PENGUIN: PARLOUR OR PUSH CART

Pranit had been in the packaged food industry for a number of years and in 2004, he decided that there was a very good opportunity in the fast growing ice cream market. Pranit had spent a long time in Orissa and he thought that it would be a good location to start this business. The per capita income in the state had been growing steadily and the expenditure on snacks and packaged foods was growing faster than the rest of the country. He decided to start small and launch an ice cream with the brand name Penguin. Indian ice cream market in 2004 The organized ice cream market in India was pegged at about Rs.1500 crores a year. The main players were Kwality Walls, Vadilal, Arun and Dinshaw. There were many other players who were very strong in regional markets. About a decade back, Hindustan Lever had changed the competitive landscape by taking over Kwality, Cadburys Dollops and 100% Milkfood in quick succession. The per capita ice cream consumption in the country was very low at 250 ml per year. It could be contrasted with that of the US, which was about 22 litres per annum. The main problem facing the product was very low penetration of ice-cream in the snacks and sweetmeats market. There is stiff competition from traditional Indian sweetmeats like gulab jamuns and rasagullas and from aerated cold drinks spearheaded by Pepsi and Coke. The difficulty in setting up a cold chain prevented ice-creams from effectively reaching the hinterland and it remained an indulgence for the urban masses. Things were changing slowly and the Indian customer was open to the idea of having ice cream. The biggest ice cream market was Gujarat where the populace had really adopted ice cream with enthusiasm and the producers were helped by a very reliable supply of electricity which had allowed them to expand their cold chain. The ice cream market in India was estimated to be growing at the rate of 13% per annum. Orissa ice cream market The total ice cream market in Orissa was estimated to be worth about 40 crore rupees annually. The market was concentrated in the urban centres with about 80% of the total sales coming from Bhubaneswar, Cuttack, Berhampur, Rourkela and Sambalpur. The ice cream market in
Copyright Rajeev Roy - Associate Professor, XIMB Page 1 of 8

Orissa was served by both local and national brands. The main national brands were Amul, Vadilal, Dinshaw and Kwality Walls. There were a few brands from West Bengal, like Big Ones, Rollick and Tulika, that also tried out their luck in Orissa but they failed to perform consistently. The local brands like Frostee, Celeste and Amrit were doing well of late. Market shares: Brand Amul Kwality Walls Celeste Frostee Vadilal Dinshaw Others Annual sales in Rs crores 10.1 6.2 5.6 3.2 3.1 2.0 8.7

An interesting feature of the Orissa market was that most of the sales was in the form of gallons and catering packs, cups and sticks made up a very small portion of the entire market. The family packs were generally one litre packs but recently, some manufacturers had successfully introduced smaller packs like 500 ml, 650 ml, etc. Packing Gallons/catering packs Family Packs Cups Sticks and novelties % of sales 56% 21% 15% 8%

The most popular flavor was Vanilla, followed by strawberry, butterscotch and chocolate, in that order. The figures were skewed towards vanilla because sales of gallons and family packs were overwhelmingly of vanilla flavour. The customers were willing to try out different flavours in the case of cups and sticks. Even flavours like black currant, mango and kesar pista were regularly demanded by customers. Flavor Vanilla Strawberry Butterscotch Chocolate All others % of sales 52% 16% 11% 10% 11%

Copyright Rajeev Roy - Associate Professor, XIMB

Page 2 of 8

Bhubaneswar Penguin decided to start with the state capital of Bhubaneswar. It was the largest city and also the most affluent. The experience of other ice cream manufacturers had been that the majority of the sales came from Bhubaneswar. It was an old city built on and around the gentle slopes of the Eastern Ghats. Even though parts of it were about 3000 years old, most of it came into existence after 1965, when the government started building the new capital city. Population Population (incl. surrounding areas) Literacy rate HH income above 1,00,000 HH income (30,000 1,00,000) Age: 6 - 15 Making ice cream The process of making ice cream is a delicate process. Milk spoils easily and there are many minor factors which can result in the rejection of the entire lot. The main raw materials are milk, skimmed milk powder, sugar, milk cream, butter, emulsifiers, stabilizers, food colours and flavouring agents. In some varieties chocolate, nuts and other fruits are also added. In the first step of the process milk, skimmed milk powder, butter or cream, sugar, stabilizers and emulsifiers are mixed in a vat and are heated to about 70 C. Then this ice cream mix is passed through a homogenizer. The homogenizer mixes the ingredients thoroughly and makes sure that the milk fat is broken down to small particles. In the next step, a heat exchanger is used to cool down this hot ice cream mix to about 20 C. Then this mix is put in a cooling vat where it is allowed to cool down slowly and stabilize. The mix stays in the cooling vat for about four hours and in this time, the temperature of the mix is brought down to 4 C. At this stage of the process, the mix is taken to a mixing vat where flavour and colour are added and then it is passed through a continuous freezer. The continuous freezer whips the mix into a froth and freezes it to a temperature of -4 C. The continuous freezer is the most important part of the machinery and it is rated in terms of output per hour. Continuous freezers usually come in ratings upward of 200 litres per hour. By beating the mix into a froth, the mix gets the smooth texture associated with ice cream. One litre of mix is usually used to produce 2 litres of ice cream. This is because the volume of the froth is greater than that of the original mix. This increase in volume in the final product is called overrun. 11,56,246 16,39,280 75.2% 15% 51% 38%

Copyright Rajeev Roy - Associate Professor, XIMB

Page 3 of 8

In some varieties of ice cream, nuts, chocolate chips or fruit bits are added by attaching a fruit feeder to the continuous freezer. The very popular two in one varieties are produced by combining the outputs of two continuous freezers in one outlet. For making bars and other stick items, a lolly tank and moulds are used additionally. Gallon and litre packs are usually filled manually by a skilled worker as the ice cream comes out of the outlet pipe. The ice cream is sent to a cup filling machine to fill cups and cones. In large plants a machine is used to fill even litre and gallon packs. The process is not complete. Now the packed ice cream is sent to a hardening chamber. The ice cream is kept at a very cold temperature of -40 C to bring the core temperature of the product to - 17 C. Then it is stored in the cold room where a constant temperature of -22 C is maintained. Penguin had two choices. They could buy machinery from an established MNC like Alfa Laval. The total investment in plant and machinery would be about 90 lakhs and the plant would have the capacity to produce 2000 litres of ice cream in a shift. If they purchased machinery from a small Indian manufacturer, it would cost about 30 lakhs and they could produce 300 litres in a shift. In both cases, electricity, labour, marketing and other direct costs of operation would be about Rs.80,000 per month. A bank had agreed to finance upto 25 lakhs of the cost of the plant at an EMI of Rs.2000 per lakh for a period of 5 years. Pranit thought that given the small size of the market, he should go in for the smaller plant. In both case the raw material cost would be about 12 rupees per litre of ice cream. Quality of raw material was very important for this business and it made sense to have a good relationship with a dairy to ensure timely delivery of milk, skimmed milk powder and butter. Distribution of ice cream The distribution of ice cream was particularly challenging in the heat, humidity and poor infrastructure of India. Distributors needed to buy freezers and other equipment for storing and transporting ice cream. Total investment on equipment for a distributor was upwards of one lakh rupees. New manufacturers often had to finance at least part of the equipment purchased by retailers. Typical distribution margins were about 10% of MRP. Retailers too needed freezers. Small 100 litre freezers could cost about Rs 10,000 and large 500 litre display freezers could cost about Rs 50,000. Again, new manufacturers often had to finance these new freezers. Retail margins varied from 15% to 25% of MRP. A big problem with retail counters was that with frequent power cuts in summer, the ice cream got damaged quite regularly. It was estimated that damages represented about 2% of annual sales. Also, with insufficient sales, retailers would not be able to even recover the cost of the freezer and electricity bills.

Copyright Rajeev Roy - Associate Professor, XIMB

Page 4 of 8

Occasionally there were minor mechanical problems with the freezers and it was good to have a maintenance contract with freezer manufacturers like Voltas, Carrier, etc. Another interesting way to reach ice cream to customers was with the use of pushcarts. These small freezer-on-wheels were mobile ice cream vending counters which were pedaled to potential sales spots by vendors who were paid a sales commission. The commission was usually similar to retailer margins. Business Model Pranit had two different ideas on how to launch Penguin. He was planning on going with either push carts or with parlours. Penguin Parlours Usually an ice cream parlour is an upscale retail outlet having a wide range of flavours where customers could try out different combinations in a relatively sophisticated ambiance. Pranit had a different vision for Penguin parlours. He had contacted Voltas, a manufacturer of freezers and they had agreed to provide small glass top freezers which would look like smaller versions of the freezers used in large ice cream parlours. Each of these machines would cost about Rs.18,000. This could hold eight gallon sized packs of ice cream and this could be placed in almost any location. These Janata parlours would be in highly visible but small retail establishments. Scoops would be priced at Rs.5 and that would bring it within the reach of many consumers. Pranit envisioned having about 50 parlours in front of small restaurants, kirana shops and other small commercial establishments. Pranit knew that it would be difficult to present this concept to retailers and he also had to convince distributors to partner retailers in this activity. The parlours would be positioned to attract primarily children. Pranit hoped that this would be an inexpensive treat which children could pay for from their own pocket money. Also, this would be a good alternative for parents who wish to take their children to a parlour but want to spend a bit less. One of the strategies to attract children was to ensure that all the eight gallons would be of different colours so that it would look visually appealing to children. Penguin decided to sell the gallon packs at a low rate of 150 rupees to the retailers. Other ice cream makers were selling gallons to retailers at about 160 to 200. Pranit wanted to keep the price low to attract the retailers. Pranit would employ two people as salesmen to help recruit retailers. There was very high competition for retail outlets as there were many ice cream manufacturers. It was very important that the retailers keep making good profits and stay happy with Penguin. It would be the responsibility of the salespersons to maintain a good working relationship with the retailers.
Copyright Rajeev Roy - Associate Professor, XIMB Page 5 of 8

The value proposition for retailers is given in Exhibit 1. Pranit expected the parlours to sell an average of about 80 scoops a day. This was well above the calculated breakeven level of 44 scoops a day. Each parlour would be given a big illuminated signboard and it was hoped that the signboard would serve as a billboard, promoting Penguin as well as letting people know that it was available in the shop. Penguin did not have any plans of promoting the product in any other way. The freezers at the retail locations would be too small to keep a significant buffer stock of ice cream. So, a system of rapid replenishment would have to be worked out. Each retail outlet would have to be visited at least three times a week. Some busy outlets may even need daily replenishment. So, it was difficult and even expensive to eliminate distributors and service the retailers directly. Pranit understood that distributors were important to his business but he did not foresee much of a problem in getting distributors. Penguin Push Carts Pranit had an interesting twist to the traditional ice cream push cart. He wanted the push carts to go door to door and sell only family tubs of 500 ml. The smaller packs will allow the price to be kept low and that would encourage a number of customers. The retail price would be kept at Rs.45 per 500 ml tub. Family packs from other makers were available at Rs.60 to Rs.80 per litre. Amul and Dinshaw occasionally sold 500 ml packs at Rs.40 to Rs.50 per pack. Pranit knew that family packs appealed to the higher income families and knew that he would have to concentrate on that segment to drive sales. He also planned on having a wide range of flavours. Penguin would introduce two to five flavours every month and several flavours would be discontinued every month. Some of the zany flavours planned included Strawberry-Chocolate Fudge, Minty-Sitaphal and Peanut butterVanilla swirl. Frequent new flavours would encourage repeat purchases. Because of the additional ingredients and the smaller packs, the ice creams produced for the push carts would entail a higher cost. The cost would go up by about Rs.4 per litre. Pranit planned on having 20 push carts and each push cart was expected to sell an average of two blocks to 8 families every day. The push carts vendors would be paid Rs.10 per tub. The push carts would have to be purchased by Penguin and that would need an additional expenditure of about Rs.30,000 per pushcart. The push carts would be stocked up at the plant and the vendors would move around selling the tubs in pre-assigned territories. Penguin would also set up a website to promote new flavours where information on new flavours would be posted even before the flavours are produced. The website could also be used to place orders for ice creams which could then be delivered by the push carts the next day. Penguin also planned on accepting orders on phone.
Copyright Rajeev Roy - Associate Professor, XIMB Page 6 of 8

A few interesting online promotions were planned like getting customers to design new flavours or to come up with commemorative flavours for events like Saffron-Mint for Independence day or a Kiwi-Mango flavor when the Indian cricket team toured New Zealand. Questions: 1. So, which option should Pranit choose? 2. Can you suggest some changes to the chosen model? 3. What is the problem if both models are simultaneously deployed?

Copyright Rajeev Roy - Associate Professor, XIMB

Page 7 of 8

Exhibit 1 Value proposition for Parlour Costs Set up costs Cost of Freezer Signage material Rs 18000 2000

Variable costs per month Electricity Serving attendant Total

Rs 1500 1500 3000

Margin per scoop of ice cream Dealer price of one gallon pack Number of scoops from pack Cost per scoop Cost of cone Napkin (1/4 of full sheet) Total cost of one scoop Sale price of a scoop Margin

150 65 2.31 0.35 0.06 2.72 5.00 2.28

Sensitivity analysis on expected sales Scoops/day Contribution Per month 50 114.12 3423.60 100 228.23 6846.92 200 456.46 13693.85

Less costs 423.60 3846.92 10693.85

Copyright Rajeev Roy - Associate Professor, XIMB

Page 8 of 8