Douglas fine foods
the douglas family business, douglas dairy, was started in 1929, by matthew's ... Question: Douglas Fine Foods The Douglas family business, Douglas Dairy, was started in 1929, by Matthew's ... Douglas Fine Foods The Douglas family business, Douglas Dairy, was started in 1929, by Matthew's father and grandfather as a dairy farm and one-horse delivery service just outside of Calgary, Alberta. Over the years, the business sold a number of products and services that were in demand, most of which had one common theme—food and beverage. The family business that had spanned nearly a century, concentrated on dairy products, soft drink bottling, vending machines, tobacco and fresh foods. Through the 1970s, the company began to focus more on over the counter food services, expanding from a local vending company to a regional cafeteria food services company as DFF continued to grow and adapt to customer needs. In 1991, Matthew Douglas's two older brothers, Jason and Mark, had purchased the family business from their father in 1975. From 1992 to 2006, Matthew Douglas played a limited role in the business, but progressively helped his father and brothers, who were actively managing multiple business ventures. In 2007, Matthew Douglas purchased one-third of the family business and became more involved in growing DFF. Later that year, he was asked to take the helm as interim CEO for a couple of months while his brother, Jason, took time for a personal sabbatical. Things ran smoothly for his trial CEO period, and Douglas made an effort not to "shake things up," never placing much effort on a strategic agenda because he knew his brother would pick up where he had left off when he arrived home. Unfortunately no One could have prepared Douglas for what happened next. Jason arrived back in Canada rested and re-thinking his role in the business only to face the sudden passing away of the middle Douglas brother, Mark.
After much consulting with his soon to retire older brother Jason, it became a moment in time when Douglas said, "I can let this crush me or use it as a catalyst." He chose the latter and, in June 2008, took the full-time reins as CEO of DEE. By 2008, DFF had grown to be the largest privately held Canadian food services company. Still headquartered in Calgary, DEE provided nutritious and healthy business dining, residence and camp food services, catering, vending machine services as well as food service equipment and design. The business serviced clients in various industries, schools, sports arenas, concessions, warehouses, government offices and corporations. DFF was proud to employ 850 full-time staff and relished in the history and legacy of the company's tremendous growth story, from a $1 million business in 1991 to a $30 million business by 2008. The business focused on creating relation-ships with a wide range of organizations that had a consistent need for food and beverage services. Not just a "food provider," I)FF offered a broad spectrum and full array of services in nearly every aspect of the value chain, beginning with the design, construction, financing and equip-ping of a food service facility (e.g. a cafeteria) and extending to staffing and providing full-scale operations for delivery of the food service. In the majority of cases, the food services infra-structure was already in place, and DFF offered its expertise in working to adjust and augment the associated people, programs and operations. DFF prided itself in its ability to offer flexible and unique services to clients. The company was able to accommodate any catering requirement from simple luncheons to elaborate high-end banquets for hundreds of guests and even outdoor events, such as corporate picnics for thousands of patrons. DFF offered several dining concepts for its institutional clients: Main Street Café for business, university and college settings; and Hero's for high schools. The company also offered the products of a number of national "brand" franchises to strengthen and support their services in large venues. Main Street Café was DFF's own internally branded dining concept that offered product variety and menu flexibility, with a full range of healthy options. The Hero's program provided school cafeterias with excellent food quality and variety at reasonable prices and was able to compete with outside retailers. An important asset was DFF's position as an authorized franchisee for four popular national chains: Tim Hortons, Canada's largest coffee chain; Pita Pit, a retail chain specializing in healthy, fresh food; Subway, the world's largest sandwich chain and Star-bucks, the world's largest coffee chain, all of which provided the necessary complement of brand recognition. In addition, DFF had its own unique blend of first-quality coffee, JOJO Stop, which was made with top-of-the-line equipment and was designed to compete with the national gourmet coffee retailers. DFF's corporate goals provided important guidelines for decision making in the organization. Douglas felt they both provided guidance for steering the company in the right direction and embodied many of the lifelong family les-sons instilled in the company's history. Industry: The industry was divided into commercial food service (food and beverage outlets and restaurants), which represented 79 per cent of the market, and non-commercial food service (food services non-restaurants), which represented 21 per cent of the market. See Exhibit 1 for a further breakdown of the market segments. The food services industry in Canada was mature with a high degree of competition. Canadian food service operators were expected to face their most challenging business environment in the next decade as cutbacks on consumer and business spending were beginning to surface amid a potential economic slowdown. A Canadian Restaurant and Foodservices Association (CRFA) report' forecast real growth in food service sales to slip by 4.6 per cent, which equated to an industry sales forecast of nearly $59 billion for 2009. See Exhibit 2 for historical and forecast food service sales. On the basis of this economic outlook, commercial food service sales would slip 2.5 per cent in 2009, and in particular, total caterer sales were forecast to drop by 3.0 per cent due to a decline in social catering and reduced contract catering spending in the business segment. Non-commercial food service as expected to see a modest increase of 2.8 per cent, and institutional food service leading the growth with a 5.8 per cent increase. See Exhibit 3 for the latest detailed forecast of food services sales by channel. Food costs (35.4 per cent of sales) and labor costs (31.5 per cent) accounted for the two largest expenses borne by foodservice operators. For a breakdown of average industry expenses as a percentage of operating revenue. Although the average pre-tax profit was 4.3 per cent of sales, this percentage varied significantly by province (from 2 per cent to 7 per cent). Profit margins diverged even further from one sector to the next. Competitive Landscape: DFF was vying to compete with global, regional and local players in the food services business. In Canada, only three major global competitors accounted for the majority of the food services business. These companies each had Cdn$20 billion or more in worldwide sales and tended to focus on the larger contracts. Similar to DFF, a handful of well-recognized regional Canadian competitors each had their own target clientele and levels of service in the market-place. In addition, DFF always kept a watchful eye on local competition. With low barriers to entry, a significant number of "mom and pop" shops had opened, although these competitors tended to be smaller, niche players that only serviced local clientele.
Although this atmosphere sometimes made small local contracts competitive, these undersized players did not have the scale or expertise to supply larger institutional clients. In the food services business, the name of the game was reputation, relationships and retention. If a company was doing a good job of servicing a client, it was hard to lose the business. Typically, the larger food services contracts were tendered through a request for proposal (RFP) method and were fixed five-year contracts. The RFP required not only a formal response but usually also included presentations and product samples. It was not uncommon for a company to keep a contract well beyond its expiration date if the supplier was providing excellent service. By winning a new contract, a vendor was typically taking business from a competitor who was inadequately servicing the needs of the client. Global Competitors: Compass Group: Compass Group' was founded in 1941 and was the world's largest food service company with operations in more than 60 countries. Compass Group provided hospitality and food service for a variety of businesses and public sector clients, including cultural institutions, hospitals and schools. It also offered vending services and catering and concession services for events and sports venues. Compass Group employed more than 365,000 employees worldwide. It grew to its leadership position through aggressive expansion and numerous acquisitions and was now focused primarily on streamlining operations and maximizing profits. It saw continued growth coming from its efforts to extend additional services to clients, particularly in the corporate hospitality segment. Compass was also working to expand its facilities management business. Compass Group in Canada tended to focus on health care, education (college and university), remote sites and travel concessions. The company's total revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) were USS19.1 billion and US$1.5 billion respectively for fiscal 2008. Sodexo: Sodexo was the world's number-two contract food service provider with operations in 80 countries, where it employed more than 212,000 staff. Its subsidiaries offered corporate food service and hospitality services, vending services and food services for educational institutions and other public sector clients. Other operations included event concessions, health care food services and such outsourced facilities management services as cleaning, grounds keeping and laundry. Sodexo was focused on winning new clients for its outsourcing services, especially in the area of facilities management. The company had also been making targeted acquisitions to expand both its services and geographical reach, In Canada, Sodexo tended to focus more on universities, private schools, health care and camps. Sodexo's total revenue and EBITDA were US$20.4 billion and US$1.03 billion respectively for fiscal 2008. Aramark: Aramark was the world's number-three con-tract food service provider and was also a leader in the uniform supply business. It employed 250,000 staff. Aramark offered corporate dining services and operated concessions at many sports arenas and other entertainment venues. The company also provided facilities management services and continued to look for opportunities to expand not only its client base but also the number of services it supplied to its existing customers. Aramark targeted industry segments such as correctional facilities and health care operators. Keen on international expansion, the company had recently focused on Europe and Asia, where it was the official food service provider for the 2008 Olympic Games in Beijing. Aramark in Canada focused on education (colleges, universities and private schools), health care, business dining and remote camps. Aramark's total revenue and EBITDA were US$13.29 billion and US$1.04 billion respectively for fiscal 2008. Regional Competitors: Diana Hospitality: was formed in 1988 and pro-vided a workplace environment with quality food. The company offered hospitality programs and management services to a wide range of clients who valued fresh on-site culinary services, with a strong focus on retail food service partnerships. It had experience in the health care, education, and business and industry sec-tors where labor management agreements were required. Diana Hospitality's Food Consulting Services Inc. was a management advisory service specializing in innovative, resourceful solutions for clients who wanted to improve their food services. Williams Foods: Williams Foods had built a strong reputation by providing quality food products and exceptional customer service. The company continued to grow in size and strength and enjoyed exceptional corporate partnership with its clients. Williams Foods offered event planning and management, culinary expertise, signature brands and cafeteria services. Williams Foods took care of all aspects of food service at a site, including vending with nationally branded products and their own prepared foods. Williams Foods also specialized in facility design from complete renovation to minor makeovers. The company provided food services to corporations, government, industrial sites, sports centers, golf clubs, educational facilities, fine dining restaurant facilities and high-profile tourism destinations. For Williams Foods, the choice of client was as important an issue as the choice of a food service company must be to any potential client. Williams Foods experience was built on quality performance and was dependent on management capability, high staff morale and the insistence that their staff show a high degree of commitment to each con-tract. The company believed that its staff must feel a degree of "pride and ownership" and consequently be directly accountable for all aspects of each contract. West Coast Company (WCC): WCC was a family-run business originating in Western Canada, now with locations across the nation. WCC had 70 major clients and primarily provided services to the education segment (secondary and college education) as well as health care. WCC had good relations with its customers and had a very similar culture and skill set to DFF. Current Situation In June 2008, Douglas's eldest brother announced that he would like to retire. As a result, Douglas was working on a financing arrangement to acquire all the remaining shares in the business and become the sole owner of the family enterprise.
Douglas spent his first several months as the official CEO reviewing operations, talking to employees, meeting with suppliers and discussing operational agendas with DFF's clients. After taking all this into consideration, Douglas sat back and wondered in what direction he should lead the business. After nearly every question posed to the staff, he wound up hearing the same answer: "because we've always done it that way:' as the new CEO, he wondered how he would be able to change the mindset of employees who had worked in the Douglas family business their entire lives. Although the business was profitable, he wasn't sure what to do and how to prioritize his decisions. One option Douglas had at his disposal was to position DFF for either immediate or eventual sale to a financial buyer, a private equity firm or a strategic buyer/competitor. His attitude had always been to work every day to prepare his companies for a sale. Having the good fortune to have his hand in many entrepreneurial activities in his life, Douglas understood what it took to build a successful organization, how hard it was to be profitable and how quickly the business reputation could be tarnished. DFF had achieved a positive reputation in a mature, well-established industry, which made the company a ripe acquisition target. Recently, a few of DFF's smaller competitors had been acquired by larger international players; Douglas speculated he could be next. On the other hand, he needed to make a pragmatic decision; he enjoyed the earnings and leadership role and wasn't sure how he would be perceived if he sold the business before even giving it a try as its new leader. Douglas wondered what changes could be made to make the business even healthier and more attractive to a potential buyer. Douglas thought about where he should position the company to compete. He knew that if DFF consolidated a number of the smaller or mid-level market players, the company would have a stronger advantage against larger competitors and would have a unique, more customized approach to serve segments of the market. Because margins seemed to be tightening year after year and, except for the larger competitors, few companies had critical mass in the mid-market space, he wondered whether this situation was an attractive opportunity to take over other companies. He was also aware that the large contracts, typically won by the bigger competitors, offered higher margins and could be won without significantly increasing the number of employees or adjusting operations. This option was advantageous because it would grow volume, achieve economies of scale and quickly grow EBITDA to position the company for a possible sale. Another option Douglas contemplated was dedicating his efforts to growing the business organically. Plenty of opportunities were out there, and with the right focus, he felt that he could win some of these key contracts. He remarked that he already had the best employees and as a favored author of his wrote "if you have the right people on the bus . . . you can go anywhere." Considering the maturity of the industry and the fact he wasn't exactly get-ting calls every day asking to buy his company, maybe consolidation really wasn't the right way to go. He considered a few approaches to organic growth and was unsure which might work best. Douglas wondered what kind of trends and product innovation DFF could capitalize on to give the company a competitive edge. Due to health issues such as obesity, diabetes and high cholesterol, more and more people were consciously choosing health and wellness as a lifestyle, and this preference was beginning to be reflected in consumer diets. Privatization and public–private partnerships by government and nonprofit organizations were also becoming standard practice; Douglas wondered how he could capitalize on this new way of securing business. He could also work on improving margins by adopting a low-cost strategy, lengthening trade payments and significantly lowering input costs.
Douglas wondered whether he could grow by focusing more heavily on his existing clients. Douglas knew that some key decisions were necessary because, in this industry, you could choose to either innovate, consolidate (acquire or be acquired) or be pushed out by stiff competition of the global players. Financial Situation As a private business, DFF had not previously been managed to impress outside investors or hit lofty share targets but was run in the most effective manner for tax planning purposes and to meet the needs of employees. In the most recent year, the company had generated more than $33 million in sales, profit of $235,000 and almost $1.7 million in EBITDA. On the other hand the company has built up a substantial amount of debt obligations. In 2008, Douglas agreed to buy out his retiring brother's shares of the company for $1 million.' The company's bank had tentatively agreed to provide the company with the financing required. Douglas knew the organization had intrinsic value for him but not necessarily for the market. In talking with various financial advisors, Douglas learned that the company needed to achieve roughly $5 million to $10 million EBITDA to successfully exit the business and position DFF as an attractive take-over target. The Auto Decision: A major decision had to be made with respect to DFF's largest client—Canada Auto Corporation (CAC). In 2004, DFF had received a phone call from CAC asking whether DFF would like to bid on the food services contract for an assembly plant with 5,000 employees. If DFF won the contract, it would replace one of its major competitors and heighten awareness of DFF in the automotive industry. Revenues from the contract would take the form of a management fee. A management fee was utilized in businesses in which the client wished to maintain a high degree of control and was willing to pay r for that control and have a company with professional experience manage the food services division. Initially, DFF had declined the offer to bid as it struggled with the management fee business model. Under the proposed contract, DFF would be provided with minimal financial transparency and control, yet would be expected to run the cafeteria and food services more efficiently. After lengthy negotiations with CAC, DFF decided to proceed with the RIP and subsequently was awarded the contract. From 2004 to 2008, DFF continued to make minor improvements in food services delivery and increasingly struggled with the conflict between the contract and DFF’s core values. For example, cost cutting often trumped quality. Also, retaining and motivating staff was increasingly difficult, due to poor labor relations conditions, which had a negative effect on DFF staff. The cafeteria tended to become the dumping ground for employee complaints and harassment, evidenced by an increasing trend toward conflict between members of the CAC unionized workforce and the cafeteria staff. Although the contract represented a substantial portion of EBITDA (almost 20 per cent), Douglas continued to find the contract difficult because it consumed much emotional and intellectual time. He felt he was always extinguishing small fires and was beginning to lose sight of the larger picture. On the other hand, the contract brought significant value to CAC and had transformed its dysfunctional food services operation into an effective, break-even operation by improving hours of operation, lowering costs and doing its best to enhance the atmosphere of an industry in dire straits. By 2009, management at DFF had become somewhat reliant on the strong cash flows from the CAC contract, and many were shocked by Douglas's decision to review the agreement and discuss the merits of declining to submit a RFP for renewal of the contract. Douglas had always felt uneasy about CAC's business model and, looking ahead, he wondered whether these types of contracts were best suited for DFF's core competencies. If the company did decide to walk away from the contract, how would he replace the cash flow? In addition, Douglas was o s worried about the successor liability provisions of the provincial labor code. DFF had inherited a unionized workforce when it took on the CAC contract and was worried about the liabilities it might incur if CAC went bankrupt. It was no easy decision. From Entrepreneur to Professional Manager Lastly and of equal importance to the many decisions that had to be made was the daunting task of how to transform the organization from an entrepreneurially oriented family business to a professionally managed multimillion-dollar company. The industry and the business world were changing. Gone were the days of lack of employment standards.
Health regulations were increasingly important, business partnerships were no longer solidified on a handshake and workplace safety was at the forefront of industry news. Douglas remarked: In the past, relationships and verbal commitments were all you needed. In today's world clients will call and say "clause 2.2 said you'll do this—you have 30 days to comply before the con-tract is terminated. Competition was tough and needed to be matched by sound management processes and strong leadership, all of which were deteriorating at DFF. Douglas knew he had his work cut out for him to transform the company into a professional setting, and he understood that the transformation needed to start from the top. Although the industry was changing, DFF had seen little, if any, meaningful change. The physical state of their building had not changed in more than two decades, information systems were in place but utilization of such systems was barely adequate. On the people side of the business, the employees were, in general, ensnared in a culture that did not match the look and feel one would expect when dealing with a multimillion-dollar organization. Excessive tolerance for risk, use of unprofessional communication, an absence of a dress code policy and other "home grown employee habits" would be unheard of in most Canadian corporate settings. Douglas noted: Our employees look up to the management team . . . we know what we're doing, but we also need to look like we know what we're doing. I want to instill a sense of professionalism and passion in all of our people, including management. Douglas noticed employees were resistant to change. For example, he had recently asked a payroll employee why he was filling out a report by hand instead of on the computer system. The employee remarked "because that is how we have always done it in the past." DFF had frequently solicited the advice of one of the largest accounting and advisory firms in Canada with respect to employee relations.
The purpose of this survey was to have employees provide recommendations for change within the organization. In a recent survey of DFF administered by the advisory firm, questions included the following: If I were the new CEO of DFF, the first three things I would change are. .. . If I were the new manager of my department, the first three things I would change are. . . . I am held back by the following inefficiencies in the way we do business. The results had provided Douglas with ideas on how to improve the business. For example, employees felt strongly about the need to have more autonomy in their roles and in the decision-making process. Employees felt their current role limited their ability to provide recommendations. People management was very important in the food services industry because client relationships were dependent on service delivery and professionalism on the front line. As such, DFF aimed to treat its employees well and understood that compensation was not always the most motivating factor. DFF motivated and rewarded its employees in a number of ways, including providing professional development (e.g. training and mentoring) and profit sharing. ,, To top it off, difficulties also existed with the senior management team, which comprised four executives. Two of the members were not pleased with Douglas taking over as CEO and would not likely support his new direction for the company; however, they held important legacy information about DFF and its clients. As a result, meetings had become increasingly difficult because members held divergent views, which created an emotional swirl. Doug-las was not sure how to address this issue. Douglas understood that change began from the top. He noted, "Culture comes from the leader and you attract people that believe in the leader's style and vision." For change to be successful in organizations, leaders need to change their own behavior first. Soon after taking over as CEO, Douglas attended a client meeting and realized that his behavior and mind space also needed to change. When the client began asking questions about the strategy of the organization and in the direction in which he wanted to take the business, Douglas had scrambled to find appropriate answers. He was stuck in the details of managing because his previous roles in the organization had always entailed some level of "doing," (e.g. preparing an RFP to bid on a new contract). He now recognized, however, that as CEO, he needed to keep his head out of the weeds and begin the transformation to become a "thinker:' Thus, his responsibilities and mind-set were no longer merely to manage day-to-day tasks but to worry about the strategic direction of the firm.
Read the case and answer all the questions
1. What are the key strategic issues facing Douglas Fine Foods and what are your recommendations regarding each of them?
2. Which of the two acquisition opportunities should be pursued if any?
3. How should the company solve its financing issues
4. As Matthew Douglas, what are your leadership challenges, and what actions will you take to move your agenda forward? Expert Answer