Analyses of Real Cocholate Company - Report Example

Strategic Analysis of Real Chocolate Company Introduction The Real Chocolate Company has a place of prominence in the gourmet chocolate segment, which is the fastest growing segment in the chocolate industry. The company is also acclaimed as one of the 100 fastest growing small companies in the United States of America. Since its inception, the company has been successful not only in economic terms but, socially and environmentally as well. The company makes only high quality products and distributes the same through its various outlets located at different strategic places of the country. When Sarah Smith, CEO stated after the performance of the fiscal year 2007 that she wants the company to cross the $100 million mark for the first time in the Companys history, it is clear that she had a measurable and clear vision about the company. External Analysis Opportunities 1. Retail chocolate sales reached $16.3 billion for the year ended December 2006. Per capita consumption of chocolate was over 13 pounds in 2004. This can be used as an opportunity to earn more revenue. 2. “Cocoa flavones, the unique compounds found naturally in cocoa may increase blood flow to the brain, according to new research published in the Neuropsychiatric Disease and Treatment journal. The researchers suggest that long-term improvements in brain blood flow could impact cognitive behavior, offering future potential for debilitating brain conditions including dementia and stroke” (Sorond FA 2008). 3. “Designed anti-dominant laws that will ensure the fair distribution and enforcement of purchase limits and export quotas in accordance with generally accepted antitrust and competition principles” (Blue 2007). 4. “The US chocolate and confectionery industry is a principle consumer of key US agricultural commodities.  For every dollar of cocoa imported, between one and two dollars of domestic agricultural products are used in the making of chocolate” (Economic Profile of the US Chocolate Industry). Threats 1. Highly competitive, fragmented chocolate and confectionary industry 2. Temperature volatility that is likely to have a bearing upon the quality of chocolate 3. “In 2000, a report by the US State Department concluded that in recent years approximately 15,000 children aged 9 to 12 have been sold into forced labor on cotton, coffee and cocoa plantations in the north of the country” (Global Exchange 2005). Internal Analysis Strengths 1. The expected growth of 6.4% 2. The health benefits from the antioxidants in chocolate and the placement of products in mass-market channels 3. The philosophy at Real Chocolate Company is to use only the finest, highest quality ingredients and no artificial preservatives 4. Its reputation for quality, variety, and taste of products, special ambiance of the stores, store site selection criteria, expertise in the manufacture and merchandising of chocolate candy products, and good customer service, provide the company with a competitive advantage. 5. Approximately 50 percent of store sales are from products made on-site. This concept conveys freshness and homemade quality to customers, and in-store preparation is fun and entertaining as customers watch the candy being made. 6. Impressive net income growth with earnings per share increasing to record levels the 2007 financial year. Our revenues rose over 12 percent to a record 7. The stores are designed to establish an inviting atmosphere to customers 8. There are 5 company-owned and 316 franchised store locations across the USA, plus stores in Canada 9. There are 110 factory outlet malls in the United States 10. The company has about 45 stores in locations considered tourist environments or entertainment-oriented sites. Weakness 1. Maintaining same quality at all the locations of production is somewhat difficult 2. Temperature level is an important factor determining the quality of chocolates 3. The shift from manual operations to automated operations may ruin the quality unless extra care and caution is undertaken Current Problem Diagnosis One of the main arguments raised worldwide against chocolate industry is that the industry is abusing child labor for production of cocoa and preservation of cocoa plants. It has been reported worldwide that majority of the labor working in the chocolate industry are minors and they would have been otherwise school goers and they are exploited by means of less wages and bad working conditions. In the United States of America, it has been observed that “in 2000, a report by the US State Department concluded that in recent years approximately 15,000 children aged 9 to 12 have been sold into forced labor on cotton, coffee and cocoa plantations in the north of the country” (Global Exchange 2005). This phenomenon has been on the increase from year to year and the industry and other labor welfare organizations find no alternatives to locate a lasting solution to the problem. The root cause of the problem is that of the insufficiency of income for cocoa producers and their communities. Producers’ income remains unaffected by the product price of which cocoa is a major element. Another problem faced by the chocolate industry including Real Chocolate Company is mounting number of chocolate producers and stiff competition. Over the last few years, seeing the spurt in the market and boom in the industry, many small manufactures enter the market with more choices in chocolate business. Consistency in product quality is another mounting problem faced by the company. The manual production is not always preferred, especially when automation is convenient and economical. Generation of Strategic Options The Solution to Child Labor Abuse- Fair Trade cocoa and chocolate Fair trade is the most widely accepted way out to combat the threat of child labor. In a Fair Trade practice, Fair Trade chocolate and cocoa products are marked with the "Fair Trade Certified" and Fair Trade Federation labels. Fair Trade is an international monitoring and certification system that guarantees a minimum price under direct contracts, prohibits abusive child labor, and remote environmental sustainability” (Global Exchange 2005). Some of the important recommendations put forward by the Joint Statement released are: a) “Execution of a binding memorandum of cooperation among the Signatories that establishes a joint action program of research, information exchange, and action to enforce the internationally-recognized and mutually agreed upon standards to eliminate the worst forms of child labor in the growing and processing of cocoa beans and their derivative products” (Global Exchange 2005). b) “Incorporation of this research that will include efforts to determine the most appropriate and practicable independent means of monitoring and public reporting in compliance with those standards” (Global Exchange 2005).; c) “Establishment of a joint foundation to oversee and sustain efforts to eliminate the worst forms of child labor and forced labor in the growing and processing of cocoa beans and their derivative products. The Signatories welcome industrys commitment to provide initial and ongoing, primary financial support for the foundation” (Global Exchange 2005). Evaluation of Strategic Options-200 words Using any relevant tool of strategy evaluation show which strategic option you propose for the company and explain your choice. “Fair Trade is an operational and well accepted system that ensures the prevent child labor and ill effects of conventional practices of the industry. It ensures the following benefits to the industry. Fair Trade guarantees farmers a stable living wage under direct long-term contracts and access to credit, ensuring that farmers can cover the costs of labor, production, and meet basic needs over the long-term. Farmers are organized into democratic cooperatives that have control of their own production and marketing, promoting continued self-sufficiency. Fair Trade prohibits abusive child labor and forced labor, and mandates sufficient wages for hired workers. Fair Trade verifies compliance of labor and wage standards through yearly independent monitoring. Cooperatives keep records of all farmer sales, offering the ability to trace cocoa directly to the farm of origin. Fair Trade requires that farmer cooperatives reserve a portion of their revenues for community development projects and farmer training, removing the need for outside charity and ensuring that 100 percent of funds earmarked for development work go to the communities that need them. Fair Trade encourages environmentally sustainable farming methods such as organic and shade cultivation, ensuring that farmers use methods that benefit the earth and maintain community health” (Global Exchange 2005). References Blue, Gloria, 2007, AGOA Annual Country Review: “Comments on the Eligibility of the Republic of Côte d’Ivoire, Chocolate Manufacturers Association and World Cocoa Foundation”, Viewed 7 March, 2009, from http://www.chocolateusa.org/pdfs/AGOA-Comments-2007.pdf Economic Profile of the US Chocolate Industry, Statistical Information, National Confectioners Association, Chocolate USA- Online, Viewed 7 March, 2009, from Global Exchange, 2005, “The Chocolate Industry: Abusive Child Labor and Poverty Behind the Sweetness” Viewed 7 March, 2009, from, Pergamon Flexible Learning, Management Extra, Pergamon Flexible Learning, Inc NetLibrary, Elearn Limited (Great Britain), Published by Elsevier, 2005 Sorond FA, Lipsitz LA, Hollenberg NK, Fisher NDL. “Cerebral blood flow response to flavanol-rich cocoa in healthy elderly humans”, Neuropsychiatric Disease and Treatment, 2008; 4:433-440 Appendix A Marks allocated PESTLE ANALYSIS Political Factors 1. “Designed anti-dominant laws that will ensure the fair distribution and enforcement of purchase limits and export quotas in accordance with generally accepted antitrust and competition principles” (Blue 2007). Economic Factors 1. Retail chocolate sales reached $16.3 billion for the year ended December 2006. Per capita consumption of chocolate was over 13 pounds in 2004 Social Factors 1. “Cocoa flavones, the unique compounds found naturally in cocoa may increase blood flow to the brain, according to new research published in the Neuropsychiatric Disease and Treatment journal. The researchers suggest that long-term improvements in brain blood flow could impact cognitive behavior, offering future potential for debilitating brain conditions including dementia and stroke” (Sorond FA 2008). 2. “In 2000, a report by the US State Department concluded that in recent years approximately 15,000 children aged 9 to 12 have been sold into forced labor on cotton, coffee and cocoa plantations in the north of the country” (Global Exchange 2005). Technological Factors 1. The introduction of automated machines in place of manual operations and adaptability of the company to the new technology Opportunities and Threats Opportunities 5. Retail chocolate sales reached $16.3 billion for the year ended December 2006. Per capita consumption of chocolate was over 13 pounds in 2004. This can be used as an opportunity to earn more revenue. 6. “Cocoa flavones, the unique compounds found naturally in cocoa may increase blood flow to the brain, according to new research published in the Neuropsychiatric Disease and Treatment journal. The researchers suggest that long-term improvements in brain blood flow could impact cognitive behavior, offering future potential for debilitating brain conditions including dementia and stroke” (Sorond FA 2008). 7. “Designed anti-dominant laws that will ensure the fair distribution and enforcement of purchase limits and export quotas in accordance with generally accepted antitrust and competition principles” (Blue 2007). 8. “The US chocolate and confectionery industry is a principle consumer of key US agricultural commodities.  For every dollar of cocoa imported, between one and two dollars of domestic agricultural products are used in the making of chocolate” (Economic Profile of the US Chocolate Industry). Threats 4. Highly competitive, fragmented chocolate and confectionary industry 5. Temperature volatility that is likely to have a bearing upon the quality of chocolate 6. “In 2000, a report by the US State Department concluded that in recent years approximately 15,000 children aged 9 to 12 have been sold into forced labor on cotton, coffee and cocoa plantations in the north of the country” (Global Exchange 2005). Appendix B For the Years Ended February 28 2007 2006 2005 Revenues Sales $25,335,739 $22,343,209 $19,380,861 Franchise and royalty fees 6,237,594 5,730,403 5,142,758 Total revenues 31,573,333 28,073,612 24,523,619 Costs and Expenses Cost of sales 15,988,620 13,956,550 11,741,205 Franchise costs 1,570,026 1,466,322 1,411,901 Sales and marketing 1,538,476 1,320,979 1,294,702 General and administrative 2,538,667 2,239,109 2,497,718 Retail operating 1,502,134 1,755,738 1,453,740 Depreciation and amortization 873,988 875,940 785,083 Total costs and expenses 24,011,911 21,614,638 19,184,349 Operating Income 7,561,422 6,458,974 5,339,270 Other Income (Expense) Interest expense (19,652) (99,988) Interest income 67,071 95,360 92,938 Other 67,071 75,708 (7,050) Income before Income Taxes 7,628,493 6,534,682 5,332,220 Income Tax Expense 2,883,575 2,470,110 2,015,580 Net Income $4,744,918 $4,064,572 $3,316,640 Basic Earnings per Common Share $0.77 $0.65 $0.55 Read More