Case Study Analysis - Roast Ltd for Acquisition by Starbucks UK

Part 1: Industry Review

Roast Ltd is an independent coffee house chain that was established in the UK in 2008. It has become a well-established part of the popular café culture that has developed alongside the emergence of the digital age, with workers taking their mobile devices to their local café to benefit from wifi, a caffeine boost and possibly something to eat, as an alternative location to their desk. To face off competition, Roast Ltd has built its brand strength on the fact that it is independent. Paola King, the chair of the company since their inception, and formidable driving force behind their success to date, cites their USP as follows: “We offer an alternative to the big brands: we are all about employing local people, and giving something back to the high street; our coffee shops are not cookie-cutter duplications of each other, they all have a certain character depending on their location, and that’s important to us in this increasingly globalised and corporate world. This is a family business, proud of its Italian heritage and inspiration: my parents were from Rome, and we use only the best Italian technology in our coffee machines and follow Italian brewing processes to ensure that every cup of Roast coffee is on a par with what you’d get in a top Italian caffè.” It may be smaller in size than its big brand competitors, but that hasn’t limited Roast’s ambitions, as it is currently in the middle of a two-phase expansion strategy:

• Phase one – which commenced at the start of 2017 was the opening of a chain of coffeeshops in Romania. This has been slow to get going: the launch was initially anticipated for midway through 2017, but ultimately sales only started in January 2018.

• Phase two – In 2019 Roast Ltd is seeking to use its strong supplier contacts in Italy to acquire a share in a coffee machine manufacturer for which it needs to secure finance of a further £400m.

You work in the finance department of Starbucks UK. Your Chief Financial Officer (CFO) has asked you to review the financial statements and other material sourced for you below, of Roast Ltd, an independent UK chain of coffee houses. The objective is to assist her in evaluating the attractiveness of the company as a target for acquisition by Starbucks. 

Prepare a 3,500 word business report for your CFO providing analysis and business advice to address the requirements below.

Part 1: Industry Review

Using your own independent research, provide a top-line review (in bullet point format) of the current UK coffee house industry. This should include a summary of who the key players are, how well it is performing, and any challenges or opportunities that you find.

Part 2: Business Performance Analysis

You will need to calculate and use appropriate ratios in your analysis for the sections required below: 

2.1 Statement of Profit or Loss

Analyse and comment on the financial performance of Roast Ltd using all relevant information from exhibits 1 and 2. Your analysis should critically evaluate the lines of the Statement of Profit or Loss.

2.2 Statement of Financial Position

Analyse and comment on the financial position of Roast Ltd using all relevant information from exhibits 1 and 2. Your analysis should critically evaluate the lines of the Statement of Financial Position.

2.3 Statement of Cash Flows

Use the Statement of Cash Flows (exhibit 1) and identify what has happened to the cash position of Roast Ltd during 2018. 4 marks Calculate and explain Roast Ltd’s Operating Cash Cycle (OCC) for 2018 and 2017. 3 marks Critically evaluate the company’s 2018 dividend policy and explain whether you think Roast Ltd was right not to make a dividend payment in 2018.

Part 3: Investment Appraisal 

Critically evaluate the investment appraisal information (exhibit 3). Your evaluation should challenge the management forecast in the first part of your answer. Then, in the context of Roast Ltd, critically evaluate the following investment appraisal techniques considering the benefits and limitations of each technique. You need to give a clear assessment as to whether the company was right to proceed based on the results of each appraisal technique and what we now know.