76 CHURCHILL ICE CREAM Churchill Ice Cream is a medium-sized family-owned company, making and selling a range of premium ice cream products. Its origins were in the middle years of the twentieth century, when John Churchill saw an opportunity to supply a growing consumer demand for luxury products. John has been followed into the business by his two sons and the Churchill family has dominated the ownership and management of the company. In 20X2 there was recognition of the need to bring in outside management expertise and John reluctantly accepted the need to relinquish his position as chairman and chief executive of the company. Richard Smith, formerly a senior executive with one of the major supermarket chains, was appointed as chief executive. Within one year of Richard's appointment, he had recruited Churchill's first sales and marketing director. Richard was consciously looking to the reduce the dominance by the Churchill family and make the company a more marketing orientated business able to meet the increased competitive challenges of the 21st century. Churchill's distinctive strategy Churchill Ice Cream is in many ways an unusual company, choosing to both manufacture its ut premium ice cream and sell its products through its own stores. Specialist ice cream stores por parlours had started in the US and soon spread to the UK. Customers can both buy and eat ice cream in the store. John Churchill saw the growing demand for such specialist ice cream stores and created a unique store format, which quickly established the Churchill brand. Most of these stores are owned by the company, but there are also some smaller franchised outlets. By 20X6 it had 40 ice cream stores owned by the company and a further 18 owned by franchise holders. Franchise stores typically are in less attractive locations than their company-owned equivalents. All stores are located in and around the London area. The logic for manufacturing its own ice cream is a strongly held belief that through sourcing its ingredients from local farmers and suppliers it gains a significant competitive advantage. Making its own ice cream also has enabled it to retain control over the unique recipes used in its premium ice cream product range. John Churchill summed up the policy saying 'We are no more expensive than the market leader but we are much better. We use real chocolate and it's real dairy ice cream. Half our expenditure goes on our ingredients and packaging. It's by far our highest cost.' Dairy ice cream, as opposed to cheaper ice cream, uses milk, butter and cream instead of vegetable oils to blend with sugar and flavourings. These ingredients are blended to produce a wide range of products. Churchill has also developed a product range with no artificial additives hoping to differentiate itself from the competition. Product innovation is a key capability in the ice cream market and 40% of industry sales are made from products less than three years old. Churchill's products are made at a new purpose built factory and supplied quickly and directly to its own ice cream stores and other retail outlets. Unfortunately, detailed and timely information about product and store performance has suffered through a delay in introducing a management information system. Consequently, its stores often faced product shortages during the peak summer months. In 20X4 Churchill became the sponsor and sole supplier to a number of high-profile summer sporting events held in London. Churchill also supplies eight million tubs of ice cream each year to London based cinemas and theatres. As a consequence, Churchill is now an established regional brand with 90% customer recognition in the London area. It also has major ambitions to become a national and eventually an international brand though facing significant competition from two global chains of US owned premium ice cream stores. Their high profile moves into the UK market was backed with expensive advertising and succeeded in expanding the demand for all premium ice creams. The UK retail ice cream market Ice cream is bought in two main ways: either from retail outlets such as supermarkets for later consumption at home or on impulse for immediate consumption from a range of outlets, including ice cream stores such as Churchill's. Impulse sales are much more dependent on the weather and in 20X4 sales of take home ice cream and impulse ice cream were roughly equal. Total sales revenue of ice cream in the UK reached $1.3 billion in 20X4. Premium ice cream in 20x6 accounted for 19% of the UK's take home market, up from 15% in 20X3. Churchill itself does not use advertising. In John Churchill's words, "There is no point in advertising your product if consumers are unable to buy the product.' Churchill has yet to achieve significant sales into the take home market. Two major barriers exist. Firstly, global manufacturers with significant global brands dominate the industry. Secondly, four major UK supermarket chains dominate the take home market. These supermarket chains account for over 80% of food spending in the UK and have the power to demand that suppliers manufacture their products under the supermarket's own label brand. Supermarkets currently account for 41% of the sales of ice cream in the UK. However, it is proving difficult to get the Churchill product range into the ice cream cabinets of the supermarket chains. In John Churchill's opinion 'If you want to buy a tub of premium ice cream and you go to a supermarket you have a choice of two American brands or its own label. I think there should be a British brand in there. Our prices are competitive, at least $1 cheaper than our rivals and our aim is to get Churchill ice cream into every major supermarket.' Some limited success has been achieved with two of the smaller supermarket chains with premium ice cream supplied under their own label brands. However, margins are very slim on these sales. Churchill's international strategy Churchill, in seeking to increase its sales revenue, has had no success in moving into foreign markets. In the 1990s it tried both setting up its own ice cream stores abroad and acquiring specialist ice cream makers with their own ice cream outlets. Its attempted entry into the US market was by using the established Churchill ice cream store format. Two stores were opened in New York, but the hopes that the emphasis on classic English quality and style and the slogan 'tradition with taste', would prove successful did not materialise and the stores were closed with significant losses - each store took upwards of $100k to fit out. Acquisition of two established ice cream makers, one in Germany and one in Italy also proved failures. Access to their retail outlets and to complementary product ranges did not overcome differences in taste and customer buying behavior. Despite attempts to change some of the German and Italian outlets to the Churchill store format the results were less than impressive and the two companies were eventually sold at a combined loss of $5 million. Table 1 Financial information on Churchill Ice Cream ($000) 20X3 20X4 20X5 20X6 20X7 Forecast Sales revenue 14,100 15,300 16,00 16,400 16,700 Cost of sales 12,790 14,250 14,990 15,360 15,760 1,050 1,010 1,040 940 530 560 310 500 Operating profit 1,310 Product development 340 Net profit 970 Non-current assets 10,910 520 450 730 440 10,400 9,670 8,880 8,320 Net assets 4,810 4,910 4,000 4,300 4,300 Gearing (%) 105 130 111 86 67 Number of UK outlets Own store 39 41 40 40 39 Franchised stores 11 13 16 18 20 Index of UK ice 106 109 107 104 109 cream sales Table 2 Typical product cost breakdown of Churchill half-litre tub of premium ice cream $ Labour 0.63 Ingredients 1.00 Packaging 0.25 Overheads 0.28 Distribution 0.09 Total cost 2.25 Sales price 2.50 Net profit 0.25 Table 3 Sales revenue breakdown for Churchill's premium ice cream Sales to own stores 60% Sales to franchise stores 10% Sales to leisure outlets 25% Sales to supermarkets 5% Sales to London region 90% Sales outside London region 10% Summary Overall, Churchill has a distinctive strategy linking the manufacturing of premium ice cream with its distribution through the company's own ice cream stores. This has secured them a regional reputation for a quality product. It has had little success to date in penetrating the major supermarket chains with the Churchill brand and in moving its distinctive ice cream store format into foreign markets. Finally, to complicate both the manufacturing and retail sides of the Churchill business, seasonality is a real issue. Ice cream is still heavily dominated by sales in the summer months. In fact, the peak demand in summer is typically five times the demand in the middle of winter. Equally serious is the impact of a cold summer on impulse ice cream sales. This has a number of consequences, which affect the costs of the product and capacity usage at both manufacturing and retail levels. Despite this, Richard Smith has set three clear strategic goals to be achieved over the next five years. First, to become the leading premium ice cream brand in the UK, second, to increase sales revenue to $25 million and third, to penetrate the supermarket sector with the Churchill product range. Required: Richard Smith has set three clear strategic goals for Churchill's growth and development over the next five years. (a) Using models where appropriate, assess the advantages and disadvantages of the current strategy being pursued by Churchill Ice Cream and its impact on performance up to 20X6. (b) Using relevant evaluation criteria, assess how achievable and compatible these three strategic goals are over the next five years. (C) What changes to Churchill's existing marketing mix will be needed to achieve the three strategic goals