WAC SugarSpiceDesserts

WAC: SUGAR &SPICE DESSERTS Elizabeth O.
De La Cruz 1
I. SUMMARY

Sugar & Spice is a specialty mini-dessert bakery in Los Angeles owned by Allison
Thatcher. She founded the bakery in the spring of 2009 as a pick-up and delivery
business. Ms. Thatcher loved to bake and decided to turn her passion into business
after her music career failed to take off. She believed she had a unique value
proposition because she is able to create artistic interpretations of customers
preferences.

Sugar & Spices cupcakes are extensively customizable based on flavor and design.
Customers mix and match on existing cake and icing flavors or may request for flavor
creation based on special theme or ingredient. Ms. Thatcher prided herself ofusing only
high quality ingredients and making every order fresh on the day of delivery. She joined
Food Networks Cupcake War contest, and was featured in a number of popular
publications like LA Times, InTouch Magazine, and Daily Candy, helping her establish
credibility in the industry.

Her main customers are businesses for corporate events and individuals who book her
for private parties, special occasions and gifts, all of which are large orders placed in
advance. Ms. Thatcher, with her brief stint as a musician, is also leveraging from her
connections in the entertainment industry to book Hollywood events such as awards
shows, premiers and birthday parties.

Sugar & Spice, despite maintaining low overhead and operational costs, increasing
sales volume from opening day in April of 2009, including having valuable
entertainment industry connections, is still struggling to break even and cover important
costs of doing business.

II. PROBLEM STATEMENT

How would Allison Thatcher boost its market position to increase Sugar & Spices
cupcakes demand?
WAC: SUGAR &SPICE DESSERTS Elizabeth O. De La Cruz 2
III. OBJECTIVES

1) To be able to increase demand for Sugar & Spice cupcakes by at least 70%.
2) To be able to capitalize on Sugar and Spices actual production capacity for both
standard and customized cupcakes to increase revenues.

IV. AREAS OF CONSIDERATION

a) Operations and Management Aspects

Sugar and Spice is a pick-up and delivery business, initially doing all baking at Ms.
Thatchers apartment on the outskirts of Los Angeles.Orders are being taken
through phone calls or the Internet and then baked, decorated and boxed the
orders. The cupcakes were either being delivered via couriers or picked-up by the
customers. Thatcher maintained low overhead that enabled her to build a client
base before investing substantial capital in the business. However, it also limited the
scale of her operations for the immediate future.

Thatcher recently relocated her baking operations from her apartment into a rented
commercial kitchen space to meet rising demand levels and allow for expansion
and also purchased a large truck as a means of selling directly to consumers with
no advance orders or notice. Sugar & Spicescurrent monthly production capacity
per dozen based on labor time required to make cupcakes stands at 1,178 and 395
for standard and custom flavors respectively. However, Ms. Thatchers operation
has been very limited since average monthly demand is only 138 dozens; almost all
are custom made.

Sugar & Spice
Monthly Production Capacity (Dozen)

Cupcakes Standard Custom
Batch Size 4 dozen 4 dozen

a. Labor time required to make a batch of cupcakes (mins) 55 164
b. Labor working hours in a day 9 9
c. Labor working minutes in a day (9hrs x 60 mins) 540 540
d. Total batch of cupcake made in one day (c/a) 9.82 3.29
e. Dozen per batch size 4 4
f. Total dozens of cupcakes made in 1 day (d*e) 39.28 13.16
g. Production Capacity (f*30) 1,178.40 394.80

Ms. Thatcher is the general manager of Sugar & Spice and also acts as the baker
and design talent. She has been exposed to important baking competition,
specifically on the Food Networks Cupcake Wars and featured on several high
profile publications like the LA Times, InTouch Magazine and Daily Candy that
helped her establish credibility within the industry.

b) Marketing Aspect

Consumer interest in cupcakes had been on the rise over the past few years due to
recent media attention and the resulting trendiness of the individually sized treats. It
is gaining particular interest among weight conscious Americans. The 100-calorie
snack packages were the most profitable industry innovation for the past years. In
addition, the continued economic slowdown has caused Americans to shift towards
small indulgences as a way of treating themselves instead of larger purchases.
Media attention related to cupcakes is widespread with many television programs
focused on baking.

The cupcake industry is highly fragmented. Moreover, Ms. Thatcher viewed
Sparkles as her main rival. It has strong presence in the Los Angeles area. Its
flagship storefront is located in Beverly Hills, a high-profile upscale location that
provided high visibility and traffic while helping it maintain as a premium brand. It
has high emphasis on quality and extensive variety of flavor offering. Customers are
willing to wait with line stretched out the door and around the block. Sparkle was a
predominantly consumer business, differentiating itself with high quality, wide array
of flavors ranging from traditional to unique and signature designs consistent across
all cupcake flavors in all locations.

Sugar & Spice operates in Ms. Thatchers apartment, avoiding setting up storefronts
to save on operational costs until its relocation to a rented commercial kitchen in
anticipation of surge in demand and to allow for future expansion. She prided
herself in using only high quality ingredients and making every order fresh on the
day of delivery. It offered extensive customization options based on flavor and
design. Customers could mix and match any of the existing cake and icing flavors or
even request a unique flavor creation based on a specific theme or ingredient.

Pricing varied based on the ingredients used but averaged around $48 per dozen
for a custom order. Thatcher also offered a number of standard flavors and designs
for $36 per dozen but almost all of her business was for custom cupcakes. Most of
the customers wanted custom designs specific to the event or recipient, with colors
created to coordinate with theme. Custom orders required additional time and
expertise compared with a standard order, and thus commanded a higher price tag.

Sugar & Spices main customers were businesses for corporate events and
individuals for private parties, special occasions and gifts which where large orders
placed in advance. Her brief stint as a musician helped her maintain a number of
high-profile connections in the entertainment industry, leveraging on them to book
Hollywood events such as awards shows, premiers and birthday parties.

c) Human Resources Aspect

Thatcher employed variable workforce composed of several part-time employees
who are willing to work on an as-needed basis with a minimum of 24 hours notice.
This enabled her to scale her labor capacity up and down based on demand, rather
paying a constant salary, often for excess capacity. She paid her worker $13 per
hour, a slightly higher hourly wage than similar jobs, in exchange for their flexible
P
R RODUCT : Custom designed cupcakes
L LACE : Pick-up from the home shop and delivery via couriers
RIRI CE : Average of $48 per dozen for a custom order
$36 per dozen for standard order
R ROMOTION : Relied primarily on publicity and connections
k
scheduling. Thatcher paid herself a salary of $60,000 annually although she was
the last to get paid and frequently went without payment when business was slow.

d) Financial Aspect

One year in the cupcake business, Ms. Thatcher was still struggling to break even and cover
her monthly costs. Despite heavy seasonal volume on holidays such as Christmas,
Valentines Day and Mothers Day, she needed to more consistently cover her costs in order
to turn profit throughout the year.

Sugar & Spices current monthly demand is only 138 dozens of cupcakes, almost all are
customized. Given this monthly demand, Sugar & Spices estimated monthly net loss is
$4,625.52. While her contribution margin ratio is at 52% (CM/Sales), her income statement
still reported a loss because of the low volume of sales or low product demand for Sugar &
Spices cupcakes. The business will actually report a meager net profit of $374.48 if Ms.
Thatcher will forego his monthly salary of $5,000.


Variable costs per dozen of standard and custom made cupcakes are $9.25 and $23.67
respectively. Monthly fixed costs stand at $3,000 covering rent and utilities and $5,000 for
Ms. Thatchers monthly salary.

Ms. Thatcher had higher supply costs than most bakeries because her scale remained small
in which she did not receive the volume discounts customary in the industry. She assumed
that larger bakeries such as Sparkles could get bulk ingredients at about 5% less than her
ingredient sourcing costs.

In comparison, Sparkle is returning a healthy net income of $22,546.00 a month buoyed by
high demand of its cupcakes. This is despite paying for a general manager and an assistant
manager and the fact that its storefronts are leased on upscale locations.


Sparkle has a higher contribution margin ratio at 71% due to the volume of monthly sales
reported. It is also operating at full capacity, taking advantage of hiring employees on
permanent basis paid at a lower rate per hour compared to Sugar & Spices variable hourly
labor rate. Its variable labor rate per dozen is only $1.83 for standard made cupcakes which
is $1.15 lower than Sugar & Spice.

While its ingredient costs per dozen is $7.95, relatively higher by $2.37 compared to Sugar
& Spices, its cupcake sizes are 50% larger. Sparkles also enjoy a bulk ingredient discount
of 5% given by its suppliers further driving variable cost down.

V. ANALYSIS OF THE CASE

Even though Sugar & Spices sales grew steadily since its inception, its still operating at a loss.
The loss can be traced back to low consumer demand for its cupcakes. Ms. Thatcher prided
herself in using only high quality ingredients and making every order fresh on the day of delivery
for her whimsical and unique cupcakes, infusing artistic creativity to suit customer preferences
and delivering high product appeal and differentiation. Her high profile client base from corporate
businesses and entertainment industry has so far failed to bring in the volume.

Consumer interest in cupcakes has been on the rise over the past few years due to recent media
attention and the resulting trendiness of the individually sized treats. Attention by media related to
cupcakes was widespread with many television programs and references also appeared in
popular mainstream programs and feature films. Single serving and portion-controlled food items
were gaining popularity as Americans were increasingly weight conscious and gourmet cupcakes
have also generated strong appeal to their increasingly busy schedules. The economic slowdown
has also helped spur demands for small indulgences as Americans becomes more conscious of
their budgets.

Sugar & Spice so far failed to capitalize on these key opportunities. Monthly demand has been
very limited, averaging to only 138 dozens, almost all are customized cupcakes. Sugar & Spice
needs to increase demand to 400 of combined custom and standard cupcakes, maximizing the
monthly capacity of custom cupcakes of 395 in order to return a meaningful monthly net profit of
$1,744.10 even without a storefront.

While Ms. Thatcher exhibit a passion for baking, possesses high artistic talent and creativity,
lacks experience in the field of cupcake business. Her major work experience has been as a
singer with brief stint in the Hollywood entertainment industry. Both production location and
variable labor are underutilized, which has a capacity to produce 1,178 and 395 dozens per
month of standard and customized cupcakes respectively. At full capacity, Ms. Thatcher stands to
report a substantial net monthly income estimated at $33,128.85.


Sugar & Spice also has a higher supply cost since it has been unable to take full advantage of the
customary volume discounts given by suppliers to bulk buyers. Her scale of operation remains
small.

All of these have contributed one way or another, to a weaker brand image of Sugar & Spice,
consequently hurting its ability to generate substantially higher sales volume.

There is also a strong market competition, especially in the Los Angeles area, where it is
saturated with strong brands like Sparkles. Sparkle has a first-class reputation and brand image
with strong emphasis on quality and extensive variety of flavor offering. Its Beverly Hills
customers are willing to wait; with lines stretching out the store door and around the block. With
increasing revenue and stronger capitalization, it has the ability to mount a challenge and
establish itself as a premium bakery that also offers highly customizable cupcakes, a market
which Sugar & Spice is currently exploiting.

An analysis of Sugar & Spices Strengths and Weaknesses including Opportunities to explore and
Threats to deal with is shown in the SWOT Matrix below.


VI. ALTERNATIVE COURSES OF ACTIONS

1) Expand existing business by maximizing its production capacity with more marketing
to drive demand.

Demand has been very limited for Allison Thatchers cupcakes. While overall
cupcake industry outlook has been overwhelmingly positive with media attention at
very high level, Sugar & Spices monthly sales volume remains paltry. This is despite
being located within Los Angeles area wherein cupcakes are reported to be popular
among local residents.

In order to drive demand and increase customer awareness, Ms. Thatcher should
maximize it production capacity and push for extensive marketing campaign.Ms.
Thatcher should leverage on her Hollywood contacts by endorsing her brand and
products deep into the entertainment industry. She should also seek their
endorsement through Twitter feed directly to their massive online Twitter followers.
Additionally, Ms. Thatcher should offer free delivery services with LA area to
encourage customers, much like what the pizza industry is best known for.

Additionally, Ms. Thatcher should also establish strategic partnerships with event
coordinators in LA and seek their endorsements to their clients when organizing for
important events like weddings and birthday parties.

With this alternative, Sugar & Spice will have a better chance of increasing sales
volume to a minimum of 400 dozens of cupcakes per month (395 and 5 dozens for
custom and standard variants respectively).

Advantages:
Reversal of month-on-month losses to net income of at least$1,744.10
buoyed by increased customer awareness and demand.
Increase in client base
Brand will be solidly established and highly sought after as a result of some
Hollywood artists endorsements
Increased strategic and competitive position

Disadvantages:
Surge in costs to cover endorsements
High demand could lead to cancelled orders due to production capacity
constraints.

2) Open a local storefront

Opening a local retail storefront had long been in Ms. Thatchers mind. A local
storefront located in high visibility and high traffic area would allow Sugar & Spice
customers to simply order cupcakes off the shelf whether for dine in or take out. This
convenience will be valuable to customers as most Americans had been increasingly
busy.

Opening a storefront will require full time staff and store manager, which will be paid
on regular basis regardless of demand.

Another alternative course of action is for Allison Thatcher to open her own retail
storefront.

Advantages:
Production capacity will be fully utilized resulting in estimated monthly net
profit of $33,121.85 (exclusive of permanent staff and store manager costs)
Increased customer brand awareness
Surge in sales volume leading to increased contribution margin
Increase market demand

Disadvantages:
High up-front costs and long term fixed costs which are largely irreversible
Detract attention from custom cake business resulting in lower contribution
margin.

3) Use the cupcake truck as a mobile store.

Ms. Thatcher has the option of utilizing the large truck she purchased as a means of
selling directly to consumers with no advance notice. The truck will be refrigerated
and could hold up to 900 mini-cup cakes but with no on-board baking equipment.

Advantages:
Reach greater market potential in the area
Increase sales
Increase customer awareness

Disadvantages:
Increased operating expenses
Stiff competition with established cupcake-mobile

4) Expand geographically.
With the expertise already acquired by Ms. Thatcher, Sugar & Spice could start
expanding to other cities in California such as San Francisco, with a goal of
expanding further to other American cities like New York, Chicago, and other cities
where cupcake trend are strong.

Advantages:
Greater market potential
Establish brand name

Disadvantages:
Increase operating expenses
Requires substantial oversight to ensure quality and consistency
Need to rely on local talents

5) Hire permanent employees for Sugar and Spice.
For Allison Thatcher to ensure that Sugar and Spice meet itsconsumer demands,
she has the option to hire permanent employees for her business to include a
General Manager who will help her in marketing Sugar and Spice and at least two (2)
permanent bakers and a delivery man.

Advantages:
Ms. Thatcher will not be overworked
Delegation of work

Disadvantages:
Increase in fixed costs

VII. RECOMMENDATION

Baking has always been the passion of Allison Thatcher. She decided to turn her
passion into a business in which she established Sugar and Spice. Shes been a year in
the business but still struggling to break even and cover her monthly costs. To be able to
continue the operation of her business and further improve and make it a profitable
business entity, the following are my recommendations based on the alternatives
mentioned above:

Alternative Course of Action No. 1
Expand existing business by maximizing its production capacity with more marketing to
Drive demand.

Open a local storefront.

Hire permanent employees for Sugar and Spice.

VIII. IMPLEMENTATION / ACTION PLAN

IX. CONCLUSION

WAC SugarSpiceDesserts

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