JetBlue Airways: Managing Growth

Final Exam Case

Shil Patel
103032302
75-498-30
April 15th, 2012
Professor J, Lee.

INTRODUCTION

The inspiration for Grocery Checkout Inc. (GCO) began at The University of
Western Ontario as a second-year business project. It was founded by a group of
business students in 2005. Nathan Felder, CEO and co-founder, was instrumental in the
formation and initial success of the company. The company catered to consumer grocery
needs at the click of a button providing its customers (primarily students at the university)
the ability to shop online and have their groceries delivered to their doorsteps. In 2005
London, Ontario was used as a test market to determine if the venture had the potential to
be both steady and successful. Initial success ultimately led to the company being
incorporated and in nearly 8 months having 800 customers and generating over $300,000
in sales (Janssen, 2011). Grocery Checkout focuses on quality and value, and success was
accompanied by excellent relations with local suppliers as well as distributors of fresh
produce, butchers, and other local grocery stores. A steady increase in sales saw sales
figures over $1 million in 2008 and by 2009 a customer base of approximately 3,500
(Janssen, 2011).
The online grocery industry in which Grocery Checkout Inc operates although
part of a large growing e-commerce sector, had declined by 8 percent in recent years
(Janssen, 2011). None the less the market is there as customers who purchase their
groceries online spend $200 more and have annual incomes of approximately $7,000
higher than those that do not (Janssen, 2011). It is evident that the adoption of online
grocery shopping had been slow in Canada, but in recent years online trends seemed to be
in favour of online shopping. Yet, the outcome for 2010 still remained uncertain.
This report will provide insight into Grocery Checkout Inc, through both internal
and external analysis. We will explore Felders options and weigh in on the benefits and
costs of different alternatives. In doing so we will be able to determine which options best
fit the company as well as how Felder himself will be impacted.

KEY ISSUES
Nathan Felder is faced with several issues that are vital to the future of Grocery
Checkout Inc. These key issues are essential to the future growth of the company and
must be addressed so that a rational decision can be made going forward. Some of the
issues Grocery Checkout Inc and Nathan are faced with are:

Pressure from investors for faster revenue growth.

Nathan has a number of growth options in which he must consider to determine

what best fits the company at this time.

Would Facebook advertising help significantly raise revenue? Would the

benefits of the advertising outweigh the costs (pay-per-click vs. pay-perview)?

Would the introduction of a mobile application change sales significantly?

Should Grocery Checkout introduce an on-campus location? Would having a

hybrid store cause the company to lose its differentiation?

Based on the needs of investors and Nathan, would selling Grocery Checkout
Inc be beneficial?

Should Nathan Felder simply have Grocery Checkout remain on its current path
of steady growth and ignore the pressure from his investors? Why change
something that isnt broken!

These issues Grocery Checkout is faced with bring about more questions for
Nathan such as was this the time to consider a new expansion? And was Grocery
Checkout ready to take on this risk. Although faced with numerous issues/concerns
determining the best option for Grocery Checkout Inc was a decision that needed to be
made quickly to ensure success instead of failure.

ANALYSIS
VRINE Analysis
We will begin by using the VRINE Model to analyze Grocery Checkout Inc on
various attributes that include value, rarity, inimitability or non-substitutability, and
exploitability. The VRINE Model will help Felder assess the companys competitive
advantage and bring insight to the advantages that GCO enjoys.
VALUE: As a prior student at The University of Western Ontario Felder created Grocery
Checkout Inc due to his own dissatisfaction with shopping for groceries. GCO was able
to add value to consumers by turning what most considered inconvenient at times (80%)
into a convenient service almost all of the time. GCO was able to adapt to its consumers
needs, hence students who were unable to drive to a grocery store or consumers who find
it difficult to get to a grocery store. The company does offer something of value as it has
the ability to create a profit and meet a market demand.

RARITY: GCO is rare in a sense as it is only available in the London, Ontario area. The
company only caters to the needs of consumers within a specific range of the university.
It can be argued that competitors provide the same products so it is not really rare. On the
other hand one can argue that its rarity comes in the form of time saving and convince as
traditional grocery stores do not offer the click of-a-button delivery option.
Temporarily GCO is the only grocer providing delivery options within the London area.

INITABILITY/ NON-SUBSTITUTABILIY: The real question here is can competitors copy

what GCO is doing? Yes, as Felder mentioned he is worried that competitors such as
Loblaws and Valu-Mart will implement a similar online grocery shopping experience.
Due to the size of these companies they will have greater marketing budgets to exploit
there services than that of Felder. The case also goes on to give one the example of
Longos acquisition of Grocery Gateway, which brings about the possibility of a
competitor acquiring an established online grocery store from a different region. On the
other hand improved distribution networks, order fulfillment systems, or consumer
loyalty may differentiate and make it difficult for competing companies to satisfy
potential consumers the way that GCO does. In addition, for other companies to copy
what GCO is doing it would require a lot of capital investment in delivery vans, drivers,
shoppers, etc. This could ultimately increase costs for these companies and make them
less profitable without the right delivery systems or inventory procedures just to name a
few. Lastly, GCO does not hold any patents or legal remedies for companies
implementing a similar technological system or business idea.

EXPLOITABILITY: Due to Grocery Checkout Inc being new it is important for the
company to increase brand awareness. Marketing is strongly based on word of mouth and
increased efforts in marketing could prove to be beneficial. As mentioned customers
include 30,000 university students , young professionals (who are prone to using
technology), families, small businesses and customers with disabilities. GCO has done
an excellent job in exploiting there capabilities and resources in terms of adapting to the
consumers needs (e.g. no cars, time saving, convenience, etc), but Felder still needs to
find ways to market the business by means of advertising, promotional campaigns and so
on to exploit its full potential.
Porters Five Forces
Another analysis which Felder can take a closer look at is Porters Five Forces. The
analysis of the threat of new entrants, threat of suppliers, the threat of buyers, threat of
rivalry, and the threat of substitutions will provide him with insight on the external forces
that may be at work in GCOs industry.
Threat of New Entrants: The online grocery industry was primarily controlled by a few
competitors. Luckily for Grocery Checkout Inc they are the only online delivery grocer in
the London area. There competitors are franchise grocers located closet to the Western
campus. I personally see the threat of new entrants as high. If we think back a few years
ago majority of these large retail grocers have become one stop shops. If you walk into a
Wal-mart you can simply do your groceries, buy clothes, look at electronics, etc. If Walmart or a company like this was to introduce an online shopping grocer as well as these
other items it would simply have a greater advantage than Grocery Checkout Inc. With
the rise in technology it almost feel inevitable that grocery stores will adapt to compete
technologically online by cutting costs and saving time. There are virtually no barriers to
a competitor or new business when entering this market as they would be able to provide
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exactly what Grocery Checkout Inc does. In addition, they may be able to do it better
with an increased marketing budget, better technology, economies of scale, and so on.
Threat of Suppliers: The force can be influenced by major grocery chains and certain
suppliers could fear losing their business to these same major grocery chains. The threat
of suppliers is high as although supplier relations are good if these relations are damaged
prices may increase or supplies may not be provided. In addition, the loss of a supplier
could be damaging as certain products would no longer be available online via Grocery
Checkout Inc. Another problem is that some of the suppliers are the local grocers which
GCO is competing against so supplies are sometimes at a higher cost.
Threat of Buyers: The threat of the buyers is extremely high. The recent economic decline
of 2008 has affected almost all customers. The high prices of things such as gas make
people less prone to want to drive, but at the same time they have an every penny
counts mentality. So if they can buy a 2L of milk for $4 instead of $4.75 they will lean
to the cheaper price. In addition 60% of consumers said that good value for their money
was most important when choosing a grocery store (Janssen, 2011). Due to the large
number of grocery shopping options and the easy access to the internet to compare prices
and so fourth the buyer power is extremely high. Looking at convenience if someone
needed a ingredient now they would hop in their car and drive to get it. With GCO
delivery is next day so wait time is limited.
Threat of Rivalry: The grocery industry is highly competitive, therefore, the threat is
extremely high. As mentioned previously large grocery retailers have the ability to enter
the online market and would able to offer some of the same products for a cheaper price.
They would also have a higher marketing budget and not have to solely rely on word of
mouth. Technological advantages held by competitors may prove to be detrimental in
giving one company the upper hand on GCO. Amazon recently introduced its online
grocery store and due to Amazons size it may be able to take market share away from
GCO if it can penetrate the market and meet consumer wants and needs better than GCO.
Again, with no patents or copyrights it makes it very easy for rivals to enter the market
and potentially take customers away. Buyers may be worried about getting the wrong
order or have the wrong items delivered this increases wait time for groceries and can be
seen as a hassle to many.
Threat of Substitutes: The threat of substitutes is one that exists because other options do
exists such as physically going to a store. Also, its a product for a product. Many
consumers today are becoming health conscious, what if a certain health product is not
available online or they dont hold a certain brand? Many large grocery retailers hold
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their own brand names to lower costs and give consumers value for a cheaper price for
instance Presidents Choice. Amazon recently introduced a similar site like Grocery
Checkout Inc, so other online options are available to consumers if they wanted to get a
product.
Financial Analysis
Taking a closer look at Grocery Checkout Incs finances we can see that it has
experienced significant growth in the past 3 years. From exhibit 1.1 one can see that sales
(2007 = $408,913 ; 2008 = $697,955 ; and 2009 = $1,056,724) has increased significantly
which would suggest a booming industry, but we should also consider the fact that GCO
has failed to minimize the cost of goods sold each year. There has been a significant price
jump in goods; 2008 they totalled $516,007 and 2009 $802,938. Although profit has
increased slightly, if GCO cannot find a way to stabilize the costs of goods sold then one
can infer that profits will never reach full potential and may even reduce drastically.
Felder has seen significant growth in sales, profit and equity (refer to exhibit 1.2).
Although profits show a 97% increase from 2008 -2009 the value of income in 2009 was
$26,854 and simply isnt sufficient for someone who is looking to find financial stability.
On the other hand the company is still young and there is significant room for growth.
GCO has a current ratio of 2.36 and acid test of 1.47 both indicating that the company is
in good health (refer to exhibit 1.2) . The 2.36 indicates that GCO has the ability to pay
its short term liabilities with its short term assets. The higher the current ratio in relation
to 1 indicates the more capable the company is of paying its obligations; we can
therefore see that GCO has excellent liquidity. In addition, the debt to equity ratio is
2.30 which is significantly lower than the year before of 3.78 but still indicates that GCO
has been aggressive with financing, and there is the potential chance that the company
may experience unpredictable earnings as a result of the increase in interest expense.
Lastly, we must consider GCOs balance sheet activities; cash is relatively stable
since 2008, but Felder should consider using some of the cash on hand to pay for
marketing to help increase sales or finding a way to reduce the cost of goods. One should
also note that since 2007 a steady increase in accounts receivable has occurred and Felder
should take some initiative in trying to collect his receivables faster than 6.68 days which
has increased slightly since 2008. (refer to exhibit 1.2 & 1.3). We must wonder about the
age of inventories at 5.57 days and what happens to that inventory since in 2008 and
2007 we had nil. Are we paying inventory holding costs for these days?

ALTERNATIVES AND RECOMMENDATIONS

Due to the recent push by investors to increase revenue, Felder must consider his
options for growth with Grocery Checkout Inc. There are various paths that Felder could
take to enhance GCO and its future growth. In the following section we will explore

Felders alternative options after his market research and make a recommendation for
what should be done.
Alternative Solutions:
Facebook Advertising: The biggest advantage to the Facebook advertising is that
GCO has experienced growth without the aid of traditional marketing. Facebook roughly
has 100,000 users between 18 and 25 in London, Ontario (Janssen, 2011). With university
students being the primary target market it could be assumed that the Facebook
alternative would certainly create a spike in sales. Felder has two options the pay per
click model (CPC) and the pay per view model (CPM).
o Financial Analysis:
Cost for CPC bid approximately $19,440i
Cost for CPM bid approximately $15,622ii
Mobile Application: with the increase in technological features the introduction of
a mobile application may be beneficial to growth in sales for GCO. Felders market
research determined that smartphones were being used by virtually every University of
Western student. After contacting a marketing firm he determined the cost to be around
$10,000.
o Financial Analysis
To be worth while GCO would have to acquire 91iii new
customers whose combined spending average is equal to
$110 per trip.
On-Campus Location: Felder presented a proposal on June 2006 and council
members voted in favour of his service on the university campus. Felder proposed a
hybrid store that would bring together online sales and point of sale grocery purchasing.
The option would require GCO to invest in physical assets at a cost of $40,000, leasehold
improvements of $60,000, POS systems for $20,000, and management of the project
would cost $20,000.
o Financial Analysis
Total Cost $140,000
Peak season = $540,000 ; Low season = $120,000iv
Total Profit = $348,000v * 0.34 = $118,320.00

The other options that exist for Felder and Grocery Checkout Inc is selling GCO
to a competitor as he knew that many super markets and grocery chains had considered
developing an online grocery model and wondered whether they might acquire GCO as a
way to crack the market. Similarly Grocery Gateway, another online grocery model, was
purchased my Longos earlier, but had sales significantly higher than GCO meaning that
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GCO would have to be sold for significantly less. Potential buyers would be competitors,
Wal-mart, or perhaps a savvy entrepreneur. Lastly, using the status quo and taking into
account a economic recession; sales for GCO for the next year would not reach higher
than 1.5 million. With all things being equal and advertising expense increasing to
$10,000 we can determine if this alternative would provide substantial profitability:

Gross Profit = $1,500,000 * 0.24 = $360,000

Total Expenses = $217,981 + $10,000 = $227,981.00
Net Income After Tax = $132,019 * (1-0.25) = $99,014.25

Based on the financial analysis completed above I believe that Felder has a few
alternatives available to him. The first is selling GCO due to the limited information
given it is difficult to assess this alternative as one is not given the value it would be
bought for. If he was offered lets say $500,000 it would be immediate cash for him and
financial stability would for sure come about. Personally I would not recommend selling
GCO, but instead building an on-campus location would prove to be the most profitable
of the alternatives or using a combination of the status quo and the mobile application
could be extremely profitable. Although initially it my decrease the net income after tax
by $10,000 (price for application) it may prove to attract more than 91 new customers
and add to the value of $99,014.25. Lastly, another alternative not given could be to
expand to nearby schools. Within a 30 minute radius other universities and colleges exist
that could be exploited and taken advantage of for a much cheaper price. This would
ultimately increase sales and expand the customer base at the same time.

IMPLEMENTATION
Nathan Felder, first and foremost needs the confidence and support of GCO
investors. Going based solely on the fact that they want to increase revenue I would
suggest that he hold off on the on-campus location for a year or two so that he could
have more cash capital to put towards the investment rather than financing the venture.
Instead, I suggest he pitch the status quo idea to investors in combination with the mobile
application at this point in time. There are a number of reason why one a timeline needs
to be created for when a new location can be built and frankly if something goes wrong
such as a delay in the building process; GCO will not be making the income projected.
The mobile application only needs 91 new customers to cover its costs and every addition
customer could be seen as a form of retained profit. The status quo also increases GCOs
advertising budget which allows for improved promotional campaigns. Doing television
commercials, radio advertisements or campus posters may prove to be beneficial in
attracting more sales and new customers. A Gantt chart should be set up for future plans
of introducing an on-campus location. For now using the status quo and mobile
application alternative has the least chance of error. In addition, sales growth has not yet
stalled so why change what is working. Felder needs to have GCO make a statement in
the market, increase awareness, and simply reap in the profits!
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APPENDIX
EXHIBIT 1.1

EXHIBIT 1.2

EXHIBIT 1.3

CALCULATIONS

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i CPC = (120 * 365 ) * 0.45 = $19,440

ii CPM = (214,000 * 365) / 1000 * 0.20 = $15,622

CPC Conversion = (120* 365) *.01 * 110 = $48,180
CPM Conversion = (214,000*365) *0.003 *110 / 1000= 25,776.63

iii AVG # of new customers = 10,000/110 = 90.9

iv Peak season = 36 wks * $15,000 = $540,000

Low season = 16 wks * 7,500 = $120,000

v Total = 540,000 + 120,000 140,000 (1200*40) (2500*36) (1000*16)

(18,000) = $348,000