BPP Real Preseen Analysis CIMA Strategic Case Study February 2020 - Shinepodd

Overview
The company is a manufacturer and supplier of coffee pods, and even a cursory glance reveals that it is clearly based upon
the Swiss firm, Nespresso (indeed Jorge Negrato appears to be playing the role of George Clooney). Understanding this link
could be crucial, as there are several real-life developments at Nespresso, which could come to the fore in this case eg
patens expiring on coffee pods, and the development of compostable pods. [NOTE we would not encourage you to undertake
masses of research on Nespresso, as there is no guarantee that the case is going to follow the path of Nespresso's actual
development as a company).
The CIMA preseen tends to contain a lot of content, but relatively little by way of important detail. From BPP's perspective we
would summarise what you really need to know as:
 The company is listed
 It's domestic currency is the M$, but, as a minimum it also transacts in US$ (coffee purchases)
 Coffee beans are a global commodity, the price of which is affected by a range of factors including local weather
conditions and the prevailing strength of the US$. Shinepodd protects itself against these by using a wide range of
suppliers, and using derivatives to hedge
 Shinepodd sells two items
o Coffee machine - these are manufactured by 3 suppliers; Homewyre, Orpalast and Zendiclam
o Coffee pods made from aluminium and plastic, in a range of 37 different flavours. Competitors pods do not
fit in Shinepodd's machines. Pods can only be bought directly from Shinepodd, predominantly online
though it does operate boutique and pop-up shops
 The company advertises extensively on TV, billboards, magazines and its own website, using Jorge Negrato to
promote the exclusive nature of its brand
 Product quality is vital - Shinepodd takes an active role in overseeing the coffee production process, even investing
in its suppliers' businesses eg providing drying sheds and promoting the 'wet' process to extract beans from coffee
berries
 Shinepodd pays a 15% premium to ensure the quality of its coffee beans
 Shinepodd controls the roasting process and manufacture and sales of the pods - via orders of boxes of 100
capsules, with delivery undertaken by a courier
Shinepodd appears to be committed to sustainable business practices. On page 9 its CSR policy covers:
 Commitments to ethically sourcing high quality beans
 Promises of a better future for tis farmers and their communicates
 Commitments to ensure there are sustainable sources of the fresh water needed to facilitate the wet process
 Using natural drying processes with no fuel used
Theses standards extend to Shinepodd's Third Party Code of Conduct.
The company's strategy is focussed on 'continuing global expansion' featuring
 High quality arabica beans
 Good conditions for growers, including a 'living wage'
 A target of 70% of orders being fulfilled within 24 hours
 Maintaining a premium brand with expensive products

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The company has a diverse board, and what appear to be good Corporate Governance practices. A note of concern is the
imbalance of NEDs v Eds - there are only four NEDs out of nine directors, and the Non-Executive Chairman appearing to
have a very wide sphere of responsibility.
The risk register on page 14 includes:
 Economic environment - exposure to changes in coffee prices and the M$
 Environmental damage - a lack of recycling capability is clearly a concern
 IT - the company relies on IT for most of its sales
 Other - weather affecting coffee supplies / prices
The company claims to have a strong Internal Audit function, and has developed a strong policy - page 15.
There are financial statements for Shinepodd and another firm Caffham. The highlights are:

Measure Shinepodd Caffham

Revenues M$3,048 million M$2,596 million
Sales growth 2.1% 2%
Gross margin 49.6% up from 49.1% 48.9% up from 48.4%
Operating profit 18.5% up from 18.1% 16.6% up from 16.2%
Interest cover 16.6x 13.5x
Dividend pay-out ratio 73% No info
Gearing (book value Loans / Loans + Equity) 28.3% up from 22.8% 28.4% up from 23.0%

Shinepodd's share price has trended upwards over the last 3 years. In the last 12 months it has risen from approximately
M$120 to M$178 - a rise of 48%. The company's geared beta is 0.51 and its ungeared beta is 0.45 - this illustrates that the
company's shares are much less volatile than the market as a whole. There is no comparative data on Caffham.
There are a number of news article that may influence the scenarios that are developed in the exam variants:
 Good gardening - coffee grounds are excellent fertilizer, but, its hard to extract from the aluminium and plastic pods
 Gadget - Pod machines may be expensive, but they are worth the money on the basis of convenience and coffee
quality
 Middland Daily News - Jorge Negrato is very well paid for his Shinepodd commercials
 Middland Telegraph - a discount supermarket, Valyuomart is crticised for squeezing its supplier in order to maintain
very low process; they reject the allegations blaming greedy manufacturers
 Middland Telegraph - an attempt to change the law to make manufactures absorb the increases in the cost of
commodity supplies has been abandoned. This suggests that the Middland government might be quite
interventionist in its outlook - a threat to Shinepodd - should they start lobbying?
 Middland Daily News - consumers are bad at recycling, and don't like storing used coffee pods in their homes - this
is a major barrier to Shinepodd increasing its collection and recycling of its pods
 CEO's blog - comments from readers questioning whether Shinepodd ensures that workers on plantations are
treated fairly, and how recycling pods is not convenient, and criticising the CEO for taking lots of flights.

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Questions about Shinepodd
We know that the Case variants will be testing the CIMA Blueprint, and in particular the 'I CAN' statements. Try and answer
these questions about Shinepodd to ensure that you understand the Preseen, and have a broad understanding of the
underlying knowledge being tested.

1. I can evaluate strategic options (digital and otherwise).

Using Ansoff Identify how Shinepodd could grow its business.

Market penetration - acquire a rival eg Caffham

Market development - export to new countries
Product development - develop new flavours of coffee / new machines
Diversify - develop tea range

2. I can recommend strategic decisions (digital and otherwise).

Describe how strategies can be evaluated, so that a reasoned recommendation can be made.

Suitable - does the ploy make strategic sense?

Acceptable - will stakeholders support the plan - eg does it increase shareholder wealth
Feasible - can it do done - eg can we afford it, does the technology exist?

3. I can evaluate potential acquisitions and divestment opportunities.

Describe the following terms - Merger, Acquisition, Joint Venture, Alliance, Franchise, MBO, MBI.

Merger - two companies combine into a single entity

Acquisition - one company acquires and absorbs a rival
Joint venture - two or more companies form a new company in which they develop a new business
Alliance - two or more companies agree work together
Franchise - know-how and brands are leased to someone wanting to run their own business, usually in exchange for an
up-front fee and a revenue/profit share
MBO - management buy-out - existing managers buy a part of the business the company wants to dispose of
MBI - management buy-in - external managers buy a part of the business the company wants to dispose of

4. I can recommend responses to opportunities and threats arising from digital technologies’.
Describe the following terms - Big data, data analytics, machine learning, AI.
Big data - the mass of new data being created all of the time, characterised by the 4 V's - volume, variety, velocity and
veracity.
Data analytics - using algorithms to detect patterns in large data sets
Machine learning - where systems teach themselves in order to develop AI capabilities
Artificial intelligence (AI) is an area of computer science that emphasises the creation of intelligent machines that work
and react like humans.

5. I can select and apply suitable strategic analytical tools.

Explain how environmental uncertainty can be incorporated into strategic planning.

Techniques such as forecasting, foresight, and scenario planning can be used to build visions of a single future, or, to
develop models of possible futures so that contingency plans can be developed.

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6. I can conduct an analysis of stakeholder needs and recommend appropriate responses.
Describe five stakeholder groups from the Preseen.
Shareholders - want increased wealth eg share price growth and dividends
Growers - want a fair price for their product (+15%)
Customers - want high quality products and prompt delivery
Farmers - want good working conditions and fair pay
Lenders - want a secure return on the loans that they make

7. I can recommend appropriate responses to changes in the business ecosystem.

Describe the CSR / Environmental / Ethical threats to Shinepodd.
Increased awareness of environmental damage amongst customers (food miles / CO2 etc / water use)
Poor recycling record
Using non-sustainable materials eg aluminium and plastic
Fair treatment of farmers - is the 15% premium being invested in a living wage?

8. I can recommend KPIs that encourage sound strategic management.

Identify or describe 5 keys measures that indicate the success of Shinepodd in meeting its strategic objectives.
70% of coffee pods delivered within 24 hours
Share price growth
% of pods sent for recycling
Number of different coffee flavours (37)
Customer satisfaction ratings

9. I can recommend responses to economic, political and currency risks.

Describe how currency risks can be hedged internally or externally.
Internal - leading/lagging, matching payments and receipts, holding o/s currency bank accounts
External - forward contracts, futures and options contracts

10. I can recommend suitable sources of finance.

Describe five potential sources of finance for Shinepodd.
Bank term loans
Reinvest profits - reduce the dividend?
Debentures - including convertibles
New equity - placing
Rights issues

11. I can recommend dividend policy.

Describe four difference dividend policies that listed companies can pursue.
Zero dividends
Residual theory
Fixed pay-out rate
Constant growth

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12. I can recommend and apply business valuation models
Describe five different ways in which companies can be valued.

Net Assets
P/E ratio
Share price
Dividend valuation
Discounted future cashflows - less value of debt

13. I can evaluate risks and recommend responses and can maintain the corporate risk register.
What does the TARA framework describe?
Transfer risk
Accept risk
Reduce risk
Avoid risk

14. I can identify ethical dilemmas and recommend suitable responses.

Describe any potential ethical threats to Shinepodd.
Mistreatment of workers on farms
Lack of recycling facilities
Environmental damage eg unsustainable water extraction
Misreporting profits

15. I can evaluate and mitigate cyber risks.

Describe 3 different types of cyber risks, and 3 common controls.
Hacking - data theft
Ransomware
Insider threat - disgruntled employees

Malware protection - firewalls

Software updates
Data backups

16. I can recommend internal controls.

What does the acronym SOAPSPAM stand for?
Segregation of control
Organisational controls
Authorisation
Personnel controls
Supervision
Physical controls
Arithmetical controls
Management

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17. I can apply internal audit resources.
Describe 5 types of audit that Shinepodd's internal audit could get involved in.

Supplier audit
Environmental audit
IT audit
Compliance Audit
CSR audit

18. I can recommend appropriate controls and evaluate the implication of compliance failures.
Describe 3 features of the UK Code of Corporate Governance.
Balance of NEDs and Executive directors
Split the role of Chairman and CEO
Audit / Remuneration / Appointments committees staff entirely by independent NEDs

19. I can recommend responses to the threats arising from poor governance.
Describe two consequences of corporate governance non-compliance in the UK.
Shareholders are not bothered - no impact
Shareholders revolt - put pressure on the board to improve compliance, ultimately could sell shares or seek to alter
composition of the board

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 SWOT analysis:

Strengths Weaknesses
 Large company  Not enough NEDs
 Profitable  Too much power in hands of one NED
 Cash rich  Poor recycling record
 Low gearing
 Strong IA function
 Stock market listed
 Strong brand
 Premium products
 Unique product - S/D pods only
 Stable/growing share price
 Successful marketing
 Established CSR policies
 Strong controls - hedging / diverse supplies
 Strong links to suppliers
 Comprehensive risk register

Opportunities Threats
 Global expansion - market development  Commodity prices
 Improve recycling rates  Currency movements
 Digital marketing campaigns  Public criticism - recycling
 Product development - recyclable pods?  Adverse legislation
 Monetise coffee grounds  Rival or generic pods fit S/D machines

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 PEST analysis – NOTE not all of these points* are found in the Preseen, however they seem
pertinent to the case.

Political
 New regulation in Middland - see failed legislation on page 23
 New regulations where coffee berries are grown
 International/cross-border political risks

Economic
 Inflation* – erodes margins
 Economic growth rates* – could dampen demand on a global scale, especially for a premium
product
 Interest rates* – significant borrowings

Social
 Consumer attitudes – reduction in coffee consumption, heightened awareness of recycling,
customers want to purchase pods at supermarkets - Valyoumart?
 Environmental concerns* – Shinepodd has a large carbon footprint (imports beans - plus criticism
of CEO's air travel)
 General CSR – Shinepodd’s treatment of staff, poor driving by couriers

Technological
 Compostable / recyclable pods*
 Process improvements*