UV8015

Rev. Jan. 30, 2024

Bob’s Baloney

Upon entering the executive conference room in early 2020, Amanda Spangler had to pinch herself to be
sure that she was really in an executive meeting at headquarters. After completing an MBA degree, Spangler
had landed her dream job as a lead manager at one of the premier brands in the American food industry, Bob’s
Baloney (Bob’s).

Spangler’s first months on the job had been all that she had hoped. She had wrestled with important
business decisions, experienced the genius of some favorite foody legends, witnessed the drama of marketing
a true premium brand, and even hobnobbed with several celebrities. It had been truly amazing. But her biggest
surprise was what was going on right then in the conference room. It was clear that things were not well at
Bob’s.

The Company

Since its founding in Philadelphia in the 1920s, Bob’s had grown to dominate the world market for
ultrapremium bologna. Bob’s market share of the high­end market was greater than 50%, and it was particularly
strong among high­end restaurants where it was the de facto bologna brand used by elite chefs. World­
renowned French chef Bruno Saucisson had recently waxed poetic in his expressions of esteem for the Bob’s
product.

Il n’y a qu’une seule brande que j’utilise à Metropolitan 5 pour mon plat signature—Cordon Baloney. Bien sûr, c’est
Bob’s. C’est le seul bologna qui parle profondement aux palats les plus raffinés.

[There’s only one brand that I use at Metropolitan 5 for my signature dish—Cordon Baloney. Of course, that’s Bob’s.
It’s the only bologna that speaks deeply to the most refined palates.]

From the finest restaurants to school cafeterias and summer camps, Bob’s Baloney was highly regarded by
customers in nearly every demographic profile.

Still, the esteem Bob’s drew was not isolated to its customers. The company had a long history of
community service awards, including a distinguished record as perennial winner in a national poll for best meat­
processing employer. The company was well known as an influential international advocate for animal rights.
Suppliers competed aggressively to do business with Bob’s, claiming it was an honor have their by­products
acknowledged with a distinction of quality. The company’s merchandise (e.g., T­shirts) had long been popular

This fictional case was prepared by Michael Schill, Sponsors Professor of Business Administration. It was written as a basis for class discussion rather
than to illustrate effective or ineffective handling of an administrative situation. Copyright  2020 by the University of Virginia Darden School
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among young people and corroborated the high regard the brand maintained. Bob’s Baloney was widely
regarded as a national treasure.

The company had been launched by Bob Klobase in the mid­1920s after his family had immigrated to the
United States from Slovenia. Klobase had a long family heritage in the bologna industry, so it was a natural
business for him to build—but he had outdone his family heritage. From the beginning, he had crafted bologna
at the very highest level. Those in meat production circles often observed that to Klobase, the phrase “Holy
Baloney” was not just an interjection but an abiding product aspiration.

The current management team continued to maintain the same commitment to quality that had always
existed in the business. Company buyers were uncompromising in their demands from suppliers for quality
source ingredients, including the finest spice blends and cures, nonmeat fillers, and nuggets of free­range,
humanely vivisected, organic beef. Inventory levels were managed carefully to ensure freshness while
maintaining sufficient product to quickly meet customer needs. Despite the demanding nature of Bob’s
customer clientele, it was very rare for the company to receive negative customer feedback. In fact, customer
delight had seemingly been uncontained since the company’s 2017 investment in a completely redesigned
production facility. The new Green Hills facility housed a host of cutting­edge food production achievements
that permeated the entire production process. The result was a bologna production operation that redefined
the frontiers of meat grinding, smoking, slicing, and product packaging, to yield a better product produced in a
better way. While esteem for the product was the centerpiece of the Bob’s Baloney brand, the brand was
vigilantly supported by a uniquely creative top­notch marketing team. The company was well known for its
popular well­executed advertising campaigns. If anything, brand­building investments at Bob’s were on the rise.

The Meeting

Due to Bob’s reputation as the poster child for corporate success, Spangler was astonished at the negative
tone at today’s meeting. Bob’s CEO Prateek Gupta, sweat accumulating on his forehead, had gotten straight to
the point. Diaz Internacional, the Argentine food conglomerate and owner of 30% of the equity shares in Bob’s,
had recently made public its great displeasure with the current management team. In a highly visible
announcement, Veronica Mino, managing director of Diaz, had openly decried Bob’s management:

Claro, todos dicen que el equipo de Bob ha construido una compañía fantástica, pero por amor de chorizo, ¿ya no importa
el desempeño financiero? ¿No debe una marca poderosa ganar dinero? Si el equipo de Bob no puede generar un rendimiento
adequada, es tan bueno que una salchicha muerta.

[Sure, everyone says that the team at Bob’s has built a fantastic company, but for the love of chorizo, doesn’t financial
performance matter anymore? Shouldn’t a powerhouse brand make money? If Bob’s team can’t generate a decent return,
I say they’re as good as dead bologna.]

Mino’s message had come across loud and clear, and in response to Mino’s displeasure, Spangler was
witnessing a management team panic that was astounding.

Spread on the table was a copy of the recent financial statements for Bob’s (see Exhibit 1) and some
business peer and capital market benchmark statistics (see Exhibit 2). As the drama unfolded around her,
Spangler picked up the financial statements and used them to calculate some financial ratios and get a sense of
the company’s financial health (see Exhibit 3). To structure her analysis, she relied on a clever algebraic
decomposition of ROE she had learned in a finance course (see Exhibit 4). She had never expected to be the
one leading an evaluation of financial performance. But now that she was looking at the ratios, she knew she
had something to say. She quickly scratched some additional notes and, feeling brave, she raised her hand.

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Exhibit 1
Bob’s Baloney
Financial Statements for Bob’s Baloney
(in millions of US dollars)

2015 2016 2017 2018 2019

Revenue 190.5 185.6 209.8 248.3 271.8

Cost of Goods Sold 136.9 135.8 156.8 189.3 212.1
Gross Profit 53.6 49.8 53.0 59.0 59.7
Selling and General Expenses 18.8 28.8 38.3 47.5 47.0
Operating Profit 34.8 21.0 14.7 11.5 12.7
Net Interest Expense 0.9 0.5 7.0 6.1 5.6
Pretax Profit 33.9 20.5 7.7 5.4 7.1
Taxes 7.8 5.0 1.9 1.4 1.7
Net Profit 26.1 15.6 5.9 4.0 5.4

Cash and Cash Equivalents 10.5 9.8 10.5 10.4 8.5

Accounts Receivable 10.0 9.7 10.1 13.8 15.0
Inventory 6.7 7.7 8.4 10.9 12.0
Other Current Assets 3.6 3.2 4.6 6.9 7.7
Current Assets 30.8 30.4 33.6 42.0 43.2

Net Property, Plant, and Equipment 92.0 89.9 264.4 275.5 289.0
Other Fixed Assets 47.1 47.6 48.9 46.6 49.7
Total Assets 169.9 167.9 346.9 364.1 381.9

Accounts Payable 12.2 13.4 15.4 14.4 12.3

Wages Payable 12.4 14.4 13.8 13.7 15.0
Other Payables 8.1 7.8 5.6 6.6 8.3
Current Liabilities 32.7 35.6 34.8 34.7 35.6
Debt 29.5 9.1 183.0 196.3 207.8
Shareholders’ Equity 107.7 123.3 129.1 133.1 138.5
Total Liabilities and Shareholders’ Equity 169.9 167.9 346.9 364.1 381.9
Source: All exhibits created by author.

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Exhibit 2
Bob’s Baloney
Benchmark Performance Figures for Sample of Premium Food Producers

Financial Returns for Sample of Premium Food Producers for 2019

ROE RONA
Low­Return Firms (25th percentile) −1.2% 2.3%
Median­Return Firms (50th percentile) 8.9% 7.1%
High­Return Firms (75th percentile) 19.4% 13.3%

Capital Market Benchmarks for January 2020

Estimated Cost of Equity (based on beta estimate of 0.9) 8.0%

Estimated Weighted Cost of Capital (WACC) 6.1%

Note: ROE is net profit divided by shareholder’s equity. RONA (return on net assets) is NOPAT divided by net assets.
NOPAT is net operating profit after tax. Net assets is net working capital plus PP&E. Net working capital is current
operating assets less current operating liabilities. PP&E is net property, plant, and equipment.

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Exhibit 3
Bob’s Baloney
Spangler’s Financial Analysis of Bob’s Baloney

2015 2016 2017 2018 2019

Growth and
Returns
Revenue Growth [percentage change in revenue] 5.5% ­2.6% 13.0% 18.4% 9.5%
Return on Assets [net profit / total assets] 15.4% 9.3% 1.7% 1.1% 1.4%
Return on Net
Assets [NOPAT / net assets] 19.0% 11.9% 3.5% 2.6% 2.8%
Return on Equity [net profit / shareholders’ equity] 24.2% 12.6% 4.5% 3.0% 3.9%

Margins
Gross Margin [gross profit / revenue] 28.1% 26.8% 25.3% 23.8% 22.0%
SG&A Percentage [SG&A expenditures / revenue] 9.9% 15.5% 18.3% 19.1% 17.3%
Operating Margin [operating profit / revenue] 18.3% 11.3% 7.0% 4.6% 4.7%
Net Profit Margin [net profit / revenue] 13.7% 8.4% 2.8% 1.6% 2.0%

Asset Efficiency
Asset Turnover [revenue / total assets] 1.1 1.1 0.6 0.7 0.7
PPE Turnover [revenue / net PP&E] 2.1 2.1 0.8 0.9 0.9
NWC Turnover [revenue / net working capital] NA NA NA 34.0 35.8
[accounts receivable / revenue ×
AR Days (DSO) 365] 19.2 19.1 17.6 20.3 20.1
Inv Days (DIO) [inventory / COGS × 365] 17.9 20.7 19.6 21.0 20.7
AP Days (DPO) [accounts payable / COGS × 365] 32.5 36.0 35.8 27.8 21.2

Leverage
Debt / Total [debt / (debt + shareholders’
Capital equity)] 22% 7% 59% 60% 60%

Summary Accounts (in millions of US dollars)

NOPAT (t = 25%) [operating profit × (1 − tax rate)] 26 16 11 9 10
Net Working
Capital [current assets − current liabilities] (2) (5) (1) 7 8
[net working capital + net fixed
Net Assets assets] 137 132 312 329 346
Note: NOPAT is net operating profit after tax; SG&A is selling, general, and administrative expenses; PP&E is net property, plant, and equipment;
NWC is net working capital; AR is accounts receivable; Inv is inventory; COGS is cost of goods sold; AP is accounts payable; DSO is days sales
outstanding; DIO is days inventory outstanding; and DPO is day payables outstanding.

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Exhibit 4
Bob’s Baloney
Spangler’s Decomposition of ROE

The financial metric Return on Equity or ROE (Profit / Equity) is an important ratio to equity holders, as it
measures the annual return that equity holders receive on the book value of their investment. It measures what
they get for what they have given up. ROE can be decomposed algebraically into three contributing ratios: (1)
Profit Margin (Profit / Revenue), which measures the business pricing and cost structure, as it indicates how much
profit is being generated per unit of business revenue; (2) Asset Turnover (Revenue / Assets), which measures the
efficiency or productivity of the business assets, as it indicates how much revenue is being generated by the
business assets; and (3) Financial Leverage (Assets / Equity), which measures how the assets are financed, as it
indicates how much of the business assets are financed with equity holder funds and, by inference, how much
are financed with debt. The ROE decomposition works algebraically because the values for Revenue and Assets
cancel out in the equation to reduce to Profit divided by Equity or ROE:

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝐸𝐸𝑅𝑅 𝐴𝐴𝐴𝐴𝐴𝐴𝑅𝑅𝑃𝑃𝐴𝐴

𝑅𝑅𝑅𝑅𝑅𝑅 = = × ×
𝑅𝑅𝐸𝐸𝐸𝐸𝑃𝑃𝑃𝑃𝐸𝐸 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝐸𝐸𝑅𝑅 𝐴𝐴𝐴𝐴𝐴𝐴𝑅𝑅𝑃𝑃𝐴𝐴 𝑅𝑅𝐸𝐸𝐸𝐸𝑃𝑃𝑃𝑃𝐸𝐸

This document is authorized for use only in Remi Jean Emile Stellian's Finanzas II y Finanzas Corporativas (Remi Jean Emile Stellian) 2025-2 at Pontificia Universidad Javeriana from Jul 2025
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