Page 12 - CIMA OCS August 2018 Day 1 Tasks

CIMA AUGUST 2018 – OPERATIONAL CASE STUDY

Product portfolio performance

The tea market is split in the pre-seen into three main segments – black teas, green teas and
infusions.
• Black teas make up 58% of Thomas Fine Teas’ budgeted sales and the company has an
11.3% (by volume) share of the Deeland market. Unfortunately this market is expected
to be static or even decline going forwards.

• The market for green teas is expected to grow by around 5-6% a year but it is
disappointing that, while being a pioneer of green teas in Deeland, Thomas Fine Teas
has seen its market share fall from25% to 16.5% in five years. Despite this, green teas
still make up 22% of budgeting revenue.
• Similarly, the market for infusions, which make up 20% of budgeted sales, is also
expected to grow by 5-6% a year. Again, Thomas Fine Teas was once at the forefront of
encouraging consumers to drink infusions but has seen its market share fall from 20% to
5% in five years.

There are two main reasons for this downward trend in market share of green teas and infusions:
• The main problem has been a lack of product development and, in many respects the
Board could be accused of complacency. It has been 10 years since a new green tea
blend was launched and 15 years since a new range of infusions was released into the
market. This is completely at odds with the increasing demand in green teas and
infusions for new flavour combinations.

• The other reason for declining market share of green teas and infusions has been
Thomas Fine Teas’ commitment to only using traditional forms of advertising whereas
the growth segments are with younger customers and those people trying to live a
healthier lifestyle. Both are likely to respond better to digital marketing campaigns, viral
advertising and the use of social media.

Financial performance
Revenue grew by 5.4% from 2017 to 2016, resulting in an increase of 14% in operating profit. This
also increased operating margins from 14.5% to 15.8%.
The overall level of investment in non-current assets fell, again suggesting a lack of ambition by
the Board.
In terms of working capital and liquidity, an additional D$3.5 million was tied up in working capital
at the end of the year. Inventory days and receivables stayed fairly constant but the receivables
days figure (>100 days) seems excessive given Thomas Fine Teas specifies a credit period of 30
days.
Budgeting

Budgets are prepared on an annual basis and incorporate a standard absorption costing system
where overheads are absorbed using direct labour hours. Thomas Fine Teas adopts a participative
approach, which should give better ownership of budgets but may result in budgetary ‘slack’ and
‘padding’.
Budgeted sales for 2019 give an increase in revenue of 3.5% over 2018 but we are not told how
this was determined / justified.

8 KAPLAN PUBLISHING