Harvard Case - Rethinking Saizeriya's Currency Hedging Strategy
"Rethinking Saizeriya's Currency Hedging Strategy" Harvard business case study is written by Mitsuru Misawa. It deals with the challenges in the field of Strategy. The case study is 20 page(s) long and it was first published on : Jul 6, 2021
At Fern Fort University, we recommend that Saizeriya adopt a more dynamic and diversified currency hedging strategy. This strategy should incorporate a combination of forward contracts, options, and potentially other hedging instruments, while also emphasizing a robust risk management framework and a proactive approach to monitoring and adapting to changing market conditions. This recommendation aims to mitigate the negative impact of currency fluctuations on Saizeriya's profitability while ensuring flexibility and responsiveness to evolving business needs.
2. Background
This case study focuses on Saizeriya, a popular Italian casual dining restaurant chain headquartered in Japan. The company faces significant challenges due to currency fluctuations, particularly the weakening of the Japanese yen against the US dollar, which impacts the cost of imported ingredients and potentially erodes profitability. The case study explores Saizeriya's existing hedging strategy, which primarily relies on forward contracts, and examines its effectiveness in light of the company's growth ambitions and evolving market dynamics.
3. Analysis of the Case Study
To analyze Saizeriya's situation, we can utilize several frameworks:
a) Porter's Five Forces:
- Threat of New Entrants: The casual dining industry is relatively competitive, but Saizeriya's strong brand recognition and cost-efficient model provide some barrier to entry.
- Bargaining Power of Buyers: Customers in the casual dining segment have a moderate level of bargaining power, as they can choose from various options.
- Bargaining Power of Suppliers: Saizeriya's reliance on imported ingredients exposes it to fluctuations in global commodity prices and supplier bargaining power.
- Threat of Substitutes: The casual dining industry faces competition from other food service options, including fast food, fine dining, and home-cooked meals.
- Competitive Rivalry: Competition within the casual dining segment is intense, with players vying for market share and customer loyalty.
b) SWOT Analysis:
- Strengths: Strong brand recognition, cost-efficient model, extensive network of restaurants, operational efficiency.
- Weaknesses: Exposure to currency fluctuations, reliance on imported ingredients, limited menu variety.
- Opportunities: Expanding into new markets, diversifying menu offerings, leveraging technology for improved efficiency.
- Threats: Economic downturns, rising food costs, competition from other dining options.
c) Value Chain Analysis:
- Inbound Logistics: Saizeriya's reliance on imported ingredients makes its supply chain vulnerable to currency fluctuations.
- Operations: The company has a strong focus on operational efficiency and cost control.
- Outbound Logistics: Saizeriya's extensive network of restaurants allows for efficient distribution of food and supplies.
- Marketing and Sales: The company relies on a combination of advertising, promotions, and brand recognition to attract customers.
- Service: Saizeriya provides a consistent and affordable dining experience.
d) Business Model Innovation:Saizeriya's current business model focuses on cost leadership and operational efficiency. However, the company could explore business model innovation to enhance its competitive advantage. This could include:
- Expanding Menu Variety: Offering a wider range of dishes to cater to diverse customer preferences.
- Leveraging Technology: Implementing digital ordering, online reservations, and loyalty programs to enhance customer experience and improve efficiency.
- Developing New Concepts: Exploring new restaurant formats or concepts to target different market segments.
4. Recommendations
To address the challenges posed by currency fluctuations and strengthen its competitive position, Saizeriya should implement the following recommendations:
a) Diversify Hedging Strategy:
- Forward Contracts: Continue using forward contracts to hedge against short-term fluctuations but reduce reliance on them for long-term exposure.
- Options: Utilize options contracts to provide flexibility and limit potential losses. Options allow Saizeriya to lock in favorable exchange rates while retaining the ability to benefit from positive currency movements.
- Other Instruments: Explore other hedging instruments, such as currency swaps or futures contracts, to further diversify the hedging portfolio and manage risk effectively.
b) Implement a Robust Risk Management Framework:
- Regular Monitoring: Establish a dedicated risk management team to monitor currency markets and identify potential risks.
- Scenario Planning: Develop various scenarios for potential currency fluctuations and assess the impact on profitability.
- Stress Testing: Conduct stress tests to evaluate the effectiveness of the hedging strategy under extreme market conditions.
c) Enhance Strategic Planning:
- Long-Term Currency Forecasting: Integrate long-term currency forecasts into strategic planning to anticipate potential challenges and opportunities.
- Scenario-Based Planning: Develop contingency plans for different currency scenarios to ensure business continuity and flexibility.
- Strategic Alliances: Explore strategic alliances with suppliers or other companies to mitigate currency risks and potentially secure access to alternative supply sources.
d) Enhance Operational Efficiency:
- Improve Supply Chain Management: Optimize supply chain operations to reduce reliance on imported ingredients and explore alternative sourcing options.
- Develop Local Sourcing Strategies: Prioritize sourcing ingredients locally whenever possible to minimize currency exposure.
- Leverage Technology: Implement technology solutions to streamline operations, improve inventory management, and enhance efficiency.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The proposed recommendations align with Saizeriya's core competencies in cost efficiency and operational excellence while mitigating the impact of currency fluctuations on its profitability.
- External Customers and Internal Clients: The recommendations aim to enhance customer satisfaction by ensuring consistent pricing and quality while also protecting the interests of internal stakeholders.
- Competitors: The recommendations will help Saizeriya maintain a competitive advantage by mitigating currency risks and allowing the company to focus on strategic initiatives.
- Attractiveness: The proposed hedging strategy is expected to improve profitability and mitigate potential losses due to currency fluctuations. The implementation of a robust risk management framework will enhance transparency and accountability.
- Assumptions: The recommendations assume continued growth in the casual dining industry, a stable economic environment, and the availability of suitable hedging instruments.
6. Conclusion
By adopting a more dynamic and diversified currency hedging strategy, implementing a robust risk management framework, and enhancing operational efficiency, Saizeriya can mitigate the negative impact of currency fluctuations, improve profitability, and strengthen its competitive position in the global casual dining market.
7. Discussion
Alternative approaches to currency hedging include:
- Natural Hedging: This involves matching foreign currency-denominated assets with liabilities to offset currency exposure. However, this approach may not be feasible for Saizeriya due to its reliance on imported ingredients.
- Currency Speculation: This involves taking a bet on the direction of currency movements. However, this approach carries significant risks and is not recommended for Saizeriya due to its focus on long-term sustainability.
The recommendations are based on the assumption that currency markets will remain volatile. However, if currency markets stabilize or the yen strengthens against the US dollar, Saizeriya may need to adjust its hedging strategy accordingly.
8. Next Steps
Saizeriya should implement the following steps to implement the recommended strategy:
- Form a dedicated risk management team: This team should be responsible for monitoring currency markets, developing hedging strategies, and implementing risk mitigation measures.
- Develop a comprehensive risk management framework: This framework should include policies, procedures, and controls to address currency risk effectively.
- Conduct a thorough review of existing hedging practices: This review should identify areas for improvement and ensure that the hedging strategy is aligned with the company's overall business objectives.
- Implement the recommended hedging strategy: This should be done in a phased approach, starting with the most critical currency exposures.
- Continuously monitor and evaluate the effectiveness of the hedging strategy: This will ensure that the strategy remains effective and is adjusted as needed to address changing market conditions.
By taking these steps, Saizeriya can develop a more robust and effective currency hedging strategy that will help the company navigate the challenges of global currency markets and achieve its long-term growth objectives.
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Case Description
Popular Japanese fast-food chain Saizeriya operates affordable family-style Italian restaurants in Japan with subsidiaries in a number of Asian locations. Since the company's Australian suppliers require payments to be made in Australian dollars (AUD) instead of Japanese yen (JPY), volatile currency exchange rates continue to be a serious risk to Saizeriya's operations. The company's president, Issei Horino, believes foreign currency hedging could reduce the costs associated with exchange rates. But an earlier attempt to use foreign currency coupon swap contracts from BNP Paribas went horribly wrong- it cost the company JPY15bn to break those contracts. As the JPY continued to depreciate, together with declining restaurant sales and a falling share price, Horino decided to revisit the company's previous use of foreign currency hedging to investigate whether Saizeriya could adopt an appropriate foreign currency hedge.
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