Company Overview and Challenges
Discuss about the Case study of Prince Edward Island Preserve Company.
The Prince Edward Island Preserves Company (PEI Preserves) is a manufacturer and retailer of specialty food products located in New Glasgow, P.E.I. The company is founded by Bruce MacNaughton in 1985 which produces high quality specialty foods such as jams preserves, honeys, teas, and coffees using only the highest quality farm gate produce and ingredients. PEI Preserves then diversified and expanded to a wider range of services including restaurants, gift shops, and gardens and had gained popularity not only in other provinces in the country but also globally. Despite the company’s success and recognition in its products, it had failed to secure the company’s financial need and had gone into receivership in May 2007. Although MacNaughton had been able to repurchase the New Glasgow shop/café, the adjacent garden property and inventory, PEI preserves needed a feasible product-market strategy to turn around his company.
Since the company had been “built on gut and emotion, rather than analysis,” MacNaughton acknowledged that it is not sufficient for the future. Presented with many growth options to expand its manufacturing and serve a larger market size, the New Glasgow factory’s capacity is too small to meet the demands of a larger market. Given the time constraints and lowest net income to revenue ratio, MacNaughton has some major decisions to make. The company needs to have a clear vision, strategy goal and objective critical to the future direction and long-term growth of the company. With a proper analysis on the external and internal (SWOT) environment, MacNaughton can improve PEI Preserve’s competitive business position.
PEI Preserves Company’s over diversification and lack of strategy has led to financial losses and an urgent need for direction. Although the company was founded on instinct rather than analysis, the company needs a feasible product-market strategy maximize.
PEI Preserves should include SWOT analysis in strategy planning to identify the internal and external factors helpful in matching the firm’s resources and capabilities to the competitive environment that it operates.
- MacNaughton’s charisma and personal customer interaction creates a great experience to people especially tourists when visiting the New Glasgow site.
- Capability to source the greatest quality fruits and raw materials and producing unique and high-quality specialty food products different from its competitors due to its higher fruit content and with champagne, liqueur or whiskey that is not currently in the market.
- Customer brand loyalty due to its unique food products that consumers buy will regardless of the competition.
- Broad product mix which includes a wide range of specialized products.
- Respectable local reputation helps attracts visitors that comes during the summer months.
- Food products not subject to the 5% national goods and services tax or PEI’s 10% provincial sales tax which gives and advantage over other gift products that firms would normally be stressing.
- Inefficient management due to Bruce MacNaughton frugality and not hiring a management team that could assist him in planning and implementing strategies that the company needed to prosper.
- Difficulty to attract and retain quality staff due to seasonal operation.
- Seasonal business structure since Prince Edward Island is mostly a summer vacation destination and most of the company’s income is generated during this time only.
- Limited product promotion since PEI preserves limit itself to personal contact and customer mail order.
- Cash flow shortage due to the seasonal nature of the business since a large percentage of the income is generated during the summer when visitors are at the island.
- Increasing demand for high-end product both locally and globally.
- Expansion to two different regions such as Toronto and Japan which can help the company with the cash shortage.
- Extensive distribution channel including store wholesale in other provinces in the country, hotel chains, and major airlines that will help expand the company’s brand.
- Highly competitive market since the gift and specialization food industry has a few but large players, all competing in the quality, taste, and plan to attract consumers.
- Array of possible substitutes due to many competitors trying to replicate its products.
- Competitive pricing capacity due to high priced products, many competitors will try to lower their prices to attract PEI preserves customers.
- Foreign market awareness and adaptability due to varied consumer preferences from one to country to another, thus a clear understanding of the geographical market that the firm want to enter should be considered carefully.
As evident from the exhibit five, an outline relating to the financial workings has been provided for the PEI Preserve Co. An illustrations obtained from the exhibit five states that the sales have grown by 14.3%. During the financial year of 2008 the company has reported a sales figure for Café 494160 while in the subsequent year of 2009 the total amount of sales stood 565,000 marking a rise of approximately 14.3 per cent. On the other hand, the cost of sales has increasingly rose by 28% representing that the gross margin has grown slowly and steadily (Scott, 2015). Exhibit five also represents that the company has reported shortage of cash. This is because the cash from the operating line stood negatively to -55000.
PEI Preserves' Need for a Product-Market Strategy
An assertion can be bought forward in this regard by stating that the firm faces severe shortage of cash. The major factor contributing to the shortage of cash is because of the seasonal nature of the manufacturing operations (Leuz, & Wysocki, 2016). Additionally, PEI Preserve Co has failed to secure the appropriate finance to meet the short term business obligations. The major reason contributing to the shortage of cash is because of the higher amount of interest paid by the company on the operating loan. Additionally, the exhibit five represents that the interest and bank charges also included the interest paid by the company on the long term debt and principle. Consequently, the total amount of bank charges stood 95,124 representing a greater level of debt undertaken by PEI Preserve Co.
The financial analysis provides that the rise in earnings prior to interest and tax was on the higher side in respect to the growth reported on sales. The rise on sales was reported low in respect to the rise in total assets (Nobes, 2014). An assertion can be bought forward by stating that the rise in sales was higher because of the rise in price by 10% instead of the other factors.
Identify issues based on the above analysis.
Some of the key issues that were faced by Prince Edward Island Preserve are listed below:
- Problems relating to cash flow of organization- The success of the diversified products also came with the problems and financing factor was not suitable for the needs of company. Several periods of severe cash shortages were associated with the seasonal nature of manufacturing operations. There was a considerable growth in deficit and the company and in the beginning of 2007, company lost $ 313000. Cash shortage was witnessed in department of cafe and diary bar. Difficulties were witnessed in making payment to creditors and the line of credit by bank was reduced to zero (Sheth & Sisodia, 2015).
- Over diversification- It is ascertained from the case study that numerous products were developed by company ranging from variety of preserves along with mustard, vinegar, honey and repackaged tea. There was the development of diverse product lines. Preferences of consumers were widely diversified. 50% total market demand for jam was occupied by Strawberry jam and there was introduction of more and more varieties of jam simultaneously. Prince Edward Island Reserve had also developed other line of products such as speciality food market and gift and gourmet. Moreover, it also introduced some luxury products that could be sold with a proper marketing strategy and over the years, several forms of diversification occurred. This made problematic for company to concentrate of their specification and targeting a particular segment of market. When the customers are presented with too many choices then there is a possibility of shutting down and diversification at product level is somewhat risky.
- Lack of efficiency in operation- Operations of business of restaurant was questionable because gross margin was increasing at slower pace. This slow increase in gross margin was questionable cost of sales increased more than growth in sales. Process of production of company is labour incentives and this has lower down the productivity of organization. There is no automation of bottling process resulting from decorative fringe that is required to be done by labours. However, there is no guarantee that the product has the requirement of fringe for the bottling process is essential. Moreover, no proper cost benefit analysis was performed by the restaurant and this has resulted in the loss from operations. The main area of concern was the operations of company and it was perceived that the management is not able to take the advantage of opportunities for making the operation process efficient (Houston et al., 2014).
- Lack of strategy- There is no viable strategy for marketing the products of Prince Edward Island Preserve. It was required by the organization to formulate proper corporate strategy because the industry in which organization is operating is considerably different from that of speciality foods and gifts. The restaurant business of the organization was not the suitable strategy as a part of expansion of business (Baldacchino, 2015). Therefore, the reason associated with the business making loss and negative generation of cash flow in certain department is inappropriate formulation of their strategy.
Rethinking of the corporate strategy: One of the options of the PEI Preserve Co is that at the current stage the company is required to think about the corporate strategy whether the firm wishes to continue the business of restaurant. The market of restaurant is considered to be entirely different from the gifts and speciality food market having little collaborations (Luez & Wysocki, 2016). Even though the restaurant industry is bringing constant amount of revenues across the year for PEI Preserve Co the management is proving as the threat for the company and this is the major disadvantage.
As the income statement collectively presents the financial performance both the restaurant it is difficult to gain the information which of the unit is yielding higher amount of profit for both the locations or just one of the unit. By gaining additional amount of information on the cost and revenues, PEI Preserve Co might be able to determine this options better. On the positive side discontinuing the business of restaurant would assist PEI Preserve Co in easing out the pressure on the vital resources of both the financial and the non-financial aspects (Martínez et al., 2015). By enhancing the financial health of PEI Preserve Co the firm would be in the better position of undertaking more rapid expansion in the areas of gifts and speciality foods market. This could be attained by expanding the business in Tokyo. Additionally, the Tokyo expansion can be gained through merely approaching the new banks that might be interested in offering finance to PEI Preserve Co at the favourable interest rate.
Issuing preferred shares and expanding in the local market of Tokyo: The PEI Preserve Co can issue preferred shares though it might not be considered as the tax efficient method of raising finance but would provide the firm with much needed cash in meeting the short term obligations. An alternative option for PEI Preserve Co is to exploit the market of Tokyo. This is because the local market of Tokyo would provide PEI Preserve Co to gain massive advantage through lower cost of transport and marketing collaboration.
The growing market of Tokyo would help the company in attracting the local consumer and consequently the firm can gain significant amount of market share (Deegan, 2013). Furthermore, another alternative for PEI Preserve Co is to open the retail store at the Japanese airport as this would enable the firm in attracting millions of tourists. On denoting the fact that The PEI Preserve Co does not have any sales agent in Tokyo. Therefore, it can be considered that opening a retail store at the Japanese airport and expanding the consumer base in Tokyo might be a better method of attracting several distributors in and around Tokyo. This would help in creating an alliance which could provide the opportunity of exploiting the Tokyo market.
Setting up the manufacturing unit in Japan: A different alternative for The PEI Preserve Co is that the company might consider setting up the manufacturing unit locally in Japan. The firm can additionally consider outsourcing manufacturing package as this would help in lower the import duties and margins for middleman which would represents a higher profit from the Japanese market (Schaltegger & Burritt, 2017). Nevertheless, if the The PEI Preserve Co undertakes the decision of outsourcing, they must ensure controlling the quality. This is because the cost reducing outsourcing is pursued instead of undertaking the reducing outsourcing.
Additionally, a large number of evidences has been obtained where the market of Tokyo is regarded as the growing market for the PEI Preserve Co. Even though the market might appear unknown for PEI Preserve Co but Bruce MacNoughton can learn about the Japanese market and specialty food market by learning about the culture (Zhang & Andrew, 2014). Problems might arise relating to the high import tariff and rent in Tokyo which is unfavourable for the PEI Preserve Co but it can be a good market to exploit based on the presence of higher population density.
Strategic Recommendations for Expanding into the Japanese Market
The general recommendations which can be provided to improve the overall efficiency of the company are given below:
- The company needs to critically think and change the operational process of the company such as reduce the over diversification which the company is currently engaged in and also overall improve the quality of the products of the company which can be shown by putting quality seals and meeting the licensing standard of domestic and foreign markets (Hooker, 2012).
- Another issue which the company faces is the seasonality problem in the products which the company is producing. The company can further expand into foreign markets where by introducing the products can reduce the overall seasonality problem of the company (Chang & Chou, 2013). For example, the company has access to Japan’s market and therefore the company can tap into the Japanese consumer market and reduce the problem of seasonality.
- The company needs to send executives to japan in order to set up an effective retail and distribution system which can facilitate appropriate supply of the products of PEI Preserves in the market of japan (Armstrong et al., 2015).
- Another problem which the company faces is the crisis of liquidity requirements. The company needs to select the sources through which the company can have access to required funds. The sources of the funds can be equity and debt that is the company can issue shares or take up loans from a bank or other financial institution (Panigrahi, 2013). The business can tie up with a bank to provide to the financing requirements of the company.
- The company also needs to determine whether the restaurant business of the company is profitable or not and then decide whether to continue with the business or sell off the business.
The alternatives as provided above clearly states that the company needs to expand in the market of Japan and also set up retail and distribution system and it is recommended that the company should focus on the expansion of the business in foreign markets. The company as per the plan should expand the markets in japan.
The company should be focusing on the expansion plan of the business into new markets. The targeted market of the company is Japan as the management of the company is of the view that the Japanese consumer market has potential and if they can successfully implement the business strategies in the Japanese market. Moreover, with the expansion of the business in Japanese market the issue of seasonality which the company faces can be reduced. The company first needs to analyze the market of Japan and ensure that the market is suitable for the products of the company. The management of the company needs to set an effective retail system which can support the distribution system for the product of the company.
As per the market analysis of Japan, the annual consumption of jam in Japanese market is around 80000 tons in approx. Therefore it can be clearly identified that the market of Japan is clearly favorable for setting up the business of jam which is one of the activities which the PEI Preserves is engaged in. The imports of japan as per previous estimates show that the market almost makes around 8 to 9 percent of imports out of total imports for jam products. Various companies import jam products and utilizes the distribution system to take advantage of the favourable conditions present for the jam market. The company needs to analyze the market of Japan and also analyze the taste and preference patterns of the consumers. Importer who are engaged in the importing business in japan have been earning sales of 10 per cent. The management of the company needs to consider the following factors while considering setting up business in new market:
- Diversification as per preference: The management of the company should consider the taste and preference pattern of the local consumers of the market. In the case of jams, strawberry jams occupy the maximum percentage of market shares in comparison to other types of jams but it all depends on the taste and preference pattern of the consumers (Oyedijo, 2012).
- Amount on supply: Another consideration is the amount or quantity which is on offer. In normal circumstances the quantity which is on offer is 650 grams, 440 grams and 250 grams. The quantity of jam which is on offer depends on the marketability conditions, infrastructure and also on the local demand in the country.
- Price of the product: The management of the company also needs to decide on the price of the product as per the local conditions and demand and supply analysis in the country.
- Marketing Strategies of the Company: The marketing strategies of the company includes the sales promotion activities which the company engages in in order to maximise the sales of the product. In any new market the companies need to ensure that there are appropriate system of distribution and also appropriate infrastructure required for effective operation of the business (Morgan, Katsikeas & Vorhies, 2012).
The need for infrastructure and incorporating proper distribution system is to be supervised by the president of the company that is Bruce MacNaughton. Bruce needs to travel to japan personally and ensure that proper infrastructures are present in the market which the company can utilize in order to expand and operate efficiently in the new market. The president will also be making preparations of setting up the company’s own distribution system, and also select potential sites for opening a retail store for the company. As per the plan of the management, the retail store and distribution system need to be developed and establish in a period one years time. The main factor which attracted the company to invest in Tokyo project is due to the immense benefit PEI Preserve Co. will be getting as such will be reducing the seasonality problem which the company is facing, and also bulid a brand name of the company in the market of Japan. The company will also be benefitting from the economies of scale which are present in the market of japan if the company engages in large scale production utilizing the resources of the country considering the distribution system and supply chain system of the country.
The risks which any company faces when entering a new market is the risks of competitors. PEI preserves co will also be facing tough competitions from the established companies of Japan. Moreover it will also have to compete with companies which are engaged in the business of importing jam products and distributing the same in the local market of japans.
The management of the PEI preserves also needs to address the other issues which the company faces which are given below:
Liquidity issues: The company faces serious liquidity issues which the management of the company needs to address if the company wants to improve the overall business efficiency of the company. The management of the company can finance the liquidity requirements by either taking a loan from banks or financial institutions or can issue equity shares which can raise the capital as required by the company.
Operating Structure: The company needs to improve the core operating structure which the company is presently using. The company needs to critically rethink the operating system of the company and further redesign the operating structure of the company.
Infrastructure: The management of the company needs to improve the infrastructure and distribution system which the company is currently operating with and also there is scope of improvement in the marketing strategies of the business such as introduction of promotional strategies and also introducing promotional strategies such gifts, lucky draw.
Thus it can be concluded that the PEI Preserves can make improvements in the strategies of the company which can lead to the overall development of the overall business. The company best option is to expand the business of the company in new markets as in this case the market of Japan is considered where the business is planning to expand. The company is also planning to issue preference shares in order to raise the capital requirement of the company. The infrastructure of the company and the distribution and supply chain system of the company is also to be adjusted as per the requirement of the new market. As per the analysis of the case study, it will be in the best interest of the company if the president of the company himself goes to survey the new market and also set up a new retail store in the new market after analyzing the market and potential store locations in the country.
Exhibit A: Revenue Vs. Expenses
Exhibit B: Profit Contribution Percentages
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