Strategy of Rocky Mountain Chocolate Facter

The cornerstone of the Company’s growth strategy is to aggressively pursue unit growth opportunities in locations where the Company has traditionally been successful, to pursue new and developing real estate environments for franchisees which appear promising based on early sales results, and to improve and expand the retail store concept, such that previously untapped and unfeasible environments (such as most regional malls) generate sufficient revenue to support a successful Rocky Mountain Chocolate Factory location.

High Traffic Environments

The Company currently establishes franchised stores in the following environments: factory outlet malls, tourist environments, regional malls, street fronts and other entertainment oriented environments.

The Company, over the last several years, has had a particular focus on regional mall locations. The Company is optimistic that its exciting new store design will allow it to continue targeting the over 1,100 regional malls in the United States. The Company has established a business relationship with most of the major developers in the United States and believes that these relationships provide it with the opportunity to take advantage of attractive sites in new and existing real estate environments.

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Store Concept

The Company seeks to establish an enjoyable and inviting atmosphere in each Rocky Mountain Chocolate Factory store. Each store prepares numerous products, including fudge, barks and caramel apples, in the store. In-store preparation is designed both to be fun and entertaining for customers and to convey an image of freshness and homemade quality. The Company‚ design staff has developed easily replicable designs and specifications to ensure that the Rocky Mountain Chocolate Factory concept is consistently implemented throughout the system.

Rocky Mountain Chocolate Factory stores opened prior to fiscal 2002 have a distinctive country Victorian decor, which further enhances their friendly and enjoyable atmosphere. Each store includes finely crafted wood cabinetry, copper and brass accents, etched mirrors and large marble tables on which fudge and other products are made. To ensure that all stores conform to the Rocky Mountain Chocolate Factory image, the Company’s design staff provides working drawings and specifications and approves the construction plans for each new store. The Company also controls the signage and building materials that may be used in the stores. The company established RMCF stores in five primary environments: 1) Regional centers,

2) Tourist areas,
3) Outlet centers,
4) Street fronts, and
5) Airports and other entertainment oriented shopping centers. Each of these environments had a number of attractive features, including high levels of foot traffic. The company, over the last several years, has had a particular focus on regional center locations.

Entertainment

RMCF shops were a blend of traditional and contemporary styles. The company sought to establish a fun and inviting atmosphere in all of its locations. Unlike most other confectionary stores, each RMCF shop prepared certain products, including fudge and caramel apples, in the store. Customers could observe store personnel making fudge from start to finish, including the mixing of ingredients in old-fashioned copper kettles and the cooling of the fudge on Large granite or marble tables, and were often invited to sample the store’s products. RMCF believed the in-store preparation and aroma of its products enhanced store ambiance, was fun and entertaining for customers, conveyed an image of freshness and homemade quality, and encouraged additional impulse purchases by customers. According to Crail, “We have a great marketing advantage with our unique in-store candy demonstrations. Customers can watch the cook spin a skewered apple in hot caramel or watch fudge being made before their eyes.

Name Recognition and New Market Penetration

The Company believes the visibility of its stores and the high foot traffic at most of its locations has generated strong name recognition of Rocky Mountain Chocolate Factory and demand for its franchises. The Rocky Mountain Chocolate Factory system has historically been concentrated in the western and Rocky Mountain region of the United States, but recent growth has generated a gradual easterly momentum as new stores have been opened in the eastern half of the country. This growth has further increased the Company’s name recognition and demand for its franchises. Distribution of Rocky Mountain Chocolate Factory products through new channels also increases name recognition and brand awareness in areas of the country in which the Company has not previously had a significant presence. The Company believes that by distributing selected Rocky Mountain Chocolate Factory products through new distribution channels its name recognition will improve and benefit its entire store system.

Regional Centers

There were approximately 1,400 regional centers in the United States, and as of February 29, although often providing favorable levels of foot traffic, regional malls typically involve more expensive rent structures and competing food and beverage concepts. The Company’s new store concept is designed to unlock the potential of the regional mall environment. The Company believes there are a number of other environments that have the characteristics necessary for the successful operation of Rocky Mountain Chocolate Factory stores such as airports and sports arenas. Six franchised Rocky Mountain Chocolate Factory stores exist at airport locations: two at Denver International Airport, one at Charlotte International Airport, one at Minneapolis International Airport, one at Salt Lake City International Airport and one at Vancouver International Airport in Canada.

Kiosk concept

The kiosk concept is the perfect vehicle for Rocky Mountain Chocolate Factory in retail environments where inline real estate is unavailable or build-out costs for an inline location do not meet the Company's financial criteria. The kiosk is actually a full-service Rocky Mountain Chocolate Factory store in the sense that it includes trademark cooking area where caramel apples, fudge and other popular confections are prepared in front of customers using traditional cooking utensils. Since many of products are purchased on impulse, the kiosk represents a natural fit that allows us to take advantage of foot traffic in regional mall environments. Similar to a regular inline store, the kiosk also offers Rocky Mountain Chocolate Factory's core products, including both bulk and packaged fine chocolates. Given the growing demand for Rocky Mountain Chocolate Factory franchises, and the limitation of inline real estate in many regional shopping malls, the kiosk concept should provide franchisees with greater flexibility in their expansion programs.

Franchising Program

The Company’s objective is to build on its position as a leading international franchiser and manufacturer of high quality chocolate and other confectionery products. The Company continually seeks opportunities to profitably expand its business. To accomplish this objective, the Company employs a business strategy that includes the following elements: Product Quality and Variety

Store Atmosphere and Ambiance
Customer Service Commitment

The Company emphasizes excellence in customer service and seeks to employ and to sell franchises to motivated and energetic people. The Company also fosters enthusiasm for its customer service philosophy and the Rocky Mountain Chocolate Factory concept through its annual franchisee convention, regional meetings and other frequent contacts with its franchisees.

* Franchisee Sourcing and Selection

The majority of new franchises are awarded to persons referred by existing franchisees, to interested consumers who have visited Rocky Mountain Chocolate Factory stores and to existing franchisees. The Company also advertises for new franchisees in national and regional newspapers as suitable potential store locations come to the Company’s attention. Franchisees are approved by the Company on the basis of the applicant’s net worth and liquidity, together with an assessment of work ethic and personality compatibility with the Company’s operating philosophy.

* Training and Support

Each domestic franchisee owner/operator and each store manager for a domestic franchisee is required to complete a 7-day comprehensive training program in store operations and management. The Company has established a training center at its Durango headquarters in the form of a full-sized replica of a properly configured and merchandised Rocky Mountain Chocolate Factory store. Topics covered in the training course include the Company’s philosophy of store operation and management, customer service, merchandising, pricing, cooking, inventory and cost control, quality standards, record keeping, labor scheduling and personnel management. Training is based on standard operating policies and procedures contained in an operations manual provided to all franchisees, which the franchisee is required to follow by terms of the franchise agreement.

Additionally, and importantly, trainees are provided with a complete orientation to Company operations by working in key factory operational areas and by meeting with members of the senior management of the Company. The Company’s operating objectives include providing Company knowledge and expertise in merchandising, marketing and customer service to all front-line store level employees to maximize their skills and ensure that they are fully versed in the Company’s proven techniques.

The Company provides ongoing support to franchisees through its field consultants, who maintain regular and frequent communication with the stores by phone and by site visits. The field consultants also review and discuss with the franchisee store operating results and provide advice and guidance in improving store profitability and in developing and executing store marketing and merchandising programs. The Company has developed a handbook containing a “pre-packaged” local store marketing plan, which allows franchisees to implement cost-effective promotional programs that have proven successful in other Rocky Mountain Chocolate Factory stores.

* Quality Standards and Control

The franchise agreement for Rocky Mountain Chocolate Factory franchisees requires compliance with the Company’s procedures of operation and food quality specifications and permits audits and inspections by the Company. Operating standards for Rocky Mountain Chocolate Factory stores are set forth in operating manuals. These manuals cover general operations, factory ordering, merchandising, advertising and accounting procedures. Through their regular visits to franchised stores, Company field consultants audit performance and adherence to Company standards. The Company has the right to terminate any franchise agreement for non-compliance with the Company’s operating standards. Products sold at the stores and ingredients used in the preparation of products approved for on-site preparation must be purchased from the Company or from approved suppliers.

* The Franchise Agreement: Terms and Conditions

The domestic offer and sale of Rocky Mountain Chocolate Factory franchises is made pursuant to the Uniform Franchise Offering Circular prepared in accordance with federal and state laws and regulations. States that regulate the sale and operation of franchises require a franchiser to register or file certain notices with the state authorities prior to offering and selling franchises in those states. Under the current form of domestic Rocky Mountain Chocolate Factory franchise agreement, franchisees pay the Company (i) an initial franchise fee for each store, (ii) royalties based on monthly gross sales, and (iii) a marketing fee based on monthly gross sales. Franchisees are generally granted exclusive territory with respect to the operation of Rocky Mountain Chocolate Factory stores only in the immediate vicinity of their stores. Chocolate products not made on the premises by franchisees must be purchased from the Company or approved suppliers.

The franchise agreements require franchisees to comply with the Company’s procedures of operation and food quality specifications, to permit inspections and audits by the Company and to remodel stores to conform with standards in effect. The Company may terminate the franchise agreement upon the failure of the franchisee to comply with the conditions of the agreement and upon the occurrence of certain events, such as insolvency or bankruptcy of the franchisee or the commission by the franchisee of any unlawful or deceptive practice, which in the judgment of the Company is likely to adversely affect the Rocky Mountain Chocolate Factory system.

The Company’s ability to terminate franchise agreements pursuant to such provisions is subject to applicable bankruptcy and state laws and regulations. See “Business — Regulation.” The agreements prohibit the transfer or assignment of any interest in a franchise without the prior written consent of the Company. The agreements also give the Company a right of first refusal to purchase any interest in a franchise if a proposed transfer would result in a change of control of that franchise. The refusal right, if exercised, would allow the Company to purchase the interest proposed to be transferred under the same terms and conditions and for the same price as offered by the proposed transferee. The term of each Rocky Mountain Chocolate Factory franchise agreement is ten years, and franchisees have the right to renew for one additional ten-year term.

* Franchise Financing

The Company does not provide prospective franchisees with financing for their stores, but has developed relationships with several sources of franchisee financing to whom it will refer franchisees. Typically, franchisees have obtained their own sources of such financing and have not required the Company’s assistance.

Marketing

The Company relies primarily on in-store promotion and point-of-purchase materials to promote the sale of its products. The monthly marketing fees collected from franchisees are used by the Company to develop new packaging and in-store promotion and point-of-purchase materials, and to create and update the Company’s local store marketing handbooks. The Company focuses on local store marketing efforts by providing customizable marketing materials, including advertisements, coupons, flyers and mail order catalogs generated by its in-house Creative Services department. The department works directly with franchisees to implement local store marketing programs. The Company aggressively seeks low cost, high return publicity opportunities through participation in local and regional events, sponsorships and charitable causes. The Company has not historically and does not intend to engage in national advertising in the near future.

Retail Marketing Strategy

Based on RMCF’s growth opportunity in the marketplace to provide factory-made premium chocolate and confectionary goods, the marketing objectives consist of establishing a unique brand identity, maximizing brand awareness, marketing across specific target markets and increasing customer satisfaction through consistent service and product quality. With so many chocolate outlets in the San Diego trade area, it is crucial to differentiate RMCF from its competitors. Consumer perception is the key factor in building brand equity. If a customer perceives RMCF products and services to be unmatched to those of its competitors then they will be more willing to pay the premium price for the products. Although RMCF stores are located in high traffic trade areas, it is imperative to first maximize brand awareness to potential customers because they will be more willing to enter a store if RCMF is at the top-of-mind for premium chocolate.

Marketing across specific targets markets will increase the opportunity to deliver information to the customers who will be interested in making a purchase of RMCF chocolate. By clearly defining our segments, RMCF will have a cost advantage over its competitors. The final objective is to increase the level of customer satisfaction. This can be achieved through a high level of customer service delivered consistently across its staff. Accomplishing these objectives will secure a sustainable competitive advantage for RMCF for many years. Marketing team has identified the following marketing strategies based on the marketing objectives: position Rocky Mountain Chocolate Factory as the premier upscale facilitator of premium chocolates and confections, build brand equity through top-of-mind awareness and increasing customer loyalty with specialized CRM programs. In today’s marketplace, there is an overwhelming amount of competition for chocolate and confectionary goods.

With both low-end and high-end brands varying from Ghirardelli, See’s Candies, Godiva, and Hershey’s, it is critical to develop a strong marketing position that will reflect RMCF’s high standard of products and services. “The basic approach of positioning is not to create something new and different, but to manipulate what’s already up there in the mind, to retie the connections that already exist.”. To simply connect RCMF and premium chocolates will have a positive influence to the customer’s willingness to purchase or recommend RMCF to friends and family. On a tactical level we recommend implementing the following: building a strategic alliance with an upscale retail store and generate a buzz with a grand opening at Fashion Valley Mall, as well as advertising on the San Diego Union Tribune. By implementing a strategic alliance with a popular upscale retailer, both parties will achieve a mutually beneficial relationship.

As the upscale retailer and RMCF both develop marketing campaigns, it will help to build awareness for companies. This will give an opportunity for existing customers to learn more about their affiliate’s partners and help to drive sales. Partnering with Burberry would suit RMCF because it will help solidify RMCF’s position in the market place. Since Burberry is a franchise, creating this strategic alliance through contract would be possible. In addition, RMCF and the retailer can provide special offers or incentives for customers to make purchases at both retail stores. An example may be to offer one free caramel apple with a $50 purchase at Burberry. There are many approaches to coupon promotions, but the most important objective is sending the message that RMCF is an upscale product.

Final initiative is to focus on a customer loyalty program, which is designed to gain customer retention. We believe the 80/20 rule will apply in this market because 20% of all chocolate lovers will make repeat purchases consisting of 80% of the total sales. So keeping the customer satisfaction high is key. Delivering a positive experience and consistent quality for clients is important. This can be achieved by consistently training the sales staff and chocolate makers. In addition, providing a discount card or membership card can help initiate a CRM program. By collecting information about the customer, RMCF can directly target them by direct mail or E-mail. By sending them a promotion on their birthday, anniversaries, or special holiday such as Valentines, the customer may show appreciation and decide to make a purchase.