George Benaroya

1. Where do I start? I understand the whole concept and what you expect us to learn from the assignments, but still, I cannot find a clear way to go about it.

One tip to sort out this type of problem is to ask ourselves, what do we want the end product to look like? Then I would do this:

1. We need to fill in a template with price increases, and the data must tie with the numbers on the annual report. The first step is then to fill in the data in that format, whether it’s by region or product.
2. Think about the overall result. If the question is price increases, ask yourself “What would a reasonable number be? Should it be the same, higher, or lower than inflation?.”
3. Do extensive research about how much your company increased prices in previous years. That information will not be on the company’s website, but it may be on their annual report, on investor’s presentations and or articles written by major business newspapers. 
4. Look at the examples from the submissions from other students. 
5. Read all the questions asked by other students here. That will give you tips on what to do.

In this class, there are no right or wrong numbers, so that makes it easier. It’s all about justifying the number we are proposing.

2. I feel a little unclear about this assignment. I just want to make sure all we need to do is to fill the Excel sheet and send emails to students from other companies then submit all the emails with responses and the Excel sheet. 

Yes, the excel file is correct, but you also need to add slides justifying the price increases.

Required

• The template with the numbers
• Comments on the text box regarding why you increased or decreased prices

Encouraged

• The emails I have seen were excellent. I would recommend that you copy a picture of them to an additional slide
• Details on consumer responses and what you are doing about it.

 

3. Calculating the impact of a price increase

I will decrease Disney’s price by 15% at the end of the first quarter of 2023. I thought the impact would be 1/4 of the full-year impact, dividing the full-year impact by 12 and then multiplying by 3. I cannot figure out why the impact should be 75%. Could you please explain more?

This is a very common mistake, that seasoned CFOs also make. Here is one way to solve this: imagine a calendar with 12 months, and start with the easiest part. When do you have to increase prices for the change to have an effect on the full year? You have to do it on January 1st. If prices are 100, and you increase prices by 10% on January 1st, your sales will increase to 110 in Jan, Feb, Mar, April, May, June, and so on. Your sales used to be $1,200 ($100 per month) and they are now $1,320 (110 per month). What happens if you increase prices on July 1st? Then you have 6 months at the old price of $100, for a total of $600, and 6 months at $110, for a total of $660. The full year is $1,260 (600+660). That is equivalent to a 5% increase in sales of $1,200 instead of 10% if you do it on January 1st. We’ve now demonstrated that to calculate the increase, we need to count how many months are there at the new price. If we do it on July 1st, is one-half (6 out of 12 months); if we do it at the end of the first quarter, we have thee quarters or 75% of the impact; if we do it in the last quarter, we have 25% of the impact.

4. What if my price decrease is only for the first quarter?

Following the example we built above, your sales will now be 3 months at $110 and 9 months at $900. The total is now $1,230 for the entire year, which is 2.5%  higher than $1,200. As shown above, the impact for one quarter (3 months) is 25% of the increase. 25% of 10% (from $100 to $110) =2.5%

 

5. Change price by Region, Business Unit, or Product

I’m uncertain about whether to change the price by region, business unit or product. According to Disney’s annual report, they display sales in all three ways. I thought of changing price by product, but I found some segments, such as content sales/licensing and merchandise licensing, are not directly charging consumers. I don’t know if I should include those segments in this assignment.  

From a commercial perspective, you want to make the price increase based on the strongest arguments you are able to make. From an implementation point of view, as a Disney executive, you want to do it taking into consideration how easy it would be for you to get the data. In the table above you show that you have the data for all different segments, so it will make no difference. On the other hand, from a presentation point of view, if you do it by product, would you have time to explain 10 lines in 5 minutes? It doesn’t matter if you can’t go through all of them and exclude the ones for which it’s harder to find data, but the complexity of doing it by-product is what you want to consider.

Altogether, any of the three versions will be fine. For which of the three can you make the strongest case? Do it on that basis.

 

6. Change prices by region or by product line?

Can I work with price changes by region (North America, Asia, Africa, Europe)? Based on the students’ examples you attached, I noticed that most students were changing prices according to product lines (skincare, makeup, and hair care).

Yes, you can change prices by region. Remember my tips:

Work in whichever format the data is displayed by the company. If you pick regions, use the same regions that the company uses to display the data on the annual report, likewise for products.

Make sure that the totals march. Management always looks at totals first, because those are numbers easier for them to recognize., For example, ensure the total net sales are the same as shown on the charts by the company. Many companies will make minor adjustments for minor brands and other items. Either include that in the smaller region or product or add another line called Other. 

7. Companies not reporting on calendar years

January 1st is considered the beginning of Nike’s third quarter, thus the beginning of the second half of the year. How do I account for that?

I recommend we take a pragmatic approach:

·       Forget about Nike’s reporting or fiscal years (FY)

·       Use a calendar year

·       When you use their annual report numbers, pretend they are for a calendar year. For example, the one for ’21, was for calendar year ’21, regardless of whether it was 1/2 for ’20.

These are the advantages of doing this:

·       Investors and consumers don’t care about Reporting years. We pay taxes on calendar years, thus we want to know what happens to a company during a calendar year.

·       Comparability: companies use different reporting years, so it’s difficult to compare their numbers. That is why figures are always compared on calendar year terms.

To summarize, if you do a price on July 1st (the math is easier than June 1st, otherwise you have to 11/12), assume that has an impact on half of the year, regardless of whether it has an impact on the full reporting year.

8. Where can I find the most recent numbers?

It takes time to have access to the latest numbers, even if you work at the company. Assume the numbers for the year you need them are identical to the ones for the latest year for which full-year figures were published. For example, if you are looking for the 2021 numbers for Nike, used the 2020 numbers instead. 

9.Cost, exchange rates, and government regulations.

I have a question about the assumptions

1. Do we have to cover the 30% impact of costs?
2. Can we assume how much is the exchange rate and how much is volume for the lower sales?
3. Regarding the change in government regulations, what is the impact on the number of customers and how many units they can buy?

The described scenario is what happened to many firms during the pandemic. Let’s assume you were in the hospitality business. This is how we will address each of the 3 questions:

1. If you were a restaurant and the cost of meat increased by 30%, you want to try to recover as much as possible. You don’t have to, but you need to.
2. Yes, you can make assumptions as to how much is the exchange rate and how much is volume. Regardless of what the reason is, just like for the cost increase, you need to find a way to compensate for it.
3. For the government regulations part, if you were in the hospitality business, you are only allowed to use ½ of the space due to social distancing rules. In the past you had 100 customers.  Now you have 50 customers, and they are also buying fewer products.

10.For those who chose IBM, where can we find the numbers? 

The decisions you are making are at a global corporate level, and you would never have access to a detailed level of information. For example, if you had chosen Procter & Gamble, you will be making a global recommendation for all products sold around the world. For those of you who have chosen IBM, assume that your sales are those shown on Page 30 of IBMs 2020 annual report for the sum of Global Business Services & Global Technology Services or $$41,974. That is, regardless of whether you picked CSR, Artificial Intelligence, Business Transformation, or Marketing & Innovation, assume your sales are $$41,974 in 2020.

If you have to recommend an overall global price change, how much would it be? In this scenario, imagine that you are the leader of these two segments, and the entire revenue is made up of IBM consultants who provide services to 3rd parties.

 

11. Can you give examples of how to calculate the impact when price changes occur during the year? 

Sure, let’s look at 3 examples:

1.Disney + has sales of $300 Million and we decrease prices 5% on January 1^st. Thus, the impact is for the full year or 12 months. 5% of $300 gives us -$15.

2.We also increase prices for tickets 20%. Sales are $100. That will be $20  for the full year. But we increase prices on October 1^st. So the impact is for three months: October, November, and December.

To calculate it, we do the impact per month ($20 million divided by 12) and then we multiply it by the number of months it will be in effect. Since it will be for 3 months, the impact is $20 ÷ 12 * 3 = $5

3.We also increase prices for merchandise by 40%.  Sales are $800. That will be $320  for the full year. But we increase prices on November 1^st. So the impact is for two months: November and December.

To calculate it, we do the impact per month ($320 million divided by 12) and then we multiply it by the number of months it will be in effect. Since it will be for 2 months, the impact is $320 ÷ 12 * 2 = $53

Also, would you say it’s more beneficial to have an impact earlier in the year so there’s more time to analyze it? 

From a financial point of view, you are better off increasing prices earlier and decreasing prices later. On the other hand, that is also riskier. So yes, if you do it later you have more time to analyze the impact.

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12. Do we need to state how much we are increasing prices and when?

The advantage of providing clear information about price changes is that we save the time we would have spent responding to phone calls and emails to answer questions about it.

The disadvantage of providing clear information about price changes is that competitors can gain a competitive advantage.

One thing one can do is to “test” the pricing communication with a few customers to see how they react and then distribute it to everyone else.

We do not want to disclose our sales and the financial impact on customers. That is an internal document.

13. Do we need to respond to the price increase letters?

Yes, at least to some of them.  As shown on the instructions:

 How would you react if you get an email like that? Please do reply, as a consumer or client.

We want to have the chance to look at this exercise from both sides: as a company, trying to increase prices to others and as a business or customer having a price increase imposed on us.

14. Can we use different price increases in the same communication?

Yes, it’s perfectly fine to have an overall price increase listing different price changes. It’s a good idea to show price decreases first (if any).

It’s not a good idea to send the same note to customers having different price increases. For example, to say that we are increasing prices by 20% in New York and decreasing prices by 10% in Georgia. Customers in New York will believe is unfair. Customers in Georgia will ask for a refund for all past periods saying that they have been historically overcharged. It’s best to keep those communications separate.

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15. If I increase North American prices by 10%. Does this mean that the price of each product would increase by 10%?

Only if that is your strategy, to increase prices in all products by 10%. For example,

Big Mac           from $3.00 to $3.30

Dollar menu    from $1 to $1.10

Hold on. Maybe you want to leave the dollar menu at $1. In that case, the price increase for the dollar menu (what I buy) will be 0%.

The overall price increase then will be less than 10%. Let’s look at one example

                                    Sales               With Price Increase                 Increase %

Big Mac                       100                  110                                                  10%

Dollar menu                100                  100                                                  0%

Total                            200                  210                                                   5%

The overall price increase in this example is less than 10%. You have increased ½ of your sales (100 out of 200) by 10% and one half by 0%. 

16. How do we decide on how many months to apply for the price change? Can we base the decision on store openings, new launches, events, etc.?

Yes, that would be a good way to decide on timing. We need to have an excuse to increase prices because otherwise clients and consumers will want to know why we are increasing prices if the business was doing just fine with the old prices.

Good reasons to increase prices include an increase in cost, and product launches with improved, more costly formulas.

17. My company for this semester is McDonald’s, I checked all their reports and I can’t find individual product sales or region-wise sales

When I checked on Google, I saw that Statista has that information. It’s better if you do it through the NYU library, to get access to  Statista Premium. I’ve uploaded their 56 slides PPT into Resources, on the Annual Reports and Statista folder.

18. McDonald’s hasn’t released information by region for Q4. How can I calculate their US sales for 2020?

The advantage of using the 2020 quarterly releases is that we get their latest figures. The disadvantage is that until they release the annual report the amount of information we get on those releases is limited.

Here is a workaround:

On their Q4 sales, their total global revenue in 2020 is $19,207 million. From their published 2019 Annual Report, we see that sales in the US were 37%  (7,843 out of 21,077, page 12).

We could then multiply their 2020 sales of 19,207 by 37% to estimate their US sales for 2020 to be around $7,107 million.

19. What does “currency-neutral basis” mean?

Currency-neutral means excluding the effects of currency exchange.

 

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This section is to respond to questions from students only. To comment on an Assignment, please go to the respective assignment (scroll up)

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Explaining Sales growth

1.Calculating the variance

To calculate the variance, delta, or difference follow this steps:

1.Begin with the end. Compare the sales of Period 1 with Sales of Period 2. For example, if sales in 2021 were 100 and in 2022 were 120, the variance is 20.

Then, try to find out what were the drivers for that change of 20. You need to identify four drivers that add up to 20, by following the same process.

2. Companies changing the way that they report

For Disney, I tried to compare their Revenue in years 2021 and 2019. I found that Disney changed the format of P&L. Could you please suggest how to compare the Revenue?

Let me try to respond to your question and then add more on what would be the best way to go about it

Companies frequently change the way they are organized, which makes historical comparison much harder. Here is how to solve the Disney comparison

1.Begin with the end: you need to identify 4 different buckets for the sales change

In 2021, you have the data displayed into 2 main buckets:

Disney Media and Entertainment Distribution

Disney Parks, Experiences and Products

2.What you want to do is to identify  2 other buckets that are big. Linear Networks in the new reporting is similar to Media Networks in the old reporting. Isolate that as the third bucket. Then try to find a fourth bucket that is similar in both periods. The difference will be “Other”

Having said that, the disadvantage of doing this way is that this would be an “accounting” sort of explanation. It would be much better if you were to first look at the growth in sales from 2019 to 2021, and then try to find the main drivers by doing research on Disney. For example, the streaming business is likely to be an important driver.  What you could do is separate that as one of the drivers, and then try to calculate the difference for other segments.  If you do that, please make sure that: 1)your total sales numbers tie with what is on the annual report 2) the drivers you identify are not double-counted.

3.I did not want to use the same example you showed us in your video to show the sales growth from 2018-2019, but after looking at previous years, 2018-2019 has the most increase in sales growth reflected. Will that be ok to use even though it will reflect the same as your example in the video?

Yes, you can use the same periods I used in the video.

The objective of this assignment is for you guys to learn how to explain the change in sales growth from one period to the next. You could also use other drivers, such as regions of the world.

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4.Finding the drivers of Sales growth in the Annual reports

I’m basing this off of McDonald’s 2018 and 2019 annual reports. Total revenues:

McDonald’s 2018 Revenue = 21,025 billion (rounded up to 21.03 billion)

McDonald’s 2019 Revenue = 21,077 billion (rounded up to 21.08 billion)

So these two values would be the outermost columns for my waterfall. With an increase of ~50 million in-between. 

Yes, the difference will be 0.05 Bio. You will have $21.03 and $21.08. It’s better to keep it in Billions to make the point that “it’s a rounding.”  For 2020 vs 2019, it’s a whole different story.

I’m also struggling to find 4 or 5 drivers since McDonald’s annual report does not break up their reports per product and they lump all international markets together. 

Acquisitions seem to be grouped and I found foreign exchange (forex). I’m struggling to understand where I would find volume and pricing. 

Is it possible for this assignment to take some of the waterfall columns from the annual report and estimate the others based on research? Or if it’s mixed is it better to just estimate based on research to be more consistent throughout the assignment?

It’s a pity that McDonald’s doesn’t disclose volume figures. The current CEO once worked at P&G. Hopefully, investors would get more transparency in the future about the number of units sold.

Regarding Pricing, we could use the BigMac index as a proxy, but even if we do all that work, there is no transparency about other drivers. We could replace Acquisitions with “net number of stores”, but we would still be missing other drivers of growth.

Your best bet with the numbers provided may be to use the regional/or by type method instead. We have data for 3 regions and for 2 methods/type of business  (company-owned and franchises)

I’ve downloaded all these numbers to Sales growth template v5 and added slide 7 to the deck. It looks like this (if you want to use it). Those files have been uploaded to resources so others can use them as well

 

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5.About the waterfall

Watch a video I made with step by step instructions here:

https://nyu.zoom.us/rec/share/7E35KqB96pZrOQXtaZ9yAvsdYRb4dSWiSPKSR4_5Qp3G15es0hQrPuM05Gx9lcHh.YBksx0Syf0ET57j2?startTime=1601060959000

I have encountered a problem with my homework. Now I need to convert excel to waterfall in PPT, but when I copied the blue part of the data in excel and paste them to the waterfall template in PPT, I found that all the data became 0. I try it many times, but the waterfall can not formed. I’m not sure if there is a problem with my excel or my operation? I attached my Excel to the email. Please enlighten me further. Thank you very much.

This is what your data looks like:

There are 3 reasons why you may be having trouble:

1. The range of the axis

In your case, the sales range from $266 to $260, but the scale of the axis is set to 10-30

Please change the scale of the axis to a maximum of 300 To do this:

1.Stand on the axis

2.Right click on it

3.A format axis will appear in the right-hand side

4.Change the range to a maximum of 300, with an interval of 100

 

The chart will then look like this

Next, we need to change the order of the data

2. Order of the data

 We need to list the changes in decreasing order for the colors to be automatically updated in proper order. This will also make it easier for the reader to see. Swap the order of Service and Iphone

Your chart will then be ready to use and it will look like this:

 

3.Not copying data as values

 When you copy the data into the Powerpoint, make sure to copy it as value.

If this solves the problem, please let me know.

 

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6. When I’m pasting my excel (orange & yellow table) results into the template in PowerPoint, the result returns zero every time and thus ruins the whole waterfall.

There are 3 reasons why you may be having trouble:

1. The range of the axis

In your case, the sales range from $21 to $13, but the scale of the axis is set to 10-15

Please change the scale of the axis to a maximum of 25 and a minimum of 0. To do this:

1.Stand on the axis

2.Right click on it

3.A format axis will appear in the right-hand side

4.Change the range to a maximum of 25, with and a minimum of 0

Next, we need to change the order of the data

1. Order of the data

 We need to list the changes in decreasing order for the colors to be automatically updated in proper order. This will also make it easier for the reader to see.

Your chart will then look like this:

 Finally, change the color for Media Networks and Studio to red (right-click on it and change data point) Then the chart will look like this:

 3.Not copying as values

 When you copy the data into the Powerpoint, make sure to copy it as value.

If this solves the problem, please let me know.

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7.When transferring the data from the excel sheet to the waterfall template, the data seemed to transfer but two of the lines in the waterfall were not drawn (fragrance and haircare). Each of these categories had the number 0 but no line was drawn below or above it. However, I noticed with my “other” column, though it read as 0 when looking at the data on excel it actually was 0.02, so there is a line even though it still says 0.

I went ahead and changed the “upper box” number on both fragrance and haircare to 0.01 and now it shows a line. Is that incorrect to do? I just wasn’t sure of another way for there to be a line drawn to represent 0.

The reason why PowerPoint doesn’t draw a line is that the value is zero. These are the solutions

1. The safest way would be to change the cell in the orange box to a number greater than zero (0.01 or higher). That way you leave the formulas unchanged.
2. Yes, you can also do what you did
3. The other way to do it is to manually draw a line. Too much work in my opinion.

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Foreign Exchange

I watched YouTube videos about the Big Mac index. I felt like I understood something, but I am not sure what it means when we say that a currency is overvalued or undervalued.

Let me try with one example.

Imagine that since you were a kid, your parents always took you on holiday to Thailand. You always got yourself a Diet Coke at a kiosk (convenience store) when you got there. It was always about a dollar, the same price that in China. The Thai Bhat fluctuates; sometimes it was $0.95, sometimes $1.10, but always around $1.00.

One year, when you got there, it was $3. It should have been $1, but now it was $3. That is because the currency was overvalued. This can happen due to inflation.

Another year, you got there and it was $0.50. It should have been $1, but now it was $0.50. That is because the currency was undervalued. This can happen when there is a drastic depreciation or devaluation of the currency until prices adjust.

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In the case of Thailand, with the BigMac index, when  The Economist says that “the currency is 32.4% undervalued”, I don’t think that they are comparing with a different time. 

You right. When The Economist says that “the currency is 32.4% undervalued,” they are not comparing to a different time.

They are comparing the price in Thailand, Costa Rica, or any other country with the price in the US. If it’s cheaper, they say that the difference is because the currency is undervalued. If it’s more expensive because the currency is overvalued. Let’s build on the example we have for Thailand to get closer to what the BigMac index tries to do.

Imagine that the regional price for a Coke is set at $1. Both in China and Thailand, it sells for $1.

When  Diet Coke was selling for $0.50 instead of $1, it was because there was a pandemic in Thailand. There were no Chinese tourists. As a result, the Thai Bhat demand dropped,  the currency weakened, and stores reduce the local prices to attract Chinese tourists.

Since Chinese entrepreneurs knew it was cheaper in Thailand, they went with their families on holiday to stock up on Diet Coke. They enjoyed the beach and brought back Diet Coke cases that they resold in China for $1.

By doing that, two things happened. When they converted dollars to get the Thai Baht,  the exchange rate for the Thai currency strengthened. At the new exchange rate, the cost of Diet Coke rose to $0.80. Secondly, when they got to the stores to buy Diet Coke, there was so much demand that stores increased prices to $1. Thus, the price went back to $1, the same as in China. That, in essence, is what the BigMac index principle argues.

In the opposite direction, the same would happen when the price in Thailand was $3 instead of $1. Thai residents would travel to China to buy Diet Coke there, which costs $1 instead of $3. The Thai currency would weaken because all Thai residents would be selling Thai Baht to purchase dollars. And because there is no demand, local stores in Thailand would reduce prices to sell. As a result, the cost would move back to $1.

When I was a kid, I grew up in a border town where cross-border trade would happen all the time when there were exchange rate discrepancies. Small entrepreneurs would seek to arbitrage that.

According to the Big Mac index, at the actual exchange rate, a Big Mac in Costa Rica should cost 3473 colons. But now it only costs 2,350 colons. So a Big Mac in Costa Rica is cheaper than in the U.S.  A YouTube video said, “if a burger in Costa Rica is cheaper, then colon is undervalued.”  I was thinking, isn’t it good that a Big Mac is cheaper? I found it so confusing.

The Big Mac index is looking at it from the theoretical point of view of an economist. Based on this theory, a Big Mac anywhere in the world should cost the same price ($5.66).

 

More recently, The Economist has adjusted to account for the fact that people in the US make more money than in Costa Rica. The economic term for that is “adjusted on a GDP per capita basis”.

Let’s look first at what The Economist is doing:

Big Mac cost

 

Costa Rica      $3.83

NY                   $5.66

 

$3.83 is 67.4% of 5.66, or 32.4% lower than $5.66. Therefore, The Economist suggests that the currency is 32.4%  undervalued.

 

The Economist also realizes that such a statement is incorrect because people in Costa Rica make less money than in NY. When you click on the tab called “GDP adjusted”, you see that on that basis their currency is 11% overvalued (because people make 39% less money there).

 

Which one is correct? Is the currency 32% undervalued or 10.7% overvalued?

 

Price positioning

Neither one is correct, because we have to take into account other factors. In Costa Rica, we wouldn’t price a burger at the same price as in the US, due to the cost of local raw materials, real estate, competition, and most importantly, strategic price positioning. 

Real estate cost: you may remember that in session one we looked at the price of real estate in Manhattan, and concluded that the most important cost driver for a cup of coffee at Starbucks was real estate. The same applies to McDonald’s in Manhattan.

Starbucks in China and McDonald’s in Hong Kong are interesting exceptions to the logic. Starbucks in China is more expensive than in NY, which doesn’t make sense from a GDP per capita or competition point of view. That is because Starbucks is positioned as a premium product.

McDonald’s is extremely inexpensive in Hong Kong, compared to India, which doesn’t make sense from a GDP per capita point of view. This is because it’s positioned at a strategic price for Hong Kong.

How can I explain to a friend from Costa Rica what the Big Mac index?

Tell your friend that the Big Mac index enables you to see that a Big Mac in Costa Rica is 32.4% cheaper than in the US ($3.83 vs $5.66), which is still expensive. It should cost 39% less.

This section is to respond to questions from students only. To comment on an Assignment, please go to the respective assignment (scroll up)

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Q1 The executives of your company met. They are organized in 3 regions: Americas (South & North), Europe, and Asia/rest of the world. For 2021, there is a limited amount of money that can be assigned to the Marketing Budget. Pick one of the regions, and justify why your region should be funded, instead of the others. If you want to increase your budget for new launches, please use the payback template for it (see the last slide). Use this checklist:

1.What is the business idea? Describe it with words/photos. Use the 27 slides with material submitted by other students for inspiration.

2.Revenue & Cost: estimate the cost to make, sales price, and revenue for 3 years

3.How are you going to sell it/launch it?

4.Why would consumers buy it? and Where are you going to sell it?

5.How much do you need to invest in marketing?

Example

1.We will launch a new line of Nike shoes.

2.Revenue & Cost: Sales will be $500 Million, cost $250 Million the first two years; The 3rd year, both will double.

5.Investment:  you recommend we invest $250 Million in this activity.  As seen on the excel template, the payback is 2 years.

2.What launch should we look at?

Try to use the work you did for inventory management, to minimize work.  Listen to the class recording, for the launches we spoke about in the session. You can launch any product/idea you want.

3.How do we get these figures?

To get the figures, you will have to estimate all numbers. For example, we know that Nike’s gross margin is 45%. In the payback template, we are using an estimate of 50%.

4. I’ve found only the information about Delta’s investment in advertising from Statista (2019-2022), but I couldn’t find the breakdown of the investment – that is, the percentages by channel and divided into the three regions. The only information I found is ad spend on TV in 2022, and there is Delta. With this, I found that Delta spent 24% on TV. That’s the only detail I got.

Yes, for many companies we just won’t be able to find a breakdown of the data. I was able to find how much they invest overall ($302 Million) by googling that,  which took me to this statista report.  I recommend that you assume that they spend proportionally the same amount in each region.

5.To finish my payback assignment,  I see Delta generally spends a very low percentage on marketing relative to its total sales. For this reason, the proposed investment, while slightly higher than what they spent in 2022, results in the payback scenarios always showing me a return of 1 year. 

For a marketing payback, a 1 year payback is a good target. However, also consider this:

1.For your specific project, the marketing investment would always be a much higher ratio. For example, if the ratio is 3%, you may propose to invest 3X more or 5X more of incremental sales.

2.Remember that your payback should be estimated on the incremental gross margin, based on incremental sales  for Sky Clubs

Should I focus on the sales of the category where I’m focusing my business idea, which is the Sky Clubs?

Yes, you should look at the specific category you are considering.

6.Can I use the FY20 full-year report and reason for 2021? 

You can choose any period you want. The strategic plan is for 2022-2025 though. You will save time by using that period.

7.Can I use the payback template for McDonald’s? 

Yes, you can. You can use it for any investment. Just remember that to calculate payback, you need:

1. The cash you are going to make per year
2. The amount you are going to invest to make it

The template is saved in the Assignments folder.

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8.My proposal is to increase the number of McCafe’s throughout Asia (McDonald’s invested $380 million into the market: Link) along with the introduction of some new breakfast items to entice customers to enter these new locations/restaurants. How do I calculate the payback?

Investment: your proposal is $380 million.

Revenue: MarketWatch says store sales of coffee in China are $6.4 billion (from the article you found on the link above). Let’s assume McDonald’s gets a 15% share after five years, based on the US market. Let’s estimate a share of 5% on year 1 (revenue $320M) and 7% on year 2 ($448M)

Net margin: use Starbuck’s global net margin we studied in session 1 when discussing marginal cost (slide 34), and round it to 55%.

The payback will be 22 months.

55% on revenue of $320M after the first 12 months will be $176M. Not enough to recover the investment of $380M. We still need to recover $204M ($380-$176)

55% on revenue of $448M after the second 12 months will be $246M. That’s more than we need ($204M). $204 is 83% of $246. 83% of 12 months is 10 months. So we need 12+10 months, or a total of 22 months to recover the investment (payback). 

7.We propose making an investment of $85 Million dollars to upgrade Dolby at Spotify. This is not a marketing investment. How do we calculate payback?

Since this question is about the strategic plan, see response number 7 on the strategic plan page

This material is in the public domain to foster education. It can be reproduced anywhere and in any language. 

It cannot be used for commercial purposes. You are not allowed to use this content if you charge for it, or receive compensation for it.

15. Market share and forecating revenue

Our strategy is about increasing market share in China and Japan for our Selective Retailing sector. We have found the CAGR of of both Japan and China, we also have the forecasted market size of both countries, and the past sales worldwide of our selective retailing sector. However we don’t really know how to proceed. How can we use these numbers to found out how much we personally believe our strategy will help us grow? Can we average the CAGR of both countries?

Great job researching the CAGR of  both Japan and China, and the past sales worldwide for your selective retailing sector. Here are some tips:

No, we shouldn’t average the CAGR of both countries, we need to use a weighted average. China is likely to be bigger than Japan, and that needs to be accounted for.

We can use the worldwide sales of the retailing sector, as a base for Japan & China. For example, assume that the weighted average CAGR of Japan and China is 10%, and worldwide is 5%. We then know that Japan and China are growing twice as fast as the rest of the world. If the selective market worldwide is growing 2%, it’s reasonable to assume that for those two markets it will grow by the same proportion, twice as much as the world, or 4%.

 

14. Regarding net income waterfall, should we estimate numbers based on past data and predicted expenses using the formula: net income = revenue – cost – expenses?

Please read also the response to question 5, 7 and 13.

For net income, 

1. Get the financial statements for your company. For example, if it’s Samsung, Google WSJ financial statements, Samsung. You will see that the net income is 18% of sales.
2. Target that you will reach the same percentage of net income as the company in general. There will be some items where you will spend less and others such as rent where you will pay more.
3. If the strategies you are proposing include an increase in marketing investment, reduce the net income by the same ratio. For example, Samsung’s net income is 18%, and its marketing expense is 3% (not the actual number). You are proposing for your strategy to increase advertising to 10% (a 7% increase) of sales. For the net incremental sales of your strategy, use a net income of 18% minus 7%. If the strategy you are using includes R&D of 20% and Samsung spends 3%, the delta is 17%. Then, for your net income on incremental net sales, use a net income of 1% (18% -17%=1%).

 

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13. Financials Checklist for a Capstone project

How can I know whether my financials are correct?

1. Get the financial statements for your company. For example, if it’s Samsung, Google WSJ financial statements, Samsung. You will see that the net income is 18% of sales.
2. Do extensive research on sales. That is a number that has got to be right. Be able to explain in a succinct but rational way how you calculated the numbers.
3. Target that you will reach the same percentage of net income as the company in general. There will be some items where you will spend less and others such as rent where you will pay more. Rent in New York City is extremely expensive. Have real data to show the rent cost.
4. Have few numbers which are realistic. The audience will believe them.

Be careful with these common mistakes:

1. Rent is not an investment; it’s an expense. It goes in the P&L, not in the Balance Sheet
2. Carefully estimate all the improvements that you will make to the store, which are expensive.
3. Payback is always in months or years, never a dollar amount. For a marketing project, a 1-year investment is reasonable. For launching a new product or store, it is not. Those projects take five years or more to pay back.
4. Breakeven is the number of units you must sell to recover all costs and expenses. It’s a “unit” number.
5. Return on investment is always calculated on an annual basis.

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12. Launching an extension through a losing money business

Should we reconsider our innovation strategy despite the potential in developing a new smart home security system using Alexa as inspiration? Market research shows a substantial demand for this segment, with an estimated market size of USD 28.52 billion in 2023, projected to reach USD 54.45 billion by 2028.

However, Alexa’s system has been financially unprofitable, reportedly on track to lose $1 billion this year. While Amazon continues to invest in Alexa’s ecosystem, our objective is profitability. Given this evident loss in past earnings and news reports, should we persist with our current strategy or reassess for a more lucrative approach?

What you are proposing to launch is new smart home security system, using Alexa. You are worried about the fact that loosing money on Alexa. This are two separate issues. One is what you are going to sell and the other one is how you are going to sell it.

Regarding the what you are going to sell, you need to do extensive research to respond to the five questions

1.What are you going to sell?

2.How much are you going to charge for it?

3.How and where are you going to sell it?

4.Why would someone buy it?

5.Where else in the world is that product or service sold and what are they doing right?

6.Why would someone buy your product instead of one that already exists?

7.How much net income are you going to make? Will you cannibalize existing products?

The drawback  selling it through Alexa is that only users of it will be able to utilize it. Quantify the advantages of selling it through Alexa compared to without it. By doing this, you may be able to see that you while you can sell it through Alexa, that is not the only channel.

 

11. There is no data for ESPN. Can we use data from a similar brand?

See answer 6

10. It’s hard for us to calculate the net incrementa revenue for our strategy. Could you give us some tips on how to do it?

Here are the steps you could follow:

1. Research the market size
2. Research who has the leading market share 
3. Decide whether you will steal market share from the main player or grow the market

If there is no information about that market, use a reasonable assumption. When the iphone was invented, that’s what Apple did. You won’t be penalized for making an educated guess based on facts, you will receive full credit for taking the time to do the research. All those slides should go into the annex.

9. How do I calculate the CAGR-Compounded Annual Growth Rate

https://cagrcalculator.net/result/

8. I’m writing about the net income for Apple’s strategic plan. We can not find Apple’s net income by category. Can we go by the ratio of annual net income to annual revenue or just delete the net income from our strategic plan? Could you give us some advice that how we should deal with this data? 

No, you cannot delete Net Income. On the Strategic Plan instructions, it’s clearly stated that you must quantify the incremental impact on Net Sales and Net Income for all strategies. As a marketeer, make it a habit to always quantify the financial impact of your recommendations. If you are recommending increasing sales of a product that is losing money, you will increase the losses by selling more of that product. You should first find a way to make it eventually profitable.

Have one team member do extensive research on the profitability of each strategy when you start. This research material should be included in the Annex. Yes, you can use a ratio if you are unable to find any material on the approximate gross margin of all products. See the response to questions 5 & 7.

7. To calculate payback, how do I estimate revenue? How is the net margin determined? How can I estimate the marketing investment?

Let’s start with the easy part, how NOT to do it.

Revenue

You need to look at the marginal increase in revenue, and what you are going to add thanks to the idea you propose. Imagine that your company is Pfizer. You shouldn’t look at the last two years with the pandemic (that is true for any company). If you go back to 2018 compared to 2019, you see that they grew their revenue by about $1 Billion dollars on sales of $40 Billion. That’s about 2.5%. That includes pricing and volume. Therefore, whatever you propose, your idea should contribute well below $1 Billion dollars. Do not estimate sales will grow by $30 Billion.

Net Margin

As mentioned in a previous question, it would be ok for you to assume that you maintain the same net margin as the previous year. Look what that number is in the annual report.

Marketing investment

First, look at how much money your company invests in marketing. For example, if you go to Pfizer’s annual report, do CTRL F and search for the word “marketing”, you will find that “Advertising expenses totaled approximately $2.0 billion in 2021”. That’s 2.5% of sales of $80 Billion. Use what you have learned the company has been growing per year (excluding the Pandemic) and their overall marketing investment to do a sense check.

6. How can I justify my $1 Billion investment idea for Disney?

Invest $1 billion into releasing 100 new movies on Disney+ each year. • Increase the subscription fee to $5.8/month.• Maintain a 20% margin on  100 million subscribers 

1. Do research to find out whether 100 movies will cost $1 Billion. The easiest way is to look at how many movies Disney or Netflix release per year and the investment they make for it.
2. When you find out how many movies Disney releases per year, you need to compare that to your proposal to make 100 movies. Is that realistic? Is it a lot? Is it 30%, 50%, or 100% more than they currently do?
3. Check whether Netflix has a net margin of 20% from its latest annual report. You need to use that margin.
4. Do a sense check on your proposed increase of $5.8 per month. What percentage is it? Has Disney ever increased prices that much? How would the new price compare to competitors?

 5. How we can get numbers for strategies that may not be present in the income statement or is new and haven’t generated any revenue?

To estimate the sales, look first for the market size for a category similar to what you are launching. Use Statista or Passport. Both are available for free at the NYU library. Once you know the size of the market, estimate what market share you will achieve. For example, if you are launching a new coffee product and the market size is $100 billion, you can estimate you will achieve a market share of 1%, therefore your sales will be $ 1 Billion.

To calculate the gross margin, if you cannot find financials for your category, assume you will achieve the same gross margin and net margin as the rest of your company and use those numbers.

5B. Our team wants to launch a new health juice product line at Starbucks.  I found a report on the forecast Pressed juicery growth to 2030, I thought I could refer to this data for Starbucks Growth Sale.  The CAGS is 7.2%. How do we calculate the incremental sales

In the photo, you sent me you also show that the market size is $1.4 Billion. As I mentioned for Q5, these are the steps you need to do:

1. Calculate the market share you are going to achieve. Out of $1.45 Billion, how much? Best if you can do it based on another launch Starbucks did. For example, imagine you figure you will get a 10% market share. Then your base will be $145 Million and the CAGR 7% per year. For margin, use the overall gross margin of Starbucks

2. Estimate the cannibalization effect. If you launch this drink, customers may NOT get a frappuccino and one of these. It will be one or the other. Therefore, your Net Incremental sales may be 0. You sell $145 Million of this but $145 Million less of Frappucino. You need to make sure that your product launch will not cannibalize your existing product line. This is hard to estimate. I am fine that you make an assumption, but I want you to please do it so you don’t forget when doing this type of analysis.

5C If I have the revenue of a company that does the strategy that I am doing(in my case specialty coffee can I use their revenue) as an indicator since it is a much smaller company? Also if only have the CAGR of the industry (in this case 12.4%) do I use that or how do I calculate/estimate the CAGR for the strategy?

Yes, it makes sense to use the sales of a similar smaller company.

Yes, it makes sense to assume the industry’s CAGR. Well done for researching those numbers.

5D. My numbers are as follows. How do I calculate cannibalization?

Revenue $327 Million

Gross Margin (for Payback) 20%

Net Margin for Net Income 10%

Price index to normal coffee is 2X

You will need to calculate what percentage of consumers will drink your coffee in addition to a regular one, or, will go to Starbucks just because you have that coffee and they wouldn’t have gone otherwise.

Assuming that you will get 50% of consumers to get this coffee that would be 50% of $327 Million or $163 million. The reason why we don’t double the sales to account for the difference in price is that the sales of $327 Million already take that into account.

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4. What goes in the main deck and what goes in the annex?

The main deck should contain 30 “beautiful slides”, with short text and great impact. The audience may get lost reading the details instead of listening to you otherwise. All slides with long text go in the annex. Some people like details, so you need to make sure that any statements made are well-supported.

Details can be found on

• Slide 5 of the Strategic Plan presentation
• Points 3 and 8 on the checklist on slide 26   

3. Which years should we use, 2021 to 2025? 

See also the same question from last year below.

You need to go at least 3 years into the future. Since we are in the middle of 2022, that will be 2023, 2024, 2025

For this year, you can use an estimate of the full year 2022.

You will want to show at least 1 year going back. The templates on the PPT will show you how other students did it in the past. Some used a total of 10 years, others 5. The minimum is 1 going back, the current year, and 3 going forward.

2. How to estimate the current year 2021

For the current year, since we don’t have the numbers yet, what can we do?  We will be using 2020 data from the Annual report as our base data. After this,  should we project for the years 2021, 2022, and 2023? Or should we do 2022, 2023, and 2024 and leave out 2021 as the year is almost over and the strategy will not be useful?

Yes, it doesn’t make sense to make a strategy for 2021, since the year is almost over. What you are doing is best: please use the published 2020 figures for the annual report as your base.

However, due to the fact that 2020 was impacted by the pandemic, please do estimate the numbers for 2021 by annualizing the year-to-date figures line by line for the second quarter. To annualize it, simply multiply it by 2. The numbers are here:

https://newsroom.ibm.com/download/BW+2Q%2721+Earnings+Release.pdf

For example,

Revenue for the six months ended in June 2021 is $36,474 M. For the Full Year 2021, assume it will be twice that or $72,948

Cost of Sales for the six months ended in June 2021 is $19,266 M. For the Full Year 2021, assume it will be twice that or $38,352. You arrive at the cost of sales by deducting Gross Profit of 17,208 from Sales of 36,474.

Expenses for the six months ended in June 2021 is $14,927, assume it will be twice that or $29,854. We calculate all expenses as a difference: 36,474-19,266-2,281=14,927

Net income for the six months ended in June 2021 is $2,281 M. For the Full Year 2021, assume it will be twice that or $4,562

1. For the Estee Lauder strategic plan, can we increase market share by buying companies or brands? Lancome is owned by L’Oreal, and Serge Luten by Shishido. I would like to add those to my Strategic Plan.

Yes, you can. The acquisition will immediately increase the market share for the category. Estee Lauder will own a greater share of fragrances. It’s only through good management however that those brands will prosper and the M&A will make sense.

To properly value an acquisition, we look at 7 building blocks. That is above and beyond concepts like NPV, IRR, and payback. For now,  do this:

1.Ask yourself,  why would Estee Lauder be better at managing these brands? 

2.Do  a Google search (or better through Nexis) for these terms:

• Procter Gamble  writedowns
• L’Oreal writedowns
• Estee Lauder writedowns

Try to find out why other companies overpaid for M&As and mention in the Strategic Plan what measures you will assume not to overpay.

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About the waterfall

Watch a video I made with step-by-step instructions here:

https://nyu.zoom.us/rec/share/7E35KqB96pZrOQXtaZ9yAvsdYRb4dSWiSPKSR4_5Qp3G15es0hQrPuM05Gx9lcHh.YBksx0Syf0ET57j2?startTime=1601060959000

I have encountered a problem with my homework. Now I need to convert excel to waterfall in PPT, but when I copied the blue part of the data in excel and paste them to the waterfall template in PPT, I found that all the data became 0. I try it many times, but the waterfall can not formed. I’m not sure if there is a problem with my excel or my operation? I attached my Excel to the email. Please enlighten me further. Thank you very much.

This is what your data looks like:

There are 3 reasons why you may be having trouble:

1. The range of the axis

In your case, the sales range from $266 to $260, but the scale of the axis is set to 10-30

Please change the scale of the axis to a maximum of 300 To do this:

1.Stand on the axis

2.Right click on it

3.A format axis will appear in the right-hand side

4.Change the range to a maximum of 300, with an interval of 100

 

The chart will then look like this

Next, we need to change the order of the data

2. Order of the data

 We need to list the changes in decreasing order for the colors to be automatically updated in proper order. This will also make it easier for the reader to see. Swap the order of Service and Iphone

Your chart will then be ready to use and it will look like this:

 

3.Not copying data as values

 When you copy the data into the Powerpoint, make sure to copy it as value.

If this solves the problem, please let me know.

When I’m pasting my excel (orange & yellow table) results into the template in PowerPoint, the result returns zero every time and thus ruins the whole waterfall.

There are 3 reasons why you may be having trouble:

1. The range of the axis

In your case, the sales range from $21 to $13, but the scale of the axis is set to 10-15

Please change the scale of the axis to a maximum of 25 and a minimum of 0. To do this:

1.Stand on the axis

2.Right click on it

3.A format axis will appear in the right-hand side

4.Change the range to a maximum of 25, with and a minimum of 0

Next, we need to change the order of the data

1. Order of the data

 We need to list the changes in decreasing order for the colors to be automatically updated in proper order. This will also make it easier for the reader to see.

Your chart will then look like this:

 Finally, change the color for Media Networks and Studio to red (right-click on it and change data point) Then the chart will look like this:

 3.Not copying as values

 When you copy the data into the Powerpoint, make sure to copy it as value.

If this solves the problem, please let me know.

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When transferring the data from the excel sheet to the waterfall template, the data seemed to transfer but two of the lines in the waterfall were not drawn (fragrance and haircare). Each of these categories had the number 0 but no line was drawn below or above it. However, I noticed with my “other” column, though it read as 0 when looking at the data on excel it actually was 0.02, so there is a line even though it still says 0.

I went ahead and changed the “upper box” number on both fragrance and haircare to 0.01 and now it shows a line. Is that incorrect to do? I just wasn’t sure of another way for there to be a line drawn to represent 0.

The reason why PowerPoint doesn’t draw a line is that the value is zero. These are the solutions

1. The safest way would be to change the cell in the orange box to a number greater than zero (0.01 or higher). That way you leave the formulas unchanged.
2. Yes, you can also do what you did
3. The other way to do it is to manually draw a line. Too much work in my opinion.

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Link to Strategic Plans

Below are the links for Strategic Plans submitted by other students, or click here

Disney

Mc Donald’s

Procter & Gamble

Estee Lauder

Nike

Apple