The operations of Smart and Final Incorporation are engaged in a number of traditional industry categories. It caters both the wholesale and retail market in commodities like food, culinary equipment and supplies. Smart and Final Incorporation therefore faces competition from supermarkets and warehouse club stores and thus is required to abide with the industrial requirements of such businesses.
Originally clients demanding foodservice were catered via direct delivery firms. The increasing consolidation that the industry is incurring led such companies to increase minimum levels of merchandise required to diminish delivery costs. These levels are normally greater than of smaller foodservice providers as Smart and Final Incorporation. This problem was mitigated by the company’s management by offering merchandize levels that specifically caters for the requirements in such market.
An increasing trend of low cost products is also being acclaimed by the customers. This is also accompanied by a rising demand for product variety and need of bulk-packaged goods, which widened the consumer and product mix in this industry
Smart and Final Incorporation – Company Overview
The organization was incorporated in 1871 and presently it holds 255 non-membership warehouse stores. Through carefully planned and implemented growth strategies the firm managed to expand in California, Arizona, Nevada and Northern Mexico. The latter location was opened with the aid of the North American Free Trade Area and through a joint venture agreement with Climax. Executive management of the company kept an important marketing objective in line with the growth strategy applied. It consists of sustaining and improving positive brand awareness among the target markets of the firm. The firm sustains such image by stating that they are “25 years old but 12 years young”. This implies that they are up to the market needs and wants.
The generic pricing strategy adopted by the company is a low pricing strategy in line with the market requirements. This penetration pricing strategy is entwined with promotional techniques like coupon promotions and special prices to further enhance the effectiveness of such strategy in line with appropriate marketing principles. A vast merchandize is provided by the company, which comprises a vast chain ranging from perishable goods like fresh meat to corporate brands, such as chef’s review, 3, 4 and 5 star goods.
A substantial investment in management information system took place in order to enhance the supply chain system and ensure greater efficiency in the organization. This will thus aid the penetration pricing strategy that the company is adopting. We have to keep in mind that inventory management is an important factor for firms engaged in industries like Smart and Final Incorporation.
Competitor Comparison: Vertical Analysis
There are eleven competitors for Smart and Final Incorporation, namely Costco Wholesale Corporation and SYSCO Corporation. Smart and Final Incorporation is a relatively small company when compared with such firms. Indeed the sales revenue of Smart and Final Incorporation of $2,104.50 million is insignificant when compared to sales of $32,628.4 million for SYSCO Corporation and $60,151.2 for Costco Wholesale Corporation. The number of employees of competitors also exceeds by far those of Smart and Final Incorporation sustaining their larger size.
However, even though small, Smart and Final Incorporation’s financial performance exceeded that of SYSCO Corporation even though a lower sales growth of 5.1% was attained in relation to the 7.7% achieved by the competitive firm. In fact, decrease in net income growth was 2.5% for Smart and Final Incorporation, while that of SYSCO Corporation was 8.5% higher reaching a fall in net profit of 11%.
COSTCO Wholesale Corporation showed supremacy even in such facet. The annual rise in sales reached 13.6%, while an increase in net income occurred of 3.8% in relation to the fall that the other firms faced. A drastic growth in employees of 4.4% also took place revealing a growth strategy, which is much more material than that of Smart and Final Incorporation.
Interpretation of Horizontal Analysis and Accounting Ratios
The accounting ratios and horizontal analysis conducted in the previous sub-sections reveal some interesting facets on the profitability, financial position and stability of HP Morgan Chase. These shall be examined separately in the following sub-sections.
Profitability of Smart and Final Incorporation
The profitability of the corporation slightly increased during the six year period time frame considered from 2001 to 2006. Indeed an upward trend is revealed in the net revenue, gross profit margin, operating income from continued operations before taxation and net income. The profitability ratios shown further sustain such premise. The operating margin for instance increased from 16.18% in 2001 to 16.51% in 2006. Managers were thus more efficient in the generation of profits from every $100 of sales as shown by the decrease in the gross profit margin, operating margin and net profit margin. This portrays better controls on the operating costs of the company and deteriorating efficiency in the organization’s operations.
Liquidity Position of Smart and Final Incorporation
The working capital of the company decreased during the year as shown by the significant rise of current liabilities in relation to current assets in the years examined. Indeed the current assets are no longer able to cover the current liabilities of the firm. In 2006 the current assets amounted to $240,348 thousand, while the current liabilities stood at $264,166 thousand. This portrays a deteriorating liquidity position of the company, necessitating appropriate working capital techniques to rectify such issue. The importance of cash should be stressed at this stage, which is the lifeblood of the organization.
Stability of Smart and Final Incorporation
Smart and Final Incorporation is a low geared company and its gearing decreased due to repayment of notes payable from 71.33% to 36.58%. A low-geared company is usually a less risky company because the interest commitments derived from loans are lower. In practice, shareholders can survive a year or two without dividends. However, if an organization fails to pay the interests due on time arising from long-term borrowings, legal proceedings will probably arise putting the business enterprise into liquidation. Thus Smart and Final Incorporation is a less risky corporation portraying a good stability on such area.
The interest cover, which signifies the capability of the company to pay for the interest cost derived from long term borrowings or other financial obligations decreased during the years analyzed. This is a negative effect on the stability of the organization. Upon examination of the financial statements of the firm, one can notice that profitability of the firm is diminishing in a higher relation than the fall in interest expense leading to a lower interest cover. In this respect, management should seek proper measures how to mitigate such financial problem, which is increasing.
Risks of Smart and Final Incorporation
The salient risks of Smart and Final Incorporation stemming from the internal weaknesses in the organization and the external threats from the market and economy are:
· Competition – the organization operates in a highly competitive market. Unexpected competitive moves may lead to financial distress to the company. The stronger financial resources and distribution networks of the main competitors further intensify such risk. In addition, the vertical integrations, which are arising in this market, are further strengthening competition necessitating more cost control and innovative marketing moves.
· Economic Conditions – the industry in which the firm operates is characterized by large sales volume and low profit margins. Unexpected adverse economic events may therefore significantly affect the financial of the organization. For example, negative weather conditions may affect the sales revenue of agricultural commodities, thereby diminishing the financial performance of such section.
· Contingent Liabilities – litigations that the corporation is presently facing and may encounter in the future can deter the profitability of the organization and the brand image of the company, which is fundamental in such competitive market. Such legal actions usually arise from clients for problems on product quality; governmental entities for breaching relevant regulations; suppliers for divergence with trade agreements; and employees for wage disputes, discrimination and other similar factors.
· Debt Commitments – Smart and Final Incorporation holds a number of debts and lease facilities, which originate financial obligations to perform capital and interest payments. The maturity of bank credit facility in 2009 will direct a sound financial position to meet such payments. Failure to meet such commitments may lead the firm to insolvency.
Final Thought – Financial Health of Smart and Final Incorporation
The firm is incurring an increasing trend of sales revenue and profitability. Indeed, a rise in profit margins was noted. The capital structure of the firm is also aiding in diminishing such negative effect. Attention should however be placed to the weak liquidity position, which may lead to working capital problems. This area is very critical to the corporation, especially in view of the debt commitments identified in the previous section that the firm will face in 2009. The capital market is still showing confidence in the firm by a good price earnings ratio of 33.3.
All the risks noted in the previous section are faced by all the major competitors in the whole industry. Particular concern is highlighted on the large competitors the firm is competing with, mostly Costco Wholesale Corporation, which is being much more efficient than the company in its business operations.