ADM 1340 Lecture 9: ADM 1340 - Lecture 9 - Merchandising Operations
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| Basic information | |||
| Exhibit 1 Hallstead Jewelers | |||
| Income Statements for YearsEnded January 31 (thousands of dollars) | |||
| 2003 | 2004 | 2006 | |
| Sales | $9,000,000 | $8,000,000 | $11,000,000 |
| Cost of goods sold | 4,050,000 | 3,600,000 | 4,950,000 |
| Gross margin | $4,950,000 | $4,400,000 | $6,050,000 |
| Expenses | |||
| Selling expense | |||
| Salaries | 2,021,000 | 2,081,000 | 4,085,000 |
| Commissions | 450,000 | 400,000 | 550,000 |
| Advertising | 254,000 | 250,000 | 257,000 |
| Administrative expenses | 418,000 | 425,000 | 535,000 |
| Rent | 420,000 | 420,000 | 840,000 |
| Depreciation | 84,000 | 84,000 | 142,000 |
| Miscellaneous expenses | 53,000 | 93,000 | 122,000 |
| Total expenses | $3,700,000 | $3,753,000 | $6,531,000 |
| Net income | $1,250,000 | $647,000 | $(481,000) |
| Exhibit 2 Hallstead JewelersOperating Statistics | |||
| 2003 | 2004 | 2006 | |
| Sales space (square feet) | 10,000 | 10,000 | 15,000 |
| Sales per square foot | $900 | $800 | $733 |
| Sales tickets | 5,000 | 5,000 | 7,000 |
| Average sales ticket | $1,800 | $1,600 | $1,571 |
What is the breakeven point in number of sales tickets (numberof customer orders written), the breakeven in sales dollars, andthe safety margin in $ and % of sales revenue for years 2003, 2004,and 2006.
How have the breakeven points andsafety margin changed from 2003 to 2004, and to 2006, assumingsales revenue is $9,000,000 in 2003, $8,000,000 in 2004, and$11,000,000 in 2006? Consider the sale, variable cost and fixedcost information in your answer.
Alternative #1: One idea that theconsultant had was to reduce prices to bring in more customers. Ifaverage prices in 2006 were reduced by ten percent (10%), and thenumber of sales tickets (unit sales) increased to 7,500, would thecompanyâs net income be increased? With prices reduced, what wouldbe the new breakeven point in sales volume and safety margin as a %of sales in 2006?
Alternative #2: Another idea thatGretchen had was to eliminate sales commissions. Hallsteadâs wasthe only jewelry store in the city that paid sales commissions, andalthough both Grandfather and Father had insisted that commissionswere one of the reasons for their success, Gretchen had der doubts.If sales commissions were eliminated, what would be the companyâsnet income? How would the elimination of sales commissions in 2006affect the breakeven volume and safety margin as a % of sales in2006?
Alternative #3: Michaela feltthat a bigger store could benefit from greater advertising andsuggested that they increase advertising by $20,000, which theyexpect will increase sales revenue by 2%. How would this affect thecompanyâs net income, breakeven point in sales volume and safetymargin as a % of sales in 2006?
How much would the average salesticket price have to increase to breakeven in 2007, if the totalfixed cost amount in 2007 remained the same as it was in2006?
Review your work in questions 2,3, and 4. Discuss whether each alternative is attractive and thenmake a recommendation based on your discussion.
Assuming the company cannotincrease the average sales ticket price by the amount youdetermined in question 5. What do you recommend? Discuss threeoptions, which may include adjustments to the alternativesmentioned above. Discuss how each option is viable. You may includecalculations to support your answers.
5- 2 Colombo Soft-Serve Frozen Yogurt
In 1994, General Mills Incorporated, a $6 billion consumer goods company, acquired Colombo Frozen Yogurt. General Mills Inc. (GMI) believed they could add Colombo frozen yogurt to their existing product lineup to increase net sales with little addition in marketing cost.
Frozen yogurt is sold through two distinct segments â independent shops and impulse locations such as cafeterias, colleges, and buffets. Frozen yogurt is the main business for the shops whereas yogurt is incremental to the impulse locationsâ main business. GMIâs large sales force already served the impulse market.
The financial results in the first couple of years were mixed. Earnings increased slightly and then dropped each year even though sales volume was relatively flat. In total, merchandising costs dropped, while pricing promotion rates escalated. The GMI sales force focused on the impulse segments and pricing promotions were believed to be driving volume increases. However, volume in the shop segment declined at alarming rates and there was widespread dissatisfaction in the sales organization. While GMI knew sales by segment, they didnât track costs by segment. Instead costs were allocated based on sales dollars. The situation was ripe for a clearer look using ABC methods.
TODAYâS FROZEN YOGURT MARKET STRUCTURE:
When Colombo Yogurt Company began marketing soft-serve frozen yogurt in the early 1980âs, their main distribution was through independent yogurt shops. In the early 90âs, they faced competition from franchise operations such as TCBY and Freshens that replaced many of the independent yogurt shops. And the market changed as Foodservice operators such as cafeterias, colleges, and buffets started to add soft-serve yogurt to their business. By the late 90âs, these Impulse locations accounted for 2/3 of the soft-serve market.
In the late 90âs, Shop sales began to increase with the addition of distinctive new products such as smoothies, boosters, and granitas. The Shops make their living from the soft-serve business and must innovate or go out of business (as thousands have done in the last decade). On the other hand, the Impulse locations make their living from other items and the soft-serve trade is only performance topspin. These firms are unwilling to take any risk (new equipment or extra labor) to serve highly differentiated products like smoothies or granitas.
THE GMI-COLOMBO MARKETING PLAN:
The GMI Foodservice Division markets brands such as Cheerios, Yoplait, Betty Crocker, Gold Medal Flour, Hamburger Helper, Pop-Secret, and Chex Snack to Food Management Firms, Hospitals, and schools. Colombo yogurt was added to this product lineup and the Foodservice sales force covered both Shop and Impulse locations.
Salesforce: Colomboâs salesforce was merged into the Foodservice salesforce. Customers were reassigned to salespeople who already serviced that geographical area. The salespeople varied in their reaction to the product. Some found shops easy to sell to while others avoided the shops despite the possible lost commission. Many spent a lot of time helping their impulse customers understand how to use the machinery.
Merchandising Promotions: Colombo traditionally charged the Shops for merchandising that was large scale and eye popping (neon signs). The Shops used these signs to draw customers inside. GMI chose not to charge for merchandising and to provide the same large scale merchandising to both Shops and Impulse locations. Shops were very interested in the kits while many Impulse locations didnât even hang them up.
Pricing Promotions: Pricing promotions are a mainstay of GMIâs impulse location approach. GMIâs salesforce generally used these promotion events as an opportunity to visit their accounts and take advantage of the occasion to meet service needs and sell other products that may not be featured.
GMI made price promotions available to both segments of the market. While the deals were typically around $5 per case, they averaged $3 per case against all the volume shipped during the year. GMI marketing knew price was not a major decision factor for Shops and they did not target pricing promotions to them. However, Shops were aware of the promotions and took advantage of them.
THE BUSINESS STATUS â PRE-ABC:
| PROFIT AND LOSS BY SEGMENT â PRE-ABC | Impulse Segment | Yogurt Shops | Total |
| Sales in cases | 1,200,000 | 300,000 | 1,500,000 |
| Sales revenue | $23,880,000 | $5,970,000 | $29,850,000 |
| Less: Price Promotions | - $ 3,600,000 | - $ 900,000 | - $ 4,500,000 |
| Net Sales | $20,280,000 | $5,070,000 | $25,350,000 |
| Less: Cost of Goods Sold | - $13,800,000 | - $3,450,000 | - $17,250,000 |
| Gross Margin | $ 6,480,000 | $1,620,000 | $ 8,100,000 |
| Less: Merchandising | - $ 1,380,000 | - $ 345,000 | - $ 1,725,000 |
| Less: SG&A | - $ 948,000 | - $ 237,000 | - $ 1,185,000 |
| Net income | $ 4,152,000 | $1,038,000 | $ 5,190,000 |
ABC ANALYSIS OF COST OF GOODS SOLD:
Cost of Goods Sold is made up of $14,250,000 for ingredients, packaging, and storage and $3,000,000 for pick/pack and shipping. Since the product is the same across segments, the cost to produce should be the same. However, pick/pack and shipping costs were found to vary with whether or not the order was for a full pallet. Full pallets cost $75 to pick and ship whereas individual orders cost $2.25 per case. There are 75 cases in a pallet and the segments differ in their utilization of full pallets as shown below.
| Impulse Segment | Yogurt Shops | Total | |
| Cases in full Pallets | 60,000 | 240,000 | 300,000 |
| Individual cases | 1,140,000 | 60,000 | 1,200,000 |
| Total cases | 1,200,000 | 300,000 | 1,500,000 |
ABC ANALYSIS OF MERCHANDISING:
Merchandising costs consist mainly of kits costing $500 each. A review of where the kits were sent indicated that 3,450 kits were sent out and 90 of them were sent to shops.
ABC ANALYSIS OF SELLING, GENERAL AND ADMINISTRATIVE:
Since sales representatives service several products, their costs are allocated to the various products based on gross sales dollars. GMI gave diaries to 10% of the sales force in randomly selected markets of the country and asked them to track their time in activity classifications for 60 days. The diaries indicated that sales reps spent almost 3 times as much time on the yogurt than GMI had estimated. The total allocation to Yogurt jumped from $1,185,000 to $3,900,000. Of their time spent on Yogurt, only 1% of the time was spent on the shops.
REQUIRED:
1. Briefly summarize Colomboâs competitive environment and General Millsâ strategy in response to that environment.
2. Using the ABC analysis, determine new segment profitability statements.
3. Based on your analysis in Questions 1 and 2, what changes would you suggest to General Mills? Give specific examples and explain.
