...California Pizza Kitchen Company Background: White-collar criminal defense attorneys Larry Flax and Rick Rosenfield in Beverly Hills, California created California Pizza Kitchen in 1985. Famously known for its hearth-baked barbecue-chicken pizza, the “designer pizza at off-the-rack prices” concept thrived. Over the last twenty years, the company has expanded into 213 locations in 28 states and 6 foreign countries. Although approximately 41% of the U.S. stores are located in California the business model has done well throughout all regions. California Pizza Kitchen derives its revenues from three sources: sales at company-owned stores, royalties from franchised restaurants, and royalties with a partnership with Kraft Foods to sell CPK-branded frozen pizzas in grocery stores. In 1996, CPK extended its brand with franchised ASAPS located in airports that offered a limited selection of pizzas and an assortment of “grab and go” sandwiches and salads. In 2000, CPK launched company owned ASAP locations as well. In 2007, CPK ceased development for any future ASAP locations to focus more on continued expansion of both domestic and international franchised locations. With the recent 10% share price decline, CPK is questioning whether this is an ideal time to repurchase shares and potentially leverage the company’s balance sheet with its prevailing line of credit. CPK is considering repurchasing shares and using debt financing to fund the strong expansion outlined for the company. In...
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...California Pizza Kitchen Case FIN 4385 Eric Lundberg Kelly Deeds Kevin Pope Drew Williams Summary of California Pizza Kitchen Recapitalization Proposal * Brief history of CPK (p.3) * Reasons for CPK’s success (p.3) * Ways to facilitate the success of CPK (p.3-4) * Anticipated effect of changing the capital structure on return on equity (p.4) * Anticipated effect of changing the capital structure on cost of capital (p.5) * Expected number of shares of CPK that can be repurchased (p.6-7) * Anticipated effect of changing the capital structure on CPK’s stock price (p.6-7) * Our recommendation (p.7) In order to explore whether or not California Pizza Kitchen should change their capital structure, we must first look at the brief history of the firm to get a better idea of the corporate culture and the firm’s appetite for risk. California Pizza Kitchen started in 1985 and they have been rather successful given that 95% of all restaurants fail in the first two years. They did not fail and even went public in 2000. In fact, as of the end of the second quarter of 2007, CPK has 213 locations in 28 states and 6 foreign countries (Shumadine). The success of California Pizza Kitchen can be attributed to many factors. First, CPK diversifies its revenue streams. Instead of relying on the main business of operating company owned stores for revenue, they also receive revenues from royalties from franchised locations and royalties from Kraft for selling...
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...California Pizza Kitchen (CPK) was co-founded in 1985 in Beverly Hills, California by Rick Rosenfield and Larry Flax. Rosenfield and Flax both hold the title of Co-President, Co-CEO, and Co-Chairman of the Board of Directors for California Pizza Kitchen. Susan Collyns, Chief Financial Officer, currently leads the financial team at California Pizza Kitchen which is faced with reducing the corporate income-tax liability while balancing the goal of the management team to grow the business. California Pizza Kitchen is in the food industry business. California Pizza Kitchen is a casual dining restaurant chain that specializes in innovative and non-traditional pizzas. California Pizza Kitchen also provides various soups, salads, pasta, sandwiches, and desserts at higher quality for lower prices. California Pizza Kitchen is in 213 locations in 28 states (41% located in California). California Pizza Kitchen’s core patrons tend to have an average household income of $75,000 (survey results from 2005); creating less of an impact on patron’s dining habits during times of inflated gas and food prices. California Pizza Kitchen’s inventive menu was not the only draw-in for patrons, their below average check (usually around $13.30) was much lower than their competitors such as, The Cheesecake Factory, Olive Garden, P.F. Chang’s, Chili’s, Red Lobster, and Panera Bread to name a few. The California Pizza Kitchen chain was labeled by RBC Capital Markets as the “Price-Value-Experience” leader...
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... 3/10/2014 PepsiCo Restaurants Case In the PepsiCo’s Restaurants case, PepsiCo must evaluate the potential acquisition of Carts of Colorado and California Pizza Kitchen. The acquisition of these restaurants would expand PepsiCo’s restaurant business, but PepsiCo must consider how each deal will affect the scope of the firm and potential synergies in each deal before making a decision to acquire these firms or not. There are several potential synergies in the Carts of Colorado (COC) deal. Specifically, there are operational synergies and financial synergies, along with a little strategic synergy. There is operational synergy because acquiring COC would create economies of scope. There could be shared resources or activities because PepsiCo could sell items, or at least similar items, from their other restaurants on these food carts. There is some strategic synergy in this deal because making this deal would mean entering a new market, the food cart industry, to extend market power. Even though food carts are also fast food, it is in a new segment that PepsiCo has not yet experienced. Financial synergies are also evident in this deal with COC because since they nearly tripled its income in one period, they could be a valuable asset. By investing in it, PepsiCo will be able to gain much revenue and capital from a new source. For California Pizza Kitchen, there are operational, strategic, and financial synergies. In terms of...
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...The proposed acquisitions of California Pizza Kitchen and Carts of Colorado by Pepsico 1. Should PepsiCo buy California Pizza Kitchen? For both acquisitions it's more about what they add to PepsiCo, not what value PepsiCo adds to them Pros: - needs to acquire CPK to learn casual dining. That's where the growth is, and internal attempts to develop casual dining in Pizza Hut Cafe have failed. whether CPK is merely a passing yuppie fad, or if it is a long-term market segment doesn’t matter to PepsiCo if it merely wants to learn casual dining. - PepsiCo startups failing Cons: - possibly PepsiCo’s failure to develop a casual chain internally, along with the real differences between fast food and sit-down dining, will prevent it from succeeding. •New segment that PepsiCo doesn't know - Yuppie casual dining • $11 check, dinner on pizza dough - PepsiCo ignorant of key success factors •high level waiter service •PR not advertising key to marketing •capital cost $1 - $2m, sales $3m not $800k, $800k. •New untested concept - 25 restaurants, 8 states, $34m sales, $3/4m net income - may be a "fad" •only seven years old - may not stretch beyond Yuppiedom 2. Should they buy Carts of Colorado? Pros: - while CoC's $8m sales is very small for Pepsico, the real market size is the revenue from non-traditional PODs, and this is potentially enormous ($2 billion to PepsiCo alone) The real reason to own CoC is to preempt Coke and MacDonalds in the best locations...
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...DISTRIBUTION CHANNEL The California Pizza Kitchen strategy to build a strong company with leadership position in the pizza industry decided to expand their distribution channel by not just having company owned business but utilizing franchises to expand their customer base. Franchising provides the ability to expand business rapidly at less of a financial risk. Profits are higher due to lower costs. Another channel is their high quality fast-casual concept called California Pizza Kitchen ASAP. The ASAP restaurants are smaller than the full service restaurants and offer a limited menu in attractive high traffic areas. They offer in-house dining or take out. This channel allows the company to get their product out to the consumer at a lower cost with smaller overhead (smaller rents, less employees, lower utilities). They also teamed up with Kraft Pizza a division of Kraft Foods another distribution channel, which has a line of frozen pizzas that are sold to supermarkets. These additional channels provide growth opportunities and name recognition. Currently, Kraft distributes pizzas in supermarkets focusing on markets in which the restaurants are located in from east coast in Georgia, Maine, to the west coast in Arizona, Nevada and California. The extensive development process involved input from CPK so that they maintained the quality of the restaurant in the frozen product. From the Kraft Manufacturing building, the pizzas are delivered by trucks equipped...
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...I was born and raised in California and had never experienced dining at the California Pizza Kitchen. I have heard about it through a few other people and passed by it numerous times. It never occurred to me to go experience eating and dining at this traditional American restaurant. This restaurant was established in 1985 in Los Angeles, California. When I was growing up, my family use to take us on road trips every so often down south to Los Angeles and San Diego. Every time we went there, I would see the sign, but never had a desire to eat there. I would see this bright, yellow sign with a single palm tree, the name, California Pizza Kitchen right below on a square shape tilted so the points are pointing North, South, West, East. The yellow sign attracted my attention and grabs other people’s attention I would think. I believe the yellow is a symbol of sun, which describes the feel of southern California. After so many years of hearing about it by word of mouth, I finally made the decision to try this food, California Pizza Kitchen, that the American people have been raving about. As I come walking into this restaurant in Los Angeles, I noticed the outside had tables, seating for four, an umbrella, lighting/heater post, and a gate for privacy and distinction. It was also very clean. This patio area is very attractive and grabs my attention. As I enter, I notice immediately the feel of the place is extremely relaxing and intimate. There’s music playing in the background...
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...k CASE 33: CALIFORNIA PIZZA KITCHEN INTRODUCTION California Pizza Kitchen (CPK) is a restaurants services company that operates a casual dining chain, with a particular focus on the premium pizza segment. The company is headquartered in Los Angeles, California and employs 14,800 people as on December 30th, 2007. The company recorded revenues of $633 million during the fiscal year ended December 2007, an increase of 14.1% over 2006. The increase in revenue was driven from its full service restaurants, ASAP restaurants and from LA Food Show. The operating profit of the company was $22 million during fiscal year 2007, a decrease of 28.3% compared with 2006. The net profit was $15 million, a decrease of 29.5% compared with 2006. In 1985 the California Pizza Kitchen was created by Rick Rosenfield and Larry Flax in Beverly Hills, California. Rosenfield and Flax both hold the title of Co-President, Co-CEO, and Co-Chairman of the Board of Directors for California Pizza Kitchen. It was known for its hearth-baked barbeque-chicken pizza, the “designer pizza at off-at-the-rack prices” concept flourished. California Pizza Kitchen derived its revenues from three sources: sales at companyowned restaurants, royalties, from franchised restaurants, and royalties from a partnership with Kraft Foods to sell CPK-branded frozen pizza in grocery stores. California Pizza Kitchen is in the food industry business. California Pizza Kitchen is a casual dining restaurant chain that specializes in...
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...founded California Pizza Kitchen in 1985 in Beverly Hills, California. California Pizza Kitchen is a casual dining, full service restaurant concept that specializes in gourmet pizzas with unique topping combinations. At the end of the second quarter of 2007 they operated 213 locations in 28 states and in 6 foreign countries. The company derives its revenue from three sources: sales at company-owned restaurants, royalties from franchised restaurant, and royalties from a partnership with Kraft Foods to sell California Pizza Kitchen branded frozen pizzas in grocery stores. Although the restaurant industry was going through some difficulties California Pizza Kitchen was really successful, and the quarterly profit was over $6 million, quite a record for the firm. Management believed that its success was due to its dedication to guest satisfaction and menu innovation and sustainable culture of service. A creative menu with high-quality ingredients was a top priority at California Pizza Kitchen. In addition to creating its inventive menu, California Pizza Kitchen had an average check of $13.3, which was below the one of many of its upscale dining casual peers. Also California Pizza Kitchen spent 1% of its sales on advertising, far less than the 3% or 4% spent by the competitors (for instance Olive Garden or Chilli’s Red Lobster) management felt that its attention to the clients and the innovative menus resulted in free but more valuable word of mouth marketing. California Pizza Kitchen...
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...California Pizza Kitchen: Management of the Corporate Capital Structure FIN 6806: Seminar in Advanced Financial Management Dr. Anita Pennathur November 2nd, 2014 Table of Contents Case Summary …………. 3 Problem Statement …………. 4 Situation Analysis 4 Major Strategic Alternatives 5 Decision Criteria 6 Recommendation 9 Appendix 11 California Pizza Kitchen California Pizza Kitchen (CPK) is an American based restaurant which has made a name in serving different types of pizzas, pastas and fast food products. California Pizza Kitchen was established in 1985 in California near Beverly Hills. The company is not only dealing within the United States but it is also serving in six different foreign countries. California Pizza Kitchen has its own restaurants as well as it also has different franchises across the United States and also is involved in a partnership with Kraft Foods to sell its frozen pizzas in grocery stores. Restaurants of the California Pizza Kitchen have a friendly environment, delicious dishes and outstanding offerings. California Pizza Kitchen has its franchises in several countries that include China, Hong Kong, Malaysia, Singapore, Philippines and numerous others. California Pizza Kitchen has also opened in parts of South Korea and the Mexico City. The franchise owners give an advance of approximately $50,000 to $65,000 and furthermore, they also pay 5% of their sales to the California Pizza Kitchen as royalty payments. ...
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...William Upham Fin. 461 California Pizza Kitchen Brief Case Analysis “[R]estaurants don’t start out making money─ they build over time. So it’s really about having the capital and the staying power.” ─ Rick Rosenfield, Co-CEO of California Pizza Kitchen. Rosenfield, and longtime business partner Larry Flax, went from being defense attorneys to innovative pizza entrepreneurs. Their idea was to make “designer pizza at off-the-rack prices,” using unusual pizza toppings to create delicious combinations at low prices. California Pizza Kitchen began in 1985 in Beverly Hills, California and took off from there. The company went public in 2000, less than two decades after the opening of its first location, and by the end of the second quarter of 2007, the company had expanded to 213 locations in 28 states and 6 foreign countries. Even though the restaurant industry is constantly battling through macroeconomic changes, California Pizza Kitchen was able to minimize the effects of macroeconomic changes due to its strong business model and conservative financial policy, which created the staying power Rosenfield described. California Pizza Kitchen’s Chief Financial Officer, Susan Collyns, was about to announce near-record profits of over $6 million for the end of the second quarter of 2007. However, despite these strong results the share price had declined 10% during the month of June as a result of industry pressures and the Company was considering a share repurchase program that...
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...Jean-Marie Le Corre 3 année – Promo 10 IBS – Case Preparation ème Pepsico’s Restaurants Pepsico is company that originated within the soft drink business with the famous Pepsi. The name PepsiCo appeared in 1965 when the Donald Kendall, former CEO of the company merged the soft drink company with Frito-Lay, a snack food company. Later many others businesses were added, mostly through external growth (PFS was added as a way reduce costs), among which are Pizza Hut, Taco Bell and KFC. A- SWOT Analysis Strengths Diversified yet complementary activities within the food business o Good outlets for distribution of Pepsi fountain sodas Allows more reactivity Highly decentralized organization o Large, while not complete, coverage of the restaurant industry Strong innovative spirit within the company Well segmented restaurant brands Internal movement of manager allows good experience sharing Weaknesses Strong resistance to higher management control o Makes it difficult to answer some new demand of the market such as single PepsiCo’s contact Independence of businesses makes it difficult to put synergies in place Group operates competitors to its potential customers o Burger king, for example is a potential customer for Pepsi, but a competitor to PespiCo’s restaurants No shared and established strategy within the brand, just based on a good practice agreement Lack of cooperation between brands (The Toilet Paper victory) Opportunities Drive more synergies between brands Share...
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...Case #33 California Pizza Kitchen Synopsis and Objectives This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt-financed stock buyback program. The case is intended to provide an introduction to the Modigliani-Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to discuss the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions. Objectives: * Introduce the Modigliani-Miller intuition of capital structure irrelevance; * Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered-beta capital asset pricing model (CAPM) equation; * Discuss interest tax deductibility and the valuation tax shields; * Explore the importance of debt capacity in a growing business. Suggested Questions 1. In what ways can Susan Collyns facilitate the success of CPK? 2. Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of capital? In assessing the effect of leverage on the cost of capital, you may assume that a firm’s CAPM beta can be modeled in the following manner:...
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...CALIFORNIA PIZZA KITCHEN Teaching Note Synopsis and Objectives This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt-financed stock buyback program. The case is intended to provide an introduction to the Modigliani-Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to discuss the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions. The case serves to motivate the following teaching objectives: • Introduce the Modigliani-Miller intuition of capital structure irrelevance; • Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered-beta capital asset pricing model (CAPM) equation; • Discuss interest tax deductibility and the valuation tax shields; • Explore the importance of debt capacity in a growing business. Suggestion for Advance Assignment to Students Students may consider the following study questions: 1. In what ways can Susan Collyns facilitate the success of CPK? 2. Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of...
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...California Pizza Kitchen Risk Analysis Based on information provided in the case, we estimated the Weighted Average Cost of Capital for California Pizza Kitchen to be: 9.64% = (1-32.50%)*6%+9.64%*643,773)/643,773 California Pizza Kitchen is an unlevered company that has no debts in the capital structure of the company, and whose sole source of financing is equity. With a return on equity of 10.1% in 2006, CPK earned a return greater than its cost of capital, but did not benefit from financial leverage. Below we will illustrate how levered cost of capital may be a cheaper alternative for CPK. Increases of debts in the capital structure of the company will impact different key variables that the company leverage status would change from unlevered company to the levered company, because before these new issuance of debts, CPK had no debts in the capital structure of the company. In assessing the effect of leverage on the cost of capital, we estimated the Weighted Average Cost of Capital for a leverage of 10% debt to be: 9.26% = (1-32.50%)*6%*22,589+(4.2%+.82*6.4%)*628,516/(22,589+628,516) A leverage of 10% debt would change the unlevered beta 0.85 of CPK to levered beta of 0.82. The decrease in beta would reduce the cost of equity for CPK to 9.45%, because an increase of 10% debt in the capital structure of the company would reduce the risk of the equity investors. A leverage of 20% debt would decrease the Weighted Average Cost of Capital...
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