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Case Study # 22: Rocky Mountain Chocolate Factory

Table of Contents
Company Overview..........................................................................................3
Corporate Governance.....................................................................................3
Industry Analysis..............................................................................................4
Ratio Analysis..................................................................................................5
Liquidity ratios:.............................................................................................5
Leverage ratios:............................................................................................6
Profitability Ratios:........................................................................................7
IFAS..................................................................................................................8
EFAS.................................................................................................................8
SFAS.................................................................................................................9
Porters Five Forces Model.............................................................................10
Porters Value Chain Model............................................................................10
Strategic Plan and Implementation Recommendation...................................11

Company Overview
Rocky Mountain Chocolate Factory (RMCF) was founded in 1981 by Franklin
Crail, and two of his partners, in Colorado, United States. It is headquartered
in Durango, Colorado. As of May 21, 2015, it operated 595 Rocky Mountain
Chocolate Factory and self-serve frozen yogurt stores in 41 states, as well as
in Canada, Japan, South Korea, Turkey, Pakistan, the Kingdom of Saudi
Arabia, and the United Arab Emirates. The company also franchises and
operates self-serve frozen yogurt cafs. RMCF manufactures an extensive
line of premium chocolate candies and other confectionery products to
supply its many franchise locations. In 1985 the Company went public and is
now traded on the NASDAQ exchange under the symbol "RMCF".
RMCFs mission statement is To offer a diverse range of best quality
chocolate. Its strategy is to focus on franchising and licensing (horizontal
growth), and co-branding with other companies, in order to stay ahead of
competitors, and gain a global presence. Its strategy to co-brand with other
companies can be seen when it partnered with Cold Stone Creamery to
create chocolate cakes and ice creams, and with Kelloggs to create chocolate
cereal. Their strategy has been successful so far, wherein even though they
have a very small presence in the industry, the larger competitors have not
been able to overcome them by acquiring them in their 35 years. The
companys corporate structure and culture are based on high reliability on

their franchises, highly regulated process of franchising and licensing, and


they are basically a family-oriented business.

Corporate Governance
All the officers and senior-level presidents have significant experience in the
department they represent, and have been with the company for many
years. The company has strict by-laws, code of conduct, and code of ethics.
It has not been involved in any scandal throughout its 35 years of business,
and running. RMCF has six Directors, four external and two internal (CEO and
CFO). The BoD is very active (catalyst), and has a high level of participation
in the companys decisions. The company has a SVP specifically for
overlooking its franchise development, which shows its dedication to its
highest source of income- franchising.

Industry Analysis
RMCF operates in the Confectionery industry, under the sector- Consumer
Goods. Its current market cap is 59.5 million USD, which is fairly small
compared to the industry average of 2 billion USD. Its revenue in 2015 was
41.5 million USD, much less than the industry average of 5 billion USD. The
company is small in size and not a major player in the industry. However
since it hires less employees, its cost is also less compared to the industry,
and its profit margin is higher than the industry average. The Earnings per
Share (as can be seen below in the ratio analysis) is also much higher than

the industry, which means that RMCF is a good alternative for shareholders
to invest in, as compared to its competitors.
The industry in general is non-cyclical, which means that it is not affected
much by recessions. However, it is affected by changes in consumer tastes
and eating habits, including their views on chocolate, and also by changing
demographic trends (more preferred by the young aged), and weather
patterns that affect crop productions and transportation of goods. The latest
trend in the market is producing gourmet variety of chocolate items, which
are free from chemicals and preservatives. Moreover, the ethical and fair
trade of chocolate has also been recently in question. Hershey Foods, Nestle,
and Mars were recently involved in court proceedings regarding their use of
child and slave labor in their chocolate production.
The company earns most through its franchising business, then through instore sales. This strategy has helped it remain in the industry for so many
years, as not many (a bare minimum) of its competitors have franchises in
different countries (they focus on opening their own stores which increases
their costs). The industry giants, such as Hershey Foods and Mars Inc. (mass
producers) are two of the companies that are the most involved in acquiring
smaller businesses in the sector. The main competitors of RMCF are Godiva
Chocolates, Lindt, Sees Candies, and Alpine Confections. They are located in
international markets- Belgium, Switzerland, U.S, and U.S. respectively.
Growing from a small town family chocolate business, to competing with
international companies is a big feat for the founder of RMCF.

Ratio Analysis
RMCFs share price as of March 30th, 2016, was 10.25 USD. The company has
also been paying dividends to its shareholders every year since 2011, which
shows a stable performance.

Liquidity Ratios
Leverage Ratios
Profitability
Ratios

Ratio Analysis
Cash ratio
Current Ratio
Quick (acid) ratio
Debt-to-Equity ratio
Debt-to-Total Assets ratio
Return-on-Equity
Return-on-Investments
Earnings per Share
Profit Margin

bad
bad
bad
bad
bad
good
good
good
good

Liquidity ratios:
a. Cash ratio determines if or how quickly a company can repay its
short term debts. The higher the cash ratio, the more liquid the
company is. Rocky Mountain Chocolate factory's financial statement
showed that company's cash ratio was 1.19 in 2004 whereas it
decreased to 0.87 in 2007 before decreasing more to 0.18 in 2008.
b. The Current ratio determines the ability of a company to repay not
only its short term debt, but also its long term debt. The companys
total assets were higher than the total liabilities by which we can
conclude that they were able to pay back their debts (positive
ratio). However, their ability to repay their short and long term
debts was decreasing throughout the years studied. In 2006, the

current ratio was 1.20 but in 2007, it was 0.87, and 0.18 in 2008
(similar to cash ratio).
c. Quick ratio (Acid test ratio) determines the ability of a company
to meet short term obligations with its most liquid assets. The
company was not doing well in keeping a good quick ratio, since
their ratios decreased from 2007 to 2008.
Decreasing liquidity ratios are bad for a company, and so is the case with
RMCF. All the three ratios above have decreased.

Leverage ratios:
a. The Debt-to-Equity ratio measures how much debt the company
is using to finance its assets. It increased from 2007 to 2008 (0.27
to 0.39). The lower the debt to equity ratio, the better, since it is
directly proportional to the risk. So we can see here that the
company is taking risks that is affecting it in a negative way; it is
taking on more debt.
b. Debt-to-Total assets measures the total amount of debt relative to
assets. The ratio increased from 2007 to 2008 (0.27 to 0.28). A
lower ratio means higher efficiency. As was the case with Debt-toequity ratio, the company seems to have taken on more debt, and
thereby increased its ratio.
Both the leverage ratios have increased, which means the firm increased its
leverage, which weakens its financial position.

Profitability Ratios:
a. Return-on-Equity measures how efficient a company is at
generating profit, in comparison to its equity. The RoE was
increasing since 2004. For instance, the company's RoE was 0.33 in
2007 and 0.43 in 2008. This can tell us that the company was
efficient in generating profits.
b. Return-on-Investments evaluates efficiency of an investment. It
compares the amount of return to the cost of the investment. The
companys RoI was 0.13 in 2004, 0.21 in 2006, 0.26 in 2007 and
0.31 in 2008. The higher the RoI, the more efficient the investment.
Therefore, RMCF has been making good investment decisions.
c. Earnings per share (EPS) is a measure of a company's value
(how much it earns as compared to its share price). The company's
EPS was 0.38 in 2004, 0.62 in 2006, 0.74 in 2007 and 0.78 in 2008.
We can conclude that the company is returning value to its
shareholders. In comparison, the average EPS for its competitors is
very low, at 0.22.
d. Profit Margin measures how much of a companys revenue is left
as its net income. The profit margin increased since 2004 to 2008
from 0.52 to 0.79. Either the expenses reduced, or the revenue
increased, to have resulted in a higher ratio. We can say that the
company is earning more money in 2008 than the previous years. In
comparison, the industry average profit margin is only 0.35.
All the profitability ratios show an increase, which is good for the company.

IFAS
This shows the internal strengths and weaknesses of RMCF, and also gives
an idea about its internal environment.

Weig
ht

Ratin
g

Weight
ed
Score

Strengths
High quality
Reliable franchising

0.20
0.15

5.0
5.0

1.00
0.75

Store atmosphere

0.05

5.0

0.25

Own fleet of trucks

0.15

4.0

0.60

Strong financial position

0.15

3.0

0.45

Experienced top-level
management

0.05

3.0

0.15

Low marketing

0.10

2.0

0.20

Reliance on franchises

0.10

3.0

0.30

Highly priced

0.05

3.0

0.15

Total scores

1.00

Internal Factors

Comments

Organic products
Very profitable
Specially selected
sites
Low cost
-transportation
Better than industry
Most have been
serving for a long
time

Weaknesses
Less known
company
Highest source of
income
Moving towards
gourmet

3.85

A total score of 3.85 from the IFAS shows that the firm has a strong response
to the current and expected factors in its internal environment.

EFAS
This shows the external opportunities and threats for RMCF, and also gives
an idea about its external environment.

Weig
ht

Ratin
g

Weight
ed
Score

Comments

0.10

3.5

0.35

New trends

0.15

4.0

0.60

Slow, but increasing

0.15

4.0

0.60

More research lately

0.20

4.5

0.90

Increased regulations

0.20

5.0

1.00

Licensing costs

0.10

3.0

0.30

Bad weather

0.10

3.0

0.30

Increased rivalry
Ethical and fair
trade
In different
countries
Crop productions
and transportation
affected

Total scores

1.00

External Factors
Opportunities
Growing industry
Increasing online
purchases
Chocolate benefits
Threats
High competition

4.05

A total score of 4.05 from the EFAS shows that the firm is in an even better
position to respond to its external environment than the internal.

SFAS

Strategic Factors

S2
S5

Reliable
franchising
Strong financial
position

Wei
-ght

Rati
-ng

Wei
ghte
d
Scor
e

0.20

5.0

1.00

0.20

3.0

0.60

Duratio
n
Comments
S

X
X

Very profitable
Better than
industry

W1

Low marketing

0.20

2.0

0.40

O1
T1

Growing industry
High competition
Increased
regulations

0.20
0.10

3.5
4.5

0.70
0.45

0.10

5.0

0.05

T2

Total scores

1.0
0

X
X

X
X

Less known
company
New trends
Increased rivalry
Ethical and fair
trade

3.20

This shows us the firms most important internal and external factors. A total
score of 3.2 from the SFAS shows that the firm is overall, good at responding
to its environment, both internal and external.

Porters Five Forces Model


This model shows us RMCFs and the industrys potential to generate profits.
1) Leverage of suppliers: Low because most suppliers are small, farm
workers.
2) Availability of substitute products: High. Chocolate is also many
times substituted with other cocoa products, such as coffee, which is
easily available everywhere.
3) Rivalry: High between competitors; large industry with many established
firms.
4) Threat of new entrants: Medium because very few entry barriers in the
industry.
5) Buyers Bargaining Power: Low. Firstly because on average, the
industry has maintained fairly low prices of chocolates. However, the
industry is moving towards the gourmet varieties, and this might increase
prices, and change customer demands.

On average, Porters 5 Forces Model tells us that RMCF and the industry that
it operates in, has a high profit potential, mostly because of low supplier and
buyer bargaining powers.

Porters Value Chain Model


This model shows us how value is added to RMCFs final product at every
stage of its creation. The upstream segment of the value chain is the
production of cocoa- basic ingredient for chocolate. The downstream
segment is the transportation of the chocolate products and the selling. The
most valuable part of the value chain for RMCF is the manufacturing of its
chocolates. The company uses a special, master recipe in all of its products
to get the chocolate. Other than the manufacturing, the transportation also
adds value to RMCF, because it owns its own fleet of trucks that it uses to
transport its products. Moreover, the service given to customers at RMCFs
stores is of the highest level. The company focuses on selecting stores in
locations where a certain atmosphere and ambiance can be created that will
allow customers to relax.
A value chain activity in which RMCF is weak is marketing. It does not have
international marketing at the level of the industry. For example, the
company has 4 stores in the UAE, but very few people know about it. In
general, RMCF adds value along many activities along the chain, and loses
value when it loses to marketing.

Strategic Plan and Implementation


Recommendation
The strategy that RMCF is currently following is working well for it, however
to increase its chances of staying in business for a long term, it needs to
start investing a lot in creating a brand reputation. With brand reputation,
there comes brand loyalty, and customers will be more willing to pay higher
prices if they develop a connection and build recognition with the brand.
To begin with the implementation, RMCF needs to hire either a marketing
consultancy firm, or get experts in their company. Then it can develop a plan,
such as begin a trial marketing campaign in universities for students, as the
young aged are the most likely to become their customers. Using word-ofmouth marketing to create a strong perceptual positioning in the minds of
their likely customers is another strategy. Sponsoring famous culinary
events, and offering giveaways will again, allow them to reach out to a new
market. Doing so may increase costs in the short term, but it assures two
things: increased revenues in the future, and long term survival.

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