Posted: July 28th, 2015

BLACK FLY BEVERAGE COMPANY INC.

BLACK FLY BEVERAGE COMPANY INC.

You will prepare a one-page memo on the case below (BLACK FLY BEVERAGE
COMPANY INC.).
The Case asks you to take on the role of a consultant or an employee of the firm and
Propose solutions to the problems identified. You must complete a one-page memo
following the format, with one more page (appendices).
Appendices must include:
KSFs
SWOT
process analysis: discuss the type of line, capacity, utilization
alternatives/trade off analysis (including quantitative analysis with payback and/or ROI)
Overall:
• Write in third person (avoiding I, me, we, our, us, etc)
• Avoid “may be” “maybe” “possibility” “potentially” “could consider” “hope”.
• Follow format below. Don’t sneak in extra words with a smaller font or wider margins.
To: Name the person you are writing to and make sure to stay in that role
From: Name yourself. Are you a consultant brought in to make recommendations?
Date: Put in the date from the case, otherwise ask your prof if you can use today’s date
Subject (or RE): State main problem statement (need to increase sales, rebuild trust, increase production
volumes, secure financing, improve customer/employee satisfaction, through what means…
it will likely be a long sentence. This can be a question?
Recommendations
1. Put
your
main
recommendation
first
it
will
be
broken
down
into
implementation
steps
next
section.
You
may
use
bullet
points
and
short
sentences.
Refer
to
the
appendices
that
helped
you
come
to
this
conclusion
(Appendix
1:
SWOT,
and
Appendix
2:
KSFs,
Appendix
3:
Financial
Analysis)
2. Since
you
often
won’t
have
the
room,
you
may
want
this
section
to
also
include
implementation,
if
so,
say
it
in
the
title
(Recommendations
&
Implementation)
or
create
a
new
title
for
Implementation
Implementation:
List
your
courses
of
action
(who
is
responsible,
by
when
(time
frame
up
to
24
months),
financial
impact
Short
Term
…state
length…
(in
the
next
two
months)
1. Here
is
the
first
thing
you
will
do
in
the
short
term
towards
your
recommendation.
Here
is
a
sentence
or
two
explaining
more
about
it.
2. Here
is
the
second
thing…
to
do
in
the
short
term
towards
your
recommendation.
Here
is
a
sentence
explaining
more
about
it.
3. Here
is
another
thing…
to
do
in
the
short
term
towards
your
recommendation.
Here
is
a
sentence
explaining
more
about
it.
Remember,
it
may
turn
out
that
you
have
8
things
to
do
in
the
short
term,
and
only
one
in
the
medium
term.
That’s
fine.
Medium
Term
(from
two
to
eight
months)
1. Here
is
the
first
recommendation
of
what
to
do
in
the
medium
term.
Here
is
a
sentence
or
two
explaining
more
about
it.
2. Here
is
the
second.
Each
one
needs
a
sentence
or
two
explaining
it.
Again
if
an
appendix
is
necessary
for
more
detail,
refer
to
the
appendix.
(Appendix
4)
Long
Term
(for
example:
from
eight
months
to
14
months)
1. You
may
not
have
any
long
term
recommendations,
but
if
you
do
put
them
here.
2. And
here.
Refer
to
your
appendices
where
appropriate
(Appendix
4)
Control
and
Feedback:
Here
is
where
you
say
how
you
will
know
if
your
recommendations
are
working
to
solve
the
problem.
You
will
need
a
performance
evaluation
methodology;
some
way(s)
of
measuring
success.
Track
sales/donations/production
volumes,
have
customers
or
employees
fill
out
satisfaction
surveys.
Review
them
at
the
interval
you
deem
appropriate
(monthly,
quarterly)
and
set
levels.
This
is
usually
in
sentences
and
has
no
bullet
points.
(refer
to
an
Appendix
6
if
more
detail
is
required).
Contingency:
Here
is
where
you
say
what
you
will
do
if
after
looking
at
the
control
and
feedback
if
your
plan
isn’t
working
or
if
you
have
major
deviations
(+/-­-
x%).
You
may
chose
to
pursue
one
of
your
other
alternatives.
(Appendix
7).
This
section
is
not
bullet
points.
Include
financial
impact.
BLACK FLY BEVERAGE COMPANY INC.
In early November 2005, Cathy Siskind-Kelly and Rob Kelly, owners of the Black Fly Beverage Co.,
based in London, Ontario, were discussing the viability of expanding their product line after less than
a year in operation. Since their startup the previous spring, sales of their original Black Fly cranberryblueberry
vodka cooler had climbed steadily and had outsold many national brands. Impressed with
their early success in the Ontario market, the husband-and-wife team wondered whether they should
take advantage of their new brand’s momentum and invest in the production of a second product.
LIQUOR SALES IN ONTARIO
The Liquor Control Board of Ontario (LCBO) was a $3.5 billion Crown corporation held by the
Ontario Government, that, with few exceptions, was the only authorized importer of beverage alcohol
in the province. The LCBO was the largest retailer of beer, wine and spirits in the world, with over
550 LCBO outlets and 190 agency stores in Ontario.
1,2
The core mandate of the LCBO included
promoting responsible alcohol consumption, supporting domestic beverage alcohol producers, and
remitting dividends to the Ontario government to fund social and capital programs.
3
This mandate
was achieved primarily through policies that sought to keep selling prices regulated to standards that
set minimum price levels across the province. Compared to other non-regulated beverage alcohol
markets, the LCBO’s pricing was considered to be substantially higher and sometimes double on
some wine and spirit products.
4
However, 50 per cent to over 75 per cent of the retail price of alcohol
sold in Ontario was made up of taxes, levies and mark-ups,
5
illustrating the socially motivated
mandates behind the LCBO’s elevated price points.
6
Although its pricing policies had sometimes
been criticized as artificially high and anti- competitive, LCBO retail shelf space remained in high
demand among domestic and international beverage alcohol producers because of the agency’s
dominant position in the distribution and retail markets.
Securing a spot in the LCBO’s retail product lineup was a highly competitive process, especially for
new, smaller beverage alcohol producers. New product proposals were evaluated by LCBO category
managers from the corresponding product type within the beer, wine and liquor groupings. Quality,
price, value, taste, packaging and marketing programs were thoroughly reviewed before a decision
was made to carry a product.
7
All products approved for retail sale were subject to stringent
performance benchmarks and were promptly discontinued if sales were below standards. However, if
a product was performing well, producers hoped to earn “general listing status,” which permitted a
brand to be carried in top-tier LCBO stores across the province, on a year-round basis.
COMPANY BACKGROUND
Rob Kelly initially had aspirations to open a craft brewery in London. However, when he discovered
that beer sales in Ontario were weakening, he turned his attention to the faster growing spirit cooler
market. After reviewing market research indicating that cooler sales had grown by 300 per cent in the
previous two-year period, he abandoned his work in developing a craft brewery and began again with
a concept for a micro-distillery. Despite having three young children and no previous experience in
the beverage alcohol industry, Kelly left his career in landscaping and partnered with his wife, Cathy,
to start a business producing spirit-based drinks. The couple sought advice from industry experts to
help build their knowledge and to ensure successful access to the Ontario market, but they
encountered unanticipated setbacks in obtaining a licence from the necessary government agencies to
produce and sell alcohol. After lengthy and rigorous negotiations, in December 2004, the Kellys
finally secured provincial and federal licensing and declared the Black Fly Beverage Company to be
Ontario’s first micro-distillery.
Unlike most manufacturers, which typically operated in industrial areas on the outskirts of the city,
the Kellys chose an old bank building in a high-traffic area in the heart of downtown London.
Although the converted building was smaller than a typical warehouse, with only 140 square metres
of production space, and was comparatively more expensive to lease, the location provided maximum
exposure to the public and a prominent presence in the community.
Recognizing the strong competition in the spirit cooler market from larger, established brands such as
Mike’s Hard Lemonade and Smirnoff Ice, the Kellys focused on developing a premium product that
was differentiated on many fronts compared to other vodka coolers available in Ontario. The Kellys’
recipe, designed for consumers seeking a fresh alternative to the mainstream vodka cooler, was made
from natural-tasting, local and identifiably Canadian ingredients. It included real cranberry and
blueberry juices and no chemical sweeteners; the product tasted much less sweet than other brands on
the market. Many competing coolers were up to four or five times sweeter than the Black Fly recipe.
The cooler retailed for $9.95 in packages of four 400-millilitre, wide-mouth plastic, resealable, ultra
durable bottles, compared to the typical 330 millilitre glass bottles used by other brands. The Kellys
chose Black Fly in branding their company and flagship vodka cooler because the name was
reminiscent of the small flying insect indigenous to Canada’s northern regions and considered
synonymous with cottage country, fun and relaxation.
After the Kellys’ Black Fly product proposal was approved, the LCBO granted limited delivery of the
cooler to six London-area stores. However, it made Black Fly responsible for arranging its own sales
and promotional activities to stores outside of London, a formidable task for such a small and largely
unknown alcohol producer. Furthermore, the production run to fill the first order encountered
complications, ending with the discovery that the new bottle-labelling machine was incompatible with
the other equipment on the production line. The Kellys had to call on family and friends to work day
and night to attach 75,000 labels by hand to meet the LCBO’s first order!
Customers received the cooler phenomenally well in its first months on the market. By November
2005, it was selling in almost 200 LCBO stores and in selected bars and restaurants in Southwestern
Ontario. The Kellys were in the process of finalizing a deal with the John Labatt Centre, a sporting
and special events arena right across the street from Black Fly’s facilities in London, to open a Black
Fly branded lounge inside the facility. In addition, they were most pleased that the LCBO had granted
their Black Fly vodka cooler with general listing status, making the product available to order yearround
for all LCBO stores and thus securing Black Fly’s position within the Ontario beverage alcohol
market.
THE CURRENT PRODUCTION PROCESS
From mixing to packing, the entire cooler production process could take up to 26 hours, including the
time needed to clean and set up each tank. The first step was mixing. A cold mixture of juice,
flavouring and ethanol, and a hot mixture of sugar and acids were combined into three 1,600-litre
tanks. The resulting mixture was stirred for up to 1.5 hours to achieve the desired taste, colour and
consistency. When the mixing stage was complete, the mixture was cooled to 00C, a process that
could take up to five hours. The mixture then underwent a carbonation step for three hours and was
then tested to ensure that the mixture contained no more than seven per cent alcohol, the maximum
amount permitted by the Canadian government for vodka coolers. It took three hours to receive the
results of the test, thus ending the 14-hour mixing process. All tanks needed to be drained before the
mixing process could begin again.
When the first tank was ready, the vodka mixture was drained into a bottling machine, where each
bottle was loaded, filled, capped, labelled and packaged. The cases were transported to an offsite
holding warehouse, where they were prepared for pickup by the LCBO. Overall, the bottling machine
could complete 12,000 bottles in 12 hours, draining all three tanks and resulting in a total of 26 hours
for each run. However, production was sometimes interrupted by delays that occurred throughout the
process.
In addition to Rob Kelly, who was primarily involved in the production side of the business, the
company rotated between one full-time and 10 part-time workers to manage operations. The cooler
production and bottling processes were scheduled during consecutive day and evening shifts, usually
five days a week, to meet the LCBO’s average order lead-time of seven days. The LCBO’s average
regular order totalled 1,200 cases per month, but orders were often sporadic and could triple during
the summer season between May and September and the holiday season in December.
8
OPTIONS FOR THE FUTURE
Although the Kellys had not yet been in business for a full year, they believed that the keen interest
they had received so far from the LCBO indicated that the market was ready for a second Black Fly
product. Rising sales, growing consumer demand, increased distribution to LCBO stores, and positive
feedback from the media and the LCBO encouraged the Kellys to consider expanding.
The most logical way to extend the Black Fly brand was to develop a second flavour using the base
vodka recipe. Although the Kellys found it difficult to predict future sales because their cooler was
still new and not representative of an established product, sales remained strong and consumer interest
high, suggesting that increased product distribution could boost current sales levels by 50 per cent to
75 per cent. Most other cooler brands on the market offered several different flavour choices as part of
an entire line of coolers. It was generally believed that additional choices allowed consumers to
further explore their favourite brand rather than being forced to choose a competing product.
However, the Kelly’s were unsure whether a second cooler flavour could maintain the same broad
appeal that the flagship cranberry and blueberry brand possessed. But overall, the Kelly’s were most
concerned with timing. Although the original Black Fly cooler was showing strong results for a
product that had been on the market for less than a year, the brand still had only limited availability,
i.e., in fewer than one third of all LCBO stores. The Kellys wondered whether it would be
advantageous to maximize the growth potential of the existing cooler before launching a second
flavour.
Despite these uncertainties, the strongest benefit to developing a second cooler would be the potential
economies of scale gained from the production process already in place. The Kellys believed that their
current production process had enough capacity at present demand levels to produce a second flavour,
avoiding the need for additional investment in equipment. The only associated cost would be a
product development and merchandising fee of $30,000. The new cooler would also benefit from
guaranteed shelf space in LCBO stores across the province.
One major concern the Kellys had with introducing a second Black Fly cooler was the risk of
cannibalization of their original recipe. Rather than serve to increase market share, a second flavour
could instead split sales between the two products. If sales levels increased by only 10 per cent, the
Kellys were unsure whether a second flavour would be worth producing. For this reason, the Kellys
believed that they should consider a non-competing product that could provide better access to new
customers, satisfy market demand for innovative concepts, increase brand awareness and ultimately
grow market share. In keeping with the unique and exciting image the Black Fly brand sought to
create, the Kellys considered developing a new specialty spirit-based product that would also capture
the LCBO’s desire for a Canadian-inspired, inventive concept with creative packaging and nonbreakable,
environmentally friendly containers.
The couple determined that a ready-to-freeze vodka cooler concept could be an answer to many of the
product demands shared among themselves, the LCBO and the end consumers. The Kellys had
considered a number of alternatives on how to produce and package a ready-to-freeze cooler, and they
ultimately came up with a product they dubbed “Spiked Ice.” Much like the summer frozen treat
known as a “Freezee,” Spiked Ice would come in a multi-pack of nine 100-millilitre, foil-packaged
units with three vodka cooler flavours per box. Customers would purchase Spiked Ice from the LCBO
unfrozen and then freeze the product at home before serving.
At present, there was no other product on the Ontario market like Spiked Ice, giving the Kellys the
opportunity to introduce customers across the province to an entirely new way to enjoy vodka coolers.
However, producing a ready-to-freeze, alcohol-containing cooler had some drawbacks. A frozen
beverage of any kind could be considered a seasonal item, reserved for the hot weather of spring and
summer. The Kellys wanted Spiked Ice to be self-sustaining. Without an ongoing large-scale
commitment from the LCBO, they were unsure whether seasonal sales could justify the investment
needed to produce and distribute an entirely new product. Additionally, launching Spiked Ice would
be essentially like starting another business. Although there would be some economies of scale gained
from added production, most of the equipment, materials and processes would be product-specific and
not shared with cooler production. The Kellys expected to spend $500,000 on outfitting their facility
with a new tank and machinery to mix, fill and package Spiked Ice for distribution; another $40,000
would be spent on merchandising and product development. Including cleaning, setup and testing
time, the new machine would be able to produce 10,000 units every three hours.
The LCBO was very enthusiastic about the Spiked Ice idea and made a commitment for the summer
months for 200 of the top-selling stores across Ontario at a retail selling price of $8.75 per box, with a
minimum four-month order of approximately 8,000 cases in total.
9
If sales performed well, the Kellys
knew they would have to be ready for a seasonal order that was three times that size. One potential
constraint was that Black Fly’s current facilities were not equipped to produce Spiked Ice and the
original vodka cooler at the same time. Although the Kellys were investigating upgrading their
processes to permit simultaneous production, they were unsure to what extent the limitation would
affect business if they opted to produce Spiked Ice with the present setup.
THE DECISION
As Cathy and Rob Kelly reviewed all the information they had collected regarding expanding Black
Fly’s product line, they still had several questions. Although it would seem a natural progression to
offer a second flavor in addition to the original cranberry-blueberry vodka cooler, the Kellys were
drawn to all the challenges of introducing a brand new product to the market. They knew that their
decision had to be justifiable from the perspectives of both marketing and operations.