To: Amy Bourgon, Sole
Proprietor of BMAC

From: Mykola
Chachula, External Consultant

Date: October 6th,
2017

RE: Bake Me a Cake
Business Review

Dear Amy Bourgon:

Thank
you for allowing me the opportunity to work with you and your company. As an
external consultant, I have been hired to assess Bake Me a Cake’s potential
success within the industry as well as some of the possible microeconomic and
macroeconomic constraints that BMAC might encounter. Within this report I have
also included a SWOT analysis and outlined some of the key factors and
strategies that you must consider when deciding on whether to renovate your
current existing kitchen or to lease a property located in downtown Sarnia.

Bake
me a Cake is currently a small retail bakery located in Sarnia. They specialize
in the creation of custom cake orders specifically for events like weddings,
bridal showers, and birthdays. They provide many different designs ranging from
3-D cake to Celebratory cake and even Sculpted Cakes. Once an order is placed,
it will usually take at least two weeks to prep the ingredients and shape the
design. The employee’s work roughly 40 hours a week in order to ensure that the
product is properly sculpted and taken care of. Once the cake has been made,
the customer will be informed of pick-up time and date. (Bake Me a Cake Sarnia,
2017)   

 

Macroeconomic
analysis: Economic & Social

            Taking a look at the present state
of the Specialty Food Stores industry, there is a considerable amount of economic
certainty within it. Recent results in the industry have provided some
promising results as “industry profit margins have increased slightly over the
past five years” (DeCarlo, 2017). More specifically, “average industry profit
is anticipated to increase from 6.5% of revenue in 2012 to an estimated 7.0% in
2017” (DeCarlo, 2017). On a macroeconomic level, these results can be justified
by the recent improvement in Canada’s national unemployment rate and its GDP
annual growth rate. Currently Canada’s unemployment rate has fallen to 6.2
percent which is the lowest it has been since 2008. (See Appendices – Figure 1). With this fall in unemployment, it
provides consumers with more buying power. In turn, this will lead to thriving
businesses as a greater amount of the population will have the resources to
spend on goods and services. Furthermore, it is projected that the “Unemployment
Rate in Canada to stand at 6.40 in 12 months’ time. In the long-term, the
Canada Unemployment Rate is projected to trend around 6.70 percent in 2020”
(Canada Unemployment Rate, 2017).

            Coupled with the fall in unemployment,
Canada has seen a rise in GDP annual growth. Currently Canada’s GDP annual
growth rate sits at 3.7 percent which is a positive from a year ago where it
sat at around 0.5 percent (See
Appendices – Figure 2). With this positive trend in GDP annual growth, it
represents Canadians generally having a higher income and having the ability to
spend more on luxury goods. Additionally, the GDP annual growth rate is
expected to rise even further and by the new year it is expected to be around 6
percent (See Appendices – Figure 3). With
GDP annual growth continuing to rise, and unemployment continuing to fall, BMAC
could look to capitalize on the current economy and achieve higher profit
levels.

            The Specialty Foods Stores industry
is one that relies on consumer behaviour and trends. In order to thrive in this
industry, companies must have a good grasp of the social characteristics
that come along with it. Currently in Canada the vegan and gluten-free movements
are two big potential factors that could alter this industry in the long run.

In the year 2017, “retail sales of gluten-free foods were forecasted to amount
to approximately 811.5 million Canadian dollars” (Retail sales of gluten-free
food in Canada 2008-2017, 2017). That amount is nearly 5 times the retail sales
value of gluten free food in Canada from 2008, which was around 178.9 million
dollars (See Appendices- Figure 4).

The reason for the positive trend since 2008, is due to the recent rise of
health awareness and nutrition. People are starting to understand the
ingredients and items being put into their foods and so “many Canadians are
choosing to purchase a greater share of organic, all-natural or otherwise less
processed foods” (DeCarlo, 2017). The expected flourishment in this market can
be directly correlated to the increase in demand for healthier and more natural
food products.

            As mentioned earlier, the vegan
movement has also become a big player in the Specialty Food Stores industry. Currently
in Canada there are approximately 33 percent or almost 12 million Canadian
people who consider themselves vegetarians or vegans. (Pippus, 2015) This trend
can be attributed back to people becoming more aware of their health and
nutrition. Additionally, it has been said that this spike in the vegan
population can be directly correlated to the millennial generation. In Canada, “vegans
represent an above average share of consumer diets among Canada’s trailing
Millennials (aged 18 to 24)” (Vegan and Vegetarian Diet Trends in Canada, 2015)
(See Appendices – Figure 5). With
this in mind, Canadian millennials also “account for 38.1% of industry revenue
in 2017” (DeCarlo, 2017) and their share of industry revenue has grown over
time. In order to succeed in the long run, BMAC must be more aware of how the
vegan movement correlates to the millennial generation and its impact on the
industry.

Microeconomic
Analysis: Competitors
and Consumers

            Bake Me a Cake currently resides in
the Specialty Food Stores industry and within that industry is a lot of competition.

Currently Bake me a Cake has several competitors ranging from Loblaw, Metro,
and Walmart who were considered commercial retail stores but kept cakes in
their store bakeries. BMAC also had competition from several other small
bakeries being Lavaratore Bakeries, Williams Pastry Shop, Sticky Fingers,
Global Donuts Limited, and Sunripe Farms Produce. This industry is considered
to be highly fragmented because it has a high variance of product
differentiation. As a matter of fact, “this industry encompasses a broad range
of divergent retail outlets that each specialize in a specific food segment, no
single operator has a dominant position. In fact, no industry participant is
expected to control more than a 1.0% share of the market in 2017” (DeCarlo, 2017).

This industry is considered to have very low barriers of entry and because of
it competition in this industry is increasing (DeCarlo, 2017). With the high
volume of new entrants, pricing and low-cost leadership are key.

            When it comes to the consumer
in the Specialty Foods Industry, the main target markets within this industry
are the age ranges of consumers aged 18-34 and consumers aged 35-54. These two
market segments account for nearly 80 percent of industry revenue in 2017. (See Appendices – Figure 6) One
of the biggest determinants of their impact on the Specialty Food Stores Industry
is their disposable income. When household income increases, consumers will
slightly increase their quantity consumed of luxury food items like cake and
ice cream. In a recent trend, Canada’s median total income, per household, has
generally increased each year since 2011 where it was $72,240 to 2015 where it
was $80,940 (See Appendices – Figure
7). With this general positive trend in median total income, it bolds
well for BMAC’s ability to sell their custom cake orders. But as we analyze
further, we can see that within the downtown core of Sarnia, we can see that
BMAC currently resides in an area where the average total income ranges from
$0.00 – $66,297.98, which is considered the lowest income bracket in the area (See Appendices – Figure 8). So,
although the median total income across the country is increasing, BMAC might
be concerned with where they are located, as the general consumer in this area
might choose lower quality and possibly cheaper cake options.   

SWOT
Analysis: Strengths, Weaknesses,
Opportunities, Threats

Strenghts: BMAC’s
main strengths within the industry are that they provide a service unlike
many with the idea of custom cake orders. This service they provide is unique
and most of the competitors in the general Sarnia downtown core do no provide
the same sort of service. Another strength BMAC has is the current economic
climate. Currently the unemployment rate is falling and along with the rise
in GDP and disposable income, more people will be willing to spend money on
goods like cakes.   

Weaknesses: BMAC
has several weaknesses that should be addressed in order to improve their
profitability. Firstly, their biggest issue is that they do not seem to be
capitalizing on the newest and growing trend, which is the gluten-free
movement. A major portion of the Canadian population is gluten free and BMAC
does not seem to offer any sort of gluten free products. Another weakness
worth mentioning is that BMAC is a relatively new company. As a new company,
especially in a niche market segment, establishing a consistent clientele
base is difficult.    

Opportunities: As
mentioned earlier, BMAC does not seem to provide any sort of gluten-free
products. With health awareness and nutrition being a big trend in today’s
society, BMAC should consider potentially providing gluten free cakes to try
and cater to more people and creating a greater clientele base. 

Threats: Some
potential threats BMAC faces comes from their competitors and the industry
itself. BMAC is in an industry where cost leadership is key and commercial
retail food stores lead the charge as they are very good at cutting costs.

With these cutting cost tactics, they are able to manipulate prices which may
not favour BMAC’s optimal price range.

 

Drawing
upon several observations and recommendations, I have identified the strategy
of your firm as a market niche. Bake Me a Cake currently operates in a
relatively small market where the elasticity of demand is elastic. Since Bake
Me a Cake does operate in a market niche, the custom cakes that are ordered can
be utilized to further enhance their brand as well as it provides them an
opportunity to grow their clientele base.

In
order to thrive in the Specialty Food Stores industry, Bake Me a Cake has a few
key
factors in which it could use to keep a competitive advantage over
the rest of its competitors. As a company who operates in a market niche, they
must have an attractive product presentation. Given that most products are
often diverse and distinct, items should be viewed as appealing to the
consumer. Another key factor that BMAC should consider is hiring experienced
staff. Having experienced staff provides the company with a better sense of
direction and management will have an easier time coordinating duties. The last
and most important factor is maintaining excellent customer relations.

Providing helpful and friendly customer service guarantees customer loyalty and
extending hours of operation will further increase customer satisfaction.

The
intention of this analysis thus far was to provide the company, Bake Me a Cake,
with a full industry overview which will help put into perspective their
decision for the future. Currently BMAC is having problems with the
profitability and expansion of their company. They are deciding between
renovating their current workspace or leasing out a new location near downtown
Sarnia. They are also having problems deciding on a pricing strategy for one of
their current products as they aren’t sure what the optimal price point is to
maximize their profit. I will be providing a full quantitative analysis very
soon and provide my opinion on what steps they should take next so that they
can succeed in the long run.