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Cooper’s Pipeline Limited

It was 7:30 pm, March 9, 1984, and Mike had a lot on his mind. Just three months ago he had left a steady,
secure job to take over a large, bankrupt gas bar and convenience store in West Park, Vancouver, now known as
Cooper’s Pipeline Limited. While things seemed to be running smoothly, a number of issues that affected the
profitability of the business needed to be addressed. Uppermost in Mike's mind was the utilization of
non-selling space. In particular, Mike was considering installing a separate business in this space and was
presently reviewing several options, including whether to operate as a franchise or an independent business.

Mike is known among his colleagues as a hard working person. For the past week he had been working for 15-
16 hours per day. In order to relieve himself from this immense work stress he is currently on a short vacation.
However at the back of his head he knew that there was still a lot work and responsibility in owning his
business and there was so much to be done.

The Owner

Mike graduated with a Bachelor of Commerce degree from Memorial University of Newfoundland (MUN) in
1978. After graduation, he didn't want just any job. He was a marketing major and wanted to put his newly
acquired skills to work. After a few months of searching, he was offered a position in the marketing department
of Canadian Natural Resource Ltd. in St John's, Vancouver.

Over the next five years working as a marketing representative with Canadian Natural Resource Ltd., both in St
John's and in Grand Falls, Vancouver, Mike became familiar with most of Canadian Natural Resource Ltd.'s
outlets in eastern and central Vancouver. He was exposed to a full range of business practices from efficient and
profitable operations to poorly managed, marginal operations. At one point, Mike managed an Canadian Natural
Resource Ltd. gas bar and restaurant operation for six months while Canadian Natural Resource Ltd. searched
for a suitable lessee. Mike was a dedicated employee and regularly worked 50 hour weeks. He did not mind
having to work occasional 12 or 14 hour days if he felt it was necessary to get the job done.

When the Pipeline site in West Park, Vancouver became available, Mike wasted no time in making up his mind;
he jumped at the opportunity. He felt his education and experience would enable him to turn it into a successful
operation. He was confident he could use his marketing abilities to increase the sales of gasoline and
convenience items.

Mike felt it was necessary to become familiar with every aspect of the business so he could instruct employees
as to how he wanted tasks performed. On a typical week day Mike would arrive at the site between 6:00 and
6:30 am and would not get home before midnight. On the weekends, he would generally arrive around 8:00 am
and leave around 10:00 pm. He worked the full service pumps from 7:00 to 9:00 am because he felt this was a
valuable opportunity to meet his customers and to provide them with good service. He also felt customers
would appreciate being served by the owner. During the day, he would occasionally work the counter if things
got busy His other activities included making up daily sales reports, scheduling employees, paying bills,
preparing the payroll, meeting with suppliers, picking up supplies, stocking shelves, ploughing the lot in the
winter when needed, and even cleaning the floor. In general, he would do what he felt had to be done to make
sure the operation ran successfully.
Company Background

Canadian Natural Resource Ltd. had made significant gains in market share in Vancouver during the past two
and a half years. Mike felt this was accomplished through capital investment in new sites, the acquisition of all
the Gulf outlets in the province, high levels of staff morale, and very effective promotions.

Cooper Pipeline Limited (Pipeline) was a modem, Canadian Natural Resource Ltd. Gas bar and convenience
store located at the intersection of Queen’s Avenue and South Avenue in West Park. It had fifteen employees,
six full-time and nine part-time. It was open 24 hours a day, 365 days a year. The site had originally opened for
operation in mid-1986 under the management of Captain Quick Limited, a local chain of convenience stores.
When the original lessee went into receivership after just four months of operation, Canadian Natural Resource
Ltd. offered a lease on the site to Mike.

The Pipeline's employees ranged in age from 18 to 22 years and were paid $4.25 to $4.75 an hour. Although all
the employees had a minimum of high school education, none of them had any special skills or abilities beyond
working in the counter, pumping gas, and stocking shelves. Mike relied on his retired father-in-law to assist in
scheduling employees, counting the cash, and making the daily bank deposits.

Accounting information and financial statements were provided by a local chartered accountant. However, by
the time the statements were prepared the information was generally three months old.

The Pipeline site consisted of a paved asphalt lot, gas pumps, an overhead canopy, green space, and a building
of approximately 3000 square feet (Exhibit 1). There was a total of eight gas pumps, four self-service, and four
full-service. In addition, there was a kiosk with a cash register.

The building was quite attractive and had won a design award from the trade journal Convenience Store
Merchandiser. The exterior consisted of medium-brown brick, large areas of glass and a cedar shake roof. The
interior was laid out much like a small supermarket with five aisles, coolers along the back wall, a deli counter
at one end, and a checkout counter with one cash register near the entrance. The northeast comer of the building
consisted of a solarium which was a focal point for an eating area of approximately 500 square feet and which
contained seven fixed tables and chairs (Exhibit 2). Although this area was quite attractive, from both the
interior and the exterior, it was rarely used, since food sold at the deli counter was almost exclusively taken out.

There were seven parking spaces on the north side of the building for customers shopping in the convenience
store. When all these parking spaces were taken, one or two customers would occasionally parallel park along
the green space or occasionally in front of the building. However since customers received fast service, traffic
tie-ups and potential resulting frustrations were usually avoided.

Competition

The city of West Park had experienced a 27 percent growth in population in the previous seven years. This was
reflected in the increased traffic volumes on Queen’s Avenue and South Avenue. The section of Queen’s
Avenue between South Avenue and Smallwood Drive had become very commercialized during this period.
There were two other gas bars with large convenience stores operated by Metro-Canada, and Irving, two gas
bars with service bays owned by Esso and Gulf, and two convenience stores all within a distance of less than
one kilometer. In addition, there was a large Metro-Canada gas bar, convenience store under construction on the
comer of Queen’s Avenue and Brookfield Road approximately two kilometers south of Cooper Pipeline.
This concentration of competition had lead to some very keen pricing on certain high-volume items such as
tobacco products. In fact, as soon as Mike took over the site he dropped the price of tobacco, significantly
underpricing all his competitors. Mike wanted to increase his market share in gasoline sales; since tobacco
typically made up 35 to 40 percent of convenience store sales he wanted to use this to attract customers. The
low price was prominently advertised on an illuminated, mobile sign in front of the store.

Operations

Immediately upon taking over the operation, Mike realized that major changes were needed in the accounting
system. There were only two accounting departments for the whole operation, one for gasoline, and the other
for everything in the store. In addition, nothing was computerized. The result was an extreme lack of
information and control. Mike had no idea of shrinkage, inventory control consisted of counting items on
shelves, and there was no way to accurately estimate the profitability of various products. The situation was
further complicated by the large stock of inventory that Mike was forced to purchase when he took over the site.
The store carried deli and dairy products, groceries, snack foods, magazines, automotive supplies, beer, lottery
tickets, health and beauty products, seasonal items, and tobacco. While both the gas bar and convenience store
were profitable, some products in the store were moving much slower than others. Mike was particularly
concerned with both the deli counter and the magazine rack.

The deli consisted of two large display coolers, a freezer, an oven and a microwave, sinks, cupboards, and
counter space for working. It occupied approximately 200 square feet of floor space. Customers could purchase
a wide variety of prepared meats, cheese, and salads to takeout or they could have a sandwich and/or salad
served in the eating area of the store. However, most items in the deli were slow moving and customers rarely
ate in the store. The deli products had to be changed frequently to maintain quality and to conform to health
standards; this resulted in a large amount of wastage.

The magazine rack occupied one side of an eight foot aisle and was stocked with approximately 90 titles. While
the retailer would receive a rebate on unsold magazines, the distributor charged for both delivery and pickup of
unsold magazines. The magazines also required a significant amount of labor to keep the rack tidy and to count
unsold copies for refund. While almost all the magazines were slow moving, Mike wondered if they were the
reason some customers chose to shop at his store.

Storage space in the building consisted of only 50 square feet which restricted the amount of inventory Mike
could keep on the site. Some suppliers had to deliver three times a week, requiring that someone be available to
stock the shelves when certain merchandise was delivered. Being constrained on storage also affected the size
of discounts Mike could receive from suppliers by purchasing large volumes.

The building did not contain an office. All of Mike's office work including counting the cash for deposit,
writing payroll and suppliers' cheques, and other accounting functions had to be done on one of the restaurant
tables or taken home. Since Mike wanted to spend as much of his working time as possible in the store, he knew
he would have to locate an office somewhere in the building.

Mike wanted to take advantage of the under-utilized interior space by possibly expanding into another business.
The eating area, almost 20 percent of the selling space in the store, was virtually unused. However, since
parking was limited, Mike knew that to be viable, any alternative must not impede the existing business by
tying up traffic at the gas pumps or elsewhere on the lot. Therefore, realistic options could only be those that
required a short transaction time. Customers should be able to make their purchases in a minimum of time
where little deliberation or choosing was necessary. In addition, the right alternative had to fit the space and
lend itself to cross merchandising with gasoline.
Alternatives

After considering a number of alternatives, Mike was favoring a film processing center which would require
approximately 200 square feet of floor space. He had the option of either purchasing a Japan Camera franchise
or developing his own one-hour photo finishing center with equipment from Kodak. At present, there was no
competition in film processing in West Park. The nearest photo finishing outlet was in the Village Mall in St
John's, five kilometers away.

While the financial terms were more attractive with Kodak, this system lacked the benefits of a franchised
business (Exhibit 3). A franchise would provide Mike with a complete package of materials and services. In
addition, Mike was provided with an estimated statement of income which seemed reassuring (Exhibit 4). He
estimated his sales might reach $250,000 in the first year based on information from Statistics Canada and the
1986 Census of Canada (Exhibit 5). Without a franchise, Mike would have to develop all the ingredients
included in a franchise package. As it was, Paid was already working too much, thus the amount of time he
could devote to any new enterprise was limited.

Mike had also been offered an over-the-counter postal franchise from Canada Post. Although Mike had limited
information on the postal franchise, it was very appealing to him (Exhibit 6). Because it required only 150
square feet of floor space, it could easily be accommodated along with a photo processing center. Mike felt a
postal service would attract customers who might not otherwise be drawn by the existing Pipeline or by the
planned film processing center. In addition, a postal franchise might increase business during the non-peak
times of 9:30 to 11:30 am and 2:00 and 3:00 pm.

The only potential drawback in choosing both franchises was the limited parking available to customers. Mike
was worried that if the Pipeline lot became too congested customers could easily go to one of the nearby
competitors. To successfully accommodate both franchises Mike felt more parking was necessary. Mike
therefore made an application to the municipality to replace one-quarter of the Pipeline's lawn with eight
parking spaces. However, the City of West Park refused the request for more parking.

The issue of his time would also have to be dealt with. Previously, Mike always assumed that as the owner of a
business he would have the time to manage the operation and to plan for business growth. But, because of the
constraints on his time and the fact that he was so caught up with the day-to-day operation he had almost no
time left for planning, organizing, or controlling.

Room service came to Mike's room with a cool mango fruit juice that he had ordered earlier. Instead of enjoying
his drink, Mike continued to lie in bed for a few more minutes and wondered how he was going to prioritize all
these decisions and what information was needed on each issue.
Exhibit 1
Exhibit 2
Exhibit 3

Comparison of Japan Camera Franchise Expenditures Versus


Expenditures from a Similar Operation Using Similar Equipment Purchased from Kodak

Japan Camera Kodak


Franchise
Equipment cost* $75,000 $65,000
Leasehold improve- 50,000 50,000
ments (estimated)
Franchise fee 40,000 not applicable
Franchise royalty 8% of gross sales not applicable
Advertising royalty 3.5% of gross sales not applicable
Start-up advertising 5,000 not applicable**
(grand opening)
Inventory 40,000 40,000

* Both the Japan Camera and Kodak machines have a one-year warranty. While there is a Kodak service technician stationed in the West Park area, a
Japan Camera technician would have to be flown in from Toronto at the franchisee's expense.

** Japan Camera required the franchisee to spend a minimum of $5,000 on start-up advertising. Kodak would provide the purchaser of their one hour
film processing equipment with $1,500 to assist in start-up advertising. Kodak would also match dollar for dollar all advertising by the purchaser up
to 3 percent of the value of the supplies purchased from Kodak.
Exhibit 4
Japan Camera Centre 1 Hour Photo
Franchise Estimated Statement of Income

The material set out herein is for informational purposes only. As certain information is of a conjectural nature only, no representation is made that if
the Franchisee attains such sales that the same profit will result.
Exhibit 5
Consumer Spending Potential Summary; Photographic Goods and Services (1987) Estimated Expenditures in
$000’s) West Park, Vancouver

Population, Households and Income Projects, West Park, Vancouver


Exhibit 6
Projected Income Statements for Canada Post Franchisees

NOTES: ESTIMATED ONLY, NOT WARRANTED BY Canada Post Corporation

1. Sales, Gross Profits and Expenses do not include Fee Items.


2. Expenses do not include Depreciation or Interest Costs.
* Available from manufacturer to retail postal outlets at manufacturer’s price.

Solve this case in 1500 words (max). Include the following:

1. Summary of the scenario.


2. Identify the core issues.
3. Suggest a decision for Mike.
4. Justify with valid reasons the decisions you made.