Case Study: Colombo Frozen Yogurt
In 1997, General Mills Plc, a multi-billion £ consumer goods company, acquired Colombo Frozen
Yogurt. General Mills Plc (GMP) believed they could add Colombo frozen yogurt to their exist-
ing product line-up to increase net sales with little addition in marketing cost.
Frozen yogurt is sold through two distinct market segments: independent shops and impulse
locations such as cafeterias, colleges and buffets. The shop business revolves around frozen
yogurt and speciality items made from yogurt. In the impulse segment, yogurt is an add-on to the
main business. GMP’s large salesforce already served the impulse market with various ‘snack’
food items.
The financial results in the first couple of years were mixed. Profits increased along with sales
volume. However, when sales hit a plateau, earnings dropped. The sales-people were dissatisfied
with yogurt sales and said their customers weren’t happy either. The GMP salesforce focused on
the impulse segments and saw increases in volume there. However, volume in the shop segment
declined at alarming rates. While GMP knew sales by segment, they didn’t track costs by seg-
ment. Instead costs were allocated based on £ sales. Therefore, they needed a new method to
track costs: activity-based costing.
Frozen yogurt market structure
Colombo Yogurt Company, an early innovator in the frozen yogurt market, did well during the
early craze when customers flocked to frozen yogurt as a healthy alternative to ice cream. As the
market continued to develop, Colombo chose to market mainly to independent shop owners. As
a result, Colombo lost customers when franchise operations such as TCBY encouraged inde-
pendent shops to become a franchise and purchase the product from the franchiser. In the early
1990s, the market changed again as food service operators such as cafeterias, colleges and buffets
started to add soft-serve yogurt to their business. By the late 1990s, these impulse locations
accounted for two-thirds of the soft-serve market.
The economics of shops is similar to that of restaurants. The shops focus on maximising
profit per square foot. While they are aware of food cost, shop owners are rooted in a culture
dominated by guest counts (new and repeat) and receipt averages. These variables are more
linked to the kind of customer referrals where word of mouth brings in new customers and the
total experience brings them back again. The key variable is the quality of the product and
experience (service and feeling). To compete with other shops, they must innovate by adding
distinctive new products such as smoothies, juices, etc. Otherwise they may go out of business as
thousands have done in the last decade.
The economics of impulse locations is very different. They make their living from other items,
and the soft-serve trade is only performance topspin. These firms are unwilling to take any risk
(new equipment or extra labour) to serve highly differentiated products such as smoothies or
juices. They generally are interesting in providing a quality service for a reasonable price. They
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typically measure performance with cost per serving, and they have a difficult time understand-
ing profit contribution as opposed to food cost. Impulse locations are typically small.
The GMP–Colombo marketing plan
It was the impulse business in the Foodservice operations that made Colombo an attractive
acquisition for General Mills. The GMP Foodservice Division was already marketing well-known
brands to food management firms, hospitals, and schools. Colombo yogurt was added to this
product line-up, and the Foodservice salesforce covered both shop and impulse locations.
Salesforce
Colombo’s salesforce was merged into the Foodservice salesforce. Customers were reassigned to
salespeople who already serviced that geographical area. The salespeople varied in their reaction
to the product. Some found shops easy to sell to, while others avoided the shops despite the pos-
sible lost commission. Many spent a lot of time helping their impulse customers understand how
to use the machinery.
Merchandising promotions
Colombo traditionally charged the shops for merchandising that was large scale and eye popping
(neon signs). The shops used these signs to draw customers inside. Since GMP traditionally pro-
vided merchandising at no cost, they stopped charging for it. Salespeople used the merchandising
as a reason to visit the customers, and the same merchandising was provided to both shops and
impulse locations. While shops expressed interest in the kits, some salespeople noticed that the
impulse locations didn’t even hang them up.
Pricing promotions
Pricing promotions are a mainstay of GMP’s impulse location approach. GMP’s salesforce gen-
erally used these promotion events as an opportunity to visit their accounts and take advantage
of the occasion to meet service needs and sell other products that might not be featured. GMP
made price promotions available to both segments of the market. While the deals were typically
around £5 per case, they averaged £3 per case against all the volume shipped during the year.
GMP marketing knew price was not a major decision factor for shops, and they did not aim
pricing promotions to them. However, shops were aware of the promotions and took advantage
of them.
The business case pre-ABC
Profit and loss by segment pre-ABC
Category Impulse segment Yogurt shops Total
Sales in cases 1 200 000 300 000 1 500 000
Sales revenue £23 880 000 £5 970 000 £29 850 000
Less: price promotions –3 600 000 –900 000 –4 500 000
Net sales 20 280 000 5 070 000 25 350 000
Less: cost of goods sold –13 800 000 –3 450 000 –17 250 000
Gross margin 6 480 000 1 620 000 8 100 000
Less: merchandising –1 380 000 –345 000 –1 725 000
Less: SG&A –948 000 –237 000 –1 185 000
Net income £4 152 000 £1 038 000 £5 190 000
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ABC analysis of cost of goods sold
Cost of goods sold is made up of £14 250 000 for ingredients, packaging and storage, and
£3 000 000 for pick/pack and shipping. Since the product is the same across segments, the cost to
produce should be the same. However, pick/pack and shipping costs vary according to whether
or not the order is for a full pallet. Full pallets cost £75 to pick and ship whereas individual orders
cost £2.25 per case. There are 75 cases in a pallet and the segments differ in their utilisation of
full pallets, as shown below.
Impulse segment Yogurt shops Total
Cases in full pallets 60 000 240 000 300 000
Individual cases 1 140 000 60 000 1 200 000
Total cases 1 200 000 300 000 1 500 000
ABC analysis of merchandising
Merchandising costs consist mainly of kits costing £500 each. A review of where the kits were
sent indicated that a total of 3,450 kits were delivered, 90 of them to shops.
ABC analysis of selling, general, and administrative (SG&A)
Since sales representatives service several products, their costs were allocated to the various prod-
ucts based on gross £ sales. GMP gave diaries to 10% of the salesforce in randomly selected
markets of the country and asked them to track their time in activity classifications for 60 days.
The diaries indicated that sales representatives spent much more time per pound of sale on yogurt
than other products. When SG&A costs were allocated based on time, the total allocation to
yogurt jumped from £1 185 000 to £3 900 000. Of their time spent on yogurt, only 1% of the
time was spent on the shops.
Questions
1 Briefly summarise Colombo’s competitive environment and General Mills’ strategy in response
to that environment.
2 Using the ABC analysis, determine new segment profitability statements.
3 Based on your analysis in questions 1 and 2, what changes would you suggest to General Mills?
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