Entr 3149 - Black Fly Beverage Company Inc.

Definition of Success:

For the company to increase market awareness and sales of their micro-distilled vodka based products annually by 30%.

Critical Issues

Black Fly must capitalize on the market and expansion opportunity, as they may see a potential growth in profits and market share if they take advantage of:

• Capabilities to increase production to meet high growing market demand
• Already established general listing status in LCBO stores

Situational Analysis

Currently Black Fly is in the growing stage of the product life cycle, meaning the company is not focusing on profits in this stage. It is more important for the company to gain market awareness and market share. Currently, the market for coolers is growing at 130% annually. It is crucial for the company to capitalize on the growth of the market.

Given Black Fly’s seasonal demand between May and September, the company’s current product demand is at 11,520 Litres per month, while their current operational capacity is at 82,560 Litres per month (see Exhibit B). This just shows that the company is only producing at 14% capacity. Showing that Black Fly has the capability to supply the increasing cooler demand.

Black Fly faces the threat of competing, large and established brands such as Mike’s Hard Lemonade and Smirnoff Ice, however there are more opportunities in the market. The company’s core competitiveness is their use of natural ingredients. The current competitors have brand equity and provide products that are 330 millilitres and three to four times sweeter compared to Black’s Fly’s 400 millilitres premium glass bottles (see Exhibit A). Therefore, the company needs to capitalize on the general listing status at the LCBO stores. With this listings, the company can penetrate the market through guaranteed shelving space in top 200 LCBO stores and increase their current sales of $482,280 (see Exhibit B).

Decision criteria:

• To increase their current sales by 30% by end of year two, which would yield $626,964 in revenue.

Option analysis:

Option 1: Focus on one product line

This option is to penetrate the market with the current product through distributing in more LCBO stores in the province. The increased demand will result with longer time in production, thus, making the cost of this option the increase in labour, utility, and machine related costs. However, due to more production those higher costs will be offset by economies of scale as the company produce more product without accruing new equipment. If this option were to be implemented it will increase current production rate by minimum of 45% (Exhibit C) to meet LCBO demands, therefore, it will satisfy our decision criteria.

As Black Fly’s product is in the beginning phase of the growing life cycle, they should focus on penetrating the market to enable consumers to be familiar and aware of their product. Exhibit B, Black Fly can produce 604,800 packs per year at full capacity with their current setup. Assuming Black Fly only have one distribution channel, LCBO, we determined the current orders from LCBO without expanding to be 172,800 packs per year at best. This difference in sales and capacity illustrates the firm can expand into more stores without issues in fulfilling orders. Using owner’s assumptions of 50% to 75% increase in sales, which is reasonable as the market is growing at an annual rate of 130%. Moreover, if the company follows the growth trend in LCBO they can easily reach 2/3rd of stores within a year and increase sales by 83% (Exhibit E). (Exhibit D) illustrates the deviation in production time. With a 50% deviation or 13-hour delay, Black Fly can make 37,800 units per month which is equivalent to the best-case scenario of 75% increase in sales making this option relatively low risk. In sum, this option will result with a moderate reward as the firm is growing below cooler market and LCBO expansion growth rate.  

Option 2: Add new flavor

This option will not meet our decision criteria, refer to Exhibit F ..

Option 3: Spiked Ice

This option proposes developing Spiked Ice: a vodka based, naturally flavoured frozen cooler packaged in 100 ml foil tubes. This product would not compete with, or cannibalize the Black Fly sales, and could capitalize on an untapped product segment. LCBO will commit to an initial stocking order of 8000 cases if Spiked Ice is produced, and they predict restocking orders three-times that size if Spiked Ice is a hit. The LCBO would also list Spiked Ice and Black Fly coolers in their top 200 locations. This arrangement would increase sales and distribution of Black Fly coolers, and strengthen Black Fly’s position in the Ontario cooler market.

The initial purchase order would earn the company $277,440 in additional revenue. Based on a worst case scenario Spiked Ice could grow sales by 68% and would exceed the decision criteria of a 30% growth from year one to year two. On a best case scenario could grow sales by 183% over the next year. (Exhibit G). This option is lucrative but has high costs and risks.

This option will cost $540,000 to implement. (Exhibit H). Spiked Ice is not a proven concept and it could fail with consumers. The unproven concept and high capital investment required makes this option high risk. Assuming a best case scenario with a 100% contribution margin on the 8000 case PO, if the new product fails the company will have lost $262,560 on implementing this option.