Gelato Natural S.A (2008)

CASE OVERVIEW This case challenges students to develop a strategy to rescue the company from the fact that its newly-expanded factory is coming on stream (and payments on related loans are beginning to become due) just as the Argentine economy is collapsing. The case is based on discussions conducted by the authors in Argentina. The case is appropriate for senior-level undergraduates as well as students in MBA and Executive Development programs. It is designed to be taught in a hour and a half class session, and is likely to require at least a couple hours of preparation by students. CASE SYNOPSIS Ariel Davalli is the Vice President of Gelato Natural S.A., a company which (at the time of the case) was selling (it's high-quality homemade ice cream) from several locations in the northern suburbs of Buenos Aires, Argentina. Based on high demand for its products from individual consumers living in the northern suburbs, the company invested $2,000,000 U.S. dollars to significantly increase the capacity of its factory. This $2,000,000 expansion was funded by borrowing $750,000 U.S. dollars (the loan comes due in four years) and by shifting the local currency equivalent of $1,250,000 of working capital into fixed assets. Unfortunately, just as the expanded factory started production, the economic environment in Argentina deteriorated significantly. In addition, the exchange rate of the peso with the U.S. fell from 1-to-1 (at the time of the loan) to 3-to-1. Currently, demand for is stagnating, and the new factory is operating at only 30% of capacity. Additional data and information in the case include: 1. For Argentina: Historical overview, a sample of recent statistics from the World Bank, and (for benchmarking purposes), comparable statistics for the United States. 2. On the company: Historical overview, current performance, and numerous factors impacting that performance. 3. Characteristics of the company's current strategy, including descriptive information on the product line, characteristics of the distribution system, information on the promotion and pricing strategies the company is currently using, etc. 4. Characteristics of the current competitive situation. 5. Detailed data on the attitudes and behaviors of buyers of homemade ice cream in Argentina. INSTRUCTORS' NOTE Overview Our hero, Ariel Davalli, Vice President of Gelato Natural S.A., faces the following situation: (1) Demand for Gelato Natural S.A.'s homemade ice cream had been so strong that the company had borrowed US$750,000 (repayable in four years, in U.S. dollars) and tied up the local currency (pesos) equivalent of US$1,250,000 in working capital to finance an overall US$2,000,000 program to double the capacity of their ice cream factory, to ensure that the factory would be able to keep up with demand from its customers living in the northern suburbs of Buenos Aires, Argentina; (2) During the time the factory expansion was under construction, Argentina defaulted on its overseas debt (i.e., the country had declared bankruptcy), and demand for Gelato Natural S.A.'s Chungo brand homemade ice cream had fallen dramatically. Looking again at the figures, Davalli saw that utilization of the expanded factory was currently 30% of capacity. Because the value of the peso had now fallen from one peso = dollar to three pesos = dollar, the amount of revenue and profit (in pesos) needed to repay the US$750,000 loan had tripled; and (3) Unless management figures out a way to dramatically increase revenues and profits, Ariel Davalli fears that the company will follow Argentina into bankruptcy. As regards lessons and/or information which students should learn from this case, at least four points can be made: 1. At the beginning of the case, students will need to consider the extent to which developed-world models and conceptual frameworks can be applied to challenges and opportunities in the developing world. …