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Solved by verified expert:read the attchemnts and answer the question each answer should be 2 sentence ,1- What are your biggest concerns about the prospects for this business? 2- Select Does Troika Potato Chips look like an attractive investment opportunity? Why or why not? 3- Select If additional information should precede the decision to invest, what is that information and where should he obtain it?
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Troika Potato Chips (A)1
St. Petersburg, Russia
J
ohn M irren drummed his fingers impatiently on the
dashboard as he sat in the usual M osco w tra ffic
jam. He w as a managing director o f a Britisho w n e d, M osco w-b ase d invest me n t f u n d t h a t ma d e
investments in various businesses throughout Russia.
John sa w many business plans, written w ith various
degrees o f competence, every w eek, and he had to
decide w hich ones w arranted f urther investigation. As
part o f his job, he visited companies that seemed especially promising.
John le f t his job at a London investment boutique in
1990 to take a job in Russia at a time w hen Russia w as
considered the land o f unlimited opportunity. He had a
background in the region because he studied Russian
history, literature, and language in university and had
spent a year in St. Petersburg writing his senior thesis.
As managing director o f the investment f und, he had
been extensively involved in evaluating and managing
many projects, a f e w o f w hich turned out to be spectacular successes, but many o f them barely broke even
and some w ere complete f ailures.
That w eek he w as considering several plans. There w as
a f urniture f actory in Novosibirsk that w as making good
quality copies o f Russian Empire f urniture, as w ell as
more modern f urniture, and it needed investment
money to expand operations. A n interesting proposal
— to open a f ast f ood restaurant in Yekatrinburg —
had come into the o ffice last w eek. That seemed very
promising since the potential manager had considerable restaurant experience, both domestic and international. There w as also a proposal to open sorely needed
self-service laundries in M osco w. Ho w ever, that propos-
36
al needed care f ul examination since they w ere asking
f or a considerable sum o f money.
A m ore m o d est b usin ess pla n h a d co me fro m St.
Petersburg. Three diff erent legal entities with experience and expertise in diff erent fields had joined together to propose a company to produce and sell potato
chips to the St. Petersburg market.
T he f ormal business plan f or this proposed startup f ollo ws. John had to decide if the business w arranted his
investment, given all he had learned about investing in
Russia (see A ppendix).
Business Plan2
Summary
T
he proposed project envisions the establishment
o f a ne w enterprise that will produce high-quality, co m p e titively-price d p o t a t o chips in t h e
to w n o f Komarovo, not f ar from St. Petersburg. 3 The
initiators have f ormed a separate legal entity called
“ Troika ” specifically f or the purpose o f realizing the
project. Th e p o t a t o chips w ill b e sold u n d er t h e
“ Troika ” brand name.
The initiators hope to attract an outside equity investor
and use the invested f unds to purchase specialized,
high-quality, imported processing equipment that will
enable them to produce and package w orld-class potato chips to be sold through both w holesalers and retailers in the Leningrad O blast (region).
The preparatory stage has been completed, and practically all key aspects have been w orked out by the ini-
TROIKA POTATO CHIPS (A)
tiators. The enterprise has acquired a production site
(building and land) and a specialized potato storage
f acility. W ith the purchase and installation o f processing
equipment, and a complete renovation o f the production site, production can begin. A preliminary agreement to purchase equipment has been reached with a
Dutch firm considered a leading producer o f f ood processing equipment.
The principal ra w ingredient, potatoes, w ill be supplied
by the agricultural consortium Komarovo w hich is one
o f the f ounding partners in Troika.
The financial requirements f or the realization o f the
above project are as f ollo ws: an equity investment o f
$803,600 f or the purchase o f production equipment,
and a short-term credit o f $236,000 f or startup capital.
The time frame f or the realization o f the project is 10.5
years. The expected net pro fit at the end o f this period
is $2,269,000. Pro fits w ill be reinvested to modernize or
expand existing operations or used to start a ne w venture.
The Enterprise
GENERAL INF ORM ATIO N
Troika is registered as a closed joint-stock company in
the to w n o f Komarovo, Leningrad O blast. 4 The venture’s principal activity is the processing o f agricultural
products, specifically, the production o f potato chips.
Troika’s f ounding partners are three independently regist ere d org a niz a tio ns. Th e first is t h e a gricult ural
Consortium “ Komarovo, ” a closed joint-stock company
w hich w as a state-o w ned f arm until 1994. Komarovo
o w ns 11,500 hectares o f f arm land, and it is the largest
producer o f potatoes in Russia’s north w estern region.
The second is “Baikal, ” a joint-stock company f ormed in
1995 by a group o f producers, w holesalers, and retailers
o f f ood products. 5 Together, Baikal’s shareholders make
u p a d evelo p e d distrib u tio n n e t w ork coverin g St.
Petersburg and the surrounding region. The last is
“ Znamya, ” also a closed joint-stock company w hose
principal activity is processing agricultural products.
Baikal – access to a distribution net w ork coverin g t h e CIS, co n trib u tio n valu e d a t
40,000,000 rubles;
Znamya – potato storage f acility valued at
20,000,000 rubles.
The initiators agreed that Baikal w ould withhold its
cash contribution o f 40 million rubles until the purchase
and installation o f production equipment. Thus, as o f
July 1, 1995, 60 out o f 100 shares o f common stock w ere
paid f or in f ull.
APPRAISING M ARKET VALUE O F
STOCKH OLDERS’ EQ UITY
Since Troika is a ne wly created enterprise, it has not
incurred any debt or losses. The fixed assets o w ned by
the company are as f ollo ws:
land
building
potato storage f acility
1.5 hectare
420 sq. meters
480 sq. meters
In ord er t o minimiz e t axes, t h e Fo u n din g Ch art er
assigns to assets the lo w est possible value allo w ed by
Russian la w. The actual market value o f these assets is
significantly higher. 6 For example, the cost o f property
in the area is bet w een $10,000 and $15,000 per hectare.
The cost o f constructing a similar building is $84,000,
and the storage f acility has been appraised at $60,000.
Thus, the actual market value o f Troika’s fixed assets is
approximately $159,000 but that w ould fluctuate as the
political and economic climate in Russia changes.
DECISIO N M A KING
Regular shareholder meetings are to be held t wice a year.
A dditional meetings can be initiated by a shareholder
holding a minimum of 25% of common (voting) shares.
Decisions can be approved provided shareholders holding
a minimum of 50% of voting shares are present. Critical
decisions, such as changing the Charter, re-organization,
and liquidation of assets, require a 75% presence.
Troik a w ill b e m a n a g e d by a Bo ard o f Direct ors,
appointed by shareholders, with A lexander I. Ivanov
serving as chairman.
CO NTRIBUTED CAPITAL
PRO FIT SH ARING
As o f July 1, 1995, st ock h old ers’ e q uity t o t als
100,000,000 rubles [US$1 = 5,000 rubles at that time].
There are 100 shares o f common stock, each w ith a
n o min al valu e o f 1,000,000 ru bles. K o m arovo a n d
Baikal each o w n 40 % o f the shares, and the remaining
20 % is held by Znamya.
Net pro fits w ill be distributed among shareholders as
dividends. The dividends are to be approved at general
shareholder meetings.
Th e f o u n d ers o f Troik a co n trib u t e d t h e f ollo w in g
assets, in lieu o f cash, f or shares in the enterprise:
Komarovo – building and land to be used f or production, valued at 40,000,000 rubles;
The Product
Troika potato chips w ill be produced and packaged
with equipment manu f actured by a Dutch firm, Florigio
Industrie, using only natural, high-quality ingredients.
The principal ra w ingredient is potatoes, not the customary processed potato concentrate, so as to give the
finished product a more natural potato taste and smell.
37
CASE STUDIES
Florigio Industrie is a leading producer o f f ood-processing technology. This technology will enable Troika to
produce both regular chips and flavored chips up to the
highest w orld standards. The chips will be packaged in
100 gram plastic packets bearing the company logo.
Highest quality packaging materials (also Dutch) w ill be
used, ensuring the chips remain fresh f or up to six
months. Package labeling w ill be in Russian.
Since potato chips are neither a staple nor a luxury
product, demand is determined by price and quality.
Troika chips will be cheaper than imported brands and
o f higher quality than domestic brands, so it is expected that they will be very popular.
Analysis of Market and Competition
Potato chips w ere produced locally in the 1960s and
1970s, t h e n disco n tin u e d u n til 1992. Local m ark e t
research indicates that the product currently enjoys a
90 % a w areness among the population.
In St. Petersburg, Western-style supermarkets selling
brand name, imported products carry the w idest assortment o f potato chips. These supermarkets cater to consumers with high purchasing po w er. Potato chips are
also available in f ood stores selling primarily Russian
products and in 10 to 15 % o f all kiosks. 7 These stores
o ff er a narro w er range o f products and usually carry no
more than t w o brands o f potato chips.
M arket research sho ws that about 60 % o f the local
population consumes potato chips with some regularity. A large segment o f potato chip consumers is aged
bet w een 5 and 18. A t the moment, the market has no
obvious leader.
Since market research indicates that potato chips are a
price elastic product in high demand, it could be concluded that expanding the consumer base by lo w ering
the price w ould greatly increase sales. A consumer survey conducted by the St. Petersburg State University
Economics Department con firms this f act, sho wing that
90 % o f potential buyers o f potato chips re frain from
buying due to high price. The remaining 10 % choose
not to buy because o f perceived lo w quality or f or some
other reason. The survey also f ound that lo w ering the
price o f potato chips by 30 % makes them a ff ordable to
20-30 % o f potential consumers, compared to the 10 %
potential buyers w ho can a ff ord to buy them at today’s
prices.
Troika’s main competitors are f oreign producers, f ollo w ed by domestic producers. Domestic competition is
not likely to become a f actor f or at least 3 to 4 years.
Presently, the region is supplied by Finnish, Dutch,
Isra eli, a n d A m erica n pro d ucers. Re t ail prices f or
imported potato chips sold in elite supermarkets are
bet w een $.95 and $1.65 per 100 g package, making
38
them a ff ordable to only 7-10 % o f the population.
O ther stores sell chips at comparatively lo w er prices,
from $.75 to $.90 per 100 g. These chips are produced
by Russian, Baltic, and Polish companies.
Some w idely distributed brands o f potato chips and
their prices per 100 g package are as f ollo ws:
SUPER
(Holland)
$1.12 to $1.52
SPECIAL SN ACKS
(M osco w)
$ .56
MINI SN ACK
(Israel)
$1.43
RA FFLES
(Poland)
$1.74
Koloss, another major domestic brand, is also relatively
inexpensive. Due to a number o f f actors, primarily high
tariffs, retail prices o f imported chips are kept relatively high. Thus, only a limited number local w holesalers
can a ff ord to purchase potato chips from abroad. In
f act, a survey o f the w holesale market sho w ed that
imported potato chips are distributed by only three o f
the 15 largest w holesalers o f f ood products in the area.
O f the 20 largest supermarkets in St. Petersburg, only
f our sell potato chips. These figures demonstrate that
choice and availability o f potato chips in St. Petersburg
and the surrounding area is limited.
A t the moment, no local producers o f potato chips use
imported, high-quality equipment. In general, the simple, lo w-tech processes employed by these companies
make them incapable o f producing on a mass scale.
Furthermore, the packaging o f local chips is not consistent w ith w orld standards.
A care f ul pricing strategy, a high quality product, and
good packaging w ill enable Troika to successf ully compete w ith local as w ell as f oreign producers. Troika chips
will diff er from imports in price (30-40 % cheaper), and
from domestic substitutes in quality and packaging.
Until more local mass-producers o f potato chips enter
the market, w hich is not likely to occur f or the next
three to f our years, the demand f or the product w ill
remain unsatisfied. By the time equilibrium is reached,
Troika is expected to have gained a 5 % share o f the
local market, producing and selling 289 tons o f chips
per year.
In summary, the market situation can be characterized
as f ollo ws:
absence o f a clear market leader
limited choice and availability o f high quality potato
chips
high price elasticity f or the product
slo wly but steadily increasing demand
increased domestic competition in the next three to
f our years
TROIKA POTATO CHIPS (A)
Marketing and Pricing Strategy
develop strategy and manage all marketing e ff orts.
The marketing plan consists o f three general components: (1) pricing strategy, (2) advertising campaign,
and (3) continuous analysis o f the changing market situation and integration o f ne w in f ormation into overall
strategy.
It is estimated that within the first t w o years o f the project, the cost o f advertising will reach approximately
$15,000 annually. As local competitors enter the market, advertising expenditures will be increased and the
advertising strategy will be modified accordingly. A t
this stage, advertising w ill become more aggressive,
f ocusing on maintaining market position as w ell as on
attracting buyers o f other brands. A dvertisements on
local radio and television will be added at this time. By
the third year, advertising expenditures are expected to
increase to about $25,000 annually.
The product’s competitive advantage is based on its:
• high quality
• image (modern, eye-catching package design)
• lo w production cost (use o f locally gro w n
potatoes)
• being ahead o f domestic competition
Since m ark e t rese arch sh o ws t h ere is u n m e t local
demand, Troika chips will be marketed initially in the St.
Petersburg region using Baikal’s distribution net w ork o f
over 400 selling points. W hen the local market is saturated, other regions w ill be explored.
Troika has obtained all necessary licenses, including certification from the M inistry o f A griculture, to produce
and sell its products.
Organization of the Production
Process
In the first five years, gro w th in sales will be based on
the expansion o f the consumer base rather than on the
elimination o f competition. Troika chips w ill be priced
on average 35 % cheaper than imports, and 10-20 %
ch e a p er t h a n d o m estic su bstit u t es, m a kin g t h e m
a ff ordable to a larger segment o f population.
The initiators have w orked out all key operational
aspects. A ll actions w ill be perf ormed according to the
schedule sho w n in Exhibit 1. The preparatory stage,
during w hich equipment w ill be installed, building renovated, and personnel trained, will last six months. Full
production capacity is expected to be reached f our
months a f ter the start o f production.
The minimum w holesale price o f $0.4125 allo ws retail
prices to be maintained at competitive levels. The use o f
local potatoes minimizes expenditures on the principal
ra w in gre die n t, since p o t a t o es su p plie d by o t h er
regions have a 10-15 % mark-up re flecting added transportation costs. Ra w material expenses (potatoes, oil,
spices, etc.) constitute 80 % o f total production costs
(Exhibit 6). Competitive pricing will allo w Troika to realize its sales objectives.
The production line requires a space measuring 200
square meters with a height o f 3 meters. W ith the completion o f renovation, w hich includes replacing electrical and w ater provision systems, the production site will
satisfy all technical requirements. Beyond housing the
production line, the building will contain an o ffice,
kitchen, bathrooms, and space f or storing packaging
materials. The site is easily accessible from a major highw ay.
Product image w ill play a significant role in attracting
potential buyers. The chips will be packaged in multicolor polypropylene packages that prominently display
the Troika brand name. The packaging will be modeled
a f ter Western standards both in quality and presentation and in guarantees o f freshness. In order not to
alienate Russian buyers, in f ormation and company logo
displayed on the package will be in Russian. 8 The product w eighs 100 g and will be distributed to retailers in
cardboard boxes.
A n agrarian specialist will be hired to ensure that the
potatoes purchased are o f the highest quality. To prevent rotting, the potatoes will be stored in a specially
adapted w arehouse. A permanent contract w ith the
potato supplier Komarovo is in e ff ect. The Consortium
o w ns 300 h ect ares o f f armla n d, e ach pro d ucin g
bet w een 16 and 18 tons o f potatoes per year. Vegetable
oil will be supplied by ARK O , a company located in a
city about 400 miles south o f St. Petersburg. The initiators o f Troika have close ties with this supplier as w ell.
The product w ill be promoted through a multi-stage
advertising campaign utilizing printed and electronic
media. The first stage o f the campaign w ill f ocus on
gaining maximum exposure and creating brand a w areness f or Troika potato chips. The product w ill be introduced with printed advertisements placed in buses,
metros, trains, and points o f purchase. Promotions will
be held at trade f airs, at local civic celebrations, and in
schools. A qualified marketing manager will be hired to
The production equipment supplied by the Dutch firm
Florigio comes w ith enough spare parts f or one year o f
operation. The choice o f Florigio as equipment supplier
is based on (1) its competitive price among imported
analogues, and (2) its higher quality compared to similar domestic equipment. The production line is capable
o f processing 400 kg o f potatoes per hour, resulting in
100 k g o f finish e d p o t a t o chips every h o ur.
A pproximately 5 % o f completed product is expected to
39
CASE STUDIES
be de f ective. Florigio w ould also supply packaging
materials that come imprinted w ith the company logo
and product in f ormation in Russian.
Production will go into recess during July and A ugust
w hen harvested potatoes are unsuitable f or potato
chips. The enterprise plans to hire a 22-person sta ff. The
technical personnel w ill undergo a training session conducted by Florigio experts w ho w ill remain t w o months
at the Troika production site. Training expense totals
$7,500 and is included in the budget. A ll equipment
maintenance w ork w ill be perf ormed by specialists
trained by Florigio.
Risk Factors
The f ollo wing list identifies some o f the risks f acing the
enterprise.
1. Hig h ra t e o f in fla tio n, co u ple d w it h fre q u e n t
changes in tax and licensing requirements, encumbers long-term financial planning and cost estimation.
stabilized, they are seeking an outside investor. This
investor will be o ff ered ne w ly issued stock in the enterprise. The total amount required o f the investor is
$837,100. The initiators w ill contribute $132,700.
Funds w ill be invested in the enterprise in the f ollo wing
order:
1. Baikal will contribute 40,000,000 as payment f or its
shares in the enterprise (40 shares at nominal price
o f 1,000,000 rubles). 9
2. Redistribution o f common shares: Komarovo and
Baikal will purchase 10 and 5 shares each, in that
order, from Znamya.
3. The second stock o ff ering will be organized, and an
equity in …
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