General Mills Paid Silly Money for Pet Food Case Analysis 3 pages Write the paper about Pet food 1. Background the picture —read the short article and se

General Mills Paid Silly Money for Pet Food Case Analysis 3 pages Write the paper about Pet food
1. Background
the picture
—read the short article and see
2. Problem Statement (one sentence)
3. Alternate Solutions (need 3)
—pick three on the picture
4. Recommendation (be detailed on why this will solve your problem)
5. Measures (3 that will show if your recommendation was successful) —-society measure with realistic and live
6. What I Learned—-two sentence
The above should be used as headings on your paper and the paper cannot
exceed 3 pages.
You also need a bibliography page with at least two outside sources and the
case. I do not care what format you use. Wikipedia is not a source. I did a
quick search for Taco Bell, London, Beer and got over 1,000 hits.
The keys will be:
1. Is your problem statement succinct and clear?
2. Do your solutions solve your problem?
3. Does your recommendation solve your problem?
4. Do you justify your recommendation?
5. Are you providing measures or tactics?
6. Do your measures support your recommendation?
7. Did you follow these really clear directions?
Article:
General Mills Paid Silly Money for Pet
Food
James Berman
General Mills violated the cardinal (and counter-intuitive) rule of value investors: Don’t
just do something, stand there. While most of us are inclined to the opposite, this wise
advice—which turns the old adage on its head—is designed to prevent action for the
sake of action. And action for the sake of action can have dangerous consequences.
General Mills might have to learn the hard way after it bought Blue Buffalo Pet
Products Inc., a fast-growing pet food company for an enterprise value of $8 billion.
Blue Buffalo has its charms. Just nothing worth the sum that General Mills paid for it
in a deal that closed earlier this year. Since the deal was announced, the market has
rendered its unsurprising verdict, incinerating more than $3 billion in market
capitalization.
General Mills is not alone in its apparent desperation. Traditional, old-school food
companies from Campbell’s Soup Co. on down have been making hasty, madcap
acquisitions in a headlong desire to do something about their paltry growth rates. The
results of their fear have not been pretty. Campbell’s recently leveraged itself to the
precarious hilt borrowing over $5 billion to buy Snyder’s-Lance, maker of pretzels and
chips. The result is a harrowing debt-to-EBITDA ratio of five times, which led to the
review of the company’s credit rating by Moody’s and the departure of the CEO.
To examine the Blue Buffalo deal is to take a gander at the dark side of paying up: the
intersection of desperation and pollyannaism.
No one can deny General Mills’ frantic need for growth. According to Morningstar, the
cereal products company suffered a -2.4% five-year growth rate, as consumers have
turned away from carbs. Such a sales result is scary and would prompt many CEOs to
do almost anything to reverse the trend. But that’s when you need to take a deep breath
and meditate for a minute, not pay a devil-may-care 6.3 times sales for a pet food maker.
As a paleo-centric, protein-focused peddler of treats and food for dogs and cats, Blue
Buffalo is trendy, well-positioned and understandably attractive—just not at over six
times revenues. To give you an idea of how astounding that multiple is for a pet food
company, J.M. Smucker paid 2.5 times sales for Big Heart Pet Brands, maker of Milk
Bone and Meow Mix, in 2015. Big Heart is a traditional purveyor, so is not a perfect
comparison. But General Mills is not paying a 10% or 20% premium to the Big Heart
Multiple; rather, it’s paying more than double.
To add value, a company’s returns on capital must exceed its costs on that same capital.
General Mills will have to make Blue Buffalo into even more of a wunderkind than it
is to generate sufficient returns to justify the cost of money on $8 billion.
Multiples in tech acquisitions frequently reach the six times sales level but this is food,
not software. By definition the food biz lacks scale, switching costs and all the attributes
that make dominant tech players so appealing. The food business is always the food
business no matter your growth rate. Sure, with Blue Buffalo wider distribution is
promised. And possibly even synergies. But as Warren Buffett warns, “If the historical
performance of target falls short of validating its acquisition, large ‘synergies’ will be
forecast. Spreadsheets never disappoint.”
CEO Jeff Harmening is a talented executive, having reportedly spearheaded the
acquisition of Annie’s in 2014 when he was not yet head of the company. But Annie’s
was bought for $820 million on $204 million in sales. The multiple here is much higher,
the stakes much larger. He has his work cut out for him.
Remember; write the format like these, you have to make perfect
English as long as the point is correct
Format:
Big Tobacco and the Advent of E-Cigarettes
Background
The U.S. tobacco industry is among the most heavily regulated and heavily taxed
industries in the United States (The Economist, 2014).
Medical evidence of the adverse
effects of smoking continues to grow, and the share of American adults who smoke has
declined markedly during the past fifty years, from 42% in 1965 to less than 18% in 2013 (CDC,
2013). But in spite of ever-increasing regulation and public wariness of the U.S. tobacco
industry, tobacco companies continue to thrive. This oligopoly industry, dominated by big
tobacco companies Altria, Reynolds American, and Lorillard, serves a shrinking but remarkably
loyal customer base. Critics are quick to point out that, despite extensive regulation of the
marketing practices in the industry, tobacco products remain highly lucrative, with sales of
over $66 billion in 2014 (Hargreaves, 2014).
This beleaguered but very profitable industry must now deal with another, potentially very
disruptive innovation in the form of e-cigarettes.
This new product category, the modern
version of which dates from 2007, generated U.S. sales of $2.5 billion in 2014 (Richtel, 2014).
Although the e-cigarette sector is still relatively small, it clearly has the potential to disrupt
tobacco sales in the coming years. E-cig use is generally perceived to be less unhealthful
than cigarette smoking, and the e-cig habit is substantially less costly than consuming
tobacco cigarettes (Richtel, 2014).
Moreover, e-cigarettes are far less regulated than
tobacco products, without many of the marketing constraints.
The early success of e-cigarettes has not gone unnoticed by the big tobacco companies.
Lorillard was the first to enter this sector with the acquisition in 2012 of the Blu eCig brand
(Esterl, 2012). Since then, Altria and Reynolds American have indicated their intention to
introduce e-cig product lines (Richtel, 2014).
Problem Statement
Tobacco companies must address the advent of e-cigarettes in order to defend their
tobacco business and to identify business opportunities in the growing e-cigarette product
sector.
Alternative Solutions
In order to limit the impact of e-cigarettes on the sales of tobacco cigarettes, tobacco
companies can lobby for additional regulation of this new product category.
Increased
regulation will help to “level the playing field” and reduce the advantages enjoyed by e-cigs
as a consequence of their largely unrestricted marketing. Among the areas for increased
regulation of e-cigarettes, the tobacco companies can lobby federal, state, and local
governments to ban television and radio broadcasting of e-cig advertising, prohibit online
sales of this product category, and proscribe e-cig use in public places.
These changes will
reduce some of the advantages of e-cigs over tobacco products, thereby presumably slowing
the market acceptance of this product category.
The tobacco companies can also lobby the federal government to regulate e-cigarettes
as an over-the-counter pharmaceutical. The Food and Drug Administration (FDA) would
then regulate product approvals and monitor the distribution of e-cigs across the United
States.
Compliance, in the form of application submissions, clinical testing, and pre-market
approvals, will be costly for applicants. This will likely limit the number of new entrants in
this market, and will therefore help to reduce the intensity of market competition.
In order to further blunt the effect of new entrants in the marketplace, tobacco companies
can acquire any promising e-cig brands in order to manage the marketing communications
and distribution of these products – or perhaps to simply discontinue these lines. Lorillard
acquired Blue eCigs and is seeking to grow this product without cannibalizing the sales of its
tobacco cigarettes. Similarly, Altria and Reynolds American could acquire existing product
lines in order to manage competition in the tobacco industry.
Recommendations
The best solution for dealing with the threat posed by e-cigs is to seek new legislation to
regulate this growing product category. By lobbying for new product clinical trials and premarket approvals, the tobacco companies will raise the cost of entry for new competitors.
Similarly, bans on broadcast advertising and online sales will reduce the advantages currently
enjoyed by e-cig marketers over tobacco marketers.
The advantage of these solutions to
the tobacco companies stem from their substantial existing capabilities for lobbying federal,
state, and local governments.
The tobacco companies would only need to shift their
lobbying emphasis from their tobacco products to the new e-cigarettes.
Program Performance Metrics
An intermediate metric to determine the effectiveness of any new regulatory legislation
is the number of new entrants in the e-cigarette product category.
If the newly erected
entry barriers reduce the number of entrants, this would provide an early indication of success.
Also on an intermediate basis, it will be possible to determine the success of newly
implemented marketing regulation of e-cigs by tracking current and potential customers’
awareness of e-cigarette brands prior to and following the enactment of such regulations.
There should be a statistically significant decline in awareness levels following the
enforcement of regulations.
A conclusive metric of the success of tobacco companies’ lobbying programs is the
goodwill premium associated with the market capitalization of e-cigarette companies. If the
entry barriers and marketing regulations are successful, the goodwill premium of these firms
should decline.
The resulting higher cost of capital will presumably reduce their ability to
compete in the market and thereby to take market share from the tobacco companies.
What I Have Learned from This Critical Analysis Exercise
The e-cigarette product category is a disruptive innovation because of its potential to
reduce demand for tobacco products. There are clear indications that tobacco companies
are taking the necessary steps to defend their very lucrative market, but these efforts are still
at an early stage.
We can expect further efforts by the tobacco companies to protect their
positions, perhaps by lobbying more intensively for the regulation of e-cigarettes.
Bibliography
Anon. (2014, January 5) “Running out of puff: Big tobacco firms are maintaining their poise,
but quietly wheezing” The Economist
Centers for Disease Control and Prevention (CDC) (November 2013) “Cigarette smoking
among adults—United States, 2013”
Esterl, Mike, (2012, April 25) “Got a Light – er, Charger: Big Tobacco’s latest Buzz”, The Wall
Street Journal
Hargreaves, Rupert (2014, April 18) “Tobacco is Still an Extremely Profitable Business, and This
Won’t
Change
Soon”
The
Motley
Fool
,
http://www.fool.com/investing/general/2014/04/08/tobacco-is-still-an-extremelyprofitable-busines-2.aspx
Richtel, Matt (June 17, 2014) “Why big tobacco companies are betting on e-cigarettes” The
New York Times

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