January 15, 2007
Business Policy Consultants
1 Graduation Way, Suite 4.0
College of Business Administration
University of North Texas
Denton, TX 76203
Dear Consultants,
I am writing to solicit your assistance in helping me to chart the future course of action for
Grandma’s Best. Our company, started by my grandmother more than 50 years ago, is now a
closely held corporation controlled by a small group of family members. Located in Spokane,
Washington, we sell chocolates, cookies and candy throughout the United States and have begun
to develop international sales.
At one level, I am thrilled with the performance of the company. My grandmother could never
have imagined that the company would ever reach the point that it has today. At another level,
however, I am concerned about the future of the company. We are approaching capacity in our
current facilities and will soon have to make some tough choices about where the company
should head. While most of those in the family want to see the company continue to grow, there
are others who are afraid that we may be getting too big. A clear plan for the future, with
appropriate support for the choice, will be necessary to satisfy all family members.
I am therefore asking your firm, along with several others, to examine our firm and propose and
justify a future course of action. From these initial proposals, I will then select one firm to work
closely with us in implementing their plan. To assist you in this task, I have included some
background material on Grandmas Best along with financial information. I had also hoped to be
able to schedule a short meeting with you to answer questions and clarify major issues.
Unfortunately, my schedule will not allow that to happen. Instead, I am enclosing a summary of
information from a recent question and answer session with some students from a local
university. I hope that addresses most of the issues you would have raised.
Please be aware that we may not be able to give you all of the information that you might like.
The family does not feel comfortable giving out all its secrets to lots of different firms. Please do
the best you can with the information available and be assured that we will be much freer with
information for whichever company we select to work with over the longer term.
I am looking forward to seeing what your firm will have to offer to help Grandma’s Best
continue to prosper into the next century.
Sincerely,
James Dranove
CEO, Grandma’s Best
Grandma’s Best1, with a home office in Spokane, Washington, manufactures, markets
and distributes a diverse line of chocolates, cookies, and candies. The majority of these
products are sold under the “Grandma’s Best” brand name, though the company does sell
some products for shipment under private label. Primary products include chocolate bars
in a variety of flavors (e.g. mint, with almonds, etc.), filled chocolates sold in boxes,
specialty cookies, and holiday specific chocolates (e.g. Easter eggs, Valentine hearts).
The company also produces gift baskets that may combine various of the companies
products. Grandma’s Best brands are typically positioned as premium quality products
sold at prices comparable to those of competitive products.
Market Overview
Sales of candy and cookie products in the United States have increased significantly in
recent years. According to the United States Department of Commerce, manufacturers'
domestic shipments of confectionery products (excluding chewing gum) grew steadily
from approximately $9 billion in 1990 to nearly $18 billion in 2005. The Chocolate
Manufacturers Association/National Confectioners Association has estimated that total
retail sales of confectionery products in the United States in 2005 were over $28 billion,
and industry trade reports project continued growth in these markets. Despite such
growth, the United States ranks only ninth in per capita candy consumption among the
industrialized nations.
The markets for candy and cookie products are dominated by a number of large, well
capitalized corporations. In the candy market, these companies include Hershey Food
Corporation, M&M Mars and Nestle S.A. The cookie and biscuit market is dominated by
Nabisco, Inc., Keebler Company and Sunshine Biscuits, Inc. In addition to domestic
manufacturers, foreign candy and cookie companies, such as Lindt of Switzerland,
Bahlsen KG, and Storck, have established their products in this market. The remainder of
the market is otherwise highly fragmented, with numerous manufacturers and hundreds
of products and distribution channels, such as mass merchandisers, vending companies
and gourmet distributors. Grandma’s Best executives believe that the company's
experience in these markets and distribution channels positions the firm to capitalize on
the growth opportunities in these markets.
Suppliers
Currently, about half of the company’s finished products (primarily candies and cookies)
are purchased from third-party manufacturers, most of whom are located overseas. These
products are produced to specific recipe and design specifications developed by
Grandma’s. Agreements have been reached with most of these firms so that they will not
1
This case was prepared by Grant Miles for use in the integrated team project of the business policy course
at the University of North Texas. While partially based on a real company, material has been altered to fit the needs
of the course. As a result, the material contained in this document should be considered the only pertinent written
information available about the company.
1
export similar products for sale in the United States. Raw materials necessary for the
manufacturing done by Grandma’s are purchased from numerous third-party suppliers.
Efforts are made to maintain a number of sources of each necessary supply so that the
company does not become dependent on any single supplier.
Manufacturing
The company currently owns and operates a 105,000 square foot manufacturing facility
in Spokane. Within this facility, about 5,000 square feet are devoted to office space.
When built in 1983, the facility was only 65,000 square feet. The rest of the space was
added in 1992. Equipment within the plant is aging, but still serviceable. This facility is
primarily used to manufacture chocolate products.
The manufacturing facility currently operates two daily shifts. The company has
experimented with a third shift, but experienced problems because of the need for down
time for cleaning and servicing the machinery. Based on this experiment, management
does not believe that a third shift is workable for any extended period of production time.
The plant is currently operating at approximately 95% of capacity, with current growth
forecasts indicating that the facility will be over capacity within 1-2 years.
Based on these forecasts, executives have begun to search for additional facilities. One
possible facility has been located in Yakima, Washington. This facility is being vacated
by another chocolate manufacturer that was recently purchased by a larger company.
The plant, built in 2001, consists of 135,000 square feet and is equipped with machinery
that is superior to that currently used by the Spokane facility. It is believed that the
Yakima plant might be purchased for between $6 and $7 million.
Distribution
Grandma’s Best distributes its products throughout the United States and has begun to
distribute internationally. International sales currently make up about 6% of total
revenues and sales to Canada account for approximately 91% of all international sales.
The majority of the company’s sales are handled through approximately 50 independent
food and candy brokers in various regions throughout the United States who then market
to retail customers. Brokers are paid on a commission basis (typically 5%) and are
generally responsible in their respective geographic markets for identifying customers,
soliciting customer orders and inspecting merchandise on store shelves. Arrangements
with the brokers prohibit them from selling competing products. It is believed that the use
of food and candy brokers, which typically specialize in specific products and have
knowledge of and contracts in particular markets, enhances the quality and scope of sales
operations and permit the company to limit the significant costs associated with creating
and maintaining a direct distribution network.
2
The marketing vice president and three regional sales managers work with brokers on an
individual basis and are responsible for managing the broker network, identifying
opportunities and developing sales in their respective territories. Five regional bonded
public warehouses that specialize in food and confectionery storage are used for
distribution. These warehouses are selected based on proximity to customers, the ability
to provide prompt customer service and efficient and economic delivery. Products are
generally sold pursuant to customer purchase orders and these orders are filled from
inventory, generally within one to two days of receipt. Products are delivered by common
carrier.
Marketing and Advertising
Product recognition by retail and wholesale customers, consumers and food brokers is an
important factor in the marketing of the company's products. Accordingly, Grandma’s
Best promotes its products and brand names through the use of attractive promotional
materials, including full-color product brochures and newspaper inserts, advertising in
trade magazines targeted to the mass merchandisers, vending industry, gourmet trade and
gift basket markets, and participation in trade shows. Last year, approximately $695,000
was spent on advertising.
Products are also promoted through sales discounts and advertising allowances. The level
of promotional programs is generally highest during the initial introduction of a product.
As distribution of the new product increases, resources gradually shift from promotion to
direct advertising to reinforce trade and consumer repeat purchasing. Management
believes that these promotional programs have shortened the time periods necessary to
achieve market penetration of its products. The company intends to continue to develop
and implement marketing and advertising programs to increase brand recognition of its
products and to emphasize favorable pricing compared to competing products.
Employees
Grandma’s best currently employs approximately 220 full-time equivalent employees, all
of whom work out of the Spokane facility. Of this number, 33 are employed in the front
office and the rest in the factory and storage areas. The employees are not represented by
a labor union. Management believes that employee relations are good, though there has
been a slight increase in employee turnover during the past year.
3
Organization and Information Systems
Grandma’s Best is operated by a management team consisting of the CEO and the VicePresidents of Marketing, Manufacturing, and Finance. Other functional areas, such as
HR and Purchasing, are also handled by this group. The company is computerized, but
has only a rudimentary central information system. For the most part, each vicepresident determines the programs and applications necessary for their own areas.
The company web page is currently housed with a local Internet service provider that the
company also uses for email purposes. The page is primarily informational, with a
section available where people can send comments to the company, though the existence
of the page is not well publicized. There has been some talk among the marketing group
about utilizing the Internet for sales and distribution purposes, but this has not yet gone
beyond the talking stage.
4
Grandma’s Best
Consolidated Statements of Income (000's)
2006 (est)
2005
2004
Net Sales
18,084
17,487
16,525
Cost of Sales
12,514
12,570
11,898
5,570
4,917
4,627
Selling, General, &
Administrative
3,139
2,744
2,495
Salaries and related expenses
1,516
1,180
1,008
155
769
570
Total operating costs
4,810
4693
4,073
Income from operations
760
224
554
(147)
(152)
(157)
20
155
34
Total other income (expense)
(127)
3
(123)
Income before taxes
633
227
431
201
24
165
432
203
266
Gross Profit
Pre-production costs
Other income (expense)
Interest
Other income (expense)
Provision for taxes
Net Income
5
Grandma’s Best
Consolidated Balance Sheets (000's)
2006 (est)
2005
688
614
2,067
2,102
-
262
4,059
3,413
127
46
Total current assets
6,941
6,437
Net property and equipment
2,642
2,335
TOTAL
9,583
8,772
1,954
1,844
Current portion of
long-term debt
175
145
Accounts payable
2,377
2,024
Accrued expenses
359
198
Income taxes
161
190
Total current liabilities
5,026
4,401
Long-term debt
1,442
1,545
194
108
6,662
6054
10
10
757
757
Retained earnings
2,154
1,951
Total Equity
2,921
2,718
Total Liabilities and Equity
9,583
8,772
ASSETS
Current assets
Cash and equivalents
Accounts receivable
Insurance settlement receivable
Inventory
Other current
LIABILITIES
Current liabilities
Line of credit
Deferred taxes
Total Liabilities
Stockholders equity ($.01 par
value, 1,000,000 shares issued)
Additional paid in capital
6
Grandma’s Best
Additional Information
The following items provide additional information about Grandma’s Best. The
information is summarized from interviews that student teams from a local university had
with Grandma’s Best executives as part of a class project.
1.
Mission and Goals
Grandma’s does not have a formal mission statement, but the basic thrust of the
company is to make good quality products, and sell them at a reasonable price.
As far as goals, it was explained that there were some differences of opinion
among the family members/owners. One faction was said to be asking when they
were going to see some payout for their ownership, since the company had
historically retained all earnings to pay for future growth. This faction was not
against further growth per se, but was interested in seeing a payoff on their
ownership in the near term. The other faction was said to be more comfortable
with waiting for a payoff down the road, and was comfortable with the current
approach. Teams were told that Mr. Dranove (the CEO) was looking for a plan
that he could “sell” to both sides.
2.
Financial Information
The current debt structure is based on “sweetheart” deals provided by a local
government development agency. The line of credit has a 4% interest rate that
will remain in effect until the company’s sales reach $50 million. The average
balance on the line of credit is about half of the 1.9 million shown on the balance
sheet. The remaining long term debt, also from the local development agency,
has a 6.5% interest rate, and is to be paid off with principle payments as follows:
2007: $200,000
2008: $300,000
2009: $300,000
20010: $642,000 balloon payment
It was explained that these “sweetheart” deals should not be expected to be
available in the future, and that Grandma’s would have to go to the general
market for future loans. It was also explained that, if necessary, loans were the
preferred method of funding future growth, with bonds a 2nd option, and equity
(IPO or investor) a distant 3rd.
Depreciation is included as part of SGA expenses and runs around $300,000.
Depreciation is done on a straightline method, with equipment depreciated over a
7 year period and facilities over 15. Cashflow statements were NOT handed out,
but it was explained that cashflow had not been a problem.
7
3.
Organizational Issues
An organization chart (with rough employee counts) and a rough list of employee
salaries are attached. Managers at Grandma’s all have appropriate education and
experience for their positions. Training for line staff is primarily “on the job”
working with an experienced employee for a short period of time (2 - 4 weeks).
The increase in turnover is coming primarily from the line employees and is
believed to be a result of the local economy providing other opportunities for the
workers at slightly better pay. The turnover rate is only about 10%, so it is not
considered to be a big problem.
4.
Products, Customers, and Markets
As is shown in the attachments, Grandma’s now makes all of its own chocolates
and soft candy, plus some of the hard candy. The finished goods imported from
foreign sources include a small amount of hard candy, but are primarily made up
of biscuits (European style cookies), which Grandma’s does NOT produce on its
own. The imports are a carry over of earlier times when an opportunity came
along. They have been reduced over time to their current level of 50% of sales.
Grandma’s does not breakdown costs by product line, but the chocolates appeared
to carry a slightly higher margin than the other products. The imported goods run
about 10% higher on cost of goods than Grandma’s own production, but there is
little overhead involved with imports.
Grandma’s products are targeted primarily at middle to higher end retail outlets
and gourmet shops, though the brokers that are utilized are free to sell to
whomever they can. Sales are generally distributed across the country, mostly
along the lines of population, though the biscuits tend to sell particularly well in
the North East. No particular region is targeted over any others. Sales have some
peaks and valleys over the course of the year, particularly related to holidays.
The international sales (primarily in Canada) are a result of requests from
international brokers rather than a designed international plan. Grandma’s is open
to further international expansion, though, if a positive case could be made for it.
An attachment gives a list of the countries with the highest per capita chocolate
consumption, though it should be noted that high consumption does not
necessarily equal a good market to enter due to possible local competition.
5.
Information Systems
Grandma’s does not have any real company wide information system. Managers
have their own computers with appropriate applications.
Integration/communication is handled in weekly meetings of the managers.
Grandma’s executives said that while they weren’t against considering more
advanced systems, the current system appeared to be working out just fine.
8
The web page is still under construction, and no immediate plans have been made
to try and incorporate web based sales. There are currently mixed feelings among
management as to whether web sales would be a good idea. While managers in
marketing are pushing for extensive use of the web, the managers within
production are skeptical. The CEO was said to be trying to keep an open mind,
though he explained that Grandma’s had no IS department and knew nothing
about web systems.
6.
Inventory Management and Delivery Systems
Some teams asked about the “high” levels of inventory. We asked them why they
thought the levels were high. We felt as though the levels were reasonable,
turning over about 4 times a year, and that we had not had any trouble with
spoilage. We also mentioned that we were able to fill all orders with stock on
hand.
The ordering process involves brokers faxing orders to the marketing department,
who then fax the order to the appropriate contract warehouse for shipment by
common carrier. The warehouses are located in eastern Pennsylvania, outside
Chicago, in Mississippi, in Phoenix and in Seattle. Relationships with the
warehouse operators are good, and additional capacity is available if needed.
7.
Production
Several areas related to production were addressed. First, it was explained that
Grandma’s now has 6 production lines operating (2 for solid chocolate, 2 for
filled chocolate, one for soft candy, and one for hard candy), with 3 packaging
lines. 2 of the chocolate lines were added over the last two years, which accounts
for the high pre-production expenses on the income statement. The equipment is
older, but serviceable, since the technology in this industry has not changed
significantly in the last 40 years. Replacing the current equipment is estimated to
cost about $2 million. While replacement would reduce breakdowns that occur
on the old machines, it is thought that it would NOT improve capacity or reduce
costs to any appreciable extent.
The Yakima plant (mentioned in the case as being available) has a capacity of
about 1.5 times the current facility with similar, though newer, equipment. It is
believed that it would take about 6 months to get it operating to Grandma’s
specifications. If deemed appropriate, it is possible that management might be
moved to that site. Moving line workers is likely to be cost prohibitive, though,
so new workers from the Yakima area would probably be hired.
The Yakima facility, however, is only one of several options for further capacity.
Other existing facilities might be available, and Grandma’s has land at its current
site that would support up to 2 production facilities of the current size. While a
new facility on Grandma’s land could share some warehousing with the current
facility, it was explained that expansion of the current building would be difficult
9
due to logistical problems that would arise in trying to combine new lines with the
current layout.
8.
Sales and Marketing
Sales are handled almost entirely through external brokers. While management is
not against developing its own sales people, a rough estimate had once been done
and it was believed that fielding a sales force of 50 people (about the current
number of brokers) would cost close to 2.5 times what the brokers were costing.
It was possible, though, that this estimate could be faulty. Marketing is not
extensive. About $350,000 a year is spent on ads aimed at the end user (primarily
through newspaper inserts), and another $350,000 is spent on trade advertising.
9.
Competitors
In addition to the big competitors in the industry (Hershey’s, Mars, Nestle in
chocolate, Nabisco, Keeblers, etc. in biscuits), there are many, many small
producers of roughly the same size as Grandma’s. These smaller firms operate in
an environment approaching “perfect competition”. It was explained that because
of this, Grandma’s does not target or spend much time on worrying about their
competitors. They believe that if they make a good product at a reasonable price
there will be a market for it.
10
Product Line Break Down
% of
Total
Sales
(dollars)
% of Our
Production
(units)
Product
Chocolates (4 production lines - 2 solid, 2 filled)
15%
35%
1. Solid Bars - Multiple Flavors
3 sizes - 2 bars, plus bite-size sold in bags
17%
30%
2. Filled Chocolates - Sold in box sets
6 assortments and/or sizes
4%
5%
3. Holiday - Solid and Filled
Hearts/Eggs/ Coins, etc.
Soft Candy (1 production line)
10%
20%
4%
10%
Multiple Flavors (taffy, butterscotch, etc.)
Sold in multiple assortments and bag sizes
Hard Candy (1 production line)
Multiple Flavors (peppermint, lemon, etc)
Sold in multiple assortments and bag sizes
Gift Baskets
Combine existing products - sales not separately
calculated, but estimated at 5-7%
Imports
42%
---
Biscuits and Cookies
8%
---
Hard Candy
11
Salaries2
Office Staff
4 Top Managers
$100,000
6 Middle Managers
$50,000
23 staff members
$25,000
Production Workers
3 Department Heads
$50,000
2 Supervisors
$35,000
15 R&D/Quality
$30,000
167 Line/Warehouse $18,000
2
These are only rough approximations for a category, not specific salaries of any individuals.
Please keep this information confidential!
12
Ranking of Countries by Consumption
CHOCOLATE CONFECTIONERY CONSUMPTION (lbs per capita, 2003)
Switzerland
Austria
Ireland
Canada
United Kingdom
Germany
Denmark
Belgium
Sweden
U.S.A
Finland
France
Netherlands
Norway
Spain
21.12
20.68
19.36
19.14
18.92
18.04
16.94
15.4
15.4
11.88
11.44
10.12
9.68
8.58
3.3
NON-CHOCOLATE CONFECTIONERY CONSUMPTION (lbs per capita, 2003)
Switzerland
Austria
Ireland
Canada
United Kingdom
Germany
Denmark
Belgium
Sweden
U.S.A
Finland
France
Netherlands
Norway
Spain
7.04
8.14
12.54
7.48
12.54
13.42
13.2
9.9
14.74
12.76
16.94
7.92
13.86
9.9
5.72
Source: CAOBISCO
13
Grandma’s Best
Organization Chart
James Dranove
CEO
Staff
(4 people)
Mary Young
VP Finance
Keith Provan
VP Manufacturing
Steve Borgatti
Chief Accountant
Donde Ashmos
Financial Analysis
Denise Cahill
HR
Tomas Hult
R&D
Staff
(4 people)
Staff
(4 people)
Staff
(3 people)
Staff
(15 people)
Jean Hennart
Production
Candace Jones
Op. Mgr. (1st shift)
14
Mitch Koza
Op. Mgr. (2nd shift)
Janet Fulk
VP Marketing
Larry Ritzman
Maintenance/
Inventory
Jo Ann Duffy
Southern Region
Carol Sanchez
Northeast Region
Jim Chrisman
West Region
Staff
(17 people)
Staff
(2 people)
Staff
(3 people)
Staff
(3 people)
15