Financial Management: Dean & Deluca Analysis

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DEAN & DELUCA ANALYSIS 1

Issues involved in this case

Dean & Deluca is an American based chain of upscale stores that began its operations in
SoHo District, New York City. It was founded in September 1977 by Joel Dean, Giorgio Deluca,
and Jack Ceglic. A fourth shareholder joined Dean & Deluca in 1981. Since 2014, Dean &
Deluca stores got acquired by a Thai based luxury development firm known as Pace
Development for a value of $ 140 million. Pace Development acquired the rights to license all
Dean & Deluca stores in the US and globally. However, the new Pace Development underwent a
liquidity crisis after this acquisition, marking the beginning of the unprecedented turmoil that has
faced Dean & Deluca to date. Despite spending over $100 million to revitalise the brand in the
US, Dean & Deluca has continuously accumulated massive debts which forced it to close most
locations across the country. For example, Dean & Deluca withdrew from lease agreements and
had its most of its promised sponsorships revoked. It has also closed most of its stores in
Maryland, Kansas, and North Carolina and has continued to withhold payments from vendors.
New York, in particular, the company owes hundreds of dollars to small vendors including
$56,000 for Brooklyn, $24,000 for Colson Patisserie, and $51,000 for Amy’s Bread. The
company got sued in 2019 for Eleni Gionopulos for $86,000, which it settled for 50 cents on the
dollar, causing a huge financial loss to the vendor. Dean & Deluca has also accumulated huge
debts to industry supplies such as Imperial Dade, forcing some of them to cease extending credit
to its chains. For instance, trade credit worth $46,588.74 owed to Fulton Fish Market by June 4,
2020, had not paid since February. 

After several months of noticeably empty shelves and staff, Dean & Deluca stores closed
several stores including the Manhattan’s Upper East Side and California’s Napa Valley. The
remaining outlets in the US are increasingly being stocked with Chobani yoghurt, and Coca-
Cola, as opposed to the company’s craft, made equivalents. Currently, only 6 Dean & Deluca
stores are operating compared to more than 40, when Pace Development purchased the chain in
2014. Since being acquired in 2014, Dean & Deluca has also been struggling against lower-
priced competitors in the market. By mid-2019, Dean& Deluca was out of cash, making it
difficult for Pace to continue providing loans to sustain its continued losses. Dean & Deluca
ended up closing all its retail outlets and e-commerce website. Currently, Dean & Deluca’s assets
cannot cover its massive debts. For the last six months, the company’s only source of revenue
has been royalty fees paid by a handful of franchised stores. Such reduced revenues are
inadequate to meets the firm’s short term liabilities. These piling debts coupled with the negative
impacts of the Corona Virus, pushed the four-decade-old grocer over its edge, forcing it to file
for Chapter 11 Bankruptcy protection. According to the filing, Dean & Deluca owes about
$700,000 vendors and $275 million to lenders and has accumulated $100 million in operating
losses. The filing also indicates that Dean & Deluca owes Midtown Equities $21.5 million while
it has accumulated $33.3 million in unpaid rents. Moreover, the company owes $ 400, 000 to the
Trump Organisation. The court papers also indicate almost all the Dean & Deluca stores globally
have closed business, with only a few still operating via franchise agreements. 
DEAN & DELUCA ANALYSIS 2

Is (was) Dean & Deluca a successful brand despite the turmoil it went through leading to
the filing for Chapter 11 Bankruptcy?

Dean & Deluca was initially a successful company despite the financial turmoil it has
undergone in recent years culminating to the filing for Chapter 11 Bankruptcy. A company’s
success is determined by several factors, including the entrepreneurial skills and financial
management skills of the management alongside leadership skills of its top management.
Whereas Dean & Deluca’s future appears bleak currently, the brand was a game-changer when it
opened in 1977(Davis, 2014). A successful company is defined as its ability to differentiate its
products from the competitors, remain innovative, and fulfil the changing clients’ tastes and
preferences. Dean & Deluca fits all these qualities of a successful company from the time it
opened its first store in 1977 in New York’s SoHo’s neighbourhood (Davis, 2014). The company
changed how Americans shopped particularly for specialty foods. For instance, most of the
company’s precious ingredients were imported, and their products offered customers a rare
experiment of satisfaction, making the brand to grow into a household name quickly. Moreover,
the company focused on improving the aesthetic value of their products to match that of the
European quality in terms of impeccable services, presenting customers with American excess.
Consequently, this made Dean & Deluca the destination of high-end vendors and customers.

From the case study of Dean & Deluca, it is evident that the brand had acquired immense
reputations since its inception in 1977. Such success could be attributed to the entrepreneurial
skills of the company’s main founders, Dean and Deluca. From inception, the founders focused
on making the brand stand out from its competitors by identifying a unique market niche of a
luxury food chain destination for various specialties including radicchio, balsamic vinegar, and
mascarpone. These are among the less tasted and unheard of dishes in the US (Davis, 2014).
Owing to this reputation, the company became a globally successful brand, expanding to the rest
of the world. At its peak, the company had an excess of 60 cafes across the Asian market and an
additional 3 in the Middle East.  

The success of Dean & Deluca could also be attributed to its prudent financial resources
management. Financial management deals with the acquisition of finances, allocation of funds,
and control of such funds by a business enterprise. For a business to be successful, skilful
planning, control and execution of these financial activities is crucial. Firms that operate in the
retail industry, like Dean & Deluca require choosing a judicious mix of short-term and long-term
funds to finance their current assets (Davis, 2014). Every firm has a minimum amount of
working capital that must be present to fund its day to day activities. A portion of this capital is
usually financed with permanent sources of finance such as equity capital, retained earnings,
share capital, and long-term debt. The other component of the company’s working capital needs
should be financed using short-term sources of funds, including trade credits. However, the
company’s management, the management is supposed to determine the degree to which current
DEAN & DELUCA ANALYSIS 3

assets should be financed using borrowed capital or equity capital. Therefore the previous
success of Dean & Deluca to become global brand could be attributed to the founder’s prudence
in managing and financing its current assets. 

A successful company must also make judicious liquidity decisions. Liquidity decisions
refer to a firm’s attempt to balance cash outflows and inflows to ensure that it can meet its short-
term debt obligation as and when they fall due. More specifically, liquidity deals with the
management of a firm’s current assets. Insolvency and liquidity must be controlled to be
successful. However, a conflict between liquidity and profitability may occur in the process of
managing current assets (Zilko, 2016). Therefore, a successful company must focus on achieving
proper tradeoff between profitability and liquidity to avoid insolvency or bankruptcy risk.
Liquidity decisions also involve the management of working capital. Working capital
management involves the management of the day to day business activities. 

For a firm to be considered successful, it has to maximise shareholders wealth. This

means that a firm has to generate sufficient returns from its operations to attain the interests of its
owners or shareholders. Therefore, enough money must be invested in the company’s current
assets to generate sales. Inadequate working capital may expose firms into the risk of
bankruptcy, particularly those in the retail industry like Dean & Deluca. This is the problem that
Dean & Deluca faced after 2014. After its acquisition by Pace Development in 2014, Dean &
Deluca could not have adequate working capital, and this impaired its profitability and ability to
meet its current obligations such as paying vendors and creditors. For a firm to be successful, its
networking capital should be positive to act as a bumper from arising obligations in the ordinary
business operating cycle. As a conventional rule, a successful business must retain its current
asset level twice the current liabilities level.  

Dean & Deluca’s success before 2014 could also be attributed to its judicious capital
budgeting decisions. Capital budgeting decisions are also known as investment decisions. They
involve committing current funds in long-term projects with the expectation of yielding returns
over several years in the future. Capital budgeting decisions can determine the success or failure
of a company as they involve a huge investment of money. Investment decisions may take the
form of expanding an existing business, acquisitions, replacements, modernisation,
diversification, and research and development (Zilko, 2016). In the case of Dean & Deluca, the
use of franchising or license structure as an expansion strategy contributed to its success.
Franchising refers to a scenario where one party (the franchisor) licenses or grants some
authorities and rights to another party (the franchisee) (Nasri et al., 2020). The franchisee is
required to pay an initial commission or fee to the franchisor alongside an ongoing share of the
revenue generated in the form of royalties. Franchising is an effective business expansion
strategy as the business owner does not incur additional expansion costs. This is because the
franchisee bears all the selling expenses. Franchising also helps in increasing the brand name
awareness to more customers, ultimately increasing the company’s goodwill (Nasri et al., 2020).
Using this expansion strategy, Dean & Deluca opened its first overseas operations in Tokyo,
DEAN & DELUCA ANALYSIS 4

Japan, in 2003(Nasri et al., 2020). At its peak period, the company had more than 40 stores
across the US and over 60 cafes across the Asian market. 

What defines a successful company, and does Dean & Deluca fit this description?

Dean & DeLuca Company has not been successful for the past few years. Throughout its
history, Dean &Deluca has earned popularity as an icon of food, subculture, and lifestyle,
originating from New York City. Respected as a hub for the invention of latest culinary
developments and traditions, Dean & Deluca has the cultural reputation and worldwide
recognition to emerge as the defining logo in luxury gourmand food retail around the global.
However, since its acquisition by the PACE, it has shown a gradual decline in its performance.
The once beacon of specialty foods across the US is currently collapsing. A successful franchise
should have the necessary financial resources to invest and improve its competitiveness and
attractiveness. However, this is not the case with Dean & Deluca currently as vendors have
ceased providing credit to the company, and several have sued it for hundreds of thousands of
dollars. Moreover, Dean & Deluca has not compensated its employees following the unexpected
closure. 

A successful company is also defined as the leadership style, particularly during times of
financial crisis. Without a doubt, Sorapoj Techakraisri, the CEO of Dean & Deluca, is a
successful leader given the immense investment portfolio he has attained by Pace Development.
However, the CEO lacks the necessary leadership skills to steer an organisation out of a crisis.
The current challenges facing Dean & Deluca should not be an excuse for the abandonment of
the US vendors and workers. During times of crisis, a company’s success depends on the
leadership style adopted by the CEO. For a firm undergoing economic crisis such as Dean &
Deluca, an effective strategy should be slowing down and resisting the urge to engage in new
investments immediately. An effective leader should ascertain facts, ask pertinent questions,
make plans and compose a crisis team to deal with the problem. According to Nasri et al. (2020),
time is of the essence and responding to a crisis should be done with thoughtful urgency. An
effective leader quickly weighs all the available options and develops a plan of action to protect
the company’s long-term interest. In most cases, human capital is the most important long-term
interest. Maintaining positive employee relationships can effectively help a firm go through a
financial crisis. For instance, Southwest Airlines protected its employees following the crisis
created by the September 11 crisis and did not lay off any employee (Mukhametzyanov &
Nugaev, 2016). By 2005, the company had the strongest post-crisis recovery among the top ten
US airlines. Such a strong recovery was attributed to the company’s ability to maintain long-term
and positive employees’ relationship during uncertain times (Nasri et al., 2020). None of these
strategies was applied by the leadership of Dean & Deluca when it began experiencing a
liquidity crisis. 

Moreover, a successful company is defined by its ability to maintain effective

communication during times of crisis. When a firm is experiencing a financial crisis, betrayal
DEAN & DELUCA ANALYSIS 5

feelings and confusion are common. During such times, an effective leader should provide open
and honest communication with team members, customers, and vendors. According to Zino and
Yeremchenko (2019), all relevant stakeholders of a company should be constantly informed of
all the undertakings the firm is focused on, as this will help counter rumour generated by the
media and other rumour mills. For example, in 2010, Toyota was compelled to recall about 2.3
million vehicles to resolve an issue with the brand’s accelerator pedals (Nasri et al., 2020). The
company went ahead to hold an AMA-style dialogue with its executives and customers, a
popular platform then, where all issues transparently addressed. The dialogue attracted more than
one million views in one week. Therefore, transparency in communication bolsters the public
image and morale, even where it is challenging to change a firm’s trajectory (Nasri et al., 2020).
The leadership of Dean & Deluca did not take any of these measures. Instead, the company
neglected its vendors and employees who were key to building its success. 

Financial analysis of Dean & Deluca

Dean & Deluca has been experiencing a liquidity crisis as evidenced from the following
outstanding expenses and liabilities extracted from Chapter 11 Bankruptcy court filings. 

Pro-forma income statement

Amounts Amounts
Operating losses ($100,000,000)

Expenses: Rent expenses

Rent expenses $33,300,000
Midtown Equities $21,500,000
Trump organisation $400,000
Another landlord $9,200,000
Totals expenses ($64,400,000)
Net operating losses ($164,400,000)

Pro-forma balance sheet: Liabilities

Totals Total
Long-term Assets
Property and equipment $20,000,000
Dean & Deluca trademark $50,000,000
Franchise agreements $5,000,000

Current assets:
Accounts receivables $700,000
Total assets $75,700,000

Liabilities:
DEAN & DELUCA ANALYSIS 6

Amount owed to lenders ($275,000,000)

Other liabilities ($495,000,000) ($770,000,000)
Equity ($694,000,000)

From the statements above, Dean & Deluca has operates with net operating loss of $164.4
million while owner’s equity is negative $694 million. Therefore, the firm’s total assets are
inadequate to settle outstanding liabilities.

Proposed strategy how Dean & Deluca could emerge from Chapter 11 Bankruptcy 

In filing Chapter 11 bankruptcy, the company can develop suitable ways of consolidating
the debt and continue with its operations. Under chapter 11, the company gives achievable plans
of settling its debts, since it allows the company to meet its obligations and pay all debts (Fisher
et al., 2019). In the case of Dean & Deluca, its liabilities exceed assets, meaning that it will be
challenging to meet its outstanding debts. Therefore, the only effective strategy for Dean &
Deluca to emerge from Chapter 11 Bankruptcy is by continuously investing in research and
development to enable it to provide its customers with reasons to pay their high premium
products (Tubkong, 2016). More specifically, launching websites will go a long way in
maintaining its loyal customers during this period of Covid-19 pandemic, as it is already an
established brand. 

Is Emergence from Chapter 11 possible?

Dean & Deluca can emerge from Chapter 11 Bankruptcy situation by adopting the
strategy above, as it already an established brand. This will enable Dean & Deluca to lock in
digital demand, as it has established its name in selling expensive products, and this means that it
could be possible to raise the capital necessary to reopen several stores (Markwardt et al., 2016).
Gourmet grocers such as Zabar and Citarella have employed this strategy and succeeded to come
out of liquidity trap, Dean & Deluca could succeed as well. 
DEAN & DELUCA ANALYSIS 7

References

Davis, J. B. (2014). Making space for success. ABAJ, 100, 45.

Fisher, T. C., Gavious, I., & Martel, J. (2019). Earnings management in Chapter 11
bankruptcy. Abacus, 55(2), 273-305.
Markwardt, D., Lopez, C., & DeVol, R. (2016). The Economic Impact of Chapter 11,
Bankruptcy versus Out‐of‐Court Restructuring. Journal of Applied Corporate
Finance, 28(4), 124-128.
Mukhametzyanov, R. Z., & Nugaev, F. S. (2016). Financial statements as an information base
for the analysis and management decisions. Journal of Economics and Economic
Education Research, 17, 47.
Nasri, B. M., Collazzo, P. G., & Welsh, D. H. (2020). Home-grown middle eastern franchises:
prospects for the future. International Entrepreneurship and Management Journal, 1-15.
Tubkong, R. (2016). Perceived Value and Customer Loyalty of Services Provided Restaurant:
Comparison of Dean & Deluca and Alpaka.
Zilko, D. (2016). Irrational Persistence: Seven Secrets That Turned a Bankrupt Startup Into a
$231,000,000 Business. John Wiley & Sons.
Zinov, V. G., & Yeremchenko, O. A. (2019). Corporate venture capital investments: features and
successful practices. The Economics of Science.