Habitual Chocolate case study PDF

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Habitual Chocolate: expansion opportunities case study...

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April&26,&2020&

CASE%STUDY%#3% HABITUAL%CHOCOLATE:%EXPANSION% OPPOTUNITIES% INTRODUCTION) ! Habitual!Chocolate!owned!by!Philippe!Lehner!now!is!a!chocolate!manufacturing!and!a!retailing! company!which!located!in!London,!Ontario.!Due!to!Habitual!chocolate!is!not!packed!with!sugars! and!it!was!Fairtrade!certified!and!almost!certified!organic,!it!was!loved!by!customers!and!been! well-known.!Currently,!Habitual!wants!to!get!opportunity!to!expand!its!operations,!as!well!as! production!capacity!in!Woodstock,!Ontario.!However,!as!an!artisanal!chocolate!production! company,!Habitual!is!facing!not!only!inter!challenges!but!also!external.! ! To!help!this!company!to!get!the!right!decision,!in!this!case!study,!I!am!going!to!analyze!Habitual! Chocolate’s!financial!statement!and!balance!sheet.!Through!analyzing!financial!statement,! company’s!own!strengths!and!weaknesses!and!comparison!with!other!competitors,!I!am!able!to! predict!and!recommend!that!should!Habitual!make!expansion!decision!and!if!it!is!an! appropriate!time!to!do!it.!

ANALYSIS)AND)FINDINGS) ! As!an!artisanal!chocolate!production!business,!with!the!rapid!growth!of!Fire!Roasted,!the! development!of!Habitual!is!good!in!previous!years,!the!owner!of!Habitual!feels!this!company! still!has!potential,!so!decide!to!pursue!its!own!business!strategy!under!Lehner’s!leadership.! Considering!since!2015,!Habitual!would!afford!increased!rent,!and!cocoa!beans!import!price! was!influenced!by!currency!exchanged!rate,!the!production!costs!increased.!Based!on!these! internal!pressures,!as!well!as!external!pressures,!such!as!other!dessert!producer!competitor,! Lehner!was!planning!to!move!production!space!to!Woodstock!but!should!be!after!financial! statement!analysis.!Exhibit!1!shows!the!Habitual’s!Income!statement!and!the!Common-size! Income!Statement!sheets!from!2013!to!2014:! !

Exhibit!1.!Habitual!Income!statement!and!Common-size!Income!Statement!

! ! Exhibit!2.!Selected!industry!and!company!ratios!

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Looking!at!the!Exhibit!2,!Habitual’s!return!on!assets!increased!rapidly!14.7%!in!total!(from! 2013!at!-1.8%!to!2014!at!12.9%),!which!exceeded!the!Canadian!industry’s!average.!It!indicates! that!the!business!was!good!using!its!assets!and!resources!to!make!money,!and!it’s!a!good!sign! for!a!long-term!investment.! ! Compared!to!net!income!to!sales!in!2013,!2014’s!was!above!industry!average!number!which! was!a!positive!trend!for!business!running.!! ! Moving!to!current!ratio,!it!has!fallen!down!to!0.6,!which!means!Habitual!couldn’t!pay!the!shortterm!liabilities.!In!my!perspective,!it’s!because!Habitual!took!a!$26,000!short-term!loan!from! Fire!Roasted.! ! Due!to!there!was!a!decreasing!number!in!days!of!inventory!in!2014!(125.6)!comparing!with! 2013!(147.4),!so!Habitual!sold!better!than!before,!sales!were!in!growth!during!that!period!of! time,!so!we!can!still!assume!that!Habitual!can!keep!doing!well!in!next!three!years.!On!the!other! hand,!compared!to!the!industry,!Habiyual’s!inventory!is!higher!than!others.!In!my!perspective,! it’s!because!Habitual!is!an!artisanal!company!but!producing!by!machines!like!others,!so!it!will! produce!and!store!product!capacity!even!when!it’s!in!a!slow!period!of!sales.! ! Compare!Habitual!in!the!chocolate!manufacturing!and!retailing!industries:! •

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Pros:! o Customized!chocolate!had!a!rich!and!unique!flavor.!! o Compared!to!larger!companies,!Habitual!offers!chocolate!can!be!more!Certified! Organic!and!Fairtrade-certified.! Cons:! o It’s!hard!for!smaller!artisanal!companies!to!compete!with!mechanized!efficiency! in!larger-scale!factories.!The!speed!of!mechanical!production!is!faster,!so!the! time!cost!of!artisanal!production!will!increase,!as!well!as!causing!stress!on!cash! flow!and!being!hard!to!able!to!satisfy!customers!in!short-peak!term.! o Pressure!from!big!brands,!some!big!companies!have!captured!40%!of!the!total! market!share!in!Canada.!

! Based!on!information!provided!online,!Lehner!provided!both!low!and!high!sales!in!the!case,!and! both!can!be!projected.!The!low!sales!scenario!results!in!a!-7%!return!on!investment,!so!there!is! no!payback;!the!high!sales!scenario!provides!a!15%!return!on!investment,!and!it!has!around!7! years!pay!back.!Because!of!the!useful!like!of!equipment!and!fixtures!is!15!years,!a!less!than!five! years!payback!in!the!high!sales!scenario!is!reasonable.!Overall,!the!returns!are!pretty!low!and!it!

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will!be!highly!risky.!Two!scenarios!of!low!sale!and!high!sale!that!Lehner!predicted!show!in! Exhibit!3!behind:! Exhibit!3.!Low!sale!and!high!sale!prediction!

! ! According!to!this!project!statement!of!earnings!for!Habitual!and!current!situation,!there!are! both!advantages!and!disadvantages!that!this!company!has!as!showing!as!follows:! •

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Advantages:! o Moving!to!Woodstock!can!allow!Habitual!to!avoid!London!retail!sales.! o Rent!fee!increased!from!2013!to!2014!in!London,!so!moving!is!good!for!company! to!avoid!affording!rising!rents.! o Building!upgrades!from!the!landlord!is!free.! o Achieve!Lehner’s!goal!for!expansion.! Disadvantages:! o The!total!investment!is!around!$68,000!which!will!make!fixed!asset!value! ($47,950!in!2014)!of!this!company!get!higher,!and!according!to!low!sale! prediction,!ROI!shows!-7%,!which!becomes!highly!risky.! o London!market!is!definitely!bigger!than!Woodstock’s,!so!maybe!after!moving,! this!company!can’t!be!enough!to!support!retail!shops.! o Habitual!seems!to!be!struggling!to!pay!back!loans.!

! Using!possible!growth!in!sales!and!expanses!after!2014!in!both!Woodstock!expansion!(Scenario! I)!and!staying!in!Western!fair!Farmer’s!Market!(Scenario!II).!Both!of!them!are!projected!under!

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the!best!option!to!make!compared.!Let’s!predict!for!Scenario!I!in!Exhibit!4!first,!which!is!if! Lehner!decides!to!move!his!business!to!Canada,!! Exhibit!4!Habitual!Chocolate!Income!Statement!Scenario!

! ! Let’s!predict!that!in!2016!and!2017,!the!increasing!trends!and!percentage!growth!are!as!similar! as!2015’s.!Even!the!customer!mix!would!be!different!in!Woodstock!so!it’s!hard!to!estimate.! Assuming!that!the!sales!in!2015!include!25%!retail!and!75%!growth!in!revenue!and!keep! computing!in!this!way!in!both!2016!and!2017.!Lehner!would!go!to!sign!rental!agreement!which! is!$1,500!per!month!for!later!five!years.!General!and!administration!costs!$300!per!month.!$300! per!month!utilities!expenses.!As!for!vehicle!expenses,!$750!per!month!from!June!to!November,! and!$1,000!per!month!from!December!to!May.! ! Looking!back!to!the!Exhibit!3.,!after!computing!low!and!high!sales!prediction!for!Scenario!I,!let’s! assuming!that!after!2015,!there!is!an!average!growth!with!sales,!and!its!RIO!is!between!-7%!and! 15%,!then!the!rest!amount!of!these!items!follow!this!increased!trend!to!get!Scenario!I!Balance! Sheet!(Exhibit!5).!We!can!see!that!this!company’s!current!assets!for!2015!was!$32,855,!while!its! current!liabilities!was!$38,235!more!than!its!current!assets,!which!means!this!company!could! not!pay!back!the!short!term!debt!from!Fire!Roasted.!It!would!be!risky!if!Habitual!asked!for! loans.! ! ! ! !

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! Exhibit!5.!Scenario!I!Balance!Sheet!

! ! Moving!forward,!Exhibit!6!and!Exhibit!7!show!the!projected!Income!Statement!and!the!Balance! Sheet!for!Scenario!II,!which!Lehner!decide!to!stay!in!London,!Ontario.!Regardless!of!moving!to! Woodstock,!in!2015,!projecting!that!Habitual’s!wholesale!would!increase!by!75%,!so!sales!will! increase!to!$273,000!in!2016!and!$477,750!in!2017.!Since!observing!early!years!as!well,!a!fair! increase!in!rent!and!salaries!and!wages!should!be!considered.!Taking!some!fluctuation!into! account,!an!estimated!net!profit!of!$77,812!(287%!increase!from!2015)!in!2016!and!$203,342! in!2017!(161%!increase!compared!to!2016).!! ! ! ! ! ! !

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! Exhibit!6!Projected!Income!Statement!for!Scenario!II!

! ! Looking!at!Exhibit!7,!keeping!a!possible!slight!increase!in!both!2016!and!2017,!and!assuming! there!are!no!changes!in!expenses.!Considering!if!Habitual!decided!to!not!move!current!location,! we!can!use!previous!years’!data!as!reference!to!estimate!from!2015!to!2017.!Assuming!that!the! situation!is!similar!with!years!before!2014,!and!business’s!trend!is!steady!rising.!To!be!specific,! Total!assets!increased!26%!from!2014!to!2015,!so!assuming!49%!(from!2015!to!2016)!and!95%! (from!2016!to!2017)!in!Total!assets,!which!are!$154,126!and!$301,583!separately.! ! ! ! ! ! ! ! ! ! ! ! !

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Exhibit!7!Projected!Balance!Sheet!for!Scenario!II!

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RECOMMENDATIONS)&)CONCLUSION) ! After!these!above!analysis,!if!Habitual!really!decides!to!open!Woodstock!market,!I!think!Lehner! should!arrange!those!bunch!of!issue!to!complete!this!expansion!successfully:!firstly,!Lehner! should!find!a!new!grand!which!can!open!store!after!June!2015!as!soon!as!possible!in!case! missing!season!of!sales,!otherwise!Habitual!already!couldn’t!pay!short-term!debt!back.! Secondly,!purchasing!new!equipment!and!fixtures!for!new!stores,!as!well!as!hiring!new!staff!are! also!important!to!think!about.!Thirdly,!even!new!stores!open!on!time,!but!the!population!in! Woodstock!is!much!less!than!London,!so!probably!sales!is!too!small!to!support!this!new! production!unsustainably.!! !

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Overall,!in!my!perspective,!I!don’t!agree!Habitual!expansion!in!Woodstock!is!really!a!good!idea.!I! recommend,!instead!of!going!to!face!more!risky!obstacles,!it’s!better!to!spend!more!time!on! current!London!market.!Taking!time!to!make!a!comparison!based!on!competitors’!performance,! as!well!as!making!new!products!with!artisanal!specials,!Habitual!will!find!a!breakthrough!point! eventually.!It’s!just!about!timing.! ! !

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WORK%CITED% !

Alex. “Habitual Chocolate: Expansion Opportunities - Case Solution.” Casehero, 10 Apr. 2019, www.casehero.com/habitual-chocolate-expansion-opportunities/. Harvard Business Publishing Education, hbsp.harvard.edu/coursepacks/720037. !

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