Case Study of Delta Beverage Group, Inc.
UVA-F-1188
DELTA BEVERAGE GROUP, INC.
It was July 1994, and John Bierbaum, chief financial officer (CFO) of Delta Beverage
Group, Inc., sat at his desk at the company’s headquarters in Memphis, Tennessee. As he considered the company’s promising future, he reflected on how close Delta had come to bankruptcy a couple of years earlier. In the last six years, the group had managed to turn around operations, and recently it had been on a buying spree and had acquired significant new franchises in its area of concentration, the South Central United States. The recently completed recapitalization plan had helped put the company back on solid financial footing, and Delta seemed to be poised for some real success.
During the first half of 1994, however, the price of a core raw material, aluminum, had risen 30% on the London Metal Exchange. Because aluminum cans were a key cost component for Delta, Bierbaum expected that the price Delta paid for its cans would be raised when negotiations with suppliers came up for renewal in a few months. Fueled in part by their quest for volume, the price charged by the can producers had been trending downward during the past few years. Although the past changes in can prices had been independent of how the price of aluminum had changed, Bierbaum wondered if this recent increase in aluminum cost for the can smelters, sheet makers, and can producers would flow through to the price Delta paid for aluminum cans. Perhaps now was the time for Bierbaum to consider a hedging program using aluminum futures contracts to offset the potential price increase and to help the company to maintain its financial footing.
History of Delta Beverage Group, Inc.
As one of the top five independent bottlers of Pepsi products in the United States, Delta
Beverage Group had become an important part of the franchise system of PepsiCo, Inc., in 1994.
Delta’s franchise areas included parts of Tennessee, Arkansas, Louisiana, and
DELTA BEVERAGE GROUP, INC.
It was July 1994, and John Bierbaum, chief financial officer (CFO) of Delta Beverage
Group, Inc., sat at his desk at the company’s headquarters in Memphis, Tennessee. As he considered the company’s promising future, he reflected on how close Delta had come to bankruptcy a couple of years earlier. In the last six years, the group had managed to turn around operations, and recently it had been on a buying spree and had acquired significant new franchises in its area of concentration, the South Central United States. The recently completed recapitalization plan had helped put the company back on solid financial footing, and Delta seemed to be poised for some real success.
During the first half of 1994, however, the price of a core raw material, aluminum, had risen 30% on the London Metal Exchange. Because aluminum cans were a key cost component for Delta, Bierbaum expected that the price Delta paid for its cans would be raised when negotiations with suppliers came up for renewal in a few months. Fueled in part by their quest for volume, the price charged by the can producers had been trending downward during the past few years. Although the past changes in can prices had been independent of how the price of aluminum had changed, Bierbaum wondered if this recent increase in aluminum cost for the can smelters, sheet makers, and can producers would flow through to the price Delta paid for aluminum cans. Perhaps now was the time for Bierbaum to consider a hedging program using aluminum futures contracts to offset the potential price increase and to help the company to maintain its financial footing.
History of Delta Beverage Group, Inc.
As one of the top five independent bottlers of Pepsi products in the United States, Delta
Beverage Group had become an important part of the franchise system of PepsiCo, Inc., in 1994.
Delta’s franchise areas included parts of Tennessee, Arkansas, Louisiana, and