Modern Fare Foods Business Plan

Executive Summary

Modern Fare Foods, LLC (the “Company”) was formed to provide a unique shopping experience for the consumer that combines the desired benefits of quality and efficiency.

Cleanliness, color, redesigned carts, personalized customer service, and easy-to-read POP signage will all combine to create this unique experience and set the Company apart from other local market competitors.

Given the trend towards smaller family sizes, a need exists for individual packaged offerings and shelf-stable foods. Serving sizes designed to eliminate waste or spoilage and fresh / organic food offerings will appeal to health conscious consumers. This shopping experience reinforces to the consumer that they are receiving quality products and can feel good about their shopping selections. Consumers will find bright color and signage to enable them to find desired items quickly and conveniently. In addition to traditional store shelves, a butcher’s counter with freshly sliced meats and cheeses, a deli with ready-to-eat lunch and dinner selections, a produce section that includes both organic and vegan selections, and stand-alone displays of specialty items will be available.

In order to offer the best specialty foods given the target market’s interests, the Company will use several suppliers on a rotating schedule to meet the target price point and product selection goals. Empire Foods, based in Cincinnati, OH, has a wide selection of natural and organic food selections that would appeal to an important segment of the Company’s target audience. They also offer marketing and merchandising services for the retail grocery industry that would provide Modern Fare Foods with a competitive edge in the marketplace. Sherwood

Food Distributors is one of the largest food distributors in the eastern United States. They offer a wide selection of frozen foods, packaged goods, fresh foods, and staples in nearly every product category. By combining the product selections of these two distributors, Modern Fare Foods can provide the best selection that fits the needs of the target consumers. The target market for

Modern Fare Foods consists of customers that value smaller portions, and are looking for food choices that cater to unique preferences. They are in a hurry, have limited space, and are looking for a distinctive shopping experience with exceptional customer service.

Industry Background The Supermarket and Grocery industry makes up the largest food retail channel in the

United States. These establishments usually engage in retailing general lines of food products, including fresh and prepared meats, poultry and seafood, canned and frozen foods, fresh fruits and vegetables, and various dairy products. The industry has had a modest growth rate from

2005-2010 of 0.6%, but experienced the most successful years during 2007 and 2008, when revenue grew 1.8% and 2.7%, respectively. Over the past 10 years, the Super Market and

Grocery industry has been steadily approaching a mature stage in its lifecycle. However, stores focusing on niche products and markets are entering into a high growth period. According to new research from the National Association for the Specialty Food Trade, specialty markets offering natural food options and locally grown produce are competing effectively with the larger supermarkets. This increase has mainly stemmed from growing support of locally produced foods and concerns about food safety.

The Fresh Market (Nasdaq: TFM) and Whole Foods Market (Nasdaq: WFMI) are representative of this increasing trend. The Fresh Market focuses on providing high quality food selections and gourmet cooking ingredients combined with exceptional customer service. Their company strategy has proven extremely successful. In November 2010, The Fresh Market

2 unveiled their initial public stock offering. In less than four months, the stock price increased by

51.8%. Revenue and income figures would be an ideal confirmation for their strong growth, but as the public offering was just released in November, public sales data has not yet been released on The Fresh Market.

Whole Foods Market has a similar corporate strategy and is also doing remarkably well.

WFMI has been publicly traded for almost three years. The company’s stock prices have steadily risen and were trading at $60.00 as of February 18, 2011, down just slightly from the 52-week high of $60.46. This represents an 82% increase over the 52-week low of $33.30. According to

Food Marketing Institute, specialty grocers are less exposed to inflation compared to other grocers due to the organic and natural mix of products. The shift in consumer shopping habits toward organic, vegan, and other healthy dietary alternatives is also providing a strong basis for smaller, customer and quality focused retailers to be successful.

Additional research performed by experts at the Kellogg School of Management sheds some light on the demographic and behavioral differences between consumers that prefer shopping at specialty markets over larger retailers, such as WalMart. In a twenty-month study conducted on consumer shopping behavior, Professors Hansen, Blattberg, and Singh identified that customers of local food retailers were more likely to purchase fresh produce, seafood, and meal replacements like deli sandwiches or freshly prepared salads, indicating that local markets can find a specialty niche by providing quality meat and produce. Their research also indicated that larger family sizes were also more likely to shop at WalMart, presumably in an effort to feed more people on a smaller budget. Therefore, an additional opportunity exists to cater to the needs of smaller, single family homes. These homes often battle with standard grocery portions.

Typical grocery portions cater towards family sizes of four or more, making excess waste

3 unavoidable for smaller household sizes. They lean toward purchasing frozen dinners designed for individuals or shelf stable foods. With the company’s ability to provide a variety of fresh meals in smaller portions, Modern Fare Foods allows customers to choose something different for every night of the week, or shop individually for each family member. This provides the customer an option of customization that traditionally has not been offered.

Value Proposition

Modern Fare Foods will provide a unique shopping experience for the consumer that combines the desired benefits of quality and efficiency. Cleanliness, color, redesigned carts, personalized customer service, and easy-to-read POP signage will all combine to create this unique experience and set the Company apart from other local market competitors. Given the current grocery trends and the lack of a customer-focused retailer within a 3-4 mile radius of the

University of Tennessee’s campus, an opportunity exists to create a retail location near the campus area that provides food products to consumers who value product quality, unique food selections, a friendly and customer-focused atmosphere, and convenience.

The aim of the Company is not to be a low-cost leader, but food and grocery items will be offered at a price point below typical convenience stores. Traditional organic markets usually price their food offerings at premium prices due to the specialty nature of their products. By combining the efficiency of a traditional convenience store with the quality and professionalism of an organic foods market, the Company will establish its competitive edge and deliver more value for the customer’s dollar. Fresh deli and prepared food selections will also provide value to health conscious consumers and those looking for quality meals in a convenient setting at a fair price. An easily navigable store and shopping carts designed to cater to consumer shopping habits make the shopping experience much more convenient than traditional big box locations.

This convenience combined with a positive feeling and association with the Modern Fare brand will give customers psychological harmony between their desires to choose healthy selections on a daily basis and their lack of time in a fast paced world.

Given the trend towards smaller family sizes, a need exists for individual package offerings and shelf-stable foods. Serving sizes designed to eliminate waste or spoilage and fresh / organic food offerings will appeal to health conscious consumers. This shopping experience reinforces to the consumer that they are receiving quality products and can feel good about their shopping selections.

Operational Strategy

Modern Fare Foods will be formed as a limited liability corporation between three partners; Jaye Phillips, Julia Taylor, and Jordan Triplett. These three partners will secure a location within 3 miles of the campus of University of Tennessee. The ideal location will provide adequate space for a 25,000 sq. ft. building, ample parking, signage, and easily accessible entrances. Preliminary target locations have been identified in the areas near 4th and Gill or behind Fort Sanders Hospital near 13th and Grand. The store will provide ample space to house a small deli/lunch counter area, fresh produce, natural foods, and approximately 10,000-15,000

SKUs.

Once inside the store, shoppers can expect to see redesigned carts with ease of use in mind. These carts have removable baskets, side hooks for shopping bags, a hand-held electronic device for tracking purchases, steerable back wheels for easy handling, and foldable child seats and cup holders in

5 front. These carts will give consumers an immediate impression of the high quality shopping experience awaiting them and are available at a cost to the company equal to that of traditional shopping carts.

Inside the store, consumers will find bright color and signage to enable them to find desired items quickly and conveniently. In addition to traditional store shelves, a butcher’s counter with freshly sliced meats and cheeses, a deli with ready-to-eat lunch and dinner selections, a produce section that includes both organic and vegan selections, and stand-alone displays of specialty items will be available.

Suppliers/Inventory Strategies

As previously mentioned, the product selection at this store will focus on smaller portion sizes of staple goods to cater to smaller family sizes typical of the demographic around the store location. Easily prepared individual meals such as Conagra’s

Healthy Choice Fresh Mixers will be typical items found on store shelves as they meet the needs of the company’s target demographic. In addition, fresh produce and specialty items like vegan food selections, gluten-free items, sugar-free items, or other specialty interest foods will be a regular addition to the product mix.

Sherwood Food Distributors is one of the largest food distributors in the eastern United

States. They offer a wide selection of frozen foods, packaged goods, fresh foods, and staples in nearly every product category. Many of their product offerings are unique to their supply chain and are offered in convenient packaging sizes. By combining the product selections of these two distributors, Modern Fare Foods can provide the best selection that fits the needs of the target consumers.

Advertising/Media Strategies

The advertising and media strategies for the first year of operations will focus mainly on print media and non-traditional advertising strategies. While television and radio advertising may reach a larger audience, the Company does not feel that the mass audience reached by these forms of advertising is representative of its target market. Television and radio ads are also typically more expensive, therefore non-traditional strategies will be used to gain exposure in a more cost-effective approach.

As stated, print media will be used in several capacities. Flyers and coupons will be distributed frequently within a 3 mile radius of the store. Distribution will be accomplished by partnering with other local businesses, utilizing local college interns, or in local coupon mailers.

Posters will be distributed in local businesses/retailers and print advertising will be used in business-to-business initiatives.

In addition, Modern Fare Foods will tap in to the university culture at every opportunity.

Booths at trade shows and job fairs will advertise the retail offerings of the store while also helping to identify quality job candidates or potential partnerships. Student internships could also be created for the purpose of distributing advertising materials and learning about the management of a retail operation.

Real Estate/Location Strategies

Modern Fare Foods recognizes the need for a solid real estate strategy. With this in mind, the Company will seek to purchase or lease a pre-existing building within the 20,000 to 32,000 square foot range at a set price between $50 and $52 per square foot with an additional $300,000 set aside for leasehold improvements to the building and lot. While this may seem small compared to other market examples such as Earth Fare and The Fresh Market, the Company feels confident that this size allows it a great deal of freedom in terms of flexibility and management potential. Ideally, this site will be less than ten years old, with open access to at the very least, two semi-truck trailer loading and unloading hangar docks. Other preferred amenities include a sizable parking lot with approximately 250 spaces, allowing for ample parking for employees, customers and additional open areas in case additions are needed.

Target Market Strategies

The target market for Modern Fare Foods consists of customers that value smaller portions, and are looking for food choices that cater to unique preferences. They are in a hurry, have limited space, and are looking for a distinctive shopping experience with exceptional customer service. This bodes well, considering recent research collected by students at the

Kellogg School of Management that points to an emerging loyal customer segment that not only prefers smaller markets but are, “more likely to buy fresh produce, seafood, and meal replacements such as deli sandwiches or pre-made salads.” (Singh, Blattberg,

H a n s e n ) This is important because this same segment was shown to be resilient to the outward thrusts of Wal-Mart and its super center pull as well as being very compatible with the original ideal of what appeals to a Modern Fare Food customer. In the Knoxville area, our preferred customer is between the ages of 20 and 55 years old and has an average household income of

$35,000 per year in a city of just over 182,000. This information, used in conjunction with population density statistics allows the company to anticipate a potential five-mile customer radius that includes just over 9,000 city residents. Of this number, the company estimates that just over half could be viable consumers for the Modern Fare Foods brand. *

* Singh, Blattberg, Hansen, . "Wal - Mart Supercent er versus the Traditional Supermarket." Kellogg Insight . Kellogg School of Management, 05 2007. Web. 20 Feb 2011. < http://insight.kellogg.northwestern.edu/index.php/Kellogg/article/wal_mart_supercenter_ versus_the_traditional_supermarket> http://www.knoxvilledemographics.com/population.html

Competitive Strategies

In today’s market, being the largest does not ensure success. Given this fact, the

Company feels there is ample room for both larger supermarket chains and smaller, specialty grocers within the target area. In the current climate, grocery/convenient store chains, such as

Krogers, Earth Fare, The Fresh Market, and WalMart, have gone to great lengths to install and manage large markets while taking up incredible amounts of space and resources in an attempt to serve even larger markets of people. While this may work in certain situations, it is certainly not a cure all for every community in the country.

Competition: Breaking Them Down In the Knoxville Area

The Fresh Market

• Specialty market

• High value foods

• Focused food prep offerings

• Organic offerings

Earth Fare

• Specialty market

• Organic focus

• Premium food offerings Competition: Where we will compete: Size, Cost, and Speed

Modern Fare Foods will serve smaller households. Many supermarkets today sell quantities that really do not fit the lifestyle of a highly mobile student or professional. Many of the Company’s targeted consumers either do not need the extra quantities or simply do not have the space to store them. Think Tank Idea: Modern Fare Foods will offer a deli section that offers freshly prepared soups, salads, and fruit. This will meet the efficiency needs of the highly mobile consumers within the

Company’s target market.

Modern Fare Foods will fit their palates and their budgets. The Company will take the science out of shopping by making it easier for consumers to find the right kinds of foods at the right prices. With this in mind, the Company understands the healthy lifestyles that many consumers are turning to, and hope to encourage and introduce many new, healthy, and exciting brands to their daily routines.

Think Tank Idea: The Company will track customers while they are onsite and offer coupons to select shoppers based on their purchasing history through the use of customer care cards. This strategy will allow the Company to gain insight into target market preferences and encourage repeat purchases and brand loyalty.

Modern Fare Foods will get them in, out, and enjoying life. Shopping can be a fun pursuit if you do not spend half your day doing it. Therefore, the Company will go the extra mile to get customers in and out of the store as quickly and conveniently as possible through the use of several innovative shopping aids.

Think Tank Idea: Newly styled shopping carts allow the consumers to tailor their shopping needs through compartments that add a unique flare to the experience. Modern fare Foods will also offer a convenient drive thru style grocery pick up option with personalized curbside service,

10 adding an additional element of customization for the customer and an additional revenue source for the Company. Competition: How We Can Compete

Given the available strategies, the Company can compete by providing lunch and dinner options through deli selections as well as healthy choices geared for smaller families at a price point that is competitive with options found at either The Fresh Market or Earth Fare. The Company will accomplish this by gaining the trust of the community it wishes to serve. Modern Fare Foods will start fresh food initiatives to educate and encourage customers to be involved in their nutrition in search of a more balanced life. Another available option is hosting home cooking exhibitions at announced times during store hours. There will also be many opportunities to engage local businesses who may be looking for healthier solutions to their business meeting meals and daily lifestyles. Simply put, the Company can compete by acting and moving like the local market for the Knoxville community.

Leadership Strategies

In order for the Company to operate in the most efficient and functional way, it will be necessary to secure a reliable, hardworking, and trustworthy work force. Modern Fare Foods will hire a store manager who will successfully execute the Company’s operating procedures, and effectively manage others. The manager will be responsible for accurately monitoring inventory levels, keeping the store stocked properly, and dealing with customer and community relations. The Company’s employees will be responsible for providing outstanding customer service and a positive shopping experience for all customers. Employees will be needed in deli, kitchen, produce, and meat. There will also be a need for several cashiers and personal shoppers to run the Company’s “Comfort Station” service. Each employee will be responsible for

11 stocking, displaying and promoting products, maintaining department cleanliness, and providing excellent customer service. The Company will strive to always maintain a high level of quality and professionalism with the employees and products that are offered.

Financial Assumptions

In order to create pro-forma financial projections and goals for the coming year, several assumptions needed to be made in many key areas of business operations for the Company. As outlined below, these assumptions were made based on industry data, research, and previous experience on the part of the Company’s executive team.

Market Size and Projected Revenue

Modern Fare Foods assumes the market will allow this Company to anticipate a potential market size of 9,360 customers based upon market research data used in conjunction with population density statistics for the city of Knoxville. Using these statistics, the Company assumes that it will receive approximately 1% of Knoxville’s total population of 187,200

(1,872), followed by the assumption that Modern Fare Foods will receive the majority of its customers from a potential five mile radius based upon the previous mentioned statistics. These assumptions, based on averages from food and marketing research, explains the Company’s potential market size of 9,360. Using this approximate market potential, Modern Fare Foods is calculating that it will hold an estimated 5% of the market share totaling a number of 468 potential customers. The Company has completed extensive research on its closest competitors:

The Fresh Market and Whole Foods. The Company has observed that it receives approximately two visits per week from the previously mentioned companies’ customer base. It has been concluded that because Modern Fare Foods focuses on individually prepared meal selections, it is estimated to average three visits per week/per customer. This, in turn, would give the

Company an estimated 10 visits per month/per customer, resulting in 4,680 unique visits a month. Through comparison research from our competitors, it is believed that the average cost per visit will be $40.00 per customer. This has enabled Modern Fare Foods to configure a reasonable projected revenue estimate. Calculating the potential 4,680 unique visits per month by the average sale per visit, Modern Fare Foods is projecting a monthly revenue of $187,200 .

Category Breakdowns and COGS

Based off of available information, supermarket retailers anticipate regular cost of goods sold expenses to fluctuate between 70% and 90% of the gross sales revenue of certain items, dependant in large part to the item offered and its current availability. In keeping with the industry average, Modern Fare Foods will spend 72% of its gross revenue on the procurement and delivery of items in the following categories:

Frozen Foods Produce Dry Package Goods Fresh Meats/Seafood Dairy Paper Products Bakery

Within the deli department, the company expects to see higher returns due to a lower cost of goods sold expense that has an industry average of 30% of gross revenue for delicatessen items.

In the future, the Company hopes to maintain this 30% margin while increasing its overall deli sales in keeping with changing American family attitudes towards prepared meals and bought food supplies.

Operational and Administrative Labor

In order to meet the high quality of customer service dictated by the Company’s business plan, the quality and supply of the workforce is critical. The Company will provide a competitive

13 wage in order to attract employees of a higher caliber. Regular hourly employees will start at

$10.00/hour and become eligible for raises after a 90-day probationary period and every 6 months thereafter, based on performance. Hourly supervisory positions start at $11.50/hour with the same increase structure. The Company will also have four full-time salaried positions on staff: General Manager, Assistant General Manager, Floor Manager, and Deli Manager. The Deli and Floor Managers will be responsible for overseeing certain areas within the store and will be compensated with an annual salary of $38,000 including benefits. The Assistant General

Manager will help oversee the entire store and will be compensated with an annual salary of

$42,000 including benefits, plus will be eligible for bonus compensation if certain financial goals are met. The General Manager will oversee and ultimately be responsible for everything in the store and will be compensated with an annual salary of $50,000 including benefit, and will also be eligible for bonus compensation based on store performance. All four salaries combine for an annual administrative cost of $168,000, which translates to $14,000 per month.

Advertising & Marketing

Based on industry research, the average marketing budget for the grocery industry is approximately 1.5% of gross sales. In order to be competitive with other area grocers and account for extra marketing associated with the grand opening, the Company has budgeted 3% during the first three months of operation, 4.5% during the month of May for Easter, Mother’s

Day, and Memorial Day, 3% in November and December for higher sales expected surrounding

Thanksgiving and Christmas, and 1.5% the remainder of the year.

Leasehold Improvements & Equipment Expenses

In 1988, Entrepreneur, Inc provided a list of suggested start-up expenses based on a convenience store of 1,500-2,000 sq ft and projected annual revenues of $350,000-$400,000. This list

14 projected leasehold expenses between $15,000-$30,000, or about $10-$15/sq ft. Although

$30,000 would obviously be significantly less than needed for the Company’s 20,000-25,000 sq ft location, a projection of $200,000-$250,000 would be artificially high for the Company’s needs as it assumes all new equipment and a brand new location. Therefore, the Company will budget $170,000 for any necessary leasehold improvements to the selected location. The

Entrepreneur article also estimated initial equipment and fixtures expenses between $26,745 -

$76,810. In order to account for the larger store size and assuming that some equipment can be purchased slightly used or at a discount, the Company has budgeted $75,000 for equipment and fixtures.