Enterpreneurial Finance - StonyField Farms

StonyField Farms

1. Discuss some of the things that Stonyfield has “done right” to contribute to financial success and profitability since it was originally founded.

Ans:

Developing Local Market: This was absolutely required for their hold on local market. Unless they are successful locally, it would have been difficult to expand or even think about expanding in a broader market. It not only boosted their confidence, but also made consumers and supermarket chains aware of their product.

 

Building New Plant: With the setback, and loosing all the money, this was the right decision and right investment to keep the company alive and running. Also this investment was more materialistic and would be an asset for the company.

 

Direct Store Delivery: I think this is an overhead to the company and is diverting from their business. Being a startup and trying to enter into logistics are not very smart move. Few decisions were left on the driver which acted as salesperson for the company. Instead they could have managed the inventory control in a better way. They could have paid a commission to any of the manager in the supermarket to give information’s about their inventory and also if any promotions is required.

 

Entering New Market: Aggressive Expansion is required for the start-up company. This was the right move.

 

Adding New Product: I feel new products are always welcomed by consumers. They should constantly evaluate their existing product and do surveys’s to know what change in taste or product mix is required. Like adding sugar was what the market demanded. Every company has their objective but these objectives are to fulfill their customer’s needs and demands.

 

Marketing and Promotional Strategies: Product Awareness by farm-tour or “adopt a cow” was best idea for the promotion. It’s adventurous for customers and interesting as well. These kinds of promotions are spread through word of mouth, which is more effective than a radio promotion.

 

2. What types of financing does Stonyfield use?  Are these types of financing appropriate?  Explain your answer.

 

Stonyfield had no institutional shareholding. They had 140 shareholders out of which 30 were their employees. Management and their families owned 56% of the company and non-management employees owned 4%.

 

Legally there are no problems with this kind of financing. It’s similar to Private equity or Angel investing. The only difference is that it not as well organized as Private Equity firms. The downside of this is that no single firm has put any money in this firm; so few people are basically running the company. If the company needs further investment then raising money would be a problem. Also management is not getting any help from other firm in terms of guidance. If any institution invests money in starting companies then they give them direction and support and put enough pressure to earn profit. That is missing in such kind of financing.

 

3. What is Stonyfield’s capital structure (mix of long term debt and equity)?  What are the major sources of debt?  Of equity?  What are the implications of this capital structure?

 

For 1992

Long term debt = $808,292

Equity                = $409,161

 

Debts are installments payables for assets and leases.

Equity source were 56% management and 4% employees. No external institutional were involved.

 

Debt-to-equity ratio is approximately 2. Not surprising for a startup company.  This means that the company has taken more debt from the market than equity for running their business. The positive side of this is that the owner has more control of the company and can take decision on their own. The negative side of this is that they have to pay interest on their debt, which is an expense for the company.

 

4. Which of the 3 options for growth discussed on pages 106-107 should Stonyfield pursue?  Explain your choice or choices.

 

Ans

Stonyfiend should pursue option 2nd and 3rd.

Option 2nd: Russian JV: This option has less overhead and will open to a new market which has huge potential. Interesting point to note in this option is that the manufacturing plant will not be setup by Stonyfield, though they have to invest around $600,000, but still that is much less than opening a new manufacturing plant in west cost, which requires an investment of &1.5 million.

 

Option 3rd: This is important for the company to focus and have strategic planning in place to move ahead. It seems that the company is trying different options and if they are success, they are adopting them. They need to focus on their objectives and expansion strategy. Need to study market before implementing it.

 

I wont suggest for option 1, as there are more overheads and are comparatively less lucrative to me then the JV with Russian firm. This can still be an open option for future expansion, but it needs more investment and needs proper planning.