Habitual Chocolate Case Study

Habitual Chocolate

Date: March 6, 2018

Definition of Success & Critical Issues

Habitual Chocolate wants to generate profits by increasing its sales by 60% annually. There are critical issues such as competition, limited space for expansion and current ratio of less than one, but Habitual can eliminate those issues by critical opportunities of market expansion, annual return on assets and enormous growth in sales than previous years.

Situation analysis

Habitual Chocolate has an opportunity to expand with an advantage of using Fairtrade certificate and organic certified products. In 2014, Chocolate manufacturing sales in Canada were $2081.97 million, which are projected to rise by 1.2% in 2015 means sales go up to $2,106.95 million (See Exhibit-1). Although the growth rate is very low, company still has an opportunity to expand. In addition, company’s main target market is young professionals, which represents 85% of population base, means they are generating $33,344.65 in revenue out of $39,229 (as shown is Exhibit-2).

When we analyze company’s financial position, company sales growth is 128.6% as compare to Hershey. They have sales growth of only 3.8% and Canadian Industry is also growing at really lower rate of 2.8%. Annual return on its assets is 12.9%, which matches industry standards of 10.8% It means that company’s management is efficiently using its assets to generate earnings and sales are growing enormously every year. Overall, company’s looks financially strong and it has a capability and opportunity to increase its sales by expanding

However, on the other side, we can see that its current ratio is only 0.6 in 2014 as compare to Hershey CO. (1.2). Current ratio less than one means company is unable to pay off its debt when they come due. Therefore, it will be very difficult for the company to borrow loan from its creditors. This will become an issue if the company decides to move to new location as it needs to borrow additional money to cover its expansion costs.

Company is also facing tough competition from its competitors as they are well reputable and offer wide variety of products as compare to Habitual. Only advantage the company have is its organic and healthier products. The problem of limited space for expansion becomes a major hurdle as Western Fair Farmers’ have declared that they will not allow any vendors to manufacture in that area within next 5 to 10 years since they want to use that space for retail.

Decision Analysis

Based on the historical sales growth of 128.6% and slow industrial revenue growth of 1.2%, we expect sales to increase only by less than half next year. Therefore, the decision criteria will be

• Generate profit by increasing sales by 60% within next year.

Option Analysis

Option-1: Purchase a new storefront and production facility in Woodstock, Ontario

In this Option, company decides to move its production in Woodstock, London. If the company choose this option, they have a loss of $7,728 (see Exhibit3).  The reason is that Habitual has a fixed cost of $47,328 and variable cost of $13,200 while its revenues are only $52,800. Moreover, although company had already secured a loan of $50,000, they need to spend large amount of $65,000 on capital assets, which will generate a cash flow of -$11,135 in the month of June and -$3,408 in July (See Exhibit 4). It means that company does not have enough cash available to cover its expenses.