Case Study 2: A Couple of Squares In June 2012, Bernadette Erb, director of Marketing and one of the co-founders/co-owners of A Couple of Squares bakery, sat at their desk, working on the company's fall and holiday sales presentation and sell sheets. She was struggling with the products' pricing. The company had experienced many developments over the past few years. As a result of these changes, Erb and her partner, Mary Bradshaw, wanted to buy back a portion of the company from their silent partner. They also wanted to expand the company, perhaps internationally or through direct-to- consumer sales. To achieve these goals, they would need to increase their revenue and profits. They were aiming to grow their business 45% to $1.8 million to sales and $162 000 in profits by 2013. As Bradshaw was on vacation, Erb continued to wrestle with the price list. A Couple of Squares A Couple of Squares, a London, Ontario-based company, specialised 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 colouring and another line with promotional logos for corporate clients) and a line of gourmet cookies, which included such exotic flavours 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 cookie 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% 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 though went into the packaging. The hand- iced cookies were packaged in cellophane with a hand-tied ribbon. Social trends heavily influenced the designed of the cookies. For example, in 2012, a popular trend was to add a face to everyday items (such as cookies shaped liked salt and pepper shakers with faces), Erb and Bradshaw also tried to ensure that the design weren't too extravagant in an effort to create operational efficiencies in the Decorating department (see Exhibit 1) History In 1997, Mary Bradshaw left her job as general manager of Sebastian's, a London-based specialty food store, to start A Couple of Squares with her friend, Eva Henning. The company originally baked and sold lemon square bars and brownies, which combined with the partnership of the two women, was the inspiration for the company's name. In 1999, Henning left A Couple of Squares to teach mathematics at Fanshawe College in London, Ontario. After a few months, Bradshaw realised that she needed another partner. She approached Bernadette Erb, whom she met mentored while both were working at Sebastian's. In 2000, the company expanded and started making cookies in addition to the bars. Cookies had a longer shelf life and were therefore easier to manage as inventory. To accommodate this product growth, the staffing also expanded. Then, in 2003, to achieve operational efficiencies, the company decided it needed to focus its efforts on one main product: either bars or cookies. The women decided that cookies would be the better product to focus their efforts on, but they still made bars from to time. Over the years, the company had received numerous accolades and wide media coverage. In 2002, A Couple of Squares had won two awards at the Canadian Fine Food Show, for Best New Food Product and Best Food Packaging and Design. Media coverage included a Business London article, front cover of London Magazine, a mention in Food and Drink magazine and, during the holidays, frequent mention in Style at Home. The cookies not branded A Couple of Squares, but instead branded by the customers they had sold their products to - appeared on Oprah Winfrey's blog and on the Ellen DeGenres Show. Additionally, such celebrities as Halle Berry and Paris Hilton had purchased their cookies through a Los Angeles store; Tia Carrere was photographed with their cookies at a pre-Golden Globe event. In 2008, the continuing global recession led to a share 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. The partners needed to make significant changes. They decided to let some of the staff go, and they made a series of cost-cutting decisions, such as sourcing ribbon from China. In spite of all of their efforts, in 2009, Erb and Bradshaw's business was two weeks from bankruptcy. All of their credit lines were maxed out. They had vendors calling about bills. Payroll and rent were almost due. They simply did not have enough operating cash. While they still had many small customers, they had lost many of their large corporate customers. They decided that they needed an investor. Erb and Bradshaw approached George Gallant, who owned both the building where they rented space and the factory down the street, to see whether he would be interested in becoming an investor. Gallant decided to invest more than $700 000 into the business. He then owned 60% of the business, and Erb and Bradshaw each owned 20%. The partners hoped in time to pay Gallant back and buy the company back. Gallant was fine being bought out whenever they were ready. In August 2009, Erb was diagnosed with cancer. About two years later, her cancer was in remission. During this time, she could only work once every two weeks. Therefore, she turned her sales portfolio over to the sales manager, Rachel Bradshaw, who was Mary's niece. As co-owner, Erb played so many different roles that it was difficult to fully assess all her responsibilities. After returning to work in 2011, Erb felt that the business had been able to just stay afloat during the past two years rather than make decisions or take strides forward. 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 good manufacturing practices (GMP) 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 kilos of dough to make, based on a calculation of how many pieces would be iced the following day. The dough was made every morning at 7am. At 8am, the baker would roll the dough out on sheeters, cut it out and bake it out day. Any leftover dough would be refrigerated and brought out the following day. Cookies were baked on one day and iced 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 size and complexity of the order. The company employed a full-time colour technician, a graphic artist whose role was to ensure the icing was consistent in colour. This technician hand-mixed the colours and matched them to Pantone standards. Because factors such as the weather could affect the colours, this manual check was critical. In addition, the colour technician's role was to ensure the icing had the correct consistency. The cookies were all hand-decorated, in part because having a decorating machine would have required a substantial upfront investment (approximately $1.5 million). The department iced up to 4 000 cookies a day during its business periods. Katie, the decorating line manager, oversaw the department and was also responsible for designing the cookies. Katie 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 will pull out of 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 labelled the cookies, then packed them in cases for shipping. This packaging process took approximately one 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 labelling process also occurred in this department. The packaging team played a role in quality control of 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 flavour would start to wane. The plant shut down every summer for the first week of July to give the staff a vacation. It was also a time when baking become more challenging become of the heat. The team also used the downtime to do a major cleaning of the plant. Management The organisation was structured under the co-leadership of the two directors, Bernadette Erb, director of Marketing, and Mary Bradshaw, director of Operations. The partners had met while both 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. Bradshaw paid a lot attention to details, while Erb was more action orientated. The administrative side of the organisation also included Rachel Bradshaw, the sales manager, Sarah, the office administrator and Lisa, another sales representative. The rest of the organisation 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 specialised 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 own 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. Javier cared deeply about his work, said he loved his job. In his entire time at A Couple of Squares, he had only produced four batches of dough that needed to be remade. Erb and Bradshaw also strong feelings about their feelings about their role as women in business they brough 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 labour costs. The machine didn't 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 seeling to the United States since 2005. The U.S. customers included bakers, gift stores and other retailers, such as Dylan's Candy Bar, Crumb's Bakery, Cherly & Co, Chesapeake Bay and FAO Schwartz. While the partners recognised that the United States presented a hug opportunity, they had struggled with the logistics. In particular were the challenges faced at the U.S border. Labelling for U.S. food products differed from the labelling 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 209, A Couple of Squares had lost an $8 000 sale 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 an 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 (e.g. Max's Market and Sanelli's) in Toronto and then drive to Toronto herself to make the deliveries. The company spent very little money on marketing, mostly just on as needed basis. From 2003 to 2008, the company participated in numerous trade shows for the gift and promotional industry, starting with the Alberta Gift Show in Edmonton in January 2003. The company was won Best in Show at the PPAI (Promotional Production Association International) show in January 2008. The cost of participating 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 fine food shops, to larger chains, 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 caf. 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 that their biggest competitor, Eleni's New York 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 in 10 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 growth through other products, such as their new gourmet cookies, which were made of high-quality ingredients and included such flavours 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 labour and food costs. They were sold to consumers in packaging ranging from 6 to 48 cookies, where unit prices ranged from 50 cents to a dollar per cookie. In 2012, gourmet cookies represented 16.7% of their business. They were hoping to double the gourmet cookie sales as 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 wholesale and direct to consumers online. Like A Couple of Squares, Eleni's New York was also Kosher-certified. Another big competitors 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 a single cookie for $16 at retail A Couple of Squares' cookies sold for 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 had a better product, which should therefore command a better price. Erb and Bradshaw were determined to keep quality of their product high, and yet to do so required certain costs. Labour was the biggest cost for the firm. When the minimum wage increased, so did the firm's labour 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 flavour in the cookies. They also used high-quality cinnamon from Saigon, which was 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 fluctuations. 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%. 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%. 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%, 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 lot rode on the pricing decision she was about to make. If the cookies were priced 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 enabling them to buy back the company from their investor and achieve their goals from growth in revenue. Also, even though the partners anticipated they would be profitable for the fiscal year ending 31 July 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 fluctuations of the ingredient's costs and the operations process, both of which could affect the margins. She needed to make a decision. that growth, they suspected it would cap at $2 million, and the rest of the business would need to be growth through other products, such as their new gourmet cookies, which were made of high-quality ingredients and included such flavours 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 labour and food costs. They were sold to consumers in packaging ranging from 6 to 48 cookies, where unit prices ranged from 50 cents to a dollar per cookie. In 2012, gourmet cookies represented 16.7% of their business. They were hoping to double the gourmet cookie sales as 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 wholesale and direct to consumers online. Like A Couple of Squares, Eleni's New York was also Kosher-certified. Another big competitors 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 a single cookie for $16 at retail A Couple of Squares' cookies sold for 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 had a better product, which should therefore command a better price. Erb and Bradshaw were determined to keep quality of their product high, and yet to do so required certain costs. Labour was the biggest cost for the firm. When the minimum wage increased, so did the firm's labour 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 flavour in the cookies. They also used high-quality cinnamon from Saigon, which was 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 fluctuations. 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%. 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%. 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%, 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 lot rode on the pricing decision she was about to make. If the cookies were priced 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 enabling them to buy back the company from their investor and achieve their goals from growth in revenue. Also, even though the partners anticipated they would be profitable for the fiscal year ending 31 July 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 fluctuations of the ingredient's costs and the operations process, both of which could affect the margins. She needed to make a decision. Exhibit 1 A Couple of Squares Single-Day Activities for Producing a Large Iced Cookie Dough Making: Dough-making time Cookies per sheet Sheets per oven Baking: Baking time Number of baking employees Number of icers Icing: Icing time per layer of icing for a single cookie Average layer of icing Number of packagers Packaging: Packaging time 45 minutes 36 40 20 minutes 5-9 5-12 1.5-1.75 minutes 1.5 3-8 45 seconds Exhibit 2 A Couple of Squares Quote Sheet for a 2010 Sale Company Name: Contact Person: Date: Retail Merchandisers 2010 Bern & Rach Apr 2010 All merchandisers all ribboned. 48 Faces in a case. All cookies ribboned. $2.50/each. Case Price - $120.00. Customer Pays Shipping. $ 120.00 10.10 2.40 1.12 0.96 0.96 2.88 0.96 0.36 10.80 0.71 Selling Price Profit-8% Packaging Flowwrap - .05 x 48 Box 16 x 12 x 12 Label-48 x .02 (PDP) Label - 48 x .02 (N.F &ing) Ribbon - 48 cookies x 16 inch 5/8 x .06 Foam (32) x3 Bubble .09 x 4 Total Packaging Costs Labour to pack a case 3 min Labour to Package 40 seconds OVERHEAD (22%) OTHER LABOUR (16%) Food Cost Face - 19 x 48 Roll/Cut/Bake 32 sec/pc x 48 Decorating Labour Faces 1.75 min plus .166 min x 48 Commission 5% of sale price Waste (Cookie Breakage) 1% of the sale price TOTAL COST OF THE PRODUCT 7.59 26.40 19.20 9.12 6.07 22.00 6.00 1.20 $ 109.09 CASE STUDY 2 QUESTIONS QUESTION 1: Bernadette Erb's used four (4) main factors in their pricing decisions. Explain these four (4) factors. (12 Marks) QUESTION 2: If Erb and Bradshaw decided not to raise prices, discuss other actions that they could take in response to their circumstances. (10 Marks) Case Study 2: A Couple of Squares In June 2012, Bernadette Erb, director of Marketing and one of the co-founders/co-owners of A Couple of Squares bakery, sat at their desk, working on the company's fall and holiday sales presentation and sell sheets. She was struggling with the products' pricing. The company had experienced many developments over the past few years. As a result of these changes, Erb and her partner, Mary Bradshaw, wanted to buy back a portion of the company from their silent partner. They also wanted to expand the company, perhaps internationally or through direct-to- consumer sales. To achieve these goals, they would need to increase their revenue and profits. They were aiming to grow their business 45% to $1.8 million to sales and $162 000 in profits by 2013. As Bradshaw was on vacation, Erb continued to wrestle with the price list. A Couple of Squares A Couple of Squares, a London, Ontario-based company, specialised 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 colouring and another line with promotional logos for corporate clients) and a line of gourmet cookies, which included such exotic flavours 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 cookie 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% 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 though went into the packaging. The hand- iced cookies were packaged in cellophane with a hand-tied ribbon. Social trends heavily influenced the designed of the cookies. For example, in 2012, a popular trend was to add a face to everyday items (such as cookies shaped liked salt and pepper shakers with faces), Erb and Bradshaw also tried to ensure that the design weren't too extravagant in an effort to create operational efficiencies in the Decorating department (see Exhibit 1) History In 1997, Mary Bradshaw left her job as general manager of Sebastian's, a London-based specialty food store, to start A Couple of Squares with her friend, Eva Henning. The company originally baked and sold lemon square bars and brownies, which combined with the partnership of the two women, was the inspiration for the company's name. In 1999, Henning left A Couple of Squares to teach mathematics at Fanshawe College in London, Ontario. After a few months, Bradshaw realised that she needed another partner. She approached Bernadette Erb, whom she met mentored while both were working at Sebastian's. In 2000, the company expanded and started making cookies in addition to the bars. Cookies had a longer shelf life and were therefore easier to manage as inventory. To accommodate this product growth, the staffing also expanded. Then, in 2003, to achieve operational efficiencies, the company decided it needed to focus its efforts on one main product: either bars or cookies. The women decided that cookies would be the better product to focus their efforts on, but they still made bars from to time. Over the years, the company had received numerous accolades and wide media coverage. In 2002, A Couple of Squares had won two awards at the Canadian Fine Food Show, for Best New Food Product and Best Food Packaging and Design. Media coverage included a Business London article, front cover of London Magazine, a mention in Food and Drink magazine and, during the holidays, frequent mention in Style at Home. The cookies not branded A Couple of Squares, but instead branded by the customers they had sold their products to - appeared on Oprah Winfrey's blog and on the Ellen DeGenres Show. Additionally, such celebrities as Halle Berry and Paris Hilton had purchased their cookies through a Los Angeles store; Tia Carrere was photographed with their cookies at a pre-Golden Globe event. In 2008, the continuing global recession led to a share 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. The partners needed to make significant changes. They decided to let some of the staff go, and they made a series of cost-cutting decisions, such as sourcing ribbon from China. In spite of all of their efforts, in 2009, Erb and Bradshaw's business was two weeks from bankruptcy. All of their credit lines were maxed out. They had vendors calling about bills. Payroll and rent were almost due. They simply did not have enough operating cash. While they still had many small customers, they had lost many of their large corporate customers. They decided that they needed an investor. Erb and Bradshaw approached George Gallant, who owned both the building where they rented space and the factory down the street, to see whether he would be interested in becoming an investor. Gallant decided to invest more than $700 000 into the business. He then owned 60% of the business, and Erb and Bradshaw each owned 20%. The partners hoped in time to pay Gallant back and buy the company back. Gallant was fine being bought out whenever they were ready. In August 2009, Erb was diagnosed with cancer. About two years later, her cancer was in remission. During this time, she could only work once every two weeks. Therefore, she turned her sales portfolio over to the sales manager, Rachel Bradshaw, who was Mary's niece. As co-owner, Erb played so many different roles that it was difficult to fully assess all her responsibilities. After returning to work in 2011, Erb felt that the business had been able to just stay afloat during the past two years rather than make decisions or take strides forward. 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 good manufacturing practices (GMP) 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 kilos of dough to make, based on a calculation of how many pieces would be iced the following day. The dough was made every morning at 7am. At 8am, the baker would roll the dough out on sheeters, cut it out and bake it out day. Any leftover dough would be refrigerated and brought out the following day. Cookies were baked on one day and iced 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 size and complexity of the order. The company employed a full-time colour technician, a graphic artist whose role was to ensure the icing was consistent in colour. This technician hand-mixed the colours and matched them to Pantone standards. Because factors such as the weather could affect the colours, this manual check was critical. In addition, the colour technician's role was to ensure the icing had the correct consistency. The cookies were all hand-decorated, in part because having a decorating machine would have required a substantial upfront investment (approximately $1.5 million). The department iced up to 4 000 cookies a day during its business periods. Katie, the decorating line manager, oversaw the department and was also responsible for designing the cookies. Katie 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 will pull out of 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 labelled the cookies, then packed them in cases for shipping. This packaging process took approximately one 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 labelling process also occurred in this department. The packaging team played a role in quality control of 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 flavour would start to wane. The plant shut down every summer for the first week of July to give the staff a vacation. It was also a time when baking become more challenging become of the heat. The team also used the downtime to do a major cleaning of the plant. Management The organisation was structured under the co-leadership of the two directors, Bernadette Erb, director of Marketing, and Mary Bradshaw, director of Operations. The partners had met while both 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. Bradshaw paid a lot attention to details, while Erb was more action orientated. The administrative side of the organisation also included Rachel Bradshaw, the sales manager, Sarah, the office administrator and Lisa, another sales representative. The rest of the organisation 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 specialised 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 own 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. Javier cared deeply about his work, said he loved his job. In his entire time at A Couple of Squares, he had only produced four batches of dough that needed to be remade. Erb and Bradshaw also strong feelings about their feelings about their role as women in business they brough 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 labour costs. The machine didn't 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 seeling to the United States since 2005. The U.S. customers included bakers, gift stores and other retailers, such as Dylan's Candy Bar, Crumb's Bakery, Cherly & Co, Chesapeake Bay and FAO Schwartz. While the partners recognised that the United States presented a hug opportunity, they had struggled with the logistics. In particular were the challenges faced at the U.S border. Labelling for U.S. food products differed from the labelling 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 209, A Couple of Squares had lost an $8 000 sale 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 an 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 (e.g. Max's Market and Sanelli's) in Toronto and then drive to Toronto herself to make the deliveries. The company spent very little money on marketing, mostly just on as needed basis. From 2003 to 2008, the company participated in numerous trade shows for the gift and promotional industry, starting with the Alberta Gift Show in Edmonton in January 2003. The company was won Best in Show at the PPAI (Promotional Production Association International) show in January 2008. The cost of participating 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 fine food shops, to larger chains, 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 caf. 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 that their biggest competitor, Eleni's New York 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 in 10 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 growth through other products, such as their new gourmet cookies, which were made of high-quality ingredients and included such flavours 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 labour and food costs. They were sold to consumers in packaging ranging from 6 to 48 cookies, where unit prices ranged from 50 cents to a dollar per cookie. In 2012, gourmet cookies represented 16.7% of their business. They were hoping to double the gourmet cookie sales as 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 wholesale and direct to consumers online. Like A Couple of Squares, Eleni's New York was also Kosher-certified. Another big competitors 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 a single cookie for $16 at retail A Couple of Squares' cookies sold for 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 had a better product, which should therefore command a better price. Erb and Bradshaw were determined to keep quality of their product high, and yet to do so required certain costs. Labour was the biggest cost for the firm. When the minimum wage increased, so did the firm's labour 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 flavour in the cookies. They also used high-quality cinnamon from Saigon, which was 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 fluctuations. 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%. 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%. 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%, 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 lot rode on the pricing decision she was about to make. If the cookies were priced 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 enabling them to buy back the company from their investor and achieve their goals from growth in revenue. Also, even though the partners anticipated they would be profitable for the fiscal year ending 31 July 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 fluctuations of the ingredient's costs and the operations process, both of which could affect the margins. She needed to make a decision. that growth, they suspected it would cap at $2 million, and the rest of the business would need to be growth through other products, such as their new gourmet cookies, which were made of high-quality ingredients and included such flavours 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 labour and food costs. They were sold to consumers in packaging ranging from 6 to 48 cookies, where unit prices ranged from 50 cents to a dollar per cookie. In 2012, gourmet cookies represented 16.7% of their business. They were hoping to double the gourmet cookie sales as 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 wholesale and direct to consumers online. Like A Couple of Squares, Eleni's New York was also Kosher-certified. Another big competitors 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 a single cookie for $16 at retail A Couple of Squares' cookies sold for 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 had a better product, which should therefore command a better price. Erb and Bradshaw were determined to keep quality of their product high, and yet to do so required certain costs. Labour was the biggest cost for the firm. When the minimum wage increased, so did the firm's labour 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 flavour in the cookies. They also used high-quality cinnamon from Saigon, which was 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 fluctuations. 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%. 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%. 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%, 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 lot rode on the pricing decision she was about to make. If the cookies were priced 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 enabling them to buy back the company from their investor and achieve their goals from growth in revenue. Also, even though the partners anticipated they would be profitable for the fiscal year ending 31 July 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 fluctuations of the ingredient's costs and the operations process, both of which could affect the margins. She needed to make a decision. Exhibit 1 A Couple of Squares Single-Day Activities for Producing a Large Iced Cookie Dough Making: Dough-making time Cookies per sheet Sheets per oven Baking: Baking time Number of baking employees Number of icers Icing: Icing time per layer of icing for a single cookie Average layer of icing Number of packagers Packaging: Packaging time 45 minutes 36 40 20 minutes 5-9 5-12 1.5-1.75 minutes 1.5 3-8 45 seconds Exhibit 2 A Couple of Squares Quote Sheet for a 2010 Sale Company Name: Contact Person: Date: Retail Merchandisers 2010 Bern & Rach Apr 2010 All merchandisers all ribboned. 48 Faces in a case. All cookies ribboned. $2.50/each. Case Price - $120.00. Customer Pays Shipping. $ 120.00 10.10 2.40 1.12 0.96 0.96 2.88 0.96 0.36 10.80 0.71 Selling Price Profit-8% Packaging Flowwrap - .05 x 48 Box 16 x 12 x 12 Label-48 x .02 (PDP) Label - 48 x .02 (N.F &ing) Ribbon - 48 cookies x 16 inch 5/8 x .06 Foam (32) x3 Bubble .09 x 4 Total Packaging Costs Labour to pack a case 3 min Labour to Package 40 seconds OVERHEAD (22%) OTHER LABOUR (16%) Food Cost Face - 19 x 48 Roll/Cut/Bake 32 sec/pc x 48 Decorating Labour Faces 1.75 min plus .166 min x 48 Commission 5% of sale price Waste (Cookie Breakage) 1% of the sale price TOTAL COST OF THE PRODUCT 7.59 26.40 19.20 9.12 6.07 22.00 6.00 1.20 $ 109.09 CASE STUDY 2 QUESTIONS QUESTION 1: Bernadette Erb's used four (4) main factors in their pricing decisions. Explain these four (4) factors. (12 Marks) QUESTION 2: If Erb and Bradshaw decided not to raise prices, discuss other actions that they could take in response to their circumstances. (10 Marks)