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Jon Guy, Director, Financial Operations Foodservice, General Mills Inc. Jane Saly University of St. Thomas Abstract: Marketing costs are coming under increased scrutiny, and activity-based costing (ABC) is often the tool used to analyze such costs. ABC is useful because it requires the identification of cost drivers and provides information that is directly applicable to decisions about marketing costs and benefits. This case illustrates the application of activity-based costing to marketing costs in a food manufacturer. It illustrates how marketing support costs may differ across two channels of distribution. This information is very useful for understanding profitability in the two channels and for decisions about how to service the two channels. In 1994, General Mills Incorporated, a $6 billion consumer goods company, acquired Colombo Fro- zen Yogurt. General Mills Inc. (GMI) believed they could add Colombo frozen yogurt to their existing product lineup to increase net sales with little addition in marketing cost. Frozen yogurt is sold through two distinct market segmentsindependent shops and impulse locations such as cafeterias, colleges, and buffets. The shop business revolves around frozen yogurt and specialty items made from yogurt. In the impulse segment, yogurt is an add-on to the main business. GMI's large sales force already served the impulse market with brand items such as Cheerios, Gold Medal Flour, Betty Crocker, Chex Snacks, and so on. 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 GMI sales force focused on the impulse segments and saw increases in volume there. However, volume in the shop segment de- clined at alarming rates. While GMI knew sales by segment, they didn't track costs by segment. In- stead costs were allocated based on sales dollars. Therefore, they needed a new method to track costsactivity-based costing. 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 independent shops to become a franchise and purchase the product from the franchiser. In the early 90s, the market changed again as food service operators such as cafeterias, colleges, and buffets started to add soft- Copyright 2000 by Institute of Management Accountants, Montvale, NJ 67 serve yogurt to their business. By the late 90s, 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 maximizing 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 check 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, boosters, and granitas. 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 labor) to serve highly differentiated products such as smoothies or granitas. They generally are interesting in providing a quality service for a reasonable price. They typically measure performance with cost per serving, and they have a difficult time understanding profit contribution as opposed to food cost. Impulse locations are typically small. It was the impulse business in the Foodservice operations that made Colombo an attractive acquisition for General Mills. The GMI Foodservice Division was already marketing brands such as Cheerios, Yoplait, Betty Crocker, Gold Medal Flour, Hamburger Helper, Pop-Secret, and Chex Snack to food management firms, hospitals, and schools. Colombo yogurt was added to this product lineup, and the Foodservice sales force covered both shop and impulse locations. Colombo's sales force was merged into the Foodservice sales force. Customers were reassigned to sales people who already serviced that geographical area. The sales people varied in their reaction to the product. Some found shops easy to sell to, while others avoided the shops despite the possible lost commission. Many spent a lot of time helping their impulse customers understand how to use the machinery. Colombo traditionally charged the shops for merchandising that was large scale and eye pop- ping (neon signs). The shops used these signs to draw customers inside. Since GMI traditionally provided merchandising at no cost, they stopped charging for it. Sales people used the merchandis- ing 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 sales people noticed that the im- pulse locations didn't even hang them up. Pricing promotions are a mainstay of GMI's impulse location approach. GMI's sales force gener- ally 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. GMI made price promotions available to both segments of the market. While the deals were typi- cally around $5 per case, they averaged $3 per case against all the volume shipped during the year. GMI marketing knew price was not a major decision factor for shops, and they did not target pricing promo- tions to them. However, shops were aware of the promotions and took advantage of them. 68 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 utilization of full pallets, as shown below. 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. Since sales representatives service several products, their costs were allocated to the various products based on gross sales dollars. GMI gave diaries to 10% of the sales force 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 dollar 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. 69 1. Briefly summarize Colombo's competitive environment and General Mills's 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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