Rocky Mountain Chocolate Factory Inc. Audit

MGMT 436

Larry Dudley

Group 3

Karla Schaapveld, Jeremy Smith, Mark Bourgoin, Matt Misitano,

Diego Elizalde, Jeff Stanton, and Reilly Kindred

CASE 22

Rocky Mountain Chocolate Factory Inc.

Jeremy Smith

I. CURRENT SITUATION

A. Current Performance

· 329 Franchised and 5 Company owned stores

· Increasing revenues year to year with $16.7 Million in 2008

· Sales have slowed due to economic downturn but the company is in an excellent financial position to withstand the recession

B. Strategic Posture

1. Mission

· Quality, Taste, Value, and Variety of products

· Quality of the product is the number one factor

2. Objectives

· Manage money carefully during economic downturn

· Slowed expansion and elimination of debt

· Maintain a good relationship with employees as well as franchisees

3. Strategies

· Adding stores in resort, tourist, street front, and entertainment-oriented locations

· RMCF is repurchasing stock as it felt it was undervalued

· Owns 8 refrigerated trucks to move products from factory to stores

· New line of sugar free candies for the health conscious and those with special dietary requirements

· Each store is setup to make product where customers can view and smell the end result

4. Policies

· Trucks are sent out from the factories with product for stores but return with ingredients to make more product making the trips more cost effective

· Franchisees are held to a high standard of excellence

· Company ensures that store locations are spaced apart well and offer the best probability for success

· Free samples of fresh products made in stores

Mark H. Bourgoin

Group 3

Strategic Audit

Rocky Mountain Chocolate Factory Inc.

Section II

II. Corporate Governance

Note: I would classify Rocky Mountain Chocolate Factory as a Stage III “Divisional Structure,” per the textbook (Hunger & Wheelen, 2010, p. 196, fig. 5-4).

A. Board of Directors

1. a. Chairman: Franklin Crail (CEO and President)

b. Directors: Bryan Merryman (VP, CFO, COO, and Treasurer), Lee Mortenson,

Gerald Kien, Clyde Engle, and Scott Capdevielle.

With the exception of Franklin Crail (co-founder of Rocky Mountain Chocolate Factory Inc.) and Bryan Merryman, the Board of Directors of Rocky Mountain Chocolate Factory Inc. is composed of entirely external/independent board members.

2. Directors do not receive any compensation for serving on the board, but they do receive compensation for serving on board committees, chairing committees, and participating in meetings. Directors who are not officers/employees of the company are entitled to stock option awards.

3. Rocky Mountain Chocolate Factory Inc. is publically traded as RMCF.O on Consolidated Issue listed on NASDAQ Global Market. It closed on April 21, 2011 at $10.40 (USD) a share. The Board of Directors has frequently paid out quarterly cash dividends, usually $0.10 to common share outstanding. This dividend, on average, has been three times that of the industry’s average.

According to the company’s most recent 10-K, there are currently 100,000,000 shares authorized; 6,026,938 and 5,989,858 shares of common stock issued and outstanding respectively. Each common stock is eligible to vote at the annual meeting. Each share of common stock entitles its holder to one vote on all matters voted on at the annual meeting (except the election of directors). Shareholders have cumulative voting rights in the election of directors.

There are also 250,000 authorized Preferred stock (with zero issued or outstanding), 50,000 shares of Series A Participating Preferred Stock, and 200,000 shares of Undesignated series stock.

4. The board members contribute vast experiences in leadership positions, with various companies. None of their experiences outside of Rocky Mountain Chocolate Factory seem to be in the food industry, though.

Franklin Crail co-founded the first Rocky Mountain Chocolate Factory store in May 1981. He has served as its President, Director, Chairman of the Board, and CEO. Prior to co-founding the company, he was co-founder and President of CNI Data Processing Inc. (a software firm which developed automated billing systems for the cable television industry).

Bryan Merryman is experienced in leverage buyout firms; retail and manufacturing of aftermarket auto parts; and audit, consulting, financial advisory, risk management, and tax. He has been with the company since 1997.

Lee Mortenson has been with the company since 1987 and has been engaging in consulting and investment activities since 2000. He was managing director of a private investment firm; has been President and CEO of a company that provided management consulting and investment services; has been involved in real estate development and manufacturing; and has been engaged in manufacturing apparel and medical products.

Gerald Kien joined the company in 1995 after retiring from his position as President and CEO of a company engaged in the development of instrumentation for vehicle emissions testing. He was also on the board of Sun Electric, a company that is tied to the oilfield, wind farm, and transmission construction industries.

Clyde Engle has been with the company since 2000, and previously from 1987 to 1995. He has experience in professional property management, property and casualty insurance services, as well as in bank holding and commercial banking services.

Scott Capdevielle joined the company in 2009. His experiences include developing user generated web video and distribution on the World Wide Web; web analytics software, and various other aspects of the software industry.

5. They have been on the Board of Directors since 1982, 1999, 1987, 1995, 2000 (previously from 1987 – 1995), and 2009 respectively.

6. The board appears to be heavily involved with the strategic management of the company, controlling everything from store locations, to how training is conducted, to where ingredients can be obtained from, etc. Based on this, I would label their involvement as “Catalyst” (see Figure 2-1 in the MGMT 436 textbook for details).

B. Top Management

1. a. CEO, President, and Director: Franklin Crail

b. VP, CFO, COO, Treasurer, and Director: Bryan Merryman

c. Senior VP – Sales and Marketing: Edward Dudley

d. Senior VP – Franchise Development and Operations: Gregory Pope

e. VP – Finance: Jeremy Kinney

f. VP – Creative Services: Jay Haws

g. VP – Franchise Support and Training: Donna Coupe

h. CIO: Willian Jobson

i. Corporate Secretary: Virginia Perez

2. As with the board of directors, top management of the company comes from a variety of backgrounds. All are very experienced in their respective fields, but no one in top management had prior experience in the food industry prior to joining Rocky Mountain Chocolate Factory Inc.

Franklin Crail co-founded the first Rocky Mountain Chocolate Factory store in May 1981. He has served as its President, Director, Chairman of the Board, and CEO. Prior to founding the company, he was co-founder and President of CNI Data Processing Inc. (a software firm which developed automated billing systems for the cable television industry).

Edward Dudley joined the company in 1997 with the goal of increasing the company’s factory and retail sales. He previously spent ten years with a healthcare corporation, serving in a number of senior marketing and sales management capacities.

Gregory Pope joined the company in 1990 as a store manager. During his 21 years with the company, he has worked his way up from being a store manager, to a new store opener, to a franchise field consultant, to Director of Franchise Development and Support, to VP of Franchise Development, to his current position of Senior VP – Franchise Development and Operations.

Jeremy Kinney joined the company in 1999 and has served in various financial and operational positions since. He is also the youngest executive officer at 33 years old.

Jay Haws has been closely associated with the company (both as a franchisee and a marketing/graphic design consultant) since 1981. Prior to joining the company, he was principal of an advertising and graphic design agency.

Donna Coupe managed franchised stores in Northern California for absentee owners from 1992-1997. Since joining the company in 1997, she has served in various positions such as Field Consultant, Regional Manager, and Director of Franchise Support.

Willian Jobson joined the company in 1988 as Director of Information Technology and has tried to enhance the company’s strategic focus on information and information technology ever since. In Durango, CO, he also worked for a company that provided diagnostic imaging and information systems solutions in the healthcare industry.

Virginia Perez joined the company in 1996 and has served as the corporate secretary since 1997. Prior to working at Rocky Mountain Chocolate Factory Inc., she worked for a property management and development firm in Palo, CA. Ms. Perez is a paralegal and has held various administrative positions during her career.

3. About half of the top managers have been promoted internally; starting off as a store manager, or franchise owner, and working their way up through the company. Some managers have been with the company since it was first incorporated in the early 1980s.

4. Yes, top management has established a systematic approach to strategic management, with intense focus placed on the Environmental Scanning portion of the Strategic Management Model (Fig. 1-2 of the MGMT 436 textbook), placing store locations in what it considers to be “tourist areas” or areas with high levels of foot traffic.

5. Top management is heavily involved in the strategic management process of the company. They control a majority of what their franchise branches do. Everything from store locations, to conducting training, to providing ingredients, is decided upon (or located) in their original Durango, CO location.

6. Unknown, but they seem to be heavily involved with each other (as is labeled “Catalyst” in Figure 2-1 of the MGMT 436 textbook).

7. Yes, decisions are made ethically in a socially responsible manner. Anything that may adversely affect the Rocky Mountain Chocolate Factory name, system, or reputation is strictly forbidden (and is grounds for revocation of any franchise agreement).

8. As with #7… although cocoa beans (the primary raw material used to make chocolate) are grown commercially in Africa, Brazil, and several other countries around the globe. Rocky Mountain Chocolate Factory cannot directly control if these countries are conducting themselves in an environmentally sustainable manner.

9. While not specifically discussed in the case study, or in the company’s 10-K, there is a note in their 2010’s 10-K (Note 8 – Stock Compensation Plans – Continued) that spells out stock options for directors and top management. In 2010, there were 371,437 preferred stock outstanding.

10. Yes. They all come from very experienced backgrounds, as far as upper-level management is concerned. To quote Bryan Merryman, COO and CFO of the company, “… we believe we are in excellent financial position and well able to withstand the recessionary forces currently buffeting the U.S. economy.”

Sources:

Hunger, J.D. & Wheelen, T.L. (2010). Strategic management and business policy (12th ed.).

Upper Saddle River, NJ: Pearson Education Inc.

Rocky Mountain Chocolate Factory Inc. (2011). Retrieved April 23, 2011 from

http://www.reuters.com/finance/stocks/companyOfficers?symbol=RMCF.O

Rocky Mountain Chocolate Factory Inc. – Form 10-K (2010). Retrieved April 23, 2011 from

http://www.faqs.org/sec-filings/100518/ROCKY-MOUNTAIN-CHOCOLATE-FACTORY-INC_10-K/

Matt Misitano

Group 3

Strategic Audit

Rocky Mountain Chocolate Factory Inc.

Section III

III. External Environment

A. Natural Environment

1. Extreme heat, Rain, Snow, Hurricanes, and Earthquakes negatively affect foot traffic and tourism. Weather conditions also affect crop production.

2. Severe weather conditions exist in all regions of the world and at different times depending on the season and geographic location.

B. Societal Environment

1. Economic

a. Unstable economic conditions locally and globally are in a recession cycle but there are signs locally that show the economy is trending into the recovery stage which will increase consumer spending. (O)

b. Low cost marketing strategy (includes in store demonstrations, free samples, new packaging, charitable events, sponsorships, coupons, flyers, and mail order catalogs produced by its in house creative services department). (O)

c. Company owned trucks (reduces transportation costs, increases company assets, quicker delivery of products, and more cost effective). (O)

d. Hershey and Mars allocating financial resources to increase the premium chocolate products locally and globally. (T)

e. Experts forecast that the Gourmet and Organic Chocolate industry will grow to become a $ 2 billion industry by 2007 (O).

f. Fixed pricing contracts with vendors for ingredients (fixed prices allow RMCF to receive their ingredients at the same price regardless of market price fluctuations which allows RMCF to continually make profits and be competitive with their product pricing). (O)

2. Technological

a. Increased Internet functionality and security increasing online consumption. (O)

b. Dynamic manufacturing processes implemented using advanced planning and scheduling systems with lean processes to reduce and quickly turn over inventory reducing costs and storage space (O).

c. Automated machine processes eliminating work previously done by hand increasing the speed, capacity, and efficiency of manufacturing processes. (O)

d. New manufacturing process called NETZSCH’s ChocoEasy along with purchased automated factory equipment allowing the development of any size or variety of candy to be cost effectively manufactured using their own proprietary brand. (O)

e. Small chocolate manufacturing companies are being bought by huge companies with automated machinery and processes in place to mass produce gourmet chocolate (T).

f. Airport’s constructing more motorized walkways decreasing foot traffic and moving potential consumers through terminals faster (T).

3. Political-Legal

a. Fair trade regulations and the use of child labor. (T)

b. Licensing costs and regulation compliance with health, safety, sanitation, building, and fire agencies from each state where stores are located along with federal regulations for the manufacturing and distribution of food products. (T)

c. Trucking regulations from federal, state, and Canadian provinces. (T)

d. Import and Export regulations (T).

e. Potential for striking labor forces in foreign countries due to unbearable working conditions. (T)

4. Sociocultural