Threats and Opportunities in the Bakery Industry in Canada - Essay Example

BAKE ME A CAKE CASE STUDY ANALYSIS Strengths and weaknesses of BMAC Strengths i) Unique cake designs BMAC offers best designsand variety of cakes in the region. The cakes are consistent and are of high quality that has resulted in the attraction of a wide customer base. ii) Social media marketing effects BMAC has a friendly as well as an active presence in social media sites such as Facebook that has kept its customers, as well as friends updated on new items, discounts and specials. This has helped in reminding customers about the future purchases because the company has a strong social media following. iii) Location BMAC has a high-traffic location. This is a strengths because more potential customers passing by the business thereby exposing it the more. It also has signage that draws more attention to its location. iv) Customer loyalty The unique cake designs of BMAC have excited her customers thus influencing them to continue buying from the same business. This has also helped BMAC in adverting about its products because the satisfied customers have resulted in word-of-mouth advertising that have greatly expanded the business’ customer base. v) Strong financial position The business has a financial position that is able to support advertising and hiring of an assistant. Weaknesses i) Staffing BMAC has few employees who can engage in mass production ii) High price BMAC’s cakes cost much more that some of its competitors. This is a weakness because of fierce competition as consumers can opt for similar quality at lower prices. iii) Spoilage and wastage BMAC has increasing provision for spoilage and wastages that have contributed to the reduction in revenues. iv) Insufficient net profit The business has not reached its full potential in terms of net profit to sustain Bourgon on a full-time basis. 2. Identify threats and opportunities in the industry. Bakery industry in Canada has a number of opportunities and risks that Bourgon need to understand. The industry has experienced massive growth since the recession particularly due to changing preferences of consumers. Consumers increasingly demand healthy and custom-made cakes for their various events. Because of this, the bakery industry revenue is anticipated to grow over the coming years at a strong rate per year. Opportunities Online markets The online markets are able to offer BMAC the ability to attract a wide customer base thus greatly expanding their business in terms of sales volume. BMAC is able to market to a very wider audience for relatively low expense. New technology BMAC can adopt new technology to better meet or satisfy the needs of their customer with new as well as improved products in a timely manner. Incorporation of technology into the business will build a competitive barrier against BMAC’s rivals thus giving it a competitive edge. Fragmented markets Fragmented markets of the bakery industry provide a number of opportunities for BMAC to expand as well as increase their market share. Such markets have numerous small rivals that lack cost advantages or bigger companies. BMAC can automate to develop a competitive advantage. Growing demand for cakes The demand for custom-order cakes as well as gourmet cupcakes has increased tremendously. BMAC needs to operate in large scale to meet this demand. Threats Rising prices of raw materials The industry is experiencing higher costs of raw materials especially due to a rise in the price of wheat which is a key ingredient for cakes. Increased competition The industry has several grocery stores and independent bakeries that operate their own in-house bakeries. BMAC has to deal with this saturated and consolidated market by automating or providing other distinct value to their customers so as to be able to compete with larger bakeries. Availability of substitutes This can hurt the ability of BMAC to raise prices since customers can easily switch to cheaper alternatives. Change in consumer taste The consumers are expected to switch to healthful baked offerings that are free of many additives and Trans fats. In future, gluten-free products for individuals with grain sensitivities will be on the rise. Recommendation BMAC should capitalize on trends in consumer tastes so as to increase margins and stay in business. The business can offer handcrafted artisanal products so as to build a recognizable niche that rivals would not easily replicate. It can also use par-baked products so as to cut down baking time thus satisfy the increasing demand. 3. Analysis of the company’s statement of cash flows for the year ended December 31, 2011. BMAC is very efficient because it produced a lot of cash internally. The operations of the business have greatly contributed to the cash flow. As per the operating activities, the business is generating sufficient cash that can be used in growing its business and financing obligations. The business has a high liquidity hence is able to meet its financial obligations. BMAC is relatively good at managing its shorter obligations and that is why its cash flow appears artificially strong. BMAC has a better performance because it generates most of its income from its primary activities implying that it is putting more emphasis on its core activities. it has a good performance since its primary activities generated a greater percentage of the total revenue (22619/94622= 23.90%) BMAC has very low investments in its own business. Bourgon has not used the money earned from operations for future investments. However, there have been a lot of drawings that have reduced the liquidity of the business. There have not been any substantial capital expenditures, a prime necessity that ensures that proper maintenance of as well as additions to the physical assets of the business to support its competitiveness and efficient operation. The business invests very little amount in financing activities. Financing is the least activity undertaken by the Bourgon, this maybe an indication that Bourgon has a good financial base and has little need for financial activity. 4. Analysis of the relevant financial ratios for BMAC. The profitability of BMAC has been on the rise. Its net profit increased from 14.75 in 2010 to 21.8% in 2011. The leverage position of BMAC is positive because it can use its total assets and shareholders’ money to generate profits and hence grow the company. The return ratios exhibit an upward trend indicating an increase in profitability. The level of profitability of the business is higher than the industry average hence it is performing better than other forms in the industry as evidenced by its higher returns on equity and assets. In terms of liquidity, BMAC is not liquid. It is not able to meet its short term obligations as they become due. A current and a quick ratio of less than one is relatively low for the business. The lower the liquidity ratios the lower the ability to meet such obligations. BMAC is less liquid compared to other businesses in the industry. The liquidity is lower because the company has more fixed assets at the expense of current assets as evidenced by its higher fixed assets to net worth. BMAC is relatively efficient in utilizing its assets to generate revenue. an inventory turnover of 27.9 in 2011 is an indication that the business uses its inventory faster. However, the efficiency reduced from 33.7 in 2010 to 27.9 in 2011. Compared to the industry, the company is relatively efficient. Finally, BMAC has a higher ability to meet its interest-payment obligations. With interest coverage of 33.7 in 2011, BMAC has low risk of bankruptcy. 5. Pros and cons of renovating the family home versus leasing a location. Renovating the family home Pros i) Provides Bourgon with an opportunity to design and decorate the premises as she wishes thereby making it as attractive as possible to the customers ii) Has separate entrance for customers thus allowing many customers to be served at a given time. iii) Increased sales per month as a result of increased signage and more professional appearance. iv) With right changes, she could add considerable value to the renovated space as evidenced by increased annuities. Cons i) High costs of renovation that tremendously reduces profit ii) It requires a lot of discipline in sourcing items at best prices. iii) Have additional expenses in terms of advertising expenses and wages. Annual incremental analysis of renovation Increase in sales ($700*12) $8400 Total expenses Buildings permit $500 Wages (10.75*10) $1075 Annual utilities ($6850-4862) $1988 Advertising expense $450 Amortization New appliances (5200/10) $520 Construction cost (26000/20) 1300 Interest cost $1106 Total 6939 Annual incremental cash flow $1461 Construction cost (asset) $26,000 New appliances (asset) 5200 Furnishings and décor $1750 New signage (FA) $1500 Bank loan 75% of construction cost Bank loan = 0.75*26000 =$19500 Personal savings $6500 Leasing a location Pros i) Location It has a high-traffic location. This is a strengths because more potential customers passing by the business thereby exposing it the more. It also has signage that draws more attention to its location. ii) increased sales due to more exposure to passersby iii) Increased customer base as a result of increased signage and more professional appearance. Cons i) increased risk due to the increase in wastage and spoilage expense of cupcakes ii) additional expenses in terms of wages Annual rent $9000 Wastage and spoilage expense $1325 Advertising budget $800 Insurance $2780 Relocation of equipment and display $800 Monthly incremental revenue $1400 Annual incremental revenue calculation Annual sales 1400*12 $16800 Incremental expenses Wastage and spoilage expense $1325 Advertising budget $800 Insurance $2780 Annual rent (750.12) $9000 Relocation of equipment and display $800 Wages (20*12*10.75) $2580 Amortization of new appliances ($5200/10) $520 Total incremental expenses 17416.25 Incremental revenue -$616.25 Assets Signage 5000 New appliances (asset) 5200 Furnishings and décor $1750*0.75= $1312.50 Leasehold improvements $1800 Differential analysis The best alternative for Bourgon is renovating the family home. This is because it results in positive incremental revenue unlike leasing a location that results in negative incremental revenue. Renovating the family home provides her with the opportunity to design and decorate the premises as she wishes thereby making it as attractive as possible to the customers. Finally, it has less additional expenses compared with leasing a location. . It is better for Bourgon to invest more money in the business because it will result in higher revenues in the coming years. This will be sufficient in sustaining her on a full-time basis. 6. Analysis of price increase Increasing cupcake prices has advantages and disadvantages to BMAC. Advantages i) An incentive It encourages the business to produce more because high prices. ii) Higher annual contribution Price increases results in more profit. iii) Acquisition of new technology High prices results in more income that can be used in buying new technology to provide more cupcakes Disadvantages i) low sales volume High prices discourage customers to buy more cupcakes because they do not have sufficient purchasing power to buy them. Direct costs of making a cupcake Cupcake bag= 5/500= $0.01 Pastry bag 31/ (50*24) = $0.026 Wage 10.75/48=0.22 Flour 21/600= 0.035 Sugar 50/60*24) =0.035 Icing sugar 35/ (20*24) =0.073 Shortening 40/ (40*24) = 0.042 Egg whites 43/ (36*42) = 0.050 Vanilla extract 24/ (200*24) = 0.005 Butter extract 71/ (200*24)0.015 Eggs 34/ (90*24) = 0.016 Total direct costs $0.527 Direct cost per cake $0.53 Contributions At $2.0 2.0-0.53=$ 1.47 Increasing the price to $2.25 2.25-0.53= $1.72 Increasing the price to $2.50 2.50-0.53= $1.97 Evaluation of the effects At $2.0 Annual contribution = $1.47*180*50=$13,230 Increasing the price to $2.25 Annual contribution=$1.72*0.90*180*50=$13,932 Increasing the price to $2.50 Annual contribution= $1.97*0.75*180*50=$13,297.50 Both price increases would result in a higher annual contribution than the current price of $2.00 per cake. However, increasing the price to $2.25 r4sults in the highest annual contribution. Bourgon should therefore increase the price to $2.25 to realize a higher annual contribution. The price increase should be communicated to customers in a timely and appropriate manner. Bourgon need to roll out new products as she raises the prices to lessen the impact of price increase. She needs to show greater value together with higher prices. Yes, she can use other methods such as an effective promotional plan that helps in increasing sales. 7. The changes that Amy should make based on the analyses. First, Amy needs to employ more efficient and effective employees to help reduce spoilage and wastages that is eating up her revenue. This will also help in mass production thereby meeting the increasing customer demand. Secondly, Amy should capitalize on trends in consumer tastes so as to increase margins and stay in business. The business can offer handcrafted artisanal products so as to build a recognizable niche that rivals would not easily replicate. It can also use par-baked products so as to cut down baking time thus satisfy the increasing demand. Thirdly, Amy needs to reduce drawings and increase investments in the business to expand it in such a manner that it will be able to engage in mass production. She needs to carry out substantial capital expenditures to ensure that proper maintenance of as well as additions to the physical assets of the business to support its competitiveness and efficient operation. Fourthly, she should renovate the family home because it has higher incremental revenue compared to leasing a location. In the long run, the alternative will result in higher revenue that will be sufficient in sustaining her on a full-time basis. In order to improve profitability, she should increase the price to $2.25 because it results in the highest annual contribution. She should communicate the price increase to customers in a timely and appropriate manner. She also needs to roll out new products as she raises the prices to lessen the impact of price increase. She needs to show greater value together with higher prices. Finally, she can use other methods such as an effective promotional plan that helps in increasing sales. 9.    Projected statement of earnings and balance sheet for the year ended December 31, 2012. Statement of earnings For the year ended December 31, 2012 Revenue $108,815.3 Food costs 39,640.50 Gross profit 69,174.8 OPERATING EXPENSES Wages 1550+1075 16625 Cake pans and baking supplies 1718 Utilities 6850 Spoilage and wastages 1325 Phone, cable and internet 1124 Uniforms 384 Advertising 2430 Maintenance and cleaning 2319 Insurance Amortization 4251 Fuel 1796 Miscellaneous (license fees) 1770 Bank fees 276 Interest expense 1106 Total operating expenses 41974 Net profit 27201 Renovating the family home incr4ases net profit from $20662 in 2011 to %27201 in 2012. Balance sheet As at December 31, 2012 Assets Current assets Cash 1189 Inventory 1837 Total current assets 3026 Long-term assets New signage $1500 Furnishings and décor $1750 Appliances 7730 Less acc. Amortization 951 6779 Cake stands and display cases 1165 Less acc. Amortization 397 768 Computer equipment 1974 Less acc. Amortization 1234 740 Vehicle 16805 Less acc. Amortization 6723 10082 Construction cost $26,000 Less acc. Amortization 1300 24700 Total long-term assets $46,319 Total assets $49,345 Liability and owners’ equity Liabilities Accounts payable 273 Line of credit 8001 Bank loan 19500 Total liabilities 27774 Owner’s equity Amy Bourgon, capital 21699 Total liabilities and owner’s equity $49,345 Bank loan = 0.75*26000 =$19500 Amy has to invest personal savings of $10000 Read More