Ben & Jerry`s Homemade - Case Study - Analysis of the Ice Producer

Contents

2 Executive Summary

3 Introduction

4 Situation Analysis
4.1 Market Analysis
4.2 Company analysis
4.3 Strengths
4.4 Weaknesses
4.5 Summary: Where the company is right now
4.6 Opportunities
4.7 Threats
4.8 Summary: Where the company could go

5 Proposed Strategy

6 Strategy implementation
6.1 Reshaping the internal structure of the company
6.2 Restructuring of distribution; channels, distributors
6.3 Concentrating on key markets
6.4 International expansion

7 Future Outlook

8 Recommendations to the Investor

9 Appendix
9.1 S.W.O.T. Analysis
9.2 P.E.S.T.-L.I.C.E. Analysis
9.3 Five Forces Analysis
9.4 Gearing Ratio Calculation
9.5 Sensitivity Analysis
9.6 Gantt chart

10 List of Reference

2 Executive Summary

Ben & Jerry’s Homemade Inc. (B&J) is one of the two major players in the superpremium ice-cream market in the United States of America. B&J had been very successful throughout the 1980s; controlled by Ben Cohen and Jerry Greenfield. It currently holds 42% of its market. It benefits from its high product quality, social image and marketing strategy, high employee satisfaction, and overall good financial situation while it suffers from high costs of sale, poor policies towards distributors and suppliers, and lack of international focus. While the company made a net loss of $1.9 million in 1994, this was due to an asset write-down of $6.8 million and the introduction of a new line of ice-cream which both can be regarded as nonrecurring events. Debt ratio and liquidity indicate that this financial crisis is temporary. Even with a slowing American economy and with it reduced ice-cream sales, B&J, with its highly differentiated product with luxury character is not as affected by the downturn.

However, the company faces the risk of falling behind strong competition. In order to strengthen its competitive position it will have to drive down the cost of sales, expand internationally, and expand domestically.

The purpose of this strategic plan is to identify and suggest the optimal solution for B&J to gain a strong competitive position in terms of market share and profitability in its business area. The study team believes that B&J should adopt ways to (1) defend its current market position, 2) expand total domestic as well as international market demand, and (3) at the same time drive down production costs.

3 Introduction

This report begins with our proposed strategy analysis for B&J followed by an analysis of the internal and external environment. Next, the reasons for selecting this strategy are presented. The implementation plan incorporates information about key resources requirements as well as the likely outcomes, both financial and non-financial, of this proposal. In section 7, projected outcomes of those strategies are presented. Finally, the study group will give some recommendations to the investor on pre- and post-investment strategies.

4 Situation Analysis

4.1 Market Analysis

- Health conscious consumers: As health awareness continues to rise throughout the population, it has the potential to slow down sales of the high-fat super premium flavours.
- Seasonal demand: Ice cream has always seen as a summer treat. In the summer, ice-cream sales are up to 30% higher than in the winter¹.
- Declining demand: The overall weakening economy in the United States has already had an impact on sales in the super premium ice-cream market.
- Price competition: Price competition has become more intense².

4.2 Company analysis

B&J is operating in the super premium ice-cream manufacturing business. The US super premium ice-cream business is dominated by the two main competitors. The market therefore has the characteristics of a duopoly.

A variety of factors define the company's current competitive position in the marketplace. Firstly, B&J finds itself in a highly competitive, low growth market. Haagen-Dazs - the company's biggest competitor - and B&J have been constantly fighting towards leadership in the super premium ice-cream market. Chart 4.2-1 below shows the latest position of B&J.

Market Shares in the Superpremium Ice-Cream Market (1995)

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Chart 4.2-1

Chart 4.2-2 shows the increase in sales vs. the increase in cost of sales. While the increase in sales in 1994 was mainly due to the success of the newly introduced "Smooth, No Chunks" line and a 3.7% price increase of pints, the increase in cost of sales was also caused by the fact that the company has about 40% of its manufacturing supplied by Edy's Grand Ice-Cream. The "out-of-house" production means a significant loss of control over the production process, especially over cost management. Hopefully this situation will improve with the start of production at the new St. Albans production plant.

Increases in net sales vs. costs of sales

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Chart 4.2-2

The company finds itself in a complex system of strengths and weaknesses and external factors, which results in a variety of opportunities and threats for the company (for detailed information, see appendix 10.1).

4.3 Strengths

4.3.1 Reputation for quality

The high quality of the product is certainly a crucial factor for the success of the proposed strategy. The stress on the genuine origin of the ingredients and the company's name "Homemade" creates and nourishes this impression in the eyes of the customer. The company's strong R&D department constantly develops new innovative flavours. Even though the barrier to imitation is extremely low³, this helps to create the cutting edge to stay ahead of the competition.

4.3.2 Social Marketing

The founders beliefs in social responsibility has not only earned them the brand loyalty of the socially aware ‘baby-boomer’ generation, it also has saved the company a lot of money by providing free marketing through media coverage of social events⁴.

4.3.3 Employee satisfaction

The company’s devotion to employee satisfaction⁵ is one of the causes for the company’s low employee turnover rate of 12%. The low turnover rate has impact on learning effects, training costs, and employee commitment. Longer employed workers are more likely to understand the production process and suggest improvements. The lower turnover rate also results in a better reputation of the company in terms of working environment. This gives the company the opportunity to choose from a wider range of applicants.

4.3.4 Low Gearing ratio

The low ratio of debts over total assets of 27% in 1994 gives B&J credibility, which is a good foundation for further investments and expansion (see appendix 10.4).

4.4 Weaknesses

4.4.1 High cost structure

The high cost structure at B&J is mainly due to labour intensive production, above average wages⁶ and their supplier policy. How far the costs can be associated with labour or high administration costs is not apparent from the data provided but worth investigating.

In addition, the company relies on one exclusive distributor⁷. This not only makes it very vulnerable in case of loss of this distributor, the company also loses control over its distribution channels. As the main competitors put more pressure on prices, the importance of cost control will rise.

4.4.2 Low shareholder value

This is caused by the lack of dividends. As 48% of the stocks are held collectively by the "Principal Stockholders"⁸ this might not be a major concern but without the potential for a decent return on investment, potential investors will be reluctant to do so. The lack of investment into the company might prove as a disadvantage, especially in regard to the main competitor, whose resources are larger.

4.4.3 Lack of international experience

Although efforts have been made to expand business activity into the United Kingdom, Israel, and Russia, the company does not make use of its full international potential⁹. The attempt to market the range of B&J ice cream through restaurants is one step in that direction.

4.5 Summary: The current position of the company.

Even though the company made its first yearly loss in 1994, it can still be considered healthy¹⁰. The loss in 1994 is in the opinion of the study group mainly due to a few "one-off" factors. A large portion of the debt can be accounted for by the asset write-down of $6.8 million. This write-down was a result of a necessary redevelopment of a malfunctioning software system and incorrect assumption about the value at the St. Albans plant. The introduction of the "Smooth, No Chunks" line in the same year also resulted in some extra advertising and introduction costs¹¹. The low debt-over-assets ratio and high liquidity ($20 million¹² ) proves the company's ability for further investment and/or international expansion. The performance record compared to the industry average also proves this point¹³.

Based on the analysis of the data given, the study group believes that B&J still has a strong position in the market and the ability to secure long-term future profit.

4.6 Opportunities

The non-fat (Sorbet) ice-cream market in the U.S. and the superpremium ice-cream market in Europe are still in very early stages of the lifecycle. Haagen-Dazs has gained a first-move advantage in Europe. However, the markets in Europe and Asia are still underdeveloped in terms of presence of superpremium ice cream. As well as new markets, new distribution channels could be opened¹⁴. The increase in production capacity will give B&J the opportunity to get production back into their own hands and increase productivity at their production facilities. If B&J is sufficiently present at U.S. supermarket outlets is not clear from the given data. If not, further growth is possible in that segment.

The new CEO Holland has experience in improving companies’ performance¹⁵. This could prove useful for the company in the future.

4.7 Threats

The overall weakening economy in the United States has already had an impact on the sales in the superpremium ice-cream market¹⁶. The main competitor has already expanded its operations into Europe and Asia. If B&J does not react to this development, it faces the risk of being stuck in the stagnating American market and no foothold in the growing European market.

Health awareness is rising in the population. This has the potential to slow down sales in the high-fat segment of the ice-cream market.

Dreyer, the company's exclusive distributor and an ice-cream manufacturer itself, is backed up by the strong, internationally operating Nestle group. If Dreyer's should decide to enter the superpremium ice-cream market, this poses a potential threat to B&J, especially since B&J is depended on this one sole distributor.

4.8 Summary: Suitable options.

A vast variety of options are open to the company. Those options can be divided into home market and international operations. Internationally, it can either expand in order to profit from the growth of the market, or it can focus on the home market to avoid the risks and additional expenses of international expansion. Other decisions regarding the internal running of the company will have to be made. There is still potential to cut down the cost of sales to improve the competitive position. There is no indication about the composition of the cost of sales in the information provided, especially no information about the structure of the administration costs. However, a few words about the labour costs can be said. Since the leadership of the company believes in a labour intensive production, labour costs are a main part of the overall cost structure. To reduce those costs, the company could

- Reduce the wages
- Not increase the wages until they reach industry average
- Reduce the work force volume and implement more labour efficient production means.
- Shift work force to the new St. Albans production plant.
- Reduce the financial and non-financial employee benefits.
- Reduce working hours as long as production capacity exceeds market demand.

On the sales side of the production, more emphasis could be made on:

- Non-fat Sorbet flavours
- Increasing demand for superpremium high-fat flavours
- Expansion or withdrawal from speciality flavours (Peace Pops)

5 Proposed Strategy - Where the Company should go

On the basis of the analysis the study group suggests for Ben & Jerry to adopt ways to expand total market demand, and at the same time protect its current market share through good defensive and offensive actions. As B&J suffers from a high cost structure, this situation can be improved through strategic internal and external changes.

Part of B&J’s long-term strategy should be to become a market leader, using its competencies in R&D, new production plant and strong brand image.

While trying to expand total market share, B&J should increase their marketing expenditure, maintain product quality and innovate flavours. B&J has to continuously defend its current business against rival attacks.

The following is a list of feasible strategic options, in line with the company’s social mission.

- Reshaping internal structure
- Restructuring of distribution; channels, distributors
- Concentration on key markets
- International expansion

6 Strategy implementation

The proposed strategies can be divided into short-term and long-term goals. Some strategies can be implemented immediately; others take more time to succeed. The study group proposes to divide the strategy implementation into four distinctive stages¹⁷.

6.1 Reshaping the internal structure of the company

The study team is aware of the sensitivity of this topic, taken the social responsibility and beliefs of the company leadership into account. However, the study team believes that making minor changes to the procedures and internal environment has the potential to increase the competitive advantage of the company without losing its image in the view of the consumer. Even though this would mean some disadvantages for the employees in the short term it will ensure their workplace and profit them in the longer term.

B&J should introduce product teams to include all members of staff from the different departments. This would integrate the activities involved in developing a new product. Cross-functional teamwork could speed up the production process and enable B&J to introduce new products faster.

The chart below shows how the future structure inside the company could look like:

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Chart 6.1-1

6.1.1 R&D

The shifts in customer demand puts further stress on the importance of the R&D department. B&J has always maintained a full-time R&D department dedicated to the development of unconventional, cutting-edge flavours. It puts B&J at the forefront of the super premium ice-cream market. B&J should maintain this advantage. Since Ben Cohen is personally very interested in creating new flavours, it should not be a problem for B&J to create innovative flavours for its non- and low-fat products. Because its low-fat product has proved to be very successful during the last few years, B&J should concentrate on this line of production to match the changing consumer tastes.

6.1.2 Marketing & Sales

B&J should keep its social mission, but needs to introduce a new sales & marketing specialist, to centralise their marketing activities.

The main customers of B&J are reaching forty and are becoming more and more health conscious. To target this group of people, the focus of the advertising strategy should be promoting its low and non-fact products. B&J needs to redesign its advertising strategy such as adjusting the design of its packaging to match its current consumers’ tastes. Since the competition in the super-premium ice-cream industry becomes more intense in terms of price. B&J could offer coupons and discounts to attract more consumers.

B&J can expand the market through discovering and promoting new uses for the product; for example, they could promote ice cream eating on any occasion and any season. The seasonal demand for ice cream is caused by cultural characteristics. Through careful advertising, consumer behaviour can be changed. B&J should give up weaker territories, such as ‘Peace pops’, and reassigning resources to stronger territories, ‘Frozen Yoghurt’, ‘Low fat/Fat free’ products. Through this strategy, B&J would consolidate competitive strength in the market and concentrate mass at strategic positions.

6.1.3 Purchases

B&J has a very strict selection procedure for its suppliers and because of its social mission, it buys ingredients from small farms, which makes it cost inefficient. The company should buy products from suppliers that offer better prices even though these suppliers may not necessarily have the social values that B&J agrees with. Since this is against the mission B&J set, it is not a feasible option for the company.

6.1.4 Human Resources

B&J should maintain their social mission and keep manual labour, but in the long term move gradually towards less labour intensive production. It should keep the benefits but not increase the wages until they reach industry average. As B&J is growing larger, communication between management and employees might suffer. It is a key point to keep employees informed about changes in the organisation and company strategy.

6.1.5 Finance

From the sensitivity analysis (see appendix 10.5), it shows that the net profit/loss is very sensitive to the cost of sales and total administration costs. By reducing cost of sales by 1%, the loss would be reduced by 29.2%; by reducing the administration costs by 2%, the loss would be reduced by 19%. If in 1995 the company had managed to keep the administration cost within the budget and had not made bad investments, then the profit would have increased even with total sales remaining the same. The plant in St. Albans is a long-term investment and though the initial cost affected one year’s profit, it will eventually benefit the company, as new equipment will increase efficiency. Without the asset write-down, the profit would have increased by 24%.

6.2 Restructuring of distribution; channels, distributors

6.2.1 Expansion of distribution channels

Even though B&J has made some attempts to open up new distribution channels, those efforts are not sufficient enough. Making the product available to the customer at new locations is essential. Those locations could be:

- Restaurants
- Internet
- Take-out/to-go ice-cream stands in street malls

The availability of the product in restaurants could be achieved by co-operation both with large restaurant chains¹⁸ as well as licensing with smaller restaurants.

Due to the fragile nature of the product, Internet sales will never become a major part of overall ice-cream sales. However, it supports the novelty image of the company. In addition, the company's website can become a marketing tool, offering a range of B&J related products¹⁹.

Even though, B&J is present at the market with B&J Café-like shops, this only targets mainly the eat-in customers. The spontaneous "Scoop-on-the-go" customer is not appreciated enough. Small franchised ice-cream stands located in busy High Street Malls could fill that niche.

6.2.2 Independence from distributors

Dreyer's Ice Cream, B&J's exclusive distributor, which accounts for over 50% of the company's sales, causes the company to lose too much control over its distribution channels. We propose restructuring the contract with Dreyer's to allow spreading the distribution among various distributors. That way, the company does not depend so much on a single distributor and the single distributor has less power, which puts B&J in a stronger position.

6.3 Concentrating on key markets

B&J target group focuses on 25-40 year old consumers in the upper-middle class sector without children. This customer group has more spare money to spend it on luxury goods like B&J. The single serving pint size is directed towards single households. Ben & Jerry should keep its target market, but attract buyers who are unaware of the product or who are resisting because of certain features. Along with this strategy, more emphasis should be put on commercial advertising. The company will have to reshape its social activities to optimise the advertising impact.

6.4 International expansion

As the U.S. superpremium ice-cream market reaches its maturity stage with slow-downs in market growth and sales²⁰, international expansion becomes more and more important - especially considering the production capacity increase by 166% due to the new St. Albans production plant. The gearing ratio (Debts/Assets) was 27% in 1994 and 17% in 1993, in other words B&J has the financial resources to expand internationally. At the moment, international markets in Europe and Asia are underdeveloped regarding superpremium ice cream, even though Haagen-Dazs has already gained entry to the markets and substantial market share. However, these approaches towards international markets have to be very carefully considered: entering the unstable Russian market is more risky than for example the European market. The customer's attitude towards the product in Europe differs from the United States. Product and marketing strategy will have to be adapted to the specific market.

7 Future Outlook

If the company should decide to follow the proposed strategic options, the following developments are likely to occur in the future:

- International expansion: Increase in sales volume is vital to the company. It will enable it to profit from economies of scale and higher profitability at the new production facilities, which are currently not operating to capacity.
- Product competitiveness: Constant product innovation will secure sales by adapting to the changing consumer environment.
- Product locations: By opening new channels of distribution overall consumption and therefore sales volume will increase.
- Cost structure: Driving down production costs will increase profitability, shareholder value, and competitive position.
- Employee satisfaction: The employee turnover rate will remain low due to good working environment and other benefits enabling the company to ride down the learning curve and profit from employee experience.

8 Recommendations to the Investor

As stated in section 3, the company is still very healthy and has good prospects for future success. The study group believes that a long-term investment into the company will be profitable. However, if the investor should decide to increase its stake in the company, the study group advises to support some strategies vital to the company's competitive advantage and future profitability. These key points are:

1. International expansion: The U.S. market is reaching maturity. The entry into international markets at earlier stages of the lifecycle will secure future growth.
2. Reduction of cost of sales: A lower cost structure increases profitability, shareholder equity, and ability to stay competitive.
3. Reshaping of the internal structure: People are the biggest asset! By restructuring, work efficiency, employee satisfaction and overall company performance can be increased.

9 Conclusion

The study team believes that there are no companies who manage to stay on the road of success and profitability without any challenges to face. When major investments are made, minor temporary losses have to be expected. B&J are still at the top of the superpremium ice-cream industry. The study group believes that the investor should have confidence in investing further into the company.

10 Appendix

10.1 S.W.O.T. Analysis

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10.2 P.E.S.T.-L.I.C.E. Analysis

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10.3 Five Forces Analysis

(1) Risk of new entry by potential competitors

⇓: High entry barriers (image, customer loyalty) for new companies, possibility of ice-cream manufacturers to enter superpremium market.

(2) Degree of rivalry among established companies within an industry

⇑: Haagen-Dazs (vast resources)

(3) Bargaining power of buyers

⇑: Strong competition by Haagen-Dazs, but innovation advantage

Dreyer: 54 (52) % of net sales in 1993 (1994)

(4) Bargaining power of suppliers

⇓: Dependent on B&J, small, large in number

(5) Threat of substitute products

⇑: Premium ice creams

The 5 Forces

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Chart 10.3-1

10.4 Gearing Ratio Calculation

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Table 10.4-1

10.5 Sensitivity Analysis

10.5.1 …towards cost of sales

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10.5.2 …towards administration costs with the asset write-down

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Table 10.5-2

10.5.3 …towards administration costs without the asset write-down

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Table 10.5-3

10.6 Gantt chart

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Chart 10.6-1

11 References

- Case Study: Hill, J and Jones, G (1998) Strategic Management - An integrated Approach, Houghton Mifflin, Boston, MA
- Ben & Jerry's Homemade Inc. Website: http://www.benjerry.com

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¹ Source: Case Study

² Using sales promotion (Source: Case Study)

³ Competing ice-cream manufacturers are now able to imitate successful flavours within 60 days.

⁴ Source: Case Study

⁵ “Joy committees”

⁶ Source: Case Study: 26% above average

⁷ Dreyer Grand Ice-Cream

⁸ Ben Cohen, Jerry Greenfield, Fred Lager, and Jeffrey Furman

⁹ Source: Case Study

¹⁰ Without the asset write-down, B&J made a gross profit of $3.018 million in 1994.

¹¹ Source: Ben & Jerry's Homemade Inc. Website

¹² Source: Case Study

¹³ The net profit margin of B&J is 5.1%, compared to the industry average of 3.4% (Case Study)

¹⁴ Presence in restaurants, at sport events, small stands in high street malls.

¹⁵ Source: Case Study

¹⁶ 1.5% decrease in pint volume

¹⁷ A timetable for the implementation of these strategies is included in appendix Chart 10.6-1.

¹⁸ The study group suggests Pizza Hut, Applebee's, Chili's, etc.

¹⁹ Baseball-hats, coffee-mugs, fridge-magnets, mouse-pads, etc.

²⁰ Source: Case Study