Moonsnail Soapworks and its environment
Moonsnail Soapworks, a company in Prince Edward Island (P.E.I) which produces high quality, purely natural bath and body products, was founded in 1995 by Jennifer Ridgway. In September 2000, Ridgway developed a new product, Moon Baby cream and she had to determine its pricing, distribution and promotion. Before making any decision, she concerns about the financial performance and overall the company's performance. To examine the competitive position of Moonsnail, appraisals such as SWOT analysis and Porter's 5 Forces strategy has been undertaken to identify internal and external environment factors. SWOT is the first stage to quick overview of Moonsnail's strategic situation whereas Porter's 5 forces further examine its competitive environment. It is useful to use Porter's Five Forces in conjunction with SWOT.
SWOT is a critical assessment of the strengths, weaknesses, opportunities and threats to analyse the company's current competitive condition. The reasons to apply SWOT in Moonsnail case because it considers both internal and external factors simultaneously; emphasises on identifying opportunities and threats makes company act proactively rather than reactively; raises awareness about the role of strategy in creating a match between the environmental conditions and the firm's internal strengths and weaknesses and; its conceptual simplicity is achieved without scarifying analytical rigor (Dess et al., 2008). Figure I is the summary of Moonsnail's SWOT.
One of the strengths is Moonsnail's products are made of high quality and natural ingredients. They are different with the commercially made products which are filled with ingredients derived from animal lard, fungicide, petrochemicals and synthetic dyes. The local customers and tourists become repeat purchases its products because of their high quality and natural ingredients. The primary target customer of Moonsnail is females the age groups 20 to 50. The middle-aged women (45 to 50 years old) tend to be fairly wealthy and eager for more health and financially sound. The younger women (20 to 30 years old) interest in these kinds of products despite of their less disposal income. Hence, Moonsnail's high quality and natural products appealing and desirable to theses two main segments. Furthermore, Moonsnail products are environmental friendly. They are all natural and cruelty-free. By no testing its products on animals and by appearing to have an ecological profile, Moonsnail has appealed to customers with ethical issues.
Additionally, location is an important strategic in business because it affects business sales and transportation cost of raw materials. Moonsnail's store is located in P.E.I. which is a tourism place. Hence, local people and tourists become the main targets customers. To attract tourists, Moonsnail provides products which are held an additional appeal to them as souvenirs. Moreover, Ridgway is the creative force behind Moonsnail, who enjoys experimenting with new ingredients and is continuously developing new products. All products are created by her. Yet, the product line has grown to more than 30 various products. Moonsnail carries a wide range of products for the body, face, and hair, which make customers a one stop shop for all their needs. The products can be classified into six categories namely, soap and skin care, healing, bath and body, P.E.I. specialities and home aromatherapy. Hence, Ridgway has ability to develop new product for Moonsnail in order to increase market share and satisfy the market's needs.
However, there are weaknesses in Moonsnail. Its products have limited shelf life due to they are made of natural ingredients and no preservations, thus customers must use them before expired date. Besides this, Moonsnail lacks of full-time employees. There are only two part time employees assist in customer services and production. Hence, there will be problems to serve customers during the peak time and affect the progress of production because part timers always work for few hours and the possibility to absenteeism is high.
In addition, Moonsnail does not communicate safety issue to customers. By referring the production of Moon Baby Cream, the labels of product only include the ingredients, logo, address and contact information, but ignore safety issues such as type of skin to apply, direction of use and products storage. Although the products are made of natural ingredients, it does not mean they are suitable to be applied to all types of skin. Also, the products have limited shelf life, users should know of the expired date.
One of the opportunities for Moonsnail to increase sales is attending the craft shows and organic trade shows to sell products. The revenue from 1998 Christmas Show which amounted to almost $20,000 has encouraged Moonsnail to attend the craft shows to increase the retail sales and build a client base. Also, craft shows offer Ridgway opportunities to meet the existing and potential customers or introduce Moonsnail's unique products line and products to both retail and wholesale. Thus, Moonsnail can expand business to large companies such as supermarkets.
Besides this, Moonsnail can increase number of mail order catalogues and create online trading retail to increase sales. Besides distributing catalogues while customers visit to store, Moonsnail can distribute catalogues in craft shows. During the One kind Show, many people picked up product catalogues with their purchases laying a potential foundation for repeat mail order business. Therefore, Moonsnail should design good enticing and pleasing catalogues to attract customers. In addition, Moonsnail can create online trading retail directly to sell products for customer too, at the same time, it can save the postage of sending catalogues to customers.
Furthermore, Moonsnail can increase its market share by developing in demographic and psychographic. By exploring new potential customers, Moonsnail can create a special product line for these customers and in turn increasing sales. For example, Moonsnail can develop a new production line for baby care. The average of mothers giving birth in P.E.I for 2000 was approximately 27.6 (CCSD, n.d.), which under the young women segment (20 to 30 years old). Since these women are normally beginning to have their children among this level of age, so they are willing to buy the natural and health products for their babies.
Moonsnail's biggest threat is its direct competitors. Lunenburg Soap Company, located on Nova Scotia, and Garden by the Sea and Nana's Pantry Soaps, both located in New Brunswick are primarily competitors due to their companies products were similar in quality to Moonsnail's products. Hence, the sales of Moonsnail will be affected. Besides this, most of the health food stores carried soaps made from all-natural ingredients. These products were often manufactured and sold in bulk and thus the prices were considered lower than Moonsnail's soap. Then, it will attract the customers to buy these products.
Moreover, Moonsnail faces 35% decline in number of tourists due to high price of gasoline over the summer months which discouraged car travel, Confederation Bridge no longer being considered a novelty and the Tall Ship 2000 series which drew many tourists to Halifax, Nova Scotia, the Official Canadian Race Port. This decline in tourist will adversely affect the sales.
Overall, SWOT shows the key strategic issues, but it cannot reveal the action steps necessary to enact strategic change or how to achieve the competitive advantages (Dess et al., 2008). Also, SWOT oversimplifies the situation by classifying the company's environmental factors into categories in which they may not always fit. It is somewhat arbitrary to classify some factors as strengths or weaknesses, or as opportunities or threats. For example, store location can be either strength or weakness. A social change can be a either threat or opportunity. It uses short time to analyse complex situation of a company, thus it is not complete study on internal and external factors. Moreover, it focus on the external environment is too narrow. Due to some drawbacks of SWOT, the Porter's 5 forces are used to further analyse Moonsnail's competitive situation.
Porter's Five Forces
To understand the nature of Moonsnail's competitive environment better, Porter's Five Forces is used to understand the strength of both current competitive position and a position Moonsnail is looking to move into. It comprises five factors to the intensity of competition and hence the profitability and attractiveness of an industry. By analysing the Porter's Five Forces, Moonsnail can come out appropriate strategies to take advantages of strengths, improve the weaknesses to defend against any threats. Other reasons to use Porter's Five Forces because it analyses whether the company should remain in or exit an industry; provides the rationale for increasing or decreasing resource commitments, improves the company's competitive position with regard to each of the five forces (Dess et al., 2008). Below is the Porter's Five Forces for Moonsnail.
- Threat of new entrants
- Bargaining power of buyers
- Bargaining power of suppliers
- Threat of substitutes
- Rivalry between existing players
Moonsnail's threat of new entrants is relatively high as the barriers to entry are low. The initial capital investment of this industry is low. Also, low customer switching costs will encourage customers to switch from one supplier's products to another. It was the evidence that many small companies came into existence during the last five years. The industry was fragmented with many small companies focusing in their local markets. Thus, emergence of these small companies will affect the market share of Moonsnail.
For Moonsnail, the bargaining power of buyers is moderate. There various choices of soap products let customers to choose in the market, but Moonsnail products are different with those products due to they are made of high quality of resources and no preservations. Furthermore, the background of Moonsnail manufactures and sells the products in a single store in P.E.I which guarantees its high quality. This will enhance the loyalty of customers. However, the customers will go to other brands if Moonsnail fail to satisfy their needs, since other products were similar in quality and the switching cost is low.
No much information provided. However, Moonsnail should build good relationships with the suppliers.
The threat of substitute for Moonsnail is considered moderate. Although the switching cost is low and the direct competitors' products were similar in quality to Moonsnail's products, the Moonsnail products are handmade, all natural and against animal test which is sound environmental friendly. Hence, people who are demand for cruelty-free products will go to Moonsnail. Also, the commercially made soaps and cream and the health food stores' products are viewed as inferior in quality compared to handcrafted soaps. Therefore, Moonsnail's products of high quality still can gain little edge over comparable substitutes.
The rivalry between existing players is high because there are many direct competitors of same size in the market, namely Lunenburg Soap Company, Garden by the Sea and Nana's Pantry Soaps. Their products were similar in quality to Moonsnail's products. Thus, the competitors will take part of market shares and potential sales, so increase the competitiveness in the market.
According to both SWOT and Porter's Five Forces, Moonsnail's situation is quite competitive due to compete with the lower price of similar products of direct competitors. It is hard for Moonsnail to maintain its market share and if it is not performing well, it will probably lose its market share. Therefore, Moonsnail is recommended to apply differential strategic which under Porter's Generic Strategic, in order to increase competitive advantage or expand its market share. Differential strategy refers to the creation or development of unique products or services that valued by customers and those customers perceived to be better than or different from other competitive products. This strategy also allows the company to charge at premium price. Ridgway can establish a new unique product or invent a product which is unavailable into the market since she has skills and creativity in developing products. For example, she can create products for babies or for pregnancy women since there is an opportunity in developing the in demographic and psychographic. Furthermore, Moonsnail provides high quality and natural product which different with the commercially made products. By providing this high quality of unique product, customers are willing to buy at the premium price. Therefore, charging premium price will able to cover high cost of quality resources, earn more profit margin, and increase the market share simultaneously. Most importantly, product differential enables Moonsnail to reduce the effects of intense competition amongst its rivals, at the same time, to increase its brand loyalty and strengthening its brand name.
On the other hand, Moonsnail should hire one or two permanent employees to help in assisting in its business. The most important thing is Moonsnail must label the precaution and safety issues on the products in order to letting user know the safety issues.
Introduce Moon Baby Cream product
Moonsnail decides to develop Moon Baby Cream as its new product line for babies. This cream provides healing and moisturizes benefits and also acts as a barrier between the diaper and the baby's skin. To determine whether to introduce Moon Baby Cream, management accounting methods which are relevant costing and Cost-Volume-Profit analysis (CVP) can be used. Relevant cost refers to the costs are specific to management's decision whereas CVP is a tool to determine the effect on profits of changes in fixed costs, variable costs, sales prices and sales volume. First of all, Moonsnail's fixed costs and variable costs as below:
Table I shows the Moon Baby Cream costs $10.86 in ingredients and $10.55 in packaging costs to yield 30 jars of finished product. It is assumed bottle and label each batch of cream are made for three hours and the employees are paid $6.50 per hour. Thus, the labour cost of producing a batch of cream is $19.50. The total variable costs associated with producing one batch of cream are approximately $40.91 and the costs of each jar are $1.36 ($40.91/ 1.36). The fixed costs includes the printing plates are $230. Besides this, Ridgway expects to spend $1,000 on advertising to launch the product. Thus, the total fixed costs are $1230 (Refers to Table II ).
After calculating the total variable costs and total fixed cost, Moonsnail can use contribution margin analysis which afforded by CVP, to show the margin profit per unit sale. The total contribution margin is calculated to cover fixed costs and earn the profits. Ridgway considers the customers will be willing to accept $9.95 per jar of Moon Baby Cream. After deducting the total variable cost, there will be contribution margin of $8.59 per jar for Moon Baby Cream (Refers to Table III). Beside this, Moonsnail can calculate the break-even point to show the volume of sales where the total revenues and total costs are equal; that are no profit or less will be made. To reach the break-even point, about 144 jars of cream need to be sold before any profits earned ($1230/$8.59). Moonsnail is estimated to sell 1000 jars to retail, thus the net profits will be approximately $7353.04 ([1000-144]*$9.95), after deducting the printing plates and advertising. After paying off the fixed cost at the initial year, the contribution margin will remain at $8590 in the following years if only 1000 jars are sold.
For the wholesale, Ridgway estimates the customers will accept a price of $6 per jar. Refer to Table III, a jar of cream sold is expected to generate contribution margin per unit of $4.64, if the wholesalers agree to absorb the shipping costs. The total fixed costs are $1230, same as retail. Therefore, to reach the break-even point, around 265 jars need to be sold before generating any profits ($1230/4.64). Assume that Moonsnail sells 1000 jars to wholesalers, the net profits will be around $3410.4 ([1000-265]*$4.64) after paying off the fixed costs. Then, Moonsnail can earn contribution margin of $4640 in the following years if 1000 jars are sold.
However, Ridgway believes that 20% decrease in price will result in a 15% increase in volume for both wholesale and retail. To evaluate whether this is a good option, Moonsnail can use incremental analysis, a process of identifying financial date that change under alternative course of action. Under this option, the retail price becomes $7.96 (9*80%), and the wholesale price becomes $4.8 (6*80%). The sale volume for both retail and wholesale is 1150 jars (1000*115%). Based on Table IV, lowering the price and increasing the volume will not result higher profits. There will be loss of $1000 for retail and $648 for wholesale. Thus, Moonsnail should accept the original price $9.95 for retail and $6 for wholesale.
If Ridgway wants to maintain the same contribution of original price, she can use the target net profit formula to calculate the sale volume. According to Table V, the sale volume should be 1302 jars for retail and 1349 jars for wholesale. Obviously, the original price is better than the lower price for retail and wholesale. As a result, Ridgway is advised to retain the original price which is $9.95 for retail and $6 for wholesale.
Based on SWOT and Porter's Five Forces, Moonsnail should differentiate product to increase its market share. Since none of its direct competitors produces baby products and there are potential customers (females aged between 20-30 years begin to have their babies) in the market, Moonsnail should introduce the baby cream. Although there are many commercially produced baby skin creams, Moonsnail takes pride in the high quality and unique of its baby cream product, thus allowing it to compete in the market. Moon Baby Cream is made of the natural ingredients and essential oil and no preservations and dyes. Additionally, its function is different with one the commercially products, Vaseline Petroleum Jelly (It provides no healing or moisturizing benefits). If Moonsnail does not introduce the baby cream, it will hard to maintain its market share, even decrease its market share.
To identify the marketing strategy Moonsnail can use marketing mix, as known as "4P", namely product, price, promotion and place. For product, 50 ml glass jars and each jar will hold 45 grams of cream would be suitable because of the limited shelf life of the cream. Moreover, Ridgway should provide some safety issue such as direction of use or caution information in the labels of products because baby skin is very sensitive. For pricing, Moonsnail can apply prestige pricing strategy. People often will buy a premium price of product because high price mean high quality. Therefore, Moonsnail should use the original price ($9.95 for retail and $6 for wholesale) due to the cream is made of high quality and natural ingredients. For place, Moonsnail can distribute the baby cream through its popular channels, namely retail and wholesale. Also, Moonsnail can sell baby cream in craft shows and organic trade show. For promotion, Moonsnail can do advertisement in organic or baby and parturient magazines. In addition, attending the craft show can be one way of promoting the baby products.
Financial performance of Moonsnail
To examine the financial performance of Moonsnail, ratio analysis can provide useful information to understand and interpret its accounts. Ratio analysis is an analytical tool that measures the proportional relationship between two financial statements amounts (Libby et al., 2004). Below are some ratios to examine the Moonsnail's financial performance.
- Investment Utilization
- Summarize of Financial statement and Recommendation
To determine whether Moonsnail had utilise its assets to generate profit, the return on assets and fixed asset turnover are calculated. Based on Table VI, the return on assets is dropping in this three years. It shows that Moonsnail unable to generate gorgeous net income to cover the operating costs. Nevertheless, an increased in fixed asset turnover ratio of FY 2000 shows better than FY 1999. It means Moonsnail has ability to utilize fixed assets to generate the revenue effectively, which for each dollar invested in fixed assets, it able to earn $10.04 in sale revenue. Overall, Moonsnail is quite good in investment utilization, but it needs to aware operating costs.
Liquidity refers to a company's ability to meet its currently maturing debts (Libby et al., 2004). There is an increase in current ratio form year 1999 to 2000. Moonsnail has 1.76 in current asses for each $1 in current liabilities in 2000, which proves that it able to generate cash. Moreover, acid quick ratio measures the availability of safety margin to cover a company's current liability. The inventory is omitted from this ratio due to uncertainty of the timing of cash flows from its sale (Libby et al., 2004). The acid quick ratio has been increased in 2000. It means Moonsnail can repay immediate commitments by using cash or near-cash which is $1.43 in cash and near cash assets for every $1 in current liabilities. However, the result in 1998 is better than result in 2000. Furthermore, working capital refers to a firm ability to generate cash internally through operations and its management of current assets and current liabilities (Libby et al., 2004). This is important because the operations are the only source of cash in the long run. Again, Moonsnail performs well in its working capital as the amount increased from year 1998 to 2000.
Besides this, average days in inventory indicate that how long a company turns its inventory into sales. In 2000, result of average days in inventory is slightly better than FY 1999. A decrease in average days in inventory is favourable to Moonsnail as its product has limited shelf life and thus the inventory is subject to rapid deterioration in quality. For age of receivables, it refers that how efficiency a company to collect its cash from debtors. This ratio usually provides useful insights. According to Table VII, the age of receivables in year 2000 is somewhat better than 1999. Moonsnail can collect its cash from debtors is just 35 days. For the age of payables, the results in year 1999 and 2000 are remaining constant. Moonsnail is able to pay its creditor in 100 days. It shows that Moonsnail can pay off its debt within 100 days. Overall, the Moonsnail's liquidity is interpreted as quite good in FY2000 by comparing with results of past two years.
Stability refers to a company's ability to meet long-term obligations. Interest coverage ratio refers to how easily the company can pay interest on its outstanding loan. If company fails to make interest payments, creditors may force into bankruptcy. There is increasing trend of interest coverage in these three years. In 2000, Moonsnail generates more than $23 in income for each $1 of interest expenses; hence it provides a secure position for creditors. Furthermore, debt-to-equity ratio expresses a company's proportion of its debt and owners' equity. In 2000, for each $1 of owner's equity, Moonsnail has 0.74 cents of liabilities. It is better than the result of FY 1999, but it is still high if compare with the result of FY 1998. Moonsnail should aware that debt is risky because interest payments must be paid out no matter the company earned enough profits. Overall, the stability of Moonsnail is quite good.
Referring to Table IX, it is a rising trends of growth in total sales volume in these two years. In 2000, the increase is partly due to the contribution of Charlottetown store. It can be found that the retail sale is increased from $47,475 in 1999 to $71,213 in 2000, represented 1.5 times of that increase. However, the growth of profit is dramatically slowness in 2000 if compare with the result of 1999. It shows Moonsnail is unlikely to generate gorgeous profits in 2000. The growth of assets in 2000 also experiences a low movement if compare with FY1999.
On the whole, Moonsnail's financial performance is quite good. However, it should beware the higher operating costs because it will hurt the profitability of business in the future. The high operating costs in FY 2000 is due to increase amounts in advertisement of trade show, gas, shipping and postage of mail order and salaries and rental of Charlottetown store. Hence, Moonsnail should find ways to manage them. One way to increase sales to cover the high operating cost is to introduce the Moon Baby Cream into the market. By targeting the specific customers (mothers), the baby cream is expected to expand the market share and increase sales. Since the shipping and postage are expensive, Moonsnail can also try to expand new retail stores where the best sellers of its products are.
Moonsnail should increase its market share and sales, regardless of higher operating costs and intensive competitive environment. Since SWOT analysis, Porter's Five Forces and financial performance, Moonsnail should differential its product by introducing Moon Baby Cream into the market. Based on high quality and natural background, the baby cream will attract the mothers who care about their babies to buy despite of premium prices. In addition, Moonsnail should focus on the baby cream by labelling the relevant information about the product usage and safety to avoid any future liabilities. Besides this, Moonsnail should attend more the trade shows because it is profitable channel for selling products. Trade shows also bring the opportunities for Moonsnail to meet potential customers. Moreover, Ridgway should hire full-time workers to help her launching the Moon Baby Cream and promote its function for the customers. Moonsnail should continue create unique products into the market because other products will become familiar with its product in the future. Also, it should maintain or achieve above its quality in order to provide a satisfied products for customers. In conclusion, Moonsnail should introduce Moon Baby cream by applying 4P in order to increase its sales and expand its market share.