BASIC MARKETING 18th Edition by Jerome McCarthy William Perreault, Joseph Cannon

Exercise 30

De Angelo's Pizzeria
Lara Logan, manager of the De Angelo's Pizzeria store in Flint, Michigan, is trying to develop a plan for the "sick" store she just took over.
De Angelo's Pizzeria is an owner-managed pizza take-out and delivery business with three stores located in Ann Arbor, Southfield, and Flint, Michigan. De Angelo's business comes from telephone, fax, or walk-in orders. Each De Angelo's store prepares its own pizzas. In addition to pizzas, De Angelo's also sells and delivers a limited selection of soft drinks.
De Angelo's Ann Arbor store has been very successful. Much of the store's success may be due to being close to the University of Michigan campus. Most of these students live within 5 miles of De Angelo's Ann Arbor store.
The Southfield store has been moderately successful. It serves mostly residential customers in the Southfield area, a largely residential suburb of Detroit. Recently, the store advertised- using direct-mail flyers-to several office buildings within 3 miles of the store. The flyers described De Angelo's willingness and ability to cater large orders for office parties, business luncheons, and so on. The promotion was quite successful. With this new program and De Angelo's solid residential base of customers in Southfield, improved profitability at the Southfield location seems assured.
De Angelo's Flint location has had mixed results during the last three years. The Flint store has been obtaining only about half of its orders from residential delivery requests. The Flint store's new manager, Lara, believes the problem with residential pizza delivery in Flint is due to the location of residential neighborhoods in the area. Flint has several large industrial plants (mostly auto industry related) located throughout the city. Small, mostly factory-worker neighborhoods are distributed in between the various plant sites. As a result, De Angelo's store location can serve only two or three of these neighborhoods on one delivery run. Competition is also relevant. De Angelo's has several aggressive competitors who advertise heavily, distribute cents-off coupons, and offer 2-for-1 deals. This aggressive competition is probably why De Angelo's residential sales leveled off in the last year or so. And this competitive pressure seems likely to continue as some of this competition comes from aggressive national chains that are fighting for market share and squeezing little firms like De Angelo's. For now, anyway, Lara feels she knows how to meet this competition and hold on to the present residential sales level.
Most of the Flint store's upside potential seems to be in serving the large industrial plants. Many of these plants work two or three shifts, five days a week. During each work shift, workers are allowed one half-hour lunch break-which usually occurs at 11 a.m., 8 p.m., or 2:30 a.m., depending on the shift.
Customers can order by phone, fax, e-mail, or at the De Angelo's Web site. About 30 minutes before a scheduled lunch break De Angelo's can expect an order for several (5 to 10) pizzas for a work group. De Angelo's may receive many orders of this size from the same plant (i.e., from different groups of workers). The plant business is very profitable for several reasons. First, a large number of pizzas can be delivered at the same time to the same location, saving transportation costs.
Second, plant orders usually involve many different toppings (double cheese, pepperoni, mushrooms, hamburger) on each pizza. This results in $11 to $14 revenue per pizza. The delivery drivers also like delivering plant orders because the tips are usually $1 to $2 per pizza.
Despite the profitability of the plant orders, several factors make it difficult to serve the plant market. De Angelo's store is located 5 to 8 minutes from most of the plant sites, so De Angelo's staff must prepare the orders within 20 to 25 minutes after it receives the telephone order. Often, inadequate staff and/or oven capacity means it is impossible to get all the orders heated at the same time.
Table 1 Practical Capacities and Sales Potential of Current Equipment and Personnel

* The variable cost estimate of 40% of sales includes variable costs of delivery to plant locations.
†Amounts shown are not physical capacities (there is almost unlimited physical capacity), but potential sales volume is constrained by number of pizzas that can be sold.
Table 2 Capacity and Demand for Plant Customer Market

Generally, plant workers will wait as long as 10 minutes past the start of their lunch break before ordering from various vending trucks that arrive at the plant sites during lunch breaks. (Currently, no other pizza delivery stores are in good positions to serve the plant locations and have chosen not to compete.) But there have been a few instances when workers refused to pay for pizzas that were only five minutes late! Worse yet, if the same work group gets a couple of late orders, they are lost as future customers. Lara believes that the inconsistent profitability of the Flint store is partly the result of such lost customers.
In an effort to rebuild the plant delivery business, Lara is considering various methods to ensure prompt customer delivery. She thinks that potential demand during lunch breaks is significantly above De Angelo's present capacity. Lara also knows that if she tries to satisfy all phone or fax orders on some peak days, she won't be able to provide prompt service and may lose more plant customers.
Lara has outlined three alternatives that may win back some of the plant business for the Flint store. She has developed these alternatives to discuss with De Angelo's owner. Each alternative is briefly described below:
Alternative 1: Determine practical capacities during peak volume periods using existing equipment and personnel. Accept orders only up to that capacity and politely decline orders beyond. This approach will ensure prompt customer service and high product quality. It will also minimize losses resulting from customers' rejection of late deliveries. Financial analysis of this alternative-shown in Table 1-indicates that a potential daily contribution to profit of $1,230 could result if this alternative is implemented successfully. This would be profit before promotion costs, overhead, and net profit (or loss). Note: Any alternative will require several thousand dollars to reinform potential plant customers that De Angelo's has improved its service and "wants your business."
Alternative 2: Buy additional equipment (one oven and one delivery car) and hire additional staff to handle peak loads. This approach would ensure timely customer delivery and high product quality as well as provide additional capacity to handle unmet demand. Table 2 is a conservative estimate of potential daily demand for plant orders compared to current capacity and proposed increased capacity. Table 3 gives the cost of acquiring the additional equipment and relevant information related to depreciation and fixed costs.
Using this alternative, the following additional pizza delivery and preparation personnel costs would be required:

The addition of even more equipment and personnel to handle all unmet demand was not considered in this alternative because the current store is not large enough.
Alternative 3: Add additional equipment and personnel as described in alternative 2, but move to a new location that would reduce delivery lead times to 2 to 5 minutes. This move would probably allow De Angelo's to handle all unmet demand-because the reduction in delivery time will provide for additional oven time. In fact, De Angelo's might have excess capacity using this approach.
A suitable store is available near about the same number of residential customers (including many of the store's current residential customers). The available store is slightly larger than needed. And the rent is higher. Relevant cost information on the proposed store follows:

Table 3 Cost of Required Additional Assets

*Annual depreciation is calculated on a straight-line basis.
†Daily depreciation assumes a 350-day (plant production) year. All variable expenses related to each piece of equipment (e.g., utilities, gas, oil) are included in the variable cost of a pizza.
Lara presented the three alternatives to De Angelo's owner, Marcelo De Angelo. Marcelo was pleased that Lara had done her homework. He decided that Lara should make the final decision on what to do (in part because she had a profitsharing agreement with Marcelo) and offered the following comments and concerns:
1. Marcelo agreed that the plant market was extremely sensitive to delivery timing. Product quality and pricing, although important, were of less importance.
2. He agreed that plant demand estimates were conservative. "In fact, they may be 10 to 30 percent low."
3. Marcelo expressed concern that under alternative 2, and especially under alternative 3, much of the store's capacity would go unused over 80 percent of the time.
4. He was also concerned that De Angelo's store had a bad reputation with plant customers because the prior store manager was not sensitive to timely plant delivery. So Marcelo suggested that Lara develop a promotion plan to improve De Angelo's reputation in the plants and be sure that everyone knows that De Angelo's has improved its delivery service.
Evaluate Lara's possible strategies for the Flint store's plant market. What should Lara do? Why? Suggest possible promotion plans for your preferred strategy.