Theo Chocolate

Four years after moving from Boston to Seattle to join her exhusband in running an organic, Fair Trade chocolate factory, Debra Music felt both a sense of accomplishment and one of foreboding. Theo Chocolate began producing its first Fair Tradecertified, singleorigin and blended dark chocolate bars in March of 2006 and by the fall of 2009 had built a unique brand that was particularly strong in the Pacific Northwest region. Seattle, with its young, welleducated, and socially conscious population, had proved to be a perfect base for a company rooted in socially responsible, sustainable business practices. The company had increased sales each year since its inception (see Exhibit 6.1¹), and in the wake of large customer orders that were coming in, production had been recently ramped up. As the Vice President of Sales and Marketing of Theo Chocolate, Debra had reason to be proud of what the company had achieved.

Select Company Financials 20062009

	Year 1 (July 06June 07)	Year 2 (July 07June 08)	Year 3 (July 08June 09)
Net Sales	$ 1,125,808	$ 2,669,264	$ 3,096,194
Gross Margin	157,294	767,179	857,788
% of Net Sales	13.6%	28.7%	27.7%
Sales & Marketing Expenses	504,634	940,693	1,097,359
General & Admin Expenses	749,619	1,018,024	1,079,063
Total Operating Expenses	1,254,253	1,958,717	2,176,422
Opex as % of Net Sales	111.4%	73.4%	70.3%
Operating Income (Loss)	(1,096,959)	(1,191,358)	(1,318,634)
Net Income (Loss)	(1,241,901)	(1,368,125)	(1,499,450)

She also had reason to be concerned. Despite a unique value proposition, a skilled and fervent management team, growing brand strength, numerous awards, and an endorsement from a wellknown celebrity, Theo Chocolate had yet to turn a profit by the fall of 2009. Joe Whinney, Debra's exhusband and Theo's CEO, had strong feelings about how the chocolate industry operated. Theo was designed from the outset to completely change the way people thought of and purchased chocolate products; Joe's explicitly stated goal was to do for cacao (the fruit from which chocolate is made) and chocolate what Starbucks had done for coffee. He had built a company that implemented sustainable, Fair Trade practices at every stage of its value chaina model totally unique in the highly competitive chocolate industry. In fact, Theo Chocolate's Web site boasted that it was the only organic, Fair Trade, BeantoBar chocolate factory in the United States.² Theo's entire marketing and branding strategyindeed, its reason for existencewas based on these principles.

With some indication that the company might soon turn the corner and get in the black for the first time in its existence, Debra was faced with a key decision: Should the company stay true to its socially responsible roots, or would it have to compromise some of its core principles to become and stay financially profitable? As the person Joe had entrusted with building the Theo brand, much of the responsibility of this decision had fallen to Debra. The decision would determine the strategic direction the company would take and, ultimately, how the company would market itself and its products. Perhaps most important, it would determine whether Joe and the rest of the management team could make a profit while maintaining their values.

1. Identify the most important facts surrounding the case.
2. Identify the key issue or issues.
3. Specify alternative courses of action.
4. Evaluate each course of action.
5. Recommend the best course of action.