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To: Ms.

Thatcher
From: Alex Jing
Subject: Sugar and Spice Desserts Seeks to Expand Current Business Model to Increase Profits
Date: September 16, 2017
Sugar and Spice Desserts is struggling to turn a profit
Allison Thatcher operates a high quality, specialty cupcake bakery in Los Angeles that has not been able
to operate at a profitable level. In an increasingly saturated, premium cupcake industry, Sugar and Spice
Desserts must create a plan to convince a potential angel investor that her bakery can operate profitably
and thrive amongst its competitors. Currently, there are four plans to increase sales immediately;
however, only one of these plans are strategically aligned with Thatchers core competencies. Thatcher
should focus her efforts on expanding existing business with more marketing such as sponsored
advertisements through her connections like Snoop Dogg as well as utilizing a cupcake truck. The
wedding dessert industry would also complement her unique made to order business model. By doing so,
she will preserve her businesss mass customization flexibility desired by her predominant design
specific, event customers and continue to grow her customer base.
Sparkles, a strong competitor with a storefront model, has achieved large market share and scale of
production
One of Thatchers expansion options is to open a local storefront. By analyzing Sparkles, local storefront
model, strengths and core competencies, I would not recommend Thatcher to enter the brick and mortar
industry.
First, opening a local storefront would not only require a large up-front investment, but it would
completely change Thatchers current strategy of special, made to order products. Sparkles brand
presence has been established nationwide for over five years. With over ten locations nationwide
producing a variety of high quality flavors, Christie Newton, Sparkles founder, has had little trouble
generating consumer demand. Contrary to Thatchers operations strategy which focuses on flexibility
and extensive customization offers; Newtons production strategy utilizes a flow-shop model which has
allowed her to capture benefits of a narrowed focus and economies of scale.
By comparing Sparkles and Sugar and Spices labor time required to make standard cupcakes, Sparkles
can produce four dozen cupcakes an average of 150% faster than Sugar and Spice. However, Sparkles is
only 113% faster at making custom cupcakes even with bulk mixes and not needing to wait for cooling.
Even though Sparkles is still faster than Thatcher, one can see how the flow-shop model does not
complement the production of custom cupcakes.
Second, Sparkles ten locations are strategically located in high foot traffic, visibility and upper-class
neighborhoods. At the cost of high rent, Sparkles preserves a premium brand image and continually
attracts customers who can afford their top dollar products. If Thatcher wanted to utilize a storefront
model and maintain her high quality, niche cupcake perception, she would need to enter similar upper-
class locations. Unfortunately, rent alone would cost five times as much as Sugar and Spices current rent
expenses. On top of expensive rent, Thatcher would need to increase her workforce and potentially lose
her high level of creative control. Her custom cupcakes reputation is built on high quality and
consistency, and by putting Thatchers reputation at risk would tarnish her growing business model. The
result of Sugar and Spice opening a storefront location would increase their external competitors
tremendously and make it even harder for Thatcher to operate profitably.
A Cupcake Truck will open a channel for sales and brand promotion
Another option for Sugar and Spice to increase demand is to use a cupcake truck to attract new customers.
I believe this would be a great marketing tool during the summer season when people are at street
festivals or other outdoor events. The trucks refrigerator holds up to 900 mini cupcakes, or 75 dozen
(18.75 batches), this would help Thatcher achieve the 100 batches cupcake sales per month. However,
Sugar and Spice lacks information on customer preferences and would be stocking a variety of flavors
and designs. If only half of the stocked designs pleased customers, Thatcher would have to worry about
wasting products. Sparkles avoids this problem by stocking their cupcake truck with the five most popular
cupcake flavors. To combat this, following two weeks of operation, Thatcher will be able to gauge which
flavors and designs are most popular with her cupcake truck customers.
By looking at the financial side of the business, if Thatcher could sell 75% of its stock at $3.50 per
cupcake ($1 more than if you were to purchase 2 dozen standard cupcakes) 3 times a week (Friday
Sunday), the truck would net $7087.5 weekly. According to Exhibit 1, it costs $5.58 for 1 dozen standard
cupcakes, which translates to $418.50 in ingredients to stock the truck. Operating a food delivery truck
has multiple expenses ranging from paying staff members and truck maintenance, to fuel and permit
costs. Based on the figures within Table 1, the truck would operate at a $5,793.50 weekly profit.
A firms product does not always need to fit the firms operation strategy. Even though this would be a
make to stock operation, I would argue that by only using the truck on weekends, Thatchers
inefficiencies would be justified. With more people, out and about on the weekends, the truck should
always have a steady flow of demand.
Aside from an increase of sales, the truck will provide Sugar and Spice much needed brand visibility.
Thatchers current clientele base has been built through high profile connections, TV show appearances,
and publications in a handful of food industry newspapers. However, there is no option for new customers
to discover the business unless they search for custom cupcakes online. Hence, a cupcake truck will be
able to attract new customers from around the Los Angeles area who may place custom event orders in
the future.
The Wedding Industry provides room for growth
Alongside using a cupcake truck to increase demand, entering the custom wedding dessert market will
help Thatcher capture 100 batches cupcakes per month she requires. Since every wedding is unique,
Sugar and Spices make to order flow of production is ideal for the industry.
On average, custom wedding cakes sell for $450 in 2017 but can range up to $1,200 in higher end
weddings. Assuming Thatcher is catering towards chic couples who are willing to pay a high price for
premium quality cupcakes in Los Angeles, she can charge $7 per custom cupcake compared to the current
custom price of $4.25. By charging almost double the price of a typical custom cupcake, Thatcher can
afford to sell 17.5 batches less than the 100 batches per month amount and still retain the earnings if she
sold 100 batches cupcakes at the standard price. Table 2 below shows a breakdown of the prices and
assumptions made during this calculation.
Celebrity Endorsements will attract wealthy clientele and preserve brand image
Following a short career in the entertainment industry, Thatcher has been able to utilize her connections
with celebrities and other large public figures. To maximize this competitive advantage, I recommend
Sugar and Spice reach out to a well renowned baked goods celebrity, like Martha Stewart or Rachel Ray,
to endorse the cupcakes. Martha Stewart has over 2.3 million followers on Facebook and over 1.5 million
followers on Instagram. Product placements for celebrities with such followings range from $1,000-
$3,000 dollars a post.
I recommend purchasing one celebrity product placement advertisement every two months for one year to
generate interest but also keep marketing costs relatively low. Research shows, after signing a celebrity,
sales will rise an average of 4% (7 dozen cupcake increase).1 $12,000 dollars may seem like a large
investment for a 4% increase in sales but Sugar and Spice will receive brand exposure on a national level.
This will give Thatcher a national brand presence making future geographic expansions an easier
transition.

The custom dessert industry has seen steady growth over the past few years, as well as a rise in
competition. With over 1000 specialty cupcake shops, one of them being Sparkles, Sugar and Spice must
strategically align its operations with their current competitive advantage of flexibility and mass
customization. By using a cupcake truck, entering the wedding industry and utilizing celebrity
endorsements, not only will Thatcher be able to increase her demand from 138 dozen per month to the
400 dozen per month she needs, but Sugar and Spice will remain competitive and have opportunities for
future growth. Table 3 shows a breakdown of the monthly demand.
Appendicies
Table 1. Revenue/Costs of Cupcake Truck

Weekly Revenue (Friday-Sunday) $7087.5


Weekly Costs $1294
Cost of Ingredients $418
Fuel $250
Maintenance $50
Labor (2 people) $576
Initial Costs $5100
Generator $1500
Vehicle Inspection $100
Truck Wrap $2500
Permits and Licensing $500
Insurance $500

Figures were estimated from http://blog.projectionhub.com/financial-projections-that-prove-whether-a-


food-truck-can-be-profitable/.

Table 2. Wedding Cupcake Financials


Price per Dozen(Custom) $51
Price per Dozen (Wedding) $84

Average Wedding Attendance 150


Average Dozens Ordered per Wedding 13
Average Weddings per Month 10
Average Dozens Ordered per Month from Weddings 130

Average Monthly Wedding Revenue $10,920


Custom Dozens needed to achieve same revenue 214.1176

Table 3. Monthly Demand Source (Dozens)

Current Demand 138


Cupcake Truck 75
Weddings 130
Celebrity Endorsement 7
Demand achieved through natural growth and promotion 50
Total Demand 400
Sources:
1. https://socialmediaweek.org/blog/2015/09/brands-using-celebrity-endorsements/