Khang Huynh

ACCT 511

Dr. Vijay Karan

February 17th, 2015

Case 5-2 Colombo Soft-Serve Frozen Yogurt

Case Brief:

The competitive environment for Colombo changed drastically from the early 1980’s

when the firm originally delivered their soft-serve frozen yogurt to independent yogurt shops, a

then major market share for Colombo. Unfortunately, Colombo’s share in the frozen yogurt was

heavily impacted in the early 1990’s when franchise firms such as TCBY and Freshens started to

streamline the frozen yogurt business with the apparent advantages of uniformed brandings and

marketing efforts; subsequently, a large number of independent yogurt shops ceased to exist as

they could not compete with the efficiency of the yogurt franchisees. The market shifted again in

the late 1990’s with the rise of the impulse segment of frozen yogurt as Foodservice operators

started to serve soft-serve yogurt as part of their operations, and ultimately became the dominant

customers for frozen yogurt at 75% market share.

In order to strive in the market dominated by franchise operations, the independent yogurt

shops in the late 90’s followed the differentiation business strategy through diversifying their

product offerings with different items such as smoothies, boosters, and granitas. In contrast, soft-

serve yogurt is only considered to be an add-on trade for Foodservice locations; thus, essentially

following a cost leadership strategy, these operators are not inclined to expand their business

with other products compared to the independent yogurt shops. Currently, the main focus of

General Malls Inc. after acquiring Colombo Frozen Yogurt is on the Impulse segment, evidently

displayed through the dedication of the salesforce time, free merchandising kits, and price

promotions. While the merchandising and pricing promotions are also applicable for the Shops,

who do indeed take advantage of them, the enthusiasm of salespeople for the Shop segment is

quite mixed, with a number of the salesforce avoid the shops completely.

Segment Profitability Analysis Statement:

Profit and Loss by Segment – ABC

Category Impulse Segment Yogurt Shops Total

Sales in cases 1,200,000 300,000 1,500,000

Sales Revenue $ 23,880,000.00 $ 5,970,000.00 $ 29,850,000.00

Less: Price Promotions $ (3,600,000.00) $ (900,000.00) $ (4,500,000.00)

Net Sales $ 20,280,000.00 $ 5,070,000.00 $ 25,350,000.00

Less: COGS (Appendix A) $ (11,400,000.00) $ (2,850,000.00) $ (14,250,000.00)

Less: Pick & Ship Expenses (Appendix B) $ (2,625,000.00) $ (375,000.00) $ (3,000,000.00)

Gross Margin $ 6,255,000.00 $ 1,845,000.00 $ 8,100,000.00

Less: Merchandising (Appendix C) $ (1,680,000.00) $ (45,000.00) $ (1,725,000.00)

Less: SG&A (Appendix D) $ (3,861,000.00) $ (39,000.00) $ (3,900,000.00)

Net Income $ 714,000.00 $ 1,761,000.00 $ 2,475,000.00

Under Activity Based Costing method, the production costs remain the same for the two

segments. However, with ABC analysis, there are adjustments to be made for pick/pack and

shipping costs, merchandising costs, and also SG&A costs. Under ABC, the pick and ship

expenses costs are driven by the number of cases in full pallets and the number of individual

cases for the two segments. With the merchandising cost, there were 90 kits sent to Yogurt Shops

while the Impulse Segment received significantly more at 3,360 kits. Lastly, with the sales reps

time as the cost driver, the SG&A had a wide discrepancy between the two segments with only

1% of the salesforce’s time was allocated to the Yogurt Shops.

Recommendation:

Based on the analysis above, there are several cost factors that GMI-Colombo can

improve upon:

First, the pick and ship cost could be reduced for the Impulse Segment as that market

accounts for 80% of GMI’s revenue yet the shipping cost for those Foodservice operators

represents 87.5% of the total shipping cost. Since the Impulse Segment prefer to order in

individual cases instead of full pallets, GMI could offer a package of 10 to 20 cases of frozen

yogurt with the possibility of minimal discount to this group of customers; this helps narrow

down the shipping costs for GMI while also incentivize the Impulse Segment to order in a

larger quantity without bulk and storage inconvenience of the full pallets.

Second, merchandising promotion is obviously a huge cost sink for GMI under ABC

analysis. The Impulse Segment accounts for 97.4% of GMI’s merchandising, yet it was

identified that many of the Impulse locations had not at all utilized these displays. Inevitably,

GMI should only provide merchandising offerings to the Impulse locations that definitely use

those displays or on the condition that the Impulse locations order a specific number of

bundles to receive these displays.

Lastly, GMI must restructure their salesforce to be more efficient and not to neglect the

Yogurt Shops segment in order to lower the SG&A expenses. Evidently, while the Yogurt

Shops only accounts for 20% of the total revenue, this segment produces as much as 71.2%

of the total profit – an absolute polarity compared to the Impulse locations. Markedly, the

salesforce’s tendency to avoid Yogurt Shops might have contributed to the lowered sales

despite the profitability of this segment. In addition, the salesforce’s time was not allocated

effectively at the Impulse locations as a majority of the salespeople only showed the impulse

customers how to use the machine. Thus, GMI should re-focus the salesforce efforts on

Yogurt Shops to boost sales through various incentives such as large order discounts and

promotional pricing for new yogurt flavors.

Under the hypothesis that GMI implements these recommendations, GMI can positively expect

the profit to almost triple in the short term just by lessening the marketing efforts on the Impulse

Segments (Appendix D). In the long run, as GMI gears their efforts toward building the

relationships with the Yogurt Shops, sales from this segment can be expected to increase but

General Mills must produce more unique flavors or innovative factors in order to compete with

the franchise operations.