Cosmo Panetta, a 74 year old immigrant from Greece, living in Niagara Falls, Ontario, Canada with his wife and two sons. After working odd jobs for ten years, Mr. Panetta used personal savings and a loan from a family member to purchase a variety store. He always dreamed of starting a family business. Panetta eventually sold the variety store and purchased, renovated, and renamed a drive-thru restaurant. A second location was added shortly thereafter. Both sons skipped college to help Panetta run the restaurants. Sales were good and customers returned for the good food and good price. Mr. Panetta’s brainchild food item, The Cosmobob, was praised by patrons of both locations, so he began preparing for mass-market introduction and development.
Cosmo was faced with a number of decisions concerning producing The Cosmobob. There was an opportunity to open a third restaurant in the Niagara Falls business district, purchase or rent a new production facility for the Cosmobob, introduce the product on a provincial or national level, and whether to distribute through a food wholesaler or supermarket chains. All of these questions would have to be answered very thoroughly because Cosmo had only $25,000 available before having to turn to a bank. His age, shortage of menu diversification, and lack of higher education in the family would also have to be taken into consideration. In this analysis, we will analyze each situation and recommend the best options for Mr. Panetta, his family and their business.
Cosmobob Product & Family Business Cosmo Panetta started his family business in 1975, when he opened his first restaurant in Niagara Falls, Canada. Mr. Panetta, his wife and older son immigrated to Canada from Greece. Mr. Panetta had a passion for starting his own family business. He knew that a variety store could be the way to fulfill this dream; therefore, in 1968, he used his personal savings along with a small family loan to purchase his first store.
By 1975, he was presented with the opportunity to sell his variety store to a convenience store chain. Using this money and a loan from the bank, he bought an existing drive-in restaurant at Niagara Falls, which he renovated and named Cosmo’s Drive-in. In 1979, he opened his second location on Lundy Lane. Mr. Panetta always believed that a good location, excellent product, and a fair price were the key ingredients for a successful restaurant.
Cosmo’s restaurants are famous for the Cosmobob. In 1998, the Cosmobob accounted for almost 35% of the Thorold location sales and 30% of the Lundy Lane location sales. With this tremendous success in one product, Panetta decided to produce and sell the Cosmobob to other restaurants in the area. An extra room in the back of the Thorold Stone location was used to prepare orders. The restaurant; however, had limited freezer space for storage so a local icehouse was used for $400 per month. Three people were initially hired on a part-time basis at $9.00 per hour to operate the production initiative. The Cosmobob sales went from 100 cases in September to 600 cases by December. Looking at this growth, production staff was increased to six people. Current locations Sales & Profit
The Lundy’s lane location was also known as “the fast food strip” and the second restaurant was located on Thorold Stone Road, a main industrial street. Mr. Panetta managed the Thorold Stone restaurant while his older son Joe managed the Lundy’s lane restaurant. The average sale per customer for the restaurants was $6.88 and most of the customer traffic was recorded during lunch and dinner hours. Cosmo’s restaurant had grown to $480,000 in assets by 1998 with a gross profit of $136, 846 and almost $1,163,000 in sales. Decisions Affecting the Longevity of the Company
Sales were promising in both locations and Mr. Panetta knew this could be a great time to inquire about expanding his company and product. He had three options to consider; opening a new store in the upcoming area mall, purchase or lease a facility for mass production, or do both. He also had to decide if he would market his product to the food service market or through supermarket chains. With only $25,000 to invest, he would need to consider a loan. Another question Mr. Panetta was faced with was; would the demand for the Cosmobob be high enough to see a profit within the first few years if he mass produced the product? Canadian Food Market
The Canadian food market is a $37.8 billion dollar a year industry which consists of the food service market and retail grocery stores. The food service market includes all meals eaten away from home in schools, hospitals, prisons, nursing homes, hotels, and restaurants. Canadians on average ate 38% of their meals away from home in 1996. Hotels and restaurants serve 960 million meals a year; however, this is a small portion, only 8% of the total food service market. On the other hand, fast food service accounted for 80% of the 960 million meals, totaling 768 million. Within the food market, there are four basic types of food service systems used for delivering entrées: Conventional system, where all food is purchased raw and processed on premises.
The Semi-conventional food system; which provided frozen pre-cut meats. The ready food system provided pre-cooked frozen entrées on premises and finally the Total convenience system where 90-95% of all food items were purchased from outside commercial suppliers. 25% of all hotels and restaurants used the total convenience system by 1990. The use of convenience foods helped contribute to the efficiency service during the peak periods of the day, resulting in faster customer service and increased sales volume. Marketing Strategy
Mr. Panetta is undecided between two marketing strategies to promote and sell the Cosmobob. Either he can enter into the food service market or distribute through supermarket chains. Distributing through a food wholesaler would require permanently adding pita bread and Cosmo sauce to his offering. Grocery store chains were a larger market than food service; however, the cost would also be substantially higher. Cosmo knew there were no existing “ready to serve” souvlaki available to the home user. Serca Foods
Serca Foods, a national food wholesaler, was interested in carrying the Cosmobob. They would require a 20% margin on the products purchased. Meaning for every Cosmobob case sold at $60, Serca Foods would receive $12. With Serca being a national wholesaler a federal inspection would be necessary for products to be sold in multiple providences. Therefore, Panetta would have to invest an extra $30-40,000 in his production facility to pass the federal government inspection.
The complimentary items to the Cosmobob; the pita bread and Cosmobob sauce, were not available in all Ontario markets, resulting in additional working capital needed to cover four weeks of inventory. If the Cosmobob was exclusive to Serca, their salesperson would have the upper hand with its buyers. Cosmo would not have to personally worry about the selling and promoting of his product to the food service market. Small restaurants and hotels liked the convenience of ordering from only one wholesaler, and if only Serca offered the Cosmobob that gave them the opportunity to gain new accounts. Supermarket Chains
Federal inspection would be necessary if the Cosmobob was introduced nationally in a supermarket chain. Distributing to the home user would be beneficial to those with large families that could not afford to eat away from home often, and also appeal to people who liked to have comfort food at home. Supermarket chains would expect a 25% margin on the retail selling price, good promotional support, and guaranteed delivery. The delivery to national supermarkets would be an additional cost for Mr. Panetta to consider. Mr. Panetta and his son were the only two conducting sales and demonstration of the product. With the promotional expectations of the supermarket chain, he would need to hire another salesperson in order to meet the demands.
There is a $20,000 placement fee per product, per supermarket chain; in addition to samples, free food allowances, advertising, and trade promotion. Consumer promotion for a new product would cost more than $800,000 a year. Table 1 shows the estimated cost and profit if he used Serca Foods and produced and sold 2,400 cases a month. New Opportunity in Victoria Mall
Mr. Panetta had an opportunity to open a new store in the upcoming Victoria Avenue Mall area. Compared to his current locations, this restaurant would be closer to the Niagara Falls business district and tourist area, which could possibly generate a lot of exposure to new customers. The estimated inflow to the mall was expected to be 500 cars per day. His target market would include local customers and tourist who visited Niagara Falls. The list of tenants in the mall includes a convenience milk store, hair styling salon, flower shop and a dry cleaner.
With this expansion, he projects the new store could generate at least 60% of the Thorold Stone location initially and potentially match it in two years. This would require an investment of about $60,000 towards leasehold improvements and equipment. Table 2 and 3 outlines his initial estimated sales of $322,503 and net income of $10,930. Production Facility Options
The facility space being utilized for production has reached its capacity. If Mr. Panetta considers expanding his product on a larger scale and mass produce, he must occupy a facility that can meet the needs of production and service. There are two options available; the mushroom factory and the old dairy farm. The mushroom factory is located outside of Niagara Falls in Grimsby, Ontario. To lease this facility for 3 years it would cost $83,340. In addition, Mr. Panetta would have to provide an upfront cost of $160,000 to cover improvements and mandatory government inspection. Alternatively, the building can be purchased for $460,000 which includes rent, facility improvements and inspection.
After conducting a differential analysis, the differential cost from the alternative to buy the mushroom factory compared to leasing would be $216,660. Table 4 outlines the details of this analysis. His second option is the old dairy plant factory. This facility would require a 3 year lease agreement for a total of $103,200 in rent. It would also take an additional $30,000 in leasehold improvements, in order to get the facility ready for operation and $40,000 for government inspection. Mr. Panetta has the option to purchase this location for $470,000. In Table 5, the differential analysis shows a $296,800 net difference in the cost to rent or buy the old dairy plant.
After conducting a full analysis of Mr. Panetta’s product and the market, we recommend that he pursue a new business opportunity and open a new location in the Victoria Mall. Although the requirement to lease the site is for a minimum of 20 years, with rent exceeding $384,000, there is potential to reach many customers on a daily basis. Sales projected on 60% average of the Thorold location is expected to produce a $10,000 net income within the first year and has the potential to reach Thorold location sales in two years.
Opening this new site would require a larger facility in order to mass produce the Cosmobob. The old dairy plant location in Niagara Falls would be the best option. Not only would it allow him to use the same employees, but the capital required to have the plant operational is less expensive. $70,000 would be required upfront compared to $160,000 in improvements and inspections for the alternative location.
There is a $296,800 difference in cost to lease the old dairy plant compared to purchase. The lease option is less and it provides the option to discontinue the lease agreement after 3 years if he determines that his net profit is not meeting the company’s expectations. To market the Cosmobob through Serca Foods would be beneficial. While hotels and restaurants only make up 8% of the food service market, they served 960 million meals a year, and 768 are at fast food restaurants. The Cosmobob is a versatile entrée and can be sold at eateries of all price points. The sales force and promotion is guaranteed, and the requested margin on sales is lower than that of supermarkets.