Case 1 Dogswell Will a small company’s new product line put it in peril? Within months of the failure of his first company, Clear Day, a natural beverage company, Marco Giannini was busy launch- ing another business, Dogswell, a company that makes all- natural, healthy dog treats that contain supplements to help with conditions such as hip dysplasia and arthritis—problems that his childhood dog, Emily, suffered from. Giannini experimented with recipes before hitting on the right one and found a manu- facturer to make the treats. In a tribute to guerrilla marketing, Giannini loaded his car with Dogswell treats and visited more than 200 independent pet stores, asking them to give his new product, Happy Hips, a chance. Many of them did, and in its first year Dogswell’s revenue was $500,000. Four years later, Dogswell appeared on Inc. magazine’s list of the fastest grow- ing small companies in the United States, with 21 employees and sales of $17 million. Giannini had bigger plans, however. He wanted to launch a line of pet foods to round out the company’s successful pet treats, taking the company into the much larger market for natural pet food. “I wanted to become a household name, and I figured food was the way to get us there,” he says. He worked with several food scientists to develop a recipe for a healthy grain-free dry dog food called Nutrisca and set up a series of canine focus groups. The results were even better than Giannini had expected: Dogs preferred Nutrisca 15 to 1 over the leading natural dog food brand. Giannini sent his sales force into the field to conduct focus groups with pet owners to determine the most effective packaging. Giannini faced the same question he had years before when he first launched Dogswell: What is the best way to launch a product on a limited marketing budget? Making personal calls on retailers was impractical now that major chains such as Target and Whole Foods carried the company’s products. Giannini hired 15 new people, most of them in sales, to roll out the new line of dog food. To entice customers to try Nutrisca, Dogswell offered coupons for a free bag of Nutrisca (normally priced at $10.99) with every purchase of a bag of Dogswell treats, which retail between $16 and $20. As with many new products, sales were slow, and the coupons that retailers were submitting for rebates were straining the com- pany’s cash flow. However, Giannini and CFO Berenice Officer were distracted by ongoing meetings with TSG Consumer Part- ners, a San Francisco-based private investment company that Dogswell had been negotiating with for months in an effort to raise capital to fund the company’s brand-building strategy. Giannini and Officer closed an equity investment deal with TSG on December 31, but when they returned to their Los Angeles head- quarters they discovered that the coupon giveaway was costing the company $100,000 a month and devastating its profits and cash flow. In addition, the promotion was not generating repeat buyers fast enough. Giannini and Officer also realized that customers purchased dog food less often than they did treats and that the profit margins on dog food were less than those on dog treats. For the first time in its history, Dogswell had incurred a quarterly loss and was clearly heading for another one. “I felt like I was losing control of the company,” says a frustrated Giannini. Giannini and Officer had less than 3 months to create a plan to stop the damage that the pet food line was causing and put together a presentation for TSG explaining their strategy and why it would work. Giannini knew all too well the stories of other companies whose equity investors had ousted their founders at the first sign of trouble. Would he suffer the same fate? Questions 1. What dangers do entrepreneurs face when they court equity investors to provide capital to finance their companies’ growth? What steps can they take to minimize these risks? 2. Develop a strategy to return Dogswell to profitability. 3. Outline at least five components for a guerrilla marketing strategy for Nutrisca. How could Dogswell tap into the power of social marketing as part of its guerrilla marketing strategy? Source: Based on Nitasha Tiku, “Case Study: Dogswell,” Inc., December 2009–January 2010, pp. 56–63. 811
Transcript
Case 1Dogswell
Will a small company’s new product line put it in peril?
Within months of the failure of his first company, Clear Day,a natural beverage company, Marco Giannini was busy launch-ing another business, Dogswell, a company that makes all-natural, healthy dog treats that contain supplements to help withconditions such as hip dysplasia and arthritis—problems thathis childhood dog, Emily, suffered from. Giannini experimentedwith recipes before hitting on the right one and found a manu-facturer to make the treats. In a tribute to guerrilla marketing,Giannini loaded his car with Dogswell treats and visited morethan 200 independent pet stores, asking them to give his newproduct, Happy Hips, a chance. Many of them did, and in itsfirst year Dogswell’s revenue was $500,000. Four years later,Dogswell appeared on Inc. magazine’s list of the fastest grow-ing small companies in the United States, with 21 employeesand sales of $17 million.
Giannini had bigger plans, however. He wanted to launch aline of pet foods to round out the company’s successful pettreats, taking the company into the much larger market fornatural pet food. “I wanted to become a household name, andI figured food was the way to get us there,” he says. He workedwith several food scientists to develop a recipe for a healthygrain-free dry dog food called Nutrisca and set up a series ofcanine focus groups. The results were even better than Gianninihad expected: Dogs preferred Nutrisca 15 to 1 over the leadingnatural dog food brand. Giannini sent his sales force into thefield to conduct focus groups with pet owners to determine themost effective packaging.
Giannini faced the same question he had years before whenhe first launched Dogswell: What is the best way to launch aproduct on a limited marketing budget? Making personal calls onretailers was impractical now that major chains such as Targetand Whole Foods carried the company’s products. Gianninihired 15 new people, most of them in sales, to roll out the newline of dog food. To entice customers to try Nutrisca, Dogswelloffered coupons for a free bag of Nutrisca (normally priced at$10.99) with every purchase of a bag of Dogswell treats, whichretail between $16 and $20.
As with many new products, sales were slow, and the couponsthat retailers were submitting for rebates were straining the com-pany’s cash flow. However, Giannini and CFO Berenice Officerwere distracted by ongoing meetings with TSG Consumer Part-ners, a San Francisco-based private investment company thatDogswell had been negotiating with for months in an effort to raisecapital to fund the company’s brand-building strategy. Gianniniand Officer closed an equity investment deal with TSG onDecember 31, but when they returned to their Los Angeles head-quarters they discovered that the coupon giveaway was costing thecompany $100,000 a month and devastating its profits and cashflow. In addition, the promotion was not generating repeat buyersfast enough. Giannini and Officer also realized that customerspurchased dog food less often than they did treats and that theprofit margins on dog food were less than those on dog treats. Forthe first time in its history, Dogswell had incurred a quarterly lossand was clearly heading for another one. “I felt like I was losing control of the company,” says a frustrated Giannini.
Giannini and Officer had less than 3 months to create a planto stop the damage that the pet food line was causing and puttogether a presentation for TSG explaining their strategy and whyit would work. Giannini knew all too well the stories of othercompanies whose equity investors had ousted their founders at thefirst sign of trouble. Would he suffer the same fate?
Questions
1. What dangers do entrepreneurs face when they court equityinvestors to provide capital to finance their companies’growth? What steps can they take to minimize these risks?
2. Develop a strategy to return Dogswell to profitability.3. Outline at least five components for a guerrilla marketing
strategy for Nutrisca. How could Dogswell tap into thepower of social marketing as part of its guerrillamarketing strategy?
Source: Based on Nitasha Tiku, “Case Study: Dogswell,” Inc., December2009–January 2010, pp. 56–63.
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Case 2Able Planet
How can a small company find capital to finance an innovative new product?
Venture capitalist Kevin Semcken discovered Able Planet,a small startup in Wheat Ridge, Colorado, that produces head-phones with an imbedded magnetic coil to enhance sound quality,at a technology conference in Denver, Colorado. Semcken, whosuffers from a hearing loss in one ear, was intrigued and testedthe small company’s product by listening to Dean Martin’s “You’reNobody ’Til Somebody Loves You.” “I was instantly a fan,” hesays. Semcken invested in Able Planet and soon became the com-pany’s CEO and chairman. Two years later, the company’s uniquenoise-cancelling Linx headphones won an award for innovation atthe Consumer Electronics Show, and orders began pouring in. In notime, the company’s annual revenue reached $2 million.
Semcken was pleased with Able Planet’s progress, but hehad a bigger vision for the company. Inspired by stents, balloon-like devices used in medical procedures to clear blocked arteries,Semcken came up with the idea of earphones that incorporated aninflatable disk that could conform perfectly to the size and shapeof a person’s ear canal. The result would be a set of earphones thatfit snugly into the ear canal, stay in place even during strenuousactivity, and block out ambient noise. He even had a great namefor the product: Sound Fit. Semcken saw the potential for SoundFit not only to improve substantially the performance of ear-phones, but also to revolutionize the design of other products,such as Bluetooth headsets and hearing aids. He had lined up 30 potential customers who were interested in learning more aboutthe innovative earphones and had convinced them to sign non-disclosure agreements. What Semcken needed now was financingso that Able Planet could manufacture production-quality proto-types of the Sound Fit earphones and generate orders.
Then Able Planet’s banker called with bad news. The bankwas changing the terms of Able Planet’s $2.5 million line ofcredit. Under the new terms, the bank would no longer financethe upfront cost of raw materials and manufacturing. Semckenwas stunned because even though Able Planet was not yet cashflow positive, the company had always made its payments to thebank on time for the last 3 years. Without a flexible line ofcredit, Able Planet would not be able to purchase the materialsand manufacture the headphones that its retail customers,
including Costco and Walmart, demanded. The credit linerestriction came at the worst possible time. Able Planet wasgearing up for the late-spring graduation season, its secondbiggest sales period of the year after Christmas. The companynormally cranked up production for the crucial back-to-schooland Christmas seasons (which account for 60 percent of itssales) during the summer, but the bank’s new restrictions on itsline of credit put its most lucrative sales seasons in jeopardy.
Semcken met with Able Planet’s two board members, RobCascella and Steve Parker, both of whom are investors in thecompany. They advised him to put the Sound Fit earphones onhold for the time being and to focus on increasing sales of Linxheadphones. Without a way to finance production of the head-phones, however, Semcken knew that opening new retailaccounts and increasing production would be impossible. Heneeded $1.5 million to finance current operations for Linx,build the Sound Fit prototypes, and market both products tonew and existing customers. Semcken traveled around thecountry to call on 15 different banks, but none of them wasinterested in making a loan. A crisis in the financial marketshad all but slammed shut the lending window at most commer-cial banks. Semcken pondered his options.
Questions
1. Experts say that entrepreneurs who need between$100,000 and $3 million often face the greatest obstacleswhen raising capital for their businesses. Why?
2. How should Kevin Semcken raise the $1.5 million incapital that Able Planet needs? Be sure to considersources of both debt and equity financing.
3. Write a short memo to Kevin Semcken explaining what heshould do before he approaches potential lenders andinvestors to maximize his chances of getting the capitalthat Able Planet needs.
Sources: Based on Jamie Kripke, “Case Study: Able Planet,” Inc.,July–August 2009, pp. 58–61; “About Us,” Able Planet, www.ableplanet.com/aboutus.html.
Can a mother–daughter team be successful entrepreneurs?
Trish Cooper, 52, spent the last 13 years of her career workingas the chief financial officer for a small telecommunicationscompany near her home in Hope, New Jersey. When the com-pany merged with another business and moved out of state,Cooper lost her job. She sent out lots of resumes to other busi-nesses but knew that her job prospects were slim because of herage and an ongoing recession. She began spending more timewith her granddaughter, Gianna, using family photographs toteach the child about family members. There was only oneproblem: “She was destroying my photos,” says Cooper, whobegan laminating the photographs.
That’s when Cooper had a flash of inspiration. “Our ‘photorecognition’ game was such fun, and she was learning so much,”says Cooper. “What if I make a ‘real’ game out of it, using indi-vidual photo flashcards that are soft and she can hold in her ownlittle hands?” Cooper envisioned a learning tool for toddlers thatconsisted of soft, flexible protective frames into which parentscould slip family photographs and create their own flashcards.She began researching the market. “I learned there were noproducts on the market like that,” she says.
Cooper made a few prototypes herself from nontoxic foamand put them in a small tote-bag carrying case but realized thatshe would need help to launch her business. Cooper turned tothe one person who had been advising her all along: her 26-year-old daughter Carrie Schwinoff. “She was a stay-at-home mom,”says Cooper. “I said, ‘Look, you are not going to have anotheropportunity like this to be a business owner.’” Schwinoff agreedbecause she wanted to supplement her family’s income butretain flexibility in her schedule to care for Gianna. She alsoliked the idea of building a business with her mother. “She’s mybest friend, my partner in crime,” laughs Schwinoff.
Cooper invested $30,000 in the startup, which they namedZatswho, and the two women assembled 500 sets of Zatswhocards and began selling them. One of their first decisions wasdividing business responsibilities. Cooper has a strong financialbackground and serves as CEO and CFO. Schwinoff, who has adegree in marketing, is responsible for sales and marketing.“Tweeting wasn’t something I could wrap my head around,”
says Cooper. As in any business, disagreements arise, but themother–daughter entrepreneurs have managed them effectively.For instance, Schwinoff thought that her mother’s use of theword “tactile” on the product’s packaging missed the mark.“Why don’t we say ‘pliable’ or ‘sensory?’” asked Schwinoff.“People get that more easily.” They changed the wording onthe packaging to “soft” and “easy to hold.” “Because I am themother and she is my daughter, my natural feeling might be,‘I know better because I am more experienced.’ But I have tolisten to her point of view. We are both learning that it takesdiscipline and respect to make this work.”
Cooper and Schwinoff are negotiating with a U.S.-basedcompany that has a manufacturing operation in China to mass-produce Zatswho flashcards, which currently sell for $15.95 perset in stores in seven states.
Questions
1. What tips can you offer Cooper and Schwinoff aboutfamily members who start and run a business together?What pitfalls would you warn them to avoid?
2. Suppose that Cooper and Schwinoff had approached youwhen they were launching Zatswho concerning the formof ownership they should use. Which form of ownershipdo you recommend they use. Why?
3. Work with a team of your classmates to brainstorm potentialgroups of people who make up Zatswho’s target market.
4. Help Cooper and Schwinoff develop a guerrilla marketingstrategy for Zatswho. Write a two-page memo to Cooperand Schwinoff that highlights the key points of yourstrategy and the reasoning behind each one.
5. Visit the Zatswho Web site at www.zatswho.com. Whatrecommendations can you make for improving the site?
Sources: Based on Colleen Debaise, Emily Maltby, and Sarah E. Needleman,“Parent & Child Inc.,” Wall Street Journal, November 15, 2010, http://online.wsj.com/article/SB10001424052748703794104575546553171806306.html?KEYWORDS=family+business+mother+daughter; “About,” Zatswho,www.zatswho.com/pages/About-.html.
How can a venue that hosts corporate events counter declining sales?
Steven and Wendy Foster purchased the Circle R Ranch, located10 miles north of Dallas, Texas, as newlyweds in 1997. The ranchspecializes in hosting corporate meetings, conventions, andevents in an authentic Western-style setting, complete with barbe-cues, steers, hayrides, country music, and almost anything else acorporate event planner requests. The ranch is known for itsstellar customer service. Friendly cowboys and cowgirls greetarriving guests and guide them to the appropriate venues, whichinclude the Western Pavilion, an enclosed 28,000-square-footstructure that features a performance stage, a dance floor, a gamearcade, and adjacent recreation area, or the smaller ChisolmRanch House and Conference Center, which overlooks a pondand can accommodate between 20 and 200 guests. In addition tobarbecues and picnics, the Circle R Ranch offers guests a multi-tude of options for their events, including fireworks shows, a hugeswimming pool, a biker bar (complete with airbrushed “tattoos”),and team-building activities with its reality television-based“Survivor Rodeo Team Challenge.” Companies can even ordersteaks branded with their logos.
An economic recession not only resulted in a 38 percentdecline in annual sales (from $4 million to $2.5 million) but alsowas a harbinger of an era of corporate austerity. Companies arecutting back on high-end (and highly profitable) options such asstaged gunfights, ice sculptures, rodeos, and fireworks and aresticking to tried-and-true (and less expensive) options such asbarbecues, picnics, and hayrides. The business remains prof-itable and debt free, but the Fosters are seeing their profit mar-gins squeezed ever smaller. To restore their lost sales, theFosters, both veterans of the hospitality industry, are consideringbranching out into the wedding market. They are hesitant tomake the move, however, because the revenue per event is muchsmaller than they are accustomed to but the work involved in cre-ating the perfect wedding is not. Steven and Wendy are worriedabout burnout; they both regularly put in as many as 100 hours aweek at the ranch. Their full-time staff of 12 employees, whichthey supplement with as many as 200 part-time workers during
the busy spring-to-fall event season, also put in long hours. TheFosters want to make sure that their employees are not over-worked and stressed so that they can continue to provide thesuperior customer service that distinguishes the Circle R Ranchfrom other event venues.
If an event planner visits the ranch, the Fosters say that there is a very high probability that they will win the planner’sbusiness. However, they believe that as companies’ travel budgetscontinue to shrink, more planners are conducting their searchesfor event venues online. The Fosters know that their Web site(www.circlerranch.org) is due for an update, but doing sowould cost an estimated $20,000. “Can we afford not to make theinvestment?” they wonder. Currently, the site features uninspiredphotos of each venue, lots of cowboys with guns, and barmaidsdressed in period saloon garb. “Remember,” says one advisor,“you’re not selling meeting space; you’re selling an experience.”
Questions
1. What steps can the Fosters take to increase sales at theCircle R Ranch? Should they enter the wedding market?What are the advantages and the disadvantages of enteringthis market?
2. Where should the Fosters look for new employees whoare passionate about providing superior customer service?What steps should they take before they begin theemployee selection process? What hiring criteria shouldthey establish?
3. How should the Fosters motivate their staff to continue toprovide the stellar service that sets the ranch apart from itscompetitors?
4. Visit the Circle R Ranch’s Web site. How effective is thesite? Develop a set of at least six recommendations forimproving the site.
Sources: Based on Patricia B. Gray, “Party Down,” FSB, June 2009, pp. 41–44; “Circle R Ranch,” www.circlerranch.org.
Should an entrepreneur buy back the brewery that he launched nearly a quarter-century before?
Tom Pastorius and his wife Mary Beth started Penn Brewery,an authentic German microbrewery in Pittsburgh, Pennsylvania,in 1986. They built the brewery into a successful business, pro-ducing more than 15,000 barrels a year and generating annualsales of $3.5 million. Along the way, their microbrewery won14 medals at the Great American Beer Festival and built a baseof devoted customers for its brands, which included PennPilsner, Penn Oktoberfest, and others. They also added a German-themed restaurant that Mary Beth managed. In 2003, Tom andMary Beth, both approaching 60, decided to cash out and soldthe brewery to Birchmere Capital, a local private equity firm.Tom retained 20 percent ownership and agreed to stay on aspresident of the company for 5 years. He had lived up to hiscontract but was miserable working for the new owners, whomade many significant changes to the company’s strategy. “I amnot a good employee,” says Tom. “I’m a solo act.”
Not only did Birchmere Capital close the brewery’s restau-rant, but it also decided to outsource production of beer to theLion Brewery in nearby Wilkes-Barre and close Penn’s brewingoperation. The moves proved to be disastrous; once-devotedcustomers departed, and sales tumbled. “It was so hard to sitback and watch this place sink,” says Tom, who was becomingbored with retirement. Then Birchmere offered to sell the brew-ery back to Pastorius for a fraction of what they had paid him forit a few years before. Tom was ready to buy the brewery backand restore it to its former grandeur, but convincing Mary Bethwould take some doing. She had been instrumental in its successbut told Tom that she had no intention of going back to it. “It’stoo risky at our age (now 65),” she says. “We don’t have the
luxury of time.” Besides, Mary Beth had launched a retirementbusiness of her own, a company that restores historic buildings.
Tom, however, could not get rid of the idea of owning PennBrewery again. He began working clandestinely on a businessplan preparing a risk-benefit analysis. The principal risks heidentified included the brewery’s $1 million debt, the tarnishedbrand name, and the fact that he would be buying back hisformer business at age 65. However, he was still very energeticand had the experience necessary to turn around the founderingbrewery. He was confident that he could restore the luster tothe Penn Brewery name by returning beer production to theVictorian-style red brick building in which he had launched thecompany years before. After weeks of candid discussions, MaryBeth told Tom, “If you want to do it, you are crazy, but keep meout of it.”
Questions
1. Should Tom Pastorius buy Penn Brewery? Explain.2. Tom Pastorius says, “I’m not a good employee.” What
does he mean? Do you think the same is true of mostentrepreneurs?
3. What challenges does selling the businesses they createpose for entrepreneurs?
4. If Pastorius decides to buy the brewery, what steps shouldhe take before closing the deal?
Sources: Based on Cristina Rouvalis, “Case Study: Penn Brewery,” Inc.,July–August 2010, pp. 71–74; “The Pennsylvania Brewing Company,”www.pennbrew.com/data/english/about.htm.
Telford James and his wife Ivey are the second-generationowners of James Confectioners, a family-owned manufacturerof premium chocolates that was started by Telford’s father,Frank, in 1964 in Eau Claire, Wisconsin. In its nearly 50 years,James Confectioners has grown from its roots in a convertedhardware store into a large, modern factory with sophisticatedproduction and quality control equipment. In the early days,all of Frank’s customers were local shops and stores, but thecompany now supplies customers across the United States anda few in Canada. Telford and Ivey have built on the company’sreputation as an honest, reliable supplier of chocolates. Theprices they charge for their chocolates are above the industryaverage but are not anywhere near the highest prices in theindustry even though the company is known for producingquality products.
Annual sales for the company have grown to $3.9 million,and its purchases of the base chocolate used as the raw materi-als for their products have increased from 25,000 pounds20 years ago to 150,000 pounds today. The Jameses are con-cerned about the impact of the rapidly rising cost of the basechocolate, however. Bad weather in South America and Africa,where most of the world’s cocoa is grown, and a workers’ strikehave disrupted the global supply of chocolate, sending pricesupward. There appears to be no relief from high chocolateprices in the near future. The International Cocoa Organization,an industry trade association, forecasts that world productionof cocoa, from which chocolate is made, will decline by 7.2 percent this year. Escalating milk and sugar prices aresqueezing the company’s profit margins as well. Much toJames and Ivey’s dismay, James Confectioners’ long-termcontracts with its chocolate suppliers have run out, and thecompany is purchasing its raw materials under short-term,variable-price contracts. They are concerned about the impactthat these increases in cost will have on the company’s finan-cial statements and on its long-term health.
Ivey, who has the primary responsibility for managingJames Confectioners’ finances, has compiled the balance sheetand the income statement for the fiscal year that just ended. Thetwo financial statements are as follows:
Balance Sheet, James Confectioners
December 31, 2xxx
Assets
Current Assets
Cash $161,254
Accounts receivable $507,951
Inventory $568,421
Supplies $84,658
Prepaid expenses $32,251
Total current assets $1,354,536
Fixed Assets
Land $104,815
Buildings, net $203,583
Autos, net $64,502
Equipment, net $247,928
Furniture and fixtures, net $40,314
Total fixed assets $661,142
.Total Assets $2,015,678
Liabilities
Current Liabilities
Accounts payable $241,881
Notes payable $221,725
Line of credit payable $141,097
Accrued wages/salaries payable $40,314
Accrued interest payable $20,157
Accrued taxes payable $10,078
Total current liabilities $675,252
Long-term Liabilities
Mortgage $346,697
Loan $217,693
Total long-term liabilities $564,390
Owner’s Equity
James, Capital $776,036
Total liabilities and owner’s equity $2,015,678
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CASE 6 817
To see how the company’s financial position changes over time,Ivey calculates 12 ratios. She also compares James Confectioners’
Income Statement, James Confectioners
Net sales revenue $3,897,564
Cost of goods sold
Beginning inventory, 1/1/xx $627,853
+ Purchases $2,565,908
Goods available for sale $3,193,761
– Ending inventory, 12/31/xx $568,421
Cost of goods sold $2,625,340
Gross profit $1,272,224
Operating expenses
Utilities $163,698
Advertising $155,903
Insurance $74,054
Depreciation $74,054
Salaries and benefits $381,961
E-commerce $38,976
Repairs and maintenance $58,463
Travel $23,385
Supplies $15,590
Total operating expenses $986,084
Other expenses
Interest expense $119,658
Miscellaneous expenses $1,248
Total other expenses $120,906
Total expenses $1,106,990
Net income $165,234
Ratio
James Confectioners ConfectioneryIndustry Median*Current Year Last Year
Liquidity RatiosCurrent ratio 1.86 1.7
Quick ratio 1.07 0.8
Leverage Ratios
Debt ratio 0.64 0.7
Debt-to-net-worth ratio 1.71 1.0
Times interest earned ratio 2.49 2.3
Operating Ratios
Average inventory turnover ratio 4.75 4.9
Average collection period (days) 34.6 23.0
Average payable period (days) 31.1 33.5
Net sales to total assets 2.17 2.1
Profitability Ratios
Net profit on sales ratio 7.40% 7.1%
Net profit to assets ratio 9.20% 5.6%
Net profit to equity ratio 29.21% 16.5%
ratios to those of the typical firm in the industry. The followingtable shows the value of each of the 12 ratios from last year.
*Annual Statement Studies: Financial Ratio Benchmarks, Risk Management Association.
818 CASE 6
“How does the financial analysis look for this year, Hon?” Telfordasks.
“I’m about to crunch the numbers now,” says Ivey. “I’msure that rising chocolate prices have cut into our profit margins.The question is ‘how much?’”
“I think we’re going to have to consider raising prices, butI’m not sure how our customers will respond if we do,” saysTelford. “What other options do we have?”
Questions
1. Calculate the 12 ratios for James Confectioners for this year.2. How do the ratios you calculated for this year compare
to those Ivey calculated for the company last year? Whatfactors most likely account for those changes?
3. How do the ratios you calculated for this year compareto those of the typical company in the industry? Do youspot any areas that could cause the company problemsin the future? Explain.
4. Develop a set of recommendations for improving thefinancial performance of James Confectioners usingthe analyses you conducted in questions 1–3.
5. What pricing recommendations can you make to Telfordand Ivey James?
Source: Cocoa forecast information obtained from “Cocoa Forecasts,”International Cocoa Organization, May 27, 2009, www.icco.org/about/press2.aspx?Id=0ji12056.
Telford James and his wife Ivey, the second-generation ownersof James Confectioners, a family-owned manufacturer of pre-mium chocolates that was started by Telford’s father, Frank, in1964 in Eau Claire, Wisconsin, have become increasingly con-cerned that turmoil in the banking and financial industries couldhave a negative impact on their business. They have read theheadlines about bank closures, heightened government scrutinyof the banking industry, and tight credit conditions, especially forsmall businesses. The company has a $150,000 line of creditwith Maple Leaf Bank, but the Jameses want to increase it to$250,000 as a precautionary move. Last week, they contactedClaudia Fernandes, their personal banker at Maple Leaf, aboutincreasing their line of credit. Fernandes said that in addition to
reviewing the James Confectioners’ most recent balance sheetand income statement, she would need a cash flow forecast forthe upcoming year.
Although Telford and Ivey have prepared budgets for JamesConfectioners and have analyzed their financial statements usingratio analysis, they have not created a cash flow forecast before.They expect sales to increase 6.2 percent next year to $4,139,213.Credit sales account for 96 percent of total sales, and the com-pany’s collection pattern for credit sales is 8 percent in the samemonth in which the sale is generated, 54 percent in the first monthafter the sale is generated, and 34 percent in the second month after the sale is generated. The Jameses have gathered the follow-ing estimates from their budget for the upcoming year:
The company’s cash balance as of January 1 is $22,565.The interest rate on James Confectioners’ current line of creditis 8.25 percent.
Questions
1. Develop a monthly cash budget for James Confectionersfor the upcoming year.
2. What recommendations can you offer Telford and IveyJames to improve their company’s cash flow?
3. If you were Claudia Fernandes, the James’s banker, wouldyou be willing to increase the company’s line of credit?Explain.
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Case 8eMusic
Should an online music company with a base of loyal fans sign on with a major music house and raise its prices?
Danny Stein is considering making some significant changesto his online music retail business, eMusic, the company that hehad founded in 1998 and built into the nation’s second largestmusic download site. eMusic has established itself as the placefor music aficionados to discover the latest independent artists,but recently several independent labels, including Drag City andTzadik, dropped eMusic as a distributor because they com-plained that the prices it charged were too low and left theirartists with royalty payments as low as 15 cents per track. In fact,pricing has been an issue for eMusic for some time. Originally,customers could pay just $9.99 per month for unlimited down-loads, but Stein switched to higher monthly rates with limits onthe number of downloads. Songs at eMusic still are bargains—about 25 cents each—compared to iTunes and Amazon, wheretracks sell for 69 cents to $1.29. Stein wants to avoid other labelsdropping eMusic because of low prices and is considering atiered pricing arrangement that ranges from $11.99 for up to24 tracks to $35.99 for up to 73 tracks. Even if eMusic adopts thenew pricing strategy, music downloads will average between49 cents and 89 cents, still 20 to 50 percent lower than iTunes’pricing. Another issue is how to deal with the long-time cus-tomers whose “legacy” contracts allow them to pay far lowerprices than new customers. These legacy customers now numberin the tens of thousands, and their outdated pricing schedules arecreating a drag on eMusic’s revenue.
An even bigger change that Stein is considering is addingsongs from one of the major music labels, Sony BMG. Under thedeal, Sony BMG would make its back catalog of 1 million songsavailable to eMusic customers. The idea of partnering with thebiggest of the major music houses would have been unthinkablein the early days of eMusic’s history, but Stein believes that he hasto offer customers something new if he raises prices. In addition,the landscape in the digital music business is changing fast, andonline music aficionados are looking for a broader range of
music content. A deal with Sony BMG would provide thatbreadth, but Stein knows that adding content from a major musichouse might alienate eMusic’s core customers, who would see themove as a betrayal of the cool, alternative music niche that eMusic has carved out. eMusic’s image always has been linkedclosely to its identity as the place to discover cool, up-and-coming, independent musical artists, and a deal with Sony BMGcould mar that image. However, Stein believes that most ardentmusic fans care more about finding the music they like rather thanthe record label it is on. The question is whether they would bewilling to pay more for access to a greater selection of music.
Stein has two very important and very difficult decisions tomake. He has called in his executive team to seek their ideas andinput.
Questions
1. What are the risks that eMusic faces if it raises prices?If it does not raise prices?
2. Should eMusic raise its prices using the new tiered pricingschedule? If so, how should the company communicatethe price increase to its customers? Compose an e-mailto existing customers that explains the rationale behinda price increase.
3. What are the risks that eMusic faces if it signs the dealwith Sony BMG to expand its online music catalog? If itdoes not sign the deal with Sony BMG?
4. Should eMusic sign the deal with Sony BMG? Explain.
Sources: Based on Adam Bluestein, “Case Study: eMusic,” Inc., March 2010,pp. 55–58; Bruce Houghton, “eMusic Relaunches with Variable Pricing,”Hypebot, November 2011, www.hypebot.com/hypebot/2010/11/emusic-relaunches-with-variable-pricing.html; Chris Foresman, “eMusic ChangesPricing Structure to Nab Major Music Tracks,” ARS Technica, November 2010,http://arstechnica.com/media/news/2010/11/emusic-changes-pricing-structure-to-nab-major-label-tracks.ars.
How can the CEO of a fast-growing company improve his poor track record at hiring stars?
In 1997, Mark Sims began working in sales and service for FikesProducts, a company in Kent, Washington, with 30 employeesthat sells janitorial supplies and services to restaurants, retailers,and other businesses. In 2003, Sims became the owner of thecompany when his parents, the founders of the company, retired.Sims used his sales talent to increase annual sales at Fikes tomore than $4 million and opened a branch in Portland, Oregon.He is proud of the company’s growth but realizes that it hascreated a problem: The day-to-day tasks of managing a fast-growing company are draining him professionally and person-ally. He wants to hire several employees, including an officeadministrator, two route drivers, and a warehouse worker. DanPrice, a fellow entrepreneur and mentor, suggests that Sims alsohire an operations manager to handle the daily operations of thecompany and allow Sims to focus on leading the company.“There is no one to take work off of Mark’s plate,” says Price.Yet he understands Sims’ hesitation. “A first senior hire isdaunting for an entrepreneur,” he says.
Sims also is a bit gun shy when it comes to making hiringdecisions because his track record is not that good. Recently, hehired several employees who seemed “fine,” but none of themlasted. A route driver that he found on Craigslist wrecked a newvehicle before he quit. A new office staffer spent 30 percent of herworkday on personal social media, distracting coworkers and rais-ing their ire. Sims also sees the time he spends sorting throughresumes as unproductive because he could be out in the field land-ing new customers. The high unemployment rate means that thenumber of applicants, qualified or not, for each job has surged.“I get resumes for driver positions from applicants who don’t even
have a driver’s license,” he laments. “We aren’t attracting thequality candidates we’d hoped for,” he says, citing a “deterioratingwork ethic” among many applicants. “I want to get people excitedabout working here—even if we do sell toilet paper and Dumpsterdeodorizers.”
To find candidates for the operations manager’s positionand lower-level jobs, Sims is considering placing employmentads on state employment agency Web sites because they arefree. He also has considered hiring a professional recruitingcompany but is hesitant because recruiters typically charge a feethat is the equivalent of 20 to 30 percent of the new hire’s firstyear salary. Sims knows that his company has to attract qualityworkers if it is to continue to grow and prosper, but he is unsureof the best way to find them.
Questions
1. What steps should Mark Sims take to ensure that he hiresthe right employees for Fikes Products?
2. Write a two-page memo to Sims that outlines a selectionprocess that will produce the results he wants.
3. Where should Sims look for quality employees? How shouldhe structure the interviews for prospective employees?
4. What methods should Sims use to motivate his employeesto achieve higher levels of performance?
Sources: Based on Adriana Gardella, “Hiring Employees, With Help orWithout,” New York Times, October 27, 2010, www.nytimes.com/2010/10/28/business/smallbusiness/28sbiz.html?ref=casestudies; “Meet theOwner,” Fikes Products, www.fikesproducts.com/company/meet-the-owner.
How can the owners of a franchise reverse declining sales?
Robin and Chris Sorenson are the owners of Firehouse Subs, achain of submarine sandwich shops with more than 400 locationsin 21 states. The Sorensons, both former firefighters, opened theirfirst Firehouse Subs restaurant in 1994 in Jacksonville, Florida,and used a firehouse theme and authentic firefighting gear to dec-orate it. Their menu followed suit, featuring sandwiches withnames such as the Hook and Ladder, the Firehouse Hero, and theNew York Steamer. In 2001, the Sorensons operated 30 FirehouseSubs restaurants across Florida and began selling franchises toexpand across the Southeast and beyond. Their goal is to have2,000 locations by 2020.
Sales at Firehouse Subs restaurants were growing until2008, when year-over-year sales declined throughout the chainby 3.4 percent. “In our entire history, we had never had a periodlike that when our entire system was running negative sales,”says Don Fox, the company’s CEO. “It was something com-pletely foreign to us.” The sales decline was particularly puz-zling because lower-priced restaurants such as Firehouse Subsnormally are well-positioned in economic downturns to attractcustomers who continue to dine out but look for less expensiveoptions. Something besides the recession was causing sales todecline.
Firehouse Subs provides franchisees with a complete busi-ness system, strong brand name recognition, and the opportunityto own their own restaurants with investments that range fromjust under $200,000 to $425,000. In return for the franchisor’ssupport, Firehouse Subs charges franchisees a $20,000 initialfranchise fee, a royalty of 6 percent of sales, and a 3 percentadvertising fee (2 percent goes toward local advertising). Whenthe executive team met to discuss the company’s decliningsales, Robin Sorensen had an unconventional idea: eliminate the2 percent local advertising fee and allow franchisees to createand execute their own marketing strategies. The Sorensons andFox presented the idea to franchisees, who approved it over-whelmingly. “It was pretty radical,” admits Fox. “Some peoplethought it was insane to give the money back. We didn’t have anego about who has the money. We wanted results.”
Six months after giving franchisees control over their localadvertising budgets, the sales decline at Firehouse Subs hadworsened. System-wide sales were down 6 percent from theprevious year. The chain’s top managers believed that theproblem stemmed from a lack of brand awareness and a very
successful “$5 Footlong” campaign that Subway, the largestcompany in the submarine sandwich business with more than33,000 restaurants around the globe, had launched.
Firehouse Subs’ executive team discussed their options andnarrowed them to three: continue the existing local marketingefforts by franchisees, begin discounting sandwich prices, orlaunch a new marketing campaign. They were hesitant to continuethe local marketing campaigns, because over 6 months sales hadcontinued to decline. Discounting sandwich prices would cut intothe company’s already thin profit margins and might damage thereputation for quality ingredients that the company had built overthe years. The management team began exploring a new market-ing campaign and met with an experienced advertising companybased in Fort Lauderdale, Florida. The advertising agency showedthem that other submarine sandwich chains, including Subwayand Quiznos, spend more on advertising per store and collecthigher royalties and advertising fees. The agency recommendedthat Firehouse Subs not only reclaim the local advertising feebut that they double it to 4 percent! That would increase thepayments that franchisees make to Firehouse Subs from 9 percentof sales to 11 percent of sales. The executives wondered whetherfranchisees would resist the move when many of them alreadywere struggling with lower sales and profits.
Questions
1. What advantages do franchisees gain when they buy theirfranchises? What disadvantages do they experience?
2. Develop a list of advantages and disadvantages for each ofthe three options the managers at Firehouse Subs areconsidering.
3. Which of the three options do you recommend managersat Firehouse Subs choose? Explain.
4. If the managers decide to create a new marketingcampaign, what should be its unique selling proposition(USP)? What key points should the campaign emphasize?
Sources: Based on Kermit Patterson, “Spending More on Ads to Overcomea Slump,” New York Times, September 22, 2010, www.nytimes.com/2010/09/23/business/smallbusiness/23sbiz.html?ref=casestudies; “FranchiseOverview,” Firehouse Subs, www.firehousesubs.com/Franchise-Overview.aspx; “Firehouse Subs,” Entrepreneur, www.entrepreneur.com/franchises/firehousesubs/317772-0.html.
