Q&A

The content below is a response to questions from students for each of the six assignments. The content is made available to everyone to foster education. 

How do I  find the headcount in each marketing sub-department for our selected company?

To help you out, I’ve uploaded the headcount for each company on the assignment PowerPoint. Pfizer is towards the end. You will find the total marketing headcount as well as for each division. All you have to do now is to recommend an increase, decrease, or no change for each sub-department.

Adjusting Disney Headcount for the latest sales

I’m on the Disney team. In the 2021 annual report,  I saw a total revenue increase of 3.1% YoY.  How do I change the numbers on the slide? Do I multiply all of these numbers by 3% to get the adjusted headcount for 2021?

No, you don’t need to adjust the estimated headcount for 2021. That’s an estimate anyhow.

The last 2 years have been exceptional so it’s important to look at numbers for 2019, before the Pandemic. The Annual reports for 2019 and 2020 have been uploaded into  External Resources. 

Digital media and direct marketing. Does digital media equal digital marketing? 

I wonder whether you mean direct marketing or digital marketing, so let me respond to both.

Resources employed in Direct Marketing organize marketing strategies (such as mailings or calls). You are managing Disney. I could foresee a Direct Marketing strategy where they for example send a free sticker to encourage consumers to visit a store.

Resources working on Digital Marketing manage what content is posted on a website, Facebook, social media, and what strategy to use to reach more consumers.

Digital Media and Digital Marketing are a bit blurry in some organizations. In general, media is the content that was created for the channels used (websites, email). Folks in Digital Media will create the content. For example, someone working on Digital Media for this class would create the flyer we will be using for the Disney speaker we have this semester. That person would make this site look much better than it looks now since it’s all done by someone without any of those skills (me). Someone working in Digital Marketing will create a strategy to distribute the invitation for participants to join the sessions with our speakers.

Is revenue the same as sales?

Revenue and sales are the same. Different companies use different terms for it. We will learn about that in session 5. Other terms used are also turnover or even Income to refer to sales.

This assignment is Individual or group?

This, and the next 5 submissions, are all individual. Only the Strategic Plan, is a Group project.

I am doing the headcount assignment about IBM/Estee Lauder. I found their up-to-date annual report is 2020’s instead of 2021’s that I’m looking for. Can I just use the 2020 annual report for my assignment?

Yes, use the latest annual report available, in this case, 2020. For some topics, you may find more recent quarterly reports, but they don’t contain all the data. The best is to use the latest annual report.

I am trying to learn something from the annual report of Estee Lauder. I have found that information on the annual report is something general because Estee Lauder is a company with many brands. I am wondering if information from Euromonitor, Nexis, and Simply Analytics is more helpful for us when we are doing projects like our headcount assignment?

Companies don’t provide detailed information about headcount. That is why I provide students a statistical sample and ask them to adjust it by sales.

This is what I would recommend you do:

1. How much do you think Estee Lauder sales can grow next year? Imagine you believe 5%. Then propose a headcount increase of up to 5%.
2. Why did you pick Estee Lauder? Is there something that attracts you to the brands? Recommend a headcount increase for those ideas that you think could help Estee Lauder grow their sales.
3. See if you can find any headcount information about it. Try these steps:    
   1. Go to their Annual Report on Adobe, do CTRL F and search for “headcount’. See what you find.
   2. Go to Nexis and do a search like this:  Estee Lauder w/10 headcount. You are asking Nexis to find any articles where the word “headcount” appears within 10 words of “Estee Lauder.”

There is no pressure at all on this first assignment. Try to find “fun ways” to do research about this company.

When I looked at the template, I found there is one segmentation called “Other”. I am very confused about what kind of people should be included in “Other” and how I should find related information about it.

Companies use “Other” for 2 reasons

1.In many countries, companies have people doing specific roles mandated by the government or local dynamics. We don’t include it in other lines because it will distort the ratios. We use “Other” instead.

2.It helps for the numbers to add up, and to adjust for roundings.

I recommend using the same ratio or adjustment for the line “Other” as for the total. For example, if you are increasing the total HC by 2%, do that to Other. If you are decreasing the total HC by 10%, do that to Other too.

This week we had a headcount assignment. I try to find the headcount of IBM these days but fail to do so. Now I only know the total number which is about 375,000 Still, I can’t find the exact headcount number for the marketing apartment or the headcount for each position. 

Companies don’t provide detailed information about headcount. That is why I provide students a statistical sample and ask them to adjust it by sales. In the case of IBM, I did it for you guys. If you go to the Assignment folder again, you will find that on slide 3.

Why do we need to recalculate the headcount for the level of sales of our company?

The information provided in the original headcount is for a company with sales of $332 Billion. Nike’s sales are 11% of that. It doesn’t make sense to use a Marketing headcount of 6,171, because it’s too far from the truth. By recalculating it based on the level of sales, we are going to be closer to the truth. The numbers for both Nike and McDonald’s are below.

This will still be a gross estimate because the type of industry and company play a significant role in the number of people employed. Some companies include also some activities as part of marketing which others don’t. That is why we have a line called “Other”.

Is the revenue of the company the same as the gross profit of the company?

No. Revenue or sales are the same, but gross profit is something different.

Gross profit is how much money you make after accounting for raw material, packaging materials, and manufacturing cost

For example, if Nike sells a pair of sneakers for $100, it costs them $55 to make. Their gross profit is $45. To that we will need to deduct fixed expenses, which are not included in gross profit, to get to their net income.

To make it easier, here is page 25 of the annual report with the revenue for the last several years. Use the line called revenue.

How can I recalculate Nike’s Marketing headcount for their sales?

 A business with $332 Billion in sales will have a marketing department with 6,171 employees. Since the Revenue of Nike is $37.4 Billion, we should assume their total headcount is 11.26% of that. Please multiply each line by 11.3% and you will get a total of 695. Then apply any changes to that.

This is how we calculate the numbers:

37.4 Billion divided by 332 Billion= 11.23%.

Total headcount: 6,171 times 11.26%= 695 heads

Each line will now look like this:

Now, as you suggested, you can apply any changes to the new total of 695.

Regarding the Nike example you’ve shared in the blog, about recalculating the Marketing headcount, shouldn’t the total employee number = total headcount number?

Yes, the total employee number should -total headcount number unless a company uses the concept of Full-Time employees and recalculates their headcount on that basis.

Also, in the previous blog, it is saying that Revenue or Sales are the same, but in the recalculating Nike’s Marketing headcount part I got confused with the example of 6,171 employees turning to the assumption of 695 headcount.

A company with revenue or sales of $332 Billion has a Marketing headcount of 6,171. But Nike’s sales are much smaller. They are not $332 Billion but $37.4 Billion. Should a company that is 10 times smaller have the same marketing headcount? Probably not. How do we adjust for it? Based on sales.

Why do we need to divide 37.4 Billion(revenue) by 332 Billion(sales)?

Revenue and sales are the same thing. Some companies call it Revenue and other sales.

We divide 37.4 by 332 to find out the ratio of how much smaller Nike is and apply that to the headcount

Is the 332 Billion just a basis to create an assumption for the Nike Marketing department?
A Marketing headcount of 61,71 for a company with sales of $332 Billion is the base we compare it with, to find out what would be a reasonable headcount for Nike.

Nike sales in China are $6.7 Billion. China, unlike the rest of the world, is growing. How can I account for that?

First,  I would start with the global numbers. Do I want to recommend an overall increase or reduction?

Then I would treat China differently. 

If I don’t have the headcount numbers for China, I would assume the same proportion. Since sales are 18% of the total (6.7 Billion divided by 37.4 Billion), I would assume the Marketing headcount is 124 in China.

Then, I will look at China’s sales growth (8%). I would agree to increase China’s marketing HC by 8% (9 heads).

Imagine that since Nike’s sales have declined by 5%,  you want to reduce marketing headcount by 1%. That would be 69 heads. Since you want to increase HC in China by 9 heads, you need to reduce HC in the rest of the world by 78. 

Then, you will need to find good arguments for the type of positions you want to hire in China, and whether you can relocate colleagues from other countries who would have lost their jobs to China.

How can I recalculate McDonald’s Marketing headcount for their sales?

A business with $332 Billion on sales will have a marketing department with 6,171 employees. Since the Revenue of McDonald’s is $21.1 Billion, we should assume their total headcount is 6.4% of that. Please multiply each line by 6.4% and you will get a total of 392. Then apply any changes to that.

This is how we calculate the numbers:

21.1 Billion divided by 332 Billion= 6.4%.

Total headcount: 6,171 times 6.4%= 392 heads

Each line will now look like this:

How do I modify the headcount by line?

First,  I would start with the total numbers. Do I want to recommend an overall increase or reduction?

You have recalculated the current sales to be $19.2 Billion. That is a drop vs. the prior year sales ($21.1 B) of almost 10%. First decide whether you are going to keep the total headcount unchanged, reduce it by one third, or one half or sales, or grow it.

Let’s imagine that you conclude that you will want to reduce the total headcount by 20% of the drop in sales, or 2%. Then you will need to reduce your headcount, on a global basis, by 8 heads (2% of 392).

Then I would treat product launches separately.

You already have 8 people working on New Product. Do you need to hire more?  Let’s say that you need to hire 1 more, for a total of 9. You can do it like this:

Headcount 2019                                                                                          392

Minus, HC reduction                                                                                   -9 (that is 8 plus one more to be able to hire one more person)

Plus, 1 New Product                                                                                    +1

Headcount 2021                                                                                          384 that’s the 2% or 8 heads reduction you want to propose

Then, you will need to find good arguments as to why you need to increase your headcount by one, and why you cannot retrain some of the people who you are going to layoff so they can do the product launches job.

Regarding the numbers, this is highly subjective. That is why is so difficult. But there are no right or wrong numbers, the task is to find arguments that are persuasive.

How do I get the data for 2020?

McDonald’s hasn’t published the annual report yet. We will have some information on the quarterly earnings, but not all. I recommend using the latest annual report we have (2019) as the base for 2020.

Can I propose an increase in headcount even if the sales have decreased?

Yes, you can. But you need to have good arguments for it, because the company may be short on cash. If you were operating a small business, and your sales had dropped, where would you get the cash to hire more people?

On the other hand, there may be great reasons to justify it. For example, due to the economic downturn, it may be easier to gain market share. It may be easier to hire talented resources who normally would be more difficult. It may be cheaper to advertise.

Is it a must to propose a total increase or decrease for headcount? Can I propose an increase or decrease for each category first and then later add up for the total?

Yes, you can go line by line. But I always give students this tip: check your totals first. That is the first thing that the audience looks at. Frequently, we have solid arguments line by line, but we make mistakes on the total. When we do that, we lose credibility. Senior executives look first at the totals.

On the other hand, in many situations, it may be better to go line by line first instead of showing the totals first. For example, if your sales are declining by 10%, and you want to increase headcount, it may be easier to sell it by going line by line first.

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.

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.

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.

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

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.

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

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.

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.

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.

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.

___________________

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)

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.

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