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Ron lay in bed, exhausted from watching the clock since 3:00 a.m. Long nights with little sleep were the norm these days, and Ron could not blame caffeine for keeping him awake. Ron rose from his bed and walked into the kitchen while wrestling with the questions that had pulled at him for days. As he poured the water for a pot of coffee, he again asked "How? How could the coffee business that he started with three friends become such a financial and emotional burden?” Ron longed for the "good 'ole days" when the business almost ran itself.
Now Ron could only think about the tour of the Chicago and Pittsburgh operations that he had just completed. Everywhere the news was the same – growth rate of the top lines had slowed significantly over the past two years, and earnings were declining as well.
Recent acquisitions in Pittsburgh and Chicago had provided a much-needed diversification of the product line into ice cream and deli products. This change came too late for some locations, as several stores were closed or sold because they were unprofitable. The recent acquisitions brought headaches of their own – how to bring together three different management teams and three different management information systems (MIS). Each team believes that they have the solution-switch to their particular information system, implement their preferred marketing strategy, and adopt their operational policies and procedures. No stress there! As Ron took the last sip of his morning cup of coffee, he could not help but think that coffee was leaving a bitter taste in his mouth-in more ways than one!
Ron knew that he and his three partners, Johanna, Bruce, and Tony, must move quickly to create a coherent strategy and three-year operations plan to turn the company around and get back on track with the original vision. Ron had decided to call a meeting of the partners to discuss the issues facing the organization. Ron had decided to handle the MIS issues and also had invited an outside management consulting firm to help them work through some of their challenges. Could they perhaps offer an answer to the question
"How"?
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Company History
Great Cups Coffee Company began in 2000 as Great Cups of Columbus with 14 stores in
Columbus, Ohio. Four friends, two of whom were coffee shop managers and two of whom were regional managers for a large corporation, founded the company when the large corporation decided to sell off their entire chain of 14 stores as a failed business.
The four friends had individual expertise in four areas of business: finance, marketing, management information systems, and human resources. And they did great by focusing their business on the larger size of the cup of coffee they served. The Great Cups name and the company motto: "A Great Cup of Coffee, at a Great Price," reflects the nature of the basic product upon which the chain of stores was founded. From the company's inception, in-store customers were treated to various coffee blends served in over-sized ceramic mugs, and carry-out orders were always provided in cups two ounces larger than those used by competing coffee purveyors. The individual stores also did a brisk business selling the ceramic mugs as gift items.
The company branched out; adding stores first in Cincinnati, then in Cleveland, and then others along I-71 corridor in Ohio. The name was changed to Great Cups Coffee
Company and over the years, the company has come to be known alternatively as just
“Great Cups,” and "GC3."
The founders of the company managed the business from the Columbus, Ohio headquarters. Their belief was that their business acumen and hands on philosophy added to the success of the company. As they grew, they looked for opportunities to add stores to the Great Cups Coffee Company chain.
2001
When the company was incorporated in 2001, there were 14 stores in the Columbus,
Ohio area with a 5-year history of selling specialty coffee in a coffee house atmosphere.
The new owners did little to alter the business. The revenue from the 14 stores was $6.5 million, approximately $465,000 per store.
The new owners kept the concept of the original store chain of creating a market for their coffee by vertically integrating. The stores had been mildly successful, however, the large corporation that owned them previously sold the stores when ran short of cash reserves.
Since all of the new owners previously worked in the business, they knew it was a sound concept and that the Columbus, Ohio area was an ideal market. They knew the stores, individually run by local managers, would ride the tide of interest in gourmet coffee created by the market leader Starbucks. The manager of each store was responsible for the operations of the store, including hiring staff, providing a monthly cash register accounting, and determining the best hours of operation.
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The four owners were happy to visit the stores on a regular basis and were usually available to help the managers resolve any issues. Generally, the stores operating hours were from 6 am – 10 pm, Monday through Saturday with peak times of 6 am until 9 am,
11 am until-1 pm, and 7 pm until 9 pm. At peak times, 1 manager, 2 shift supervisors, and 2 counter people were on staff. The counter people were typically paid between
$4.45 and $4.60 per hour, and on average at least 7 counter people worked 20 hours a week. The manager was salaried earning $24,600 a year with benefits. There were two hourly shift supervisors working 40 or more hours a week at $4.95-$5.10 an hour. The total Full Time Equivalent (FTEs) per store was around 6.5.
In 2000, the stores sold only coffee and pastries and catered to the young, urban crowd.
Between 2000 and 2006, the company experienced controlled growth. The owners personally selected the sites to build new stores and on rare occasions came across an opportunity to acquire an existing store or two that were converted into a Great Cups of
Coffee Company store.
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2007
By 2007, through the careful and thoughtful executive leadership of the company by the four owners, there were 57 stores with each store doing approximately $575,000 in gross sales per year. The owners were happy with their revenue of $32,760,000. Almost 90% of the stores were located in Cincinnati, Columbus & Cleveland and along the I-71 corridor.
A few stores were located beyond Cincinnati along I-71 and a few were located west of
Columbus in the Dayton area.
For the executive owners, the business was running much the same as when they started, although they did travel a little more and were forced to split up the stores into territories with Cleveland, Cincinnati, and Columbus as the major areas. The marketing executive had maintained a small advertising budget by using outsourced marketing resources. The stores relied mostly on word of mouth advertising.
Within each store, the daily operations remained much the same. At this time, FTEs per store averaged 10. The managers still relied on cash register accounting, although the corporate finance director had hired an assistant to help in doing the monthly accounting for all stores.
In 2007 the owners, based on requests from the store managers who were reporting on customer requests, began selling custom ground coffees to commercial coffee services through the stores. The one issue that they needed to overcome was keeping the coffee fresh to insure quality. The managers and the executives determined that they would sell the coffee through the stores to ensure that the coffee was delivered from the roasting facility within 72 hours. The local stores would then blend and grind the coffee right before they turned it over to the commercial services. The managers were happy with the
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arrangement of ordering the roasted coffee, then blending and grinding it on site before passing it on to the commercial services.
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2008
2008 was a banner year for Great Cups of Coffee Company. The executive team looked for ways to expand their business even more. During a visit home, one of the executives learned of an opportunity to acquire a group of 85 ice cream stores, Great Scoops, headquartered in Pittsburgh.
The strategic intent of the acquisition was to add coffee and pastries from Great Cups of
Coffee to the Great Scoops menu. This acquisition allowed the company to expand outside its current territory. The acquisition also added an exceptional training department, something the company needed and the existing managers had been discussing for a year or so. The caveat was that the owner and management team of the
Pittsburgh stores received a three-year contract to remain employed by the new company.
The former owner became the Vice President of the Pittsburgh Division with the responsibility of making arrangements with a local Pittsburgh roasting company to roast the coffees. The managers in the Pittsburgh area received training on the coffee business.
With the strong training program, and the Marketing and HR departments run as regional centers, the Columbus executive team was confident this was a good acquisition.
One of the contract stipulations for the Pittsburgh business was that the Great Scoops former owner continued to oversee operations during his three-year contract. As a result, in team meetings, he vetoed virtually any changes to the Pittsburgh stores. When faced with the closing of some of his Pittsburgh locations, he was adamant about providing unusually generous benefits for employees, especially hourly ones. Thus, the executives were forced to move several managers to the Columbus stores. This in turn created animosity among the shift supervisors in the Columbus stores who were waiting for promotions into managerial positions.
During this time, the I-71 corridor development continued, and the company added 35 new stores in two years. For this piece of the business, things ran as they had previously.
The managers still controlled their own stores.
2009
In 2009, another opportunity presented itself. The Great Cups executive team needed a boost since they had been forced to close seven unprofitable stores in the Pittsburgh area.
This was a first for them, and morale throughout the company was affected by the negativity of closing the stores. The executive team realized that company employees were getting their information via informal, and sometimes erroneous, channels (i.e., the rumor mill). Although the Ohio stores were in great shape and most of the Pittsburgh stores were coming around, the closings still made most employees wary.
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A positive change in morale occurred when the executives learned of 70 Chicago stores that were on the market and where coffee was the main product. Although most of the stores were similar to the original Great Cups stores, 28 of them were delis or combomarts (10 coffee shops were in bookstores, and seven were lobby coffee shops). The executive team decided the Chicago stores would be a good acquisition to enable opening another new market in a large metropolitan area, not too far from Columbus.
The executive team, having learned their lessons with the Pittsburgh team, negotiated a two-year contract with the existing Chicago management team. The perks for the
Pittsburgh team, while unusual, had been accepted because of the opportunities that the acquisition provided. The opportunity presented itself to approach the Chicago acquisition differently.
The Chicago operation had a strong regional marketing department and an HR department. It was decided that this would be a good acquisition as the Columbus marketing department was beginning to feel the burden of all the stores, and there was a hope that the Chicago HR department would complement the strong Pittsburgh HR department, making it easier for the Ohio HR department, located in Columbus, to focus on overall issues.
The addition of these 70 stores changed the dynamics of the company and the manner in which each store was run. While it was simple to change the Pittsburgh stores by adding coffee and pastries to the existing ice cream menu, the combo stores in Chicago had different dynamics. Not only were they busy throughout the day, the clientele varied from store to store. Additionally, the product line was much more diverse; and, furthermore, their accounting system was regional, with managers only accessing a computer database rather than a shared system. When the executive team visited the stores, they were amazed that the managers were not knowledgeable about their own store accounting, but somehow knew their profitability as it related to their end-of-year bonus.
Soon 2009 became known in the company as “the year.” Up until this time, the company had limited growth to acquisitions and new-builds in Columbus, Cincinnati, Dayton,
Cleveland, and then Pittsburgh. Some of the stores in Columbus and Pittsburgh were in ethnically diverse communities, but nothing prepared the team for the diverse markets in the metropolitan area of Chicago. The stores in Chicago often catered to specific neighborhood tastes, and sold unique and specialized items. Although the Chicago operation was comfortable with its flexibility to serve individual neighborhood tastes, this approach was contrary to the corporate image of Great Cups of Coffee. The executive team decided to keep the Chicago “DA Deli” name, as they had kept “Great Scoops” in
Pittsburgh, but to sell their brand of coffee with the same quality guarantee.
While the company was enjoying the continued growth (270 stores total), they were having issues with brand identity and were working to move away from being a marketfollower of Starbucks. Although the company had been successful with its commercial coffee services operations in Ohio, it found limited success in selling branded, packaged
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7 coffee through local arrangements with regional grocery store chains. The company decided to discontinue that operation despite protests from the Chicago marketing department.
2010
In 2010, the company began to feel the repercussions of its broad expansion. With approximately $200,000,000 in revenue, each store was making about $739,000 a year.
However, their revenue growth had shrunk considerably.
Turnover problems across all levels of personnel began to surface. In the corporate offices, people were leaving because of the lack of communication between the Chicago,
Pittsburgh and Columbus offices. The regional employees in Chicago and Pittsburgh were finding it difficult to deal with the Columbus headquarters, stretched very thin by the incredible growth. Additionally, the store management was moving to other fast food restaurants for $3,000 -$5,000 more in salary per year. The only turnover rate that remained constant was the counter/sales employees, which were viewed as part-time, short-term employees. While the company’s overall turnover rate was lower than the industry average, there were exceptions in parts of upscale Chicago, especially Winnetka and Northbrook. There were also exceptions in Pittsburgh suburbs such as Upper St.
Clair and Sewickley.
In an executive staff meeting, Chicago expressed concern about the company rule of hiring only employees who were 18 years old or older. They were considering hiring high school students to meet their staffing needs. The Pittsburgh team brought up the downsides of hiring high school students as they had tried that approach themselves. They felt that the additional and necessary training presented real problems. The Pittsburgh team, with their needs in Sewickley and Upper St. Clair, then brought up the idea of attracting college student employees by offering some form of college benefits.
Since the executive team still regularly visited the stores as part of their hands-on approach, hourly employees who wanted a real career path often approached them. What they were learning was that the current hourly shift supervisors had visions of store management positions, something that happened regularly in the early days, but did not see the same growth in new stores. These supervisors felt they were in dead-end jobs as the company had built only six new stores in 2010.
Employees were also bothered by what they considered to be a minimal benefits package.
In 2010, the benefits agreement in the contract between Pittsburgh and Columbus expired. The HR director then reduced the Pittsburgh benefits to match the Ohio-based benefits package. There had been no such necessary arrangement with Chicago, as they had changed to the same benefits package as Ohio at the time of the acquisition. Prior to the acquisitions in Chicago and Pittsburgh, where benefits packages were more extensive, the Ohio employees had seemed satisfied. However, once the Ohio package of benefits were applied company-wide, the Ohio employees began grumbling as much as the
Pittsburgh and Chicago teams, especially when employees from different locations
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8 participated in training programs together at the Pittsburgh facility and discussed their benefits.
The executive team was stretched thin trying to manage their large territory with the same hands-on management style that had served them in the beginning. They found they had no time to seek out new opportunities, such as other partnerships. Although they were aware of Starbucks marketplace efforts, their hectic schedules kept them from investigating different business options thoroughly. They couldn’t find time to reflect on their structure or their professional direction, and they often asked each other in passing questions about how Starbucks retained their employees and how they were so wildly successful. But no one seemed to have the time to thoroughly investigate their main competitor for the answers to these questions.
Another area of concern for the executive team was the actual store facilities. Their original plan had been for the stores to maintain their individual regional identity – Ohio stores one way, Pittsburgh their way, and Chicago their own way. However, they were finding that the different types of stores had different levels of financial success. Issues were also arising with their customers, especially those that traveled. Many of the customers in Ohio were surprised to find out that Great Cups owned stores in Pittsburgh and Chicago. The executive team believed that they were missing sales opportunities due to a lack of brand identity as customers traveled to other regions.
On the development and marketing front, the executive team began thinking about adding some new types of stores, such as some in strip malls, kiosks, or stores in malls.
Starbucks seemed to be successful with similar arrangements. The marketing team in
Columbus had added a mail order service to their offerings via the Web site. This operation, although new, had already raised a few supply issues. The Great Cups of
Coffee Company prided itself on a 72-hour turn around, but the systems were just not in place for Web orders to be processed, filled, shipped, and delivered in 72 hours.
The strong training program in Pittsburgh was also causing problems for the company.
Prior to obtaining the Pittsburgh company, all training was done by the managers and shift supervisors, who followed written procedures retained from the previous owners of the business. If new procedures were needed, the HR department in Columbus created them and hand-delivered them to the managers.
The Pittsburgh organization had specific ideas about training, and the training often contradicted what managers in the Ohio stores were telling their employees. Pittsburgh also focused their training program on the Pittsburgh stores, where ice cream was still the main product. However, at the insistence of the executive team, the Pittsburgh training team often included managers from the Ohio and Chicago regions in their training. The training sessions became an informal meeting for the managers to discuss and identify inconsistencies in corporate policy.
In mid-2010 during their individual visits to the stores in Ohio, the executive team found managers questioning a number of policies, including how many employees were hired,
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9 their benefits, as well as the items being sold in their stores. The Ohio managers were also concerned that their jobs appeared more difficult than the ones in Chicago and
Pittsburgh, where strong regional centers took care of the HR functions such as hiring and firing. These managers from Ohio also complained about the attitude of superiority expressed by the Chicago managers.
Although the regional HR director in Columbus had oversight over Equal Employment
Opportunities (EEO) issues and benefits issues, the director frequently experienced conflicts with the Chicago and Pittsburgh HR teams, who resented intrusion into how they were running their stores.
On another front, the Marketing director in Columbus was often at odds with the strong marketing department in Chicago and often brought these issues to the executive table.
Discussions with the Chicago marketing team rendered complaints of what were called
“backwoods marketing techniques” of the Columbus-based team. Pittsburgh fared even worse in the eyes of the Chicago team. Overall, the Chicago team was accustomed to local campaigns built to address specific store clientele and resented the simplistic Great
Cups model that had been used since the company’s inception. The marketing director pointed to the success of that model repeatedly and wanted to find a way to use it for all three companies, despite their different product lines. Additionally, Chicago was very aggressive in their marketing techniques while Columbus and Pittsburgh were traditionally more bottom-line focused.
Other areas of concern for the company which continue to persist today, and that may impact revenue, include the disastrous management information systems (MIS) practices.
There are three separate systems that do not communicate with each other. The three factions of the company use different cash registers that report sales differently. In
Chicago, the system transmits all information on a daily basis for each store to a centralized system where the data is organized in a database that can access information in virtually any format requested. The inventory and sales are all done regionally with only a managerial electronic signature. The Ohio stores continue to operate on an individual basis, with the manager creating month-end reports for the corporate office in a variety of ways. Some managers use Excel spreadsheets while others use a proprietary system developed by the Pittsburgh regional center. Others report on paper.
In order for the corporate office to have a true accounting of the business each month, especially for decision-making, accounting and MIS personnel must work together for hours to generate meaningful reports. Often, the data technicians, most of whom are in
Chicago, are young and do not understand the manual accounting system nor the reluctance at the Columbus headquarters to adopt an electronic system.
Last month, when they did get a clear financial picture, it was alarming. Financial data, since the company's inception, showed growth as slow but steady, until Chicago joined the team. The data also showed that the company had acquired 40% of their business and
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10 built 30 new stores in three years (2007-2009). The two major acquisitions encouraged growth, but the revenue is now dropping sharply, from 58% in 2005 to a mere 3% today.
Generally, the stores in Ohio follow a simple formula where operating hours are from
6:00 am – 10:00 pm, Monday through Saturday with peak times 6:00 am – 9:00 am,
11:00 am – 1:00 pm, and 7:00 pm – 9:00 pm. At peak times, one manager, two shift supervisors, and two counter people are on duty. The counter people are paid, on average, between $6.50 and $7.50 per hour and usually a minimum of 7 counter people work 20 hours a week.
In Chicago and Pittsburgh, Ohio’s simple formula does not apply. The Chicago hours of operation and staffing requirements vary from store to store with each store setting the times and personnel based on their individual needs. The Pittsburgh stores follow the
Ohio store patterns more closely, but because their main product is still ice cream, the evening shift extends from 6:00 pm until 10:00 pm, while only a manager and one counter person staff their morning shift. The managers in the Pittsburgh and Chicago stores stores are salaried and make $38,500 a year with benefits, and there are two hourly shift managers who work 40 or more hours a week at $8.00-$8.50 an hour. Despite the varied hours in the Chicago stores, the average store payroll is about $10,354 plus benefits. The total Full Time Equivalent (FTEs) per store in Chicago is around 10.
The board has called you here as an outside consulting team to make recommendations to the board in the areas of Marketing, eMarketing, Human Resources, Finance, and
Management Information Systems. Here are the individual concerns of each of the original owners.
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Financial Concerns (from the CFO)
As I look around, I come to realize that we have outgrown our finance reporting capabilities. When it was just the 14 stores a long time ago, we had mechanisms in place to ensure a quick turnaround of reports. I’m not sure when it happened, maybe with the
Pittsburgh acquisition, but somewhere along the line we’ve lost the ability to produce timely, meaningful reports. I’ll try to summarize my main concerns:
Current Format of Reports
Under our current format, we don’t have the ability to isolate what is driving our profits down. We also cannot pinpoint our most profitable operations; either by location or product line. I guess this situation has crept up on me because I know from my travels which ones are our top stores and what product mix is most profitable; it’s just not evident on paper. I’m not sure who else gets these reports and to be honest with you, I’m not sure who should get them. We have become so spread out that a better method needs to be initiated so that we can see the trends developing. We need to be able to identify potential opportunities and problems while there is still time to act on them.
Ratios
At the risk of sounding too technical, our ratios have shifted over the years too. I have not paid much attention to these either, I do know that we are ahead of the rest of pack
(industry). I also haven’t had the time to sit down and crank out the most common ratios we need to monitor: Liquidity, Activity, Profitability, and Debt.
Cash Flow
Here again there is some reason for concern. While it is very evident that our revenue is up, our ability to get these funds into our main account has been cumbersome at best. We have always maintained an extremely high quality credit rating. Remember, this was the main reason we were able to leverage the Pittsburgh and Chicago acquisition, and I would not want our rating to drop because our working capital is getting tight. We also rely on the flow of these funds for our investments (interest income): CDs, Repos, Banker
Acceptances, etc. We’ve got to come up with a better plan to access the Pittsburgh and
Chicago funds more quickly.
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Coupon Use
Bruce and I were having a drink the other night and he mentioned that in Chicago our coupon campaign was really taking off. Now on the surface this may sound great; but in reality, are we setting a dangerous precedent here? Are we attracting new customers, or are we just allowing our current customer base to use less money and more paper
(coupons)? Ron, is there some software available to track this? Bruce, what do marketing people do to analyze this?
Personnel
My assistant, Cheryl, has been a godsend; but I’m telling you that she is reaching her limit. You all know that she was our secretary, and her big skill when we first started this was that she balanced her checkbook. She is encountering problems with our field offices, particularly Chicago. Don’t get me wrong--I know we need to get someone in here with a formal accounting/finance education, but I will not allow her to be abused by someone outside our circle.
Well, I know I’ve brought a lot of problems to this meeting; but I’ve tried to just highlight the big ones. There are a few more issues that need to be addressed but if these were resolved, I’d be a very happy man. We all started this with the idea of creating a better life for ourselves and to have more control of our destiny. I’m convinced that I’ve lost more control of my life….it seems that I spend my time putting out fires everywhere.
We need to come up with a workable solution to these items before we look to expand or consolidate.
Employee Benefits
Oh yeah, there is one more important issue. I remember a time when we all drove the company truck to and from stores. Now-- the folks in Pittsburgh got wind that even though we limited them to a travel allowance (remember the acquisition contract), the
Chicago group has cars. I’m not sure what the best way to resolve this would be. Do we lease cars, give gas cards, or just give a car allowance? Any ideas?
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HR Concerns (from the HR Director)
GC3 is at a real crossroads right now, at least as far as HR is concerned. We may have one of the least well-organized HR shops for any company of our size in the whole country! We probably need to get one of those high-powered HR consulting firms – maybe from Chicago, seems like they have all that kind of capability out there – to come in here and figure out how we should put all the pieces together.
We do have some distinctive competencies around here: the Pittsburgh training group is topnotch, although their focus is narrow – their real strength is developing high customer satisfaction with their training of what they call “counter help” out there. Problem is, we have “baristas” in the rest of our stores, not ice cream scoopers. We need to find a way to get better transfer of training to the areas of the company that didn’t start out in the ice cream business. Not only that, but it’s probably also true that the Chicago group could teach us some different marketing approaches than we’ve used in Ohio and Pennsylvania, if we could just figure out who should be trained with what.
For that matter, the whole company is probably in need of a structural analysis. We’ve grown through acquisition, and are still paying the price for it – we have lame duck managers on the payroll, or are just now getting rid of some, and we still have some positions that were inherited. We need to do some job analysis to see if we really need those positions, and, if so, where they should be.
If I look at it all from the perspective of professionalism, as reflected in our job descriptions and our inventory of people, we just don’t have much. Sure, we have several people with college degrees, even a couple of advanced degrees, but not too much technical knowledge beyond our MIS group – they’re pretty solid. Ron’s done a good job of working with me to get exactly the kind of people we needed in some key positions there. He has a real knack for knowing what MIS needs next, in terms of talent. I don’t know that we can do that it other areas. Bruce has always had to “make do” with a minimal marketing shop here in Columbus. One thing we really learned from acquiring the Chicago businesses is that (we may need more marketing staff?) there is another model for how to market products. I’m not sure we know what the right model is for us, but we know that we have choices to make.
Turnover is now a real problem for GC3. We hover around 120% for our part-time and entry-level positions. Maybe that’s not terrible for the fast food industry; but it isn’t competitive with the big boys, like Starbucks, in coffee industry. Then again, Starbucks has programs we just can’t fund in a company with our resources; things like medical benefits for part-time workers and an incentive pay plan. We really do need to take a hard look at some of those ideas, though.
We probably also need to get creative with some job sharing ideas in some locations, which might help reach some other segments of the labor market. We’re having a devil of a time keeping store managers in the upscale suburbs of Chicago, and can’t even get enough hourly workers for some of those stores! We haven’t really concentrated on hiring strategies for high school or college students. We’re not sure what incentives might
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14 attract and retain them, or – to be honest – haven’t really looked closely at all the issue associated with employing 15 and 16 year olds in our kind of stores.
Then, there’s the issue of organizational culture. It all started in Columbus, but we don’t have the same organizational culture in Pittsburgh that we have in Columbus, and
Chicago is a different culture altogether. Chicago is a “work-hard, play hard” culture, while Pittsburgh is more of a “tough guy” culture, and here in Columbus, we’re more into
“roles.” In Chicago, you need Cubs tickets and free coffee promotions to sell product, while in Columbus, we’re trying to structure things centrally around who does what functions, whereas in Pittsburgh the store managers like “back to basics;” if it “ain’t broke, don’t fix it,” and, “out-working” the competition to keep customers loyal.
When I studied for my Senior Professional in Human Resources (SPHR) certificate last year, I read quite a bit of material about strategic management of the HR function, strategic alignment of HR strategy with company strategy, and how to use things like HR scorecards to value intangible assets – like people – and show the HR contribution to the success of the firm. I would like to implement some of these strategies. Of course, that would mean we’d have to figure out a whole different set of HR metrics for GC3 to use – heck, we don’t track much more than turnover and lost-time accidents around here! We know we should have ways to tell where – by region or specific stores – we are most efficient, or what training programs really pay off, or, for that matter, which products we are really making our money on! Tony has told me a couple of times that profit margins seem to be shrinking, even though revenues are going up. We really need to find out to what extent that is due to “people” issues.
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Management Information Systems Concerns (From the CIO)
In 2011 Great Cups of Coffee finds itself facing a number of Management Information
Systems (MIS) challenges.
While our original MIS strategy worked well for our central Ohio coffee operations, now that we have geographically dispersed operations and have diversified into Ice Cream and
Deli’s, both our infrastructure and the information we need to run the business on a daily basis are inadequate.
Our telecommunications infrastructure is a mess. The infrastructures in Chicago,
Pittsburgh and Columbus are adequate, but we still do not have a robust Wide Area
Network, we use different telecommunication carriers in each city and we’re paying way too much. Dialup connectivity works for transferring small amounts of data, but as our information needs grow, we will need a different solution. Some kind of consolidation is probably necessary. We have also had several “hacking” incidents over the past couple of months and the NIMDA virus hit us hard.
Our overall MIS organization is probably too big for our current cost structure and we really don’t have the skills we need, where we need them. Part of our problem, stemming from the acquisitions we have made, is that we have different operating systems and applications software in each city.
Here in Columbus we have AS/400 hardware because in the early 2000s the AS/400 platform was very affordable to lease, efficient to operate and RPG programmers were easy to hire and very affordable. The AS/400 has its own proprietary database, but there are many off-the-shelf software packages available for it. We initially chose a software suite from SSA called BPCS, which had great accounting and operations software.
However, SSA has lost market share in recent years and its viability as an ongoing concern is in question. Our office platform in Columbus is mostly Windows 2000 or XP, with a few Windows 98 systems still to be converted. Our e-mail platform is Lotus
Notes, which we picked up in 2003 when they were running a special promotion.
Pittsburgh, on the other hand, has evolved on a Unix platform. The MIS manager in
Pittsburgh joined Great Scoops after graduating from Carnegie Mellon with an MS in computer science and the Unix operating system was the one with which he was most familiar. When it was time to choose a database platform in Pittsburgh, they chose
Informix because it was one of the most popular and best performing databases on the market in early 2000s. It was so new, however, most of the software in Pittsburgh is proprietary software written by the MIS staff and some graduate students from Carnegie
Mellon. Because Informix was recently purchased by IBM and has been losing market share for the past five years to Oracle and SQL Server, Pittsburgh has recently lost a couple of key programmers. When they left, so did much of the knowledge about their
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16 poorly documented systems. Pittsburgh’s e-mail system is a proprietary e-mail system developed at Carnegie Mellon, but licensed to Great Scoops. It works great for Great
Scoops, but doesn’t comply with either IMAP or X.400 standards and doesn’t interface to either Lotus Notes or Microsoft Exchange.
The Chicago Director of MIS joined DADeli after being laid-off from Marshall Fields.
He was an NT systems administrator with an MBA from DePaul University and had a great relationship with the local Microsoft sales representative. All of the systems in
Chicago are Microsoft-based. They have Windows XP on the desktop along with Office
2000 and Microsoft Exchange as the e-mail and calendaring standard. Their server infrastructure is all Microsoft 2000 servers with SQLServer 2000 as their standard database platform. They are in the process of sun-setting several proprietary legacy systems and implementing the Great Plains software ERP Package that they purchased after Microsoft bought Great Plains. Management reporting in Chicago is more sophisticated than either Columbus or Pittsburgh. They have the beginnings of a nice
Data Warehouse and have purchased the Crystal Reports software for some of their DSS ands EIS reporting.
The in-store systems are also a potpourri of software for various vendors. None of the instore systems, however, currently send data from the stores to a central location on a daily basis. Most store reporting is summarized and sent to the respective headquarters operations on a weekly basis, primarily on Excel spreadsheets. This will probably not be sufficient to monitor our operations going forward. Meanwhile, our competitors have moved to the web. They have online ordering of coffee and other branded products and several have set up cyber-cafes. This whole area of e-commerce really needs to be investigated.
As a management team, we have struggled over the last year to understand the precise financial and operational nature of our business. While we do receive spreadsheets from
Pittsburgh and Chicago weekly and monthly to help close the books, we still don’t have adequate cost accounting and profitability information by store or by product. Monthly and weekly data doesn’t seem timely enough to allow us to make the key operational and marketing decisions we face on a daily basis.
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17
Marketing Concerns (from the Marketing Director)
What gives me the biggest headaches and keeps me up at nights? It’s that we haven’t yet reached a consensus on whether we’re one company or 273. Sometimes it seems like the only thing we have in common is that we all sell coffee. And sometimes we can’t even agree on that. Some of our Pittsburgh stores, especially those in residential neighborhoods with lots of young families, tell me they sell more ice cream and pastries than coffee. And I can’t figure Chicago out at all. Are we coffee shops? Delis? Kiosks?
This lack of consistency plays out in a lot of ways. Perhaps the most visible way is in our branding and identity. No two stores look alike. Our locations are completely unpredictable. We’ve got freestanding units, stores in malls, kiosks and a bunch of variations. I remain convinced that site selection and store planning were the major factors contributing to our store closings. I still don’t know that we have a good handle on what predicts a particular location’s success. Almost as worrisome as picking a bad location is picking a great one and then having Starbuck’s move in across the street. Also, customers who visit one of our stores while they are traveling away from home frequently complain that our menu items aren’t consistent. But it’s not just the stores themselves. Our name varies – Great Cups, Great Scoops, DA Deli. Likewise, execution also varies, from signage to menus to letterhead. I’m not saying we have to be
McDonald’s, but if we’re ever going to build any brand equity, we have to have a brand.
So, what do we sell anyway? Sure, we sell coffee, but we also sell ice cream and pastries and deli sandwiches and deli meats and… and... and… More to the point what SHOULD we be selling? The problem is I’m not even sure what questions to ask. I suspect one thing we need to look at is the profitability of the different products and the different stores. to. I also wonder what our customers would say. In the old days, we used to just think of a new product or “borrow” a menu idea one of us came across while on the road.
(Remember Biscotti?) Seems like we haven’t been adding new items like we used to.
Should we be running taste tests? Focus groups?
While I’m on the subject of our store customers, I’m concerned about our customer comment cards. We’re still getting right around 40-45 per week. But, as in the past, a few stores account for the majority of these. We’ve continued to forward them on to the store managers. We continue to assume (hope?) that the store managers are solving the problems and passing along the praise, but I’m not sure that’s a safe assumption.
Occasionally I read through a stack. Seems like I’ve read the same ones before.
The good news is our various promotional “campaigns” seem to be working pretty well.
Chicago continues to rely heavily on couponing. The redemption rate for these is way up.
We’ve finally figured out what the problem was. We used to have part-time employees earn extra money by paying them per hundred of delivered “door-knobbers.” I suspect many of the coupons were never making it to our customers. Now that we’re having a real company deliver them, we’re seeing them in our stores. The best response rate seems to be from residential neighborhoods. Pittsburgh continues to have success with radio spots run seasonally (during the peak ice cream months of July & August). In some ways,
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Compared to Chicago and Pittsburgh, Columbus may seem like the least sophisticated of the three major markets. Columbus’ strongest suit continues to be the loyalty of our customers (as evidenced by our frequent-drinker card). I like the way we’ve been able to stick with our original concept of the community coffee house. Our community bulletin boards, book club meetings and special events continue to be our best tactics for building loyalty (which leads to the best kind of advertising – word of mouth). I’d still like to see how that’d work in our stores in other cities.
Currently what passes for control over our marketing efforts is just regional oversight.
The “big three” (Columbus, Pittsburgh & Chicago) each have their own way of doing things – based largely on what they’ve always done. Even within these regions, it seems no two ads are quite alike.
Intuitively, it seems to make sense to consolidate the Marketing function, and to headquarter it in Chicago. Chicago is, after all, more of a Marketing and Advertising town than Columbus or Pittsburgh. Many of the higher-powered ad agencies have their headquarters there. The Chicago stores have also had the largest marketing budgets and the most concerted advertising efforts. If we were to move Marketing to Chicago, we could create advertisements and other promotional executions there. These would be shipped out to the various regions for implementation. Media buying would also be handled through a Chicago agency. Economies of scale and centralization would likely offset the higher rates of Chicago firms.
And then there’s our Website-- It’s what I’d call first generation – somewhat like a business card for the company. We’ve got the obligatory “About Us,” “Contact Us,” and
“Store Locations” buttons (not entirely up to date). But, I really think we could do more with it. I’d like to start selling packaged coffees, our ceramic mugs, gift sets and the like over the Internet. Initially, it would probably make the most sense to have orders processed and fulfilled at our roasting facility in Columbus, but it might be interesting to consider having the nearest store send out the order. That way the store manager would get some “credit” for the sale to offset any “hits” he or she would take from having to accept returns. The other thing about our Website is that we haven’t done any thing to promote it. Seems like the bare minimum effort ought to be to put our URL on everything we print, including our cups.
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19
Conversation between Two Founders
Johanna Nelson and Tony Amanti (two of the four co-founders of Great Cups of Coffee) have been good friends since they met twenty years ago, as employees of the same food distribution company. Johanna and Tony used to really enjoy their roles in GC3, but now they are having their doubts. When the company was smaller, Tony was operations manager for the Cincinnati area, and Johanna had similar duties for the Cleveland area.
Since Tony’s education and experience were in accounting and finance, he was a natural, from the inception of the company, to perform the duties of the CFO. Johanna, on the other hand, had majored in sociology in college, and was more of a natural on the “people side” of the business. As GC3 grew, the role of HR Director attached itself to Johanna, almost by default. Both managers were able, at least in the early years, to handle their complex roles well. In a recent conversation, the pair reminisced about the “good old days,” and compared how GC3 – and they – have changed over the years:
“Hey, Tony – what’s up?”
“How’re ya doin, Johanna? Man, I haven’t seen you in a long time. Have you been gone more often lately? Just kiddin’ – I know neither one of us does anything any more but put out brushfires and try to keep our stores running smoothly. Sometimes I think I live in an airline seat. Between travel and paperwork, I don’t know which end is up.”
“Yeah, Tony – ya got that right. I should be up in Cleveland right now, but I just got back from Pittsburgh early this morning – another training issue came up at the center there, and now I’ve been cooped up all day trying to figure out how to report our data on Chicago new-hires to the State of Illinois, so we can get some grant money for employee development. Sometimes, I don’t have a clue what I’m doing with some of that stuff in Illinois. Remember the old days? We’d get together and jump into that old beat up Jeep you used to have, and sneak over to the roasting facility to experiment with new coffee blends! Now, that was fun!
“Then, we’d call Bruce to see what he thought, and if he liked the idea we’d just take some samples to a few of our best stores and try them out, while Bruce ran them by Ron, and came up with a catchy name for the new blends, or figured out how to advertise them. That’s how we came up with some of the stuff that’s still among our best sellers.”
“Like ‘Jamaican Jolt?’ I think Bruce named that one after he came out of the coma; it had more kick than anything we’d ever tried – at least up until then.
When was that, about 2001 – maybe 2002?”
“It must have been at least that long ago; I don’t think we’ve really thought up anything great since before we started buying all these other stores and got so damned busy with bureaucratic stuff. It’s gotta be at least five or six years since we really did those things…”
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20
“At least. But, hey! That sure was fun back then! Ya know, to tell the truth, it’s not all that damned much fun any more... adding Pittsburgh and Chicago seemed like good ideas at the time – well, they were good for the company – but sometimes I wonder if we were moving too fast.”
“Yeah. But, geez, Tony – what’re we gonna do about it? Are you a CFO or a regional manager? Same for me – what am I supposed to be when I grow up?
Sometimes I think I either need to hire a real HR director – although I really enjoy doing that stuff now, especially since I got that SPHR certificate last year – or just quit trying to ride herd on store managers entirely. The trouble is, and I’m talking like the HR guy again here, we don’t have anybody to replace us as regional managers! I dunno, Tony – what do you think?”
“I think you’re really making me depressed, Johanna... But, you’re right – I’m sure not enjoying all the extra work these days. Plus – if we’re really being honest here – every once in a while, some company or other wants to know if I’d like to be a full time CFO, now that I have over a decade of experience at it. At least that would get me off the road more. Hell, I’m gonna have grandkids soon; I’d like to know what they look like!”
“Maybe we need to talk to Ron about how we can restructure things. We’ve really never paid attention to the org chart all that much around here. Maybe we need to add some real pros – if we can figure out where they should be and what they ought to be doing!”
“Sounds good to me – especially the part about figuring out who is supposed to be doing what. Maybe you’re right; we should mention this to Ron the next time we’re all in town and can have an executive board meeting.”
“Yeah, when do you think that might be?”
Copyright © 2011 by Franklin University

21
Company-
Operated Retail
Other Sales
Total Net Sales
Cost of Sales and related occupancy costs
Operating
Expenses
Depreciation and
Amortization
General and
Administrative
Expenses
Marketing
Expenses
Operating Income
Interest Income
Interest Expense
Earnings Before
Income Taxes
Income Taxes
Net Income
(000's) omitted
Income Statement
2008 2009
$77,652 $182,360
3,828
81,480
32,590
11,640
194,000
83,420
30,148
3,200
4,237
815
10,490
831
664
10,657
3,730
6,927
69,840
15,436
9,500
2,250
13,554
649
3,813
10,390
3,636
6,754
Copyright © 2011 by Franklin University
2010
$187,000
13,000
200,000
87,000
72,000
13,524
9,600
2,250
15,626
860
6,478
10,008
3,502
6,506

Assets
Cash and cash equivalents
Accounts receivable
Inventory
Other Current
Assets
Current Assets
Property, Plant, and
Equipment, net
L-T Investments
Intangible Assets
Other L-T Assets
Total Assets
Liab. & Equity
Accounts payable
Short-Term Notes
Payable
Other Current
Liabilities
Total Current
Liabilities
Long-Term Notes
Payable
Other Long-Term
Liabilities
Total Liabilities
Shareholders’
Equity
Common Stock, par value $0.01 per share, 20,000,000 authorized;
5,000,000 issued and outstanding on
December 31, 2007
Additional Paid-In
Capital
Retained Earnings
Total Shareholders’
Equity
Total Liabilities and
Shareholders’
Equity
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4,950
54,773
59,773
$76,550
2008
$4,000
Balance Sheet
2009
$5,899
1,800
6,880
7,000
3,500
20,380
7,100
19,680
20,000
12,500
12,000
12,370
76,550
3,250
1,500
2,027
6,777
4,500
5,500
16,777
50
45,000
118,752
50
36,879
77,180
8,500
45,000
17,720
185,279
8,579
4,500
5,673
18,752
55,000
4,950
61,527
66,527
$185,279
4,950
68,033
73,033
$190,727
22
2010
$13,897
3,800
22,887
8,250
48,834
71,180
10,500
45,000
15,213
190,727
11,804
4,600
7,290
23,694
54,000
40,000
117,694
50

Copyright © 2011 by Franklin University
Executive Team
(Ron, Tony, Johanna, and Bruce)
VP Of Operations
Chicago
Columbus
Corporate Headquarters
COO, CFO, HR, MKT, MIS
VP of Operations
Pittsburgh
Human Resources
Finance
MIS
Marketing
Human Resources
Finance
MIS
Marketing
Human Resources
Finance
MIS
Marketing
23

24
The company currently has three debt facilities in place:
A commercial bank unsecured, committed, 3-year term revolving line of credit totaling $10 million. Borrowings under the facility are priced at three-month
LIBOR + 2% p.a., currently 6.78%. At 12/31/2010 total outstandings under the facility were $8.6 million, with $4.6 million classified as S-T Notes Payable and $4 million classified as LT Notes Payable. The commitment fee on the facility is
0.25% p.a. on any unused portion. The facility is renewed annually for an additional one year to maintain a 3-year term.
Commercial bank secured term loan totaling $50 million that was originated in
2008 to finance, in part, the acquisition of the Chicago stores. This 5-year term loan is secured by the firm’s tangible long-term assets. The interest rate on the facility is six-month LIBOR + 1.75% p.a. and is re-priced each year in January and June. The current rate is 6.36% p.a. There is no amortization on this term loan. Principal is due in total in 2013. There are no prepayment penalties on this facility. At 12/31/10 the entire $50 million was outstanding.
A ten-year, secured $50 million term note from the sellers of the Chicago stores scheduled to be amortized over its life with principal repayments of $5 million per annum. The interest rate on this note was fixed in 2008 at 5.5% p.a. At
12/31/2010 total outstandings under the facility were $45 million, with $5 million classified as CMLTD under “Other Current Liabilities” and $40 million classified under “L-T Notes Payable.” The security on the LT note involves a second position on the firm’s tangible long-term assets.
Copyright © 2011 by Franklin University