t

TB0101
September 27, 2006

os
Graeme Rankine

Aussie Pies (B)

rP
On a visit to Australia, Anna Amphlett and Andrew Ferris discovered meat pies, the national snack food
of Australia. During their visit to Sydney, Melbourne, and Surfers Paradise, they found that Australians
consumed vast numbers of meat pies, particularly at sporting events such as games of Australian Rules
(Aussie Rules), where they were usually washed down with vast quantities of ice-cold beer. They decided
to explore the possibility of establishing a business in Seattle’s Pike Place Market where they would
make and distribute meat pies under the name Aussie Pies. They had trademarked the name, Aussie

yo
Pies, on returning to the U.S. in case they decided to launch the new business. With limited financial
resources, Amphlett and Ferris would have to prepare a detailed business plan to obtain outside financ-
ing.

Amphlett worked at Starbucks Coffee Corporation in Seattle, Washington, where she gained
valuable retailing experience as a regional manager. She had been involved in many different aspects of
Starbucks’ business including personnel, supply chain, production, and business development. Ferris,
an accountant by training, worked as an assistant controller at the Seattle headquarters of Tully’s Coffee
op
Corporation, where he had became familiar with the financial side of retailing and customer service.

Australian Meat Pies

The meat pie, a hand-sized pot pie made with pastry and filled with minced (ground) beef and gravy, is
consumed as a takeaway food snack in Australia (see Exhibit 1). According to some observers, it is
tC

iconic in Australian culture and has been described by former New South Wales Premier Bob Carr as
Australia’s “national dish.”1 The average Australian will consume an average of 45 meat pies per year,
and the popular brand Four’N Twenty Pie produced 50,000 pies per hour. The meat pie is heavily
associated with Australian Rules football, rugby league, and other sports as one of the most popular
consumables while watching a game.2 The meat pie is about four inches in diameter and traditionally
eaten in the hands with tomato sauce (aka tomato ketchup) and is usually accompanied by a cold beer.3
The pie has a short crust bottom and flaky pastry top.
No

Operations
Amphlett and Ferris decided to locate the first outlet in Pike Place Market, a popular destination for
tourists to Seattle, particularly international travelers who were curious about other cuisines and more
willing to try foods originating in other countries (see Exhibit 2 for the store’s location). Since many
international travelers were between 30 and 50 years of age and conscious of their diet, they decided to
make the pies with high-quality, low-fat beef that had been range fed, not lot fed. They would also

1
From Wikipedia.
Do

2
Ibid.
3
http://swengelsk.com/COOKING/AustralianFood.htm.
Copyright © 2006 Thunderbird, The Garvin School of International Management. All rights reserved. This case was
prepared by Professor Graeme Rankine for the purpose of classroom discussion only, and not to indicate either effective or
ineffective management.

This document is authorized for educator review use only by Allan Quijano, HE OTHER until September 2016. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 ensure that the beef had been raised on ranches that used no hormones or insecticides. They would

t
develop a marketing and sales campaign emphasizing the use of high-quality ingredients. Using beef

os
raised under these conditions would be more expensive, but they felt that this would be more appealing
to young, health-conscious global travelers capable of paying a premium for superior quality snack
foods.

They also decided to make the pies fresh at the store rather than serving customers with reheated
products. This would occasionally mean disposing of unsold pies, but Amphlett and Ferris decided that

rP
reheating meat pies caused the sauce filling to permeate the pie base and make the pie soggy. They
would also enable customers to call in their orders so that the meat pies could be made fresh on demand.

The store would emphasize strict hygiene and sanitary conditions in making and serving the meat
pies. Amphlett and Ferris came up with a design for the store in which the meat pies would be made at
the back of the store with a glass wall panel separating the front section so that customers could see the
spotlessly clean facilities in which the pies were made. They felt that this would enhance the customers’
perception that Aussie Pies was a premium product using high quality ingredients and produced under

yo
impeccably sanitary conditions.

Although the business would initially produce only the standard meat pie, they decided to explore
the possibility of making and distributing specialty pies such as steak and kidney pies, meat and sun-
dried tomato pies, chicken and potato pies, and even Barramundi pies.4 These products would be sold
in smaller quantities and require custom production techniques. Amphlett and Ferris also decided to
explore baking and distributing fresh breads including wine bread, Barramundi bread, and Bodalla
op
cheese bread.5 Ferris’s experiments in making wine bread had been quite successful, so they decided to
initiate discussions with the makers of the popular Australian wine, Yellow Tail, about co-branding the
new wine bread.

Amphlett and Ferris also decided that if their first store were successful, they would open addi-
tional stores in Bellevue and Issaquah, Washington, and they would consider supplying large retail
chains such as Costco Wholesale Corporation.
tC

Initial Business Setup

Establishing the new business would require outside financing. Through Ferris’s work in the controller’s
office at Tully’s Coffee, he had developed an excellent working relationship with Al Ross at Puget Sound
Bank, who tentatively agreed that a bank loan of up to $1 million at an interest of 6% per year would be
possible. But Ross indicated that the bank’s loan committee would want, along with other documents,
a business plan including a complete set of projected financial statements for the first year of operations,
No

with an income statement, statement of cash flows, and a balance sheet.

Based on market research, they decided to set the price of Aussie Pies at $3.25 per pie. Although
they had initially contemplated renting the store, equipment, and fixtures, they now decided to buy
these items. The new facilities with 4,000 square feet of space would enable the business to produce and
distribute about 30,000 pies per month under normal operating conditions.

After much soul-searching, Ferris decided to quit his job at Tully’s Coffee to devote his full-time
energies to the new business. To reduce risk, Amphlett decided to maintain her job at Starbucks but
Do

work on the business on weekends and at nights. If Aussie Pies were successful enough to expand
operations, she too would work on the new business full-time.

4
A barramundi is a popular fish with Australia consumers. It is usually pale grey-green with a coppery
shimmer, and can grow to a maximum length of 2 m (6 ft. 7 in.), weighing up to 60 kg. (130 lb); specimens
weighing 5-6 kg. (11-13 lb.) are more commonly seen, however (http://en.wikipedia.org/wiki/Barramundi).
5
Bodalla cheese, a popular cheese with Australian consumers, is made in Bodalla, Australia.

2 TB101
This document is authorized for educator review use only by Allan Quijano, HE OTHER until September 2016. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 As a result of guidelines established by the company’s legal advisors, Amphlett and Ferris decided

t
that additional events would need to occur in the start-up phase (by December 31, 2005) of the busi-

os
ness as follows:

1. Amphlett and Ferris would contribute the jointly owned land at Pike Place Market valued at
$100,000, for which they would each receive 50,000 shares of common stock.

2. A $700,000 bank loan would be signed with Puget Sound Bank and the cash disbursed to Aussie

rP
Pies immediately.

3. Cash fees for attorneys and incorporation costs to establish Aussie Pies, Inc. during the start-up
phase would amount to $60,000.

4. Aussie Pies would initially purchase $20,000 of inventory consisting of meat, flour, spices, butter,
and customer packaging for cash.

yo
5. The company would spend $200,000 in cash to construct a store building on the land they had
acquired at Pike Place Market.

6. The company would also spend $140,000 in cash to purchase cooking equipment and outfit the
store with furniture and fixtures.

7. Amphlett and Ferris agreed that the former would retain the title of President and Chief Executive
Officer and that the latter would be the Chief Operating Officer. Both would be members of the
op
Board of Directors.

Key Events in the First Year

In order to comply with the bank’s request for projected financial statements, Amphlett and Ferris
compiled a list of the important events that would likely occur during the first year of operations. The
tC

list included the following events:

1. Based on market research, Amphlett and Ferris estimated that meat pie sales in the first year would
be about 28,000 pies per month or 336,000 pies per year at $3.25 per pie. Since some commercial
customers had approached the entrepreneurial couple about supplying their retail outlets, it was
estimated that 50% of sales revenue would be on credit terms of 30-60 days. The remaining amount
uncollected at the end of the year was projected to be $370,000.
No

2. Additional purchases of inventory were estimated to be $410,000 during the year. All purchases
would be on credit terms of 30-60 days. It was estimated that the unpaid balance of this credit
purchase at the end of the year would be $90,000.

3. The loan agreement on the bank loan called for repayment over 10 years at the end of each year.
Interest would also have to be paid.

4. Payroll expenses (including benefits) for employees including those involved in making and selling
the pies were estimated to require cash outlays of $100,000 during the year. Selling and general
Do

administration expenses of $150,000 were also expected to require cash outlays during the first
year.

5. Additional equipment to expand future production was estimated to require a cash outlay of $30,000.

6. A physical inventory would be necessary to determine the remaining inventory on hand so that
accurate measurement of the cost of making the meat pies could be determined. The company’s
policy was to sell only fresh pies, so the ending inventory was expected to be zero.
TB101 3
This document is authorized for educator review use only by Allan Quijano, HE OTHER until September 2016. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 7. Depreciation for the year was determined to be as follows:

t
os
• $17,000 for equipment, furniture, fixtures—based on an estimated life of 10 years.
• $10,000 for buildings—based on an expected life of 20 years.

8. The company’s start-up costs would be written off over two years.

9. Amphlett and Ferris issued 100,000 shares to a passive outside investor for $2 per share to finance

rP
future expansion plans.

10. A friend of the family gave one of the company’s meat pies to a famous gourmet cuisine personality,
Julia Child, who showed up on the opening day and wrote a rave review in the Seattle Times the next
day. Based on this review, Amphlett and Ferris thought their shares would now be worth consider-
ably more and that this should be reflected in the proforma financial statements.

11. The state of Washington has no state income taxes. Federal income taxes were estimated to be only

yo
$110,000 with 60% being paid by the end of the year.

12. On the last day of the year, Amphlett and Ferris decided to acquire $80,000 of inventory in antici-
pation of next year’s production. Credit terms were 30-60 days.

13. Amphlett and Ferris expected to declare and pay cash dividends of $120,000.
op
tC
No
Do

4 TB101
This document is authorized for educator review use only by Allan Quijano, HE OTHER until September 2016. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
 t
Exhibit 1. A Typical Aussie Meat Pie

os
rP
Source: http://en.wikipedia.org/wiki/Australian_meat_pie.

yo
op
Exhibit 2. Location of Aussie Pies’ First Store in Seattle’s Pike Place Market
tC
No
Do

Source: Yahoo Maps.

TB101 5
This document is authorized for educator review use only by Allan Quijano, HE OTHER until September 2016. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860