For many years, Mr. Dieter Bachembesser served as pastry chef at several of Torontos finest hotels, earning

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For many years, Mr. Dieter Bachembesser served as pastry chef at several of Toronto’s finest hotels, earning a reputation as one of the most knowledgeable people in the field of fine baking. In 1993, he used this knowledge to start Dieter’s Delicacies, a small firm that that sold fine baked goods to several of the area’s finest caterers. These products were made according to Dieter’s own specifications by Browne’s Bakery, a reputable producer of baked goods. While Dieter’s Delicacies was only a small part-time venture, it was financially successful, and Dieter’s reputation spread.

In 1999, Dieter decided to quit working for hotels and to start his own business, Dieter’s Delectables Ltd., with himself as president and general manager. This new company operated in a similar manner to Dieter’s Delicacies, in that it did not produce goods, but rather operated in the distribution and wholesale business. Dieter’s purchased its entire product line from Browne’s Bakery, with whom Dieter had established a very satisfactory working relationship, and distributed and resold these to a variety of retail outlets under the company’s own private label brand of Dieter’s Delicacies.

In its first year of operation, Dieter’s Delectables’ sales were $150,000. As its reputation for quality and customer service spread, sales grew rapidly, in large part due to Dieter’s knowledge and his personal selling efforts, as well as effective merchandising techniques.

In 2002, some larger grocery chain stores began to merchandise Dieter’s products under their own private labels, boosting sales further. By 2005, sales had reached $1,500,000 and the company employed 9 customer service representatives. By 2005, Dieter’s purchases from Browne’s Bakery had grown to the point that they represented 20% of Browne’s total production for the year.

In the spring of 2006, Dieter Bachembesser presented an aggressive proposal for a joint venture to Mr. Elmer Smith, president and major shareholder of Browne’s Bakery. The keystone of this proposal was the 5-year marketing plan shown below.

SALES PROJECTIONS, 2005-2010

(Millions of Dollars)

The sales figures in the above graph assumed a significant and steady increase in Dieter’s

market share, from 6.1% of the total market in 2005 to 10.1% in 2010, as shown below:

DIETER’S PROJECTED MARKET SHARE

2005-2010

(% of total market)

Dieter’s plan envisioned a dramatic increase in his company’s sales since its founding in

1999, as the following graph shows:

ACTUAL SALES, 1999-2005

and

PLANNED SALES, 2006-2010

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Dieter’s sales plans were based on an aggressive expansion plan that included:



expansion into new geographical areas



the addition of new outlets, including major supermarkets



introduction of new product lines, especially certain German recipes that had been

favourites of Dieter’s customers when he was the most famous pastry chef in Toronto



improvement in product quality



improved service to customers/retailers



stronger merchandising and promotional activities

Dieter proposed that Browne’s Bakery accommodate Dieter’s plans by:

expanding its manufacturing facilities and

transforming some of its existing operations in order to produce new product lines that Dieter’s would be introducing over the next 2-3 years.

While Mr. Smith was impressed by Dieter’s plans, he was fundamentally a cautious businessman.

Smith listened to Dieter’s presentation, then made the calculations shown in the following table. They show that if:

the total market were to grow as Dieter had forecasted, and

Browne’s traditional retailers continued to obtain the 25% share of that market that they had held for many years, and

Dieter’s market share and sales increased as he had forecasted,

Browne’s would have to expand its plant capacity by over 35% by 2010, or

reduce shipments to its traditional retailers, and that in either case,

nearly 30% of Browne’s output would be sold to one buyer—Dieter’s.

Total

Dieter’s

Browne’s Sales

Market Market Share

Browne’s Sales

to Dieter as a %

Year

($million)

(%)

To Dieter

To Others

Total

of Browne’s Sales

2005 $24.5

6.1%

$1.5

$6.1

$7.6

20%

2006

25.4

7.3

1.9

6.3

8.2

2007

26.5

7.8

2.1

6.6

8.7

2008

27.4

8.7

2.4

6.9

9.3

2009

28.5

9.4

2.7

7.2

9.9

2010

29.6

10.1

3.0

7.5

10.5

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Smith was reluctant to make dramatic changes such as those proposed by Dieter. He said: “For over 35 years, Browne’s has grown with our established retailers and the market. Our policy has been to expand gradually, and to finance expansion projects internally, through the reinvestment of profits. By doing this, we have built a solid, reputable firm while avoiding long-term debt. As a result, Browne’s is unwilling to risk a costly, debt-financed expansion on the basis of marketing plans that may or may not be realistic. For us, the risk of overexpansion and damage to our relationships with our long-standing retailers is too great”.

Dieter emphasized that he was confident that his sales objectives could be met, and praised Browne’s as the only established producer in the area that had the combination of reputation and capacity to work with Dieter to fulfil his plans. Therefore, in Dieter’s view, Browne’s must agree to expand its manufacturing operations very soon. He acknowledged that it would be three years before the expanded plant would be operating at capacity; however, he believed that by doing the entire expansion in one phase, the costs would be reduced by about 25%. However, Smith was adamant. Dieter reminded Smith that due to its rapid growth in the recent past, Dieter’s now accounted for over 20% of all of Browne’s sales, and told Smith that if Browne’s would not agree to his proposal, he was considering building his own plant and that Browne’s would lose all those sales.

Dieter estimated that it would cost $1.8 million to build a plant large enough to produce the volume of product called for by his sales forecast. While he knew he could not use its full capacity until 2009 at the earliest, he wanted to build the complete facility all at once, as he estimated this could save as much as 25% on the final cost. He approached local business people and financial institutions to raise financing for his planned plant, but was unsuccessful. The business people were not willing to put forth as much equity financing as he had counted on, and without enough equity, the financial institutions were unwilling to make the loans that the project required.

However, Dieter was able to find financing in another community within the market area that he planned to serve. There, after ten local business persons and other investors indicated their willingness to provide the necessary equity financing for the plant, a bank was prepared to provide mortgage funds and to finance Dieter’s working capital through a line of credit. Because of financing limitations, the plant was approximately three- quarters of the size that Dieter had originally planned. Now, Dieter must make the most important decision of his business career: should he build his own plant, or continue buying his products from Browne’s Ltd What is swot analysis and their alternatives with their pros and cons?