Dec 2003 business plan for d'lectables

D’Lectables
Main Line Corporate Center
807 Cricket Avenue, Suite 100
Ardmore, Pennsylvania 19003

Tel. (610) 995 9648
Fax (610) 788 2748

www.dlectables.net

Principal Contact
Dale S. Fickett
President & Founder

Summer 2004

This Business Plan has been prepared by the management of D’Lectables, LLC., and is being furnished to
select individuals for the purpose of providing potential financing to the Company. The Business Plan is a
confidential document that contains ideas, concepts, information, processes, methods and other proprietary
information. Readers are to treat the information herein as confidential and may not copy or otherwise
reproduce the materials without the express written consent of D’Lectables, LLC.

1.0 Executive Summary ............................................................................................. 4
1.1 Market Opportunity .......................................................................................................................................... 4
Exhibit 1 – Market Calculation ............................................................................................................. 4
Exhibit 2 – Same Store Sales Projections .................................................................................................. 4
1.2 The Concept....................................................................................................................................................... 5
1.3 Profitability ......................................................................................................................................................... 6
Exhibit 5 – 2004 Margins .................................................................................................................... 6
1.4 Returns to Shareholders ................................................................................................................................... 8
2.0 The Confectionary Industry & Our Niche ........................................................... 9
2.1 Our Environment.............................................................................................................................................. 9
2.1.1 Industry Scale ........................................................................................................................... 9
2.1.2 The Market for Fudge ............................................................................................................. 12
2.1.3 Macro Factors......................................................................................................................... 13
2.1.4 Industry Supply Chain ............................................................................................................ 14
2.1.5 Economics of the Industry ..................................................................................................... 15
2.1.6 Operating Environment.......................................................................................................... 18
2.2 The Company & The Concept ......................................................................................................................19
2.3 History ............................................................................................................................................................20
2.3.1 Over 100 Years of Fudge ...................................................................................................... 20
2.3.2 D’Lectables ............................................................................................................................. 21
2.4 Our Products....................................................................................................................................................21
2.4.1 Superior Fudge ....................................................................................................................... 21
2.4.2 Fine Chocolate Creations ........................................................................................................ 22
2.4.3 Other Products ....................................................................................................................... 23
2.5 Unique Selling Points ......................................................................................................................................23
3.0 Strategic Formulation ........................................................................................ 25
3.1 Corporate Focus & Social Responsibility ....................................................................................................25
3.1.1 Mission ................................................................................................................................... 25
3.1.2 Core Values ............................................................................................................................ 25
3.1.3 Core Purpose .......................................................................................................................... 25
3.1.4 Organizational Goals .............................................................................................................. 25
3.1.5 Envisioned Future .................................................................................................................. 26
3.2 Internal Analysis ..............................................................................................................................................26
3.2.1 A Resource to be Developed .................................................................................................. 27
3.2.2 SWOT Analysis ...................................................................................................................... 28
3.2.3 Value Chain Analysis .............................................................................................................. 28
3.2.4 Core Competencies................................................................................................................. 28
3.2.5 Value Proposition & Positioning............................................................................................. 28
3.3 Strategic Analysis (7 & 8) – Seeking Sustained Competitive Advanatage ...............................................28
3.3.1 Grand Strategy ........................................................................................................................ 28
3.3.2 Entry/Growth Strategy – Our Strategic Choice ...................................................................... 28
3.3.3 Long-term Objectives (6) ........................................................................................................ 30

This Business Plan has been prepared by the management of D’Lectables, LLC., and is being furnished to select individuals for the purpose of providing potential financing to the
Company. The Business Plan is a confidential document that contains ideas, concepts, information, processes, methods and other proprietary information. Readers are to treat the
information herein as confidential and may not copy or otherwise reproduce the materials without the express written consent of D’Lectables, LLC.

3.4 Strategic Implementation (9) .........................................................................................................................30
3.4.1 Short-term Objectives & Action Plans .................................................................................... 30
3.4.2 Reward System ....................................................................................................................... 30
3.4.3 Functional Tactics................................................................................................................... 30
3.4.4 Empowerment ........................................................................................................................ 30
3.4.5 Leadership & Culture .............................................................................................................. 30
3.4.6 Strategic Control & Continuous Improvement (11) ................................................................ 30
3.5 Harvest Strategy ...............................................................................................................................................31
4.0 Market Research & Analysis .............................................................................. 32
4.1 Customers .........................................................................................................................................................32
4.1.1 Segmenting Our Customers .................................................................................................... 32
4.2 Nature & Degree of Competition .................................................................................................................34
4.3 Market Share & Sales Forecasts ....................................................................................................................35
5.0 Our Marketing Plan ........................................................................................... 37
5.1 Strategic Positioning........................................................................................................................................37
5.2 Potential Locations..........................................................................................................................................37
5.3 SWOT Analysis (move to 2.6.2.2) ................................................................................................................37
5.4 Pricing ...............................................................................................................................................................38
5.5 Sales ...................................................................................................................................................................38
5.6 Advertising & Promotions .............................................................................................................................39
5.7 Logo & Packaging ...........................................................................................................................................40
5.8 Distribution ......................................................................................................................................................41
5.9 Product Guarantees ........................................................................................................................................41
6.0 Production & Operations ................................................................................... 42
6.1 Operational Strategy........................................................................................................................................42
6.2 The Process ......................................................................................................................................................43
6.3 Facilities ............................................................................................................................................................44
6.4 Suppliers............................................................................................................................................................44
6.5 Logistics & Inventory Management .............................................................................................................47
7.0 Human Resources ............................................................................................. 49
7.1 Job Design (2) ..................................................................................................................................................49
7.2 Commitment to Diversity (3&4) ...................................................................................................................49
7.3 Staffing ..............................................................................................................................................................49
7.3.1 Recruitment (5) ....................................................................................................................... 49
7.3.2 Selection (5) ............................................................................................................................ 49
7.3.3 Terminations & Separations (6) .............................................................................................. 49
7.4 Development....................................................................................................................................................49
7.4.1 Appraisal & Motivation (7) ..................................................................................................... 49
7.4.2 Training (8) ............................................................................................................................. 49
7.4.3 External Development (9) ...................................................................................................... 49
7.5 Compensation (10, 11 & 12)..........................................................................................................................49
7.6 Governance (13, 14 & 16) ..............................................................................................................................49
8.0 The Online Initiative.......................................................................................... 50

8.1 Introduction .....................................................................................................................................................50
8.2 Implementation Considerations ....................................................................................................................51
8.3 B2B Opportunities ..........................................................................................................................................51
8.4 Online Challenges ...........................................................................................................................................51
8.5 Technology Infrastructure .............................................................................................................................52
9.0 Management Team ............................................................................................ 53
9.1 Our Organization ............................................................................................................................................53
9.2 Before D’Lectables ..........................................................................................................................................53
9.3 Compensation & Ownership .........................................................................................................................54
9.4 Other Investors................................................................................................................................................54
9.5 Buy Sell Agreements & Stock Options ........................................................................................................54
9.6 Board of Directors ..........................................................................................................................................55
9.7 Other Shareholders, Rights & Restrictions .................................................................................................55
9.8 Supporting Professionals & Advisors ..........................................................................................................55
10.0 Overall Schedule ............................................................................................... 56
11.0 Critical Assumptions & Risks ........................................................................... 58
12.0 Economics of the Model .................................................................................. 59
12.1 Projected Costs & Margins ..........................................................................................................................59
12.2 Profit Potential & Durability .......................................................................................................................61
12.4 Breakeven Analysis .......................................................................................................................................63
12.5 Cash Flow .......................................................................................................................................................63
13.0 The Financial Plan ........................................................................................... 65
13.1 Pro Forma Financial Statements .................................................................................................................65
13.2 Cash Flow Analysis .......................................................................................................................................67
13.3 Cost Control...................................................................................................................................................67
13.4 Additional Analysis .......................................................................................................................................68
14.0 Proposed Company Offering ............................................................................ 70
14.1 Desired Financing .........................................................................................................................................70
14.2 Offering ..........................................................................................................................................................70
14.3 Capitalization .................................................................................................................................................70
14.4 Use of Funds ..................................................................................................................................................71
14.5 Investor Returns ............................................................................................................................................71
15.0 Regulatory & Legal Considerations ................................................................. 74
16.0 Appendices ....................................................................................................... 75


1.0 Executive Summary
Market opportunity worth $2,190,000 in Philadelphia, $146,000,000 nationally
Upscale confections concept with premium positioning and marketing
Gross margins of 76%, operating margins of 36%
Return to shareholders – projected at 55%; worst case 32%

1.1 Market Opportunity Exhibit 1 – Market Calculation
2004
The market opportunity for retail candy in Philadelphia is 1
National Chocolate Market 14,600,000,000
compelling for several reasons. First, the under-served National Fudge Market @ 1%2 146,000,000

market for fudge in Philadelphia is estimated at Fudge Market by Metro Area
$2,190,000, while that of the New York, New Jersey and New York @ 5.2% 7,592,000
Scranton-Hazleton @2.0% 2,920,000
Pennsylvania tri-state area is $16,352,000, and nationally Philadelphia @ 1.5% 2,190,000
is $146,000,000 (see exhibit 1). Second, the entire Nassau-Suffolk @ 1.3% 1,898,000
Pittsburg @ 1.2% 1,752,000
retail candy industry is attractive because it is mature and Tri State Fudge Market 16,352,000
stable, growing at 4% nationally, leading to impressive Philadelphia Fudge Market 2,190,000
conservative same store net sales growth estimates (see Philadelphia Retail Market Sector (1/6) 365,000

exhibit 2). The industry is also characterized by a high Market Share Captured @ 75% 273,750
household penetration rate, strong brand differentiation Anticipated Sales of Other Candy 100,000
Same Store Sales Projections 373,750
and brand loyalty among the wide consumer base, un-
concentrated suppliers, and customers that are generally willing to pay a premium for superior quality and
Exhibit 2 – Same Store Sales Projections upscale branding. These industry advantages have

$440,000
$437,176 historically led to superior margins, especially to
$420,361
$430,000 those firms producing their own products. Third,
$420,000
$410,000 $404,223 the Philadelphia geography is attractive because
$400,000 $388,719
there are currently no specialty providers of fudge
$390,000
$380,000
$373,750 in the region, the 11th largest metro area for retail
$370,000
candy sales in the country (see section 2.1.1). The
$360,000
$350,000 little prepackaged fudge that is available is of lower
$340,000
2004 2005 2006 2007 2008 quality due to the use of chemical preservatives and

1D&B Sales & Marketing Solutions. www.zapdata.com. October 8, 2003.
2 Corcoran, Jim. National Confectioners Association. Personal Telephone Interview. April 20, 2003.

additives. The entry strategy to exploit this opportunity includes the construction of numerous retail
stores throughout the region, each carrying the fudge product line and other upscale confections, as well
as the establishment of secondary sources of revenue including orders received via the internet and
telephone and business to business sales; however, it is anticipated that early growth will be achieved
primarily through geographic expansion and subsequently through product line extensions.

1.2 The Concept Exhibit 3 – Industry Positioning
D’Lectables, LLC was recently
Ultra Premium; Godiva
formed in early 2004 to bring
Boutique Chocolate and Truffle
the D’Lectables concept to Retailers; D’Lectables

retail mall environments Department Stores, Mom-n-Pops
Price Gas Stations, Convenience Stores, Grocery
within the greater- Stores, Wholesale Clubs
Philadelphia region. It is
Discount Stores, Dollar Stores
based upon providing retail
Product Quality
candy stores that are
reminiscent of an age gone by. The typical customer approaches the store and is met with the sweet
aroma of the fudge being handmade – just as it has been for over a 100 years, the sight of it being tossed
high into the air by expert confectioners, the taste of smooth consistency and pure quality - the type of
product quality that is often missing in today’s marketplace, and the service of a cordial and pleasant
salesperson. Our fudge will be made with pride and tradition that is reminiscent of the artisans of decades
passed, and all-natural ingredients and freshness that are always guaranteed. In short, D’Lectables plans to
become the leader in providing confections products of outstanding quality, a nostalgic store atmosphere
that is reminiscent of the artisans of decades passed, and timeless excellence in customer service.
Within the aforementioned retail candy market our target consumers and their benefits sought
include: 1) Gourmet food consumers searching for a quality confection; 2) Impulse snack shoppers
looking to satisfy a sweet tooth; and 3) Upscale gift purchasers seeking a branded gift. Our upscale brand
Exhibit 4 – Core Competencies image as a premium confection will be achieved by
• Superior Product Quality coupling the aforementioned product quality with other
• Nostalgic Store Atmosphere
• Customer Service Excellence marketing efforts such as premium pricing, elegant
packaging, selective store placement, and a consistent


Exhibit 5 – 2004 Margins
message of superior product and service in
Monthly Annual Margin
Net Sales 31,250 375,000 100% advertising and promotions efforts. Our
Cost of Goods Sold 7,646 91,752
Gross Margin 23,604 283,248 76% premium pricing of $15/lb. for fudge and
3
Store Operation Costs 12,412 148,944 $25/lb. for chocolates maintains the upscale
Operating Margin $11,192 $134,304 36%
branding yet still keeps an immediate
consumption portion within reach at $2 to $4. At these price points unit sales are estimated at 1,530
pounds of fudge and 335 pounds of chocolates per month, while break even is achieved at 1,083 lbs. and
236 lbs., respectively. The primary competitive advantages for D’Lectables in the pursuit of this market
opportunity are in the combination of our core competencies - superior product quality, nostalgic and
engaging store atmosphere, and excellence in customer service. Each of which may be moderately
difficult to imitate in independence, but collectively will be infinitely harder to duplicate. It is important to
note that in the area of product quality, potential competitors would face a steep learning curve when
attempting to imitate our production.

1.3 Profitability Exhibit 5 – Conservative Sales & Profitability Projections
We estimate our gross 4,500,000
margins at 76%, and our 4,000,000
single store operating 3,500,000

margins at 36%.4 A long- 3,000,000

term growth rate of 48% is 2,500,000

sustained by opening two 2,000,000

stores a year over a five year 1,500,000

period. In 2004, conservative 1,000,000

cost estimates for store, 500,000

internet, and office setup are 0
2004 2005 2006 2007 2008
$85,000; and operating costs 96,242 255,137 470,854 691,280 896,508
Earnings
are $26,700 monthly for all Net Sales 363,242 1,201,370 2,153,742 3,172,470 4,115,995
operations. It has been Sales Growth 230.74% 79.27% 47.30% 29.74% 48%

3 These margins do not include a contribution towards supporting head office or the internet/telephone cost centers.
4 See section 10.1.

estimated that all setup and

operating cash expenditures for the first Exhibit 6 – Low Growth / Low Demand Scenario
store will be recovered within 16 months.5 2,000,000

Projecting out store sales, assuming the 4% 1,800,000

industry growth rate, and costs6 results in 1,600,000

strong profitability (see exhibit 5). 1,400,000

Exhibit 6 shows the impact of our 1,200,000

1,000,000
low demand, low growth scenario. In this
800,000
scenario, the revenue numbers are adjusted
600,000
to reflect the case in which demand is 85%
400,000
of our projections, store openings occur at a
200,000
rate of one per year (as opposed to the
0
projected 2 per year), and 2004 2005 2006 2007 2008
Earnings 22,268 69,906 132,351 193,639 253,229
internet/telephone sales are 50% of
Net Sales 225,781 547,250 961,900 1,404,926 1,878,016
projections per year. Interestingly, the sales Sales Growth 142.38% 75.77% 46.06% 33.67% 33.67%

growth level remains strong at 33.67%.
Using the assumptions from the original market and resultant financial projections, the pro forma financial
statements reveal that net income (net of the depreciation expense) grows from $75,526 in 2004 to $1,422,575 in
2008. The projected balance sheet reveals total assets grow from $300,000 upon inception to $2,918,477, while
book value of the equity grows from $300,000 to $2,918,477, over the same period. Projected cash flow is
evidenced by a cash account that grows from $220,645 at the end of 2004 to $2,430,763 at the end of 20087.
An analysis of a low growth/low demand scenario includes 85% of the projected demand, and in
which we grew stores at a rate of one per year (as opposed to two per year in the projections), and
internet/telephone orders at 50% of those in the projections. This scenario results in profits of $22,268 in
2004 and $253,229 in 2008. Also, the sales growth rate is then projected at 33.67% (see exhibit 6).
Plugging these numbers into the pro forma statements reveals low demand net income of $5,268 for 2004
after the depreciation expense and it increases to $154,223 by 2008. The low demand balance sheet reveals that
the cash level increases from $235,951 at the end of 2004 to $394,603 in 2008.

5 See section 10.5.
6 The cost growth rates: 4% on store operating costs, 10% on store setup costs, and 15% on internet operating costs.
7 See 11.1 and 11.2 for full pro forma statements.


Exhibit 7 – Return on Invested Cash
1.4 Returns to Shareholders Invested Capital for 5% holding $100,000
Return on equity of 21.1% for 2004, return on
invested capital from 11.33% in 2004 to 80% in Low Demand
Distributions At Projections Scenario
2008, and equity distributions of 25% over the 2004 at 25% of earnings 947 66
first three years and 30% in 2007 and 2008 can 2005 at 25% 3,967 300
2006 at 30% 8,440 983
be expected. Fixed asset turnover is strong, 2007 at 30% 15,979 1,655
increasing from 2.14 in 2004 to 10.06 in 2008, 2008 at 30% 21,374 2,313

and a collection period of 0
is Repurchase Value days 828,675 402,096
representative of the retail nature of the
Return on Investment 55.73% 32.42%
business. Finally, the acid test ratio increases
from 16.41 in 2004 to 30.91 in 2008, further End of year cash balance $2,430,763 $394,603
reflecting the strong cash flow of the business model.8 Most impressive, is the fact that after calculating the
projected stream of equity distributions and repurchase value of the 5% holding9, a rate of return on the $100,000
investment is calculated at 55.73% for our projections, and 32.42% for the low demand scenario.
The management team is comprised of the president, Dale Fickett, and the vice-president Joseph Filachek,
owning and invested thus far at 60%/40%, respectively. Dale has over ten years of experience within the retail
candy industry managing a store with a peak season staff of 30 employees, while Joe also has retail candy
experience. The two had an opportunity to work together within the industry and complement one another’s
leadership styles well. More recently, Dale graduated from Villanova University with a Masters of Business
Administration degree10, and Joe has gained valuable sales experience as a representative with Sola Optical Lenses,
handling a sales geography that stretches the eastern seaboard.
D’Lectables is seeking start-up financing, and is offering 5% of the outstanding equity for an investment of
$100,000 and 15% for $200,000. Currently Dale and Joe have collectively made arrangements to personally invest
$100,000 and are seeking the remaining financing needed for working capital, and for investment into the required
fixed assets associated with the store fronts and supporting infrastructure.

8 See 11.4.
9 See section 11.5 for calculations of the equity distributions, and the repurchase value in 2008.
10 See 7.2 for more on Dale’s background.


2.0 The Confectionary Industry & Our Niche

2.1 Our Environment
The best approximation of the market for D’Lectables could be described as: ‘the market for gourmet
fudge and chocolate in the mid-Atlantic region’. However, it is also useful to view this industry at the
confections level, meaning the nation-wide amount of all gourmet chocolate sold. A regional breakdown
allows insight into the market potential within the mid-Atlantic region.

2.1.1 Industry Scale
In 2003, the mature U.S. chocolate industry generated $13 billion in sales, according to data gathered from
MarketResearch.com11. The premium, or gourmet, segment is estimated at 10% of this market,
representing $1.3 billion in sales. From 1999 to 2003, growth in the gourmet segment of the market has
grown at an average annual rate of 13%. Over this period growth has slowed, while the largest
competitors have continued to experience double-digit growth.12 MarketResearch.com also projects the
growth rate of the market to be 10.18% over the next five years13 (see exhibit 8):

Exhibit 8 – Projected US Market for Gourmet Chocolate Sales (in thousands of dollars)
1,916
2,000 1,739
1,800 1,578
1,432
1,600 1,300
1,400
1,200
1,000
800
600
400
200
0
2003 2004 2005 2006 2007

11 “The U.S. Market for Gourmet Chocolate.” MarketResearch.com, April 2004, p. 2.
12
“The U.S. Market for Gourmet Chocolate.” MarketResearch.com, April 2004, p. 4.
13
“The U.S. Market for Gourmet Chocolate.” MarketResearch.com, April 2004, p. 25.

Factors which explain the growth in the gourmet chocolate market, include: population growth within
those age and ethnic segments that have an affinity for gourmet chocolate, an increased prevalence of
chocolate consumption as a part of one’s daily routine, the increased awareness of high-cocoa content
dark chocolate as a healthy indulgence, increased availability of organic and all-natural chocolate products,
and convenient single-serving sized packages. In general, the industry is attractive because its sheer size,
coupled with its uniquely high household penetration rate, makes it an area in which retailers can be
aggressive with their margins14.
While the vast majority of the confections industry sales are conducted through grocery stores,
warehouse clubs, and convenience stores, ‘Candy, Nut, and Confectionery Stores’ (SIC code 5441)
achieved 2002 sales totaling $957.7 million15, or roughly 5% of the overall confections industry. The
estimated 6,879 establishments employ 32,897 people, or an average of 4.7 employees per establishment.
Finally, average annual sales per establishment are $200,000.16 Interestingly, over 85% of establishments
employ nine or fewer individuals (see exhibit 2).

Exhibit 9 – Market Analysis by Company Size17
Number of Number of Percent of Total Total Average Average
Employees Establishments Total Employees Sales Employees Sales
Unknown 303 4.4 N/A 19.3 N/A 0.8
1 1118 16.3 1118 50.1 1 0.1
2 to 4 3484 50.6 8638 277.4 2 0.1
5 to 9 1422 20.7 8763 235.9 6 0.3
10 to 24 457 6.6 5824 209.7 13 0.7
25 to 49 59 0.9 1827 66.6 31 1.6
50 to 99 16 0.2 951 23.1 59 2.1
100 to 249 12 0.2 1608 35.1 134 5.9
250 to 499 4 0.1 1250 40.5 313 20.3
500 to 999 4 0.1 2918 N/A 730 N/A
Total / Average 6879 100 32897 957.7 5 0.2
Note: Sales figures are in millions.
Also of particular interest is the market size for these confectionary establishments by metro area.
When ranking these markets by total annual sales, the Philadelphia area represents a market of $14.9
million, while the Scranton, Hazleton, and Wilkes-Barre area represents a market of $19.4 million – 11th

14 David Wellman, “Sugar Rush”, Supermarket Business, June 1999, p. 23-26.
15 D&B Sales & Marketing Solutions. www.zapdata.com. October 8, 2003.
16
D&B Sales & Marketing Solutions. www.zapdata.com. October 8, 2003.
17

and 8th in the country, respectively (see exhibit 3). In fact, five of the top thirteen local markets for
confectionary stores are located within the New York, Pennsylvania, and New Jersey tri-state region.

Exhibit 10 – Market Ranking for Confectionary Stores by Total Sales in Metro Areas18
Metro Area Total Percent Number of Total Average Average
Sales of Total Establishments Employees Employees Sales
Riverside – San Bernardino, 66.4 6.93% 76 340 5 1.3
CA
New York, NY 50.4 5.26% 486 1313 3 0.1
Merced, CA 38.4 4.01% 5 20 4 9.6
Chicago, IL 29.4 3.07% 349 1730 5 0.2
San Francisco, CA 28.3 2.95% 65 576 10 0.7
Los Angles – Long Beach, CA 22.5 2.35% 190 828 5 0.2
New Orleans, LA 19.7 2.06% 34 188 6 0.8
Scranton, Wilkes-Barre, 19.4 2.03% 28 514 18 1.3
Hazleton, PA
Youngstown – Warren, OH 18.2 1.90% 18 258 14 1.8
Cleveland,Lorain,Elyria,OH 15 1.57% 97 536 6 0.3
Philadelphia, PA-NJ 14.9 1.56% 128 416 3 0.2
Nassau – Suffolk, NY 12.8 1.34% 115 403 4 0.1
Pittsburg, PA 11.6 1.21% 98 480 5 0.2
Boston, MA 10.8 1.13% 108 438 4 0.1
Sacramento, CA 10.7 1.12% 45 179 5 0.4
Dallas – Fort Worth, TX 9.7 1.01% 94 276 3 0.1
Buffalo – Niagara Falls, NY 9.6 1.00% 55 271 5 0.3
Cincinnati, OH 9.3 0.97% 44 180 4 0.3
St. Louis, MO-IL 8.8 0.92% 56 226 4 0.2
Seattle, WA 8.8 0.92% 64 288 5 0.2
Atlantic City – Cape May, 8.5 0.89% 47 261 6 0.3
NJ
Detroit, MI 8 0.84% 80 227 3 0.1
Minneapolis-St. Paul, MO-WI 7.9 0.82% 69 497 8 0.2
Honolulu, HA 7.9 0.82% 29 185 7 0.4
San Diego, CA 7.5 0.78% 66 298 5 0.2
Portland, OR 7 0.73% 53 189 4 0.2
Note: Sales figures for exhibits 10 & 11 are in millions.

18

Exhibit 11 - Market Analysis by Specialty (8-digit SIC Code)19
SIC SIC Description No. % Total Total Total Avg. Avg.
Code Bus. Emps. Sales Emps. Sales
5441- Confectionery produced for 151 2.2 782 34.9 5 0.3
9903 direct sale on the premises

2.1.2 The Market for Fudge
Jim Corcoran of the National Confectioners Association estimates fudge, a sub-segment of the chocolate
industry, to represent less than 1% of the U.S. Chocolate market due to its short shelf life, and the
resultant inability of large producers to mass market fudge20. That is, fudge is primarily sold through
manufacturing confectioners, or those retailers who produce fudge to sell directly at a retail location. SIC
code 5441-9903 denotes ‘Confectionery produced for direct sale on the premises.’ These 151
establishments accounted for $34.9 million in annual sales, achieving average sales of $300,000 (see
exhibit 4) or 50% more than those establishments that are not included in the category.
1% of the $13 billion total chocolate industry results in a national fudge market worth $130
million. Given that the Philadelphia metro area market represents 1.5% of the national market for
confectionary stores, we conclude that the Philadelphia metro area also represents 1.5% of the national
fudge market. Thus, our best estimate of the Philadelphia market for fudge is $1,950,000. A similar
analysis of the top 5 markets within the tri-state area reveals a total market for fudge of over $14 million
(see exhibit 5).

Exhibit 12 – Our Market in New York, New Jersey, and Pennsylvania - 2004
National Gourmet Chocolate Market..................................................................................1,300,000,000
National Market for Fudge................................................................130,000,000
New York @ 5.2%....................................................................6,760,000 67,600,000
Scranton-Hazleton @ 2.0%.....................................................2,600,000 26,000,000
Philadelphia @ 1.5%.................................................................1,950,000 19,500,000
Nassau-Suffolk @ 1.3%........................................................... 1,690,000 16,900,000
Pittsburg @ 1.2%.......................................................................1,560,000 15,600,000
Tri-State Market for Fudge............................$14,560,000
Tri-State Market for Gourmet Chocolate..................................$ 145,600,000

19
20 Corcoran, Jim. National Confectioners Association. Personal Telephone Interview. April 20, 2003.

Exhibit 12A – Our Market in California - 2004
National Chocolate Industry..............................................................................................14,600,000,000
National Market for Fudge................................................................146,000,000
2.1.3 Macro Factors Bernadino @ 6.9%.......................................10,074,000
Riverside - San 1,007,400,000
Merced @ 4.0%..........................................................................5,840,000 584,000,000
San Francisco @ 2.9%...............................................................4,234,000 423,400,000
Los Angeles – Long Beach @ 2.4%....................................... 3,504,000 350,400,000
Sacramento @ 1.1%...................................................................1,606,000 160,600,000
Tri-State Market for Fudge............................$25,258,000
For Chocolate............................$ 2,525,800,000

Whether one is examining the confections industry as a whole, or the chocolate segment, it is clear that
there are several macro issues that are noteworthy. First, regulations regarding the labeling of food, food
safety, and workplace safety continue to develop. Although at first glace it may appear that regulations
regarding food safety and product transparency are mature, and that significant changes are unlikely to
continue, the opposite may in fact be true. Take for instance the July 11, 2003 FDA final ruling on the
labeling of products that contain trans-fatty acids; or the two new regulations that have been proposed
under the Bio-terrorism Act. Second, demographic shifts in age for the American population may be
linked to an increase in candy consumption. According to the Bureau of the Census, the proportion of
the U.S. population aged 65 and older will increase from 12.6 percent in 2000 to 20 percent by 203021.
Industry experience would indicate that chocolate and confection consumption is positively correlated to

Exhibit 12C – Significant Gourmet Market Factors
• Smaller households and ‘on-the-go’ lifestyles that encourage snacking over full meals, including chocolate
consumption
• Increasing customer interest in gourmet chocolates, especially dark chocolates, and retailer willingness to stack
premium items
• The consumption of gourmet chocolate seen as more of an affordable indulgence rather than as a gift item
sparking everyday consumption. Product offerings in convenient packaging and attractive pricing will increase
consumption.
• Product innovation in various combinations of nut and chocolate varieties and innovative packaging and sizes to
hold consumer interest.
• Increased retail presence with offerings in chocolate cafes, making chocolate consumption convenient and
pleasant experience.
• Increasing health consciousness among baby boomers and evidence that dark chocolate is beneficial to health.
• Nostalgic flavors and images of retro products appealing to the aging baby boomers and flavors suited to the
diverse ethnic population will expand the market in the future.

21U.S. Bureau of Census. “Resident Population Projections by Sex and Age”, reproduced in Statistical Abstract of the United
States: 2001, table 13, at 15.

age increase, or that as people age they tend to consume more candy. Also, demographic shifts in the
ethnic profile of America may have an impact on the industry, however no conclusive evidence exists to
support a positive or negative effect. Finally, technological advances currently play a small role in the
industry and no relevant manufacturing improvements are on the horizon.
A significant social trend that persists is characterized by attitude changes regarding personal
weight control, healthy lifestyles, and dieting. Although the trend has yet to negatively affect the
confections industry; there is a risk of a future impact. Coverage of food issues in the US media is often
erratic and occasionally alarmist. Because of the aforementioned attitude shifts, studies from
organizations of widely varying credibility frequently receive significant attention from the major media.
Similarly, studies on the healthfulness of chocolate have received mixed results. Articles have revealed the
benefits of chocolate in moderation, while studies also speak of the real health dangers of over-
consumption. Less certain is the link between these reports and consumer buying behavior. In sum, most
indicators are that while customers are well versed in dietary matters, they are not significantly changing
eating patterns. Most recently, the health-conscious have been drawn to healthier versions of their
favorite foods primarily when there is no perception of a reduction in product quality or taste (for more
market trends specific to the gourmet market see exhibit 12C22).

2.1.4 Industry Supply Chain
The industry supply chain for the confections industry23 is composed of retailers, producers, wholesalers,
importers, and farmers (see below).
Exhibit 13 – Confections Industry Ingredients Supply Chain

Raw Refineries Importers Food Confections Whole- Retailers Consumers
Material and and Distributors Producers salers
Producer Processing Transporters
and Plants
Farmers

22
“The U.S. Market for Gourmet Chocolate.” MarketResearch.com, April 2004, pp. 9.
23
We use the confections industry as the relevant market to analyze as it is inclusive of all industry players.

The areas in light blue represent those areas of the industry, which are external to D’Lectables business
model, while those areas in dark blue represent those functions of the industry carried out in-house.
D’Lectables has focused on these areas of the supply chain, because this is where the most value is added
and will continue to be added through differentiation and branding. Little real economic profit is made
dealing in the commodity areas of the industry, however those producers and retailers able to build brand
recognition make significant profits.

2.1.5 Economics of the Industry

2.1.5.1 Internal Rivalry
For the sake of this analysis we will define D’Lectables market as the confections shop market within the
Philadelphia metro area, although this region is typical of the suburban and urban markets around the
United States. People are rarely willing to travel outside their metro area for the purchase of confections;
however this is not to say that people don’t purchase outside their local metro area. Certainly, many
people purchase confections while vacationing. Within this market internal rivalry can be said to be
moderate. On the one hand, there are many small sellers within a slow growth industry, which usually
tends to heat up price competition.
However, this industry has historically been characterized as having high margins. Several reasons
can be defended: 1) As mentioned, high household penetration rates have worked to keep margins high;
2) Strong brand differentiation has enabled companies, such as Godiva, to combine brand presence,
positioning and a quality product as a recipe for aggressive returns; 3) High levels of brand loyalty have
been enjoyed by many stores, especially those offering outstanding customer service. D’Lectables intends
to take advantage of the market opportunity by building core competencies around superior product
quality, an engaging shopping experience, and excellence in customer service.

2.1.5.2 Threat of Entry
The threat of new market entrants is a double-edged sword. Ease of entry for a start-up is beneficial,
while once established, barriers to new entrants become advantageous. Generally, access to key inputs is
high and there are few barriers to market entry – such as large up-front investments, network externalities,
government protection, or limited access to distribution channels. Furthermore, there is a low minimum


efficient scale, meaning a company can become profitable with a small piece of the market. All of these
factors favor the new market entrant.
Those factors that work against the new market entrant, and favor the market incumbent are clear.
First, the low accessibility to our old-fashioned hand-whipping process is a clear competitive advantage for
D’Lectables, and there is a steep learning curve associated with perfecting the process. Second, product
differentiation is possible, and can be supported through brand differentiation. Finally, consumers are
highly brand loyal – further justifying the need for a strong brand position.

Exhibit 14 – A Five Forces Analysis for the Confections Producing Industry
Threat of Entry
Environmental Factors • Low minimum
• Regulatory Tightening efficient scale
• Demographic Shifts • High access to key
inputs
• Low access to our
production
process
•

Supplier Power Internal Rivalry Customer Power
• Commodity inputs • Many sellers in the market • Un-concentrated
• Low threat of • Slow growth – mature industry customers – low
forward integration • Strong brand differentiation power
• Few relationship • Brand loyalty • Small sales relative
specific investments • Low exit barriers to producers
• Low threat of revenue
forward integration • Low price-elasticity

Substitutes and
Complements
• Many available
substitutes
• Low price elasticity –
people don’t move to
substitutes when
industry prices rise
• Readily available
complements


2.1.5.3 Substitutes & Complements
Many people would assert that there is no substitute for chocolate! However, when it comes to selling
fudge, chocolate is a significant substitute, while distant substitutes would include ice cream, cookies,
pastries, and other bakery products. Also, when thinking in terms of the product ‘fudge as a gift’,
substitutes range from chocolates to flowers to books to clothing. If we focus primarily on chocolate as
the closest product substitute, we can see that chocolate has a low price elasticity of demand. That is,
customers don’t stop purchasing chocolate when industry prices are high. Also, switching costs are
insignificant. In fact, in this market high prices can be justified by product differentiation coupled with
strong positioning. Complements include soft drinks, coffee and other beverages. Pricing of
complements has little impact on the industry. In conclusion, substitutes and complements place little
pressure on industry profits due to low price elasticity of demand.

2.1.5.4 Supplier Power
Suppliers are relatively un-concentrated and sell commodity inputs. This bodes well for a market leader or
dominant firm, which can negotiate better service and lower prices for large orders. The threat of
contract hold-up is negated by relatively low relationship specific investments. In sum, threat of forward
integration is small (although some chocolate producers have moved towards retailing), suppliers’ power
to price discriminate is small, and overall supplier power is low.
Exhibit 15 – The Pros and Cons of the Industry
Industry Force Pro /Con Factors to Consider
Moderate Internal Rivalry • Con • Many small sellers in a slow growth market
• Pro • High household penetration rates
• Pro • Strong brand differentiation possible
• Pro • High levels of brand loyalty
Moderate Threat of Entry • Pro • Access to key inputs is high
• Pro • Few barriers to market entry
• Pro • Low minimum efficient scale
• Pro • Low accessibility to our old-fashioned hand-whipping process
• Pro • Steep learning curve associated with perfecting the process
• Pro • Consumers are highly brand loyal
Substitutes & Complements • Even • Readily available substitutes and complements with no switching costs
• Pro • Low price elasticity of demand for substitutes and complements
Low Supplier Power • Pro • Suppliers are relatively un-concentrated and sell commodity inputs
Pro • The threat of contract hold-up is negated by relatively low relationship
specific investments
Pro • Low threat of forward integration
Pro • Low power to price discriminate


Low Customer Power • Pro • Un-concentrated retail customer base with small relative purchases
Pro • Little risk of backward integration
Pro • Low price elasticity - customers are willing to pay premium prices for
premium products

2.1.5.5 Customer Power
Customer power is also quite low. First, un-concentrated customers make small individual purchases
relative to overall company revenues at the retail level. Second, there is little risk of backward integration,
or the risk of a customer producing fudge themselves. If anything, cultural shifts have supported
purchasing fudge as opposed to producing fudge in the home.

2.1.6 Operating Environment

2.1.6.1 Competitive Landscape
D’Lectables Godiva Boutique Premium Mom-n-Pops, Mass
Chocolate Chocolatiers Department Marketers
Retailers Stores
Sample D’Lectables Godiva Lindt, Gertrude L.A. Burdick, Kilwin’s, Acme, CVS,
Companies Hawk, Fudge Dean& Deluca Bayard gas stations,
Fatale, Rocky Boscov’s, convenience
Mountain Macy’s, stores
Market Share Small Medium Small to Small Medium to Large
for each player Medium large
Breadth of Medium Medium Medium Limited Medium Limited
Product Line
Key-account No Yes Yes Yes No No
advantages
Price No No Some No Some Yes
Competitiveness
Advertising & Yes Limited No Yes Yes
Promotional
Effectiveness
Location & Age Good Good Good Adequate Aging Mixed
of Facilities
Capacity &
Productivity
Experience
Raw Materials
Cost
Financial
Position
Personnel
Caliber
Image/ Publicity
Customer
Profile
Patents &


Copyrights
Labor
Relations/
Culture
Technological
Position
Community
Reputation

2.1.6.2 Customer Profiles –

(to be added)

2.1.6.3 Suppliers
Supplier Price Competitve / Reciprocal Quality Standards Reputation
Shipping Terms Relationship

2.1.6.4 Creditors
Creditor Stock as collateral Acceptance of Leverage Loan terms and
Payment History availability relative
to profit objectives
PNC

2.1.6.5 Market for Labor
Currently, D’Lectables has no reputation within the labor market, but looks to hold a position that enables
us to attract and retain the talented people that are required for our continued growth. Because of the
narrow labor market (most people will be willing to travel 30 miles), availability of the people we need is
specific to the geography surrounding the particular location, as are the applicable employment rates.

2.2 The Company & The Concept
D’Lectables is a new organization that has been designed from its inception to achieve a position as the
preeminent producer and boutique retailer of fudge and other fine confections. We are currently in the
seed stage of organizational development, and are currently focused on the following objectives:


• Financing the creation prototype locations
• Building and operating prototype locations
• Planning the organizational infrastructure to support continued growth
• Developing our management team and team of advisors
• Securing appropriate proprietary standings
Our fudge will be sold to consumers through physical store fronts and electronic channels. Fudge sales
will typically follow holiday sales peaks, with the largest sales typically experienced in the four weeks
leading up to Christmas, Easter, Halloween, and Valentines Day. D’Lectables locations will be located in
retail areas characterized by high levels of foot traffic and with the demographics of our three target
consumer groups. Hours of operation will be determined by consumer demand and will be constrained
by mall operating hours when indoor mall locations are utilized.
Our management team includes expert in the production process, selling strategies, and store
management. Our president has had over 10 years of management experience within the industry. This
experience is a significant competitive advantage as D’Lectables will not meet a steep learning curve in
perfecting the fudge production process, because the management team enjoys an intimate knowledge of
the hand whipping production process. Second, the management team has developed competence in
proven selling strategies. Third, we have demonstrated superiority at the cross-functional skills required to
manage the day-to-day sales and production activities preformed within a location. Fourth, the team
enjoys knowledge of their prospective customers’ tastes, as a large portion of our potential customers in
the greater-Philadelphia area purchase fudge while on vacation in Cape May County, New Jersey. Finally,
the management team has established relationships with many of the necessary vendors. These
advantages, along with our passion for superior product quality, creating an engaging shopping experience,
and providing excellence in customer service, will ensure D’Lectables customers consistently enjoy the
quality and tradition of hand whipped fudge and of our other confections, and the freshness of onsite
production in an environment that supports our position as the premium fudge retailer.

2.3 History

2.3.1 Over 100 Years of Fudge


People of all ages and demographics have been enjoying fudge for over a century. Historically fudge has
been a homemade treat made by Mom. However over the last several decades it has been sold through
two channels. First, mom-and-pop candy shops have distributed their fudge directly to their retail
customers. This has enabled these operations to tightly control the quality and freshness of their fudge,
but owners have lacked the business acumen to grow their organizations beyond a handful of locations.
Second, and with limited success, mass producers have distributed their products through re-sellers. This
has afforded these companies larger market reach, however the quality of the product has been limited by
the addition of preservatives and the automation of production.
Along the east coast of the U.S. holidaymakers find fudge and other confections shops at various
tourist destinations. These holiday resorts offered an ideal environment for confections retailing: high
levels of foot traffic, relatively low real estate costs, and generally provided the confectioner and their
family a comfortable lifestyle in a desirable location. One of the areas in which the industry has flourished
is Cape May County, New Jersey. It is no surprise given the ‘Jersey shore’ is legendary for summer
vacationing due to the beautiful beaches and fine resort towns. Dale was introduced to the business of
making and selling confections at the age of 14 with Fudge Kitchens, Inc., and has kept a hand in the
business ever since.

2.3.2 D’Lectables
The D’Lectables concept began as an idea of the president’s, and has been developed over the past two
years. This business plan represents the results of the development of the concept. In early 2004
D’Lectables, LLC was established in the state of Pennsylvania as a Limited Liability Company. Finally,
D’Lectables is currently seeking start-up financing to establish prototype locations within the greater
Philadelphia area to test the viability of the model.

2.4 Our Products

2.4.1 Superior Fudge
D’Lectables is committed to delivering consistently superior fudge that employs a production process that
has roots dating back to the 1800s. Our process produces simply the creamiest and most delicious fudge
available. Competing products are characterized as having a grainy and gritty texture, and as having less
depth of flavor. D’Lectables product line consists of our 17 flavors of fudge (see appendix A). These


flavors are divided into serving size pieces that are typically 2 ounces in weight, and are approximately 1.5”
by 2” by ¾” in size; however it should be noted that due to the hand- cutting process pieces range slightly
in weight and size.
Regardless of ordering channel, consumers have the option of customizing their package by the
choice of flavors, and by their choice of packaging. Packaging is determined by: 1) package quantity; and
2) package style. Package quantities range from 1 piece to several pounds, and there are two packaging
non-seasonal styles – standard and gift. The following diagram shows the breakdown:
Exhibit 16 – Packaging offerings
Package Quantity Standard Gift
1 piece / 2 oz. Wax bag Not available
2 pieces / 4 oz. Wax bag Not available
4 pieces / 8 oz. Standard ½lb. box Elegant ½lb. ballotin
8 pieces / 16 oz. Standard 1lb. box Elegant 1lb. ballotin
16 pieces / 32 oz. Standard 2lb. box Elegant 2lb. ballotin

All package quantities and both styles will be available in the stores, and quantities in excess of
1/2lb. will be available for parcel shipment. Furthermore, customers will have the option of creating a
customized gift card that will be included in the package, when the gift packaging style has been selected.
Our fudge has a shelf life of 3 weeks from completion of the production process to the cutting
process. Typically our fudge is cut the evening before, or on the day of purchase. After the fudge is cut
for sale, it has a shelf life of 10 days at room temperature and if kept within its packaging (the fudge can
also be frozen for six months and left to thaw at room temperature). This provides our walk-in customers
with a package of fudge that will be good for 10 days, and our shipping customers a package that will
good for 3 days, given a worst-case scenario 7 days in transit.

2.4.2 Fine Chocolate Creations


2.4.3 Other Products
In an effort to minimize the square footage that each location will require, and to utilize this area
most cost efficiently, it has been determined that other products to be sold alongside our fudge will be
limited. Possibilities for additional products include:
• Holiday creations – packaging and product changes reflecting the season
• Other upscale gifts – assortment baskets, dried fruits and nuts, etc.

2.5 Unique Selling Points
Those qualities that will propel us above the competition are providing quality confections that make an
excellent gift:
• Superior Quality – Simply put, our fudge is uniquely creamy and tasty. All of our other
confections have the same exceedingly high level of quality as that of our homemade fudge.
• Upscale Gift – Leveraging our strength in product quality, we will position our brand so that
our confections will serve as upscale gifts.
• Engaging Experience – Our painstaking attention to detail is reminiscent of an age gone by.
The sights, sounds and aromas we create are evident when a customer approaches our store.
They are greeted with the sound of the fudge being traditionally hand whipped in copper
kettles, the mesmerizing exhibition of our expert confectioners flipping the fudge high in the
air, and the sweet aroma that results from the process (see below).
• Superior Customer Service - Whether an order was placed in person or online, our customers
will receive consistently prompt, courteous and pleasant service.


Exhibit 17 – Our Production Process


Dec 2003 business plan for d'lectables

Dec 2003 business plan for d'lectables

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