BLACK FLY BEVERAGE COMPANY INC.

BLACK FLY BEVERAGE COMPANY INC. You will prepare a one-page memo on the case below (BLACK FLY BEVERAGE COMPANY INC.). The Case asks you to take on the role of a consultant or an employee of the firm and Propose solutions to the problems identified. You must complete a one-page memo following the format, with one more page (appendices). Appendices must include: KSFs SWOT process analysis: discuss the type of line, capacity, utilization alternatives/trade off analysis (including quantitative analysis with payback and/or ROI) Overall: • Write in third person (avoiding I, me, we, our, us, etc) • Avoid "may be" "maybe" "possibility" "potentially" "could consider" "hope". • Follow format below. Don’t sneak in extra words with a smaller font or wider margins. To: Name the person you are writing to and make sure to stay in that role From: Name yourself. Are you a consultant brought in to make recommendations? Date: Put in the date from the case, otherwise ask your prof if you can use today's date Subject (or RE): State main problem statement (need to increase sales, rebuild trust, increase production volumes, secure financing, improve customer/employee satisfaction, through what means… it will likely be a long sentence. This can be a question? Recommendations 1. Put your main recommendation first it will be broken down into implementation steps next section. You may use bullet points and short sentences. Refer to the appendices that helped you come to this conclusion (Appendix 1: SWOT, and Appendix 2: KSFs, Appendix 3: Financial Analysis) 2. Since you often won't have the room, you may want this section to also include implementation, if so, say it in the title (Recommendations & Implementation) or create a new title for Implementation Implementation: List your courses of action (who is responsible, by when (time frame up to 24 months), financial impact Short Term …state length… (in the next two months) 1. Here is the first thing you will do in the short term towards your recommendation. Here is a sentence or two explaining more about it. 2. Here is the second thing… to do in the short term towards your recommendation. Here is a sentence explaining more about it. 3. Here is another thing… to do in the short term towards your recommendation. Here is a sentence explaining more about it. Remember, it may turn out that you have 8 things to do in the short term, and only one in the medium term. That’s fine. Medium Term (from two to eight months) 1. Here is the first recommendation of what to do in the medium term. Here is a sentence or two explaining more about it. 2. Here is the second. Each one needs a sentence or two explaining it. Again if an appendix is necessary for more detail, refer to the appendix. (Appendix 4) Long Term (for example: from eight months to 14 months) 1. You may not have any long term recommendations, but if you do put them here. 2. And here. Refer to your appendices where appropriate (Appendix 4) Control and Feedback: Here is where you say how you will know if your recommendations are working to solve the problem. You will need a performance evaluation methodology; some way(s) of measuring success. Track sales/donations/production volumes, have customers or employees fill out satisfaction surveys. Review them at the interval you deem appropriate (monthly, quarterly) and set levels. This is usually in sentences and has no bullet points. (refer to an Appendix 6 if more detail is required). Contingency: Here is where you say what you will do if after looking at the control and feedback if your plan isn't working or if you have major deviations (+/-­- x%). You may chose to pursue one of your other alternatives. (Appendix 7). This section is not bullet points. Include financial impact. BLACK FLY BEVERAGE COMPANY INC. In early November 2005, Cathy Siskind-Kelly and Rob Kelly, owners of the Black Fly Beverage Co., based in London, Ontario, were discussing the viability of expanding their product line after less than a year in operation. Since their startup the previous spring, sales of their original Black Fly cranberryblueberry vodka cooler had climbed steadily and had outsold many national brands. Impressed with their early success in the Ontario market, the husband-and-wife team wondered whether they should take advantage of their new brand’s momentum and invest in the production of a second product. LIQUOR SALES IN ONTARIO The Liquor Control Board of Ontario (LCBO) was a $3.5 billion Crown corporation held by the Ontario Government, that, with few exceptions, was the only authorized importer of beverage alcohol in the province. The LCBO was the largest retailer of beer, wine and spirits in the world, with over 550 LCBO outlets and 190 agency stores in Ontario. 1,2 The core mandate of the LCBO included promoting responsible alcohol consumption, supporting domestic beverage alcohol producers, and remitting dividends to the Ontario government to fund social and capital programs. 3 This mandate was achieved primarily through policies that sought to keep selling prices regulated to standards that set minimum price levels across the province. Compared to other non-regulated beverage alcohol markets, the LCBO’s pricing was considered to be substantially higher and sometimes double on some wine and spirit products. 4 However, 50 per cent to over 75 per cent of the retail price of alcohol sold in Ontario was made up of taxes, levies and mark-ups, 5 illustrating the socially motivated mandates behind the LCBO’s elevated price points. 6 Although its pricing policies had sometimes been criticized as artificially high and anti- competitive, LCBO retail shelf space remained in high demand among domestic and international beverage alcohol producers because of the agency’s dominant position in the distribution and retail markets. Securing a spot in the LCBO’s retail product lineup was a highly competitive process, especially for new, smaller beverage alcohol producers. New product proposals were evaluated by LCBO category managers from the corresponding product type within the beer, wine and liquor groupings. Quality, price, value, taste, packaging and marketing programs were thoroughly reviewed before a decision was made to carry a product. 7 All products approved for retail sale were subject to stringent performance benchmarks and were promptly discontinued if sales were below standards. However, if a product was performing well, producers hoped to earn “general listing status,” which permitted a brand to be carried in top-tier LCBO stores across the province, on a year-round basis. COMPANY BACKGROUND Rob Kelly initially had aspirations to open a craft brewery in London. However, when he discovered that beer sales in Ontario were weakening, he turned his attention to the faster growing spirit cooler market. After reviewing market research indicating that cooler sales had grown by 300 per cent in the previous two-year period, he abandoned his work in developing a craft brewery and began again with a concept for a micro-distillery. Despite having three young children and no previous experience in the beverage alcohol industry, Kelly left his career in landscaping and partnered with his wife, Cathy, to start a business producing spirit-based drinks. The couple sought advice from industry experts to help build their knowledge and to ensure successful access to the Ontario market, but they encountered unanticipated setbacks in obtaining a licence from the necessary government agencies to produce and sell alcohol. After lengthy and rigorous negotiations, in December 2004, the Kellys finally secured provincial and federal licensing and declared the Black Fly Beverage Company to be Ontario’s first micro-distillery. Unlike most manufacturers, which typically operated in industrial areas on the outskirts of the city, the Kellys chose an old bank building in a high-traffic area in the heart of downtown London. Although the converted building was smaller than a typical warehouse, with only 140 square metres of production space, and was comparatively more expensive to lease, the location provided maximum exposure to the public and a prominent presence in the community. Recognizing the strong competition in the spirit cooler market from larger, established brands such as Mike’s Hard Lemonade and Smirnoff Ice, the Kellys focused on developing a premium product that was differentiated on many fronts compared to other vodka coolers available in Ontario. The Kellys’ recipe, designed for consumers seeking a fresh alternative to the mainstream vodka cooler, was made from natural-tasting, local and identifiably Canadian ingredients. It included real cranberry and blueberry juices and no chemical sweeteners; the product tasted much less sweet than other brands on the market. Many competing coolers were up to four or five times sweeter than the Black Fly recipe. The cooler retailed for $9.95 in packages of four 400-millilitre, wide-mouth plastic, resealable, ultra durable bottles, compared to the typical 330 millilitre glass bottles used by other brands. The Kellys chose Black Fly in branding their company and flagship vodka cooler because the name was reminiscent of the small flying insect indigenous to Canada’s northern regions and considered synonymous with cottage country, fun and relaxation. After the Kellys’ Black Fly product proposal was approved, the LCBO granted limited delivery of the cooler to six London-area stores. However, it made Black Fly responsible for arranging its own sales and promotional activities to stores outside of London, a formidable task for such a small and largely unknown alcohol producer. Furthermore, the production run to fill the first order encountered complications, ending with the discovery that the new bottle-labelling machine was incompatible with the other equipment on the production line. The Kellys had to call on family and friends to work day and night to attach 75,000 labels by hand to meet the LCBO’s first order! Customers received the cooler phenomenally well in its first months on the market. By November 2005, it was selling in almost 200 LCBO stores and in selected bars and restaurants in Southwestern Ontario. The Kellys were in the process of finalizing a deal with the John Labatt Centre, a sporting and special events arena right across the street from Black Fly’s facilities in London, to open a Black Fly branded lounge inside the facility. In addition, they were most pleased that the LCBO had granted their Black Fly vodka cooler with general listing status, making the product available to order yearround for all LCBO stores and thus securing Black Fly’s position within the Ontario beverage alcohol market. THE CURRENT PRODUCTION PROCESS From mixing to packing, the entire cooler production process could take up to 26 hours, including the time needed to clean and set up each tank. The first step was mixing. A cold mixture of juice, flavouring and ethanol, and a hot mixture of sugar and acids were combined into three 1,600-litre tanks. The resulting mixture was stirred for up to 1.5 hours to achieve the desired taste, colour and consistency. When the mixing stage was complete, the mixture was cooled to 00C, a process that could take up to five hours. The mixture then underwent a carbonation step for three hours and was then tested to ensure that the mixture contained no more than seven per cent alcohol, the maximum amount permitted by the Canadian government for vodka coolers. It took three hours to receive the results of the test, thus ending the 14-hour mixing process. All tanks needed to be drained before the mixing process could begin again. When the first tank was ready, the vodka mixture was drained into a bottling machine, where each bottle was loaded, filled, capped, labelled and packaged. The cases were transported to an offsite holding warehouse, where they were prepared for pickup by the LCBO. Overall, the bottling machine could complete 12,000 bottles in 12 hours, draining all three tanks and resulting in a total of 26 hours for each run. However, production was sometimes interrupted by delays that occurred throughout the process. In addition to Rob Kelly, who was primarily involved in the production side of the business, the company rotated between one full-time and 10 part-time workers to manage operations. The cooler production and bottling processes were scheduled during consecutive day and evening shifts, usually five days a week, to meet the LCBO’s average order lead-time of seven days. The LCBO’s average regular order totalled 1,200 cases per month, but orders were often sporadic and could triple during the summer season between May and September and the holiday season in December. 8 OPTIONS FOR THE FUTURE Although the Kellys had not yet been in business for a full year, they believed that the keen interest they had received so far from the LCBO indicated that the market was ready for a second Black Fly product. Rising sales, growing consumer demand, increased distribution to LCBO stores, and positive feedback from the media and the LCBO encouraged the Kellys to consider expanding. The most logical way to extend the Black Fly brand was to develop a second flavour using the base vodka recipe. Although the Kellys found it difficult to predict future sales because their cooler was still new and not representative of an established product, sales remained strong and consumer interest high, suggesting that increased product distribution could boost current sales levels by 50 per cent to 75 per cent. Most other cooler brands on the market offered several different flavour choices as part of an entire line of coolers. It was generally believed that additional choices allowed consumers to further explore their favourite brand rather than being forced to choose a competing product. However, the Kelly’s were unsure whether a second cooler flavour could maintain the same broad appeal that the flagship cranberry and blueberry brand possessed. But overall, the Kelly’s were most concerned with timing. Although the original Black Fly cooler was showing strong results for a product that had been on the market for less than a year, the brand still had only limited availability, i.e., in fewer than one third of all LCBO stores. The Kellys wondered whether it would be advantageous to maximize the growth potential of the existing cooler before launching a second flavour. Despite these uncertainties, the strongest benefit to developing a second cooler would be the potential economies of scale gained from the production process already in place. The Kellys believed that their current production process had enough capacity at present demand levels to produce a second flavour, avoiding the need for additional investment in equipment. The only associated cost would be a product development and merchandising fee of $30,000. The new cooler would also benefit from guaranteed shelf space in LCBO stores across the province. One major concern the Kellys had with introducing a second Black Fly cooler was the risk of cannibalization of their original recipe. Rather than serve to increase market share, a second flavour could instead split sales between the two products. If sales levels increased by only 10 per cent, the Kellys were unsure whether a second flavour would be worth producing. For this reason, the Kellys believed that they should consider a non-competing product that could provide better access to new customers, satisfy market demand for innovative concepts, increase brand awareness and ultimately grow market share. In keeping with the unique and exciting image the Black Fly brand sought to create, the Kellys considered developing a new specialty spirit-based product that would also capture the LCBO’s desire for a Canadian-inspired, inventive concept with creative packaging and nonbreakable, environmentally friendly containers. The couple determined that a ready-to-freeze vodka cooler concept could be an answer to many of the product demands shared among themselves, the LCBO and the end consumers. The Kellys had considered a number of alternatives on how to produce and package a ready-to-freeze cooler, and they ultimately came up with a product they dubbed “Spiked Ice.” Much like the summer frozen treat known as a “Freezee,” Spiked Ice would come in a multi-pack of nine 100-millilitre, foil-packaged units with three vodka cooler flavours per box. Customers would purchase Spiked Ice from the LCBO unfrozen and then freeze the product at home before serving. At present, there was no other product on the Ontario market like Spiked Ice, giving the Kellys the opportunity to introduce customers across the province to an entirely new way to enjoy vodka coolers. However, producing a ready-to-freeze, alcohol-containing cooler had some drawbacks. A frozen beverage of any kind could be considered a seasonal item, reserved for the hot weather of spring and summer. The Kellys wanted Spiked Ice to be self-sustaining. Without an ongoing large-scale commitment from the LCBO, they were unsure whether seasonal sales could justify the investment needed to produce and distribute an entirely new product. Additionally, launching Spiked Ice would be essentially like starting another business. Although there would be some economies of scale gained from added production, most of the equipment, materials and processes would be product-specific and not shared with cooler production. The Kellys expected to spend $500,000 on outfitting their facility with a new tank and machinery to mix, fill and package Spiked Ice for distribution; another $40,000 would be spent on merchandising and product development. Including cleaning, setup and testing time, the new machine would be able to produce 10,000 units every three hours. The LCBO was very enthusiastic about the Spiked Ice idea and made a commitment for the summer months for 200 of the top-selling stores across Ontario at a retail selling price of $8.75 per box, with a minimum four-month order of approximately 8,000 cases in total. 9 If sales performed well, the Kellys knew they would have to be ready for a seasonal order that was three times that size. One potential constraint was that Black Fly’s current facilities were not equipped to produce Spiked Ice and the original vodka cooler at the same time. Although the Kellys were investigating upgrading their processes to permit simultaneous production, they were unsure to what extent the limitation would affect business if they opted to produce Spiked Ice with the present setup. THE DECISION As Cathy and Rob Kelly reviewed all the information they had collected regarding expanding Black Fly’s product line, they still had several questions. Although it would seem a natural progression to offer a second flavor in addition to the original cranberry-blueberry vodka cooler, the Kellys were drawn to all the challenges of introducing a brand new product to the market. They knew that their decision had to be justifiable from the perspectives of both marketing and operations.