tlVEY Publishing HABITUAL CHOCOLATE: EXPANSION OPPORTUNITIES On December 3, 2014, Philippe Lehner, owner and chocolatier of Habitual Chocolate (Habitual), a chocolate manufacturing and retailing company located in London, Ontario, was considering an expansion opportunity within Southwestern Ontario. Habitual's current production facility in the Western Fair Farmers' Market was sufficient for immediate demand; however, there was limited space for expansion in the same building. In addition, the Western Fair Farmers' Market had plans to prohibit manufacturing within the next five to 10 years. In light ofthis situation, Lehner was debating a couple of options: Was it the right time to purchase a new storefront and production ficility in Woodstock, Ontario? Or, should Habitual continue its operations in London while looking for other opportunities to expand? THE CHOCOLATE MANUFACTURING INDUSTRY IN CANADA History The chocolate manufacturing industry underwent rapid consolidation and technological innovation between 2004 and 2012. During that same period, increased automation substantially decreased the number of production sites and, consequently, the number of production employees from 3,008 to 1,448.1 As technology advanced, smaller production facilities could not compete against the larger production sites' economies of scale. One of the key reasons for this situation stemmed from the chocolate manufacturing industry's dependence on the volatile commodity prices 3 of sugar and cacao beans, and smaller producers ficed a greater risk if prices increased rapidly. The number of chocolate manufacturing Chocolate and Confectionery Manufacturing from Cacm Beans (NAICS 31132): Wnufacturing costs,' Government of Canada, acessed December 17, 2015, wwwjc.gcca/app/scr/sbms/sbWds/empbymenthtmI?code=31132&Iang=eng Emnomies of scale occurred when a business was able to purd7ase large quantities of materials at a diounted rate or to spedalize its latour tasks to increase efficiency. These knds of activities enabkd the business to lower its cost of in omparison to smaller mmpetitors. The Ebola crisis of 2014 aeated a supply shortage in the and caud cac.m to ri due to a lack of producion in East Afre. Page 2 companies was predicted to shrink 05 per cent annually through 2021.4 Exhibit I shows a breakdown of chocolate manufacturing costs. The Canadian chocolate industry was dominated by five major international companies: Ferrero, The Hershey Company, Mars, Mondelez and Nestl. Together, these compames captured almost 40 per cent of the total market share. s They all had well-known products attached to their brands, which were sold in almost every retail store in Canada. None actively promoted Certified Organic or FairTrade6 certified products, but all offered known brands and products to consumers at lower price points than those of artisan chocolate retail products. The chocolate manuficturing industry in Canada had grown at a compound annual growth rate of 4.9 per cent from 2004 to 2012. During the same time period, the overall manufacturing industry in Canada had grown at an annual compound late of 0.1 per cent. Over half of all chocolate manufacturing revenue was generated through sales made to expon markets and was therefore heavily dependent on foreign-currency exchange rates. In 2014, the Canadian dollar depreciated from USSO.94 to USSO.85,7 which significantly increased the cost of importing cacao beans and drove up the retail selling prices of chocolate products. Because of these higher retail prices, revenue groMh for 2015 was expected to be 1.2 per cent. Trends Recent studies promoted the health benefits that could be derived from chocolate-based products, includin antioxidant compounds, which helped reduce blood pressure while also stimulating improved memory. This effect was most prevalent in dark chocolate products wherein the ingredients were predominantly natural as opposed to the more processed ingredients in milQhocolate products. On the other hand, there was a growing concern for chi ldhood obesity and, specifically , the high amount of sugar children were consuming. This factor was closely tied to increases in diabetes and had significantly raised parental concerns. The Artisan Chocolate Market The retail market for artisan chocolate differed in many ways from the standard chocolate market. To manufacture chocolate naturally , the required process could take between 38 and 76 hours (see Exhibit 2). Most chocolate that was available at major retail stores was produced in large, automated factories, where Clw:olate Production in Canada,' IBIS Worki Industry Report, December 17, 2015, http://chents I. ibisworld jib uwo. Chocolate Market Share in Canada in 2015, by Company,' Statista, accessed 17, 2015, wwwstatista.com/statistics315273c.an ada-s-chocolaternarket-share-brcompan y/. When a product displays the Fairtrade it indicates that the and traders have met standards. These standards are desgned to address the imbalance of power in trading Elatbnships, unstable markets, and the injustes of conventional trade. Ulbmatety, this &Sgnatbn ensures that farmers and are fairly for their and services. Canadian Donar vs. IJS. Google Finance, accesd January 18, 2016, Statista, op. cit. Kathryn Hamon M.'hy Is Dark Chocolate for You? Thank Your Scentific Ameri:an, Mard7 19, 2014, acesd December 17, 2015, wwwsaentifirnerican.corn/articwwhpis-dark-docdategood-for-you-thank-pur- microbes'. 0 Carly Wks, Mud7 Sweetness: A1 SLAars Arent the Same,' The Globe and Mail, May 2, 2014, accessi 17, 2015, www.theglobeandrnail.mrntlife/heafr-and-fitness/healthftoomuch-sweetness-all-sugars-arent-the- sarne'article Page 3 chemicals were added to the process in order to shorten production time; for example, some major chocolate producers could finish a batch of chocolate in three hours. These major chocolate producers limited production to a small number of flavours to help streamline operations and, therefore, did not offer the same kind of flavour diversity offered by artisanal chocolate companies. Furthermore, some consumers placed a premium on a handmade, custom product that had a rich and unique flavour. Artisan producers held chocolate-tasting events to show'case their products' differences. Many artisanal producers also offered Certified Organic or Fairtrade-certified products. Due to mass production, obtaining these certifications was extremely difficult for a large company because the celtified raw materials cost more than non-Fairtrade-certified materials and were in shorter supply. THE COMPETITION Consumers could purchase dark chocolate products from premium brands such as Lindt, Godiva, and Ghirardelli. These brands were mass-produced and sold in most major retail locations at an average retail selling price between S3 and S4.7511 per 100-gram bar-12 Lehner believed that Habitual's direct artisan competitors were SOMA Chocolatemaker, ChocoSol Traders, and Rheo Thompson Candies. SOMA Chocolatemaker Based in Toronto, Ontario, SOMA Chocolatemaker (SOMA) was a boutique chocolate factory with three retail locations within the city. 1 SOMA had expanded its operations from one small location in the Distillery District of Toronto into two new larger locations. The business had wholesale contracts across Canada and the United States and generated over Sl 50,000 in annual revenue. 1 a Specifically, within Ontario, SOMA had wholesale contracts with Locomotive Espresso, in London and Oudetkirk & Taylor, in Guelph, while most of the remaming Ontario contract customers were located in the Greater Toronto Area (GTA).IS Many of SOMA's products bore the Certified Organic label, but most products were not certified Fairtrade. SOMA identified the sources for its cacao beans on its website and advocated for fair supplier relationships with chocolate farmers. SOMA offered a diverse range of products including, but not limited to, truffles, gelato, cookies, toffee, spreads, and bars. SOMA sold over 15 different 65-gram bars at retail selling prices between $8 and $14.50.16 ChocoS01 Traders Founded in 2004, ChocoSol Trade (ChocoSol), which was branded as a social enterprise 17 in chocolate production, promoted more than just an ethically sourced chocolate product. The company valued ecologically sound practices throughout all operations, and it made use of bicycle delivery, compostable A" currerwyin uNess specified otherwise. Godiva CMmIates, accessed December 13, 2015, www.godiva.comnarge-seventy-two-percent-dark*ocoIate-bar/794 IOhtrn , Ghirardelli Chocolate, accessed December 13, 2015 , www.ghirardelli com'shop-l/flavors/darkchocolatefintense- dark-sea-salt-soiree-bar Walmart Canada, amessed December 13, 2015 , www walrnart_ca/ arch/Iindt%2085. January 18, 2016 Our Story,- SOMA CMmIatemaker, accssed December 17 , 20155, .com/pages'our-story. u SOMA Ctw:olate Ltd.,- Mergent Intellect, accessed De:ember 17, 2015, ."b.uwoca/ index. php' se ard7 'comp any Deta ilsJ20975% 90 Sto*ists,- SOMA Chodatemaker, December 17, 2015, wwwsomachocolate.com/pagesjstockists' SOMA Ctw:olatemaker Valentine's Day 2016," Shopify accessed January 18.2016 , https]/cdnshopifycom/s/files/l/030 A sccial enterprise attempts to improve human and environmental well-being while profits for shareholders at the same tirne About us, ChocoSoI Trrs, accesd December 17 , 2015, Page 4 packaging, and pedal-powered machinery. All cacao beans used in ChocoSol products were organic and were sourced directly from indigenous conununities in Mexico. This sourcing was classified as a horizontal-trade relationship, which was defined as going beyond the simple exchange of commodities. For example, ChocoSol and its supplier communities would exchange social enterprise business models to help improve best practices. ChocoSol's products were manufactured in its sole, companBwned retail location on St. Clair Avenue West, in Toronto, Ontario. The company also sold its products in farmers' markets and to other retailers across the province, generating over S200,000 in sales annually. I g ChocoSol had contracts with three retailers in Stratford, Ontario, and one in London, Ontario, while the bulk of the contracts were held with retailers in the GTA.20 Some of ChocoSol's online retailers distributed their products (including ChocoSol's products) globally. ChocoS01 offered five flavours of chocolate for eating, four flavours of chocolate for drinking, and a variety of dry goods, such as coffee beans, cacao beans, vanilla pods, agave, hemp, and chia seeds. The company sold 130-gram bars ofchocolate for an average price of SIO each. Rheo T hompson Candies Founded in 1969, Rheo Thompson Candies (RTC), based in Stratford, Ontario, manufactured and sold handmade candy products. A majority of RTC's more than 150 products were chocolate-based and ranged from hard candy and peanut brittle to fruit jellies and assorted chocolates. RTC did not use Certified Organic or Fairtrade-certified products; rather, its focus was on umque recipe creations and creative packaging presentation. RTC was most renowned for its milk chocolate mint smoothie, first launched in 1971, and sales of this product had been key to the expansion of the company worldwide. RTC retailed the milk chocolate mint smoothie for S6.25 per box, which weighed approximately 114 grams. The company also sold a 50-gram dark chocolate bar for S2.15. RTC manufactured all products in its Stratford facility, with 17 employees who generated almost Sl million annually in revenue. RTC chose to sell most of its product directly to end-consumers through the company website rather than through multiple wholesale customers. Whenever possible, RTC advocated for the purchase of local ingredients, such as maple syrup, honey, and dairy products, but it primarily focused on its "old-style" handmade production of its products. CONSUMERS Chocolate products had a strong appeal across many consumer demographics; however, the local artisanal market attracted two distinct groups: young professionals between the ages of 25 to 35, and retirees between the ages of 65 to 85. The latest census data from 2011 revealed the following information about these demographic groups: Location Aver e Income olds 50 5 4,905 ulation 6585 olds 45 590 5,370 lation London 39 229 s 37,068 Ch:cosol Mergent accessed 17, 2015, www.rnergentintelect_com.proxyl.ibuwoca/ index. se 'comp any Oeta ilsJ244231499. Where to Find us, ChocoSoI Traders, acssed January 18 , 2016, http://chocosoltraders.corn/where-to-findus/. Thompson. Rheo Candies, Ltd. acssed December 17 , 2015, www.mergenthtellect.com goxyl .lib.uwocahndekphp' "company Details/205333487. 22 NHS Profile, Lonchn, CY, Ontarb, 20 II,' Statisti:s Canada, accessed January 18, 2016, www12statcan.gcea/nhs-enm/ 2011 /dppd/prof/details'page .cfm?L I PR: O Izlmorne ;TAB I. Page 5 Young Professionals Lehner estimated that 85 per cent of his current customer base was composed of young professionals. This consumer group often had a significant amount ofdisposable income to spend on high-pliced goods, and its members had become increasingly well-educated on the impacts of their purchasing decisions. As a result, the growth in demand for organic and Fairtrade-certified products was typically driven by this demographic. As well, many in this segment were passionate about supporung ethical practices and local business develo nt. Initiatives such as revitalizing the downtown core and groups like Emerging Leaders London were examples of initiatives led by young professionals. This demographic appreciated a short, all-natural ingredient list when purchasing f.od products. Retirees The artisanal nature of Lehner's production process had attracted retirees, an older demographic who remembered a time when it was more common for chocolate production to involve craftsmanship. Based on this nostalgic appeal, this consumer group remained undeterred by the higher costs of artisanal chocolate. Retirees also appreciated a short, all-natural ingredient list when purchasing food products. HABITUAL CHOCOLATE History In 2009 , the founders of Habitual were travelling in Latin America in search of coffee producers, and they in love with the production process of open-air chocolate cuting. Upon returning to Canada, they decided to launch a chocolate business alongside their existing Fire Roasted Coffee (Fire Roasted) business. Due in part to the high upfront investment costs of starting chocolate production, and the rapid growth of Fire Roasted (which used up a majority of the company's human and capital resources), the owners felt that Habitual had never reached its full potential. This factor led them to sell Habitual in January 2014 to Lehner, an expelienced chocolatier who had been an employee at Habitual during the previous year. This sale would allow Habitual to pursue its own strategy under Lehner's leadership, independent from Fire Roasted. Habitual was proud of what it called a "clean label," which meant that few ingredients were used in its products. The majority of the chocolate bars sold by Habitual contained only three ingredients: cacao beans, cacao butter, and organic cane sugar. Since most bars were dark chocolate, the sugar content was often lower than both the protein and fibre content. Customers told Lehner that they rarely felt guilty indulging in Habitual chocolate because it was not packed with sugars. Furthermore, Habitual's chocolate was Fairtrade certified and almost always certified organic. Philippe Lehner Lehner had always had a passion for baking and, more specifically, for chocolate-making. Trained as a chocolatier in Switzerland, Lehner began his career working as a pastry chef and candy-maker apprentice '%cus on Series, 2011 Census: Lonchn Ontario,' Statistics Canada, acssed December 17, 2015, www12.statcangcca/census-lensemen t/2011/as-saffogs-sp$acts-csd-eng Emerging Leaders (EL) is an inmrprated '-on-profit organizatbn that focuses on the retention, development, and of talent as a means to a more vbrant, irwusive, and dynarfic mmmunity for the future. Page 6 from 1998 until 2003. As part of his mandatory service to the Swiss military, Lehner served for three years as a kitchen chef, in charge of cooking for 150 military personnel. He then moved to Kansas City in the United States and worked again as a pastry chef in a Swiss pastry and chocolate shop. In 2008, Lehner moved to Canada and worked in Cambridge, Ontario, where he was the production manager for a gluten- free bakery. Lehner moved to London in 2012 and began working part-time at both Artisan Bakery and Habitual before accepting a full-time management and chocolatier position at Habitual in February 2013. Since the beginning of his apprenticeship in Switzerland, Lehner had always believed that a product hnade from scratch" was of superior quality. He was disappointed during his training to discover that the company he worked for simply melted pre-made chocolate blocks to make truffles. When Lehner heard that Habitual was producing from "bean to bar," he pursued the job opportunity with excitement. Facility Production of Habitual chocolate originally took place in Fire Roasted's flagship location in downtown London, Ontario, at the comer of King Street and Talbot Street. Once the company was sold to Lehner, the entire production facility moved to the Western Fair Farmers' Market, where the chocolate was sold every Saturday when the market was open. In addition, a portion of retail space in Fire Roasted's downtown location was reserved for Habitual products. The current production space at the market exceeded the capacity requirements of Habitual, but the management at the Western Fair's Farmers' Market had informed Lehner that, in the future, they uould allow vendors to use the space for retailing only, rather than for manufacturing and retailing. In fiscal 2015, rent at the Western Fair Farmers' Market would increase by SO.90 per square foot. Habitual currently rented I ,000 square feet of space in the market. Operations Habitual's revenue was split evenly between retail and wholesale sales. Most of the wholesale contracts were with other local retailers in London, such as Remark, Unger's, and Farm Boy, who resold the same chocolate bars that were made available at the market. A small percentage of customers (typically restaumnts) also purchased chocolate in bulk to melt as an ingredient in their own products. The bulk of retail revenues came from the sale of IOS-gram and 35-gram chocolate bars. Habitual retailed the IOS-gram bars between $6.75 and SS per bar, and the 35-gram bars between S3.25 and S4 per bar. Habitual also sold truffle chocolates for special occasions like Valentine's Day for a retail price of S7.25 per box of four chocolates. As an artisan chocolate company, the flavour options and different origins of the beans were extremely diverse. Lehner had begun to streamline production and limit advertising dollars to 10 of its core flavoured bars in order to help control costs (see Exhibit 3). For Habitual's past financial performance see Exhibits 4, 5, and 6. THE WOODSTOCK OPTION Since taking over Habitual, Lehner had been looking for potential opportunities to move to a new production space in anticipation of the time when London's Western Fair Farmers' Market would put a stop to manufacturing activities in its building. Habitual would continue to retail its products at the Western Fair Farmers' Market, even if the move to Woodstock was executed. If Lehner pursued the Page 7 Woodstock option, all production, including equipment, would be moved to the new location, and Habitual would rent just 500 square feet at the Western Fair Fanners' Market. Rental costs would decrease accordingly. Location Woodstock was located 50 kilometres northeast of London, Ontario, and had a population of almost 40,000.25 Although it was not a large city, Woodstock promoted its vibrant community, which hosted multiple summer festivals, and emphasized its revitalized city core, which consisted of many heritage buildings and boutique shops. Of particular interest to Lehner was a vacant building on Dundas Street in downtown Woodstock. He believed the space would be large enough to handle Habitual's production expansion and a retail storefront. Lehner liked the location because it was in the financial district of the city; however, banks were closed on Saturdays, which could have an impact on sales. The building had been vacant for the past five years, and there were a few other empty storefronts close by. Upon closer inspection, Lehner discovered that the building had water damage, but the landlord agreed to repair the damage and install some major structural renovations at no cost to Lehner. Lehner would need to spend on equipment purchases and S 15,000 on fixtures; he would pay for these expenses in cash as soon as the new store was launchece If all went according to plan, Lehner thought he could open the store on June l, 2015. Sales Lehner's demographic research showed that, compared to London, the customer mix uould be different in Woodstock, so the sales volume would be hard to estimate. 2 He thought in-store retail sales at the Woodstock location would reach between S80,000 and S 100,000 annually.2g Due to seasonality, sales would range between $30,000 and $36,000 from June l, 2015 to November 30, 2015.29 Expenses Lehner would have to sign a five-year, Sl,500-per-month rental agreement, with the option to renew fi)r an additional five years. A deposit for the last month's rent was not required upon signing the rental agreement. Utility costs would vary based on the weather, and Lehner expected utility expenses to equal S400 per month during the first six months of each fiscal year and S300 per month during the last six months. Vehicle expenses (including fuel, insurance, and maintenance) would be S750 per month from June to November, and S 1,000 per month from December to May, annually. General administrative costs would average an additional $300 per month. If Lehner pursued the Woodstock expansion, Habitual's insurance company quoted the total company policy at $610 per month. The insurance policy for the London operation would remain at the satne monthly rate as fiscal 2014.30 If the Woodstock option was z Fwus on Geography Series, 2011 Census: Ontario," Statiste acessed Dember 17, 2015, statcan.gc t/2011/as-sa/fogs-sp$acts-crna-eng. The new equipnz7t would be depreciated the straight4ine method cner 15 years, with a sidual value of Se,n; the fixtures would be depreciated using the straight-line method cwer six years with no residual value The existing client base was split into 85 per cent professionals and15 cent rebrees, but in client-base split was expected to be 65 nt professionals and 35 per cent retirees. Lehner dE not expect that any additional wholesale revenue would be generated with the opening of the new store. June, July, and August would make up 40 per cent of the first six months of sales. Lehner started insurance premiums on Habitual when he the company from Fire Roasted Coffee on January I, 2014. Page 8 pursued, total company supply costs would increase by $2,700 annually and would be incurred and paid evenly throughout the year. The Woodstock storefront would be open flom Tuesday to Saturday, 10 a.m. until 5 p.m., and one staff member would be required to operate the storefront at a time. From December I until May 31 of each year, five additional retail hours would be added per week to accommodate the additional demand (i.e., Christmas, Valentine's Day, Easter). Lehner's staff members would earn an average of S12 per hour to mn the store front. Training costs would be negligible since Lehner would train the new employees "on the job." Since some of Habitual's busiest times surrounded major holidays, Lehner expected the store to be open all 52 weeks of the year. All wages were paid in full on the last day of the month in which they were worked. Variable Costs Habitual's variable costs consisted of raw materials that were purchased on the first day of the month on account in order to maintain inventory levels. Regardless of whether or not Lehner moved his entire production to Woodstock, variable costs would be 25 per cent of sales. Lehner hoped to maintain the same days of accounts payable as in fiscal 2014, and he expected accounts receivable to remain negligible. Finally, to promote the new store, Lehner would spend an additional each year (the same amount each month) and another S500 to advertise the grand opening during the month of June. Upon expanding to Woodstock, Lehner would initially purchase $3,000 worth of raw-materials inventory. 2015 PROJECTIONS CURRENT LOCATION Regardless of whether the move to Woodstock took place, Lehner estimated that, in fiscal 2015, Habitual's wholesale revenue would increase by 75 per cent, and retail sales would increase by 25 per cent. All sales were paid in cash or with bank credit cards. Sixty per cent of wholesale and existing retail sales would occur between December I and May 31. The summer months (June, July, and August) would account for just 20 per cent of annual sales for two reasons: ( l) there were no major holidays during these months, and (2) customers were typically interested in cold treats during these months as a way to combat the summer heat. Lehner expected annual salaries and wages to increase by $5 ,000 and general and administrative costs to remain the same dollar amount as in fiscal 2014. Both expenses would be paid evenly throughout the year. Lehner also planned to increase the marketing budget to Sl ,000 annually, and he would incur S450 of supply costs per month for the Western Fair Farmers' Market. On December l, 2014, rent increased by $900 annually at the Western Fair Farmers' Market. CONCLUSION Lehner was excited about the opportunity to expand Habitual into a new city. If he decided to expand, Lehner had secured a S50,000 loan from a local angel investor, effective June l, 2015.31 Before making his decision, Lehner wanted to review Habitual's current operations from a cash flow perspective. Based 10-year loan had an interest rate of 7 pr cent. Equal principal and interest payments woukf made once a year starting on June I, 2016. Interest would be calallated based on the prirwipal armunt outstanding the fiscal Page 9 on his decision, he also planned to project a fiscal 2015 statement of earnings and statement of financial position, and he wanted to create a cash budget for the slower summer months of June, July, and August. He expected to create these projected statements regardless of whether or not he moved his operations to Woodstock. The company's existing loans from Fire Roasted were not charged any interest, nor did they require any principal payments in fiscal 2015. However, if the Woodstock expansion was not pursued, Lehner hoped to be able to pay off S2,500 per month on his outstanding demand loan from Fire Roasted, starting at the beginning of July 2015. LehiEr to start June 2015 with S15 in the bank. Page 10 EXHIBIT 1: MANUFACTURING COSTS BY CATEGORY Chocolate and Confectionary Manufacturing from Cacao Beans (NAICS 31132) 1200 1 ,000 2004 2007 2010 2011 eMateriaIs Supplies ($ in millions) 2012 Wages ($ in milions) tlVEY Publishing HABITUAL CHOCOLATE: EXPANSION OPPORTUNITIES On December 3, 2014, Philippe Lehner, owner and chocolatier of Habitual Chocolate (Habitual), a chocolate manufacturing and retailing company located in London, Ontario, was considering an expansion opportunity within Southwestern Ontario. Habitual's current production facility in the Western Fair Farmers' Market was sufficient for immediate demand; however, there was limited space for expansion in the same building. In addition, the Western Fair Farmers' Market had plans to prohibit manufacturing within the next five to 10 years. In light ofthis situation, Lehner was debating a couple of options: Was it the right time to purchase a new storefront and production ficility in Woodstock, Ontario? Or, should Habitual continue its operations in London while looking for other opportunities to expand? THE CHOCOLATE MANUFACTURING INDUSTRY IN CANADA History The chocolate manufacturing industry underwent rapid consolidation and technological innovation between 2004 and 2012. During that same period, increased automation substantially decreased the number of production sites and, consequently, the number of production employees from 3,008 to 1,448.1 As technology advanced, smaller production facilities could not compete against the larger production sites' economies of scale. One of the key reasons for this situation stemmed from the chocolate manufacturing industry's dependence on the volatile commodity prices 3 of sugar and cacao beans, and smaller producers ficed a greater risk if prices increased rapidly. The number of chocolate manufacturing Chocolate and Confectionery Manufacturing from Cacm Beans (NAICS 31132): Wnufacturing costs,' Government of Canada, acessed December 17, 2015, wwwjc.gcca/app/scr/sbms/sbWds/empbymenthtmI?code=31132&Iang=eng Emnomies of scale occurred when a business was able to purd7ase large quantities of materials at a diounted rate or to spedalize its latour tasks to increase efficiency. These knds of activities enabkd the business to lower its cost of in omparison to smaller mmpetitors. The Ebola crisis of 2014 aeated a supply shortage in the and caud cac.m to ri due to a lack of producion in East Afre. Page 2 companies was predicted to shrink 05 per cent annually through 2021.4 Exhibit I shows a breakdown of chocolate manufacturing costs. The Canadian chocolate industry was dominated by five major international companies: Ferrero, The Hershey Company, Mars, Mondelez and Nestl. Together, these compames captured almost 40 per cent of the total market share. s They all had well-known products attached to their brands, which were sold in almost every retail store in Canada. None actively promoted Certified Organic or FairTrade6 certified products, but all offered known brands and products to consumers at lower price points than those of artisan chocolate retail products. The chocolate manuficturing industry in Canada had grown at a compound annual growth rate of 4.9 per cent from 2004 to 2012. During the same time period, the overall manufacturing industry in Canada had grown at an annual compound late of 0.1 per cent. Over half of all chocolate manufacturing revenue was generated through sales made to expon markets and was therefore heavily dependent on foreign-currency exchange rates. In 2014, the Canadian dollar depreciated from USSO.94 to USSO.85,7 which significantly increased the cost of importing cacao beans and drove up the retail selling prices of chocolate products. Because of these higher retail prices, revenue groMh for 2015 was expected to be 1.2 per cent. Trends Recent studies promoted the health benefits that could be derived from chocolate-based products, includin antioxidant compounds, which helped reduce blood pressure while also stimulating improved memory. This effect was most prevalent in dark chocolate products wherein the ingredients were predominantly natural as opposed to the more processed ingredients in milQhocolate products. On the other hand, there was a growing concern for chi ldhood obesity and, specifically , the high amount of sugar children were consuming. This factor was closely tied to increases in diabetes and had significantly raised parental concerns. The Artisan Chocolate Market The retail market for artisan chocolate differed in many ways from the standard chocolate market. To manufacture chocolate naturally , the required process could take between 38 and 76 hours (see Exhibit 2). Most chocolate that was available at major retail stores was produced in large, automated factories, where Clw:olate Production in Canada,' IBIS Worki Industry Report, December 17, 2015, http://chents I. ibisworld jib uwo. Chocolate Market Share in Canada in 2015, by Company,' Statista, accessed 17, 2015, wwwstatista.com/statistics315273c.an ada-s-chocolaternarket-share-brcompan y/. When a product displays the Fairtrade it indicates that the and traders have met standards. These standards are desgned to address the imbalance of power in trading Elatbnships, unstable markets, and the injustes of conventional trade. Ulbmatety, this &Sgnatbn ensures that farmers and are fairly for their and services. Canadian Donar vs. IJS. Google Finance, accesd January 18, 2016, Statista, op. cit. Kathryn Hamon M.'hy Is Dark Chocolate for You? Thank Your Scentific Ameri:an, Mard7 19, 2014, acesd December 17, 2015, wwwsaentifirnerican.corn/articwwhpis-dark-docdategood-for-you-thank-pur- microbes'. 0 Carly Wks, Mud7 Sweetness: A1 SLAars Arent the Same,' The Globe and Mail, May 2, 2014, accessi 17, 2015, www.theglobeandrnail.mrntlife/heafr-and-fitness/healthftoomuch-sweetness-all-sugars-arent-the- sarne'article Page 3 chemicals were added to the process in order to shorten production time; for example, some major chocolate producers could finish a batch of chocolate in three hours. These major chocolate producers limited production to a small number of flavours to help streamline operations and, therefore, did not offer the same kind of flavour diversity offered by artisanal chocolate companies. Furthermore, some consumers placed a premium on a handmade, custom product that had a rich and unique flavour. Artisan producers held chocolate-tasting events to show'case their products' differences. Many artisanal producers also offered Certified Organic or Fairtrade-certified products. Due to mass production, obtaining these certifications was extremely difficult for a large company because the celtified raw materials cost more than non-Fairtrade-certified materials and were in shorter supply. THE COMPETITION Consumers could purchase dark chocolate products from premium brands such as Lindt, Godiva, and Ghirardelli. These brands were mass-produced and sold in most major retail locations at an average retail selling price between S3 and S4.7511 per 100-gram bar-12 Lehner believed that Habitual's direct artisan competitors were SOMA Chocolatemaker, ChocoSol Traders, and Rheo Thompson Candies. SOMA Chocolatemaker Based in Toronto, Ontario, SOMA Chocolatemaker (SOMA) was a boutique chocolate factory with three retail locations within the city. 1 SOMA had expanded its operations from one small location in the Distillery District of Toronto into two new larger locations. The business had wholesale contracts across Canada and the United States and generated over Sl 50,000 in annual revenue. 1 a Specifically, within Ontario, SOMA had wholesale contracts with Locomotive Espresso, in London and Oudetkirk & Taylor, in Guelph, while most of the remaming Ontario contract customers were located in the Greater Toronto Area (GTA).IS Many of SOMA's products bore the Certified Organic label, but most products were not certified Fairtrade. SOMA identified the sources for its cacao beans on its website and advocated for fair supplier relationships with chocolate farmers. SOMA offered a diverse range of products including, but not limited to, truffles, gelato, cookies, toffee, spreads, and bars. SOMA sold over 15 different 65-gram bars at retail selling prices between $8 and $14.50.16 ChocoS01 Traders Founded in 2004, ChocoSol Trade (ChocoSol), which was branded as a social enterprise 17 in chocolate production, promoted more than just an ethically sourced chocolate product. The company valued ecologically sound practices throughout all operations, and it made use of bicycle delivery, compostable A" currerwyin uNess specified otherwise. Godiva CMmIates, accessed December 13, 2015, www.godiva.comnarge-seventy-two-percent-dark*ocoIate-bar/794 IOhtrn , Ghirardelli Chocolate, accessed December 13, 2015 , www.ghirardelli com'shop-l/flavors/darkchocolatefintense- dark-sea-salt-soiree-bar Walmart Canada, amessed December 13, 2015 , www walrnart_ca/ arch/Iindt%2085. January 18, 2016 Our Story,- SOMA CMmIatemaker, accssed December 17 , 20155, .com/pages'our-story. u SOMA Ctw:olate Ltd.,- Mergent Intellect, accessed De:ember 17, 2015, ."b.uwoca/ index. php' se ard7 'comp any Deta ilsJ20975% 90 Sto*ists,- SOMA Chodatemaker, December 17, 2015, wwwsomachocolate.com/pagesjstockists' SOMA Ctw:olatemaker Valentine's Day 2016," Shopify accessed January 18.2016 , https]/cdnshopifycom/s/files/l/030 A sccial enterprise attempts to improve human and environmental well-being while profits for shareholders at the same tirne About us, ChocoSoI Trrs, accesd December 17 , 2015, Page 4 packaging, and pedal-powered machinery. All cacao beans used in ChocoSol products were organic and were sourced directly from indigenous conununities in Mexico. This sourcing was classified as a horizontal-trade relationship, which was defined as going beyond the simple exchange of commodities. For example, ChocoSol and its supplier communities would exchange social enterprise business models to help improve best practices. ChocoSol's products were manufactured in its sole, companBwned retail location on St. Clair Avenue West, in Toronto, Ontario. The company also sold its products in farmers' markets and to other retailers across the province, generating over S200,000 in sales annually. I g ChocoSol had contracts with three retailers in Stratford, Ontario, and one in London, Ontario, while the bulk of the contracts were held with retailers in the GTA.20 Some of ChocoSol's online retailers distributed their products (including ChocoSol's products) globally. ChocoS01 offered five flavours of chocolate for eating, four flavours of chocolate for drinking, and a variety of dry goods, such as coffee beans, cacao beans, vanilla pods, agave, hemp, and chia seeds. The company sold 130-gram bars ofchocolate for an average price of SIO each. Rheo T hompson Candies Founded in 1969, Rheo Thompson Candies (RTC), based in Stratford, Ontario, manufactured and sold handmade candy products. A majority of RTC's more than 150 products were chocolate-based and ranged from hard candy and peanut brittle to fruit jellies and assorted chocolates. RTC did not use Certified Organic or Fairtrade-certified products; rather, its focus was on umque recipe creations and creative packaging presentation. RTC was most renowned for its milk chocolate mint smoothie, first launched in 1971, and sales of this product had been key to the expansion of the company worldwide. RTC retailed the milk chocolate mint smoothie for S6.25 per box, which weighed approximately 114 grams. The company also sold a 50-gram dark chocolate bar for S2.15. RTC manufactured all products in its Stratford facility, with 17 employees who generated almost Sl million annually in revenue. RTC chose to sell most of its product directly to end-consumers through the company website rather than through multiple wholesale customers. Whenever possible, RTC advocated for the purchase of local ingredients, such as maple syrup, honey, and dairy products, but it primarily focused on its "old-style" handmade production of its products. CONSUMERS Chocolate products had a strong appeal across many consumer demographics; however, the local artisanal market attracted two distinct groups: young professionals between the ages of 25 to 35, and retirees between the ages of 65 to 85. The latest census data from 2011 revealed the following information about these demographic groups: Location Aver e Income olds 50 5 4,905 ulation 6585 olds 45 590 5,370 lation London 39 229 s 37,068 Ch:cosol Mergent accessed 17, 2015, www.rnergentintelect_com.proxyl.ibuwoca/ index. se 'comp any Oeta ilsJ244231499. Where to Find us, ChocoSoI Traders, acssed January 18 , 2016, http://chocosoltraders.corn/where-to-findus/. Thompson. Rheo Candies, Ltd. acssed December 17 , 2015, www.mergenthtellect.com goxyl .lib.uwocahndekphp' "company Details/205333487. 22 NHS Profile, Lonchn, CY, Ontarb, 20 II,' Statisti:s Canada, accessed January 18, 2016, www12statcan.gcea/nhs-enm/ 2011 /dppd/prof/details'page .cfm?L I PR: O Izlmorne ;TAB I. Page 5 Young Professionals Lehner estimated that 85 per cent of his current customer base was composed of young professionals. This consumer group often had a significant amount ofdisposable income to spend on high-pliced goods, and its members had become increasingly well-educated on the impacts of their purchasing decisions. As a result, the growth in demand for organic and Fairtrade-certified products was typically driven by this demographic. As well, many in this segment were passionate about supporung ethical practices and local business develo nt. Initiatives such as revitalizing the downtown core and groups like Emerging Leaders London were examples of initiatives led by young professionals. This demographic appreciated a short, all-natural ingredient list when purchasing f.od products. Retirees The artisanal nature of Lehner's production process had attracted retirees, an older demographic who remembered a time when it was more common for chocolate production to involve craftsmanship. Based on this nostalgic appeal, this consumer group remained undeterred by the higher costs of artisanal chocolate. Retirees also appreciated a short, all-natural ingredient list when purchasing food products. HABITUAL CHOCOLATE History In 2009 , the founders of Habitual were travelling in Latin America in search of coffee producers, and they in love with the production process of open-air chocolate cuting. Upon returning to Canada, they decided to launch a chocolate business alongside their existing Fire Roasted Coffee (Fire Roasted) business. Due in part to the high upfront investment costs of starting chocolate production, and the rapid growth of Fire Roasted (which used up a majority of the company's human and capital resources), the owners felt that Habitual had never reached its full potential. This factor led them to sell Habitual in January 2014 to Lehner, an expelienced chocolatier who had been an employee at Habitual during the previous year. This sale would allow Habitual to pursue its own strategy under Lehner's leadership, independent from Fire Roasted. Habitual was proud of what it called a "clean label," which meant that few ingredients were used in its products. The majority of the chocolate bars sold by Habitual contained only three ingredients: cacao beans, cacao butter, and organic cane sugar. Since most bars were dark chocolate, the sugar content was often lower than both the protein and fibre content. Customers told Lehner that they rarely felt guilty indulging in Habitual chocolate because it was not packed with sugars. Furthermore, Habitual's chocolate was Fairtrade certified and almost always certified organic. Philippe Lehner Lehner had always had a passion for baking and, more specifically, for chocolate-making. Trained as a chocolatier in Switzerland, Lehner began his career working as a pastry chef and candy-maker apprentice '%cus on Series, 2011 Census: Lonchn Ontario,' Statistics Canada, acssed December 17, 2015, www12.statcangcca/census-lensemen t/2011/as-saffogs-sp$acts-csd-eng Emerging Leaders (EL) is an inmrprated '-on-profit organizatbn that focuses on the retention, development, and of talent as a means to a more vbrant, irwusive, and dynarfic mmmunity for the future. Page 6 from 1998 until 2003. As part of his mandatory service to the Swiss military, Lehner served for three years as a kitchen chef, in charge of cooking for 150 military personnel. He then moved to Kansas City in the United States and worked again as a pastry chef in a Swiss pastry and chocolate shop. In 2008, Lehner moved to Canada and worked in Cambridge, Ontario, where he was the production manager for a gluten- free bakery. Lehner moved to London in 2012 and began working part-time at both Artisan Bakery and Habitual before accepting a full-time management and chocolatier position at Habitual in February 2013. Since the beginning of his apprenticeship in Switzerland, Lehner had always believed that a product hnade from scratch" was of superior quality. He was disappointed during his training to discover that the company he worked for simply melted pre-made chocolate blocks to make truffles. When Lehner heard that Habitual was producing from "bean to bar," he pursued the job opportunity with excitement. Facility Production of Habitual chocolate originally took place in Fire Roasted's flagship location in downtown London, Ontario, at the comer of King Street and Talbot Street. Once the company was sold to Lehner, the entire production facility moved to the Western Fair Farmers' Market, where the chocolate was sold every Saturday when the market was open. In addition, a portion of retail space in Fire Roasted's downtown location was reserved for Habitual products. The current production space at the market exceeded the capacity requirements of Habitual, but the management at the Western Fair's Farmers' Market had informed Lehner that, in the future, they uould allow vendors to use the space for retailing only, rather than for manufacturing and retailing. In fiscal 2015, rent at the Western Fair Farmers' Market would increase by SO.90 per square foot. Habitual currently rented I ,000 square feet of space in the market. Operations Habitual's revenue was split evenly between retail and wholesale sales. Most of the wholesale contracts were with other local retailers in London, such as Remark, Unger's, and Farm Boy, who resold the same chocolate bars that were made available at the market. A small percentage of customers (typically restaumnts) also purchased chocolate in bulk to melt as an ingredient in their own products. The bulk of retail revenues came from the sale of IOS-gram and 35-gram chocolate bars. Habitual retailed the IOS-gram bars between $6.75 and SS per bar, and the 35-gram bars between S3.25 and S4 per bar. Habitual also sold truffle chocolates for special occasions like Valentine's Day for a retail price of S7.25 per box of four chocolates. As an artisan chocolate company, the flavour options and different origins of the beans were extremely diverse. Lehner had begun to streamline production and limit advertising dollars to 10 of its core flavoured bars in order to help control costs (see Exhibit 3). For Habitual's past financial performance see Exhibits 4, 5, and 6. THE WOODSTOCK OPTION Since taking over Habitual, Lehner had been looking for potential opportunities to move to a new production space in anticipation of the time when London's Western Fair Farmers' Market would put a stop to manufacturing activities in its building. Habitual would continue to retail its products at the Western Fair Farmers' Market, even if the move to Woodstock was executed. If Lehner pursued the Page 7 Woodstock option, all production, including equipment, would be moved to the new location, and Habitual would rent just 500 square feet at the Western Fair Fanners' Market. Rental costs would decrease accordingly. Location Woodstock was located 50 kilometres northeast of London, Ontario, and had a population of almost 40,000.25 Although it was not a large city, Woodstock promoted its vibrant community, which hosted multiple summer festivals, and emphasized its revitalized city core, which consisted of many heritage buildings and boutique shops. Of particular interest to Lehner was a vacant building on Dundas Street in downtown Woodstock. He believed the space would be large enough to handle Habitual's production expansion and a retail storefront. Lehner liked the location because it was in the financial district of the city; however, banks were closed on Saturdays, which could have an impact on sales. The building had been vacant for the past five years, and there were a few other empty storefronts close by. Upon closer inspection, Lehner discovered that the building had water damage, but the landlord agreed to repair the damage and install some major structural renovations at no cost to Lehner. Lehner would need to spend on equipment purchases and S 15,000 on fixtures; he would pay for these expenses in cash as soon as the new store was launchece If all went according to plan, Lehner thought he could open the store on June l, 2015. Sales Lehner's demographic research showed that, compared to London, the customer mix uould be different in Woodstock, so the sales volume would be hard to estimate. 2 He thought in-store retail sales at the Woodstock location would reach between S80,000 and S 100,000 annually.2g Due to seasonality, sales would range between $30,000 and $36,000 from June l, 2015 to November 30, 2015.29 Expenses Lehner would have to sign a five-year, Sl,500-per-month rental agreement, with the option to renew fi)r an additional five years. A deposit for the last month's rent was not required upon signing the rental agreement. Utility costs would vary based on the weather, and Lehner expected utility expenses to equal S400 per month during the first six months of each fiscal year and S300 per month during the last six months. Vehicle expenses (including fuel, insurance, and maintenance) would be S750 per month from June to November, and S 1,000 per month from December to May, annually. General administrative costs would average an additional $300 per month. If Lehner pursued the Woodstock expansion, Habitual's insurance company quoted the total company policy at $610 per month. The insurance policy for the London operation would remain at the satne monthly rate as fiscal 2014.30 If the Woodstock option was z Fwus on Geography Series, 2011 Census: Ontario," Statiste acessed Dember 17, 2015, statcan.gc t/2011/as-sa/fogs-sp$acts-crna-eng. The new equipnz7t would be depreciated the straight4ine method cner 15 years, with a sidual value of Se,n; the fixtures would be depreciated using the straight-line method cwer six years with no residual value The existing client base was split into 85 per cent professionals and15 cent rebrees, but in client-base split was expected to be 65 nt professionals and 35 per cent retirees. Lehner dE not expect that any additional wholesale revenue would be generated with the opening of the new store. June, July, and August would make up 40 per cent of the first six months of sales. Lehner started insurance premiums on Habitual when he the company from Fire Roasted Coffee on January I, 2014. Page 8 pursued, total company supply costs would increase by $2,700 annually and would be incurred and paid evenly throughout the year. The Woodstock storefront would be open flom Tuesday to Saturday, 10 a.m. until 5 p.m., and one staff member would be required to operate the storefront at a time. From December I until May 31 of each year, five additional retail hours would be added per week to accommodate the additional demand (i.e., Christmas, Valentine's Day, Easter). Lehner's staff members would earn an average of S12 per hour to mn the store front. Training costs would be negligible since Lehner would train the new employees "on the job." Since some of Habitual's busiest times surrounded major holidays, Lehner expected the store to be open all 52 weeks of the year. All wages were paid in full on the last day of the month in which they were worked. Variable Costs Habitual's variable costs consisted of raw materials that were purchased on the first day of the month on account in order to maintain inventory levels. Regardless of whether or not Lehner moved his entire production to Woodstock, variable costs would be 25 per cent of sales. Lehner hoped to maintain the same days of accounts payable as in fiscal 2014, and he expected accounts receivable to remain negligible. Finally, to promote the new store, Lehner would spend an additional each year (the same amount each month) and another S500 to advertise the grand opening during the month of June. Upon expanding to Woodstock, Lehner would initially purchase $3,000 worth of raw-materials inventory. 2015 PROJECTIONS CURRENT LOCATION Regardless of whether the move to Woodstock took place, Lehner estimated that, in fiscal 2015, Habitual's wholesale revenue would increase by 75 per cent, and retail sales would increase by 25 per cent. All sales were paid in cash or with bank credit cards. Sixty per cent of wholesale and existing retail sales would occur between December I and May 31. The summer months (June, July, and August) would account for just 20 per cent of annual sales for two reasons: ( l) there were no major holidays during these months, and (2) customers were typically interested in cold treats during these months as a way to combat the summer heat. Lehner expected annual salaries and wages to increase by $5 ,000 and general and administrative costs to remain the same dollar amount as in fiscal 2014. Both expenses would be paid evenly throughout the year. Lehner also planned to increase the marketing budget to Sl ,000 annually, and he would incur S450 of supply costs per month for the Western Fair Farmers' Market. On December l, 2014, rent increased by $900 annually at the Western Fair Farmers' Market. CONCLUSION Lehner was excited about the opportunity to expand Habitual into a new city. If he decided to expand, Lehner had secured a S50,000 loan from a local angel investor, effective June l, 2015.31 Before making his decision, Lehner wanted to review Habitual's current operations from a cash flow perspective. Based 10-year loan had an interest rate of 7 pr cent. Equal principal and interest payments woukf made once a year starting on June I, 2016. Interest would be calallated based on the prirwipal armunt outstanding the fiscal Page 9 on his decision, he also planned to project a fiscal 2015 statement of earnings and statement of financial position, and he wanted to create a cash budget for the slower summer months of June, July, and August. He expected to create these projected statements regardless of whether or not he moved his operations to Woodstock. The company's existing loans from Fire Roasted were not charged any interest, nor did they require any principal payments in fiscal 2015. However, if the Woodstock expansion was not pursued, Lehner hoped to be able to pay off S2,500 per month on his outstanding demand loan from Fire Roasted, starting at the beginning of July 2015. LehiEr to start June 2015 with S15 in the bank. Page 10 EXHIBIT 1: MANUFACTURING COSTS BY CATEGORY Chocolate and Confectionary Manufacturing from Cacao Beans (NAICS 31132) 1200 1 ,000 2004 2007 2010 2011 eMateriaIs Supplies ($ in millions) 2012 Wages ($ in milions) 2004 2m6 ($ in milions) 2007 2010 2011 2012 eMateriaIs Supplies ($ in millions) Energy, Water and Vehcle Fud (S in milions) 5urce: Created by autWs using data from Statistics Canada , special tabulation, unpublished data, Annual Survey of Manufactures and 2004 to 2012 Chocolate and Confectionery Manufacturing from Cacao Beans (NAICS 31132): Manufacturing costs,- Government of Canada , accessed December 17, 2015 , www.icgcca/apgdscdsbrns/sbb'cis/ manu facturingCost&h 1132 &langzeng. EXHIBIT 2: NATURAL CHOCOLATE MANUFACTURING PROCESS STEP 1 Roasting and cooling beans 5 to 12 hours STEP 4 Tempering chocolate 1 to 2 hours Note: ver batch of 300 bars. %urce: Company files. Page 11 074% %urce: Cornpany files. Page 12 REVENUE Sales Variable costs Contribution FIXED COSTS Rent Supplies STEP 2 Dehusking beans 1 hour STEP S Pouring and cooling 0.5 hours EXHIBIT 3: 2014 HABITUAL FLAVOUR OFFERINGS cacao 1%.) tWil 100* cacao STEP 3 Grinding and adding ingredients 4 48 hours STEP 6 Packaging bars 6 to 12 hours O eacao EXHIBIT 4: STATEMENT OF EARNINGS (year ended November 30) General and administration Advertising Salaries and wages Insurance Depreciation, fixed assets* Total fixed costs Net income before taxes Income taxes" Net income after taxes 2014 $ 80,000 _2L50Q 58,500 4,020 3,250 725 850 33,255 2,750 $_4t95Q $ 10,550 100.0% 26.9% 73.1% 0.9% 1.1% 41.6% 3.4% 3.9% 59.9% 132% 13.2% 2013 35,000 12 210 22,790 3,600 1,255 425 510 15,600 _2.40Q $ (1000) 100.0% 34.9% 65.1% 10.3% 3.6% 1.2% 1.5% 44.6% 6.9% 68.0% -2.9% 2.9% Habitual depreciated asts using the straight-ine method. - Habitual did not pay tax in 2014 due to prevbus deferred loss tax uedits_ The company to pay the standard corprate tax rate of 20 per cent forward. Source: Company files. Page 13 EXHIBIT 5: STATEMENT OF FINANCIAL POSITION (as at November 30) ASSETS Current assets: Cash* In Total current assets Fixed assets: Production equipment Less: Accumulated depreciation Fixtures and fumiture Less: Accumulated depreciation Total fixed assets Total assets LIABILITIES & SHAREHOLDERS' EQUITY Liabilities Current liabilities: Accounts payable Current portion of loans payable Demand banFire Roasted Coffee Total current liabilities Long-term liabilities: Loans payableFire Roasted Coffee Total long-term liabiities Total liabdities Shareholders' equity Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity Habitual a merdraft limit at bank. $ 63,000 12,000 __U_S2Q1 2014 $ 7,500 7 500 15,000 56,520 _1L3O $ 250 _2.0QQ 26,250 20 626 20 626 46,876 40,000 _3524 $ 40,000 (4,000) 10,000 _LLQQQI 2013 $ 5.000 5 000 10,000 36,000 _XQQO 500 8,400 8,900 20 626 20 626 29,526 40,000 2 474 $_55.QQ0 - Habitual exgeded to have S15m) of inventory bbvember 2015. %urce: Company files. Page 14 EXHIBIT 6: SELECTED INDUSTRY AND COMPANY RATIOS HERSHEY CO. CANADIAN INDUSTRY* Gross ofit O rati ses to sales Net income sales Current ratio Da of accounts able Da of invent Debt to e i Return on assets Interest covera Sales routh Indudes a" cmcolate manufacturing mmpane 2014 440% 326% 11 12 432 da 718 da 27 15.4% 9.5x 2013 42.7% 39.2% 11.2% 27.0 da 10.8% 3.2x 2.8% %urces Hershey Co.JNY SE MarketWatch, amessed De:ember 17 , 2015 , www.rnarketwatch.cornfinvesting/StodO HSY/profiIe; Cmcolate Production in Canada: Market Researd7 Report, IBIS World, accessed December 15, 2015 , www.ibisworld.cafindustry/chomlate-production html; Chocolate Confectionary in Canada,- MarketLine IMustry Prone, August 2015, accessed December 17, 2015, www Tneentkbrcom proxy I lib.uwoca/indexphp/report4industry, Candy and Other Confectionary Products, Oun and Bradstreet Library Solutions , accesd December 17, 2015, h ttp://advantage marketinecom proxyl Jib uwo catproduct HABITUAL CHOCOLATE Current ratio Da of accounts Da of invent Debt to e Retum on assets Sales ow'th %urce: Cornpany files. 2014 0.6 le 4.2 d 125.6 da 1.3 12.9% 1286% 2013 1.1 14.7 d 147.4 da 12