CASE STUDY
Jeff and Jordan Hopkins recently attended a birthday party for their 10-year-old granddaughter, Shirley. During the party, the children were all given a chance to make their own popcorn and add flavors and colors to the popped corn. The children could add caramel, butter, chili pepper, cocoa powder, or dried cheese flavoring. The girls were delighted with the idea of mixing the flavors to their taste, which in some cases were delightful and others not so much. The fun was in the mixing and the girls were delighted. Jeff and Jordan, recent retirees, were looking for a new small business to start and they immediately latched onto this idea: Why not produce popcorn flavors? On second thought why not produce snack flavors in general? Why not produce flavors for popcorn, pretzels, and potato chips that people could mix and match to their taste – A gourmet flavor treat for all ages. Flavor “N” Snack (FNS) was born.
FNS makes 18 powdered flavor basics that when heated in a microwave for seconds would add flavor to most snack foods. The powders come in flavors like masala, Thai green chili, honey and mustard, chili, malt vinegar and sweet flavors like orange chocolate, salty caramel, and honey apple. The flavors are packaged in plastic jars with shaker lids for easy dispensing. Online instructions for hosting tasting parties are included in the packaging.
Jeff and Jordan do a ll the product purchasing, mixing, bottling, labeling, packaging and shipping of the product in the basement of their large home. Their teenage grandson has created a web page for them and helps with online orders. Currently after six months in business FNS is selling about 875 bottles each month. The couple took the FNS products to a recent Sweets and Snack Expo in California and were surprised at the response received. They received a contract from several small boutique chains looking for clever food gift ideas. This contract will increase their output by about 300 bottles per month alone. They also learned from other conventioneers that the holiday season would give them a big jump in sales as people look for hostess gifts, stocking stuffers, party ideas, and gift guides for new ideas. In fact, the conventioneers suggested the Hopkins’ increase their existing production as much three times. Encouraged by positive reactions from the convention sales and a new listing posted in two national gift guides, the company’s July revenue was $6,500. FNS”s gross margin ranged from $3 to $5 on each bottle, depending on the ingredients. At this time, the website is doubling its orders.
The holiday season is upon FNS and Jeff and Jordan are at a crossroads in their business: do they expand the business in general or do they just try to meet the Holiday demand and worry about expansion later? The idea of not having enough inventory for the Holiday season and disappointing customers is unsettling to James and Allison. The couple cannot be seen as unreliable to first-time customers. It is also true that keeping down expenses is critical because the company is self-financed and the couple does not want to touch their 401K pension funds to fund FNS. Yet, spending money for a onetime event seems like an inefficient use of their budget if they just have to turn around and put more money out to do the job permanently.
Jeff and Jordan have studied the market and although uncertain that they will reach their sales goals it seems likely that to fill all their possible sales for the holiday season the couple would have to produce 6,000 bottles per month starting in September through December.
Jeff estimates that he will need two additional full-time workers in October, mainly for production; an extra three and a half workers in November, for production and shipping; and one and a half workers in December, mainly for shipping. The couple has examined a few options to meet the huge increase in production:
- One option they considered is renting extra bottling machines and asking friends and family to help in exchange for food and laughs. The problem is that other commitments may diminish the volunteers’ participation as the holidays, school schedules and work demands consume their time. They are likely not to be reliable as time nears the holiday week. Further, Jeff and Jordan know that family and friends cannot be managed like salaried workers, and hurt feelings may result. Also, the workforce is not trained and would have to be coached as well as supervised on dealing with food products. Although the most cost-effective measure would cost $1800, easily payable from their bank account, Jeff and Jordan worry they may not meet the goal without losing some family or friends. Depending on family and friends is risky.
- A second option would have them rent the machines and hire bonded and vetted temp-workers through an agency. The cost is $25 an hour for a total of $20,000. This sum would tap into their cash reserve and leave them strapped for other expenses. Although doable, this option leaves little cushion in the FNS bank account. It is a risk. The workforce is also not trained and would have to be coached as well as supervised on dealing with food products.
- Another option is a loan. The source of the loan could be from family, friend, or bank. A loan would allow for a more professional workforce and free Jeff and Jordon to work on expanding the growth of the company all around. A bank loan would likely have higher rates for people their age. Jordan called AARP for some advice and was told that age should not be an issue from a legitimate lender; however they would most likely have to post collateral that means mortgaging their home, which is mortgage free. The house they feel is off limits. They must have a place to live at their age. However, getting a loan without using the house or their 401K accounts as collateral is possible but they have no idea of the rates. Friends or family have the same problem. What happens to their relationship if the business fails? Will it change their relationship?
- Another option is to invest in new equipment and one full-time employee to run them. The cost would include turntables, workbenches, shrink wrap machines and fulfillment equipment that Jeff thinks will cost $11,500. He is uncertain that they will have enough time to install the machines in the basement in time for a September production. He might have to pay extra for a rush fee of $3,000 more to guarantee a timely installation. The salary of one employee would be $35,000 per year. The cost is something FNS can handle without too much strain.
Looking for some advice, the couple turned to some of the small business people they met at the convention. Here are some of the comments they received:
- Use every personal contact as you must get the orders filled and to the customers on time. The first impression is the best so do it right the first time. Work 24/7. If you do not want to use family and friends look to other groups that may be willing to help for a small donation. You may even have previous work buddies who may help for a small fee. Also include with every order a product list and order form. Happy customers make good long-term customers.
- Do not invest in any equipment if you are not sure the holiday surge will continue in the months afterward. Family and friends will want to see you succeed while temp workers will consider it just another job.
- Investing in machinery is a real growth move. Find customers that will sustain the expense by going to bigger retailers.