Cases In International Finance: II

1. Cases In International Finance: II

2. Case #1: Delta Airlines Headquartered in Atlanta, Georgia, Delta Airlines (and its wholly owned subsidiaries Atlantic Southeast and Comair) offers 7,726 flights daily to over 503 cities in 89 countries. Sales: 15B Earnings: - 5B

3. Delta Airlines first established a presence in Latin America when it took over Western Airlines Mexican operations in a 1987 merger. It still maintains a reservation center in Mexico. In 1998, Delta began rapid expansion into Latin America, opening offices in Brazil, Panama, El Salvador, Guatemala, Costa Rica and Peru

4. Should Delta Consolidate its reservation centers? • In Recent Years, Delta has considered consolidating its reservation call centers. There are several benefits from doing so: • These call centers have tremendous economies of scale. Therefore, by concentrating in one location, Delta could save on operational costs. • By having one central reservations center for the region, Delta could standardize its operations and operate more hours per day. • Upgrading each current facility to the latest technology is estimated to cost $2-3M per facility! Building one new facility is estimated to cost $5M.

5. Criteria for country selection • The site selection team considered the following when selecting candidates for the new call center: • Telecommunications infrastructure: With 13,500 incoming and 2,000 outgoing calls per day, a low cost, reliable telephone network is essential • Low cost labor: Since labor comprises 60-80% of the call center’s costs, cheap labor is a must! (Note: Not just low wages, but health insurance, retirement benefits, etc) • Qualified Labor: While the positions are not technically demanding, fluency in multiple languages is important • Flexibility of labor laws: The center will be open 24/7. The country’s laws must be able to accommodate this • Political/Economic stability • Tariffs (important when it comes time to import equipment) • Government support (some tax breaks would be nice!)

6. The Finalists Mexico Pro: Established Presence, Economic Stability, Qualified Labor Force Con: Poor Telecommunications, High Labor Costs, Strict Labor Laws, Tariffs on Computer Equipment Argentina Pro: Transformation to market oriented policies, Qualified Labor Force Con: Expensive Telecommunications, High Labor costs, Tariffs Chile Pro: Efficient Telecommunications Infrastructure, Economic Stability, Low Labor Costs, Low Tariffs, Government Support, Con: Remote Location, Poor Language Skills, Small Labor Pool

7. Questions • Should Delta consolidate its call center operations • If so, are there other factors to consider when choosing the location? • If the consolidation occurs, what type of currency exposure will Delta face? • How could it hedge this exposure?

8. Case #2: Wendy’s Founded in 1969 by Dave Thomas as a single restaurant in downtown Comumbus, the franchise sparked a fast food sensation! By 1997, Wendy’s had 4,933 restaurants (481 outside the US) with plans to expand to 8,000 by 2002. EPS: $.45 Sales: $3.6B ROE: 3% Income: $52M Profit Margin: 1.4%

9. Expansion into Argentina Wendy’s is considering an expansion into Argentina. Prior to 1990, franchising did not exist in Argentina. Following privatization implemented by President Menem, many public employees lost their jobs and were compensated with generous severance packages. Much of this newly available income was used to purchase US franchises However, most franchises met with limited success. Poor quality and the impact of the Tequila effect caused KFC and Dominos to fold after one year. McDonalds and Burger King remained and captured 55% and 25% market shares respectively.

10. Expansion into Argentina Some Facts about Argentina (1995): GDP: $295B ($8,900 per capita) Average Wage: Ps 3.25 (1Ps = $1) Literacy Rate: 95% Unemployment: 12% Inflation: 58% • Argentine beef consumption is higher than that of the US, but Hamburger consumption per capita is 1/3 of that in the US • The average hamburger price in Argentina was Ps 2.50 (US price = $2.56) • 73% of Argentina’s land is used for cattle • Argentina is also a farming country

11. Expansion into Argentina Wendy’s estimated that the minimum scale required to launch an advertising campaign in Argentina was 25 stores. Wendy’s needs to determine the number of stores to build as well as the mix between company owned restaurants and franchises

12. Expansion into Argentina Cost of Building: $200,000 - $400,000 Cost of Furniture/Equipment: $400,000 • Franchising Agreement (Franchises are for 20 years) • Applicant pays a non-refundable fee of $5,000. On acceptance the applicant pays a $30,000 technical assistance fee plus a $350,000 franchise fee. • Franchisee also supplies equipment and furniture. The Franchisee purchases its supplies from Wendy’s • Franchisee spends 4% of gross income on local advertising as well as 2% towards a national advertising program • 12.5% (Rent on facility) and 4% (royalties) of gross income is also paid to Wendy’s

13. Expansion into Argentina • What should Wendy’s consider in its decision to expand into Argentina? • What exchange rate risk would Wendy’s face and how should it hedge this risk?