IB Business Management SL 3.5.2 Improving profitability ratios Question Bank

Trestle Z PLC (TZ)
Trestle Z PLC (TZ), a specialist coffee roaster, operates in the secondary sector. Its instant coffees are sold worldwide in a very competitive market. Consumers in this market have strong brand loyalty.
Although demand for instant coffee has not grown in many richer countries, it is growing in emerging markets and Eastern Europe. TZ has no control over the price of its raw material (coffee beans),

as prices are determined by world markets.

The directors of TZ want to increase the company's gross profit margin and net profit margin and grow the business. Table 5 gives selected financial information for the company for 2019 and 2020.

TZ's directors are considering two options.
Option 1: Take over a specialist coffee business
TZ is considering taking over Green Glass ( G G ) for $\$ 600$ million. GG owns 1000 cafés in the USA that sell speciality products at high prices. It also has an e-commerce subscription service that sells its coffee beans to consumers. In 2020, GG's net profits were $\$ 120$ million. GG has a well-organized distribution channel and strong brand awareness in the USA. TZ would operate the cafés using the GG branding.
Option 2: Launch its own chain of cafés
These cafés would compete against established chains of cafés serving the mass market. Initially, the launch would be in three EU countries but would then, if successful, be launched across the world. TZ would produce a range of freshly ground coffees for sale in the cafés.

Explain two factors that might prevent T Z from increasing its gross profit margin.