BUA 449 Grandmas Chocolate Manufacturer Business Case Analysis You are doing an analysis on a company called Grandma’s Chocolate. PLEASE FOLLOW THESE STEPS

BUA 449 Grandmas Chocolate Manufacturer Business Case Analysis You are doing an analysis on a company called Grandma’s Chocolate. PLEASE FOLLOW THESE STEPS IN ORDER TO ENSURE YOU DO THE ASSIGNMENT RIGHT. ALSO LOOK AT MY INSTRUCTIONS BELOW AS WELL!

1) Read the letter from Grandma’s Chocolate CEO.

2) Do a strategic analysis on it. I have attached a template for the assignment that you MUST FOLLOW. DO ALL ASPECTS OF THE TEMPLATE OR ELSE I WILL HAVE TO ASK FOR A REFUND.

4 pages minimum, don’t go above 6 page.

Given the firm and industry information, you can then apply our strategic analysis project to analyze the environment, strategy, and business capabilities along with reviewing the firm’s financial performance.You can then use your conclusions from this analysis to assess E<->S<->BC fit and identify the major issues facing the firm. From this, you can then make and justify recommendations for what changes (if any) that you believe the firm should make in their strategy and what actions they need to take to have the best chance at successful performance in the future.

The Analysis Process Template that you have been given “walks you through” the analytical process that you should use. While long, there is nothing new here – it is simply the simple strategic analysis process that we have been talking about all term flushed out with details to guide your work. Pay particular attention to the “Conclusion – The focus of your write-up” sections because these will help you see where the analysis in each area should lead you. But don’t forget that you cannot get to good, defendable conclusions in each area without going through the steps outlined.

There is NOT a single right answer. The BEST answer is the one that you can justify and support based on your analysis. So, plan to spend some time thinking about and working through the material before you start deciding on recommendations and/or writing anything up.

NOTE: In the case, it talks about whether the company should purchase a new facility or expand their current plant. Though this may be an important issue, it is by no means the only issue or even necessarily the most important. Further, any decision regarding manufacturing capacity must be placed in a larger E—S—BC fit analysis (e.g., if your analysis determined that the company should better focus its sales, it may not need any new capacity at all!). So, don’t get too focused on any single issue or decision. Grandma’s Chocolate
April 20, 2020
Business Policy Consultants
1 Graduation Way, Suite 4.0
Maine Business School
Orono, ME 04472
Dear Consultants,
I am writing to solicit your assistance in helping me to chart the future course of action for Grandma’s
Chocolate. Our company, started by my grandmother more than 50 years ago, is now a closely held
corporation controlled by a small group of family members. Located in Spokane, Washington, we sell
chocolates, cookies and candy throughout the United States and have begun to develop international sales.
At one level, I am thrilled with the performance of the company. My grandmother could never have
imagined that the company would ever reach the point that it has today. At another level, however, I am
concerned about the future of the company. We are approaching capacity in our current facilities and will
soon have to make some tough choices about where the company should head. While most of those in the
family want to see the company continue to grow, there are others who are afraid that we may be getting
too big. A clear plan for the future, with appropriate support for the choice, will be necessary to satisfy
all family members.
I am therefore asking your firm, along with several others, to examine our firm and propose and justify a
future course of action. From these initial proposals, I will then select one firm to work closely with us in
implementing their plan. To assist you in this task, I have included some background material on
Grandma’s Chocolate along with financial information. I had also hoped to be able to schedule a short
meeting with you to answer questions and clarify major issues. Unfortunately, my schedule will not
allow that to happen. Instead, I am enclosing a summary of information from a recent question and
answer session with some students from a local university. I hope that addresses most of the issues you
would have raised.
Please be aware that we may not be providing you all of the information that you might like. The family
does not feel comfortable giving out all its secrets to lots of different firms. Please do the best you can
with the information available and be assured that we will be much freer with information for whichever
company we select to work with over the longer term.
I am looking forward to seeing what your firm will have to offer to help Grandma’s Chocolate continue to
prosper into the future.
Sincerely,
James Dranove
President and CEO, Grandma’s Chocolate
Grandma’s Chocolate
Grandma’s Chocolate 1, with a home office in Spokane, Washington, manufactures, markets and
distributes a diverse line of chocolates, cookies, and candies. The majority of these products are
sold under the “Grandma’s Chocolate” brand name, though the company does sell some products
for shipment under private label. Primary products include chocolate bars in a variety of flavors
(e.g. mint, with almonds, etc.), filled chocolates sold in boxes, specialty cookies, and holiday
specific chocolates (e.g. Easter eggs, Valentine hearts). The company also produces gift baskets
that may combine several of the company’s products. Grandma’s Chocolate brands are typically
positioned as premium quality products sold at prices comparable to those of competitive
products.
Market Overview
The markets for candy and cookie products are dominated by a number of large, well capitalized
corporations. In the candy market, these companies include Hershey Food Corporation, M&M
Mars and Nestle S.A. The cookie and biscuit market is dominated by Nabisco, Inc., Keebler
Company and Sunshine Biscuits, Inc. In addition to domestic manufacturers, foreign candy and
cookie companies, such as Lindt of Switzerland, Bahlsen KG, and Storck, have established their
products in this market. The remainder of the market is otherwise highly fragmented, with
numerous manufacturers and hundreds of products and distribution channels, such as mass
merchandisers, vending companies and gourmet distributors. Grandma’s Chocolate executives
believe that the company’s experience in these markets and distribution channels positions the
firm to capitalize on the growth opportunities in these markets.
Suppliers
Currently, about half of the company’s finished products (primarily candies and cookies) are
purchased from third-party manufacturers, most of whom are located overseas. These products
are produced to specific recipe and design specifications developed by Grandma’s. Agreements
have been reached with most of these firms so that they will not export similar products for sale
in the United States. Raw materials necessary for the manufacturing done by Grandma’s
Chocolate are purchased from numerous third-party suppliers. Efforts are made to maintain a
number of sources of each necessary supply so that the company does not become dependent on
any single supplier.
1
This case was prepared by Grant Miles for use in the integrated team project of the strategic management
course at the University of Maine and is not intended to portray either effective or ineffective management practices.
While partially based on a real company, material has been altered to fit the needs of the course. As a result, the
material contained in this document should be considered the only pertinent written information available about the
company.
2
Manufacturing
The company currently owns and operates a 105,000 square foot manufacturing facility in
Spokane. Within this facility, about 5,000 square feet are devoted to office space. When built in
1994, the facility was only 65,000 square feet. The rest of the space was added in 2008.
Equipment within the plant is aging, but still serviceable. This facility is primarily used to
manufacture chocolate products.
The manufacturing facility currently operates two daily shifts. The company has experimented
with a third shift, but experienced problems because of the need for down time for cleaning and
servicing the machinery. Based on this experiment, management does not believe that a third
shift is workable for any extended period of production time. The plant is currently operating at
approximately 95% of capacity, with current growth forecasts indicating that the facility will be
over capacity within 1-2 years.
Based on these forecasts, executives have begun to search for additional facilities. One possible
facility has been located in Yakima, Washington. This facility is being vacated by another
chocolate manufacturer that was recently purchased by a larger company. The plant, built in
2011, consists of 135,000 square feet and is equipped with machinery that is superior to that
currently used by the Spokane facility. It is believed that the Yakima plant might be purchased
for between $6 and $7 million.
Distribution
Grandma’s Chocolate distributes its products throughout the United States and has begun to
distribute internationally. International sales currently make up about 6% of total revenues and
sales to Canada account for approximately 91% of all international sales.
The majority of the company’s sales are handled through approximately 50 independent food
and candy brokers in various regions throughout the United States who then market to retail
customers. Brokers are paid on a commission basis (typically 5%) and are generally responsible
in their respective geographic markets for identifying customers, soliciting customer orders and
inspecting merchandise on store shelves. Arrangements with the brokers prohibit them from
selling competing products. It is believed that the use of food and candy brokers, which typically
specialize in specific products and have knowledge of and contacts in particular markets,
enhances the quality and scope of sales operations and permit the company to limit the
significant costs associated with creating and maintaining a direct distribution network.
The marketing vice president and three regional sales managers work with brokers on an
individual basis and are responsible for managing the broker network, identifying opportunities
and developing sales in their respective territories. Five regional bonded public warehouses that
specialize in food and confectionery storage are used for distribution. These warehouses are
selected based on proximity to customers, the ability to provide prompt customer service and
efficient and economic delivery. Products are generally sold pursuant to customer purchase
orders and these orders are filled from inventory, generally within one to two days of receipt.
Products are delivered by common carrier.
3
Marketing and Advertising
Product recognition by retail and wholesale customers, consumers and food brokers is an
important factor in the marketing of the company’s products. Accordingly, Grandma’s Chocolate
promotes its products and brand names through the use of attractive promotional materials,
including full-color product brochures and newspaper inserts, advertising in trade magazines
targeted to the mass merchandisers, vending industry, gourmet trade and gift basket markets, and
participation in trade shows. Last year, approximately $695,000 was spent on advertising.
Products are also promoted through sales discounts and advertising allowances. The level of
promotional programs is generally highest during the initial introduction of a product. As
distribution of the new product increases, resources gradually shift from promotion to direct
advertising to reinforce trade and consumer repeat purchasing. Management believes that these
promotional programs have shortened the time periods necessary to achieve market penetration
of its products. The company intends to continue to develop and implement marketing and
advertising programs to increase brand recognition of its products and to emphasize favorable
pricing compared to competing products.
Employees
Grandma’s Chocolate currently employs approximately 220 full-time equivalent employees, all
of whom work out of the Spokane facility. Of this number, 33 are employed in the front office
and the rest in the factory and storage areas. The employees are not represented by a labor
union. Management believes that employee relations are good, though there has been a slight
increase in employee turnover during the past year.
Organization and Information Systems
Grandma’s Chocolate is operated by a management team consisting of the CEO and the VicePresidents of Marketing, Manufacturing, and Finance. Other functional areas, such as HR and
Purchasing, are also handled by this group. The company is computerized, but has only a
rudimentary central information system. For the most part, each vice-president determines the
programs and applications necessary for their own areas.
The company web page is currently housed with a local Internet service provider that the
company also uses for email purposes. The page is primarily informational, with a section
available where people can send comments to the company, though the existence of the page is
not well publicized. There has been some talk among the marketing group about utilizing the
Internet for sales and distribution purposes, but this has not yet gone beyond the talking stage.
4
Grandma’s Chocolate
Consolidated Statements of Income (000’s)
2019
2018
2017
Net Sales
18,084
17,487
16,525
Cost of Sales
12,514
12,570
11,898
5,570
4,917
4,627
Selling, General, &
Administrative
3,139
2,744
2,495
Salaries and related expenses
1,516
1,180
1,008
155
769
570
Total operating costs
4,810
4,693
4,073
Income from operations
760
224
554
(147)
(152)
(157)
20
155
34
Total other income (expense)
(127)
3
(123)
Income before taxes
633
227
431
201
24
165
432
203
266
Gross Profit
Pre-production costs
Other income (expense)
Interest
Other income (expense)
Provision for taxes
Net Income
5
Grandma’s Chocolate
Consolidated Balance Sheets (000’s)
2019
2018
688
614
2,067
2,102
–
262
4,059
3,413
127
46
Total current assets
6,941
6,437
Net property and equipment
2,642
2,335
TOTAL
9,583
8,772
1,954
1,844
Current portion of
long-term debt
175
145
Accounts payable
2,377
2,024
Accrued expenses
359
198
Income taxes
161
190
Total current liabilities
5,026
4,401
Long-term debt
1,442
1,545
194
108
6,662
6054
10
10
757
757
Retained earnings
2,154
1,951
Total Equity
2,921
2,718
Total Liabilities and Equity
9,583
8,772
ASSETS
Current assets
Cash and equivalents
Accounts receivable
Insurance settlement receivable
Inventory
Other current
LIABILITIES
Current liabilities
Line of credit
Deferred taxes
Total Liabilities
Stockholders’ equity ($.01 par
value, 1,000,000 shares issued)
Additional paid in capital
6
Grandma’s Chocolate
Additional Information
The following items provide additional information about Grandma’s Chocolate. The
information is summarized from interviews that student teams from a local university had with
Grandma’s Chocolate executives as part of a class project.
1.
Mission and Goals
Grandma’s Chocolate does not have a formal mission statement, but the basic thrust of
the company is to make good quality products, and sell them at a reasonable price.
As far as goals, it was explained that there were some differences of opinion among the
family members/owners. One faction was said to be asking when they were going to see
some payout for their ownership, since the company had historically retained all earnings
to pay for future growth. This faction was not against further growth per se, but was
interested in seeing a payoff on their ownership in the near term. The other faction was
said to be more comfortable with waiting for a payoff down the road, and was
comfortable with the current approach. Mr. Dranove (the CEO) is looking for a plan that
he could “sell” to both sides.
2.
Financial Information
The current debt structure is based on “sweetheart” deals provided by a local government
development agency. The line of credit has a 4% interest rate that will remain in effect
until the company’s sales reach $50 million. The average balance on the line of credit is
about half of the 1.9 million shown on the balance sheet. The remaining long term debt,
also from the local development agency, has a 5.5% interest rate, and is to be paid off
with principle payments as follows:
2020: $200,000
2021: $300,000
2022: $300,000
2023: $642,000 balloon payment
These “sweetheart” deals should not be expected to be available in the future, and
Grandma’s Chocolate will have to go to the general market for future loans. If necessary,
loans are the preferred method of funding future growth, with bonds a 2nd option, and
equity (IPO or investor) a distant 3rd.
Depreciation is included as part of SGA expenses and runs around $300,000.
Depreciation is done on a straight-line method, with equipment depreciated over a 7 year
period and facilities over 15. Cash-flow statements are not available, but cash-flow has
not been a problem.
7
3.
Organizational Issues
An organization chart (with rough employee counts) and a rough list of employee salaries
are attached. Managers at Grandma’s Chocolate all have appropriate education and
experience for their positions. Training for line staff is primarily “on the job” working
with an experienced employee for a short period of time (2 – 4 weeks). The increase in
turnover is coming primarily from the line employees and is believed to be a result of the
local economy providing other opportunities for the workers at slightly better pay. The
turnover rate is only about 10%, well below industry norms, so it is not considered to be a
big problem.
4.
Products, Customers, and Markets
As is shown in the attachments, Grandma’s Chocolate now makes all of its own
chocolates and soft candy, plus some of the hard candy. The finished goods imported
from foreign sources include a small amount of hard candy, but are primarily made up of
biscuits (European style cookies), which Grandma’s Chocolate does NOT produce on its
own. The imports are a carryover of earlier times when an opportunity came along.
They have been reduced over time to their current level of 50% of sales. Grandma’s
Chocolate does not breakdown costs by product line, but the chocolates appears to carry a
slightly higher margin than the other products. The imported goods run about 10%
higher on cost of goods than Grandma’s Chocolate own production, but there is little
overhead involved with imports.
Grandma’s Chocolate products are targeted primarily at middle to higher end retail
outlets and gourmet shops, though the brokers that are utilized are free to sell to
whomever they can. Sales are generally distributed across the country, mostly along the
lines of population, though the biscuits tend to sell particularly well in the North East.
No particular region is targeted over any others. Sales have some peaks and valleys over
the course of the year, particularly related to holidays.
The international sales (primarily in Canada) are a result of requests from international
brokers rather than a designed international plan. Grandma’s Chocolate is open to further
international expansion, but only if a positive case could be made for it. It should be
noted, though, that high consumption rates for a country does not necessarily equal a
good market to enter due to possible local competition.
5.
Information Systems
Grandma’s Chocolate does not have any real company wide information system.
Managers have their own computers with appropriate applications.
Integration/communication is handled in weekly meetings of the managers. Grandma’s
Chocolate executives said that while they weren’t against considering more advanced
systems, the current system appeared to be working out just fine.
8
The web page has only limited functionality, and no immediate plans have been made to
try and incorporate web based sales. There are currently mixed feelings among
management as to whether web sales would be a good idea. While managers in
marketing are pushing for extensive use of the web, the managers within production are
skeptical. The CEO was said to be trying to keep an open mind, though he explained that
Grandma’s Chocolate had no IS department and knew nothing about web systems.
6.
Inventory Management and Delivery Systems
While some may see the levels of inventory as high, the company feels as though the
levels are reasonable, turning over about 4 times a year, and they have not had any
trouble with spoilage. We also mentioned that we were able to fill all orders with stock
on hand.
The ordering process involves brokers sending orders electronically (fax, email, etc.) to
the marketing department, who then communicate the order to the appropriate contract
warehouse for shipment by common carrier. The warehouses are located in eastern
Pennsylvania, outside Chicago, in Mississippi, in Phoenix and in Seattle. Relationships
with the warehouse operators are good, and additional capacity is available if needed.
7.
Production
Several areas related to production were addressed. First, it was explained that
Grandma’s Chocolate now has 6 production lines operating (2 for solid chocolate, 2 for
filled chocolate, one for soft candy, and one for hard candy), with 3 packaging lines.
Two of the chocolate lines were added over the last 2 years, which accounts for the high
pre-production expenses on the income statement. The equipment is older, but
serviceable, since the technology in this industry has not changed significantly in the last
40 years. Replacing the current equipment is estimated to cost about $2 million. While
replacement would reduce breakdowns that occur on the old machines, it is thought that it
would NOT improve capacity or reduce costs to any appreciable extent.
The Yakima plant (mentioned in the case as being available) has a capacity of about 1.5
times the current facilit…
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