Barbecue Sauce Manufacturer

EXECUTIVE SUMMARY

PRODUCTS & SERVICES

ORGANIZATION

MARKET ANALYSIS

CUSTOMERS

FINANCIAL ANALYSIS

CONCLUSION

FLAMETHROWER BARBECUE SAUCE

312 W. Ann St.
Ann Arbor, Michigan 48103

Bo-Hung Ke, Robert Oesch, and Jeriah Williams

FlameThrower barbecue sauce comes from a very unique and locally established restaurant, FlameThrower BBQ, located in Ann Arbor, Michigan. The restaurant has a well–established and local loyalty in the Detroit metropolitan area. Its delicious hickory–smoked meats basted in an incredible sweet vinegar–based sauce have a special quality unlike any other barbecue restaurant in the area. The current FlameThrower special barbecue sauce is the creation of its owner, Matteo Hill, and has developed a reputation of its own with customers. Based on customer feedback, we have a desire to mass produce and sell this sauce.

EXECUTIVE SUMMARY

FlameThrower barbecue sauce comes from a very unique and locally established restaurant, FlameThrower BBQ, located in Ann Arbor, Michigan. The restaurant has a well–established and local loyalty in the Detroit metropolitan area. Its delicious hickory–smoked meats basted in an incredible sweet vinegar–based sauce have a special quality unlike any other barbecue restaurant in the area. The current FlameThrower special barbecue sauce is the creation of its owner, Matteo Hill, and has developed a reputation of its own with customers. Other sauces have since been added to the FlameThrower menu, including a spicy sauce, wing sauce, and barbecue seasonings.

FlameThrower barbecue sauce is an excellent departure from the sauces currently on the market in the local region. Its robust flavor has a uniqueness that sets it aside from that of most nationally mass produced sauces. However, some of the limitations associated with the introduction of the sauce to the market pose potential threats, which include (a) limited regional and national exposure; (b) no national cook–off or convention entries; (c) resistance of sales in specialty boutiques due to loyalty to their own sauces and; (d) the limitations of the owner’s resources and time to market and produce.

The current national bottled barbecue sauce industry has its high points. There is a growing trend for specialty sauces like FlameThrower and the overall market value is increasing. Locally, there are only a handful of barbecue sauce businesses that are in the metro area, which include Cayenne, Richard’s BBQ, and Mesquite Tavern. There are about 13 different brands of barbecue sauces in local supermarkets that come in various sizes and flavors.

Due to the distinct differences in the selling process, customer requirements, and sales forecasts, the study was performed by dividing the introduction of the FlameThrower signature sauce into two main sales channels: Local Grocery Markets and Supermarket Chains. Neither venture is immediately feasible, as they cannot produce short–term financial profits and exhausts more of the owner’s time than he has available. The majority of smaller local grocers sell their own bottled barbecue sauce, which causes them to limit the amount of other sauces they will carry. Pursuing the supermarket chain channel would require a very large initial investment, and the number of bottles that would have to be sold to break even is beyond reasonable investment and will not turn over foreseeable profit. We suggest reinvestigating the feasibility of this project in 3 years after pursuing a number of marketing activities. Some of those activities include: local events including the Catsup Bottle Festival and the International Horseradish Festival. Participation in such events is very inexpensive and will give FlameThrower an opportunity to provide a venue for new customers. Donations of the sauce to local schools for fundraisers and charities are also recommended. A “sauce swap” relationship in which Matteo displays other area sauces in the restaurant in exchange for them displaying his is another activity that could help build a mutually beneficial relationship with other stores while increasing brand recognition in the local area. We believe these kinds of activities will prove to further increase FlameThrower’s brand equity.

PRODUCTS & SERVICES

Unique Benefits

The unique feature of this sauce is the original, well–balanced combination of ingredients that creates a truly unique and impressive barbecue sauce. The savor of the sauce makes it an excellent departure from the vinegary and/or overly smoky sauces that are available in the local region, while offering a more robust palette than that of nationally mass produced sauces. FlameThrower Barbecue Sauce is the signature sauce from the local well–regarded restaurant of the same name, which has been recently revived under new management. It is still known for its quality food, and most notably its sauce.

Risk Factors

The shortcomings of the product are: (a) FlameThrower brand image is strongest only in the Ann Arbor (Metro Detroit) area. There are some predicted challenges in selling the FlameThrower sauce outside of the area; (b) The sauce has not gained any exposure through any local, state, or national cook–offs or barbecue sauce conventions for potential first time buyers; (c) there are a limited number of boutique establishments where FlameThrower would be able to sell its product, and many of these places restrict their sales to their own specialty sauce; and (d) lastly, Matteo’s time. The owner, Matteo Hill, is the sole owner and key manager for the already successful FlameThrower restaurant. His time and resources are limited and extremely valuable. He must be selective in making the best use of his time given his already successful but demanding restaurant activities.

ORGANIZATION

Stage of Development

The product has an existing, well–tested and received client base. The signature sauce is currently sold through the one location but there is currently no point–of–sale display. A well–designed and attractive bottle must still be selected and will be done so based upon (a) appeal to the consumer; (b) the optimum size(s) to be offered. To support short–term production forecasts, there will not be any additional production capacity required. However in the very long–term, there would be some further research and speculation in the increased capacity, only after short–term objectives are achieved. Even then, research and feasibility will have to be further investigated.

Legal Restrictions and Rights

The intellectual property in question, namely the FlameThrower sauce recipe, is known only by a handful of well–trusted employees. The ingredients, according to US FDA requirements, must be listed on the bottle, with the exception of flavorings and spices. Those ingredients can be listed on the packaging as “natural flavors, spices” and is where the true unique quality of the sauce lies. All OSHA, FDA, and health code standards are already met, and the internal bookkeeping can be handled by the same individual currently handling this function for the restaurant.

The logo that will adorn the bottle is already copyrighted, through Smith Graphics in 2004 and is owned wholly by Matteo Hill.

Insurance Requirements

There is no need for any additional insurance coverage. There are no initial plans to take on addition employees, but this may be considered if the additions of merchandisers and/or administrative personnel are required due to substantial growth as time progresses.

MARKET ANALYSIS

Specialty sauces and “home–grown recipes” have gained a strong niche market as many individuals are looking for increased diversity of flavors, while looking for a new “secret” brand. The growing interest in at home barbecuing and the introduction of a number of barbecue cooking shows has raised the quality of the food prepared, which for many justify (and even require) a quality local sauce.

National Barbecue Sauce Industry

According to industry research (2002–2005), US sauce, dressing and condiment revenues grew by 3.5 percent to just more than $14.4 billion. In real terms, overall value sales grew by 1.9 percent, compared to a relatively static performance in 2001. However, volume sales growth lagged behind value gains, increasing by only 1 percent to just more than 2,410,126 metric tons. This was speculated to be due, in a large part, to US consumers changing their product usage trends. Consumers have shifted to higher priced premium products with US consumer demand also demonstrating a growing trend towards higher unit priced specialty sauces. Logically, many manufactures have begun to produce more specialty ethnic sauces to jump on margin gains.

Local Barbecue Sauce Industry

According to industry research findings, there are four firms in the Detroit metro area barbecue sauce bottling business, of which all were able to survive during the 3 years (2002–2004) resulting in a failure rate of 0 percent. Due to the sales classification change of 1 company from $5 million to “unknown,” the overall industry numbers are difficult to use for reliable analysis. However, since the annual revenues of this company are substantially larger than the other 3 companies (within the less than $200k sales class), their sales should not be included in this analysis.

The following illustrates the Detroit metro area market (these are averages over a three year period (2001–2004)):

Annual market volume ($)

Average annual sales ($)

Industry Trends

To gain a perspective of how the sauce bottling and sale relates to the barbecue restaurant industry, we will present relevant industry trends. Barbecue sauce is usually the heart of a Barbecue restaurant, and almost every restaurant purports to have its own secret sauce recipe. The Local Marketing Research Profile provided by bizminer.com indicates that in the Detroit metro area there were 86 restaurants existing from July of 2002 to July of 2004.

The total number of restaurants combined comes to an annual market volume of $22.17 million in 2004. The average sales of small business barbecue restaurants is approximately $214,286 amongst 3–year surviving businesses, representing 3–year growth of 3.6 percent, which demonstrates that although average sales per small business is declining, it is declining at a much lower rate than that of the industry overall.

FlameThrower is in the small business segment classification. Industry figures indicate that the small business segment has a failure rate of 30 percent by year 3. As a very positive note, FlameThower restaurant far surpassed this possibility, as it has been an established restaurant for a number of years. The market share maintain by this small restaurant business segment of 3–year surviving firms is 13.53 percent, with the remainder being held by the larger, restaurant chain firms (bizminer.com).

COMPETITION

The primary restaurant competition includes Cayenne in Canton, Michigan, Richard’s BBQ in Windsor, Canada, and Mesquite Tavern in East Lansing. Also, the bulk of the 86 metro area barbecue restaurants are within Detroit city limits, which are considered secondary competition due to having a different client base, based upon geographic proximity. Cayenne and Richard’s BBQ are both of a similar size as FlameThrower, whereas Mesquite Tavern is in a different category since it is a restaurant chain, with 15 stores in Michigan, 3 in Illinois, 1 in Ohio, and 1 in Louisiana and has considerable more seating capacity.

CUSTOMERS

The customer base for FlameThrower is based in the Ann Arbor/Metro Detroit area; with the concentration of customer depleting as the distance range outside the Metro Detroit area is increased. FlameThrower’s brand recognition almost completely dissipates once the entire Detroit metro area is viewed.

Due to the distinct differences in the selling process, customer requirements, and sales forecasts, we propose a split in the introduction of the FlameThrower signature sauce into two main sales channels: Local Grocery Markets and Supermarket Chains.

Local Grocery Markets

There are a number of local grocery vendors in the Detroit Metro East area. The search was focused on an area within a 15–mile range of FlameThrower Restaurant based upon the strength of the FlameThrower brand in this general area. Other criteria for identifying stores that are part of this sales channel were: (a) must be independently owned and operated; (b) must currently offer some kind of sauce (whether a full grocery store, meat market or butchers shop). Thirteen stores were identified as meeting all of these qualifications.

Competition

There are a number of competing brands that are available within all of the small grocer markets (including butcher shops) in the Detroit Metro East area; these brands are Spicy Sauce, Marc’s Marinade, and Chef LaPonde’s BBQ Sauce. Spicy Sauce and Marc’s Marinade are both local companies that internally handle the production and distribution of their own sauces. Both company have been in the bottled sauce business for a substantial number of years and produces a variety of sauces, but neither have any history within the restaurant business.

Another notable trend found across all of the butcher shops and meat markets was that most stores had their own brand of barbecue sauce. This represents 10 of the 13 qualifying stores and after discussion with the stores’s owners would prove to be a major issue as they are not interested in carrying another local brand of barbecue unless a large number of customers begin to demand a particular sauce.

Customers

Since these stores purchase the sauce rather than holding inventory on consignment, the direct customers are the stores themselves. The end customers, if this sales channel were pursued, would be individuals who purchase ribs, brisket, chicken, and other items they intend to barbecue and would also be buying their sauce of choice from the meat market. The issue found with these direct customers (stores) is that only 3 of the 13 stores would even be interested in carrying FlameThrower signature sauce since they are interested in building demand for their own signature sauces.

Operating Expenses

The total cost to produce a pint of sauce for Matteo in–house is $0.76 and the cost of the actual bottle is $0.67, not including the $0.10 that each label will cost. Initial marketing for Matteo in–house production costs will include the $300 investment needed for label design, $8 an hour in wages to be paid to an employee to sample and sell the product in the individual stores for 10 hours per store and an average of 3 sample bottles per store. This would make annual operating expenses:

Initial startup costs

Profitability and Pricing

Based upon discussions with the management of the individual store locations, it can be expected that 312 pint bottles could be sold annually if local stores that claimed they would be interested were to sell the sauce. To be competitively priced in these stores, FlameThrower sauce would be sold for $4.00 per pint–size bottle.

Mr. Hill currently sells his barbecue sauce at customer request within the restaurant. The prices currently being charged are: $21 for a gallon, $7 for a quart and $3.50 for a pint container. Due to pints being the most popular size within this sales channel, this would be the only size that would be sold. The price would have to be raised to establish it as a premium sauce and would be sold for $4 a pint–size bottle, as that is what the direct customers quoted as an average price they pay, as they mark up prices 33 percent.

Based on the Director of Sales at Food Stores R Us, a small manufacturer in Detroit, Michigan, an estimate of costs related to production is $20 dollars per case. Because Food Stores R Us is a small operation, they can produce at a base minimum of 100 cases (1200 bottles) for a single production line. The only fixed cost to consider in this operation is $300 for label design, since all other fixed cost are sunk costs. A break even analysis of this venue of sales is as follows:

Supermarket Chains

There are many large supermarket chain locations around the Ann Arbor area. The first step of getting sauce into the stores is to introduce the product to a supermarket distributor or buying manger. If at this stage the product is approved and received by the buyer, then a further discussion of the details of distribution is begun. At an estimate of $7,500 for an initial shipment of the product to the warehouse, an initial order requires at least 250 cases (approximately 3000 bottles/12 bottles per case). If the product cannot be sold out, Matteo will have to buy the product back from the supermarket at its retail price.

Competition

In brand analysis, we did a survey in several different supermarkets. There are basically 13 different brands of barbecue sauces with different sizes and flavors. Based on the information we collected from the manager of supermarket, the product that can be put on the fifth level shelf will have better sales because customers can see the product easily. Based on this logic, we can have two conclusions: (1) the first one is that we can pay extra money to put our product on the fifth level shelf. (2) The other conclusion is that Spicy Sauce, Marc’s Marinade, and Chef LaPonde’s BBQ Sauce have better sales than other brands.

Another important note is that products which are located on the fifth level of the shelf are there for two reasons, one is so that the product sells better than other similar products, another is the sauce producer invests more money to place their products in a more obvious location.

In flavor analysis, there basically 8 kinds of flavors, such as Hot, Smoked, Honey, Hickory, Original, Kansas City–Style, St. Louis–Style and Tennessee–Style.

Small brands and big brands prefer to produce their sauces into smaller bottles. These brands typically produce their sauce in 18oz bottles. One logical reason given by local managers for this is to encourage customers to try new products as customers don’t have to buy much of the sauce to try a new one.

Customers

Since sales are done directly to stores, the stores’ Purchasing Agents are the direct customer. The end customers are those individuals who shop in the local supermarket chain locations do so for convenience. They usually go to the store that has easy accessibility and within a 15–mile radius. It is important to understand that the motivations of a supermarket customer are usually low price and convenience. Customers of a local supermarket are usually local residents. The direct customer would be the supermarket Purchasing Agent, since the sale of the sauce will be directly to Food Stores R Us.

Pricing

The amount of initial order is 3000 bottles, and we also have to pay $7,500 to the supermarket in order to sell our product through their distribution. Based on Mr. Hill’s suggestion, he preferred his product with middle price, after we research the market price; we suggested that he could sell his 18oz bottle as $1.15 and 28oz as $3.50. Based on the information of the supermarket’s manager, supermarket will increase 30 percent of the buying price. For example, if the price were labeled as $1.15 dollar, the cost of buying the product would be $0.88 dollar. Based on this logic, we can assume that the price of 18 oz sauce that we sell to the supermarket would be $0.88, and the price of 28oz sauce that we sell to the supermarket would be $2.69 dollars.

Given an estimate of costs from local sauce manufacturers, a realistic estimate of costs is $20 dollars per case give or take depending on the sauce content and production process. From our research of supermarket requirements, we have to be able to ship 250 cases (12 bottles a case) to the warehouse, and expect a $7,500 cost for shelf space at a minimum, and $300 for label design. In our study, the initial order set up costs is $7,800. The major component of variable cost is the manufacturing cost, which is $5,000 for 250 cases. Based on the figures above, we determine that ATC (Average Total Costs) per 16oz bottle is $4.27.

We will have to sell our 16 ounces for $0.88 so that we can price the product competitively at $1.15 a bottle. This is how we will come to a typical supermarket mark up of 30 percent. So, if we sell one bottle per Food Stores R Us cost estimates, we have a cost $4.27 and will have to sell it to the supermarket at $0.88 per bottle. We would lose $3.39 when we sell each bottle.

In summary, if we acquire an outside manufacturer to produce and bottle the sauce and sell through supermarket chains, breakeven will never be reached. For every bottle sold, we lose $4.00, which is clearly not feasible.

FINANCIAL ANALYSIS

Custom Manufacturing Option

Since a profit cannot be earned through 16oz bottle sales of sauce that is produced internally, custom manufacturing becomes a strong possibility. Food Stores R Us, a local Detroit–based sauce manufacturer, handles sauce production for several barbecue sauce brands in the Metro Detroit Area. Establishing a relationship and manufacturing a sauce recipe is quite simple. The process involves (a) providing a sample of the product to the new product manager (of which they will sign a confidentiality statement); (b) they provide a test batch on the customer base; (c) there is further discussion of the size bottles and marketing issues; and (d) the new product manager and owner decide if a line or size change is necessary.

The initial cost of this endeavor is as follows:

Initial case requirement

400 cases
$20 per case
$8,000 initial production costs

At the current prices charged to the supermarkets, this method of production is unfeasible.

Sources of Start–up Capital

The money required to begin selling in the local grocery markets could be financed from internal cash. To venture into the Supermarket chains, additional funding could be acquired through a SBA 504 loan.

CONCLUSION

To pursue either of these sales channels at this stage of development is not feasible. Overall, such activities would require a great deal of time to pursue, which is something that Matteo does not have to spare. It is unfeasible to pursue the local grocery markets, since the majority of these stores sell their own bottled barbecue sauce limiting the amount of other sauces that they carry to those that receive a large number of customer requests. This results in too few stores shelving FlameThrower barbecue sauce to make this venture currently reasonable to pursue. Pursuing the supermarket chain channel would require a large initial investment and the number of bottles that would have to be sold to breakeven can not be realistically forecasted. We foresee the possibility of reinvestigating the feasibility of this project in 3 years after pursuing a number of suggested marketing activities.

We recommend that Matteo Hill use the money that would be invested into this project to further advertise the restaurant. The recommended marketing activities include becoming a vendor at local events including the Catsup Bottle Festival and the International Horseradish Festival. Participation in such events is very cheap and it will give FlameThrower barbecue sauce an opportunity to introduce people to their food and to display their bottled sauce for both new and existing companies, while proving their connection to the area. FlameThrower could also donate bottled sauce (using sauce that is leftover and not to be used for food) to local schools for their fundraisers to increase the presence of both their restaurant and sauce. A “sauce swap” where Matteo displays other area sauces in the restaurant (particularly those from the small grocery markets) in exchange for them displaying his, could help build a mutual beneficial relationship with the stores, opening the opportunity to do business with them in the future, while further increasing FlameThrower’s brand equity.

If the activities are pursued and show signs of success, we foresee the possibility of selling in the local grocery markets 4–5 years from now, outsourcing production to a custom manufacturer such as Food Stores R Us in Detroit, Michigan and beginning to sell the sauce to chain grocery stores and through a website (Matteo already owns the rights to an appropriate domain name) in 8–10 years.