Case Analysis of a Couple of Square
Definition of Success & Critical Issues
In order to be successful, A Couple of Squares (ACS) needs to achieve $500,000 in profit in next five years and, allow the owners to sell the business and retire within 10 years. ACS needs to address the following critical issues:
1. How to choose the pricing strategy so that ACS can increase profit to $400,000 within three years.
2. How to promote its high-quality and handcrafted cookies so that ACS can increase its bargaining power in the bakery industry.
3. How to reduce labour cost so that profit margin increases to 40%.
Situation Analysis
ACS sells their cookies at an average price of $2.5, and receives only 5% to 10% margin (Exhibit 3). The middleman (retailer) sells ACS’s cookies at $5 and earns 100% margin while the competitor (Eleni’s New York) sells their cookies at $16 each. The corporate customers have high bargaining power; they are price sensitive because they have more substitute products to choose from. ACS buys the best quality of ingredients at a higher price because suppliers have more bargaining power (Exhibit 2). When they sell their product at a minimum and purchase their materials at a high cost, the company is facing operating loss. Additionally, ACS’s 60% of the business is owned by a silent partner, who does not contribute to the company’s operation or decision making. The icing process takes one to three days which limits capacity and prohibits the potential store sales. Hand-made cookies are a selling point because other brands are mostly using automation in the industry. Although the company is delivering great value to the customers, the value of the product is not well communicated to the customers. Producing handmade cookies result in high labour costs. The labour costs constitutes 45.38% of the total cost to make each cookie (Exhibit 3). The industry standards recommend 16.4% for labour costs (Masterson, 2017). High labour costs lowers the profit margin which is a critical threat to the existence of the business.
Decision Criteria
1. Gain a profit of $162,000 at the end of 2013
2. Increasing gross margin from 31% to 40% within three years
3. Ingredients and taste of the cookies should not be affected
Option Analysis
Option 1: Buying a packaging machine and increasing price to $3
By increasing the selling price from $2.5 to $3, the company would have gross profit margin of 44% in 2013 (Exhibit 4). To achieve the profit of $162,000, the company will have to sell 231,429 cookies; the company is currently selling 520,000 cookies in 2012 (Exhibit