Azalea Seafood Gumbo Shoppe – Case Analysis

Azalea Seafood Gumbo Shoppe is in a stage when development of a complex business strategy is needed because of insufficient use of production capabilities, need for a bigger market share and financial results that cannot satisfy owners needs. Current strategy of the company is primarily focused on increasing the market share in the United States in order to increase the amount of sales. This is done by direct marketing activities and collaboration with the food brokers. The first mentioned is very hard to do from the position of a small producer because of large corporations on the other side of the table and the second one was not successful because of insufficient attention from the brokers side. Also the reason for getting larger market share is to use free production capacities which are now at approximately 60 %.

Competitive forces in the seafood industry

The current situation (year 2000) in the value added seafood industry is influenced by four competitive forces: competitors, suppliers, buyers or customers and firms offering substitutes. Everyone in the seafood industry could be described as a competitor for the Azalea Company. The competitors are trying to get the competitive advantage by creating the biggest number of accounts (larger market share) with customers and getting the best shelf locations in the stores. However, in the same product line the Azalea Seafood Gumbo product does not have a real competitor because of the good taste which comes from long tradition and only few producers of gumbo which were not able to stay on the market for a longer period of time. The competition from suppliers of substitutes is relatively weak because these substitutes (as for example raw fish or shrimps) are more time consuming and require other ingredients to prepare.

Also if we look at the picture 3 in the appendix section, we can see that the consumption of substitutes has increased by only 0,9 lb per person during the years 1990 and 2000. The competitive threat of new entry is also relatively weak. The new production capacities which would come with new producers would not be sufficiently used because the already existing producers have a lot of free capacities (in case of Azalea Company it is more than 30 %). Another factor that is not influencing the market situation of the Azalea Company very markedly are suppliers.

Their bargaining power is weak because the seafood products are commodities which are available from several suppliers on the market (the Azalea Company is purchasing from California rather from nearby Gulf Coast also because of better prices). One of the most important competitive forces is the power of food service companies, food products brokers and supermarket chains. These three institutions are able to increase the sales of the Azalea in very high volumes which would not be possible to sell to individual customers and therefore they are very important. Of course they know how important is their position for the seafood producers and therefore this competitive force is so strong.

Problems

The Company has in the year 2000 faced several important problems. They have lost an important customer (Jitney-Jungle worth of $100,000 sales) and because of production problems they have recalled products for another $100,000. As a consequence the company has lost the eighth biggest supermarket chain in the US – Publix. The Company has constantly problems with the marketing activities. Insufficient attention of the food brokers and unfavorable product placement in the distribution networks lowers the sales. The Company facilities are not enough big to increase the production for larger customers or to get certificates allowing new product lines. The management (Addison and Rathle) was unable to get contracts with larger restaurants chains.

Financial situation

From the financial point of view the Azalea Seafood Gumbo Shoppe is in a good shape and financial results could be described as better than moderate if compared to the US seafood industry average.

Financial Ratios for the Azalea Seafood Gumbo Shoppe, 1996 – 2000

2000 1999 1998 1997 1996

Return on assets 17.10% 19.30% 1% 25.70% 17.40%

Return on equity 203.90% 112.40% 6.10% 131.20% 49.50%

Gross profit margin 29.90% 30.60% 27.60% 28.50% 28.50%

Current ratio 0.7 0.8 0.8 0.7 1

Inventory turnover 164.4 109.9 118.4 104.5 133

The profitability ratios support this argument. Even the return on assets ratio (which shows how the company can generate profit from its assets) has from the year 1996 to 2000 decreased by 0.3 % to 17.1 % it is still more bigger than the industry average of 6.66 % (Investors.reuters.com, 2006). The return on equity ratio has circulated in the last five years from 6.1 % to unbelievable 203.9 %. Therefore we will count with an average of the last five years which is 100.62 %. This average is still bigger than the five years industry average of 23.93 % (Investors.reuters.com, 2006) and therefore the invested money is very profitable. The Gross profit margin of the Azalea Company was during the last five years stable and has slowly increased from 28.5 % to 29.9 %. This is very close to the industry average of 31.96 % (Investors.reuters.com, 2006) and from this we can conclude that the company is sufficiently able to compensate for its operating and other expenses.

From the last two ratios mentioned in the table above we can assume that the Azalea Company needs to increase its ability to change assets into cash (below industry average of 1.32) (Investors.reuters.com, 2006) and its ability to turnover the inventory more times during one year period (below industry average of 6.42) (Investors.reuters.com, 2006).

All financial results in the 1998 are strongly influenced by the increased demo costs which have misrepresented their interpretation value.

SWOT analysis

StrengthsWeaknesses

– Better product quality relative to rivals

– Award winning product

– Superior intellectual capital relative to key rivals (know-how resulting from long-year tradition)

– Azalea’s representation in the Wal-Mart Supercenters – No clear strategic direction

– Weak brand image or reputation in the global market

– Weak dealer network and lack of adequate global distribution capabilities

– Lots of underutilized plant capacity

– Missing R& D strategy

– Missing Marketing strategy

OpportunitiesThreats

– Getting new customers groups or expanding into new geographic markets or product segments

– Expanding the product line to meet a broader range of customers

– Using the Internet and e-commerce to increase sales opportunities

– Alliances or joint ventures that expand the firm’s market coverage or boost its competitive capability – Entry of a new competitor

– Increasing competition in the industry

– Costly new regulatory requirements

– Bargaining power of customers or suppliers

– A shift in buyer needs away from the product

Evaluation of possible solutions

SOLUTION 1: Specialization of the two partners plus employ a new employee with good marketing skills can decrease production costs and increase sales. The reason behind this is that both partners were sharing responsibility in the production process as well as in the company’s sales and marketing activities. If Adison would take the responsibility for marketing and Rathle for production both of them can more concentrate on their fields and improve the results of their work. Because the marketing activities are more important for the company’s sales Adison should employ a new employee with good marketing skills. His position should partially compensate non-functional collaboration with food brokers and on the other side increase the number of new customers and keep better product placement in the shelves. The biggest negatives of this solution are increased costs for payments for the new employee. However, it is predictable that if this employee would be able to get new contracts those would produce more money than his salary and other operational costs.

SOLUTION 2: More people in the marketing section means more time for the improving of the food broker’s strategy. The brokers play an important part in the company’s sales and therefore few of them need to be “caught” to the Azalea side. Only by increased attention towards food brokers the company can increase broker’s attention towards Azaleas products. This solution is very time consuming but the results can bring more success than individual attention to each customer.

SOLUTION 3: As proposed in the first solution Rathle would have now more time for concentration on the production process. Its first decisions should lead towards an increase of finished goods and decrease of the raw materials in the inventory. This step is necessary in order to satisfy jobbers which can play also an important part in company’s sales and in increasing the inventory turnover which is very low. Of course this step brings more pressure on the just in time delivery management of the raw materials and more precise production planning. It can have also a negative impact on the supplier’s prices.

SOLUTION 4: Azalea Seafood Gumbo Shoppe products had a stable price for the last two years. A 10 % price increase for the whole product line would be acceptable by the market and it would dramatically change the net income of the company. If we look at the picture 1 and 2 in the appendix section we can observe a constant increase in the demand for the seafood products which is bigger than supply and constantly increasing consumption of the seafood products. The 10 % increase is not so dramatic if we take into account the inflation rate in the years 1999 and 2000 which was together 5,6 % (GPEC Information Center, 2005) good know-how of the company and weak competition in the gumbo product line. Of course each increase in the product price can cause change in the customer preferences. Orientation towards substitutes (raw fish, shrimps and others) is excluded as it was described in the competitive forces section (picture 3 in the appendix section). The only threat of this solution is orientation on ordinary customers (not restaurants) towards other products available in the supermarket chains.

SOLUTION 5:

More attractive product covers are necessary in order to get not only customer attention but also better product placement on the shelves. If we look at the quart packaging for the gumbo we can assume that the cover is very old fashioned and not attractive for the eyes of the customer as well as for the sellers. The new cover should include more graphics and colors and should increase the customer relationship towards Azaleas products. Not only the cover but also the inside of the gumbo product should be innovated. Rathle idea about boxes with gumbo and rice inside is very accurate and necessary at the same time. If we look at the picture 4 in the appendix section, we can see that Rathle’s idea become five years later reality. This solution will increase the cost of containers entry in the IS and also create a new entry in the expenses section of the IS. However this solution would also increase the company’s amount of sales.

SOLUTION 6: One of the most difficult possible solutions for the Azalea Seafood Gumbo Shoppe is the idea of new facility vs. rebuilding. The advantage of a new facility would increase production capacities and more attractive company profile in front of the biggest customers. The disadvantage is represented in the money needed for the new equipment (more than $100,000) and increased rent. The argument of increased production capacity is until now very weak because the production has still more than 30 % of capacities free, however if bigger customer would be attracted then the production would be overloaded. Another possibility is to rebuild the existing facilities in order to enlarge them. How realistic is the first or second possibility depends on number of big customers.

SOLUTION 7: In the year 2000 it is already more than necessary to create a new section in the company responsible for the internet and e-commerce activities. Few years later this section will be not only the main communication channel with big and small customers but also a way how to attract and increase the sales, decrease expenses and attract new customers. Investments needed for the technology will have a high return value. This solution does not have a disadvantage or negative effect for the company.

Recommendations

Based on the presented statistical data and analysis in the section above we would recommend all solutions except solution number six to be included in the new plan of action for the Azalea Seafood Gumbo Shoppe.

Short term plans (realized during less than 1 year period):

SOLUTION 1: Specialization of the two partners plus employing a new employee.

SOLUTION 5: New cover, new boxes

SOLUTION 4: 10 % increase for the whole product line

Long term plans (realized during more than 1 year period):

SOLUTION 2: Improving the food brokers strategy.

SOLUTION 3: Increase finished goods and decrease of the raw materials in the inventory.

SOLUTION 7: Introduction of e-commerce

The primary task of the plan of action above is to increase the amount of sales, increase the quality, increase the inventory turnover, create new sale methods and create space for speculations about alliances or joint ventures after the next three years.

References:

Investors.reuters.com. (2006). Ratios for MKC.N. Retrieved April 27, 2006 from

http://www.investor.reuters.com/mg.aspx?ticker=mkc.n⌖=/stocks/financialinfo/ratios/valuation

GPEC Information Center. (2005). U.S. Inflation Rate. Retrieved April 27, 2006 from

http://www.gpec.org/infocenter/Topics/Economy/USInflation.html

NOAA Fisheries. (2004). Office of Constituent Services. Retrieved April 27, 2006 from

http://www.nmfs.noaa.gov/ocs/tradecommercial/documents/ustrade2004F.ppt)

National Marine Fisheries Service. (August 2001). U.S. Annual per capita consumption report.

Retrieved April 27, 2006 from http://www.nmfs.noaa.gov/ocs/ tradecommercial/documents/Fisheries2000.pdf)

Zatarain’s. (2004). Zatarain’s web page. Retrieved April 27, 2006 from http://www.zatarain.com/

products/products.php/2/16/Gumbo)