Morningstar Bakery, Inc.

Morningstar Bakery, INC.  From Cases in Strategic Management and Business Policy.  1990.  Edited by Peter Ginter & Linda E. Swayne. Prentice Hall , Englewood Cliffs, NJ

 This case was prepared by D. Michael Fields, The University of North Carolina at Charlotte, as a basis for class discussion rather than to illustrate either effective or ineffective handling of an adminis- trative situation. Used by permission from D. Michael Fields.

John Pollard was gathering the last of the chocolate cheesecakes so he could start delivery of that morning's bake to his customers. As he started out the door, he glanced at the tray of brownies on the cooling rack. A faint smile crossed his face. After months of trying, he and his wife, Terri, had finally agreed on a recipe for a brownie they thought was better than anything presently on the market. Although he had no time to think about it now, he promised himself that he would make a decision by the end of the month on the amount of production time that would be allocated to this product knew it was a risk to commit total production to one product, but he was aware of several companies that had taken a single product and achieved a high level of success. John was aware this decision would play an important role in the future success of their bakery operation.

MORNINGSTAR BAKERY

In the 18 months since Morningstar had begun operations, the bakery had realized a moderate but steady increase in its customer base. "We started with no commercial baking experience, but a commitment to quality. I approached a number of restaurants and specialty shops and convinced them to add some of Morningstar's dessert items to their product line on a trial basis. Almost everyone turned into a regular customer." John and Terri attributed this success to the consistently high quality of their products. When they began their business, the Pollards decided they would take no shortcuts in the baking of their products-they considered the quality of their products to be a personal reflection on them. In the development of the recipes, Terri insisted on only the highest quality of ingredients (e.g., using butter not margarine), limiting or eliminating preservatives, and hand mixing-rather than using their commercial mixer-when possible. The result was satisfied customers.

John and Terri were comfortable with the manufacturing/supplier role for their business. Neither desired the business to become a retail operation. Because they had no prior business experience, John and Terri were much more comfortable producing the product from guaranteed orders than trying to estimate varying customer demand. Additionally, their location was in the back of a building and was not conducive to pursuing retail sales.

Another area in which the owners took a great deal of pride was the degree of cleanliness of their bakery. Although few of their customers ever saw the bakery, those who did were usually impressed with the condition of the operation. As one person noted, "You know this place has never gotten dirty, because if it had, they could have never have got it this clean."

 The couple had been receptive to the needs of their customers. On several occasions, customers had requested additional products the bakery was not presently making. "Most of the time, these 'special requests' are added to the product line since we spent time developing the product." However, this proved to not always be a good short-term business practice as John admitted "sometimes getting stuck making unprofitable items."

The product line being produced in the first quarter of 1988 can broadly be classified into five categories: cheesecake, coffee cake, other cakes, muffins, and miscellaneous snacks (Exhibit 27-1). Although all products were not being produced daily, all were being produced at least once a week and some were being baked several times each week.

 The demands of the broad product line had lengthened the total production time and expanded the work day of John and Terri, the bakery's only two employees. "Most weeks, we work a six-day week and average 11 hours a day," said Terri. "There are some friends that could be called in an emergency, but we just don't get I sick."  

Like many new businesses, Morningstar did not make a profit in its first year of operation. The income statement for 1988 can be seen in Exhibit 27-2. Although the previous year's loss was not unexpected, John was concerned about the prospects for reaching profitability in the near term. He knew that increased volume would help the bakery achieve profitability, but he questioned how much more production time they could handle. Both were apprehensive about the potential impact on product quality if another shift were added. The decision on how to alter the

 product line was complicated by the fact that John believed the bakery was continuing to increase sales in the first quarter of 1988 with its present product line (Exhibit 27-1). Although sales for many retailers are traditionally slowest in the first quarter, John had found that the demand from his customers remained relatively consistent-making it proportionally representative for the year.  

John believed the key to long-term profitability was trimming the product line. He knew that from a production standpoint, the optimal situation would be to identify a product with an acceptable contribution margin and dedicate all the production time to that product.

THE BROWNIE

Starting with an old family recipe, Terri began an almost endless series of alterations in an attempt to improve the product. With each iteration, she would test the result on numerous friends. Terri was convinced that their brownie, which drew the hearty approval of the testers, was better than anything available. It contained no preservatives, was made with all natural ingredients, and had a cakelike texture. In addition, the use of pure chocolate (rather than cocoa) gave the brownie a distinctive flavor. John's perceptions of how their brownie compared to some of the competitive products in the market can be seen in Exhibits 27-3 and 27-4.

 As with their other products, the use of all natural ingredients created some drawbacks. First, their products were usually higher in calories. Second, they almost always were higher in price.

Initial calculations indicated that the physical cost of the brownie in a 2 x 3 x ~-inch portion would be $.20 per unit. Individual "pocket" packaging that would need sealing on only one end was estimated to cost $.03 per unit. These costs, given the bakery's desired gross margin of approximately 50 percent and a range of selling costs and retail markup of between 30 and 50 percent, would generate a projected retail price to the consumer of $.75 to $.90 per brownie. The high relative cost not withstanding, the Pollards remained convinced that the quality of their product justified the price. In addition, they were certain that their product would gain easy acceptance in the marketplace.

John and Terri had purposefully not added the chocolate brownie to their product line. They had decided to wait until the decision was made concerning marketing and manufacturing the brownie. The couple wanted to avoid the possibility

 of having to discontinue the sale of the chocolate brownie at some point in the future to an existing customer. Nevertheless, a number of their customers had indicated a desire to handle the new product.

THE SNACK FOOD MARKET

The overall snack food industry has shown continued real growth in re- cent years. For example in 1986, Business Week reported that snack food sales have increased 54 percent to $16 billion since 1981. Similar growth has been noted in the sweet goods market, which has been projected at $15 billion for 1987. Total real shipments of bakery products, which are expected to increase 1.5 percent per year over the next four years, are expected to help continue to fuel this growth.

 Examples of other segments within the snack food area which have enjoyed recent growth include: (1) a 6 percent increase in cookie and cracker sales (to $5.2 billion) in 1985, (2) a 15 to 25 percent increase in upscale cookies in supermarkets in 1986, (3) the growth of the ice cream novelty market, which has doubled since 1981 and is expected to double again by 1991, and (4) the sale of potato chips growing two to three times faster than the overall population growth of 0.9 percent annually. However, not all snack food segments will enjoy uniform future growth. The

IKimberly Carpenter and Christine Dugas, "Candy May Be Dandy but Confectioners Want a Sweeter Bottom Line," Business Week, October 6, 1986, p. 66.

past growth of cookies not withstanding, cookie consumption is expected to drop 0.03 percent in 1987, and a similar decrease is anticipated for the next four years.

 Changes in consumer's life-styles have had a dramatic effect on the development of new snack food products. Producers have responded to the national emphasis on health and fitness with snack products that are often high in fiber and low in fat and cholesterol. Ironically, the desire for "healthier" products does not necessarily mean the products will have fewer calories because studies have shown that people now consume 20 percent more calories per capita than they did ten years ago.  

Finally, the snack food industry has been aided by the increasing number of women aged 20 to 44 who are working outside the home. In 1986, the total reached 60 percent, an increase of 10 percent since 1980. Because of the increased emphasis on convenience, these two-income families are spending more money per person on food and are particularly interested in prepared, prepackaged foods.

THE LOCAL BROWNIE MARKET  

Typically, in each local market, a wide variety of brownies are available in supermarkets, convenience stores, bakeries, and similar type stores. In this market, retail prices ranged from $.99 per dozen for Little Debbie brownies to $.94 each for David's brownies (Exhibit 27-5). One competitor conspicuously absent from the local market was Rachel's Brownies. Rachel had started selling her brownies in 1975 in Philadelphia at a produce shop and an ice cream store. The company marketed an all natural product to those discriminating buyers who were willing to pay a premium for their brownies. By 1985, Rachel's employed 40 people and was producing five million brownies annually. The brownies at that time were being sold through 65 distributors in 35 states. They could be found in both supermarkets (in one-pound tins retailing at $3.79) and convenience stores (for $.75 each). In addition to their store sales, Rachel's had successfully pursued national distribution through mail order catalogs.

Rachel's management had indicated that "meeting the demands of growth is the biggest challenge, but we are determined to approach growth slowly, with deliberation and control, maintaining product quality. . . ." It had been rumored that Rachel's was close to signing an agreement with two distributors that serve the ;;: regional market-one operates in Morningstar's market.

THE DECISION

John and Terri Pollard were aware of the Rachel's story. They knew that 13 years ago Rachel's had been in a position not unlike their own and had developed

2Snack Food Association Management Report, 1987.

 a very successful business. Further, they were both aware that the success realized by Rachel's was not an isolated instance. Other small companies with "special" products had been able to realize substantial sales growth. For example in 1981, "Chipwich"-the popular ice cream and cookie combination-had been marketed from pushcarts on the streets of New York City. The couple felt that their gourmet brownie afforded them a similar opportunity, and they were both excited about the prospects.

John had collected some information to help with the impending decision. To begin with, he calculated the number of brownies that the bakery could produce with its present equipment. Given total dedication to brownies, Morningstar could produce 4,000 to 6,000 units each week. With the addition of a second shift, that initial total could be doubled. The purchase of a second oven (used, for an estimated $2,000) would increase production from 8,000 to 12,000 for one shift and 16,000 to 24,000 for two shifts. The addition of the second oven would necessitate the adding of a third baker to each shift. A second shift with the additional oven would prob- ably be the maximum capacity in the current location.  

Morningstar had a great deal more flexibility in its physical facilities than did most small businesses. Although the initial lease period was for three years, John had found the landlord to be "extremely laid back," and he felt that if the situation dictated it, the landlord would even allow Morningstar to break its lease without any penalty.

 Existing customers, who had expressed an interest in selling the new brownie, had estimated the volume of the product that they would be able to retail. The

volume estimates, as noted in Exhibit 27-6, particularly pleased John since some of the customers had not yet had an opportunity to sample the final recipe. John, remembering the success that the Chipwich product had enjoyed through the use of pushcarts, had investigated that possibility for Morningstar's new product. Although he had not favored the option initially, John found that the local chamber actually encouraged controlled street vending in areas adjacent to an outdoor plaza that had been developed to increase pedestrian traffic for downtown retailers. More than 40,000 people worked in the immediate area. An estimate of costs to develop a pushcart and those retailers that were already authorized to sell on downtown streets can be seen in Exhibit 27-7.

 Two area food brokers had been contacted in an attempt to gauge their level of interest in adding Morningstar's gourmet brownie to their assortment of products. To John's surprise, both were somewhat cool to the idea. In fact, one had indicated that he "would not touch a product that could not guarantee a weekly volume of $6,000."

 Finally, John considered the available: funding to support the brownie project. John estimated they could get $10,000 from a family member. In addition, he was willing to take on as much debt as possible to get the brownie off the ground. He and Terri had a product they believed in and were willing to do whatever was necessary to succeed. The news that Rachel's might be moving into the market gave John an added sense of urgency.  

"We think our gourmet brownie is better than anything on the market and we're willing to do whatever is necessary to get the job done," noted Terri. "We don't know if it's true that Rachel's is going to enter the market, but it probably won't be long."

"We need to be established in the market before Rachel's arrives," commented John. "We've got to make a product line decision soon so we can address the corresponding issues of increasing capacity and required capital. It's clear, if we're going to move, we're going to have to move quickly."