CASE 13 AMY'S BREAD Amy glanced at the clock and moaned. It was 3:30 a.m., time to get up and head to her Manhattan bakery, but she hadn't slept all night. She had a big decision to make. No, she muttered to herself; she had a multitude of big decisions to make. Amy muttered to herself, "There are already so many days when I feel stretched past the breaking point. There are so many demands." Amy mentally ticked them off: Ensuring consistent quality, scheduling and training staff, ordering supplies, developing new recipes, contacting potential customers, collecting from slow-paying clients... the list was truly endless. Amy wondered, "If I decide to expand, can I do it successfully? Can I find another trustworthy manager, like Toy Kim Dupree, to help me manage the staff and maintain bread quality? Can I find expansion space in Manhattan? Should I close our current location and expand to a much larger space, thus eliminating the need to manage two locations? Should I look for a location for my wholesale production, or a space that would provide both retail and wholesale opportunities?" There was so much to decide. Right now though, Amy's dough starters were waiting, as were her employees. She had to get up and face another busy day at her bakery. Amy's Bread, founded in 1992, served about 50 wholesale customers, including some of the finest restaurants, hotels, and gourmet food shops in Manhattan. Amy's Bread also had a waiting list of more than 30 wholesale customers from other quality restaurants, hotels, and shops. Amy thought, "I really want to meet their needs and accept their business, but any further production expansion in my existing space is impossible. I know I can't produce one more loaf without hurting bread quality, which is absolutely unthinkable! We are already working three shifts, and there is no more room for additional equipment." Amy and her assistant manager, Toy Kim Dupree, had commiserated: "The bakery is stretched to the limits. Dough production ranges from 1,800 to 3,000 lbs. of bread per day, well over capacity for just 1,300 square feet." As Toy described, "We are like sardines making bread. Surviving in these close quarters is so difficult. Not only do we produce all of the wholesale and retail bread in this one location, but we also store ingredients and have a small office." Amy worried that some of the customers on her long waiting list were on the brink of turning away. But, Amy thought, "Am I really ready to tackle a major expansion? On the one hand, I have worked so hard to make my dreams a reality, I can't imagine stopping now. But, can I handle an expansion and larger ongoing operations? Financially? Mentally? Physically?" Amy remembered Toy's recent comment: "Amy's Bread is finally turning a profit." The thought of an expansion and additional debt was very scary. Future Opportunities Armed with 6 years of continuing success, Amy was facing a critical decision. Should she expand or stand pat? She had a waiting list of wholesale customers, but could she stretch herself and her resources enough to expand successfully? Despite the popularity of Amy's Bread, Amy was still working long hours and earning only a modest income. Amy had managed to put away a good-sized nest egg, but it wasn't nearly enough for expansion. Armed with sales and financial projections, she began by looking for additional wholesale production space in Manhattan. Amy was looking for about 3,000-4,000 square feet that would essentially triple her current space. She based this requirement on her growing waiting list of potential customers, analyses of optimal production layouts, and associated projections for sales and expenses. Amy eventually found a 6,000-square-foot building on 31st Street that she felt she could afford. She also succeeded in getting a bank to agree to a $150,000 loan for her business plan. Unlike her 1992 application for a loan, Amy now had a proven track record and was interested in borrowing funds to purchase a hard asset, a building. However, her estimated budget for purchasing the building and making needed improvements was approximately $300,000. Amy's personal savings as well as the bakery business savings were not enough to make up the difference. Creative finances would be required to expand ... but Amy declared, "I have managed before and will again." While pursuing this plan, a developer contacted Amy with a new option. A lease was available on a 7,500-square-foot space that was part of a block-long warehouse renovation on 15th Street. The developer's idea was to fill the space with a variety of food producers with small retail shops who sold their products at slightly reduced prices directly from the production source. The proposed market would include a fresh produce shop, flower shop, and pastry shop. This space was essentially an empty shell with no wiring, ventilation, plumbing, or interior walls. Amy would need to make all the leasehold improvements, but she could also choose how things were to be designed and constructed. Amy estimated that it would take 4 months to construct her store at a cost of approximately $500,000. This rental space had retail potential; the 31st Street building she could purchase was essentially a production facility only and was located in a desolate area. Amy was faced with a decision to lease space that would service both retail and wholesale customers, or to buy a space that would serve wholesale customers only. Amy commented, "Although retail is profitable, you need many locations to reach more customers and increase retail volume. Wholesale business volume can be increased from just one location." Amy's gross sales were approximately 75 percent wholesale and 25 percent retail. The wholesale business was much more stable with advance bread orders for large, fixed amounts. Retail business depended on individual consumer buying decisions for much smaller quantities. However, an item that sold for $1.10 wholesale would retail at $1.75. This represented a price increase of 59 percent contrasted with an additional retail cost of only about 14 percent (for counter staff, table space, and so forth) resulting in a projected per item net retail gross profit margin increase of 45 percent. And, retail sales were for cash only. Amy commented, "Although retail is profitable, you need many locations to reach more customers and increase retail volume. Wholesale business volume can be increased from just one location." Amy's gross sales were approximately 75 percent wholesale and 25 percent retail. The wholesale business was much more stable with advance bread orders for large, fixed amounts. Retail business depended on individual consumer buying decisions for much smaller quantities. However, an item that sold for $1.10 wholesale would retail at $1.75. This represented a price increase of 59 percent contrasted with an additional retail cost of only about 14 percent (for counter staff, table space, and so forth) resulting in a projected per item net retail gross profit margin increase of 45 percent. And, retail sales were for cash only. Amy said, I am sure the answer lies in careful financial projections for sales and associated costs, a bit of luck, and a lot of passion and hard work." It was time to complete some detailed financial analysis, including cash flows to help decide the best course of action. Amy stated, Deciding not to expand would be the only "sure" bet. But, I'm not sure I am ready to sit back and be satisfied with what I have already accomplished. I have worked so hard to get this far, I am not sure I can turn hard-earned customers away. And, what if my business slumps because I can't meet increasing Page 543 demand? Can I keep interest in my bread high if I am turning away potential customers? Should I rely on my personal insights and awareness of New York City trends?"