JOSEPH'S GOURMET PASTA AND SAUCES:ATA
CROSSROADS
oe Faro, founder and CEO of Joseph's Gourmet
J ,
Massachusetts, had just come from a meeting with his
top management team. It was already a very long day,
something that Faro was accustomed to. Sales appeared
to be recovering from a decline experienced during the
first quarter of 2011, but there was disagreement as to the
direction the firm should take and not even the slightest
agreement on the cause of the downturn in sales. Faro
wanted to come to a decision concerning the future
direction of his company and do it reasonably quickly.
He did not like the feeling of waiting for others to act
and force a decision on him. As he prepared to leave for
home, Faro wondered what his next moves should be:
I want to spend more time with my wife and
three kids, but I want to continue with this
company. My dad is still working with his
bakery, even expanding, slowly. I could go for-
ever, but priorities change. It's been almost two
decades at least for the way I run this .... It
will run very well up to probably $50 million,
but from $50 million to $70 million is where
the challenges started to come. My facility is
reaching 80-85 percent of current capacity,
which is a sweet spot with good margins, but
to expand, I need to be more strategic than operative, not just make next week work ... the strategic piece
really suffers.
JOSEPH'S HISTORY
Faro founded Joseph's Gourmet Pasta and Sauces in 1995, shortly after graduating from college with a degree in
business. The company initially produced traditional pasta as an extension of Faro's father's bakery business. Faro
experienced little success selling this product for the restaurant industry until he met a chef at a restaurant north of
Boston. The chef agreed to let Faro try to supply him with lobster-stuffed ravioli. Faro said, “The chef took pity on me.
I had been trying to sell pasta to him for several months. I experimented for several days until I felt that I was able
to replicate the chef's ravioli? The product was produced and frozen on the unused top floor of the bakery. The chef
approved the product and agreed to purchase it from Joseph's. Faro offered a price that was lower than the cost for the
chef to produce it himself. The chef was also happy to relieve himself of the tedious task of making the stuffed ravioli.
Faro proceeded to sell his stuffed ravioli to a variety of restaurants, from Boston to southern New Hampshire, making
the pasta in the morning and delivering it to his customers in the afternoon.
The business grew steadily over the next two decades as he added new customers, restaurants, and an independent
food distributor to handle his product. Faro noted that when he could no longer produce enough products to supply
his customers, he began searching for ways to automate the production. He traveled to Italy to personally observe the
best practices for making and producing pasta. In order to learn how to inject whole chunks of lobster or vegetables
into his pastas, he visited Ben and Jerry's manufacturing plants to see how it injects whole chunks of chocolate, fruits,
and other ingredients into its ice cream without melting or changing the ice cream's texture. He combined the best
production practices and procedures of several other industries to develop his own automated manufacturing pro-
cesses. In 1997, he hired his former college roommate, Dave Robinson, to help bolster sales. Robinson convinced Faro
to expand into both restaurant-chain sales and wholesale clubs such as Costco and BJ's. Sales continued to increase
throughout the next two decades. The continued growth caused the company to move, several times, into larger facili-
ties. In the early years, growth was at least 25 percent per year. Joseph's continued to grow by expanding its product
line, coverage in geographic area, and the types and numbers of customers served.
In 2006, Faro approached the owner of his largest competitor (La Romagnola, a Florida-based firm) to see if
an acquisition was a possibility. The owner, who had recently come to the United States from Germany, proposed a
merger instead. Faro, however, felt the owners' management styles were too different to manage together. Two years
later, with La Romagnola facing large losses, the owner approached Faro about selling La Romagnola. After
serious negotiations, Faro acquired La Romagnola. The acquisition was primarily to secure distribution in the
southeastern region of the United States and to gain access to a large national restaurant chain headquartered in
Florida. The acquisition, along with internal organic growth, brought Joseph's sales to more than $34 million by
the end of 2009. By the end of 2010, sales and profits had increased to more than $40.8 million and $6.2 million,
respectively. Financial results for the years 2006-2010 are presented in Exhibit 2.1: JGP&S Income Statement
and Exhibit 2.2: JGP&S Balance Sheet." Faro noted that the company had experienced 52 consecutive growth
quarters through the end of 2010. January 2011 was different, however. He explained, “This one month, we
were off 14 percent. We will be off about 6 percent for the quarter. The second quarter will be better. We made
a decision to pull back. We were doing too many things."
JOSEPH'S SPECIALTY PASTA MARKETS AND INNOVATION
Joseph's produced an expansive line of high-end, frozen stuffed pasta as well as a smaller line of frozen ap-
petizers. The products were frequently tailored to the individual needs of the customers. Although there was
a “generic” line of products sold to small restaurants, chains, and wholesale clubs, many of the larger chains
had insisted on a look that was unique to their restaurants. Faro had been able to design individual tools to
stamp out the pasta shells to make them different for each of these large customers. He won over the customers
by inviting them to his plant and demonstrating in a small laboratory how the product would be formed in a
large-scale setting. Faro noted, “People ask why we spend so much on a pilot plant that doesn't add to capacity.
When we bring in potential customers, they get sold by seeing us produce their product in that lab. We see this
as one of the most profitable parts of the company. In the long run, we make more money out of the lab than
anywhere else." By 2006, Joseph's had five chefs on staff performing R&D under the direction of Faro and his
vice president of culinary and manufacturing operations.
Faro designed the production process to mimic the way chefs made the products by hand. He explained,
"We put real pieces of lobster in the ravioli. Actually, we are one of the largest processors of lobster in the
country. We have our own processing plant in eastern Canada? Joseph's also employs stuffing consisting of
ingredients other than lobster, including several types of cheese, chicken, mushrooms, shrimp, and other
food products. The company also produces other forms of pasta shells in addition to ravioli. Joseph's initial
market segment of small, local restaurants was served through independent regional food distributors. Faro
and Robinson sought out one or two of the best distributors in every region they entered. They believed that
though Joseph's had the best product on the market, convincing new restaurants to switch to them from their
distributors was difficult. Robinson noted, “Distributors are very loyal to their suppliers, until these suppliers
do something seriously wrong.” Although Joseph's had secured some suppliers outside of the East, other parts
of the country were not well represented, including the West, Southwest, and Northwest.
Large restaurant-chain accounts were developed and serviced by Joseph's in-house sales staff and man-
aged by Robinson and Faro. These accounts were supplied either through the distributors or directly from
the company facility. A third segment encompassed large warehouse clubs (including Bl’s and Costco) that
were typically members-only facilities. A fourth segment, supermarket sales, was abandoned in late 2003,
primarily because it had been an expensive division to enter and maintain due to its being a commodity-
driven business.
COMPETITION AND INDUSTRY TRENDS
Joseph's main competition was composed of many local pasta makers who had revenues in the $1 million to
$3 million range. Most of these competitors produced products manually for local markets. Some competitors
b
LOC = line of credit. Source: Joseph's Gourmet Pasta and Sauces, Financial Statements.
36 ACTING STRATEGICALLY, THINKING CRITICALLY: CONCEPTS, CASES, AND TOOLS FOR BUSINESS STUDENTS
had expanded regionally to the $5 million to $7 million range by trying to replicate Joseph's product lines and
technologies and by capturing some regional restaurant chains. These competitors, according to Faro, were
also still producing manually, with labor costs anywhere from two to four times Joseph's. Joseph's salespeople
closely tracked these rivals, regularly sending information back to Faro. Faro believed that though they were
competing with Joseph's, they were also helping to spread the word about specialty pastas. He cautioned that
these smaller firms were still trying to determine how Joseph's had managed to lower its costs by automating
its manufacturing process. Some of Joseph's major customers were pressuring Faro to share his production
methods with them, but he refused because he considered this his “magic sauce” and intellectual property.
Protecting his technology from being copied by rivals, however, was becoming more and more difficult as
Joseph's double-digit growth accelerated. The small companies were lacking in innovation (Faro believed that
his company was at least a year ahead of them), but this gap was closing. Faro knew that one of his largest
customers (who had asked Faro to provide a second source for Joseph's product) had teamed up with one
of the smaller regional rivals to replace a significant amount of Joseph's product for the first quarter of 2011.
Although none of the rest of his customers had followed this pattern, he noted that, even with Joseph's cost,
some potential customers had expressed concerns about Joseph's being the sole source of his specialty pastas.
Faro was being forced by some of the larger restaurant chains and wholesale clubs to lower Joseph's prices so
they could increase their profit margins or lower their retail prices.
Joseph's had managed to stay under the radar of big food processing companies, but this changed with the
La Romagnola acquisition. Faro noted, “The big food companies now know that we are here, but so far they
have not entered our markets.” These larger companies dominated the high-volume, lower-priced end of the
frozen pasta market. They concentrated on lower-priced, mass-produced, and mass-marketed frozen foods
and were unable to successfully enter the higher-quality, higher-priced specialty pasta segment. Faro also saw
a change in consumer tastes toward more healthy food options, especially with emerging natural and organic
specialty foods.
NATURAL AND ORGANIC FUNCTIONAL FOODS
By 2010, U.S. organic and natural food was a $26.7 billion industry. Natural food and functional food (herbal
supplements, vitamin and energy drinks, and dietary remedies) were rapidly expanding from a few special-
ized health-food stores to becoming a staple on supermarket and retailer shelves, as well as popular menu
options in some restaurant chains. Standard and Poor's reported that more and more consumers expected
their food and drink, in addition to tasting good, to be low in calories and offer other health benefits as well."
In response to this trend, major food companies began to refocus their best product lines and acquire rec-
ognized brands to encourage innovation in new areas for growth with higher profit margins. In 2010, the
Organic Trade Association (OTA) reported that U.S. organic- and natural-foods sales grew 7.7 percent over
2009 and represented a 4 percent share of the $673 billion U.S. food industry. Beginning in 2002, the North
American organic-food industry experienced major structural change. Large food companies who primarily
mass-produced and mass-marketed their food products such as Nestlé, General Mills, Kraft, Dean, Pepsi,
Kellogg's, and Cargill—were caught off guard by the rapid growth of the natural and organic markets." In 2010,
с
d
e
"US organic industry valued at nearly $29 billion in 2010; Organic Trade Association, accessed May 2012, http://www.organicnewsroom.
com/2011/04/us_organic_industry_valued_at.html.
"Organic Market Analysis," Organic Trade Association, accessed May 2012, http://www.ota.com/organic/mt/business.html.
Graves, Tom and Easter Y. Kwon. "Foods & Nonalcoholic Beverages: Industry Survey." Standard & Poor's, June 9, 2011, http://www.
standardandpoors.com.
"Organic Market Analysis," Organic Trade Association, accessed May 2012, http://www.ota.com/organic/mt/business.html.; "Organic
Production." The United States Department of Agriculture, http://www.ers.usda.gov/data/organic.
"Organic World: Global Organic Farming Statistics and News" FiBL, accessed November 23, 2015, http://www.organic-world.net/index.
html.
f
CRITICAL INQUIRY, BUSINESS MODEL EVALUATION, AND CASE STUDY 37
mass-market retailers (mainstream supermarkets, club/warehouse stores, and mass merchandisers) sold
54 percent of all organic food."
NATURAL AND ORGANIC FUNCTIONAL FOODS
By 2010, U.S. organic and natural food was a $26.7 billion industry. Natural food and functional food (herbal
supplements, vitamin and energy drinks, and dietary remedies) were rapidly expanding from a few special-
ized health-food stores to becoming a staple on supermarket and retailer shelves, as well as popular menu
options in some restaurant chains. Standard and Poor's reported that more and more consumers expected
their food and drink, in addition to tasting good, to be low in calories and offer other health benefits as well.
In response to this trend, major food companies began to refocus their best product lines and acquire rec-
ognized brands to encourage innovation in new areas for growth with higher profit margins. In 2010, the
Organic Trade Association (OTA) reported that U.S. organic- and natural-foods sales grew 7.7 percent over
2009 and represented a 4 percent share of the $673 billion U.S. food industry. Beginning in 2002, the North
American organic-food industry experienced major structural change. Large food companies who primarily
mass-produced and mass-marketed their food products-such as Nestlé, General Mills, Kraft, Dean, Pepsi,
Kellogg's, and Cargill-were caught off guard by the rapid growth of the natural and organic markets. In 2010,
"US organic industry valued at nearly $29 billion in 2010, Organic Trade Association, accessed May 2012, http://www.organicnewsroom.
com/2011/04/us_organic_industry_valued_at.html.
с
d "Organic Market Analysis," Organic Trade Association, accessed May 2012, http://www.ota.com/organic/mt/business.html.
e Graves, Tom and Easter Y. Kwon. "Foods & Nonalcoholic Beverages: Industry Survey, Standard & Poor's, June 9, 2011, http://www.
standardandpoors.com.
"Organic Market Analysis," Organic Trade Association, accessed May 2012, http://www.ota.com/organic/mt/business.html.; "Organic
Production, The United States Department of Agriculture, http://www.ers.usda.gov/data/organic.
"Organic World: Global Organic Farming Statistics and News," FiBL, accessed November 23, 2015, http://www.organic-world.net/index.
f
html.
CRITICAL INQUIRY, BUSINESS MODEL EVALUATION, AND CASE STUDY 37
mass-market retailers (mainstream supermarkets, club/warehouse stores, and mass merchandisers) sold
54 percent of all organic food.hMANAGEMENT TEAM
As Joseph's product lines and sales continue to grow, Faro has maintained all the company's management roles.
In 1998, Tom Bean, vice president of administration, was hired as Faro's accountant, and later Faro added
other administrative responsibilities as well. Although Faro maintained his charge of production, research and
development, and some of the large national sales accounts, he continued to occupy overall control of financial
decisions. Both Bean and Robinson became concerned that Faro was not spending enough time and resources
developing his management team. Faro agreed that this was a problem after experiencing some difficulty with
the La Romagnola acquisition. Faro relied on his management team to keep him in check, stating, "I can find
myself fixated on issues; these people are paid to say no and are free to state their concerns." In 2003, Dave
Gillen, Joseph's production supervisor, was made vice president of culinary operations and manufacturing; he,
along with Bean and Robinson, was paid incentives based on sales and profit goals.
Faro believed that his most productive time period was the early morning when he spent time alone in
his office. The founder regularly came in before the rest of his management team, often arriving at 4:30 a.m.
However, much to Bean and Robinson's dismay, Faro continued to exercise influence over all parts of the
business. Faro explained, "I get the work habits from my father. He was always at the bakery and had his fingers,
literally, in everything. We both want to control everything." Although Faro was the majority owner of the
company, several family members also held small stakes in the company; however, only Faro's top management
team members had been given stock options.
OPTIONS
Faro felt there were still considerable growth opportunities available for his company. After all, Joseph's had
been a prime mover, making specialty pasta a main entrée on many restaurant-chain menus, and had success-
fully penetrated upper-scale, high-end restaurants. As specialty pastas were now offered at many high-end
restaurants, providing attractive margins on their menu entrees, Faro no longer considered frozen specialty
pasta as just a side dish or appetizer. Accordingly, he and Robinson maintained that many of their best custom-
ers saw Joseph's as the leading brand name for specialty pastas. By early 2008, no customer accounted for more
than 17 percent of Joseph's sales. Because of this, Faro expected any future acquisitions to further diversify
Joseph's customer base.
He did not consider the consumer trend toward low-carbohydrate diets and natural and organic foods as
detrimental to company sales. Although Faro also believed that low-carbohydrate diets were more of a fad, he
still had concern about the growth in all-natural and organic foods. Correspondingly, he instructed Joseph's
R&D group to not only begin working on low-carbohydrate options but also investigate sourcing natural and
organic ingredients for its product lines. Faro was also keenly monitoring the recent trend toward gluten-free
pastas and other gluten-free food items. Smaller, more innovative food-processing companies were leading the
way with gluten-free products. Consequentially, gluten-free food options were beginning to appear on restau-
rant menus and supermarket shelves. Despite this, both Faro and Robinson maintained that high-end frozen
specialty pasta products would continue to experience growth in the company's critical restaurant market. Faro
also did not believe that any of Joseph's current rivals posed a serious threat to the company or its markets. He
did, however, see potentially serious threats to his company's market with the entry of some of the major food
companies. A few of the larger ones and some major investment bankers approached Faro in regard to selling hiscompany. Faro knew that some of his rivals were also engaged in discussion with these potential
suitors. He felt that the company was really at a crossroads. Accordingly, Faro outlined several
strategic options:
Aggressively try to grow on their own through internal expansions of the product lines and
acquisition. (Faro believed that there were several small companies selling products similar
to his, but they were selling to markets where Joseph's was not strong.)
• Take some time to stabilize their current position by building a stronger management team
and adopting some better management systems and procedures, and then grow at a reason-
able rate while maintaining their strong margins.
Explore selling the company. Selling would provide some of the private investors and man-
agement team with an opportunity to cash out, thus earning a good return on their hard
work and investment in the company. It would also provide Joseph's with the needed funds
to substantially grow the company and stave off rivals.
• Explore taking on additional private-equity investors with the goal of moving the company
public with an IPO (initial public offering). (Joseph's was still regarded as too small to seri-
ously consider this option on its own. Private-equity investors and an IPO would provide
Joseph's with the needed funds to substantially grow the company and stay ahead of rivals.)Joseph's with the needed funds to substantially grow the company and stay ahead of rivals.)
In Thousands (000)
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Indirect Manu. Expense
Selling Exp.
G&S Expense
Total Operating. Expense
Income From Operations
Other Income (Expenses)
Loss on Property Abandon
Interest Expense
Interest Income
Total Other Expenses
2006
13125
8210
4915
2090
1449
3539
1367
280
266
-45
501
Pre Tax Income
875
Source: Joseph's Gourmet Pasta & Sauces, Financial Statements.
2007
17730
7441
10289
3638
2146
1595
7379
2910
|
461
-49
412
2498
2008
21593
9380
2213
4395
2702
1983
9080
3133
353
-35
318
2815
2009
34688
15343
19345
5623
5717
3502
14842
4503
|
444
-40
404
4099
2010 Exhibit 2.1
JGP&S
Income
Statement
40841
18584
22257
7128
5725
2858
15711
6546
359
-23
336
6210In Thousands ($000)
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid Assets
Total Current Assets
Property, Plant & Equipment (PP&E)
Gross PP&E
Accumulated Depreciation
Net PP&E
Intangible Assets
LT Notes Receivable
Other LT Assets
Total Assets
Working Capital LOC*
Accounts Payable
Accrued Expenses
Total Current Liabilities
Long-Term (LT) Liabilities
Long-Term Debt
Deferred Income Taxes
Total LT Liabilities
Total Liabilities
Shareholders Equity (SE)
Common Stock
Retained Earnings
Total Stockholders' Equity
2006
44
1350
1428
146
2968
7100
-1184
5916
233
653
886
9770
845
1597
108
2550
5349
31
5270
7920
20
1830
1850
2007
30
1180
1908
342
3460
7693
-1847
5846
221
531
752
10058
1037
613
313
1963
4729
58
4787
6750
20
3288
3308
2008
133
1978
1973
149
4232
8807
-2601
6206
209
458
667
11105
0
1684
369
2053
4090
69
4159
6212
25
4868
4893
2009
33
3054
4826
146
8059
10127
-3480
6647
198
1604
1802
16508
769
1938
646
3353
5812
65
5877
9230
600
6678
7278
2010
695
2725
5017
333
8770
11622
-4642
6980
186
810
996
16746
941
1781
601
3323
3830
113
3943
7266
605
8875
9480Faro believes that he was "almost selfish" in how he managed the company. He admits that he has neither an
exit strategy nor diversification strategy, and he is not ready to retire. Although Faro had no personal debt in the
company, he did not want to plunge the company into significant debt. He believed that to get this company to
$100 million in sales, he needed an additional $15 million to $20 million in debt or equity. Faro reported with
concern: "We have seen costs creep up on us. In the past we were able to keep costs and margins the same ...
do I stay with all my equity tied up in this business or do I sell?"
a. What is Joseph's strategy? What is Joseph's business model and value proposition? Take a look at
Joseph's financials in Exhibits 2.1 and 2.2. Does Joseph's have a below-average, average, or above-
average competitive advantage? What standards or assumptions did you use making your assessment
of JGP&S's competitive advantage?
b. Faro is the protagonist or main decision maker in the case. Again, without conducting any in-depth
analysis, what is your assessment of Faro's ability to think critically and act strategically? What infer-
ences did you make that allowed you to arrive at this conclusion?Tufte's Six Principles of Elegant Design¹
"Analytical presentations ultimately stand and fall depending on the quality,
relevance, and integrity of their content" - Edward Tufte
1 Comparisons: the fundamental analytical act in statistical reasoning is to answer
the question "compared to what?" - show comparisons, contrasts, and
differences
2 Causality: In displaying evidence and making comparisons the case researcher
needs to make inferences, "what is the evidence saying?" - show and support
cause and effect
3
Multivariate analysis: show more than one or two variables. In presenting data,
avoid two dimensional displays
4
5
6
Integration of evidence: use everything available to make your case, include
words, numbers, images, diagrams, graphics, charts
Documentation: Thoroughly describe the evidence. Provide a detailed title,
indicate the authors and sponsors, document the data sources
Content counts most of all: provide credible and believable evidence. The case
researcher needs to provide quality content and make the time and effort to
display it properly.
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