Be on schedule.Score better.


Description . • • • • Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes



Students are advised to make their work clear and well presented, marks may be reduced for
poor presentation. This includes filling your information on the cover page.
Students must mention question number clearly in their answer.
Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
Learning Outcomes:
Describe the different issues related to environmental scanning, strategy formulation, and strategy
implementation in diversified organizations. (CLO2)
Explain the contribution of functional, business, and corporate strategies to the competitive advantage of
the organization. (CLO3)
Distinguish between different types and levels of strategy and strategy implementation. (CLO4)
Communicate issues, results, and recommendations coherently, and effectively regarding appropriate
strategies for different situations. (CLO6)
Case study (1.5 Marks for each question)- Max 700 words
Read carefully the case No.26 from your textbook entitled “Rocky Mountain Chocolate
Factory Inc. (2008): Recipe for Success” (Authors: Annie Phan and Joyce Vincelette) and
answer the following questions:
1) Briefly discuss the different functional strategies of the corporation (marketing,
operations, distribution, HR, finance, and purchasing).
2) Describe the competitive position of the company. Briefly explain which type of
competitive strategy is used.
3) What is/are the type(s) of the directional strategy (ies) used by the company? Justify.
4) How is the relationship between the company and its customers? What is the company
doing to enhance their satisfaction and sustain the relationship with them? Justify.
Mini-project (1 mark for each question)- Max 400 words
From a real national/international market, choose an example of acquisition or merger between
companies and answer the following questions:
1) Present your chosen companies and explain the reasons for this acquisition/merger.
2) What is the method used by the company to manage the culture of
the acquired/merged company(ies)? Justify.
3) Assess the cultural compatibility of the companies.
4) Is this acquisition/merger successful? Why or why not? Discuss the competitive position
of the company (after acquisition/merger).
Rocky Mountain Chocolate
Factory Inc. (2008):
Annie Phan and Joyce Vincelette
counting his blessings at the success of Rocky Mountain Chocolate Factory Inc. (RMCF)
over the past 27 years. The company had not only allowed him and his wife to raise their children in Durango, Colorado, but had also provided them a more-than-comfortable livelihood.
Crail knew that for his company to continue to grow and be successful, planning for the future was
necessary. How long would growth continue in the gourmet segment of the chocolate industry? Consumer tastes were changing. Competition was heating up, with smaller companies being bought
by corporate giants who were eying the growth in the gourmet segment of the market. RMCF’s
business model had been effective, but should changes be considered? With one last glance at
the beginnings of springtime in the mountains, Crail left for RMCF’s annual planning meeting
and his management team waiting in the board room across the hall.
Rocky Mountain Chocolate Factory (RMCF) was built around a location and a lifestyle. RMCF
began as Frank Crail’s dream to move his family from crowded and bustling Southern California, where he owned CNI Data Processing Inc., a company that produced billing software for the
This case was prepared by Annie Phan, a student, and Professor Joyce Vincelette of the College of New Jersey. This
case cannot be reproduced in any form without the written permission of the copyright holder, Annie Phan and Professor Joyce Vincelete. Reprint permission is solely granted to the publisher, Prentice Hall, for the book Strategic
Management and Business Policy-13th ed. (and the International and electronic versions of this book) by copyright
holders, Annie Phan and Professor Joyce Vincelete. This case was edited for SMBP-13th Edition. Copyright © 2008
by Annie Phan and Professor Joyce Vincelete. The copyright holders are solely responsible for the case content. Any
other publication of the case (translation, any form of electronics or other media), or sold (any form of partnership) to
another publisher will be in violation of copyright laws unless Annie Phan and Professor Joyce Vincelete have granted
an additional written reprint permission.
Industry Six—Specialty Retailing
cable TV industry, to a slower-paced and family-friendly environment. He and his wife chose the
small and quaint Victorian-era town of Durango, Colorado, and began surveying the town’s residents and merchants for business opportunities. “It came down to either a car wash or a
chocolate shop,” recalls the father of seven. “I think I made the right choice.”2
Founded in 1981 by Crail and two partners and incorporated in Colorado in 1982, RMCF
was successful from the start. In addition to the opening of the Durango store, Crail’s partners
opened stores in Breckenridge and Boulder, Colorado. The first franchised stores were opened
in 1982 in Colorado Springs, and Park City, Utah. Crail later told ColoradoBiz that the “typical franchisee was a professional who wanted to set out on a second career in a small, familyoriented town,”3 much as he himself had done. Crail’s two partners left the business in 1983.
Over the years, RMCF fine-tuned its chocolates and its strategy. In February 1986, Crail
took the company public, where it is now found on the NASDAQ under the symbol RMCF.
Chain Store Age pronounced RMCF founder Frank Crail one of its Entrepreneurs of the Year
for 1995. In the late 1990s most of the company-owned retail operations were closed or sold
to franchisees, allowing RMCF to focus on franchising and manufacturing.
In 2008, RMCF was an international franchiser and confectionary manufacturer. The original shop “still stands on Main Street in Durango, with its sights and smells tempting tourists and
locals alike to experience a cornucopia of chocolaty treats before taking part in a scenic ride on
the Durango-Silverton Narrow Gauge Railroad or after a white water rafting trip through town.”4
As of March 31, 2008, there were five company-owned and 329 franchised RMCF stores
operating in 38 states (concentrated primarily on the west coast and in the Sun Belt), Canada,
and the United Arab Emirates,5 with total revenues of $31,878,183.6
Frank Crail believed he had created the recipe that had driven the company to success.
“The number one factor is the quality of the product,” said Crail. “Without that customers
aren’t going to stay around long.”7 “As a testament, Crail proudly points to a page from Money
magazine mounted on his office wall, which features Rocky Mountain Chocolate winning the
coveted 3-heart rating in a blind taste test. The candy maker’s chocolate beat out See’s Candies, Perugina, Teuscher, Godiva, and Fanny May for the richest chocolate, with intense natural flavor.”8 In addition to product quality, taste, value, and variety having been key to
RMCF’s business strategy, the company also believed that its store atmosphere and ambiance,
its brand name recognition, its careful selection of sites for new stores and kiosks, its expertise in the manufacture, merchandising and marketing of chocolate and other candy products,
and its commitment to customer service were keys to the accomplishment of its objective to
build on its position as a leading international franchiser and manufacturer of high quality
chocolate and other confectionary products.9
“A great deal has happened over the years,” recounts Crail with a twinkle in his eye. “I
never imagined that in my search for a place to raise a family things would turn out so sweet!”10
Corporate Governance
The biographical sketches for the executive officers and directors as of April 30, 2008, were
as follows:
Executive Officers
Franklin E. Crail (age 66) co-founded the first RMCF store in May 1981. Since the incorporation of the company in November 1982, he has served as its chief executive officer, president, and
a director. He was elected chairman of the board in March 1986. Prior to founding the company,
Mr. Crail was co-founder and president of CNI Data Processing Inc., a software firm that developed automated billing systems for the cable television industry.
Rocky Mountain Chocolate Factory Inc. (2008)
Bryan J. Merryman (age 47) joined the company in December 1997 as vice president, Finance,
and chief financial officer. Since April 1999, Mr. Merryman has also served the company as chief
operating officer and as a director, and since January 2000 as its treasurer. Prior to joining the
company, Mr. Merryman was a principal in Knightsbridge Holdings Inc. (a leveraged buyout
firm) from January 1997 to December 1997. Mr. Merryman also served as chief financial officer of Super Shops Inc., a retailer and manufacturer of aftermarket auto parts from July 1996 to
November 1997, and was employed for more than eleven years by Deloitte and Touche LLP, most
recently as a senior manager.
Gregory L. Pope (age 41) became senior vice president of Franchise Development and Operations in May 2004. Since joining the company in October 1990, he has served in various positions, including store manager, new store opener, and franchise field consultant. In March 1996
he became director of Franchise Development and Support. In June 2001 he became vice president of Franchise Development, a position he held until he was promoted to his present position.
Edward L. Dudley (age 44) joined the company in January 1997 to spearhead the company’s
newly formed Product Sales Development function as vice president, sales and Marketing, with
the goal of increasing the company’s factory and retail sales. He was promoted to senior vice
president in June 2001. During his 10-year career with Baxter Healthcare Corporation,
Mr. Dudley served in a number of senior marketing and sales management capacities, including
most recently that of director, Distribution Services from March 1996 to January 1997.
William K. Jobson (age 52) joined the company in July 1998 as director of information technology. In June 2001, he was promoted to chief information officer, a position created to enhance
the company’s strategic focus on information and information technology. From 1995 to 1998,
Mr. Jobson worked for ADAC Laboratories in Durango, Colorado, a leading provider of diagnostic imaging and information systems solutions in the healthcare industry, as manager of technical services, and before that, regional manager.
Jay B. Haws (age 58) joined the company in August 1991 as vice president of Creative Services.
Since 1981, Mr. Haws had been closely associated with the company, both as a franchisee and
marketing/graphic design consultant. From 1986 to 1991 he operated two RMCF franchises located in San Francisco. From 1983 to 1989 he served as vice president of Marketing for Image
Group Inc., a marketing communications firm based in Northern California. Concurrently,
Mr. Haws was co-owner of two other RMCF franchises located in Sacramento and Walnut
Creek, California. From 1973 to 1983 he was principal of Jay Haws and Associates, an advertising and graphic design agency.
Virginia M. Perez (age 70) joined the company in June 1996 and has served as the company’s
corporate secretary since February, 1997. From 1992 until joining the company, she was employed by Huettig & Schromm Inc., a property management and development firm in Palo Alto,
California, as executive assistant to the president and owner. Huettig & Schromm developed,
owned, and managed over 1,000,000 square feet of office space in business parks and office
buildings on the San Francisco peninsula. Ms. Perez is a paralegal and has held various administrative positions during her career, including executive assistant to the chairman and owner of
Sunset Magazine & Books Inc.
The company bylaws provided for no fewer than three or more than nine directors. The board
had previously fixed the number of directors at six. Directors were elected for one-year terms.
Crail and Merryman were the only two internal board members. Directors of Rocky Mountain Chocolate Factory who did not also serve as an executive officer were as follows:
Gerald A. Kien (age 75) became a director in August 1995. He retired in 1995 from his positions
as president and chief executive officer of Remote Sensing Technologies Inc., a subsidiary of Envirotest Systems Inc., a company engaged in the development of instrumentation for vehicle
emissions testing located in Tucson, Arizona. Mr. Kien has served as a director and as chairman
Industry Six—Specialty Retailing
of the Executive Committee of Sun Electric Corporation since 1980 and as chairman, president,
and chief executive officer of Sun Electric until retirement in 1993.
Lee N. Mortenson (age 71) has served on the board of directors of the company since 1987.
Mr. Mortenson has been engaged in consulting and investments activities since July 2000, and was
a managing director of Kensington Partners LLC (a private investment firm) from June 2001 to
April 2006. Mr. Mortenson has been president and chief executive officer of Newell Resources
LLC since 2002, providing management consulting and investment services. Mr. Mortenson
served as president, chief operating officer, and a director of Telco Capital Corporation of
Chicago, Illinois, from January 1984 to February 2000. Telco Capital Corporation was principally engaged in the manufacturing and real estate businesses. He was president, chief operating officer, and a director of Sunstates Corporation from December 1990 to February 2000.
Sunstates Corporation was a company primarily engaged in real estate development and manufacturing. Mr. Mortenson was a director of Alba-Waldensian Inc. from 1984 to July 1999, and
served as its president, chief executive officer, and director from February 1997 to July 1999.
Alba was principally engaged in the manufacturing of apparel and medical products.
Fred M. Trainor (age 68) has served as a director of the company since August 1992.
Mr. Trainor is the founder, and since 1984 has served as chief executive officer and president of
AVCOR Health Care Products Inc., Fort Worth, Texas (a manufacturer and marketer of specialty dressings products). Prior to founding AVCOR Health Care Products Inc. in 1984,
Mr. Trainor was a founder, chief executive officer, and president of Tecnol Inc. of Fort Worth,
Texas (also a company involved with the health care industry). Before founding Tecnol Inc.,
Mr. Trainor was with American Hospital Supply Corporation (AHSC) for 13 years in a number
of management capacities.
Clyde W. Engle (age 64) has served as a director of the company since January 2000.
Mr. Engle is chairman of the board of directors and chief executive officer of sunstates corporation and chairman of the board of directors., president and chief executive officer of Lincolnwood Bancorp, Inc. (formerly known as GSC Enterprises, Inc.), a one-bank holding
company, and chairman of the board and chief executive officer of its subsidiary, Bank of
The Board of Directors had determined that Klein, Mortensen, Trainor, and Engle were “independent directors” under Nasdaq Rule 4200. Mortenson, Trainor, and Kien served on the Auditing Committee, Compensation Committee, and the Nominating Committee of the
company’s board of directors.12
Directors of RMCF did not receive any compensation for serving on the board. Directors
received compensation for serving on board committees, chairing committees, and participating in meetings. Directors who are not also officers or employees of the company were entitled to receive stock option awards.13
As of June 28, 2007, there were approximately 6,080,283 shares of common stock
outstanding and eligible to vote at the annual meeting. For each share of common stock
held, a shareholder was entitled to one vote on all matters voted on at the annual meeting
except the election of directors. Shareholders had cumulative voting rights in the election
of directors.14
Store Concept
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
Rocky Mountain Chocolate Factory Inc. (2008)
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.
Of course, everyone gets a sample!”16
RMCF stores opened prior to fiscal 2002 had a distinctive country Victorian décor. In fiscal 2002, the company launched its revised store concept, intended specifically for high foot
traffic regional shopping malls. This new store concept featured a sleeker and more contemporary design that continued to prominently feature in-store cooking while providing a more
up-to-date backdrop for newly redesigned upscale packaging and displays. The company required that all new stores incorporate the revised store design and also required that key elements of the revised concept be incorporated into existing store designs upon renewal of
franchise agreements or transfers in store ownership. Through March 31, 2008, 197 stores incorporating the new design had been opened.
The average store size was approximately 1,000 square feet, approximately 650 square
feet of which was selling space. Most stores were open seven days a week. Typical hours were
10 a.m. to 9 p.m., Monday through Saturday, and 12 noon to 6 p.m. on Sundays. Store hours
in tourist areas may have varied depending upon the tourist season.
RMCF believed that careful selection of store sites was critical to its success, and it
considered a number of factors in identifying suitable sites, including tenant mix, visibility, attractiveness, accessibility, level of foot traffic, and occupancy costs. The company believed that the experience of its management team in evaluating potential sites was one of
its competitive strengths, and all final site selection had to be approved by senior management. RMCF had established business relationships with most of the major regional and
factory outlet center developers in the United States and believed these relationships provided it with the opportunity to take advantage of attractive sites in new and existing real
estate environments.
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 entertainmentoriented 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.
Outlet Centers
As of February 29, 2008, there were approximately 110 factory outlet centers in the United
States, and there were RMCF stores in approximately 67 (up from 65 in 2007) of these centers in more than 25 states.
Tourist Areas, Street Fronts, and Other Entertainment-Oriented
Shopping Centers
As of February 29, 2008, there were approximately 40 (down from 45 in 2007) RMCF stores
in locations considered to be tourist areas, including Fisherman’s Wharf in San Francisco, and
the Riverwalk in San Antonio, Texas. RMCF believed that tourist areas offer high levels of
foot traffic, favorable customer spending characteristics, and increase its visibility and name
recognition. The company believed that significant opportunities existed to expand into additional tourist areas.
Industry Six—Specialty Retailing
Regional Centers
There were approximately 1,400 regional centers in the United States, and as of February 29,
2008, there were RMCF stores in approximately 95 (down from 100 in 2007) of these centers, including locations in the Mall of America in Bloomington, Minnesota; and Fort Collins, Colorado.
Although often providing favorable levels of foot traffic, regional malls typically involved more
expensive rent structures and competing food and beverage concepts. The company’s new store
concept was designed to capitalize on the potential of the regional center environment.
RMCF believed there were a number of other environments that had the characteristics necessary for the successful operation of successful stores, such as airports and sports arenas. In
February 2008, twelve (up from nine in 2007) franchised RMCF stores existed at airport locations:
two at both Denver and Atlanta international airports, one each at Charlotte, Minneapolis, Salt
Lake City, and Dallas/Fort Worth international airports, one at Phoenix Sky Harbor Airport, and
three in Canadian airports, including Edmonton, Toronto Pearson, and Vancouver international
On July 20, 2007, RMCF entered into an exclusive Airport Franchise Development
Agreement (which expires on July 20, 2009) with The Grove Inc. The company believed this
agreement would accelerate the opening of stores in high volume airport locations throughout
the United States. The Grove Inc. was a privately owned retailer of natural snacks and other
branded food products and, at the time of the agreement, owned and operated 65 food and beverage units, including retail stores in 13 airports throughout the United States. Under the terms
of this agreement, The Grove Inc. had the exclusive right to open RMCF stores in all airports
in the United States where there were no stores currently operating or under development. The
Grove Inc., as of March 31, 2008, operated three stores under this agreement.
Kiosk Concept
In fiscal 2002, RMCF opened its first full-service retail kiosk to display and sell the company’s products. As of March 31, 2008, there were 18 (down from 24 in 2007) kiosks in operation. Kiosks ranged from 150 to 250 square feet and incorporated the company’s
trademark cooking area where popular confections are prepared in front of customers. The
kiosk also included the company’s core product and gifting lines in order to provide the customer with a full RMCF experience.
RMCF believed kiosks were a vehicle for retail environments where real estate is unavailable or building costs and/or rent factors do not meet the company’s financial criteria. The company also believed the kiosk concept enhanced its franchise opportunities by providing more
flexibility in support of existing franchisees’ expansion programs and allowed new franchisees
that otherwise would not qualify for a store location, an opportunity to join the RMCF system.
Franchising Program
The RMCF franchising philosophy was one of service and commitment to its franchise system, and the company continuously sought to improve its franchise support services. The
company’s franchise concept had consistently been rated as an outstanding franchise opportunity and in January 2008, RMCF was rated the number one franchise opportunity in the
candy category by Entrepreneur magazine. As of March 31, 2008, there were 329 franchised
stores in the RMCF system.
Rocky Mountain Chocolate Factory Inc. (2008)
RMCF believed the visibility of its stores and the high foot traffic at many of its locations
had generated strong name recognition of and demand for its providers and franchises. RMCF
stores had historically been concentrated in the western and Rocky Mountain regions of the
United States, but new stores were gradually being opened in the eastern half of the country.
RMCF’s continued growth and success was dependent on both its ability to obtain suitable sites at reasonable occupancy costs for both franchised stores and kiosks and its ability to
attract, retain, and contract with qualified franchisees who were devoted to promoting and developing the RMCF store concept, reputation, and product quality. RMCF had established criteria to evaluate prospective franchisees, which included the applicant’s net worth and
liquidity, together with an assessment of work ethic and personality compatibility with the
company’s operating philosophy. The majority of new franchises were awarded to persons referred by existing franchisees, to interested consumers who had visited RMCF stores, and to
existing franchisees. The company also advertised for new franchisees in national and regional
newspapers as suitable store locations were recognized.
Prior to store opening, each domestic franchise owner/operator and each store manager for
a domestic franchisee was required to complete a seven-day comprehensive training program in
store operations and management at its training center in Durango, Colorado, which included a
full-sized replica of a properly configured and merchandised RMCF store. Topics covered in the
training course included 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 was based on standard
operating policies and procedures contained in an operations manual provided to all franchisees,
which the franchisee was required to follow by terms of the franchise agreement. Additionally,
trainees were provided with a complete orientation to company operations by working in key factory operational areas and by meeting with members of the senior management.
Ongoing support was provided to franchisees through communications and regular site
visits by field consultants who audited performance, provided advice, and ensured that operations were running smoothly, effectively, and according to the standards set by the company.
The franchisee agreement required compliance with RMCF’s procedures of operation and
food quality specifications, permitted audits and inspections by the company, and required franchisees to remodel stores to conform to established standards. RMCF had the right to terminate any
franchise agreement for non-compliance with operating standards. Franchisees were generally
granted exclusive territory with respect to the operation of RMCF stores only in the immediate
vicinity of their stores. Products sold at the stores and ingredients used in the preparation of products approved for on-site preparation were required to be purchased from the company or from approved suppliers. Franchise agreements could be terminated upon the failure of the franchisee to
comply with the conditions of the agreement or upon the occurrence of certain events, which in the
judgment of the company was likely to adversely affect the RMCF system. The agreements prohibited the transfer or assignment of any interest in the franchise without the prior written consent
of the company and also gave RMCF the right of first refusal to purchase any interest in a franchise.
The term of each RMCF franchise agreement was 10 years, and franchisees had the right
to renew for one additional 10-year term. The company did not provide prospective franchisees with financing for their stores, but had developed relationships with sources of franchisee financing to which it would refer franchisees.
In fiscal 1992, the company entered into a franchise development agreement covering
Canada with Immaculate Confections Ltd. of Vancouver, BC. Under this agreement Immaculate Confections had exclusive rights to franchise and operate RMCF stores in Canada.
Immaculate Confections, as of March 31, 2008, operated 38 stores under this agreement.
In fiscal 2000, RMCF entered into a franchise development agreement covering the Gulf
Cooperation Council States of United Arab Emirates, Qatar, Bahrain, Saudi Arabia, Kuwait,
and Oman with Al Muhairy Group of United Arab Emirates. This agreement gave the
Industry Six—Specialty Retailing
Al Muhairy Group the exclusive right to franchise and operate RMCF stores in the Gulf Cooperation Council States. Al Muhairy Group, as of March 31, 2008, operated three stores under this agreement.
Frank Crail gives credit for the success of RMCF to the more than 200 independent franchise operators that bought into his concept. “They are the ones that really make this company
a success,”18 he remarked.
Company-Owned Stores
As of March 31, 2008, there were five company-owned RMCF stores. These stores provided
a training ground for company-owned store personnel and district managers and a controllable
testing ground for new products and promotions, operating, and training methods and merchandising techniques, which might then be incorporated into the franchise store operations.
The cornerstone of RMCF’s growth strategy was to aggressively pursue unit growth opportunities in locations where the company had traditionally been successful, to pursue new
and developing real estate environments for franchisees that appeared 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 centers) generated sufficient revenue to support a successful RMCF location.19
Exhibit 1 shows the total number of RMCF stores in operation as well as those sold but
not open as of February 29, 2008.
Company-owned and franchised stores were subject to licensing and regulation by the
health, sanitation, safety, building, and fire agencies in the state or municipality where they
were located as well as various federal agencies that regulate the manufacturing, packaging,
and distribution of food products. RMCF was also subject to regulation by the Federal Trade
Commission and must comply with state laws governing the fair treatment of franchisees including the offer, sale, and termination of franchises and the refusal to renew franchises.20
RMCF typically produced approximately 300 chocolate candies and other confectionery products at the company’s manufacturing facility, using premium ingredients and proprietary
recipes developed primarily by its Master Candy Maker. These products included many varieties of nut clusters, caramels, butter creams, mints, and truffles. During the Christmas, Easter,
and Valentine’s Day holiday seasons, the company may have made as many as 100 additional
items, including many candies offered in packages specially designed for the holidays. RMCF
continually strove to create and offer new confectionery products in order to maintain the excitement and appeal of its products and to encourage repeat business. RMCF developed a new
line of sugar-free and no-sugar-added candies. According to the company, “results have been
‘spectacular,’ filling a need for those with special dietary requirements.”22
Rocky Mountain
Chocolate Factory
Stores as of
February 29, 2008
Sold, Not Yet Open
Company-Owned Stores
Franchise Stores—Domestic Stores
Franchise Stores—Domestic Kiosks
Franchised Stores—International
SOURCE: Rocky Mountain Chocolate Factory, Inc. 2008 Form 10-K, p. 34.
Rocky Mountain Chocolate Factory Inc. (2008)
In addition to RMCF’s traditional chocolates and candies, special treats were prepared in
each store. Besides the caramel-covered apples (some stores feature over 30 varieties), fudge
(more than fifteen varieties) was made fresh every day in each store using a marble slab to
literally suck the heat out of the confection while the cook shaped it with paddles into a giant 22-pound “loaf.” A variety of fruits, nuts, pretzels, and cookies were also dipped by hand
in pots of melted milk, dark, and even white chocolate.23
One of RMCF’s trademarks, big, chunky chocolate concoctions, were created somewhat
by accident. According to Crail, “In the early days, my partners and I did not know how to
make chocolate and had to literally learn on a ping pong table.” Crail recalls that “from the
start we made the candy centers too big, not compensating for the added size and weight when
coating the pieces in chocolate. And if they didn’t look quite right we would dip them again.
But the huge pieces instantly caught on and have remained the RMCF benchmark ever
since.”24 One of these large-sized specialties was a king-sized peanut butter cup dubbed the
Bucket™. Another signature piece, the Bear™ (turtles), was a paw-sized concoction of chewy
caramel, roasted nuts and a heavy coating of chocolate. The best-selling items were caramel
apples, followed by Bears.25
All products were produced consistent with the company’s philosophy of using only the
finest, highest quality ingredients with no artificial preservatives to achieve its marketing
motto of “the Peak of Perfection in Handmade Chocolates®.”26
RMCF believed that, on average, approximately 40 percent of the revenues of RMCF
stores were generated by products manufactured at the company’s factory, 50% by products
made in each store using company recipes and ingredients purchased from the company or approved suppliers, and the remaining 10% by products such as ice cream, coffee, and other sundries purchased from approved suppliers. Franchisees sales of products manufactured by the
company’s factory generated higher revenue than sales of store-made or other products. A significant decrease in the volume of products franchisees purchase from the company would adversely affect total revenue and the results of operations. Such a decrease could result from
franchisees decisions to sell more store-made products or products purchased from third-party
Chocolate candies manufactured by the company were sold at prices ranging from
$14.90 to $24.00 per pound, with an average price of $18.30 per pound. Franchisees were able
to set their own retail prices, though the company recommended prices for all of its products.28
RMCF developed special packaging for the Christmas, Valentine’s Day, and Easter holidays
and customers could have their purchases packaged in decorative boxes and fancy tins
throughout the year.
In 2002, RMCF completed a project to completely redesign the packaging featured in its retail stores. The new packaging was designed to be more contemporary and capture and convey
the freshness, fun, and excitement of the RMCF retail store experience. Sleek, new copper gift
boxes were designed to reinforce the association with copper cooking kettles. And the new logo
was meant to represent swirling chocolate.30 This new line of packaging won three National Paperbox Association Gold Awards in 2002, representing the association’s highest honors.31
RMCF sought low-cost, high-return publicity opportunities through participation in local and
regional events, sponsorships, and charitable causes. The company had not historically and
did not intend to engage in national advertising. RMCF focused primarily on local in-store
marketing and promotional efforts by providing customizable marketing materials, including
Industry Six—Specialty Retailing
advertisements, coupons, flyers, and mail-order catalogs generated by its in-house Creative
Services Department, and point-of-purchase materials. The Creative Services Department
worked directly with franchisees to implement local store marketing programs. To cover its
corporate marketing expenses, each franchised store paid a monthly marketing and promotions fee of 1 percent of its monthly gross sales.33
The trade name Rocky Mountain Chocolate Factory®, the phrases, The Peak of Perfection
in Handmade Chocolates, America’s Chocolatier®, The World’s Chocolatier®, as well as other
trademarks, service marks, symbols, slogans, emblems, logos, and designs used in the Rocky
Mountain Chocolate factory system, were proprietary rights of the company. The registration
for the trademark “Rocky Mountain Chocolate Factory” had been granted in the United States
and Canada. Applications had been filed to register the Rocky Mountain Chocolate Factory
trademark in certain foreign countries.34 The company had not attempted to obtain patent protection for the proprietary recipes developed by the company’s Master Candy Maker and was
relying upon its ability to maintain confidentiality of those recipes.35
Operations and Distribution
RMCF sought to ensure the freshness of products sold in its stores with frequent shipments to
distribution outlets from its 53,000-square-foot manufacturing facility in Durango, Colorado.
Franchisees were encouraged to order from the company only the quantities they could reasonably expect to sell within two to four weeks because most stores did not have storage space for
extra inventory.
RMCF believed that it should control the manufacturing of its own products in order to
better maintain its high product quality standards, offer unique proprietary products, manage
costs, control production and shipment schedules, and pursue new or underutilized distribution channels. The company believed its manufacturing expertise and reputation for quality
had facilitated the sale of selected products through new distribution channels, including
wholesaling, fundraising, corporate sales, mail order, and Internet sales.37
RMCF’s manufacturing process primarily involved cooking or preparing candy centers, including nuts, caramel, peanut butter, creams and jellies, and then coating them with chocolate
or other toppings. All of these processes were conducted in carefully controlled temperature
ranges, employing strict quality control procedures at every stage of the manufacturing process.
RMCF used a combination of manual and automated processes at its factory. Although RMCF
believed that it was preferable to perform certain manufacturing processes, such as dipping
some large pieces by hand, automation increased the speed and efficiency of the manufacturing
process. The company had from time to time automated processes formerly performed by hand
where it had become cost-effective to do so without compromising product quality or appearance. Efforts in the last several years had included the purchase of additional automated factory
equipment, implementation of a comprehensive advanced planning and scheduling system, and
installation of enhanced point-of-sales systems in all of its company-owned and 182 of its franchised stores through March 31, 2008. These measures had improved the company’s ability to
deliver its products to the stores safely, quickly, and cost effectively.
Chocolate manufacturing had been a similar process for all companies within the
confectionary/chocolate industry up until 2005. In 2005, new chocolate manufacturing
technology was introduced. This new manufacturing process, called NETZSCH’s ChocoEasy™,
enabled chocolate makers of any size to cost-effectively manufacture all varieties of chocolate
from scratch. For the first time, smaller chocolate companies were no longer dependant on
large chocolate manufacturers and were now free to create their own chocolate recipes and to
develop their own proprietary chocolate brands.38
Rocky Mountain Chocolate Factory Inc. (2008)
During fiscal 2008, the RMCF’s manufacturing facility produced approximately
2.84 million pounds of chocolate candies, an increase of 4% from the approximately 2.73 million pounds produced in fiscal 2007. During fiscal 2008 the company conducted a study of
factory capacity. As a result of this study, RMCF believed its factory had the capacity to produce approximately 5.3 million pounds per year. In January 1998, the company acquired a
two-acre parcel adjacent to its factory to ensure the availability of adequate space to expand
the factory as volume demands.39
RMCF maintained the taste and quality of its chocolate candies by using only the finest chocolate and other ingredients. The principal ingredients used by RMCF are chocolate, nuts, sugar,
corn syrup, cream, and butter. Chocolate was purchased from the Guittard Chocolate company,
known for 130 years as providing the finest, most intensely flavored chocolate.41 The factory
received shipments of ingredients daily. To ensure the consistency of its products, ingredients
were bought from a limited number of reliable suppliers. The company had one or more alternative sources for all essential ingredients. RMCF also purchased small amounts of finished
candy from third parties on a private-label basis for sale in its stores.
Several of the principal ingredients used in RMCF’s candies, including chocolate and nuts,
were subject to significant price fluctuations. Although cocoa beans, the primary raw material
used in the production of chocolate, were grown commercially in Africa, Brazil, and several other
countries around the world, cocoa beans were traded in the commodities market, and their supply
and price were therefore subject to volatility. RMCF believed its principal chocolate supplier purchased most of its beans at negotiated prices from African growers, often at a premium to commodity prices. RMCF purchased most of its nut meats from domestic suppliers who procured their
products from growers around the world. Although the price of chocolate and nut meats had been
relatively stable in recent years, the supply and price of nut meats and cocoa beans, and, in turn,
chocolate, were affected by many factors, including monetary fluctuations and economic, political, and weather conditions in countries in which both nut meats and cocoa beans were grown.
The Ivory Coast (Cote d’Ivoire) was responsible for producing 40 percent of the world’s
cocoa beans that are necessary for the manufacturing of chocolate.42 In late 2006, there was a
five-day strike in which laborers refused to enter the factories because of unbearable working
conditions. These strikes led to an increase of 20 percent in the price of chocolate for most
companies within the industry.43 Forty-seven percent of the total U.S. imports of cocoa beans
came from the Ivory Coast.
RMCF did not engage in commodity futures trading or hedging activities. In order to assure a continuous supply of chocolate and certain nuts, the company entered into purchase contracts of between six to eighteen months for these products. These contracts permitted the
company to purchase the specified commodity at a fixed price on an as-needed basis during
the term of the contract.
Trucking Operations
Unable to find a suitable shipper, RMCF built its own fleet of brown and bronze semis.44 In
2008 RMCF operated eight refrigerated trucks and shipped a substantial portion of its products from its factory on its own fleet. The company’s trucking operations enabled it to deliver
its products to the stores quickly and cost-effectively. In addition, the company back-hauled
its own ingredients and supplies, as well as product from third parties to fill available space,
on return trips as a basis for increasing trucking program economics.45 The company’s trucking operations are subject to various federal, state, and Canadian provincial regulations.46
Industry Six—Specialty Retailing
Human Resources
On February 29, 2008, RMCF employed approximately 190 people. Most employees, with
the exception of store, factory, and corporate management, were paid on an hourly basis.
RMCF also employed some people on a temporary basis during peak periods of store and factory operations. The company sought to assure that participatory management processes, mutual respect and professionalism, and high performance expectations for the employee existed
throughout the organization.
RMCF believed that it provided working conditions, wages, and benefits that compared
favorably with those of its competitors. The company’s employees were not covered by a collective bargaining agreement. The company considered its employee relations to be good.
Chocolate and Confectionary Industry
While people enjoy chocolate across cultures, there were certain cultures that value chocolate sweets more than others. Per capita consumption of confectionary tended to be the highest in the established markets of Western Europe and North America, although these were
also the most mature.48
The sale of chocolate and confectionary products was affected by changes in consumer
tastes and eating habits, including views regarding the consumption of chocolate. In addition,
numerous other factors such as economic conditions, demographic trends, traffic patterns, and
weather conditions could influence the sale of confectionary products. Consumer confidence,
recessionary and inflationary trends, equity market levels, consumer credit availability, interest rates, consumer disposable income and spending levels, energy prices, job growth, and unemployment rates could impact the volume of customer traffic and level of chocolate and
confectionary sales.
According to the National Confectioners Association, the total U.S. candy market approximated $29.1 billion of retail sales in 2007, up from $27.9 in 2005, with chocolate generating
sales of approximately $16.3 billion up from $15.7 billion in 2005. Per capita consumption of
chocolate in 2006 was approximately 14 pounds per person per year nationally, an increase of
1% when compared to 2005, according to Department of Commerce figures.49 The average
U.S. consumer spent $93.92 on confectionary products in 2006, $52.16 on chocolate.50
Exhibit 2 shows 2007 U.S. confectionary market sales.
In 2007 the United States was the strongest market for chocolate. According to a 2004 survey, the U.S. chocolate market was far from being saturated, and considerable opportunities for
growth remained, particularly in the gourmet, higher-priced premium segment.51 Consumers in
The 2007 U.S.
$(in billions)
% change
Retail Sales
Manufacturer Shipments
Domestic Manufacturer Shipments
Profit margin is approximately 35% for the confectionary category.
SOURCE: National Confectionary Association 2007 Industry Review on the United States Confectionary Market,
January 2008,
Rocky Mountain Chocolate Factory Inc. (2008)
the United States were shifting away from mass-produced chocolates, of the type traditionally
manufactured by Hershey Foods and Mars Inc., to more expensive gourmet varieties free from
chemicals and preservatives. Hershey and Mars had recognized the trend and had been increasing their interest in premium brands. Some industry observers have predicted that by 2011, premium chocolate will account for 25% of the U.S. market, generating sales of $4.5 billion.52
The European chocolate market had also remained lucrative for manufacturers, although
there had been some degree of slowdown over the past five years. Average annual per capita
chocolate consumption was cited as being about 8 kg in Europe, but this varied considerably
country by country.53 Chocolate was also used for other purposes (baking, snacks, etc.) that
differed considerably across ethnic, social, regional, or religious subcultures. Exhibit 3 shows
the leading countries for per capita consumption of chocolate and confectionary.
The leading manufacturers in the European market were Mars, Nestle, Cadbury, Ferrero,
and Lindt & Sprungli. These companies saw a bright future in Europe, particularly the markets of the newer members of the EU where consumers had significantly increased their
chocolate consumption since 2004. Some manufacturers also believed that Russia was a key
market for European growth because its rising affluence had driven a demand for premium
chocolate products.54
Confectionary manufacturers were also looking to break into new markets such as China
and India because of their growing affluence. These markets were dominated by traditional
sweets, but there was a growing demand for Western goods, including chocolate, with chocolate consumption increasing at a rate of 25% a year in the Asia-Pacific region and 30% in
China.55 Many large chocolate and confectionary companies had undertaken marketing campaigns in order to lure customers in China, India, and Japan away from traditional sweets to
chocolate.56 Exhibit 4 shows regional cocoa consumption.
Per Capita
Consumption of
Confectionary in
Leading Countries in
2002 (in kilograms)
SOURCE: Leatherheadfood International, The Global Confectionary Market—Trends and Innovations.
Regional Cocoa
Asia and Oceania
Percentage of global total
SOURCE: Kermani, Faiz, Chocolate Challenges, Report Buyer, 2007, p. 4.
Industry Six—Specialty Retailing
Consumer Tastes and Trends
The growth in the chocolate market was heavily dependent on manufacturers satisfying consumer tastes and being aware of consumer trends in each market in which they operated. In
established markets, pressure was coming from consumers for lower-fat healthier snacks and
higher quality chocolate. In addition, consumers had been showing an interest in the healthrelated benefits of chocolate. In emerging markets, chocolate manufacturers have had to compete with traditional confectionary products. In addition, consumers were increasingly
becoming concerned with the exploitation of African workers and many were choosing not
to do business with “unethical” organizations that were not engaged in fair trade practices.
Gourmet Chocolate and Organic Chocolate
According to industry expert Michelle Moran, “Gourmet chocolate is expected to experience
delicious growth over the next four years. Indeed, it is expected to become a nearly $1.8 billion market. According to market analysts and manufacturers, consumers are seeking betterquality chocolate at a variety of market levels. Further evidence of this trend is the recent
acquisitions of small artisan chocolatiers by large manufacturing powerhouses.”57 Customers
have been increasingly willing to pay higher prices for chocolates they felt were healthier;
products made with quality ingredients and free from chemicals and preservatives.
In addition to growth in the gourmet segment of the chocolate industry, organic chocolate
sales in the United States grew 65% to $120 million in 2006 according to Massachusetts-based
Organic Trade Association, with similar growth forecasted for 2007.58
Health Consciousness of Consumers
Throughout history many cultures had believed in the medicinal properties of cocoa. Most
historians agree that chocolate was first consumed in Central America and some evidence
suggest its use by the Mayan civilization as early 500 BCE.59 Following the Spanish conquest
of Mexico, chocolate found its way to Europe in the 1500s. A number of the original European chocolate manufacturers were apothecaries (early chemists) who wanted to take advantage of the reported medicinal properties of cocoa. Dark chocolate is again being touted and
researched for its health benefits. Studies have been reported in medical and scientific journals linking chocolate derived antioxidant flavonols and other compounds with the reduction
in the risk of dementia, diabetes, heart-attacks, and strokes. In other studies, dark chocolate
has shown health benefits such as decreased blood pressure, lower cholesterol levels, and improved sugar metabolism. Much additional research remains to be done before these health
benefits can be confirmed.
According to the National Confectioners Association, dark-chocolate sales were up 50% in
2007.60 Between 2002 and 2006, Hershey reported an 11.2% increase in the sale of dark chocolate. As a result, Hershey had been concentrating almost half of its business in this area.61 Mars
Inc. was thought to be conducting research trying to substantiate the health benefits of chocolate
and had discussed partnerships with pharmaceutical companies to develop products from cocoaderived compounds.62 Other manufactures had been experimenting with low-fat, sugar-free
products and chocolates fortified with minerals, vitamins, antioxidants, and probiotics.
Ethical and Fair Trade Chocolate
Not only were consumers more health conscious and visibly consuming darker and more premium chocolates products, they were also showing concern for the exploitation of cocoa
Rocky Mountain Chocolate Factory Inc. (2008)
farmers in Western Africa, particularly the use of child labor and the prices that cocoa farmers were able to charge for their crop.
Many consumers were choosing to support organizations and purchase products from companies that supported both “ethical chocolates” as well as fair trade practices. These companies
had reported rising demand for their products as consumer interest in fair trade had grown.63
The global market for chocolate was highly competitive. With consumer attitudes changing
and new markets offering opportunities for growth, chocolate manufacturers faced a number
of challenges in keeping ahead of their rivals.
RMCF and its franchisees competed with numerous businesses that offered confectionery products, from large, publically held, global conglomerates to small, private, local
businesses. Many of the large competitors had greater name recognition, both domestically
and globally, and greater financial, marketing, and other resources than RMCF. In addition,
there was intense competition among retailers for prime locations, store personnel, and qualified franchisees.
Large confectionary companies that had traditionally concentrated on mass-produced candies, sought to make inroads into the premium market. For example, in 2005 Hershey Foods acquired two medium-sized gourmet chocolate companies, Scharffen Berger and Joseph Schmidt,
for between $46.6 million and $61.1 million.64 Mars Inc. established its catalog/retail subsidiary, Ethel M Chocolates, in 1981 when billionaire candy maker Forrest Mars developed a
chain of chocolate stores in the western U.S., specializing in liquor-filled candies. In 2005 Ethel
M’s launched an even more premium line of chocolates called ethel’s. Ethel’s chocolates were
available on-line and could be purchased at upscale department stores, including Nieman Marcus, Macy’s, and Marshall Fields.65 Also in 2005, Ethel’s Chocolate Lounge was created as a
place where sweets lovers could linger on sofas and order hot cocoa and chocolate fondue.
Principal competitors of RMCF included Alpine Confections Inc., Godiva Chocolatier
Inc., See’s Candies Inc., Chocoladefabriken Lindt & Sprungli AG, Fannie May (a wholly
owned subsidiary of Alpine Confections), and Ethel M’s/ethel’s. These companies not only
manufactured chocolate but also had their own retail outlets. Exhibit 5 shows the number of
stores in operation for each of these competitors in 2006.
Godiva Chocolatier, the Belgian chocolate maker, with annual sales of approximately
$500 million, was one of the world’s leading premium chocolate businesses. Godiva sold its
products through company-owned and franchised retail stores, and wholesale distribution outlets, including specialty retailers and finer department stores and on the Internet. In January
2008, Campbell Soup company announced that it agreed to sell its Godiva Chocolatier unit to
Yildiz Holdings of Turkey for $850 million. Godiva was to become part of the Ulker Group,
which is owned by Yildiz. Ulker is the largest consumer goods company in the Turkish food
Chocoladefabriken Lindt & Sprungli AG and its subsidiaries offered products under multiple brands names, including Lindt, Ghirardelli, Caffarel, Hofbauer, and Kufferle. The company was founded in 1845 and was based in Kilchberg, Switzerland, and had six production
sites in Europe, two in the United States, and distribution sites and sales companies on four
continents.67 Lindt & Sprungli was a recognized leader in the market for premium chocolate,
and offered a large selection of products in more than 80 countries around the world.68
See’s Candies, Ethel M’s/ethel’s, and Alpine Confections Inc. were privately held companies. Alpine Confections Inc. was based in Alpine, Utah, and had sales of approximately
$125 million in 2005. Alpine owned a number of candy companies, including Maxfield Candy
company, Kencraft Inc., and Harry London Candies Inc. Alpine acquired the Fanny Farmer
Industry Six—Specialty Retailing
Chocolate Retailers:
Number of Stores in
Operation 2006
Fanny May
Ethel M’s
SOURCE: Prepared by R.J. Falkner & Company Inc. on the company profile report for Rocky
Mountain Chocolate Factory, November 15, 2006.
and Fannie May brands from bankrupt Archibald Candy Corporation in 2004. The company
also produced confections under license for Hallmark and Mrs. Fields. Alpine’s Canadian
brands included Dolce d’Or and Bottecelli, produced in British Columbia.69
See’s Candies was founded in 1921 and headquartered in San Francisco, and had manufacturing facilities in both Los Angeles and San Francisco. See’s Candies was purchased by
Berkshire Hathaway Inc. (Warren Buffett) in 1972. The company manufactured over 100 varieties of candies and had over 200 retail candy shops throughout the western United States.70
A relatively new competitor founded in Oregon in 1993, acquired by Wayne Zink and
Randy Deer in 2005, and moved to Indianapolis, Indiana, was the Endangered Species Chocolate Company. The company was the number-one seller of organic chocolate treats, with annual sales of $16 million in 2007. Its products were stocked at natural-foods stores such as
Wild Oats and Whole Foods. Endangered Species Chocolate Co. was committed to making organic and healthy products that were easy on the environment, made with fair-traded ingredients, and with sustainable practices. One of Endangered Species main rivals, Oregon-based
Dagoba Chocolate, sold out to Hershey in 2007.71
Financial Position
In 2007 RMCF was ranked number 60 in Forbes annual listing of America’s 200 Best Small
Companies (up from number 124 in 2006). The list was compiled from publically traded
companies with sales between $5 million and $750 million. Qualifying candidates were
ranked according to return on equity, as well as sustained sales and earnings growth over
12-month and five-year periods.73 Exhibits 6 and 7 show the income statements and balance sheets for RMCF for the fiscal years ended 2004 through 2008.
RMCF’s revenues were derived from three principal sources: 1) sales to franchisees
and others of chocolates and other confectionery products manufactured by the company
(75-72-69-68%); 2) sales at company-owned stores of chocolates and other confectionery
products including product manufactured by the company (5-8-11-11%); and 3) the collection of initial franchise fees and royalties from franchisees (20-20-20-21%). The figures
Rocky Mountain Chocolate Factory Inc. (2008)
Balance Sheets: Rocky Mountain Chocolate Factory Inc.
Year ending February 28/29
Deferred income taxes
Other current assets
Total current assets
Property and Equipment, Net
Current Assets
Cash & cash equivalents
Accounts receivable, less allowance for
doubtful accounts of $114,271, $187,519,
$46,929, $80,641, and $73,630 respectively
Notes receivable
Refundable income taxes
Inventories, less reserve for slow moving
inventory of $194,719, $147,700, $61,032,
$127,345, and $73,269 respectively
Other Assets
Notes receivable, gross
Less: Allowance
Notes receivable, net
Goodwill, net
Intangible assets, net
Other assets
Total other assets
Total Assets
134, 597
Liabilities and Stockholders’ Equity
Current Liabilities
Line of Credit
Current maturities of long-term debt
Accounts payable
Accrued salaries & wages
Other accrued expenses
Dividends payable
Deferred income
Total current liabilities
Long-term debt, less current maturities of
$126,000 and $1,080,400 respectively
Deferred Income Taxes
Stockholders’ Equity
Common stock, $.03 par value; 100,000,000
shares authorized; 100,000,000, 5,980,919,
6,418,905, 4,602,135 and 4,486,461 shares
issued and outstanding, respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
Total stockholders’ equity
Total liabilities and stockholders’ equity
$16,147,460 $18,456,169 $19,057,481 $19,247,891 $17,967,245
SOURCE: Rocky Mountain Chocolate Factory Inc., 2008 form 10-K, p. 30 and 2005 Form 10-K, p. 30.
Industry Six—Specialty Retailing
Statements of Income: Rocky Mountain Chocolate Factory Inc.
Year Ending February 28/29
Franchise & royalty fees
Total revenues
Costs and Expenses
Cost of sales, exclusive of depreciation and
amortization expense of $389,273, $412,546,
$381,141, and $359,633, respectively
Franchise costs
Sales & marketing expenses
General & administrative expenses
Retail operating expenses
Depreciation & amortization
$25,558,198 $25,335,739 $22,343,209 $19,380,861 $16,668,210
31,878,183 31,573,333 28,073,612 24,523,619 21,132,828
Total costs & expenses
Operating Income (loss)
Other Income (Expense)
Interest expense
Interest income
Total other income (expense), net
Income before Income Taxes
Income Tax Expense
Basic Earnings per Common Share
Diluted Earnings per Common Share
Net Income
Weighted average common shares outstanding
Dilutive effect of employee stock options
Weighted average shares outstanding-diluted
Year end shares outstanding
Total number of employees
Number common of stockholders
Number of beneficiary stockholders
Total number of stockholders
SOURCE: Rocky Mountain Chocolate Factory Inc., 2008 Form 10-K, p. 31 and 2005 Form 10-K, p. 29.
in parentheses show the percentage of total revenues attributable to each source for fiscal
years ended February 28 (29), 2008, 2007, 2006, and 2005, respectively.74
Basic earnings per share increased 18.5% from fiscal 2006 to fiscal 2007 and from
$0.74 in fiscal 2007 to $0.78 in fiscal 2008, an increase of 5.4%. Revenues increased
12.5% from fiscal 2006 to fiscal 2007, and 1% from 2007 to fiscal 2008. Operating income increased 17.1% from fiscal 2006 to fiscal 2007, and 4.7% (from $7.6 million in fiscal 2007 to
$7.9 million) in fiscal 2008. Net income increased 16.7% from fiscal 2006 to fiscal 2007, and
4.6% from $4.7 million in fiscal 2007 to $5.0 million in fiscal 2008. The increase in revenue,
earnings per share, operating income, and net income in fiscal 2008 compared to fiscal 2007
and 2006 was due primarily to the increased number of franchised stores in operation, the
Rocky Mountain Chocolate Factory Inc. (2008)
Rocky Mountain
Chocolate Factory
Sources of Revenue
(Revenues in
thousands of
Factory Sales
Retail Sales
Royalty and Marketing Fees
Franchise Fees
SOURCE: Rocky Mountain Chocolate Factory, Inc. 2007 Form 10-K, p. 23 and 2006 Form 10-K, p. 20 and 23.
increased sales to specialty markets, and the corresponding increases in revenue.75 Details can
be found in Exhibit 8.
Factory sales increased in fiscal 2008 compared to fiscal 2007 due to an increase of
28.8% in product shipments to specialty markets and growth in the average number of stores
in operation to 324 in fiscal 2008 from 310 in fiscal 2007. Same-store pounds purchased in fiscal 2008 were down 9% from fiscal 2007, more than offsetting the increase in the average
number of franchised stores in operation and mostly offsetting the increase in specialty market sales. RMCF believed the decrease in same-store pounds purchased in fiscal 2008 was due
primarily to a product mix shift from factory products to products made in the stores and also
the softening in the retail sector of the economy.76
The decrease in retail sales resulted primarily from a decrease in the average number of
company-owned stores in operation from 8 in fiscal 2007 to 5 in fiscal 2008. Same-store sales
at company-owned stores increased 1.1% from fiscal 2007 to fiscal 2008 and 6.9% from fiscal 2006 to fiscal 2007.77
Under the domestic franchise agreement, franchisees paid the company 1) an initial franchise fee; 2) a marketing and promotion fee equal to 1% of the monthly gross retail sales of
the franchised store; and 3) a royalty fee based on gross retail sales. RMCF modified its royalty fee structure for any new franchised stores opening the third quarter of fiscal 2004 and
later. Under the new structure no royalty was charged on franchised stores’ retail sales of products purchased from the company and a 10% royalty was charged on all other sales of product
sold at franchised locations. For franchise stores opened prior to the third quarter of fiscal
2004, a 5% royalty fee was charged on franchise stores gross retail sales. Franchise fee revenue was recognized upon opening of the franchise store.78
The increase in royalties and marketing fees resulted from growth in the average number
of domestic units in operation from 266 in fiscal 2007 to 281 in fiscal 2008 partially offset by
a decrease in same store sales of 0.09%. Franchise fee revenues decreased during the past two
fiscal years due to a decrease in the number of franchises sold during the same period the previous year.79
Cost of sales increased from fiscal 2007 to 2008 due primarily to increased costs and mix
of products sold. Company-store margin declined during the same period due primarily to a
change in mix of products sold associated with a decrease in the average number of company
stores in operation.80
As a percentage of total royalty and marketing fee revenue, franchised costs decreased to
23.7% in fiscal 2008, 25.2% in fiscal 2007, and 25.6% in fiscal 2006 due to lower incentive
compensation costs. During this same period, sales and marketing costs and general and administrative costs also decreased due primarily to lower incentive compensation costs.81
In fiscal 2008 retail operating expenses decreased due primarily to a decrease in the average number of company-owned stores during fiscal 2008 versus fiscal 2007. Retail operating
expenses, as a percentage of retail sales, decreased from 57.6% in fiscal 2006, to 57.2% in fiscal 2007, to 55.3% in fiscal 2008 due to a larger decrease in costs relative to the decrease in
Industry Six—Specialty Retailing
revenues associated with a decrease in the average number of company stores in operation during each fiscal year.82
Depreciation and amortization of $783,000 in fiscal 2008 decreased 10.4% from the
$874,000 incurred in fiscal 2007 due to the sale or closure of four company-owned stores and
certain assets becoming fully depreciated. Depreciation and amortization of $874,000 in fiscal 2007 was essentially unchanged from the $876,000 incurred in fiscal 2006.83
Other, net of $101,000 realized in fiscal 2008 represented an increase of $34,000 from the
$67,000 realized in fiscal 2007, due primarily to higher average outstanding balances of invested cash during fiscal 2008. Notes receivable balances and related interest income declined
in fiscal 2008 because of two notes maturing or being paid in full compared with fiscal 2007.
RMCF also incurred interest expense in fiscal 2008 related to use of an operating line of credit.
Other, net of $67,000 realized in fiscal 2007, represented a decrease of $9,000 from the
$76,000 realized in fiscal 2006, due primarily to lower interest income on lower average outstanding balances of notes receivable and invested cash. RMCF paid its long-term debt in full
during the first quarter of fiscal 2006.84
RMCF’s effective income tax rate in fiscal 2008 was 38.1%, which was an increase of
0.3% compared to fiscal 2007. The increase in the effective tax rate was primarily due to increased income in states with higher income tax rates.85
In early 2008 RMCF repurchased 391,600 shares of its common stock at an average price
of $11.94 because the company believed the stock was undervalued.86 During the past eight
years, the company had repurchased approximately 3,909,000 shares of its common stock (adjusted for stock splits and stock dividends), at an average price of $5.09 per share.87 As of
April 30, 2008, there were 5,980,919 shares of common stock outstanding.88
As of February 29, 2008, working capital was $5.2 million compared with $7.5 million as
of February 28, 2007. The change in working capital was due primarily to operating results
less the payment of $2.4 million in cash dividends and the repurchase and retirement of
$5.9 million of the company’s common stock.89
Cash and cash equivalent balances decreased from $2.8 million as of February 28, 2007,
to $676,000 as of February 29, 2008, as a result of cash flows generated by operating and investing activities being less than cash flows used in financing activities. RMCF had a $5.0 million line of credit, of which $4.7 million was available as of February 29, 2008, that bears
interest at a variable rate. For fiscal 2009, the company anticipated making capital expenditures of approximately $500,000, which would be used to maintain and improve existing factory and administrative infrastructure and update certain company-owned stores. The
company believed that cash flow from operations would be sufficient to fund capital expenditures and working capital requirements for fiscal 2009. If necessary, the company had available bank lines of credit to help meet these requirements.90
RMCF revenues and profitability were subject to seasonal fluctuations in sales because of
the location of its franchisees, which had traditionally been located in resort or tourist locations. As the company had expanded its geographical diversity to include regional centers, it
had seen some moderation to its seasonal sales mix. Historically the strongest sales of the company’s products had occurred during the Christmas holiday and summer vacation seasons. Additionally, quarterly results had been, and in the future are likely to be, affected by the timing
of new store openings and sales of franchises.91
The most important factors in continued growth in the RMCF’s earnings were ongoing
unit growth, increased same-store sales and increased same-store pounds purchased from the
factory. Historically, unit growth more than offset decreases in same-store sales and same-store
pounds purchased.92 RMCF’s ability to successfully achieve expansion of its franchise system
depended on many factors not within the company’s control, including the availability of suitable sites for new store establishment and the availability of qualified franchises to support
such expansion.93
Rocky Mountain Chocolate Factory Inc. (2008)
Changes in
Same-Store Sales
SOURCE: Rocky Mountain Chocolate Factory, 2008 Form 10-K, p. 4, and 2007 Form
10-K, p. 4.
For the fiscal year ended February 29, 2008, same-store pounds purchased from the factory by franchised stores decreased 9.1% from the previous fiscal year.94 Fiscal 2007 showed
a similar trend with same-store pounds purchased by franchisees decreasing 2.6% from fiscal
2006.95 RMCF believed the decrease in same-store pounds purchased was due to a product mix
shift from factory-made products to products made in the store, such as caramel apples and
fudge.96 Company efforts to reverse the decline in same-store pounds purchased from the factory by franchised stores and to increase total factory sales depended on many factors, including new store openings, competition, and the receptivity of the company’s franchise system to
new product introductions and promotional programs.
In addition to efforts to increase the purchases by franchisees of company manufactured
products, RMCF was also sought to increase profitability of its store system through increasing overall sales at existing store locations. Changes in systemwide domestic same-store sales
can be found in Exhibit 9. The company believed that the negative trend in fiscal 2008 was due
to the overall weakening of the economy and retail environment.97
According to Bryan Merryman, COO and CFO, “Sales at most RMCF stores are greatly
influenced by the levels of ‘foot traffic’ in regional shopping malls and other retail environments where the stores are located, and widely reported declines in such traffic resulted in lower
revenues and earnings in the fourth quarter of our 2008 fiscal year. In light of the significant
uncertainties surrounding the U.S. economy and retail trends in coming months, combined with
decreasing same-store pounds purchased by franchisees, we do not feel comfortable providing
specific earnings guidance for fiscal 2009 at the present time. If recent economic and consumer trends continue but do not deteriorate further, we are likely to report a modest decline in
earnings for the (2009) fiscal year. Fortunately, we believe we are in excellent financial position and well able to withstand the recessionary forces currently buffeting the U.S. economy.”98
1. Rocky Mtn. Chocolate Profiles in Success, January 28, 2008,
p. 1,, Rocky Mountain Chocolate Factory Inc., 2008 Form 10-K, p. 3, and Rocky
Mountain Chocolate Factory, Inc., www.referenceforbusiness.
January 28, 2008, pp. 1–6. These sections were directly quoted
with minor editing.
2. Rocky Mtn. Chocolate Profiles in Success, January 28, 2008,
p. 1,
3. Rocky Mountain Chocolate Factory, Inc.,–Mountain-ChocolateFactory, January 28, 2008, p. 2.
4. Rocky Mtn. Chocolate Profiles in Success, January 28, 2008,
p. 1,
5. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K, p. 3.
6. Ibid., p. 30.
7. Rocky Mtn. Chocolate Profiles in Success, January 28, 2008,
p. 1,
8. Ibid.
9. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 10. This section was directly quoted with minor editing.
10. Rocky Mtn. Chocolate Profiles in Success, January 28, 2008,
p. 2, This section
was directly quoted with minor editing.
11. Rocky Mountain Chocolate Factory, Inc., Proxy Statement,
August 17, 2007, pp. 3–4, and Rocky Mountain Chocolate
Factory, Inc., 2008 Form 10-K, pp. 11–12. These sections were
directly quoted with minor editing.
Industry Six—Specialty Retailing
12. Rocky Mountain Chocolate Factory, Inc., Proxy Statement,
August 17, 2007, p. 11. This section was directly quoted with
minor editing.
13. Ibid., p. 20. This section was directly quoted with minor editing.
14. Ibid., p. 1. This section was directly quoted with minor editing.
15. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
pp. 4–9 and 2007 Form 10-K, pp. 5–7. These sections were directly quoted with minor editing.
16. Rocky Mtn. Chocolate Profiles in Success, January 28, 2008,, p.1. This section was
directly quoted with minor editing.
17. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
pp. 7–8 and Rocky Mountain Chocolate Factory, Inc., Press Release, August 1, 2007, p. 1. These sections were directly quoted
with minor editing.
18. Rocky Mtn. Chocolate Profiles in Success, January 28, 2008,, p. 1.
19. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 5. This section was directly quoted with minor editing.
20. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p.13. This section was directly quoted with minor editing.
21. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 6. This section was directly quoted with minor editing.
22. Rocky Mtn. Chocolate Profiles in Success, January 28, 2008,, p. 2.
23. Rocky Mtn. Chocolate Profiles in Success, January 28, 2008,, p. 2.
24. Ibid., p. 1. This section was directly quoted with minor editing.
25. Rocky Mountain Chocolate Factory, Inc., www–MountainChocolate-Factory, January 28, 2008, p.3. This section was
directly quoted with minor editing.
26. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 9. This section was directly quoted with minor editing.
27. Ibid., p. 14. This section was directly quoted with minor
28. Ibid., p. 6. This section was directly quoted with minor editing.
29. Ibid., pp. 4, 6. This section was directly quoted with minor editing.
30. Rocky Mountain Chocolate Factory, Inc., www–
Mountain-Chocolate-Factory, January 28, 2008, p. 1. This
section was directly quoted with minor editing.
31. Confectionary, Rocky Mountain Chocolate Wins
Packaging Award, May 31, 2002,
32. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 10. This section was directly quoted with minor editing.
33. RJFaulkner & Company, Inc.-Company Profile, Research Report, Rocky Mountain Chocolate Factory, Nov/Dec 2006, p. 5,
34. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 10. This section was directly quoted with minor editing.
35. Ibid.
36. Ibid., pp. 9–10. This section was directly quoted with minor
37. Ibid., p. 3. This section was directly quoted with minor editing.
38. NETZSCH’S ChocoEasy™, “New Chocolate Manufacturing
Technology Offers Chocolatiers Independence, More Efficient
Production,” Press release, November 17, 2005,
39. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 15. This section was directly quoted with minor editing.
40. Ibid., pp. 9, 10, 13, 27, 38. These sections were directly quoted
with minor editing.
41. Rocky Mountain Chocolate Factory Corporate Site, Product Selection, p. 1,
42. Chanthavon, Samlanchith, “Chocolate and Slavery: Child Labor in Cote d’Ivoire,” TED Case Studies, January 2001, http://
43. Bax, Pauline. “Chocolate Industry Watching Cocoa Strike,” The
Seattle Times. October 7, 2006,
44. Rocky Mountain Chocolate Factory, Inc., www–
Mountain-Chocolate-Factory, January 28, 2008, p. 1. This section
was directly quoted with minor editing.
45. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 10. This section was directly quoted with minor editing.
46. Ibid., p. 12. This section was directly quoted with minor editing.
47. Ibid., p. 11. This section was directly quoted with minor editing.
48. Leatherhead Food International, The Global Confectionary
Market-Trends and Innovations,
49. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 3. This section was directly quoted with minor editing.
50. National Confectioners Association, United States Confectionary Market, January 2008, Slide 5, .ecandy
51. Kermani, Faiz, “Chocolate Challenges,” Report Buyer, 2007,
p. 3, This section was directly quoted
with minor editing.
52. Ibid.
53. Ibid.
54. Ibid., pp. 3–4.
55. Ibid., pp. 5–6.
56. Ibid., p. 1.
57. Moran, Michelle, “Category Analysis: Chocolate: Quality Satisfies American Sweet Tooth,” Gourmet Retailer Magazine,
June 1, 2006,
58. Schoettle, Anthony, “Local Chocolate Firm Leads Organic
Pack,” Indianapolis Business Journal, December 17, 2007,
Vol. 28, Issue 42, p. 19.
59. Kermani, Faiz, “Chocolate Challenges,” Report Buyer, 2007,
p. 2,
60. National Confectioners Association, United States Confectionary Market, January 2008., Slide 26, .ecandy
61. Kermani, Faiz, “Chocolate Challenges, Report Buyer,” 2007,
p. 7,
62. Ibid., p. 7.
63. Ibid., p. 11.
64. Ibid., p. 3.
65. Young, Lauren, “Candy’s Getting Dandier,” Business Week,
February 13, 2006, Issue 3971, p. 88, and Fuller, Allisa C.,
“Ethel M Ready to Rule Chocolate Kingdom,” Las Vegas Business Press, October 1986, Vol. 3, Issue 10, Section 1, p. 56.
66. Sorkin, Andrew Ross (ed.), “Campbell Soup Sells Godiva for
$850 million,” DealBook, New York Times Business, January 14,
2008, p. 1,
67. Business Week, Chocoladefabriken Lindt & Sprengli Ag, 2007,

68. Lindt Company Website, About Lindt, July 3, 2008,

69. Alpine Confections, Inc. Company History,
70. See’s Candies Website, July 3, 2008,
history.cfm and
71. Schoettle, Anthony, “Local Chocolate Firm Leads Organic
Pack,” Indianapolis Business Journal, December 17, 2007,
Vol. 28, Issue 42, p. 19.
72. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K.
pp. 15–37 also 2007 and 2005 Form 10-K. This section was directly quoted with minor editing.
73. Rocky Mountain Chocolate Factory Press Release, October 24,
2007. This section was directly quoted with minor editing.
74. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K, p. 3
and 2007 form 10-K, p. 3. These sections were directly quoted
with minor editing.
75. Ibid., p. 20. These sections were directly quoted with minor editing.
76. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 21. This section was directly quoted with minor editing.
77. Ibid. This section was directly quoted with minor editing.
78. Ibid., p. 35. This section was directly quoted with minor editing.
79. Ibid., p. 21. This section was directly quoted with minor editing.
Rocky Mountain Chocolate Factory Inc. (2008)
80. Ibid., p. 22.
81. Ibid., p. 22.
82. Ibid., p. 22.
83. Ibid., p. 22.
84. Ibid., p. 22.
85. Ibid., p. 22.
86. Ibid., p. 22. This section was directly quoted with minor editing.
87. Rocky Mountain Chocolate Factory. Inc. Board Authorizes
New Stock Repurchase Program, PR Newswire, February 19,
2008, p. 1,
88. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 1. This section was directly quoted with minor editing.
89. Ibid., p. 24. This section was directly quoted with minor editing.
90. Ibid., p. 24. This section was directly quoted with minor editing.
91. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 25. This section was directly quoted with minor editing.
92. Ibid., pp. 18–19. This section was directly quoted with minor
93. Ibid., p. 19. This section was directly quoted with minor editing.
94. Ibid., p. 19. This section was directly quoted with minor editing.
95. Rocky Mountain Chocolate Factory, Inc., 2007 Form 10-K,
p. 19. This section was directly quoted with minor editing.
96. Rocky Mountain Chocolate Factory, Inc., 2008 Form 10-K,
p. 4. This section was directly quoted with minor editing.
97. Ibid.
98. Rocky Mountain Chocolate Factory Reports Record FY2008
Revenues and Earnings, Press Release, May 8, 2008, pp. 1–2.
This section was directly quoted with minor editing.

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