Cool Moose Case

In March 2010, Greig Perantinos, owner of Cool Moose Creamery (Cool Moose), was considering expanding his product line by purchasing a soft-serve ice cream machine for one of his stores. The business in Alliston, Ontario, had been in operation for a year and sold scooped ice cream, frozen yogurt, milkshakes and floats. Perantinos believed the addition of soft-serve ice cream would increase sales and improve the company's market share in Alliston. Perantinos wanted to continue growing the business, and he wondered whether this was the best way to do so. ALLISTON, ONTARIO Alliston was a small community of approximately 13,000 people, within the town of New Tecumseth, Ontario, home to 28,800 people. As part of Simcoe County, Alliston was approximately 60 kilometres north of the Greater Toronto Area. See Exhibit I for a map of Cool Moose locations. Alliston was home to the largest employer in Simcoe County, Honda of Canada, an automotive manufacturing operation that had two plants located in the area. One of the county's tourist attractions was the South Simcoe Railway's historic steam train. The restored railway coaches from the 1920s lured people from across Canada to see Canada's oldest operating steam train. Alliston was also well known as the birthplace of Sir Fredrick Banting, the co-discoverer of insulin. The community's Annual Potato Festival, begun in 1974 and held in June each year, attracted thousands of people annually to the area. Although a small community, Alliston had a vibrant downtown area, and local residents and tourists regularly frequented the restaurants and shops. Victoria Street was the centre of this downtown district, and Cool Moose was located at the Victoria and Church Street intersection.

COMPETITION

Prior to the opening of Cool Moose in the summer of 2009, the only other business in Alliston that offered ice cream was Dairy Queen, also located at an intersection on Victoria Street. Dairy Queen's ice cream offering was limited to its famous vanilla soft-serve flavour. This location also sold several treats, such as the Blizzard, as well as cakes, hot dogs and hamburgers. Throughout the summer months, long lineups were commonplace at the Alliston Dairy Queen. This store generated over $500,000 in annual sales."

Dairy Queen, a wholly owned subsidiary of Berkshire Hathaway Inc., was a large multinational corporation with over 5,900 restaurants in 22 different countries. The first Dairy Queen location opened in Joliet, Illinois, U.S.A., in 1940, the result of a father and son experimenting with a soft frozen dairy product. Their recipe and process developed into what is now referred to as soft-serve ice cream, immensely popular since its inception.

In 2010, the Dairy Queen brand was well known throughout North America for its signature soft-serve ice cream and for its focus on customer satisfaction. The company's current slogan was We Treat You Right." Dairy Queen's pricing model was considered slightly high for the industry (e.g., $3.35 for a large vanilla ice cream cone). In spite of this pricing, Dairy Queen became the destination for little league teams celebrating a victory, business professionals taking their lunch break and families taking time out to enjoy fast food and a variety of soft-serve ice cream products.

COMPANY BACKGROUND

Perantinos was searching for summer employment after his first year at The University of Western Ontario, London, Ontario. He decided an entrepreneurial venture would be a rewarding experience and would help prepare him for his education at the Richard Ivey School of Business, as well as his future career. Since there was no scooped ice cream parlour in Tottenham, Perantinos founded the first Cool Moose Creamery in Tottenham in the summer of 2008. The ice cream parlour opened in May of each year for a four-month period, operating throughout the summer until Labour Day. Cool Moose currently offered 16 varieties of hard, scooped ice cream, as well as frozen yogurt (which could be mixed with freshfruit), milkshakes, floats and other frozen treats.

Perantinos experienced moderate success in his first year and was able to develop strong brand recognition, and a loyal customer base in the community of Tottenham. Cool Moose was known for its excellent service to customers - Perantinos and his staff were friendly, outgoing, fun and enthusiastic, and they attempted to provide service beyond customers' expectations. Perantinos established three core values for the business: helping the community, making customers smile and inspiring employees. He believed these business practices allowed him to carry his success into the summer of 2009. In the second year of operations, Perantinos opened a new location for Cool Moose in nearby Alliston, Ontario. Summer 2009 sales increased at the Tottenham store, and the successful launch of the parlour in Alliston helped Perantinos achieve sales growth of 233 per cent over fiscal 2008. The Alliston Cool Moose store currently had four full-time employees who strived to know each customer personally.

In early 2010, Perantinos received the Student Entrepreneur Champion award for Ontario from a not-for-profit organization called Advancing Canadian Entrepreneurship. See Exhibit 2 for a newspaper article highlighting Cool Moose's success and this award. The summer of 2010 was critical to Perantinos future, since he would be entering his final year of studies at the Richard Ivey School of Business and had to decide whether he would operate Cool Moose as a full-time occupation upon graduating. He had found another town without a scooped ice cream parlour and was making arrangements to open a third Cool Moose in Cookstown. Although the business kept him extremely busy, he was unsure whether it could provide him with a full-time income. After two successful years, Perantinos began to research how to further grow Cool Moose.

THE SOFT-SERVE OPPORTUNITY

Perantinos thought that expanding his product line would increase same-store sales and grow the business. One way to do this was to invest in a soft-serve ice cream machine at one of the Cool Moose locations. Soft-serve ice cream was very common in fast-food restaurants such as McDonald's and Dairy Queen. The machines produced a frozen dairy product that was smoother than scooped ice cream and dispensed the product in a swirl pattern. Most machines had a single head that produced only one flavour, vanilla. However, Perantinos had considered a triple-head machine that would produce vanilla, chocolate and a vanilla-chocolate swirl flavour. See Exhibit 3 for a picture of each soft-serve machine. Perantinos had found a used single-head machine available for purchase at a cost of $2,000. If he wanted a triple-head machine, he would need to buy it new at a cost of $12,000." Perantinos' research has found that some store owners had success with used machines, while others had been greatly disappointed and lost money due to repairs costing thousands of dollars. He estimated the useful life of a used machine to be three years while a new machine should last seven years. Cool Moose used the straight-line method of depreciation for all its fixed assets. Given the large investment, Perantinos wanted to assess the feasibility of adding soft-serve ice cream to the Alliston store and to calculate the anticipated return on investment. Purchasing one of these machines would attract new customers, who preferred soft-serve over scooped ice cream. Specifically, several of these new customers could be current Dairy Queen customers who would switch to Cool Moose because of its lower prices, variety of ice cream or its pleasant experience. If soft- serve ice cream was offered, Perantinos would charge $2.50 per serving. Each serving was approximately 90 grams of ice cream and the customer could choose to have the ice cream on a cone or in a cup for the same price. Sales were estimated to be 2,800 servings of the vanilla flavour per operating period. If Cool Moose purchased the triple-head machine, 1.200 more servings would be sold annually. The soft-serve mix used in the machines was sold by the bag, and Perantinos estimated one serving of ice cream would cost $0.25. Each cone cost $0.07 and, if the customer chose a cup, the cup and spoon combined were also $0.07. One napkin was provided with each serving. The napkins were purchased in packages of 500 for $5. Cool Moose kept 10 days of inventory in the store at all times. Since some existing customers would choose soft-serve instead of scooped ice cream, Perantinos was unsure of the impact cannibalization would have on his profitability. Although he did not want current scooped ice cream sales to decline, soft-serve ice cream did offer much better gross profit margins. Perantinos thought that approximately 980 servings of scooped ice cream would be cannibalized if he sold soft-serve ice cream using the single-head machine, and 1,400 servings of scooped ice cream would becannibalized if he sold soft-serve ice cream using the triple-head machine. Scooped ice cream had an average selling price of $2.50 per serving, and the ice cream cost averaged 31 per cent of sales. Soft-serve ice cream machines created numerous health and safety issues. The cleaning of these machines was critical to their ability to function properly and the longevity of their useful life; more importantly, if not cleaned properly, the machines were susceptible to bacteria and food-borne illnesses. If Cool Moose added a soft-serve machine, all employees would need to be trained in how to use and clean the machine. Perantinos would provide one-time training for two hours on a single-head machine or three hours on a triple-head machine to each of the store's employees. Historically, employee turnover was low. A thorough cleaning of the machine would be needed every night and would require an employee to work later. A single-head machine would take an additional hour to clean and a triple-head machine would take 1.5 hours to clean. All Cool Moose employees were paid $10.90 an hour including employment insurance (EI) and Canada Pension Plan (CPP) contributions. The soft-serve ice cream mix came as a bagged liquid product that required refrigeration. In anticipation of his decision, Perantinos purchased a small refrigerator last month at a cost of $150. Operating the soft-serve machine would also increase Cool Moose's utilities costs by $150 for a single-head machine and $350 for a triple-head machine over the four-month-operating period. Perantinos knew that the investment in a new soft-serve machine was a large one. After meeting with his bank's account manager, Perantinos was told that the bank would extend Cool Moose a loan of up to $12,000 to purchase the desired machine at an annual interest rate of seven per cent. The loan would require repayment in equal monthly installments over the next five years. All principal and interest payments would be due on the first day of each month.

CONCLUSION

Perantinos was quite pleased with Cool Moose's performance to date and with the awards and recognition. His ice cream store was a "hotspot" in downtown Alliston and was more than capable of holding its ground with the local Dairy Queen competition. Was the demand for Dairy Queen's soft-serve ice cream proof that Perantinos could improve his profitability by offering this product? Were the benefits of adding soft- serve ice cream great enough to overcome the investment, time and effort needed to add these machines? Perantinos sat down with his notes to contemplate the opportunity and evaluate its fit with the company's strategy. After completing this analysis, he would make his decision.

Exhibit 2

LONDON FREE PRESS ARTICLE CREAM Ivey student scoops award for entrepreneurship By DANIELA DISTEFANO, SPECIAL TO QMI AGENCY Last Updated: February 22, 2010 6:39am Greig Perantinos' love of ice cream is gaining him some cool accolades across the province. Perantinos, owner of Cool Moose Creamery and a student at UWO's Richard Ivey School of Business, has been named 2010 Student Entrepreneur Ontario champion by a not-for-profit group called Advancing Canadian Entrepreneurship. "It's great to be recognized for doing something that I love," the 20-year-old business student says. Perantinos, nominated by a fellow Ivey student, is one of four champions chosen among 30 Ontario contestants. Greig Perantinos, a student at Western's Richard Perantinos had been looking for a summer job in 2008 without Ivey School of Business, has been named Student Entrepreneur. Ontario for starting twoice any luck, so he decided to start his own business. cream stores called Cool Moose Creamery. His brother, Matthew Perantinos, and Breanna "I like hard ice cream and there were only soft-serve shops in my Sweers work for him at his Tottenham store. town," he says. So he found a space for rent, bought a few freezers and opened the first Cool Moose Creamery in Tottenham, an hour's drive north of Toronto, Now with six employees, the shop serves ice cream and frozen yogurt from May through September. A second store opened last summer in nearby Alliston Perantinos says he receives a lot of support from the community and his family, especially his younger brother, Matthew. In return, his stores have played host to several fundraising events that collectively have raised more than $7,000 for Big Brothers Big Sisters of South Simcoe, Alliston and District Humane Society, Tottenham Food Bank and Tottenham Lions Club Perantinos plans to grow his business, opening two more stores this summer. "I love what I do, it's such great fun and it really complements my academic studies," he says. "I hope to continue running Cool Moose when I graduate." Perantinos will represent Ontario in a regional competition March 8 in Toronto that has $1,000 up for grabs for two finalists. A national champion will be selected in Calgary on May 12, with a $10,000 cash prize on the line and a shot at becoming Global Student Entrepreneur. ACE is a not-for-profit organization that provides post-secondary students with an opportunity to gain entrepreneurial and leadership skills outside of the classroom.

Cool Moose

Assignment Questions

1. Perform a business size-up of Cool Moose
2. Analyze Cool Mooses customers and perform a contribution analysis of each.
3. Examine Cool Mooses competitors. What is Cool Mooses competitive advantage?
4. Qualitatively analyze the Cool Moose opportunity
5. Of these, which are recurring costs and which are one=time costs?
6. Perform a differential analysis for the parties and events options. Calculate the Return on investment and payback period for this option. (ROI = Net cash flow / total long term investments) (Payback = total long term investments / net cash flow) for each.
7. Make recommendations on the situation

* Please answer all the parts of the question and show working.