Case Study - PEI Preserve Company PDF

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THE PRINCE EDWARD ISLAND PRESERVE COMPANY: TURNAROUND

Nathaniel C. Lupton wrote this case under the supervision of Professor Paul W. Beamish solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2008, Ivey Management Services

Version: (A) 2008-09-05

In April 2008, Bruce MacNaughton, president of Prince Edward Island Preserve Co. Ltd. (P.E.I. Preserves), was focused on turnaround. The company he had founded in 1985 had gone into receivership in May 2007. Although this had resulted in losses for various mortgage holders and unsecured creditors, MacNaughton had been able to buy back his New Glasgow shop/café, the adjacent garden property and inventory, and restart the business. He now needed a viable product-market strategy.

BACKGROUND

Prince Edward Island Preserve Co. was a manufacturing and retail company located in New Glasgow, P.E.I. which produced and marketed specialty food products. The company founder and majority shareholder, Bruce MacNaughton, had realized that an opportunity existed to present P.E.I. strawberries as a world-class food product and to introduce the finished product to an “up-scale” specialty market. MacNaughton had made good on the opportunity he had perceived years earlier. It had not been easy, however. MacNaughton arrived in Prince Edward Island from Moncton, New Brunswick, in 1978. Without a job, he slept on the beach for much of that first summer. Over the next few years he worked in commission sales, waited tables in restaurants, and then moved to Toronto. There he studied to become a chef at George Brown College. After working in the restaurant trade for several years, he found a job with “Preserves by Amelia” in Toronto. After six months, he returned to Prince Edward Island where he opened a restaurant. The restaurant was not successful and MacNaughton lost the $30,000 stake he had accumulated. With nothing left but 100 kilograms of strawberries, MacNaughton decided to make these into preserves in order to have gifts for Christmas 1984. Early the following year, P.E.I. Preserves was founded. The products produced by the company were priced and packaged for the gift/gourmet and specialty food markets. The primary purchasers of these products were conscious of quality and were seeking a product

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which they considered tasteful and natural. P.E.I. Preserves felt its product met the highest standard of quality at a price that made it attractive to all segments of the marketplace. Over the next few years as the business grew, improvements were made to the building in New Glasgow. The sense of style which was characteristic of the company was evident from the beginning in its attractive layout and design. In 1989, the company diversified and opened “The Perfect Cup,” a small restaurant in Prince Edward Island’s capital city of Charlottetown. This restaurant continued the theme of quality, specializing in wholesome, home-made food featuring the products manufactured by the company. The success of this operation led to the opening in 1990 of a small tea room at the New Glasgow location. Both of these locations showcased the products manufactured by P.E.I. Preserves. In 1989, the company also opened a small (22-square-metre) retail branch in the CP Prince Edward Hotel. MacNaughton hoped this locale would expand visibility in the local and national marketplace, and serve as an off-season sales office. P.E.I. Preserves had been given very favourable lease arrangements and the location would require minimal financial investment. Two years later, the CP hotel location was closed and the company opened the Piece of Cake restaurant and a retail location a short distance away in the Confederation Court Mall. As Table 1 suggests, various forms of diversification had occurred over the years. Table 1 Operation (Year Opened - Closed) Charlottetown — Manufacturing and Retail (1985 - 1987) New Glasgow — Manufacturing and Retail (1988 - Present) Charlottetown — Restaurant (Perfect Cup) (1989 - 1990) Charlottetown — Retail (CP Hotel) (1989 - 1991) New Glasgow — Restaurant (Tea Room) (1990 - Present) Charlottetown — Restaurant (Piece of Cake) (1991 - 1992) Charlottetown — Retail (1991 - 1993) Moncton, N.B. — Retail Franchise (1992 - 1994) New Glasgow — Garden (bought 1994, opened 2003) New Glasgow — Theatre (2003 - Present) Charlottetown — Sweater Shop (2006 - 2006)

MARKETPLACE

Prince Edward Island was Canada’s smallest province, both in size and population. Located in the Gulf of St. Lawrence, it was separated from Nova Scotia and New Brunswick by the Northumberland Strait. The major employer in Prince Edward Island was the various levels of government. Many people in Prince

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Edward Island worked seasonally in farming (especially potato), fishing, or tourism. During the peak tourist months of July and August, the island population would swell dramatically from its base of 138,000. Prince Edward Island’s one million annual visitors came “home” to enjoy the long sandy beaches, picturesque scenery, lobster dinners, arguably the best tasting strawberries in the world, and slower pace of life. Prince Edward Island was best known in Canada and elsewhere for the books, movies and television series about Lucy Maud Montgomery’s turn-of-the-century literary creation, Anne of Green Gables. 2008 was a special year for many tourists as it marked the 100th anniversary of the publication of Anne of Green Gables. P.E.I. Preserves felt it was competing in a global market. Its visitors were from all over the world, and in 2008, it expected the numbers to exceed 150,000 in the New Glasgow location alone. New Glasgow (population 100) was located in a rural setting equidistant (15 kilometres) from Charlottetown and Prince Edward Island’s best-known north shore beaches. In its mailings, it planned to continue to promote Prince Edward Island as “Canada’s Garden Province” and the “little jewel that was in everyone’s heart!” It had benefitted, and would continue to benefit, from that image. MARKETING Products

The company had developed numerous products since its inception. These included many original varieties of preserves as well as honey, vinegar, mustard and repackaged tea (Exhibit 1 contains a 2008 price list, order form and a page from the mail order catalogue). The company had also added to the appeal of these products by offering gift packs composed of different products and packaging. With over 80 items, MacNaughton felt that a diverse product line had been achieved, and efforts in developing new product lines were expected to decrease in the future. Approximately three-quarters of total retail sales (including wholesale and mail order) came from the products the company made itself. Of these, three quarters were jam preserves. With the success of P.E.I. Preserves, imitation was inevitable. Several other small firms in Prince Edward Island also retailed specialty preserves. Another company which produced preserves in Ontario emphasized the Green Gables tie-in on its labels. Price

P.E.I. Preserves was not competing with “low-end” products, and felt its price reinforced its customers’ perception of quality. The 13 types of jam preserves retailed for $6.95 for a 250-millilitre jar, significantly more than any grocery store product. However, grocery stores did not offer jam products made with such a high fruit content and with champagne, liqueur or whisky. The food products were not subject to the five per cent national goods and services tax or Prince Edward Island’s 10 per cent provincial sales tax, an advantage over other gift products which the company would be stressing.

Promotion

Product promotion had been focused in two areas — personal contact with the consumer and catalogue distribution. Visitors to the New Glasgow location (approximately 125,000 in 2007) were enthusiastic upon meeting MacNaughton “resplendent in the family kilt,” reciting history and generally providing live

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entertainment. MacNaughton and the other staff members realized the value of this “island touch” and strove to ensure that all visitors to New Glasgow left with both a positive feeling and purchased products. Visitors were also encouraged to visit the New Glasgow location through a cooperative scheme whereby other specialty retailers provided a coupon for a free cup of coffee or tea at P.E.I. Preserves. In 2007, roughly 2,000 of these coupons were redeemed. Approximately 25,000 people received their mail order catalogue annually. They had experienced an order rate of 7.5 per cent with the average order being $66. They hoped to devote more time and effort to their mail order business in an effort to extend their marketing and production period. In addition to mail order, the company operated with an ad hoc group of wholesale distributors. These wholesalers were divided between Nova Scotia, Ontario and other locations. For orders as small as $150, buyers could purchase from the wholesalers’ price list. Wholesale prices were on average 60 per cent of the retail/mail order price. Total wholesale trade for the coming year was projected at $211,000, under the assumption of a three per cent increase over the previous year. Over the past few years, the company had received numerous enquiries for quotations on large-scale shipments. Mitsubishi had asked for a price on a container load of preserves. Airlines and hotels were interested in obtaining preserves in 28- or 30-gram single-service bottles. One hotel chain, for example, had expressed interest in purchasing three million bottles if the cost could be kept under $0.40 per unit. (MacNaughton had not proceeded due to the need to purchase $65,000 worth of bottling equipment, and uncertainty about his production costs.) This same hotel chain had more recently been assessing the ecological implications of the packaging waste which would be created with the use of so many small bottles. It was now weighing the hygiene implications of serving jam out of larger, multi-customer use containers in their restaurants. FINANCIAL

Growth, although indicative of the success of the company’s products, had also created its share of problems. Typical of many small businesses, the company had not secured financing suitable to its needs. This, coupled with the seasonal nature of the manufacturing operation, had caused numerous periods of severe cash shortages. Recent years, however, had been especially difficult for the company. The company had lost over $313,000 to start 2007, and this deficit grew to over $365,000 by the end of March. After going through four different bookkeepers, an unsuccessful attempted acquisition of an unrelated store in Charlottetown which proved costly, and general “distractions” with his garden and other projects, MacNaughton realized his company was not going to be able to manage payments to creditors any longer. The company officially went into receivership on May 10, 2007, after the bank reduced its line of credit to zero. Exhibit 2 presents the balance sheet of the P.E.I. Preserve Co. Ltd. The new company, Prince Edward Island Preserve Co., with a fiscal year end of April 30, opened shortly thereafter. Sales of the new company up to the end of March 2008 were a little over $1,570,000. These sales were made up of $1,065,000 from retail and wholesale (including mail order) of what they manufactured and/or distributed, $494,000 from the café and dairy bar, and $13,000 in sales and donations from visitors to the garden. Exhibit 3 provides a departmental income statement from these operations, while Exhibit 4 contains a consolidated balance sheet.

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At this time, MacNaughton was attempting to provide a sound financial base for the continued operation of the company. Projected sales for the period from May 1, 2008, to April 30, 2009, are summarized in Table 2 (see Exhibit 5 for details). Table 2

New Glasgow Restaurant Retail (New Glasgow) Wholesale (New Glasgow) Mail Order (New Glasgow) Kiosk (Charlottetown Mall) Garden Donations Gallery and Tea Room Shipping

$565,000 $708,000 $211,000 $163,000 $140,000 $24,600 $15,000 $50,230

Total

$1,876,830

OPERATIONS

Preserve production took place on site, in an area visible through glass windows from the retail floor. Many visitors, in fact, would videotape operations during their visit to the New Glasgow store, or would watch the process while tasting the broad selection of sample products freely available. Production took place on a batch basis. Ample production capacity existed for the $30,000 main kettle used to cook the preserves. Preserves were made five months a year, on a single shift, five day per week basis. Even then, the main kettle was in use only 50 per cent of the time. Only top quality fruit was purchased. As much as possible, P.E.I. raw materials were used. For a short period the fruit could be frozen until it was time for processing. The production process was labour intensive. MacNaughton was considering the feasibility of moving to an incentive-based salary system to increase productivity and control costs. While there were some minor differences due to ingredients, the variable costs for the 250-ml size are shown in Table 3 for both the traditional line of products and a new certified organic line developed for export to Japan (discussed later). The Japanese retailer required a unique style of jar and shrink-wrapping for the lid which increased the overall cost in addition to the premium price for organically grown fruit.

Table 3

Traditional Line

Certified Organic

Ingredients Labour Packaging

$1.24 $0.47 $0.40

$2.37 $0.47 $0.90

Total

$2.11

$3.74

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Café, Gallery and Tea Room

Restaurant operations were the source of many of MacNaughton’s headaches. The New Glasgow Restaurant had evolved over time from offering dessert and coffee/tea to its present status where it was also open for meals all day from late May until mid-October. McNaughton spent about 40 per cent of his time on restaurant-related activities.

Retail and Mail Order

Retail accounted for the greatest portion of both sales and income for the company (see Exhibit 3). Most retail took place in the New Glasgow store as visitors stopped in individually or on bus tours. Although road travel vacations were on a steady decline due to record high gas prices, cruise ship travel received a major boost after the opening of a new pier in 2008, as shown in Table 4. With major expansions to the port still under way in Charlottetown, the number of visiting cruise ships was expected to rise to about 80 within two years. In the past, cruise ships would stay in Prince Edward Island for about half a day before heading off to other ports. However, due to the popularity of the location they began staying for a full day in 2007. MacNaughton estimated that about 30 per cent of the ship’s passengers would stop in New Glasgow in the morning, and another 30 per cent in the afternoon. Based on this, he forecast that the number of visitors would increase from about 125,000 to 150,000.

Table 4

Year 2004 2005 2006 2007 2008

Cruise Ships 28 23 25 16 40

Passengers 23,118 23,894 28,830 21,360 69,380

Source: http://historiccharlottetownseaport.com/cruiseships/

About 85 per cent of the passengers of these ships were American with the majority of the remaining 15 per cent divided evenly between Canadians and Germans. MacNaughton noted that the European consumers were not interested in purchasing products to take back with them but preferred items they could consume on the premises. American consumers were also beginning to shy away from purchases of preserves and other products as new air travel regulations disallowed liquids and gels in containers with volumes greater than 100-ml in carry-on luggage. When MacNaughton suggested these customers place the bottles in their checked luggage, customers expressed fears about the bottles breaking. For these customers, MacNaughton agreed to ship the products to their homes for the same fee used for mail orders (see Exhibit 1). The goal of P.E.I. Preserves was to operate shipping on a breakeven basis but in actuality it was proving to be an expense (see Exhibit 3). Some of the customers who purchased products while visiting the New Glasgow location would become repeat customers who would order using the P.E.I. Preserve mail order catalogue or through the company’s website (www.preservecompany.com). Shipping to the United States had become difficult over the last few years. The Food and Drug Administration’s (FDA) bioterrorism act required that any shipment of

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food products be announced well in advance of the shipment date. In addition, the FDA notified P.E.I. Preserves early in 2008 that their labels were not compliant with new regulations in terms of the print location and presentation of the size of the container and the ingredients. As a result, the 40,000 labels the company had printed were now useless and mail order was halted for a period of two months while new labels were designed and printed. In addition to the retail location in New Glasgow and mail order, P.E.I. Preserves Co. opened a small kiosk in the Charlottetown Mall to gain access to the estimated $150,000 local market. MacNaughton felt the kiosk was an efficient way of educating customers about his products. The kiosk operated during the summer months only in 2007, but MacNaughton decided to keep it in operation from July 1 to December 25 in 2008 in order to increase sales during the holiday season.

Wholesale

The company’s wholesale operation largely resulted from market pull forces. Prior visitors to the New Glasgow location who did not want the inconvenience and added cost of purchasing products through mail order requested that their local high-end food distributors import P.E.I. Preserves products. The company established several relationships with these distributors in locations from Eastern Ontario to the Maritimes, and a few in Alberta and British Columbia. In general, however, MacNaughton was always worried about how his products were marketed in these stores and how that might affect his brand. He strongly believed customers needed to sample the products, as they regularly did in the New Glasgow shop, in order to be convinced that the premium price was justified. He felt he should visit locations that wished to sell his products, but he did not have the time to do so, given the demands of managing his business. The Country Garden

P.E.I. Preserves purchased 12 acres of land adjacent to the New Glasgow location in 1994 and committed substantial time, energy and money in landscaping and adding new structures beginning in 2003. One structure was an old church which was donated to the company and was to serve as a gallery for local artists in 2008. Another was a pavilion where local classical musicians were paid to perform on occasion during the summer. The third building was a butterfly observatory...