixture of series and movies. SOAPnet owns character-driven soapy drama, from daytime and primetime soaps, to reality shows and movies. Disney ABC Domestic Television provides motion pictures and TV programming to U.S.-based media platforms. Disney Media Distribution is an international distributor of branded and nonbranded content to all platforms. Hyperion publishes fiction and nonfiction titles for adults. Radio Disney is available in more than 40 U.S. markets, and on satellite radio, mobile apps, and the Web.

EXHIBIT 1 Disney’s Organizational Chart