Case Analysis

Assignment Requirements

 

A Couple of Squares, a London, Ontario-based company, specialized in making hand-iced, artisanal-quality cookies and other baked goods. In June 2012, A couple of Squares’ unique product line included hand-decorated iced cookies (one line with all-natural food coloring and another line with promotional logos for corporate clients) and a line of gourmet cookies, which included such exotic flavors as almond ginger, black pepper ginger and raspberry jam-filled cookies. The owners anticipated that much of their future growth would come from the gourmet cookies lines, which used a more automated manufacturing process. Their customers included both small and large retailers. Distributors and corporations that bought cookies iced with their logos for promotional purposes. Cookies sold to corporate clients currently drove approximately 5 per cent of the company’s revenue, but, in the past, had been a much larger piece of the business.

The partners described a top-quality A Couple of Squares cookie as a combination of good design, packaging and taste. The cookies were never shrink-wrapped, and much care and thought went into the packaging. The hand-iced cookies were packaged in cellophane with a hand-tied ribbon. Social trends heavily influenced the design of the cookies. For example, in 2012, a popular trend was to add a c=face to everyday items (such as cookies shaped like salt and pepper shakers with faces)/ Erb and Bradshaw also tried to ensure that the designs weren’t too extravagant in an effort to create operational efficiencies in the Decorating department.

Over the years, the company had received numerous accolades and wide media coverage. But in 2008, the continuing global recession led to a sharp decline in the bakery’s corporate clients. A couple of squares had just moved to a new 10,000 square foot facility and had a top- heavy staff of 35. The firm started losing money. Cash flow started to dry up.

Operations

Operational efficiency was critical to the success of a Couple of Squares because it was a manufacturer with high overhead, low margins and perishable inputs.

Every day, a god manufacturing practices officer inspected the facility before it opened to ensure all of the tabletops were clean, no pests were present, chemicals were stored properly, and the fridge and freezer were at the proper temperatures.

Every Tuesday, the team ordered from three to four suppliers all the supplies needed for the coming week.

Daily the baker determined how many kilos of dough to make, based on a calculation of how many pieces would be iced the following day. The dough was made every owning at 7am. At 8 am, the baker would roll the dough out on shelters, cut it out and bake it that day. Any leftover dough would be refrigerated and brought out the following day.

Every day, the icing was prepared for all decorating that would occur the following day. After the cookies were iced, they needed to sit for one to two days to dry. Cookies that needed multiple layers of icing would be iced with their first layer and then left to dry again. Altogether, icing a batch of cookies took one to three days, depending on the size and complexity of the order.

The company employed a full-time color technician, a graphic artist whose role was to ensure the icing was consistent in color. This technician hand-mixed the color and matched them to pantone standards. Because factors such as the weather could affect the colors, this manual check was critical. In addition, the color technician’s role was to ensure the icing had the correct consistency.

The cookies were all hand-decorated, in part because having a decoration machine would have required a substantial upfront investment. The department iced up to 4000 cookies a day during its busiest period. The decorating line manager oversaw the department and was also responsible for designing the cookies. She also played an active role in quality control, surveying the work of the decorators during their shift. Each decorator had his or her own rack. They would pull out a rack, decorate all the cookies and then initial the rack to identify that they had iced the cookies.

After the cookies were iced, they went to packaging. This team bagged and labeled the cookies, then packed them in cases for shipping. This packaging process took approximately on day. During the busiest times of year, eight people packaged the cookies at two sets of tables set up in the front of the decorating room. Many of the products were hand-packaged with a hand-tied ribbon. A batch code was applied to each cookie package so it could be traced back to the batch it had come from. The labeling process also occurred in this department. The packaging team played a role in quality control of the icing of the cookies.

The shipping team was then responsible for sending the finished product out. Via truck if there were enough cookies for a skid or with a pickup via CanPar if it was a smaller order. The products had a shelf life of six to nine months, after which, the flavor would start to wane.

Management

The organization was structured under the o-leadership of the two directors, Bernadette Erb, director of marketing, and Mary Bradshaw, director of operations. The partners had met while both were working at Sebastian’s and both had significant experience in the food industry. Additionally, Erb was the daughter of a French chef. Both Erb and Bradshaw felt they balanced each other out well. Radshaw paid a lot of attention to details. While Erb was more action-oriented. The administrative side of the organization also included Rachel Bradshaw, the sales manager; Sarah the office administrator and Lisa, another sales representative. The rest of the organization was concerned with the production and shipping of the product. The business had three departments: Baking, decorating and shipping. Depending on the time of year and the volume of demand, the baking department employed from five to nine people, the Decorating department employed up to 12 people, and the shipping and packaging department employed three to eight people. When a bottleneck occurred in the manufacturing process, most of the employees were able to switch departments. The only exception was the decorating of the cookies, which was a specialized skill.

The partners felt strongly about their management philosophy. They were very direct with their employees, in spite of some occasional discomfort. They let their won guards down, in the hopes that their staff wouldn’t feel bad about making mistakes and they felt strongly about conveying the enthusiasm they felt about their products and business. They believed that their philosophy paid off- the company had a very loyal staff, many of whom had been with the company for seven or eight years. As an example of a long-term employee, Erb and Bradshaw pointed to Javier, who made their dough, and had been employed by A Couple of Squares since 2007. In his entire time at A Couple of Squares, he had only produced four batches of dough that needed to be remade.

Erb and Bradsaw also had strong feeling about their role as women in business-they brought passion and a certain style of management to the table. Yet, they also felt that they were occasionally taken advantage of because they were women. For example, most of the equipment had been purchased used rather than new. In November 2011, they had paid $25,000 for a used packaging machine, which they intended to use to automate the packaging of their cookies, which would decrease the labor costs. The machine did not work and sat unused in their facility. The partners raised concerns that they had been taken advantage of in the deal.

International strategy

A Couple of Squares had been selling to the United States since 2005. The U.S customers included bakers, gift stores and other retailers, such ad Dylan’s Candy Bar, Crumb’s Bakery, Cheryl & Co, Chesapeake Bay and FAO Schwartz. While the partners recognized that the United States presented a huge opportunity, they had struggled with the logistics. In particular were he challenges faced at the U.S. border. Labeling for U.S. food products differed from the labeling requirements in Canada, and much paperwork was associated with sending product across the border. If U.S. customs pulled a product to review, testing it in a lab took six weeks. For example, right before Easter 2009, A Couple of Squares had lost $8,000 sales because a Canadian Label had been placed on a U.S. product. The product was pulled at the border and never made it to the customer.

The team found that U.S. customers were hesitant to place orders across the border. In Fact, when selling to U.S. customers, Erb and her team felt they needed to communicate that the order would be delivered by a certain date- but only barring no customs issues. However, no U.S. customers had yet backed out of an order.

Finally, their product faced much higher competition in the United States than in Canada. Nevertheless, Erb and Bradshaw wondered whether the key to success might be expansion across the border.

Marketing and Sales

Initially, the company had acquired most of its customers through sales-in particular, cold calls to potential retail customers. In the early years, Erb would cold-call flower shops, kitchen stores, chocolate shops and coffee shops in Toronto and then drive to Toronto herself to make the deliveries

The company spent vey little money on marketing, mostly just on an as needed basis. From 2003 to 2008, the company participate in numerous trade shows for the gift and promotional industry, starting with the Alberta Gift show in Edmonton in January 203. The company even won: “best in the show. The cost of participation in each show was approximately $15,000. Ultimately, as attendance declined, Erb and Bradshaw determined that attending these shows was too expensive, given the return. As a result, they stopped participating in these shows in 2008.

A Couple of Squares customers ranged from small independent retailers, including chocolate shops and find good shops, to larger chain, such as Second Cup, which had 400 stores across Canada and had been a loyal customer since 2004, and Chapters/Indigo, which had 230 stores across Canada.

The bakery was also Kosher-certified. One of the bakery’s largest customers, Second Cup, had a kosher café. Additionally, the partners understood that many of the bakery’s end consumers were in the kosher community. Several costs were associated with being Kosher-certified. For example, nothing could enter the bakery that was not kosher. All raw goods were required to be blessed by a Rabbi. Erb and Bradshaw were trying to anticipate the demands of their current and future customers and were very aware their biggest competitor, Eleni’s New or, had just become Kosher-certified.

As an expansion strategy, the partners had explored entering U.S. big-box stores, such as Costco, TJ Maxx and Home Goods. Companies in this channel wanted to pay the firm very little for their cookies, making it very difficult for them to make any money. They were also concerned that focusing on one big retailer created a huge risk: if they had one big customer, they risked losing a huge amount of their business if they were dropped as a supplier. They felt they needed to do a better job conveying that the cookies were hand-iced and of artisanal quality because these qualities might improve the price they could command, both with larger retailers and in other channels.

Both Erb and Bradshaw felt that sales weren’t where they should be. They were on track to deliver$1.3 million in sales for the fiscal year ending in 2012 and were hoping to grow to $1.88 million the following year, $2 million the year after that and, within five years, to be at $ 5 million in annual sales. In 10 years, they wanted to be earning $10 million in revenue. Erb and Bradshaw hoped to be ready to sell the business in10 years, when Bradshaw would be 70 and considering retirement. While they anticipated that the decorated cookies could drive some of that growth, they suspected it would cap at $2 million, and the rest of the business would need to be grown through other products, such as their new gourmet cookies, which were made of high-quality ingredients and included such flavors as black pepper ginger with a lemon glaze. These cookies were not iced with a piping bag, but if iced at all, they were dipped in a glaze. Like all of their cookies, these new cookies were priced on the basis of their associated labor and food costs. They were sold to consumers in packages ranging from six to 48 cookies, where unit prices ranged from 50 cents to a dollar per cookie. In 2012, gourmet cookies represented 16.7 per cent of their business. They were hoping to double the gourmet cookie sales as a percentage of total sales over the next year.

Although no other Canadian companies produced hand-iced gourmet cookies, A Couple of Squares competed with several U.S.- based companies. Probably the biggest U.S. competitor was Eleni’s New York, which had a similar product line and sold both wholesales and direct to consumers online. Like A Couple of Squares, Eleni’s New York was also Kosher-certified. Another big competitor with a similar set of products was Monaco, but the partners felt that Monaco wasn’t able to truly compete on product, taste or look.

Pricing

As Erb considered the pricing issue, she couldn’t help but recall that Eleni’s New York, the company’s biggest competitor, sold single cookies for $16 at retail. A Couple of Squares’ cookies sold for an average retail price of $5 for an individual cookie. (Gift boxes of smaller cookies retailed for $21.95) Erb and Bradshaw were concerned about the impact of raising their prices on demand. Yet, internally they believed they had a better product, which should therefore command a better price.

Erb and Bradshaw were determined to keep the quality of their product high, and yet to do so required certain costs. Labor was the biggest cost for the firm. When the minimum wage increased, so did the firm’s labor costs. Food costs were the smallest part of their costs, yet their commitment to quality meant that food costs were not an insignificant factor in the business. For example, the bakery used butter instead of oil in its cookies. Oil could extend the shelf life of cookies, but it had no taste, whereas butter imparted great flavor in the cookies. They also used high-quality cinnamon from Saigon, which was significantly more costly than other sources, as were the raisins and nuts they bought from California, Flour, sugar and butter were purchased in quantities large enough to require skids. Flour was subject to much price fluctuation.

Overhead costs included the payroll, as described above, the office, waste and materials.
Prices varied depending on the volume of the particular customer, with the unit price decreasing depending on volume. The margins for the Bakery’s smaller customers were currently about 10 per cent. In other words, a cookie that cost A Couple of Squares $2.25 to produce was sold to a smaller customer for $2.50. The margins with larger customers were closer to 5 per cent. Erb and Rachel Bradshaw often used a quote sheet as tool as they priced their cookies for customers. The retailer customers then marked up their cookies 100 per cent, so the bakery’s regular line of decorated cookies were sold to the retailers at $2.50 and retailed for $5.00.

The pricing decision

Erb felt that a lot rode on the pricing decision she was about to make. If the cookies were pried too low the firm would continue to struggle to keep afloat. Priced right, they could alleviate the cash flow issues the partners had faced in the past. Also even though the partners anticipated they would be profitable for the fiscal year ending July 31, 2012, after operating at a loss for three consecutive fiscal years, they still had approximately $49,000 in credit-card debt and a line of credit. If they priced the cookies too high, demand could dry up and they might be even worse off than when they had started, Erb needed to complete the pricing if she was to have the fall and holiday sales collateral ready in time for the selling season. She wasn’t even sure whether they were using the correct process to set the price she also worried about the fluctuation of the ingredient costs and the operations process, both of which could affect the margins. She needed to make a decision.

Questions:

1 Apply fundamental pricing concepts, including margin, markup, and the impact of cost structure on pricing to address the issue and make recommendation.

2 analyses the interplay between marketing and operations.

3 to analysis the implications surrounding pricing with a small, entrepreneur business environment

 

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