Colombo Frozen Yogurt Case Study using Activity Analysis

Chapter05 -Activity-Based CostingandCustomer Profitability Analysis 5-2Colombo Soft-Serve FrozenYogurt In1994, General MillsIncorporated, a$6 billion consumer goodscompany, acquiredColombo FrozenYogurt.

General MillsInc.(GMI) believed theycould addColombo frozenyogurt totheir existing productlineuptoincrease net sales withlittleaddition inmarketing cost.

,Frozen yogurtissold through twodistinct segments -independent shopsandimpulse locations suchascafeterias, icolleges, andbuffets. Frozenyogurtisthe main business forthe shops whereas yogurtisincremental tothe impulse locations' mainbusiness. GMl'slargesalesforce already servedtheimpulse market.

The[mancial resultsinthe first couple ofyears weremixed. Earnings increased slightlyandthen dropped eachyear even though salesvolume wasrelatively flat.Intotal, merchandising costsdropped, whilepricing promotion rates escalated. TheGMI salesforce focused onthe impulse segments andpricing promotions werebelieved tobe driving volume increases. However,volumeinthe shop segment declined atalarming ratesandthere waswidespread dissatisfaction inthe sales organization. WhileGMIknew salesbysegment, theydidn't trackcostsbysegment.

Instead costswereallocated basedonsales dollars. Thesituation wasripe foraclearer lookusing ABCmethods.

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TODA Y'SFROZEN YOGURT MARKET STRUCTURE:

WhenColombo YogurtCompany beganmarketing soft-servefrozenyogurt inthe early 1980's, theirmain distribution wasthrough independent yogurtshops.Inthe early 90's,theyfaced competition fromfranchise operations suchasTCBY andFreshens thatreplaced manyofthe independent yogurtshops.Andthemarket changed asFoodservice operatorssuchascafeterias, colleges,andbuffets startedtoadd soft-serve yogurttotheir business. Bythe late 90's, these Impulse locations accounted for2/3 ofthe soft-serve market.

:Inthe late 90's, Shop salesbegan toincrease withtheaddition ofdistinctive newproducts suchassmoothies, boosters, andgranitas. TheShops maketheirliving fromthesoft-serve businessandmust innovate orgo out of business (asthousands havedone inthe last decade). Onthe other hand, theImpulse locations maketheirliving from other items andthesoft-serve tradeisonly performance topspin.Thesefirmsareunwilling totake anyrisk (new equipment orextra labor) toserve highly differentiated productslikesmoothies orgranitas.

THE GMI-COLOMBO MARKETINGPLAN:

;TheGMI Foodservice DivisionmarketsbrandssuchasCheerios, Yoplait, BettyCrocker, GoldMedal Flour, !Hamburger Helper,Pop-Secret, andChex Snack toFood Management Firms,Hospitals, andschools. Colombo yogurtwasadded tothis product lineupandtheFoodservice salesforce covered bothShop andImpulse locations.

Salesforce: Colombo'ssalesforcewasmerged intotheFoodservice salesforce.Customerswerereassigned to salespeople whoalready serviced thatgeographical area.Thesalespeople variedintheir reaction tothe product.

Some found shopseasytosell towhile others avoided theshops despite thepossible lostcommission. Manyspenta lot oftime helping theirimpulse customers understand howtouse themachinery.

.Merchandising Promotions:Colombotraditionally chargedtheShops formerchandising thatwas large scaleand ;eye popping (neonsigns). TheShops usedthese signstodraw customers inside.GMIchose nottocharge for merchandising andtoprovide thesame largescale merchandising toboth Shops andImpulse locations. Shopswere very interested inthe kits while many Impulse locations didn'tevenhang them up.

Pricing Promotions: Pricingpromotions areamainstay ofGMI's impulselocation approach. GMI'ssalesforce generally usedthese promotion eventsasan opportunity tovisit their accounts andtake advantage ofthe occasion to meet service needsandsellother products thatmay notbefeatured.

5-8 Chapter05 -Activity-Based CostingandCustomer Profitability Analysis r"' GMImade pricepromotions availabletoboth segments ofthe market. Whilethedeals weretypically around$5per case, theyaveraged $3per case against allthe volume shipped duringtheyear. GMImarketing knewpricewasnota major decision factorforShops andthey didnottarget pricing promotions tothem. However, Shopswereaware of the promotions andtook advantage ofthem.

THE BUSINESS STATUS -PRE-ABC: PROFIT ANDLOSS BYSEGMENT -PRE-ABC Cost ofGoods Soldismade upof$14,250,OOO foringredients, packaging,andstorage and$3,000,000 forpick/pack and shipping. Sincetheproduct isthe same across segments, thecost toproduce shouldbethe same. However, pick/pack andshipping costswerefound tovary withwhether ornot theorder wasforafull pallet. Fullpallets cost $75 topick andship whereas individual orderscost$2.25 percase. There are75cases inapallet andthesegments , differ intheir utilization offull pallets asshown below.

, ABCANALYSIS OFMERCHANDISING:

t :Merchandising costsconsist mainlyofkits costing $500each. Areview ofwhere thekits were sentindicated that 3,450kitswere sentoutand 90ofthem weresenttoshops.

ABC ANALYSIS OFSELLING, GENERAL ANDADMINISTRATIVE:

Since salesrepresentatives serviceseveralproducts, theircosts areallocated tothe various products basedongross sales dollars. GMIgavediaries to10% ofthe sales force inrandomly selectedmarketsofthe country andasked !them totrack theirtimeinactivity classifications for60days. Thediaries indicated thatsales repsspent almost 3 ! times asmuch timeonthe yogurt thanGMI hadestimated. Thetotal allocation toYogurt jumped from$1,185,000 to $3,900,000. Oftheir timespent onYogurt, only1%ofthe time wasspent onthe shops.

5-9 - - - --- Category Impulse Segment YogurtShops Total Sales incases 1,200,000300,000 1,500,000 Sales revenue $23,880,000$5,970,000$29,850,000 Less: PricePromotions -$3.600.000 -$ 900.000 -$4.500.000 Net Sales $20,280,000$5,070,000$25,350,000 Less: CostofGoods Sold -$13.800.000 -$3.450.000 -$17.250.000 GrossMargin $ 6,480,000 $I,620,000 $8,100,000 Less: Merchandising -$1,380,000 -$ 345,000 -$1,725,000 !Less: SG&A -$ 948.000 -$ 237.000 -$ I.I 85.000 ;Net income $4,152,000 $1,038,000 $5,190,000 ABC ANALYSIS OFCOST OFGOODS SOLD:

"" Impulse Segment YOgurtShops Total Cases infull Pallets 60,000240,000300,000 Individual cases 1,140,00060,0001,200,000 Total cases 1,200,000300,000 1,500,000