Discuss the distribution business in France
Exhibit 5 2009 Ice-cream Transfers between France and Spain Ice-cream Cost of ingredients Cost per litre Total (in '000 Euros) 603 2.76 1.56 0.09 1.98 0.69 0.09 1,194 416 57 Volume transferred (in '000 litres) Actual Costs (in Euros) Dairy Ingredients Other Ingredients Labor Allocated Fixed Costs (in Euros) Other costs Depreciation S&A expenses 5% profit margin Total transfer price 0.46 0.09 0.04 0.17 3.53 279 56 23 101 2,126 France Jean Pinoux was the manager of the French region. He was promoted to this position in 2007 when Pierre Giraux, the previous manager, took over the lagging Italian operation. Jean had started as a sales representative, then advanced to be responsible for production, and finally became division manager. Jacques was pleased with Jean's performance (see Exhibit 2). His profits were above budget, and sales had increased almost 20% over the previous year. Jean had invested a lot of his time in managing the expansion into the west coast of France, negotiating with new vendors and suppliers, and arranging distribution of the product. If all this effort had paid off in 2009, the profits would have been even higher, but Jacques knew that they would have to wait several years to get the full benefits from this investment. The performance in the traditional regions of the French market had been a bit disappointing. Market share had slipped from 20% in 2007 to 18% in 2009. Jean Pinoux argued that his frequent trips to the west coast had negatively affected his relationships with distributors in the east coast. The French region had bought new machines two years ago. While there had been some start-up problems, the machines ran smoothly during 2009 thanks to Jean's manufacturing expertise. The manufacturing operation was staffed with a core group of employees which supervised production and maintained the machines. Most of the workforce was people hired on an hourly basis. Jean had found a new source of revenue from a personal friend who operated a well-known restaurant in Camargue. Over the summer of 2009, Jean's friend had decided to package his meals and distribute them through supermarkets and food stores in the region. He needed refrigerated trucks to deliver his products and Jean agreed to distribute them for a fee. Most of the retail outlets were already visited by Compagnie du Froid's delivery trucks and the incremental cost to the company to provide this service was very low. Jean saw this business opportunity as a simple way to increase revenue. By the end of the summer, he had agreements with two other regional food producers to deliver their products beginning in summer 2010. He planned to work over the winter season on getting more of these deals that were easy and very profitable. Jacques was surprised by Jean's initiative, but acknowledged that there was a profit potential in the distribution business. He was concerned, however, that distribution was outside Compagnie du Froid's core business, and he felt unsure whether to follow this new opportunity (Compagnie du Froid's mission is reproduced in Exhibit 7). Spain Andres Molas was the manager for the Spanish region. He had been in charge of the Spanish operation since it started in 1995. Andres was the only non-French top manager. His performance had been outstanding until 2009. He had grown the division from scratch and he was well-respected for his innovative ideas. For example, last year he had developed a vending machine to sell specialties. The idea had been so successful that France and Italy were planning to introduce it in 2010. Andres was the most successful manager in introducing new products to the market and the other managers followed some of his marketing ideas. Unfortunately, 2009 had been problematic for several reasons. (Exhibit 4 shows the performance of the Spanish region.) New machines, similar to the ones purchased in France, were bought early in the year to increase efficiency, but they did not perform adequately until late August. Technicians from the supplier had to spend several weeks adjusting the machines. Because of these problems, Andres had run out of capacity several times during the year and he had been forced to import product from the French division. This was the first time that Compagnie du Froid had transferred sales between regions and Jacques had decided to set the transfer price at full cost plus a 5% profit for the manufacturer (see Exhibit 5). There was some argument about the policy. Andres was not happy about it because he said that it made his division look bad, but he accepted it as a temporary solution. In addition, the Spanish division had been forced to absorb the expenses of having people travel to France to help fit Spanish containers and packaging to the French production line. In addition, the market had been very tough that year. Unseasonably cold temperatures had driven tourism down (Exhibit 6 shows the history of sales and temperature for the various regions). Over time, Jacques had developed a rule of thumb that a 1C deviation from the mean summer temperature resulted in a 3% change in volume growth. The 2009 summer temperatures in the coastal zones of Spain had been 1.7C below average; thus Jacques' rule of thumb predicted volume growth to be only 4.9% rather than the planned 10%. The reaction of a large competitor to lower sales volume had been to lower prices to stimulate demand. Andres had followed with a price cut. Even with total market sales down, Andres decided to keep the level of advertising up to build market share
