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Monforte Dairy Situational Analysis

Essay by   •  August 6, 2019  •  Case Study  •  983 Words (4 Pages)  •  13 Views

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Definition of Success

In order to be successful, Monforte Dairy (Monforte) must reach a debt-to-equity ratio of 5.00[1] by fiscal year ending 2011, while addressing the following critical issues:

Critical Issues and Opportunities:

  • Inability to secure debt financing.
  • Inability of meeting current and future demands of customers.
  • Monforte’s presence in the market has substantial opportunity to grow.

Situational Analysis

External analysis shows that there are a large number of competitors in the market,[2] but Ruth is not worried. Suppliers hold high power against Monforte through controlling prices of the dairy sold. External forces such as climate, government regulations, and ethical standards of suppliers pose threats to profits.[3] New trends of environmental companies and awareness of local sustainable companies to consumers can be favourable to Monforte’s position within the market.

Monforte has great brand awareness in a growing market. Monforte has strong footing with the community which has resulted in loyal customers pledging money to help Monforte. The pricing model of 30/30/30, leaves a mere 10% for Monforte to earn profits is not feasible for future goals.[4] Since Monforte donates 10% of their 10% profits, they are only making a minimal profit. Seasonal barriers affect the business through January – March because no production can be made. Ruth is a strong promoter for sustainable cheese making, which she wants to ensure carries on in Monforte.

Monforte’s sales are currently on an upward turn from previous years. However, Monforte is struggling to overcome the previous year’s setbacks. Monforte’s current debt-to-equity ratio is 11.49,[5] showing that large debts relative to equity are not allowing Monforte to take out more debts. The acid-test ratio is 0.9,[6] showing that Monforte will struggle paying back current liabilities. Monforte is experiencing some cash flow problems since the company has less than a dollar to pay off assets.

The artisanal cheese industry is highly populated with many competitors in the market. The government quotas in place do not allow companies to sell any type of milk cheese. At Monforte, the 30/30/30 pricing model does not allow for much profit to be earned, however Ruth is not concerned. Monforte has relied on customers and their support to invest in the company, creating a high debt-to-equity ratio for the company. Despite all this, Monforte has good fitting in the community with strong brand recognition, reputation, and loyalty.

Decision Criteria

  • Must continue to maintain strong brand recognition through sustainable practices.
  • Must improve acid-test ratio to at least 1.5 by fiscal year ending 2011.
  • Must maintain status quo to earn projected $2 million in sales for 2010.
  • Must expand product portfolio including the existing product mix.

Options Analysis

Ruth’s alternatives of an auberge and charcuterie are not feasible. The auberge is not feasible because it will bring in minimal profits because of high costs. Charcuterie will not work because Monforte lacks the expertise.

Option One: Affinage.

Renovation including shelving will cost $750,000. Climate control system would cost $250,000 with $2,000/mo. in utilities. Six additional staff annual salaries will total $185,000. A marketing budget of $30,000 will be needed.[7] It is approximated that Monforte will sell 3,500 pounds of affinage cheese in the first year at $11/pound, bringing in $38,500. An affinage will meet three out of four decision criteria; it will not improve the acid-test ratio.[8] There is a risk that customers will not be interested in the new products which could create fewer sales than projected. This option is moderate risk, moderate reward.

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