Middleby Corporation
1. What caused Middleby's struggles in the 1990s?
The following caused the struggles of Middleby Corporation in the 1990’s: a. A period of rapid international and domestic expansion by chain restaurants during the first half of the 1990’s, which caused DFE manufacturers and suppliers to increase production capacity domestically and build assets in foreign markets. b. A decline in sales through the second half of the 90’s which was caused by a shift in domestic consumer eating habit towards healthier foods. In addition, a slowdown in Asian market, caused by the Asian economic crisis, hit chain restaurants hard and resulted in slow than anticipated growth for the DFE industry. c. Middleby’s expansion into foreign markets left them exposed to currency exchange risk, with the dollar increasing in value, foreign sales margins declined. d. The investment in the Ro-Fry oil-less fryer had failed
2. To what extent were these exogenous versus endogenous i.e. what if anything could management have done?
Both exogenous and endogenous factors played a role in Middleby’s problems. Certainly macro-economic factors such as the economic slowdown in Asia and the strengthening of the U.S. dollar where not managements fault and growth in these markets was important to Middleby’s future. On the other hand, management could have mitigated currency exchange losses by hedging their exposure (though this would have come at a cost). While the details of the transaction are not specified in the case, it appears that the due diligence performed on the Ro-Fry technology was weak, or management assumed too much risk by investing at an early stage in the products development.
3. What did Middleby’s Z scores in the late 1990s indicate in terms of trends in the company’s financial performance?
Z-SCORE Calculations: | | | | | 1997 | 1998 | 1999 | working capital | 38790 | 30609 | 28095 | Retained earnings | -319 | -4303 | -5297 | EBIT | 8342 |
The following caused the struggles of Middleby Corporation in the 1990’s: a. A period of rapid international and domestic expansion by chain restaurants during the first half of the 1990’s, which caused DFE manufacturers and suppliers to increase production capacity domestically and build assets in foreign markets. b. A decline in sales through the second half of the 90’s which was caused by a shift in domestic consumer eating habit towards healthier foods. In addition, a slowdown in Asian market, caused by the Asian economic crisis, hit chain restaurants hard and resulted in slow than anticipated growth for the DFE industry. c. Middleby’s expansion into foreign markets left them exposed to currency exchange risk, with the dollar increasing in value, foreign sales margins declined. d. The investment in the Ro-Fry oil-less fryer had failed
2. To what extent were these exogenous versus endogenous i.e. what if anything could management have done?
Both exogenous and endogenous factors played a role in Middleby’s problems. Certainly macro-economic factors such as the economic slowdown in Asia and the strengthening of the U.S. dollar where not managements fault and growth in these markets was important to Middleby’s future. On the other hand, management could have mitigated currency exchange losses by hedging their exposure (though this would have come at a cost). While the details of the transaction are not specified in the case, it appears that the due diligence performed on the Ro-Fry technology was weak, or management assumed too much risk by investing at an early stage in the products development.
3. What did Middleby’s Z scores in the late 1990s indicate in terms of trends in the company’s financial performance?
Z-SCORE Calculations: | | | | | 1997 | 1998 | 1999 | working capital | 38790 | 30609 | 28095 | Retained earnings | -319 | -4303 | -5297 | EBIT | 8342 |