California Pizza Kitchen
November 16, 2013
The purposes of this case study are to discuss the main issues of CPK (California Pizza Kitchen) and think critically to find solutions to the current situation. In order to achieve these purposes, we first analyze time frame of the CPK’s establishment and recent development to find the absolute advantages and disadvantages of CPK compared with its competitors. According to our calculation, we will discuss whether to use moderately levering up CPK’s equity. Finally, a more suitable and profitable model will be established to improve the competitiveness and market share percentage of CPK.
Key words: time frame, stay power, ...view middle of the document...
The ASAP concept had a little success, but sales and operations at the company-owned ASAP units never met the management’s expectations. As a result, management decided to halt all ASAP development in 2007.
In 1997, CPK entered into a licensing agreement with Kraft Foods. It started to run with the concept that includes increasing the guest satisfaction, ”. In order to maintain the creative menu’s originality, two co-founders led the menu-development team to distinguish its menu and prevent it from being found at its casual dining competitors so that RBC Capital Market labeled the chain a “Price-Value-Experience” leader in its sector. CPK spent less percentage of sales on advertising than that of its peers.
Despite the strong performance, CPK still faced with 10% share price decline during June 2006 to a current of $22.10. To leave the dilemma, the management had to put debt on the balance sheet. They should make a choice, staying power or levering up CPK’s equity.
On one hand, CPK achieves benefits with its subjective factors: family-friendly surrounding, excellent ingredients, and inventive offering. These factors can be narrowed down as creative menu, unique products, reasonable cost allocation, increase in minority interest, and strong management team. On the other hand, the cooperation with other strong company like Kraft can improve CPK’s competitiveness.
In recent years, several factors had challenged restaurant industry, including increasing commodity prices; higher labor costs; softening demand due to high gas prices; deteriorating housing wealth; and intense interest in the industry by activist shareholders. Besides, the initial weaknesses are wrong acquisitions, lack of scale, and weak brand.
CPK can use several ways to facilitate success. It can increase the percentage of sales on advertising and focus on its creative menu. Besides, it can increase leverage using debt financing. This approach includes purchase U.S. treasury securities and changes the capital structure policy. Moreover, the management team can decide to repurchase company shares.
CPK belongs to the restaurant industry so that it will be faced with all the bad factors that the restaurant industry is suffering from. What’s worse, CPK will suffer intense competition from other casual dining peers. If CPK decides to repurchase company shares, it will require debt financing. This decision will break the conservative finance policy to stay power.
SOLUTIONS TO STATEMENT OF PROBLEM
Decisions that Susan Collyns face
1. Susan Collyns can avoid the CPK’s other management team members to putting debt in its balance sheet. It means Collyns will hold the same opinion with Rick Rosenfeld, even though Collyns has been aware of the importance of levering up the equity. In this way, CPK will keep the conservative policy to stay power and hold the strong borrowing...