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Thompson−Strickland: 9.

Azalea Seafood Gumbo Case © The McGraw−Hill


Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

case 9 Azalea Seafood


Gumbo Shoppe
John E. Gamble
University of South Alabama

The aroma of boiling crawfish and shrimp and the sound of “A Pirate Looks at Forty”
filled the air on Monterey Street on the temperate May 2001 evening as block party
guests mingled and sampled the libations provided by their hosts. Jimmy Buffett songs
were frequently heard during such events in Mobile, Alabama, since the famous musi-
cian lived there until his graduation from McGill-Toolen High School in the late
1960s. The Monterey Street Spring Fling block party was one of Mobile’s great tradi-
tions. Mardi Gras balls had concluded more than two months earlier, and weekend
trips to the cottages and antebellum homes along Mobile Bay’s Eastern Shore were still
a few weeks off. For many, the third Saturday evening in May was best spent socializ-
ing with old friends and new acquaintances amid the residential street’s 100-year-old
live oaks and mix of Craftsman, Victorian, and Georgian homes that dated to the early
1900s.
Mike Rathle and John Addison had tended the boiling 25-gallon pots of crawfish
and shrimp since late afternoon. As they cooked pot after pot of shellfish, they had
chances to catch up with old friends—some of whom asked about their business. Aza-
lea Seafood Gumbo Shoppe catered special events like the Monterey Street block
party, but, more important, it was among the largest producers of ready-to-eat gumbo,
with annual revenues in 2000 of more than $1 million. In 2001 Azalea’s products could
be found in approximately 1,000 supermarkets and were served in about 300 restau-
rants in the southeastern United States. Mike Rathle commented on why he and his
partner dabbled in catering:
Our catering activities provide very little revenue for the company, but John and I enjoy it
and it’s great for public relations. In a way, I feel kind of obligated to do these events since
we used crawfish to prevent robberies when we first began running our business, which at
the time was just a small retail seafood shop. During our first few years of selling fresh fish
and gumbo, we always had a pot of crawfish cooking. We had not been out of college too
long and it seemed that there were always about 5 to 10 guys at our store just hanging
around eating crawfish—especially on Friday and Saturday nights. One spring there was a
rash of robberies at the intersection where our business was located. Every business at that
intersection was robbed—some more than once. On any given weekend we probably had
$1,000 to $2,000 cash in the building, but we were never robbed. I guess the prospects of
holding up a business where the parking lot was almost full didn’t seem too appealing to
whoever was responsible for the robberies.

The case author is grateful for the assistance and cooperation of Mike Rathle and John Addison in prepar-
ing this case. Copyright © 2001 by the case author.
C-184
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

Case 9 Azalea Seafood Gumbo Shoppe C-185

The event also gave Rathle and Addison an opportunity to discuss the future of
their business while they prepared more than 1,200 pounds of shrimp and crawfish that
filled and refilled a five-foot replica of a wooden fishing boat where partyers could
serve themselves throughout the evening. As the two men were about to begin their
second decade as partners, Addison reflected briefly on the company’s success and
brought up some points for consideration:
Our growth has been phenomenal since we bought the seafood shop in 1991. We have suc-
cessfully transitioned from a small retail seafood shop to one of the largest producers of
gumbo in the United States. We’ve gained distribution to supermarkets, Wal-Mart Super-
centers, Sam’s Clubs, and probably half the seafood restaurants within 100 miles of here.
However, I think that we need to consider what our sales and profit expectations for the
business are. Are we satisfied with $1 million a year in sales or do we want annual sales of
$1.5 million? Do we want sales of $5 million? $10 million? If we want greater sales, how
will we achieve our growth? Should more of our sales come from supermarkets or food ser-
vice? Do we need a new location? Can we improve our packaging? Are our prices too low?
Also, should we extend our product line to different sized packages or other items?
Rathle agreed that Addison’s questions would have to be answered soon and sug-
gested that the 10th anniversary of the partnership underscored the importance of eval-
uating the company’s strategy and its opportunities for further growth.

COMPANY HISTORY AND BACKGROUND


Azalea Seafood Gumbo Shoppe was established in Mobile, Alabama, in 1971 by Pat
Lodds. Mobile was an attractive market for seafood sales because the city’s location on
the northern coast of the Gulf of Mexico made fresh seafood readily available and be-
cause seafood dishes were staples in most Mobilians’ diets. Many established families
in Mobile took pride in some recipe for a seafood dish that had been handed down for
generations. A cookbook, first published in 1964, that contained seafood recipes from
some of Mobile’s oldest families had been reprinted a number of times and remained
a popular seller over the next decades and into the new century. Azalea Seafood
Gumbo Shoppe, like other seafood shops in Mobile, offered customers fresh snapper,
grouper, flounder, and shrimp caught in Mobile Bay and the Gulf of Mexico, but Aza-
lea differed from its rivals by also selling prepared seafood gumbo that could be taken
home for dinner.
The shop was located near the busy McGregor Avenue and Airport Boulevard in-
tersection in a concrete-block building that had been a fried chicken restaurant in the
mid-1960s. Azalea’s sales of seafood were brisk from almost the day the store opened,
and its gumbo (made using Lodds’s 100-year-old family recipe) became popular within
months as the word spread. Many Mobilians possessed their own treasured gumbo
recipes, but since gumbo was very difficult and time-consuming to prepare, it was much
more convenient to drop by Azalea Seafood Gumbo Shoppe to pick up high-quality
gumbo for that evening’s dinner. The most trying aspect of preparing gumbo was mak-
ing its roux base—a mixture of flour and oil that was cooked at a very high temperature.
The skill, which involved cooking the flour-and-oil mixture until it reached a deep
brown color without being scorched, took some time for most cooks to master.
Pat Lodds owned and operated Azalea Seafood Gumbo Shoppe until 1981, when
it was sold to Jim Hartman. Hartman continued to sell fresh fish and freshly prepared
gumbo to the walk-in customers, and he began to freeze large gallon containers for sale
to local seafood restaurants that might not be able to cook a good gumbo. Hartman also
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

C-186 Cases in Strategic Management

began to prepare and sell shrimp creole to walk-in customers and area restaurants be-
cause the product required ingredients similar to those found in gumbo and used a sim-
ilar preparation process. However, gumbo was by far the more popular seller of the
two prepared food products. By 1991, Azalea’s seafood gumbo was distributed by
three food-service suppliers to about 30 restaurants along the Gulf Coast and its sales
remained relatively stable at about $10,000 to $15,000 per month. Even though the
store was doing well, Jim Hartman began to grow tired of the daily routine and men-
tioned to a few business contacts and friends that he would entertain offers on the busi-
ness. Three of Hartman’s previous employees heard that the business was for sale and
began to think about the possibility of purchasing Azalea Seafood Gumbo Shoppe.
Mike Rathle, John Addison, and Bill Sibley had been friends since attending
McGill-Toolen High School together, and all worked at the seafood shop after school
during their senior year. Upon high school graduation, Rathle and Addison attended the
University of South Alabama, where Rathle obtained a marketing degree and Addison
graduated with a degree in international business. Sibley began a career with Interna-
tional Paper and was employed at the company’s Mobile mill as a safety coordinator
when he heard that Jim Hartman was interested in selling his seafood business. Imme-
diately intrigued, Sibley contacted his two longtime friends to discuss forming a part-
nership to purchase the business. Rathle and Addison were both busy operating a small
construction company at the time but were interested in the opportunity. After hearing
the details, Rathle believed that he could leverage the knowledge he had gained while
employed by Brach’s Candy as an area sales manager to expand Azalea’s gumbo into
supermarkets. Addison, believing that Azalea could be an attractive investment oppor-
tunity if the company’s gumbo sales could be expanded into supermarkets and addi-
tional restaurants, agreed to join his two friends in the new venture.
The three friends approached Jim Hartman with an offer, and by August 1991 they
owned and operated the seafood gumbo shop where they had once worked after school.
Sibley oversaw the company’s gumbo production, while Rathle immediately began to
call on area supermarkets and restaurants to gain access to new customers for the com-
pany’s prepared gumbo. Addison was still involved with a number of construction proj-
ects but joined Rathle in Azalea’s marketing efforts within a few months.
Shortly before the company’s first anniversary of new ownership, the three part-
ners were notified that their building lease would not be renewed because a shopping
center would be built on the property where Azalea Seafood Gumbo Shoppe had oper-
ated since 1971. Relocating would be a problem since it would be difficult to move the
kitchen equipment and freezers without disrupting the company’s production. The
three partners spent several days following the eviction notice dreading the prospects
of moving, but before they had an opportunity to look at other properties, they were ap-
proached by a competing gumbo producer who was retiring. The competitor offered
Azalea his kitchen equipment and freezers for $5,000; in addition, Azalea could as-
sume his building lease. Mike Rathle stated that the timing of the offer was a godsend:
“We were able to pick up our ingredients and move to a turnkey operation without los-
ing a beat.”
Azalea’s new 2,200-square-foot production facility, much larger than its previous
building, was located on a one-acre parcel of land that also included a frame house
built in the 1930s. The house was located only about 100 feet from the concrete-block
plant and could be used as an office. The only drawback to the new building was that
its location on a quiet street outside the city limits was too far from high-traffic areas
to support retail sales of fresh seafood and prepared gumbo. Before they knew of their
pending lease termination, however, the partners had considered giving up retail sales
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

Case 9 Azalea Seafood Gumbo Shoppe C-187

and focusing on commercial accounts—the move was the deciding factor. With a clear
vision of Azalea’s future business and the new facility’s eight-ton-per-day production
capacity, Rathle and Addison began to aggressively pursue new supermarket and food-
service accounts. They were able to land account after account over the next 10 years,
and in 2001 Azalea Seafood Gumbo Shoppe produced more than 45 tons of gumbo and
other seafood products each month. Bill Sibley sold his interest in the business to
Rathle and Addison in early 2001 so that he could pursue other business opportunities.

OVERVIEW OF THE VALUE-ADDED SEAFOOD INDUSTRY


Value-added seafood products included any type of packaged food item with seafood
as an ingredient. Value-added seafood producers purchased fresh, frozen, or cooked
seafood to use in creating products for sale to restaurants, supermarkets, or other types
of food retailers. Food companies that sold seafood products either used their own
marketing staffs to sell and distribute products to retailers and restaurants or contracted
with food brokers to provide the marketing and logistical support needed to distribute
their products. Packaged seafood products were also distributed by jobbers, indepen-
dent sellers who purchased packaged food products directly from manufacturers and
sold them to restaurants and grocers after a 15–20 percent markup.

Suppliers
Value-added seafood producers could readily obtain ingredients from seafood proces-
sors, fruit and vegetable producers, canned and dry goods producers, or large food
wholesalers that specialized in such ingredients. Large processed food companies had
considerable latitude in their choice of suppliers since most ingredients were com-
moditylike and readily available from multiple sources. In some instances, large food
companies were able to further improve their ability to negotiate with suppliers by
their own production of some key ingredients. Many times, smaller value-added pro-
ducers did not have adequate volume to negotiate directly with the producer of ingre-
dients but were able to select from a variety of wholesalers to obtain the best mix of
quality and price for purchased ingredients.

Production
Packaged food production in the United States was regulated and monitored by the
U.S. Food and Drug Administration (FDA), the U.S. Department of Agriculture
(USDA), and state departments of public health. State departments of public health
usually monitored only the cleanliness of food producers’ cooking areas and other fa-
cilities with monthly inspections, whereas the FDA required food producers to develop
and implement a Hazard Analysis Critical Control Point (HACCP) system for their op-
erations and comply with the provisions of the Food and Nutritional Labeling Act. The
Nutritional Labeling and Education Act of 1990 required all packaged foods to bear
nutrition labels that listed ingredients and nutritional facts about the product. The act
also established standardized definitions for such terms as low fat or light. The USDA
enforced the Federal Meat Inspection Act, which established sanitation standards for
producers of meat and poultry products.
All seafood processors were required to develop an HACCP plan using guidelines
provided by the FDA to ensure that packaged foods were free from such health hazards
as pathogens and toxins. HACCP plans were required to provide general information
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

C-188 Cases in Strategic Management

about the company’s product and processes, describe the food, describe the method of
distribution and storage, identify the intended use and consumer, and develop a flow
diagram of the company’s value chain. Food companies were also required to identify
potential species-related and process-related health hazards and identify critical hazard
control points. Once a food producer had set critical limits for health hazards, a moni-
toring procedure was developed and followed. Food companies were required to es-
tablish record-keeping and verification procedures that could be evaluated by the FDA
during inspections.

Distribution
Processed food items were distributed either by the producer or by food brokers who
represented a large number of companies producing many types of products. Some-
times a food broker might represent companies producing products in nearly every cat-
egory found in supermarkets. Food brokers had become larger and their product
offerings broader during the 1990s. A wave of acquisitions and mergers reduced the
number of food brokers in the United States from about 2,500 in 1990 to about 200 in
2001. Consolidation among food brokers was driven primarily by consolidation among
food producers and food retailers. However, there remained a large number of small
food brokers that focused on representing food companies for the sale of their products
to restaurants.
Consolidation of Packaged Food Companies Throughout the 1990s,
large global food companies like Unilever, Nestlé, and Kraft Foods had acquired
smaller companies to fill gaps in their product lines and expand their global presence.
Food brokers were forced to alter their business practices as the food industry consol-
idated since larger food companies had greater service demands than small, indepen-
dent food producers. Smaller companies were typically pleased with a broker that
could deliver products to supermarkets within a limited geographic region and assure
that items were in stock and located in appropriate locations within stores. Large food
companies that chose to outsource distribution considered contracts with brokers com-
petitive resources that could be used to provide broader geographic coverage for their
brands and that could contribute to efficient inventory management and replenishment
systems. Global food manufacturers had also begun to demand in-store marketing ser-
vices from brokers in return for distributing their multiple brands. Brokers could be re-
quired to report stockouts, make price checks, and deliver up-to-the-minute inventory
data to manufacturers’ distribution centers. Brokers might also be asked to set up in-
store displays, discuss new products with store managers, and conduct in-store prod-
uct sampling. Small food manufacturers had much less ability to demand such services
from food brokers. In fact, some small food producers found it difficult to secure the
services of a national food broker and, if a large broker did agree to distribute their
product, would likely receive only minimal attention to their brand.
Consolidation of Supermarkets and Other Grocers Consolidation
among grocery retailers also supported the trend toward fewer, larger food brokerages.
In 2000, 38.2 percent of the $494 billion supermarket industry was accounted for by
Kroger, Wal-Mart, Albertson’s, Safeway, and Royal Ahold. In 1995, the top five su-
permarket companies had accounted for only 26.5 percent of industry sales. There
were 60 mergers and acquisitions in the supermarket industry between 1997 and 2000,
and industry analysts expected between 15 and 20 mergers and acquisitions in 2001.
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

Case 9 Azalea Seafood Gumbo Shoppe C-189

exhibit 1 Estimated Sales and Number of Supermarket Locations for


the Top 20 U.S. Grocers, Year-End 2000
Number of
Estimated Supermarket Locations
Sales (store sales of
Rank Company (in millions) $2 million or greater)

1 The Kroger Co.* $43,120 2,366


2 Albertson’s 31,461 1,715
3 Safeway 28,829 1,482
4 Wal-Mart* 22,947 908
5 Royal Ahold 20,022 974
6 Food Lion 15,042 1,435
7 Winn-Dixie 13,731 1,081
8 Publix 13,021 645
9 A&P 8,075 553
10 SUPERVALU 7,197 539
11 H-E-B Grocery Co. 6,704 270
12 Shaw’s 4,001 165
13 Pathmark 3,807 138
14 Military 3,607 190
15 Meijer* 3,545 144
16 Hy-Vee 3,383 184
17 Fleming 3,120 200
18 Raley’s 2,982 149
19 Giant Eagle 2,856 120
20 Aldi 2,522 697

*Supercenter statistics reduced to include only traditional supermarket items.


Source: Progressive Grocer annual report, April 2001.

Much of the industry’s merger activity had occurred as a result of traditional super-
market companies’ attempts to better compete with Wal-Mart. Although Wal-Mart did
not enter the grocery industry until 1988, when it opened its first Supercenter, it was
crowned the U.S. supermarket leader in 2001, with annual grocery sales of $57.2 bil-
lion. Competition in the industry was expected to intensify further with Wal-Mart’s an-
nual addition of 150–175 new Supercenters and 15–20 smaller Neighborhood Markets
to expand its chain of more than 1,500 stores. The industry’s other leading grocery
companies believed that mergers between the larger companies and acquisitions of
smaller chains would provide greater purchasing power to meet Wal-Mart’s discount
pricing. Exhibit 1 presents estimated sales and number of stores with annual sales ex-
ceeding $2 million for the top 20 U.S. grocers.
The grocery industry experienced more than $15 billion in grocery bankruptcies be-
tween 1997 and 2001, and analysts believed bankruptcies totaling another $15 billion
would occur in the retail grocery industry between 2002 and 2005. One such bankruptcy
involved Delchamps, Inc., a former Mobile, Alabama–based grocery chain that was
acquired by Jackson, Mississippi’s Jitney-Jungle in 1997 in an attempt by both com-
panies’ management to gain greater purchasing power. In 1999, the Jitney-Jungle/
Delchamps chain included 198 stores with annual sales of approximately $2 billion, but
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

C-190 Cases in Strategic Management

the company was forced to file for bankruptcy protection that same year and was dis-
solved in late 2000. The new company had been able to achieve some cost savings in
purchasing, but any cost savings from lower prices on packaged goods were more than
offset by the interest expense and debt service that accompanied the buyout. Jitney-
Jungle’s stores and fixtures were purchased by Winn-Dixie, a chain with more than
1,000 stores in 14 states, and by Bruno’s, a 153-store chain operating in Alabama,
Florida, Georgia, and Mississippi. Bruno’s had emerged from its own Chapter 11 bank-
ruptcy protection just months before it purchased 17 of Jitney-Jungle’s stores.
Like the large global food companies, large national grocers expected food brokers
to provide national coverage and take a large role in inventory management and re-
plenishment efforts. The grocery industry’s razor-thin margins required that supermar-
kets have access to cutting-edge information systems to reduce spoilage of perishable
items and keep popular items on the shelf while keeping store inventory levels at a
minimum. SUPERVALU, the largest distributor of food products to U.S. grocers, of-
fered comprehensive procurement, distribution, and replenishment services to more
than 5,500 supermarkets, mass merchandisers, and e-tailers in the United States. The
company’s logistics services featured activity-based costing, cross-docked warehouses,
on-time delivery, 24/7 service, and Web-based ordering and invoicing. In addition to
inventory management benefits, both large and small grocery chains profited from
SUPERVALU’s $40 billion purchasing power. Like many other large food brokers,
SUPERVALU had made a number of acquisitions in recent years to boost its ability to
provide better service and broader geographic coverage to food companies and gro-
cers. The company’s 1999 acquisition of Richfield Holdings for approximately $1.5
billion was completed to boost SUPERVALU’s distribution capabilities in the mid-
Atlantic region of the United States. In 2001, SUPERVALU was also the nation’s 10th-
largest supermarket chain, with 1,200 stores and retail sales of $9.3 billion.

Distribution in the Food Service Industry Even though the $175 billion
U.S. food-service industry was highly fragmented, with more than 3,500 broadline
food-service distributors and 15,000 specialty product suppliers that provided various
food items to restaurants and other locations where prepared food was served, many
industry participants believed that the industry would soon consolidate. Large food-
service companies like SYSCO Corporation and U.S. Foodservice had begun to ac-
quire food-service distributors of all types and in all geographic locations in the United
States. SYSCO, the largest food-service company in the United States, with 2000 sales
of $19.3 billion, provided more than 275,000 products to 356,000 different customers
in all 50 states and in portions of Canada.
SYSCO had completed more than 20 acquisitions between 1991 and 2000 to ex-
pand its line of fresh and frozen meats, seafood, poultry, fruits and vegetables, canned
and dry foods, equipment and supplies, beverages, bakery items, dairy products, dis-
posables, medical and surgical products, and chemical and sanitation items sold to
restaurants, hotels, schools, hospitals, and other locations where food was prepared. In
early 2001, SYSCO acquired a distributor of hotel housekeeping supplies and guest
personal care items; a Houston, Texas, specialty meat supplier; and a Canadian dis-
tributor of prepared food and cleaning and paper supplies. SYSCO management in-
tended for its acquisitions of distributors serving food-service niches to improve its 11
percent market share and gain more of the industry’s 850,000 customers.
U.S. Foodservice, the second-largest food-service company in the United States,
held about a 7 percent share of the food-service market, with 2000 sales of $12 billion.
U.S. Foodservice had stepped up its acquisition efforts after it was acquired by Dutch
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

Case 9 Azalea Seafood Gumbo Shoppe C-191

supermarket giant Royal Ahold in April 2000. Royal Ahold was the fifth-largest super-
market chain in the United States, with approximately 1,300 supermarkets and 2000
sales of $27.5 billion. Royal Ahold’s stores in Europe, Latin America, and Asia brought
the company’s worldwide sales to more than $50 billion in 2000. U.S. Foodservice’s
acquisitions in 2000 and 2001 included the $1.5 billion acquisition of PYA/Monarch,
a leading food-service distributor in the southeastern United States; the purchase of
Parkway Food Service, a broadline distributor in western Florida with more than 1,000
accounts; and Mutual Wholesale Company, a Florida food-service company with more
than 4,200 accounts. The rapid growth through acquisition by SYSCO and U.S. Food-
service had encouraged other food-service distributors to rapidly advance their own ac-
quisition plans.
The growing size and strength of food-service distributors had little effect on job-
bers since jobbers had traditionally been forced to call on small accounts or distribute
items needed by restaurants only on an infrequent basis. A jobber was usually a one-
person operation with company assets limited to a single refrigerated truck. Jobbers
lacked any formal relationship with food producers and usually operated on a cash-
and-carry basis. Jobbers typically purchased only a few cases of an item at any given
time for their daily calls to small restaurants that might need a case or two of some
food item. Although few had annual sales of over $400,000, jobbers were an important
distributor for small restaurants that lacked the sales volume to establish an account
with a large food-service company.
Food brokers also played a role in the food-service industry. Many small- and
medium-sized food companies would contract with food brokers to promote their
products to restaurants served by food-service distributors that purchased their prod-
ucts. For example, once a food-service distributor agreed to purchase a food com-
pany’s product, food brokers could be hired to create pull for that product by marketing
the product directly to the food distributor’s restaurant customers. In return, food bro-
kers typically received a 5 percent commission on a food company’s sales increases to
food distributors.
Growth in Sales of Meals Eaten Away from Home Consolidation of the
U.S. food-service industry was also likely because of opportunities presented by the
rapid growth in meals eaten away from home. In 2000, more than 54 billion meals
were eaten in nearly 850,000 restaurants, schools, work cafeterias, hospitals, nursing
homes, and other places where meals were served. Restaurants’ share of the food dol-
lar had grown from 33 percent in 1980 to 46 percent in 2001. Americans were pro-
jected to spend 53 percent of their food dollars in restaurants by 2010. In addition, the
restaurant industry’s sales were projected to grow from $399 billion in 2001 to $577
billion in 2010. Companies like SYSCO and Royal Ahold were willing to make further
investments in the food-service industry to capture a greater share of the rapidly grow-
ing industry. Also, food service offered Royal Ahold the chance to diversify beyond
sales of food items in supermarkets while not straying too far from its core competen-
cies developed in the grocery business.

AZALEA SEAFOOD GUMBO SHOPPE IN 2001


In 2001, Azalea Seafood Gumbo Shoppe’s seafood gumbo, crawfish etouffee, shrimp
creole, and shrimp-and-crabmeat bisque were distributed to more than 1,000 super-
markets, 20 Sam’s Clubs, and approximately 300 restaurants in the southeastern United
States. The company’s sales had grown at a compounded rate of 33 percent between
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

C-192 Cases in Strategic Management

exhibit 2 Azalea Seafood Gumbo Shoppe, Income Statements, 1996–2000*


2000 1999 1998 1997 1996

Revenues
Wholesale sales $1,036,570 $1,222,452 $1,327,346 $944,522 $880,914
Catering 18,937 16,146 10,613 20,575 5,980
Allowances/damages ⫺11,936 ⫺5,800 ⫺4,453 ⫺1,855 ⫺1,669
Sales discounts ⫺2,004 ⫺3,627 ⫺13,683 ⫺8,291 ⫺9,742
Total revenues $1,041,567 $1,229,171 $1,319,823 $954,951 $875,484
Cost of goods sold
Cost of ingredients 440,673 501,554 555,873 449,086 401,812
Cost of containers 82,813 94,368 97,520 67,120 57,519
Freight and shipping 24,249 26,384 35,925 8,039 10,494
Payroll–officers 84,186 123,260 138,363 108,480 107,873
Payroll–other 97,248 107,016 123,446 50,206 46,101
Commission/brokerage 480 463 4,708 0 2,206
Cost of goods sold 729,650 853,046 955,833 682,931 626,005

Gross profit $311,917 $376,125 $363,990 $272,020 $249,479


Expenses
Advertising $ 3,973 $16,633 $14,626 $ 9,217 $ 2,421
Bad debt expense 0 5,634 0 0 0
Bank charges 1,316 5,682 4,367 9,437 1,260
Contract labor 2,071 687 976 1,103 254
Contributions 607 1,646 816 1,081 1,294
Depreciation expense 31,202 39,738 41,000 20,388 19,496
Dues and subscriptions 909 83 286 183 264
Equipment rental 1,265 296 1,658 943 326
Entertainment and meals 1,909 2,414 1,592 342 2,442

1992 and 1999. However, its 2000 sales fell by 15 percent after Jitney-Jungle filed
for Chapter 11 bankruptcy protection and later ceased operations. As an unsecured
supplier, Azalea had no ability to recover the outstanding account of more than
$100,000. The company’s 2000 sales were also adversely affected by a kitchen
worker’s decision to stamp gumbo containers with a date stamp after a stamp showing
a lot number broke. The company eventually had to recall more than $100,000 worth
of gumbo when consumers and retailers believed that the stamp showed an expiration
date that had passed. Revenues were decreased further when Publix supermarkets
stopped placing orders with Azalea because of the recall. Azalea Seafood Gumbo
Shoppe’s income statements for 1996 through 2000 are presented in Exhibit 2. The
company’s balance sheets for 1996 through 2000 are presented in Exhibit 3.

Azalea’s Product Line


Azalea sold fully cooked seafood gumbo, crawfish etouffee, shrimp creole, and shrimp-
and-crabmeat bisque in pint, quart, half-gallon, and gallon containers. The company’s
seafood products were sold frozen and were ready to serve after thawing and heating.
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

Case 9 Azalea Seafood Gumbo Shoppe C-193

exhibit 2 (continued)
2000 1999 1998 1997 1996

Insurance 43,442 28,275 31,741 21,681 21,522


Interest expense 12,133 11,188 12,623 5,298 6,268
Janitorial and pest control 3,177 4,473 4,394 7,102 2,026
Miscellaneous 179 190 0 817 0
Postage 169 356 961 410 334
Office expense 2,510 3,141 4,635 2,884 3,662
Payroll tax expense 16,249 19,911 21,988 12,627 12,341
Penalties 1,134 5,800 847 529 0
Product demo costs 10,368 45,344 105,683 30,520 46,951
Product sampling 250 670 1,785 2,512 0
Professional fees 6,085 5,813 6,457 6,177 7,554
Rent 14,560 14,560 15,718 11,030 14,339
Repairs and maintenance 26,258 19,553 7,799 3,462 11,368
Service charges 3,863 3,662 2,108 1,660 4
Security 283 1,692 1,180 728 1,037
Supplies 3,219 9,775 6,360 1,667 1,554
Taxes and licenses 1,222 2,782 1,488 2,103 2,899
Telephone 13,015 16,405 16,899 11,595 12,613
Travel 2,927 4,343 5,333 3,317 864
Truck lease 16,891 15,820 18,894 13,721 13,984
Truck expenses 15,375 10,526 5,543 5,553 8,067
Uniforms and laundry 1,999 3,913 3,664 2,113 1,796
Utilities 21,816 21,527 19,767 17,526 19,445
Total expenses $260,376 $322,530 $361,186 $207,726 $216,384

Net income $51,541 $53,595 $2,804 $64,294 $33,094

*
Azalea Seafood Gumbo Shoppe’s financial statements have been disguised. However, the relationships remain intact.

Azalea’s pint- and quart-sized containers were sold in supermarkets and wholesale
clubs, and its half-gallon and gallon containers were sold to restaurants and other food-
service customers. The company’s gumbo was its best-selling item, accounting for
approximately 90 percent of annual sales. Azalea’s seafood gumbo, like other gumbos,
was a stewlike soup containing okra, crabmeat, shrimp, and spices in a roux base; it
traced its roots to the Acadians who were forced from Canada in the late 1700s and set-
tled in the New Orleans area. In perfecting many of today’s Cajun recipes, the Acadi-
ans borrowed heavily from the Native Americans and the French and Spanish settlers
who lived near the Mississippi Delta. Azalea Seafood Gumbo Shoppe’s authentic
Louisiana-style seafood gumbo had been featured in the Taste of America sponsored by
the National Press Club in Washington, D.C., and had been served in the White House
during the Reagan presidency.
Azalea Seafood Gumbo Shoppe added a white cream sauce–based shrimp-and-
crabmeat bisque in 1997 and introduced a crawfish etouffee in 1998. Etouffee was an-
other Cajun-style dish that was usually served over rice but could also be served in a
bread bowl, in a pie shell, or alone. Azalea’s crawfish etouffee received the San Fran-
cisco Seafood Show’s Silver Award for Best New Product in 1998. Exhibit 4 provides
technical data for Azalea’s products. Nutritional label information for all four products
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

C-194 Cases in Strategic Management

exhibit 3 Azalea Seafood Gumbo Shoppe, Balance Sheets, 1999–2000*


2000 1999 1998 1997 1996

Assets
Current assets
Cash $ (12,249) $ (22,689) $ 6,467 $ (23,542) $ (18,345)
Accounts receivable 98,347 130,043 93,444 99,777 62,143
Other current assets
Inventory—finished goods 6,337 11,189 11,145 9,134 6,580
Inventory—raw materials 21,503 34,686 33,990 34,223 29,913
Prepaid insurance 10,554 7,771 5,940 6,325 5,316
Total other current assets 38,393 53,646 51,074 49,681 41,810
Total current assets 124,491 160,999 150,985 125,916 85,608
Fixed assets
Equipment and machinery 293,064 206,477 198,423 150,484 106,616
Office equipment and furniture 9,966 9,966 9,966 7,406 7,406
Leasehold improvements 12,147 12,147 12,147 1,663 1,663
Vehicles 31,055 31,055 17,819 16,134 16,134
Accumulated depreciation (196,989) (165,788) (126,050) (80,902) (60,514)
Total fixed assets 149,243 93,858 112,305 94,785 71,305
Other assets
Stockholders’ loans 27,624 22,850 28,932 29,055 33,083
Total other assets 27,624 22,850 28,932 29,055 33,083
Total assets $301,357 $277,707 $292,222 $249,757 $189,996

Liabilities and equity


Current liabilities
Accounts payable $126,635 $126,100 $119,345 $ 99,874 $ 51,831
Other current liabilities
Notes payable $ 13,805 $ 5,261 $ 5,185 $ 46,305 $ 6,297
Payroll taxes payable 4,411 5,528 8,642 6,728 4,625
Current portion of long-term debt 46,136 64,606 44,692 29,253 19,561
Total other current liabilities $ 64,352 $ 75,396 $ 58,520 $ 82,286 $ 30,483
Long-term liabilities
Notes payable $131,222 $ 93,132 $112,834 $ 47,848 $ 60,379
Less current portion (46,136) (64,606) (44,692) (29,253) (19,561)
Total long-term liabilities $ 85,086 $ 28,526 $ 68,141 $ 18,595 $ 40,818

Equity
Common stock $ 300 $ 300 $ 300 $ 300 $ 300
Paid in capital 19,698 19,692 19,692 19,692 19,692
Retained earnings 5,286 27,693 26,225 29,009 46,872
Total equity $ 25,284 $ 47,685 $ 46,217 $ 49,001 $ 66,864
Total liabilities and equity $301,357 $277,707 $292,222 $249,757 $189,996

*Azalea Seafood Gumbo Shoppe’s financial statements have been disguised. However, the relationships remain intact.
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

Case 9 Azalea Seafood Gumbo Shoppe C-195

exhibit 4 Technical Information for Azalea Seafood Gumbo Shoppe’s


Prepared Seafood Dishes*
Case Dimensions
Available Size† Count per Case (inches) Pallet Configuration

Pint (16 oz.) 12 143⁄8 ⫻ 95⁄8 ⫻ 67⁄8 N/A


Quart (30 oz.) 12 181⁄2 ⫻ 121⁄8 ⫻ 7 Tie 7 ⫻ 6 ⫽ 42
Half-gallon (64 oz.) 8 15 ⫻ 15 ⫻ 101⁄2‡ Tie 6 ⫻ 7 ⫽ 42
Gallon (117 oz.) 4 161⁄2 ⫻ 161⁄2 ⫻ 63⁄4 Tie 6 ⫻ 6 ⫽ 36

*
Seafood gumbo, shrimp-and-crabmeat bisque, shrimp creole, crawfish etouffee.

All items packed in reusable plastic containers.

11 inches for shrimp bisque.
Note: Shelf life: frozen, one year; refrigerated, four to five days. Cooking instructions: Microwave, open skil-
let, slow cooker, or crock pot; serve over cooked rice; add hot sauce to taste.

is presented in Exhibit 5. The company’s wholesale prices and a retail pricing survey
from April 2001 are shown in Exhibit 6.

Azalea’s Production Process


Azalea operated on a just-in-time production schedule with relatively short production
runs that were initiated as needed to fill orders from distributors and retailers. Rathle
and Addison shared responsibility for planning and organizing the company’s overall
production process, but the company’s kitchen manager was responsible for day-to-
day kitchen operations and coordinating the efforts of Azalea’s three full-time and two
part-time kitchen workers. Rathle’s responsibility for planning and organizing the
kitchen operations included scheduling the batch-cooking activities and purchasing in-
gredients. The company purchased fresh vegetables, fresh cooked crabmeat, cooked
frozen shrimp, and packaging directly from manufacturers. It purchased other ingredi-
ents and supplies from one primary and two secondary food distributors. Most of the
company’s supply of crabmeat and crawfish was landed and processed by Gulf Coast
fisheries, but Rathle and Addison had found that shrimp landed, cooked, and flash-
frozen in California could be purchased at better prices than that from the nearby Gulf.
Azalea attempted to eliminate as much preparation as possible and concentrate
only on the production of its gumbo, bisque, etouffee, and creole items. The company
purchased diced vegetables and cooked shrimp, crabmeat, and crawfish to eliminate la-
bor-intensive preparation activities. In addition, the purchase of processed vegetables
and seafood reduced food waste and allowed for shorter cleanup periods.
Gumbo was cooked to order each day in the company’s 150-gallon insulated
steam kettle. Shrimp-and-crabmeat bisque, shrimp creole, and crawfish etouffee were
not cooked every day since orders for those products were less frequent than for the
company’s gumbo. The gumbo and other products were cooked for approximately one
and a half hours in the steam kettle before being transferred to pint or quart plastic tubs
that would be stocked in supermarket freezers. Azalea’s quart container is shown in
Exhibit 7. The food prepared in the 150-gallon kettle was moved to a vertical agitator
where the ingredients were evenly distributed. Shrimp, however, could not be added to
the agitator because the machine’s vertical structure, combined with the weight of the
shrimp, allowed the shrimp to settle to the bottom rather than being distributed evenly.
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

C-196 Cases in Strategic Management

exhibit 5 Nutritional Facts For Azalea Seafood Gumbo Shoppe’s Seafood Dishes
Seafood Gumbo Shrimp-and-Crabmeat Bisque
Nutrition Facts Nutrition Facts
Serving Size 1 cup (228g) Serving Size 2/3 cup (140g)
Amount Per Serving Servings Per Container approx. 14
Calories 60 Calories from Fat 15 Amount Per Serving
% Daily Value* Calories 120 Calories from Fat 50
Total Fat 2g 3% % Daily Value*
Saturated Fat 0g 0% Total Fat 26g 9%
Cholesterol 30mg 11% Saturated Fat 1.5g 9%
Sodium 410mg 17% Cholesterol 50mg 16%
Total Carbohydrate 6g 2% Sodium 580mg 24%
Dietary Fiber 0g 0% Total Carbohydrate 9g 3%
Sugars 5g Dietary Fiber 0g 0%
Protein 5g Sugars less than 1g
Vitamin A 4% • Vitamin C 8% Protein 7g
Calcium 2% • Iron 4% Vitamin A 2% • Vitamin C 4%
*Percent Daily Values are based on a 2,000-calorie Calcium 2% • Iron 4%
diet.
*Percent Daily Values are based on a 2,000-calorie
diet.
Shrimp Creole Crawfish Etouffee
Nutrition Facts Nutrition Facts
Serving Size 2/3 cup (139g) Serving Size 2/3 cup (140g)
Amount Per Serving Amount Per Serving
Calories 40 Calories from Fat 10 Calories 100 Calories from Fat 40
% Daily Value* % Daily Value*
Total Fat 1g 2% Total Fat 4.5g 7%
Saturated Fat 0g 0% Saturated Fat 1g 4%
Cholesterol 20mg 6% Cholesterol 40mg 13%
Sodium 300mg 13% Sodium 710mg 30%
Total Carbohydrate 5g 2% Total Carbohydrate 9g 3%
Dietary Fiber 0g 0% Dietary Fiber less than 1g 2%
Sugars 3g Sugars 7g
Protein 3g Protein 7g
Vitamin A 6% • Vitamin C 10% Vitamin A 4% • Vitamin C 8%
Calcium 2% • Iron 4% Calcium 2% • Iron 6%
*Percent Daily Values are based on a 2,000-calorie *Percent Daily Values are based on a 2,000-calorie
diet. diet.

To ensure consistent protein content, shrimp were weighed on a scale and placed by
hand into each container. Once the frozen cooked shrimp were added to the containers,
kitchen workers drew gumbo or other seafood mixtures from the 150-gallon kettle into
four-gallon containers and then manually filled each tub. As soon as the workers filled
batches of containers, they placed lids on each container and applied a safety seal
around the rim of the lid. The filling process usually involved slight spills or overfills
that would require cleaning the tubs before applying the safety seal. Filled and sealed
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

Case 9 Azalea Seafood Gumbo Shoppe C-197

exhibit 6 Retail Pricing Survey and Wholesale Prices of Azalea


Seafood Gumbo Shoppe’s Seafood Dishes
Retail Pricing Survey

Grocery Chain Item Retail Price

Winn-Dixie 1-quart seafood gumbo $5.99


1-quart crawfish etouffee 6.99
Wal-Mart Supercenters 1-quart seafood gumbo 5.47
1-quart shrimp creole 5.47
Bruno’s 1-quart seafood gumbo 5.98
1-quart shrimp creole 5.98
1-quart shrimp-and-crabmeat bisque 5.98
Greer’s 1-quart seafood gumbo 5.98
1-quart shrimp creole 5.98
Randall’s 1-quart seafood gumbo 5.99
1-quart shrimp creole 5.99
1-quart shrimp-and-crabmeat bisque 5.99

Wholesale Prices

Product Container Size Wholesale Price

Seafood gumbo Gallon $15.50


Half gallon 8.00
Quart 3.60
Pint 2.00
Shrimp creole Gallon 15.50
Half gallon 8.00
Quart 3.60
Pint 2.00
Crawfish etouffee Gallon 18.00
Half gallon 9.25
Quart 4.00
Pint 2.25
Shrimp-and-crabmeat bisque Gallon 16.50
Half gallon 8.25
Quart 3.60
Pint 2.00

containers were then moved to a freezer where the temperature was brought down
from about 150 degrees Fahrenheit to ⫺10 degrees Fahrenheit within four hours.
The company had begun to use a new packaging process for its half-gallon and
gallon food-service packages that added automation to replace many of the labor-
intensive activities called for in its current packaging process. After gumbo or other
products were cooked in the steam kettle, the cooked product was transferred by a pis-
ton pump through a three-inch-diameter stainless-steel pipe to a horizontal paddle
wheel agitator where shrimp and other ingredients were evenly distributed. The
seafood products were then conveyed by stainless-steel piping from the agitator to a
vertical form/fill/seal machine that accurately metered the product into plastic boil-in
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

C-198 Cases in Strategic Management

exhibit 7 Azalea Seafood Gumbo Shoppe’s Quart Packaging


for Gumbo

bags. The form/fill/seal machine had the capability to fill and seal 15 gallon-sized plas-
tic bags per minute or 30 half-gallon pouches per minute. In production testing, the
form/fill/seal machine filled quart and pint bags at the rate of about 40 per minute. The
form/fill/seal machine left no residue on the filled and sealed boil-in bags. Each sealed
bag of gumbo, etouffee, bisque, or creole was then moved to a 1,000-gallon chill tank
that was able to lower the products’ temperature from approximately 150 degrees
Fahrenheit to about 35 degrees Fahrenheit within 15 minutes. The cooled packages
were then moved to the company’s freezer, where temperatures were lowered to ⫺10
degrees Fahrenheit. The frozen seafood products were then placed in individual boxes
and prepared for shipping. Once frozen, the prepared seafood products had a shelf life
of one year.

Sales and Marketing


John Addison and Mike Rathle were both responsible for the company’s sales and mar-
keting efforts. When either partner identified a potential new customer, typically he
would give price quotes over the phone and ship samples of the product to the company
to evaluate. If the grocer or food-service distributor was interested in the new product,
meetings would be set up to finalize the details. The partners’ approach to developing
new accounts had been successful with grocery accounts established with Wal-Mart,
Bruno’s, Winn-Dixie, Publix, Greer’s, and Randall’s. (See Exhibit 8 for a listing of
Azalea’s supermarket accounts.) The company used the same approach to develop
food-service accounts and had been able to gain access to more than 300 restaurants
through distribution agreements with PYA/Monarch and Wood Fruitticher. Usually es-
tablishing an account with a regional office of a national grocer took time, hard work,
and some good fortune. Rathle explained how personal contacts, persistence, and sales-
manship played a role in Azalea’s gaining access to distribution in about 300 Wal-Mart
Supercenters and 20 Sam’s Clubs in the southeastern United States:
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

Case 9 Azalea Seafood Gumbo Shoppe C-199

exhibit 8 Estimated Sales and Number of Locations for Azalea


Seafood Gumbo Shoppe’s Supermarket Customers, 2000
Number of Stores
Estimated 2000 Sales (store sales of
Company (in millions) 2 million or greater)

Wal-Mart* $22,947 908


Winn-Dixie 13,731 1,081
Randall’s† 2,600 117
Bruno’s 2,139 172
Jitney-Jungle/Delchamps 1,985 119
Greer’s 90 38

*Supercenter statistics reduced to include only traditional supermarket items.



Randall’s is a subsidiary of Safeway.
Source: Progressive Grocer annual report, April 2001; company websites.

We got into Wal-Mart because a local Supercenter manager liked our product and asked
that we sell to him on a direct delivery basis. Our product was selling well in that one store
and I found out that a person I knew while working for Brach’s was a grocery manager for
Wal-Mart. I called him up and said, “You guys need to get me in the warehouse. Look at
the volume I’m selling down here in this one store.” Two weeks later we were in the ware-
house selling to 300 Wal-Marts and 20 Sam’s stores.
We were also lucky in the way that Wood Fruitticher became a distributor for our
gumbo. John just called them up one day and they told them what volume we could supply
and they said, “Ship it.” Other accounts are very difficult to land. We’ve been in Winn-
Dixie regionally for a long time, but we’ve made no progress working with their corporate
people to get our gumbo distributed on a national basis.
Addison and Rathle’s marketing efforts to grocers also included trying to keep a fa-
vorable product placement in its distribution network of 1,000 supermarkets. This was
a challenging task since it was impossible for the two partners to call on all 1,000 store
managers or seafood managers. Many times, store managers might decide to move
items around in the store and Azalea’s gumbo might be moved to an unfavorable
freezer location without Addison or Rathle’s knowledge. The company had hired a
number of food brokers in the past to ensure a favorable placement but had only re-
cently found a broker willing to devote sufficient attention to the company’s products.
The company had achieved some success in guaranteeing good in-store placement by
purchasing nine-cubic-foot display-box freezers to place in some stores where its prod-
ucts were found. The bin-style display-box freezers contained only Azalea products and
were usually placed in the center of the seafood department. The company’s in-store
placement in Wal-Mart and Sam’s Clubs was not a concern since Wal-Mart maintained
a Plan-O-Gram that standardized product placement in all stores. Rathle explained how
the product’s placement in the store had such a large bearing on its sales:
One of our biggest problems in supermarkets is having our product moved down to the end
of a freezer aisle by the bait shrimp or getting stuck at the top-right corner of stand-up
freezer. The best placement is center face—right at eye level. We usually have good place-
ment in Wal-Mart or Sam’s because we’ve proven our product sells and we’ve worked with
them to get a good Plan-O-Gram placement. The Plan-O-Gram goes out to every Super-
center and Sam’s so that every store has the exact same store schematic. As long as we’ve
got a good spot on the Plan-O-Gram, the biggest part of the battle is won.
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

C-200 Cases in Strategic Management

It’s also very hard for us to get a good broker to distribute our products. We just aren’t
large enough to get the interest of a SUPERVALU. So we’ve been forced to work with cor-
porate buyers to work on our placement. We have found a broker that is small enough to be
interested in us, but yet he has a very good relationship with Winn-Dixie. He’s done a great
job getting us a good Plan-O-Gram placement with Winn-Dixies in Alabama and Missis-
sippi, but we really need more brokers with relationships like his.
In some ways, Azalea’s competition in supermarkets was limited since there were
few companies that specialized in gumbo. However, when discussing competition, Ad-
dison explained how in other ways everything in the store competed with his gumbo:
Our competitor is every other product in the store or on the menu. A customer can purchase
gumbo or they can buy fish. They can buy gumbo or they can buy steak or chicken. But as
far as other gumbo producers, there are only about four or five out there. Usually they ap-
pear whenever we land a new supermarket account. When we were only in Bruno’s, we had
no real competition. Then we got into Delchamps and here came everyone out of the wood-
work trying to take away the account. The same thing happened when we showed up in
Wal-Mart. However, we’ve never really permanently lost business to a competitor. Some-
times a newcomer or existing competitor will pay a big slotting fee to get on the shelf, but
if their product doesn’t taste as good as ours or is overpriced, they’ll be gone in three or
four months. There are a couple of other companies that sell gumbo to food-service dis-
tributors, but we haven’t really experienced any strong price competition in that segment.
Azalea’s food-service accounts with food distributors were highly attractive be-
cause they required virtually no continued sales and promotion support after the ac-
count was established. Once the food distributor began to carry a prepared food item,
it promoted the products it carried and placed regular orders with its manufacturers.
About 10 percent of Azalea’s production volume was dedicated to its food-service ac-
counts. Most of the company’s gumbo and other products were sold to large food-
service accounts like U.S. Foodservice, but about 20 percent of Azalea’s food-service
sales were made to jobbers. Addison and Rathle believed that the company’s just-in-
time production process helped keep its costs low and improved cash flow, but since
the company had very little inventory on hand, it frequently did not have any cases to
sell to jobbers who stopped by.
Addison and Rathle had also gained some food-service accounts by calling di-
rectly on the corporate offices of various restaurant chains. The partners had been able
to gain accounts with a few small regional chains, but had been unable to land accounts
with larger chains even though many chain buyers liked the gumbo samples and were
comfortable with Azalea’s pricing. Rathle discussed how the company’s austere facil-
ities had been a problem for some corporate buyers:
I made a presentation to Applebee’s a year or so ago to try to get them to serve our gumbo.
The meeting was going very well with the buyer saying how great our gumbo was, but then
she started talking about how the manufacturers of their food items had these state-of-the-
art facilities. It seemed that she went on forever about the automation that she sees in the
plants and manufacturers’ use of statistical quality control techniques. I knew that the meet-
ing was a waste of time when she asked when she could come down and inspect our plant.
We later had a similar opportunity with Cracker Barrel. We had sent a sample and they
called to say that they liked the product and were coming down to work out the details of a
contract. We knew from our meeting with Applebee’s that we needed to impress these peo-
ple with our facility. Well, we did the best we could do. We painted everything, did a lot of
yard maintenance, and generally cleaned everything up. They never showed up. Actually, I
think that they did show up, but didn’t come in. On the day of the meeting, I was sitting in
the office when I saw a rental Suburban full of suits pull into our driveway, sit for a while,
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

Case 9 Azalea Seafood Gumbo Shoppe C-201

and then turn around and pull off. Now I don’t know if those were the guys from Cracker
Barrel, but I never did receive a phone call about why they never showed for the meeting.
But I can’t really blame them. They probably pulled in here and said, “This is it? These
guys can’t do anything for us.”

OPPORTUNITIES FOR FURTHER GROWTH


As Addison and Rathle began to break down the cooking equipment used at the Mon-
terey Street block party, Rathle addressed some of the questions Addison had raised
earlier in the evening. Rathle was so pleased with the new boil-in bags used for the
company’s half-gallon and gallon food-service packages that he was convinced the
company should move to boil-in bags for its pint and quart packages sold in super-
markets:
You know, I am really happy with the new boil-in bags we’re using for the food-service
packages. I’ve been thinking that we might want to get rid of our pint and quart tubs. First,
we’ll have less wear and tear on the freezer and lower utility expenses. Right now we’re
running at a high load factor because we’re bringing 150-degree gumbo down to ⫺10 de-
grees. We’ve got to set the freezer at ⫺25 degrees to do that. By using the chill tank for all
of our gumbo, we’ll take gumbo at 35 degrees down to ⫺10 degrees—so we’ll only need
to set the freezer at ⫺10 degrees. I’ve run some numbers and I think that the lower load
factor will save about 30 percent per month in utility expense and about $2,000 per year in
freezer maintenance. We’ll have some labor cost savings because we won’t have to weigh
shrimp, safety-seal the tubs, or wipe spilled gumbo from the tubs, but that will probably be
offset by the cost of boxes needed for the boil-in bags.
Another advantage of the boil-in bags is our products’ appearance and the flexibility it
gives us for new product introductions. John, you know as neat of a pourer as I am, I can’t
keep those containers from sloshing around as they are racked and wheeled into the freezer.
When they come out of the freezer we’ve either got gumbo down the side of the tub or
under the safety seal.
Also, the boxes will look more like what people are used to seeing from national
brands. We can have a full-color photo-quality image of our product right on the front of
the box. Initially, the boxes are going to cost about 50 percent more per container than what
we pay for the tubs, but I think we’ll get better placement in the stores with a box that is at-
tractive and can be stood on end in a freezer near other seafood items. I believe that our
sales will increase by at least 20 percent because of the more attractive packaging. Right
now, I’m not sure that anyone knows what’s in our tubs unless they’re already familiar with
the product. Also, we haven’t raised our prices in two years. Maybe a price increase could
accompany a packaging change. Also, the additional cost of the box will eventually fall be-
low what we currently pay for tubs once our order size increases.
Addison agreed with Rathle’s observations but pointed out that gumbo could be
wiped off the tub before shipping and that they had rarely heard a complaint from a
retailer about gumbo under the safety seal. Rathle replied,
Well, it bugs me because I know it doesn’t look good. I wouldn’t buy a product that’s com-
ing out of the container. Plus, I think that we could sell true ready-to-serve meals if we put
a bag of rice and a gumbo boil-in bag in the same box where both could be dropped in a pot
of boiling water and served within 10 minutes. The individual servings might also be a hit
with restaurants since instead of cooking a gallon of gumbo that might not be completely
used, they could take out a six-ounce pack that could be boiled or microwaved whenever
someone ordered a cup of gumbo.
Rathle mentioned that his only reservation with changing to boil-in bags for retail
sales was the potential for the bags to contain varying amounts of shrimp:
Thompson−Strickland: 9. Azalea Seafood Gumbo Case © The McGraw−Hill
Strategic Management: Shoppe Companies, 2002
Concepts and Cases, 13th
Edition

C-202 Cases in Strategic Management

I’ve tested and tested the paddle wheel agitator and it seems that the number of shrimp in
the bags is always consistent, but I know and you know that someone out there is going to
buy a pint of gumbo that doesn’t contain as many shrimp as what they are used to. I’d just
hate for someone to say, “Gosh, it had more shrimp in it last time.”
Addison didn’t comment on the consistency issue and shifted the conversation to
the need for a new production facility:
You know I really think that we’re going to have to move to a new facility before we can
land many more accounts—especially in food service. It just seems that large customers are
worried about our sanitation, which has never been a problem, and our ability to meet their
production needs. They see this 2,200-square-foot building and think we can’t do as much
volume as we can. We’ll need about $120,000 in new equipment if we move. Also, our rent
will probably go up by about $1,000–$1,500 per month, but we have about $5,000 in
monthly payments on equipment loans that will pay out within the next six months. Plus,
if the people in Bentonville wanted our product in 100 Sam’s locations, I’m not sure we
could do it with our current facility.
Also, if we had a larger building specifically designed for food processing, we could
become USDA certified. USDA certification would allow us to add new products like
chicken gumbo that would sell at a lower price point than seafood gumbo. We could also
add new products like Red Beans and Sausage or Cajun Stuffed Chicken Breasts. We could
also do custom entrées for our food-service customers. None of that will happen in our cur-
rent building since we don’t have 12-foot ceilings, two bathrooms, an office for the USDA
inspector to park, or isolation freezers for raw food.
With the last of the cooking equipment loaded, Addison and Rathle got in the truck
to return to the plant. Addison mentioned to Rathle that Azalea’s current production ca-
pacity would allow the company to increase annual sales to about $1.5 million without
any further investment. He believed that both partners could live very well if the com-
pany could grow sales by another 50 percent without the addition of debt or increased
rental expenses. However, Addison went on to comment that the highest return on their
investment of time and money hinged on their ability to grow revenues and earnings
by an additional five- to tenfold to become an acquisition candidate for a large food
company or food distributor.