4018
MAY 15, 2009
TEACHING NOTE
JOHN H. MCARTHUR
SUNRU YONG
Ceres Gardening Company:
Funding Growth in Organic Products
Special Note to Instructors:
Two Excel spreadsheets are available to you from Harvard Business Publishing.
• Product 4019 presents Case Exhibits 2 (Balance Sheet) and 3 (Income Statement) for students
to use for forecasting financial performance. Included in the spreadsheet is a derived
statement of cash flows, which underscores the cash effect of rapid growth in accounts
receivable and inventories. Students will need to make assumptions about performance
beyond 2006 in order to analyze the likely challenges with cash flow and debt covenants.
• Product 4020 presents a more comprehensive view of financial history and projections.
Projections for financial performance beyond 2006 are included, as are calculations for the
effect on channel inventory, dealer sales, and debt covenants. These projections match the
ones shown in the teaching note, though the file allows instructors to experiment with their
own sets of assumptions.
Introduction
The Ceres Gardening Company case presents a story of aggressive, continuing company growth
and tacitly challenges students to identify the signs of potentially grave financial danger. More
specifically, the case focuses on the interrelation between marketing strategy and credit policy and
their effect on the company’s financing requirements. The case illustrates the potential consequences
when effective controls are not present to manage the way in which marketing drives revenue
growth.
, 4018 | Teaching Note—Ceres Gardening Company: Funding Growth in Organic Products
Case Synopsis
The case is set at the end of 2006. The Ceres Gardening Company is a leading player in the
organic gardening industry. As consumer interest in organic products has grown, Ceres’s
distribution has shifted from direct catalog sales to retail sales through independent nurseries and
garden centers. (Thus far Ceres has steered clear of distribution via giant home centers and discount
stores.) Believing that the company is positioned to gain share as the organic gardening market
grows, management began to market itself much more aggressively. The challenge in expanding
distribution is that the window of time during which seeds and seedlings can be sold is narrow, and
the small dealers that carry organic gardening products are unable to finance much inventory. Ceres
responds to this obstacle with its GetCeres™ program, which offers aggressive discounts and very
generous vendor financing. The objective is both to accelerate its penetration into new retail accounts
and to encourage dealers to accept more inventory in anticipation of seasonal sales.
The decision ostensibly faced by Ceres’s management is how to craft the right marketing plan for
the following year, given the apparent success of the GetCeres™ program. What the company has
failed to recognize is that significant inventory remains with the dealers, the accounts receivable has
grown dramatically, and a likely decline in sales in the next year would put Ceres at risk of violating
its debt covenants.
It is worth emphasizing that the case in no way suggests that the Ceres management was
dishonest. Indeed, the actual protagonist of this heavily disguised case had good intentions and
worked hard to create shareholder value. Furthermore, the market rewarded the company’s growth
with steadily increasing P/E and EBITDA multiples. Ultimately, it was inexperience and the absence
of a qualified CFO that led the company into difficult times.
Learning Objectives
1. To guide students to identify critical clues in financial statements. A quick analysis of
revenue and profit growth is often not sufficient to determine whether a company may be in trouble.
The Ceres case is not about financial shenanigans, and a cursory view of the income statement would
indicate that the company is operationally strong. Insightful students will recognize that the key to
the case lies in the balance sheet, the notes to the financial statements, and the cash flow statement
(not provided in the case).
2. To develop student skills in financial projection based on sound business judgment.
Students should project possible outcomes for Ceres using reasonable assumptions based on
information provided in the case. Dealer inventories have grown as Ceres has inadvertently “stuffed
the channel,” and this has important implications for future sales. Furthermore, the cost structure
and debt covenants are relatively tight and do not allow much room for deterioration in performance.
3. To enable students to explore the connection between marketing and credit policy.
Marketing and credit can—and often must—be complementary. Credit terms, applied judiciously,
can be a useful marketing tool to win new accounts and gain greater share in existing accounts.
However, it is a tool that can easily be misused, particularly in the hands of an ambitious sales and
marketing department.
Secondary pedagogical goals may include discussion of organizational behavior in a growing firm
and the issue of distribution channel strategy. Ceres is a company that has seen tremendous success
in recent years. With top-line sales growing rapidly, it is very much a marketing-driven organization,
as evidenced by the hiring of Annette O’Connell and how it has prioritized its resources. Indeed, in
2
MAY 15, 2009
TEACHING NOTE
JOHN H. MCARTHUR
SUNRU YONG
Ceres Gardening Company:
Funding Growth in Organic Products
Special Note to Instructors:
Two Excel spreadsheets are available to you from Harvard Business Publishing.
• Product 4019 presents Case Exhibits 2 (Balance Sheet) and 3 (Income Statement) for students
to use for forecasting financial performance. Included in the spreadsheet is a derived
statement of cash flows, which underscores the cash effect of rapid growth in accounts
receivable and inventories. Students will need to make assumptions about performance
beyond 2006 in order to analyze the likely challenges with cash flow and debt covenants.
• Product 4020 presents a more comprehensive view of financial history and projections.
Projections for financial performance beyond 2006 are included, as are calculations for the
effect on channel inventory, dealer sales, and debt covenants. These projections match the
ones shown in the teaching note, though the file allows instructors to experiment with their
own sets of assumptions.
Introduction
The Ceres Gardening Company case presents a story of aggressive, continuing company growth
and tacitly challenges students to identify the signs of potentially grave financial danger. More
specifically, the case focuses on the interrelation between marketing strategy and credit policy and
their effect on the company’s financing requirements. The case illustrates the potential consequences
when effective controls are not present to manage the way in which marketing drives revenue
growth.
, 4018 | Teaching Note—Ceres Gardening Company: Funding Growth in Organic Products
Case Synopsis
The case is set at the end of 2006. The Ceres Gardening Company is a leading player in the
organic gardening industry. As consumer interest in organic products has grown, Ceres’s
distribution has shifted from direct catalog sales to retail sales through independent nurseries and
garden centers. (Thus far Ceres has steered clear of distribution via giant home centers and discount
stores.) Believing that the company is positioned to gain share as the organic gardening market
grows, management began to market itself much more aggressively. The challenge in expanding
distribution is that the window of time during which seeds and seedlings can be sold is narrow, and
the small dealers that carry organic gardening products are unable to finance much inventory. Ceres
responds to this obstacle with its GetCeres™ program, which offers aggressive discounts and very
generous vendor financing. The objective is both to accelerate its penetration into new retail accounts
and to encourage dealers to accept more inventory in anticipation of seasonal sales.
The decision ostensibly faced by Ceres’s management is how to craft the right marketing plan for
the following year, given the apparent success of the GetCeres™ program. What the company has
failed to recognize is that significant inventory remains with the dealers, the accounts receivable has
grown dramatically, and a likely decline in sales in the next year would put Ceres at risk of violating
its debt covenants.
It is worth emphasizing that the case in no way suggests that the Ceres management was
dishonest. Indeed, the actual protagonist of this heavily disguised case had good intentions and
worked hard to create shareholder value. Furthermore, the market rewarded the company’s growth
with steadily increasing P/E and EBITDA multiples. Ultimately, it was inexperience and the absence
of a qualified CFO that led the company into difficult times.
Learning Objectives
1. To guide students to identify critical clues in financial statements. A quick analysis of
revenue and profit growth is often not sufficient to determine whether a company may be in trouble.
The Ceres case is not about financial shenanigans, and a cursory view of the income statement would
indicate that the company is operationally strong. Insightful students will recognize that the key to
the case lies in the balance sheet, the notes to the financial statements, and the cash flow statement
(not provided in the case).
2. To develop student skills in financial projection based on sound business judgment.
Students should project possible outcomes for Ceres using reasonable assumptions based on
information provided in the case. Dealer inventories have grown as Ceres has inadvertently “stuffed
the channel,” and this has important implications for future sales. Furthermore, the cost structure
and debt covenants are relatively tight and do not allow much room for deterioration in performance.
3. To enable students to explore the connection between marketing and credit policy.
Marketing and credit can—and often must—be complementary. Credit terms, applied judiciously,
can be a useful marketing tool to win new accounts and gain greater share in existing accounts.
However, it is a tool that can easily be misused, particularly in the hands of an ambitious sales and
marketing department.
Secondary pedagogical goals may include discussion of organizational behavior in a growing firm
and the issue of distribution channel strategy. Ceres is a company that has seen tremendous success
in recent years. With top-line sales growing rapidly, it is very much a marketing-driven organization,
as evidenced by the hiring of Annette O’Connell and how it has prioritized its resources. Indeed, in
2
