Advanced Management Accounting Colombo Frozen Yogurt Essays

Advanced Management Accounting Colombo Frozen Yogurt Essays Advanced Management Accounting Colombo Frozen Yogurt Paper Advanced Management Accounting Colombo Frozen Yogurt Paper Essay Topic: Marketing Colombo Frozen Yogurt was acquired by General Mills Incorporated (GMI) in 1994 so GMI could strengthen its product line-up with a small addition to marketing costs. General Mills is a large food service corporation, worth $11.5 billion in net sales, that prides itself on innovation beyond the kitchen (GMI Website, 2003). In Australia, some of GMIs branded products that are merchandised in local supermarkets and shops, are Betty Crocker, Old El Paso Mexican Foods, Fruit Roll-ups and Wheaties Breakfast Cereal. $2.9 Billion of net sales are in the cold perishables section of the food market which includes brands that are known in Australia such as Yopliat, Go-Gurt and the subject of this report, Colombo frozen yoghurts. Colombo entered the ice cream market with an innovative frozen yogurt product, which was considered a healthier alternative to ice-cream. Competitive Environment Shop Locations Originally Colombo chose to market mainly to independent shop owners (Jane Suly, 2000. pg. 67). Profit-maximisation was achieved through the new and repeat guests of the shops and therefore profits were calculated on a per-square-foot basis. Colombo also relied on customer referrals, whereby the total experience of the product brought them back again and advocated to others that the product was of exceptional quality. To compete with other shops, Colombo introduced differentiated products, such as; smoothies, boosters and granitas. Impulse Locations The ice-cream market experienced a change in the early 90s where soft-serve yoghurt, was added to food service operators such as; cafeterias, colleges, and buffets. As the industry expanded, in the late 90s two-thirds of the soft-serve markets were a result of impulse locations. However, impulse locations core business is made up on the sales of many other items, and frozen soft-serve yoghurt is only considered an additional product line. This meant that independent impulse locations relied on purchasing quality products at a reasonable price. Therefore, buyers were sensitive at the cost per serving, and also had difficulty understanding profits that they had made from the frozen yoghurts. Colombo Marketing Plan The Colombo marketing plan used a diverse range of strategies to make the acquisition of General Mills a successful one. Before the purchase of Colombo yoghurt, the GMI Foodservice Division, was already marketing a wide-range of products, Colombo was added to the list. GMIs sales force covered both shop and impulse locations (Jane Suly, 2000, pg. 68). Sales Force The Colombo sales force was integrated into the Foodservice sales force to become one. The reaction from the sales assistants whose responsibility it was to market and sell the frozen yoghurt was mixed. Shops were considered reasonably easy to sell to, however, some felt that time was lost assisting impulse customers how to use the machinery. Merchandising Promotions The use of neon signs, and other forms of advertising, and the costs incurred to display these forms of advertising, was charged to shops. These signs were used as a tool to encourage potential customers to enter the shop and purchase the frozen yoghurt. Previously, General Mills provided the advertising to shops at no cost, however, they then stopped charging for it. Sales people were well aware that many impulse locations did not even display the advertising, which ultimately did not have an effect on profits, as impulse locations accounted for two-thirds of the soft-serve market. Pricing Promotions The most reliable marketing tool to that of Colombo was the use of promotional events. Although the deals were generally within the vicinity of $3-5, General Mills used these promotions as an opportunity to take advantage to sell products that might otherwise be featured. Price was not considered a factor to shops, however, the shops were always well aware that promotions were to take place, and ultimately, took advantage of the situation. ABC at Colombo Activity Base Costing (ABC) allocates overhead costs to a product or service, based on the costs of activities that are needed to make a product or conduct a service (Ingram, Albright, Hill, 2001, pg. 177). The information gathered on the costs of a product or service are supposed to be much more accurate than any other forms of traditional costing. This is because a particular product or service that may require more value addition than compared to another product or service. With traditional methods of costing, other products that are made by that company may carry 1 product burden and therefore that 1 product may not be as profitable as once thought. Hence ABC provides management more accurate costs so they can make strategic decisions such as to stay with a particular customer, to stay in a particular market or to stay with a particular product. The list of strategic decisions can be endless. With GMIs acquisition of Colombo, the cost structure for Colombos frozen yoghurt was also affected. Under a traditional method of costing, Table 1 shows Colombos individual product costs. With a model in place for ABC and cost pools defined, the Table 3 shows what the new costs and profit were calculated using the ABC system and compared to the traditional costs and profits. As it can be seen from table 3, the profitability changes from 1 segment to another rather drastically. With allocation of overheads directed to cost drivers in the cost pools, the costs associated with selling to shops is far less than the costs to impulse locations. The impulse segment is almost unprofitable, only at 3%, whereas the margin for the shops is around 29%, which could be very high if compared to an industry benchmark. Table 4 shows the final profitability statement. With ABC, the total amount of costs does not change, but the costs are only allocated differently, so therefore both the traditional costing statement and ABC statement should match in total cost. The statement in Table 4 does not match because of the additional costs that were attributed to SGA from the study conducted by 10% of the sales people. The costs of SGA had risen from an original amount of $1,185,000 to $3,900,000. (The original profitability statement is in Appendix A) Table.4: Profitability Statement Recommendations From the results of ABC it is evident that there are problems with the pricing of the products in the impulse and shop market. With this new costing data, GMI management can decide on what strategies that they would choose to pursue to ensure the sustainability and profitability of Colombo frozen yoghurt. The following are recommendations that can be useful to meet this goal. Re-pricing GMI can choose to re-price itself in both the Impulse segment and shop segment to try to remain cost competitive. With the costs being significantly lower for shops, GMI could drop the price for shops and increase its price for impulse locations. This could improve sales of frozen yoghurt in shops, which lately have been falling at considerable rates. A reason for the sales falls could be linked to a high price that shop owners charge and discourage purchases from the public. A rate of return for GMI between 10% 20% would be reasonable. Also impulse market is very competitive and saturated with ice cream products that frozen yoghurt has to compete with. The sales history shows that in the impulse segment sales have a plateau. Therefore any further price-cutting could mean an increase in sales but as a consequence have a minute or negative margin. With the expensive cost structure for the impulse market, there is very little room for movement. Market/Customer Exit Based on the cost structure of the impulse market, GMI could choose to exit their customers in the impulse market. Some advantages of this option is that they may cut their loses early because the threat of competition entry to the frozen yoghurt and ice cream market is high. Future sales have the potential to decline by competitors dropping prices and entering the market with new products. The costs associated with spending time selling to the impulse market were a whopping statistic at 99% of sales representatives time. Also, costs have increased with the selling activity. With the exit of this segment, the sales people could be utilised in other areas of the business. The down side of the exit strategy is that GMI can lose market penetration, hence losing further sales by limiting the locations of where frozen yoghurt is sold and losing sales by terminating their customers. If this exit option were followed, GMI would have to ensure that the process is managed and marketed carefully to make this work for the long term. Value Engineering Lastly, GMI could attempt to cut their own costs that are driven by the value chains activities. These activities are in the form of manufacturing the frozen yoghurt, shipping, merchandising and SGA. To conduct a value engineering analysis would mean to look at eliminating wastage in the value chain and therefore reduce the costs associated with frozen yoghurt. Value engineering is widely used in the automotive industry as a cost reduction activity. If GMI used this tool in the shipping link of the value chain, it could focus on solutions to lower the cost of shipping per case of $2.25 in the impulse market. Perhaps an agreement could be reached with a freight forwarder that cases are picked up from GMI on pallets and then the forwarded individually to impulse locations. For example, costs could potentially be dropped to $1.50. For merchandising, maybe the cost of kits can be reduced by either re-sourcing to another supplier for the manufacture of the kits or even change the medium in what merchandising is conducted in. The problems with the escalating SGA costs may be attributed to GMIs own process. GMI could look at changing their processes to make it easier and therefore cheaper to sell products to the impulse market by sales representatives. Maybe even selling can be handled more efficiently, or even GMI could conduct training courses to improve the skills set for the sellers.