Introduction Cowgirl Chocolates was started in 1997 by Marilyn Lysohir and her husband, Ross Coates.

Marilyn and Ross are artists and devote much of their time to their artistic endeavors. Marilyn is a ceramicist and lecturer who is internationally known and has a successful ceramic art business. Ross is a sculptor and a professor of fine arts at a nearby University. As a labor of love, Marilyn and Ross began publishing a once-a-year arts magazine called High Ground. More a multimedia product than a magazine, the 600-copy production of this product does not pay for itself, so Marilyn and Ross have continually sought other ways to provide income to cover the costs of production for High Ground. Cowgirl Chocolates began as one of those ways.

Marilyn had experience working with chocolate and, in a prior job, created chocolate sculptures. From this experience, she saw the love people have for chocolate. Because of her love for hot and spicy foods, her brother suggested she combine hot and spicy with chocolate and develop a product. She began experimenting with different combinations and recruited neighbors, friends and acquaintances to try her creations and give her feedback. She received mixed responses many enjoyed the hot and spicy chocolates, while some felt the combination didnt work or that they were too spicy. Marilyn was able to find a local candy company to produce the chocolates in quantity and, with that, Cowgirl Chocolates was born.

Cowgirl Chocolates motto Sissies Stay Away matches the image of the companys logo. Looking tough, May Lillie, a turn-of-the-century cowgirl, graces the packaging of every Cowgirl Chocolates product looking down the barrel of a pistol.

Situation Analysis Company Cowgirl Chocolates offers a variety of products including individually wrapped truffles, chocolate bars and a hot caramel dessert sauce. The truffles are available in chocolate, mint, orange, lime tequila and espresso. All of these truffles are hot and spicy, with espresso being the hottest. Truffles can be purchased in gift boxes, in drawstring muslin bags, or in a collectible tin. They can also be ordered in a plain plastic bag. The - pound muslin bag is the most popular truffle product making up 16 percent of total revenues, while the - pound tin makes up 12 1

percent of revenues. A sampler bag made up of four assorted hot truffles makes up 7 percent of total sales. Overall, truffles make up 40 percent of the companys total revenues. Spicy Chocolate Truffle Bars are sold individually and come in two varieties orange espresso or lime tequila crunch. Sales of this product account for 50 percent of total revenues. The Hot Caramel Dessert Sauce is sold by the jar and equates to 10 percent of total revenues. The companys retail pricing is set to achieve an average gross profit margin of 65 percent after ingredients and packaging. Although gift boxes, buckets, and baskets make up a small percentage of total truffle sales, these items are made up of a combination of existing truffle and bar products, so the additional cost to the company is the cost of the box, bucket or basket. Cowgirl Chocolates has won numerous awards in both the Fiery Food Challenges and the Scovie Award Competitions held annually. Additionally, the companys distinctive product packaging has won several awards. Although the company has had some success with its hot and spicy product line, many potential wholesalers and customers have commented that the product is too spicy. With this in mind, Marilyn is in the process of developing a mild-mannered truffle without the spice.

Environment The market for chocolate is vast. Gift baskets are popular purchases, especially around the holidays, and Cowgirl Chocolates has positioned its product as a gift-type purchase. Yet, while the market for chocolate is large, the market for spicy chocolate is markedly smaller. While doing initial product testing, Marilyn discovered this even with her small sample size. Additionally, at trade shows and other events, Marilyn continues to see the reaction consumers have to the products. Specialty chocolate products do not hold as significant a percentage of the market as traditional chocolate products because they are purchased less frequently, yet they may hold greater customer loyalty and generate repeat customers. Because of their higher price, specialty chocolate products may be purchased more for special occasions, so these products are positioned as a gift purchase or special treat for oneself.

Competitors Although very few direct competitors exist for Cowgirl Chocolates, there are many indirect competitors other companies that manufacture chocolate and sweets. Cowgirl Chocolates competes against these companies for shelf space at various retailers and for a portion of the 2

disposable income of the consumer. Seattle Chocolates, the company that produces Cowgirl Chocolate products, has its own line of high quality chocolate, yet without the spice. Additionally, other companies produce premium chocolate products and charge comparable or somewhat lower prices for similar sized chocolate bars. Cowgirl Chocolates must also keep in mind the lower quality chocolate products that also compete for the consumers dollar. Lower quality means these products sell for a lower price. Consumers may choose these chocolates more frequently because they cost less.

In addition to competing with other chocolate companies, Cowgirl Chocolates also competes in the hot and spicy food industry. Although these other products may not have the sweet element, they could be substitute products in the mind of a hot and spicy food consumer.

Customers Cowgirl Chocolates sells its products wholesale through a number of different retailers. It has been successful in placement of the product through various companies in Moscow, Idaho, where the business is located. The Moscow Food Co-op accounts for 10 to 15 percent of the companys sales. Most of the products sold at the Co-op are made or grown locally, so Cowgirl Chocolates products fit nicely. Three other locations in Moscow also carry the product: Wild Women Traders, Northwest Showcase and Bookpeople. Each of these companies serves a unique, niche market. Outside of Moscow, the Boise Food Co-op carries the companys products, as does the Boise Museum of Fine Arts gift shop and three other gift shops in Montana, Oregon and Ohio. An upscale restaurant in New York called the Kitchen Market carries Cowgirl Chocolates products and is probably one of the companys steadiest wholesale customers, second to the Moscow Food Co-op. In addition, a handful of specialty stores that sell hot and spicy foods carry the products, yet customers at these stores seem unwilling to pay the premium price. Various online retailers also sell Cowgirl Chocolates products, yet sales from these companies are not very significant. Marilyn continues to promote the companys products and has tried to gain placement in bigger name, upscale retailers. In the past, she had been successful in getting the product placed at the Whitney Museum in New York City, yet the product did not sell well, so it was dropped. Numerous grocery stores, specialty food stores, upscale restaurants, and highend retailers are currently the focus of Cowgirl Chocolates wholesale marketing efforts. 3

Cowgirl Chocolates also sells its product retail through the company website. The relatively simple site is maintained by a small, local Internet service provider. The website address is included in all packaging materials and is linked to many other upscale shopping sites. Because the website does not include the features that allow the company to track where customers are coming from and if they have purchased from the company before, it is nearly impossible for the company to determine exactly who its retail customer base consists of. Market analysis shows that men tend to prefer hotter food than women, yet only 15 percent of American consumers currently eat hot and spicy food.

Because of its packaging and positioning of the product as a specialty or gift purchase, the enduser evaluates purchase of this product carefully before making a buying decision. Depending on where they are exposed to the product, consumers will compare Cowgirl Chocolate products with other chocolate products or other hot and spicy food products. They may also evaluate other gift package options to make their choice. Price, value, quantity and taste will all be factors in making the purchase decision.

Problem Definition The company has been in business for four years and has not achieved profitability nor has it achieved a significant growth in sales. While Marilyn has had some success positioning Cowgirl Chocolates products in various locations throughout her town, she has had limited success expanding outward. Cowgirl Chocolates products serve a very unique niche the products are not simply for people who enjoy spicy food but for those in that group craving something distinctive. Because of this extreme specialty, it is not easy to find Cowgirl Chocolates customers.

Additionally, selling both wholesale and retail has its challenges. The company has identified a niche within the unique, specialty, or eclectic retail stores. Its products tend to sell well in these locations. However, because of Marilyns connections, various locations, including museum gift shops, are also wholesale customers. These locations have been mostly unsuccessful selling Cowgirl Chocolates. Better identification of potential wholesale customers and a well-drafted 4

marketing plan are necessary in order to expand wholesale sales. On the retail side, the company is missing huge potential by maintaining an inadequate website. The inability to track online retail customers prohibits Cowgirl Chocolates from properly serving its customer base with the products they desire. It also does little to aid in the companys marketing efforts, as the company is unsure what type of consumer purchases its products.

Cowgirl Chocolates has positioned itself as a specialty chocolate company with unique, one-ofa-kind spicy chocolates. Its tough cowboy or cowgirl image is reflected in the company logo and packaging which is printed with bold lettering and wording. Market statistics show that more men prefer hot and spicy food than women. The company logo, Sissies Stay Away, may draw men toward the product, viewing it as a challenge. However, the logo may have the opposite effect on women who may assume it is too spicy for them.

Compared to other specialty chocolate companies, Cowgirl Chocolates offers smaller package sizes and similar or higher prices. Customers who purchase the product and open a tin filled to the rim with chocolates may feel satisfied that they got their moneys worth; however, a comparison on the shelf may prove different results. Cowgirl Chocolates smaller tin with a higher price tag may be passed over for the purchase of a competitors larger tin. Additionally, the smaller packaging sizes may make the product appear to be an exclusive product that is enjoyed occasionally in small quantities.

While marketing and sales efforts are the immediately visible problem with Cowgirl Chocolates, the underlying problem may be uncertainty as to the companys mission. A possible mission statement for a company such as this may be, To provide quality chocolate products to our customers using premium ingredients and processes while being attentive to our customers needs. Yet, Cowgirl Chocolates did not start with the sole purpose of providing an excellent chocolate product. It started as a way to fund High Ground, the arts magazine created and published by Marilyn and Ross - their true passion. A vision for Cowgirl Chocolates must be identified in order to point the company in the right direction.

Alternatives Cowgirl Chocolates must evaluate many different alternatives in order to grow the business or even to simply stay in business. Improvement of the website and focus on increasing online retail sales is one avenue of growth. Determining who the customer is will be the first step in choosing a new website design and which online retailers to offer the companys products through. This option includes development of the analytical capabilities of the website in order to determine what type of person is purchasing the products, with what frequency they make their purchases, and how they find the website. Cowgirl Chocolates could also expand its wholesale business by first determining what types of retailers should be targeted. By learning more about the end-user of its products, the company can develop a target wholesale customer base that consists of retailers that are frequented by hot and spicy chocolate lovers.

Cowgirl Chocolates also has options to evaluate that are centered on its product line. The company could develop additional products based on its customers preferences or it could discontinue parts of its product line that have sold with no or minimal success.

Cowgirl Chocolates must also evaluate a variety of marketing options. Marilyn is considering writing a cookbook to promote Cowgirl Chocolates products. The company must determine if a cookbook has the potential to increase product sales. Additionally, Cowgirl Chocolates should evaluate the feasibility of doing additional focused marketing during the holiday seasons. While other companies in the industry see increased sales around the holiday seasons, Cowgirl Chocolates has not noticed a marked increase in sales. Marketing strategies to capitalize on this opportunity should be explored.

Lastly, Cowgirl Chocolates must evaluate the potential for continued viability of this business. Identifying and understanding the target customer and projecting income and expenses for the next few years can help determine if the company has the ability to generate profits and be successful.

Evaluation of Alternatives

Increase Online Retail Sales Sales through the company website account for about 1/3 of the companys total sales. The website also accounted for much of the increase in sales from 1999 to 2000. Retail sales produce higher gross profit margins than wholesale sales. As illustrated in Appendix A, retail sales of Spicy Chocolate Truffle Bars earn a 61% gross profit margin, while wholesale sales of the same product earn 23%. This result is similar for all other products, not including the 1-pound plastic bag that is only sold retail. A 10 percent increase in online retail sales ($883) would result in $574 in additional profits, assuming an average gross profit margin of 65%. Unfortunately, because of the low sales volume the company is currently generating, in order to cover the $20,000+ cash shortfall generated from operations in 2000 using the same 65% gross profit margin, a minimum of $31,000 in online retail sales would need to be generated. Cowgirl Chocolates has already established itself as an online retailer. However, the website does not provide features to allow the company to track its customers. Adding these features to the website should have a very reasonable, minimal cost.

Another area to be evaluated is the size of orders placed on the internet and the appropriate shipping and handling costs for each order. Although shipping costs are fully passed on to the customer, the amount of time necessary to package and ship the products is not accounted for, nor is the cost of shipping materials. For online retail sales, we will assume that each product is purchased individually except candy bars which are purchased in pairs. If each order takes 15 minutes to prepare and package for shipping, the person preparing the order makes $10 per hour and the shipping materials cost $1.00 per order, this will add $3.50 to the cost of each order. Online retail sales in 2000 were $8,839.14. Using the percentage of total sales of each product and the product prices, means approximately 1,375 online orders were placed. This additional cost, ($4,812) must either be used in determining the retail sale price of the product or the shipping and handling cost on each order. Shipping preparation and materials costs will not typically change as the size of the order changes. However, as retail sales increase, employees may be needed to package products and prepare them for shipping. Please see Appendix C for calculations. 7

Expand the Wholesale Business Majority of Cowgirl Chocolates sales come from the wholesale side of its business. The company has explored many options to find companies or organizations that are a fit with its product. It has had success with many local stores which could be the result of Marilyns reputation in the community. Sporadic success has been achieved outside the local market. The most success has been achieved at two Food Co-ops and at the Kitchen Market, an upscale restaurant and gourmet-food take-out business. Yet, limited or no success has been achieved at museum gift shops and specialty food stores featuring hot and spicy foods. Wholesale gross profit margins, after ingredients and product packaging, range from 23 to 47 percent, with an average of 33 percent. This is 32 percent less than retail gross profit margins. Wholesale markets offer additional exposure for the product and larger distribution channels. Continuous contact with existing and potential wholesale customers is necessary to expand this side of the business. In addition to marketing directed toward the end-user, Cowgirl Chocolates must market to wholesale customers as well, educating them about the products and securing placement on their shelves. Through experiences with different wholesale customers, Marilyn has determined that the product will typically sell better if it is positioned with other like-priced products or if it is found in a unique, high-end store.

Evaluate and Make Changes to the Product Line Evaluating the existing product line and identifying products that could be discontinued or added may help the company achieve greater profitability. The company feels it is currently achieving a 58 to72 percent gross profit margin on each product. Yet, without accounting for packaging time, this is inaccurate. Packaging labor must be included regardless of which company, Cowgirl Chocolates or Seattle Chocolates, does the packaging. While Marilyn feels she may be able to hire employees to package the product at a lower cost than Seattle Chocolates charges, this analysis uses the packaging costs of Seattle Chocolates. It also assumes that the gift bucket, gift basket, and 1-pound plastic bag have $1.00 in packaging costs, as the process for packing these products should be similar to that of the gift box and -pound tin. The packaging and production costs for the Hot Caramel Dessert Sauce was found by using Marilyns time to produce 21 cases with 12 jars each. Including drive time of five hours round-trip and eight hours 8

of production at a $12 per hour rate equates to $0.62 cost per jar. Please see Appendices A, B and C for more details. The addition of these costs drops gross profit margins by 2 to 10 percent on the retail side and 3 to 17 percent on the wholesale side depending on the product.

By conducting this analysis, it is apparent that the lowest gross profit margin produced on the retail side (48%) and the wholesale side (11%) is the Hot Caramel Dessert Sauce. The sauce also makes up the lowest percentage of total company sales at 10 percent. Marilyn has been looking into the possibility of having a sauce company in Montana make the Hot Caramel Dessert Sauce. This company will make and package the sauce and sell it to Cowgirl Chocolates for $2.75 per jar. The company requires a minimum order size of 72 cases (864 jars), but may be willing to produce and sell in half batches initially. In addition to a shipping cost of $70 - $90 per delivery, Cowgirl Chocolates would incur one-time costs of creating new label designs to fit on the jars used by this sauce company. If Cowgirl Chocolates maintains its current pricing, it will achieve 3 percent additional gross profit margin on the retail side if it purchases in full batches and 2 percent additional if it purchases in half batches. On the wholesale side, it will achieve 8 percent additional gross profit if it purchases in full batches and 7 percent if it purchases in half batches. Please see Appendix D for calculations.

The next lowest gross profit margin on the retail side comes from the one-pound plastic bag at 57 percent and from the -pound gift box on the wholesale side at 18 percent. Both of these product currently generate about 1% of total sales. However, in anticipation of increased sales, Cowgirl Chocolates has more gift box inventory on hand than it normally does.

Implement New Marketing Strategies The first step in determining which marketing strategies have a greater chance of success is to determine who the target customer is for Cowgirl Chocolate products. Then, company management must determine the most effective ways to reach these customers. In order for the new ad in Chile Pepper magazine ad to cover its cost, Cowgirl Chocolates must generate additional revenue of over $9,000. Many competitors have seasonal sales pattern and see large increases in sales around holidays such as Valentines Day and Christmas. Marilyn is considering the purchase of an email list which would be used to send information and product 9

specials at times when potential customers are shopping for gifts. Because a local jewelry store may be willing to split the $300 cost of purchasing the list, the $150 cost would need to generate $462 in increased sales to cover it. Another option Marilyn is considering is writing a cookbook to promote Cowgirl Chocolates products. The time involved developing the book, cost of materials, potential sales price, and ability to generate additional product sales must all be evaluated. Cowgirl Chocolates could develop and implement a new marketing campaign including the above options. If it doubled its current advertising budget, that additional $8,000 in marketing expense would need to generate nearly $25,000 in sales to cover its cost. Please see Appendix E for calculations.

Determine Viability of the Business Lack of profitability for the last four years that the company has been in business is a key driver for the evaluation of this option. As discussed above, adding in estimated packaging labor reduces overall gross profit margin for the company from 45% of sales to 22% of sales in 2000. This equates to over $6,000 in less net income for the company based on current year sales. Additionally, this business was started with the purpose of funding the development of High Ground, the arts magazine created by Marilyn and Ross. Up to this point, Cowgirl Chocolates has not provided any funding for the magazine. It has only drained Marilyn and Ross of their personal savings. In the analysis, it was estimated that the 600-issue production of High Ground cost $100 per issue to produce. If this $60,000 need is added to the 2000 financial results of Cowgirl Chocolates, Net Profit Before Taxes would drop to ($72,000) a $72,000 Net Loss. To look at this another way, because Cowgirl Chocolates was not able to generate the income necessary to fund the production of High Ground and it generated more expenses than income from operations, Marilyn and Ross were required to use their personal savings in the amount of $72,000 to cover both Cowgirl Chocolates and High Ground. Please see Appendix B for calculations.

A break-even analysis of Cowgirl Chocolates identifies many variable costs including ingredients, packaging materials and packaging labor. Once subtracted from total sales (including shipping income) of $30,046, the result is a 32 percent contribution margin. The contribution margin is what is available to cover the fixed costs which were identified to be 10

advertising, travel, miscellaneous, memberships, brokers, office expense, and the necessary funds for High Ground. Total fixed costs equal $82,024. In order to determine what level of sales Cowgirl Chocolates needs to meet to meet its goal of providing adequate funding for High Ground, I divided total fixed costs by the contribution margin. The analysis shows that over $250,000 in annual sales is needed. This is a 741% increase in sales!

Recommendations Positioning Cowgirl Chocolates as a premier, high-quality chocolate company is an appropriate strategy. However, because of the uniqueness of the product, Cowgirl Chocolates does not have equal footing with its competitors. The spicy aspect of the chocolates limits its ability to directly compete in the specialty chocolate industry. On the other hand, the sweetness of the product, limits the companys ability to compete in the hot and spicy food industry. Cowgirl Chocolates should maintain its positioning strategy as a chocolate company and hot and spicy food company, but it should become better aware of who it customer truly is to capitalize on its uniqueness in both industries. This positioning strategy will be best served by establishing Cowgirl Chocolates as a brand. The company can best do this by directly influencing the consumer through its website and other marketing tools and selecting only the wholesale customers that offer high-quality, specialty products or hot and spicy food.

In order to keep the company alive, the following recommendations must be followed:

1. Increase Online Retail Sales The backbone for this revenue source is already in place, yet it is not adequately utilized. Although the company can currently determine which products sell better online than others, it cannot identify who is purchasing what. This knowledge will be a major step in development of the companys overall marketing strategies. The tracking features installed on the website will also allow the company to determine how customers arrive at its website. Marilyn can then determine the effectiveness of paying to have the website listed on other sites. Additionally, she can better choose potential sites to link to when she learns more about the customers buying habits and preferences.

11

As online retail sales increase, a greater number of small orders will be generated. These orders are time consuming to prepare and package for shipping. Employees will need to be hired to manage and ship orders. In order to ensure an adequate profit is being earned from online retail orders, Cowgirl Chocolates could consider establishing a minimum online order or increasing its shipping and handling costs to cover these costs.

Retail sales generate significantly greater gross profit margins than wholesale sales. Because the company has the ability to sell retail through its website, it should maximize these efforts while keeping in mind the added costs of hiring employees.

2. Strategically Expand the Wholesale Business Wholesale customers are a good way for Cowgirl Chocolates to cover additional parts of the market. When seeking out wholesale customers, the company must keep in mind its high-quality, specialty and hot and spicy image. Stores offering hot and spicy products alone will not be ideal candidates as wholesale customers. Cowgirl Chocolates must utilize wholesale channels that offer products with comparable quality and price. Other companies similar to Kitchen Market and the local Food Co-ops, should be sought. Consumers who enter these stores expect high quality, unique products and they are comfortable paying more for them.

3. Evaluate and Make Changes to the Product Line Cowgirl Chocolates should discontinue the Hot Caramel Dessert Sauce for a number of reasons. It currently achieves a much lower gross profit margin than all other products and accounts for only 10 percent of the companys sales. The commitment to this product is one full day of Marilyns time on at least a quarterly basis to achieve $2,600 in total sales. The other option, utilizing a sauce company to manufacture the product, requires a large commitment from Cowgirl Chocolates to purchase 432 or 864 jars at one time. Unless a strong sales and marketing effort is implemented that focuses on this product, the purchase of 864 jars of caramel sauce will last the company one year. Because of the low margins and high level of commitment to the product, it is not feasible to continue production. 12

4. Implement New Marketing Strategies In order to capitalize on the growing trend of gift baskets and on the increased sales around the holiday seasons, Cowgirl Chocolates must not only position itself as a highquality, specialty product, it must position itself as a gift option. The company has unique packaging for all of its products which makes all of them suitable as gift purchases. Price-conscious consumers may choose a less expensive tin over the large gift basket because even alone, the tin makes an attractive gift. Additional marketing of the gift bucket and gift basket around the holidays may increase sales of these products. The gift bucket is currently priced to achieve the highest gross profit margin of all products. Offering discounted pricing on this product to wholesalers during the holiday seasons may increase their purchases of this product. Selling additional gift buckets also has the added bonus of using up the overstock of inventory in gift baskets. A special price on gift buckets could also be included on the companys website and other marketing pieces to gain additional retail sales of the product, as well.

Purchasing the email list seems to be a cost effective new marketing strategy. To this list, the company can add retail customers from the website and wholesale customers and prospects. All new marketing strategies must be evaluated to determine the level of sales needed to cover the cost, which products have the greatest marketing potential, and which avenues are most effective in reaching its target customers. As stated earlier, only 15 percent of the American consumers enjoy hot and spicy foods, and men prefer hot and spicy foods more than women do. Based on this information, the content of the ad placed in Chile Pepper magazine should appeal to Cowgirl Chocolates target customer men who enjoy hot and spicy foods.

Development of a cookbook as a marketing strategy for Cowgirl Chocolates is a huge time and cost commitment with uncertain results. Marilyn and Ross already have commitments to their full-time careers, to Cowgirl Chocolates, and to High Ground. Finding time to write and market a cookbook will be difficult.

13

Although the above recommendations should increase sales and profitability for Cowgirl Chocolates, this is not a guarantee that the company is viable. For four years, Cowgirl Chocolates has had difficulty identifying how to best reach the end-users of its products. Because of the extreme uniqueness of its product line, the customer base is very small. Unless a company has identified the best channels to reach the customer or the customer purchases in large quantities, it is difficult to achieve sufficient profitability to stay in business. Cowgirl Chocolates has not achieved either of these milestones. Additionally, the level of sales needed to bring the company to a sufficient level of profitability is more than three times existing sales. Until this occurs, the company will continue to drain the owners personal savings. In my opinion, the recommendations made to keep the company alive will have too small of an impact and be unable to turn the company around quickly. It appears the goal of providing funding for High Ground is too insurmountable for the market potential of Cowgirl Chocolates. Unless Marilyn is willing to re-focus the mission of the company and remove the burden of providing funding for High Ground, Cowgirl Chocolates will not remain a viable business. However, even without the burden of High Ground, viability will be difficult. Ultimately, I would recommend re-defining the company and developing a mission statement that does not include funding another organization. Then, I would develop a budget and projections for the year 2001, implement recommendations #1 through #4 above, and evaluate performance against the budget at the end of the year. Continuation of the business should only be done if the owners are aware of and accept the potential personal contribution they may need to make if the company fails to meet its projections. If the company fails to meet expectations after one year, I would stop production and close the business.

Jennifer Pontinen MBA 8711: Marketing Management Spring 2010 14