Case 1 Black Fly Beverage Company Inc.

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907D03 
 
 
BLACK FLY BEVERAGE COMPANY INC. 
 
 
 
Julie Harvey wrote this case under the supervision of Professor John Haywood-Farmer solely to provide material for class 
discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors 
might have disguised certain names and other identifying information to protect confidentiality. 
 
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Copyright © 2007, Richard Ivey School of Business Foundation Version: 2014-03-14 
 
 
 
In early November 2005, Cathy Siskind-Kelly and Rob Kelly, owners of the Black Fly Beverage Co., 
based in London, Ontario, were discussing the viability of expanding their product line after less than a 
year in operation. Since their startup the previous spring, sales of their original Black Fly cranberry-
blueberry vodka cooler had climbed steadily and had outsold many national brands. Impressed with their 
early success in the Ontario market, the husband-and-wife team wondered whether they should take 
advantage of their new brand’s momentum and invest in the production of a second product. 
 
 
LIQUOR SALES IN ONTARIO 
 
The Liquor Control Board of Ontario (LCBO) was a $3.5 billion Crown corporation held by the Ontario 
Government, that, with few exceptions, was the only authorized importer of beverage alcohol in the 
province. The LCBO was the largest retailer of beer, wine and spirits in the world, with over 550 LCBO 
outlets and 190 agency stores in Ontario.1,2 The core mandate of the LCBO included promoting 
responsible alcohol consumption, supporting domestic beverage alcohol producers, and remitting 
dividends to the Ontario government to fund social and capital programs.3 This mandate was achieved 
primarily through policies that sought to keep selling prices regulated to standards that set minimum price 
levels across the province. Compared to other non-regulated beverage alcohol markets, the LCBO’s 
pricing was considered to be substantially higher and sometimes double on some wine and spirit products.4 
However, 50 per cent to over 75 per cent of the retail price of alcohol sold in Ontario was made up of 
taxes, levies and mark-ups,5 illustrating the socially motivated mandates behind the LCBO’s elevated price 
1 www.lcbo.com/aboutlcbo. Accessed June 2006. 
2 Despite the prominence of the LCBO in Ontario beer sales, most beer in the province was sold through the 635 outlets of Brewers 
Retail Inc., branded as The Beer Store. The Beer Store supplied the LCBO. 
3 www.lcbo.com/aboutlcbo. Accessed June 2006. 
4 en.wikipedia.org/wiki/LCBO. Accessed June 2006. 
5 www.lcbo.com/aboutlcbo. Accessed June 2006. 
 
For the exclusive use of T. Veronez, 2015.
This document is authorized for use only by Tarik Veronez in Analise da Decis?o 2015 - 2 sem-1 taught by Fernando de Almeida, Universidade de Sao Paulo (USP) from March 2015 to 
September 2015.
Page 2 9B07D003 
 
 
points.6 Although its pricing policies had sometimes been criticized as artificially high and anti-
competitive, LCBO retail shelf space remained in high demand among domestic and international beverage 
alcohol producers because of the agency’s dominant position in the distribution and retail markets. 
 
Securing a spot in the LCBO’s retail product lineup was a highly competitive process, especially for new, 
smaller beverage alcohol producers. New product proposals were evaluated by LCBO category managers 
from the corresponding product type within the beer, wine and liquor groupings. Quality, price, value, 
taste, packaging and marketing programs were thoroughly reviewed before a decision was made to carry a 
product.7 All products approved for retail sale were subject to stringent performance benchmarks and were 
promptly discontinued if sales were below standards. However, if a product was performing well, 
producers hoped to earn “general listing status,” which permitted a brand to be carried in top-tier LCBO 
stores across the province, on a year-round basis. 
 
 
COMPANY BACKGROUND 
 
Rob Kelly initially had aspirations to open a craft brewery in London. However, when he discovered that 
beer sales in Ontario were weakening, he turned his attention to the faster growing spirit cooler market. 
After reviewing market research indicating that cooler sales had grown by 300 per cent in the previous 
two-year period, he abandoned his work in developing a craft brewery and began again with a concept for 
a micro-distillery. Despite having three young children and no previous experience in the beverage alcohol 
industry, Kelly left his career in landscaping and partnered with his wife, Cathy, to start a business 
producing spirit-based drinks. The couple sought advice from industry experts to help build their 
knowledge and to ensure successful access to the Ontario market, but they encountered unanticipated 
setbacks in obtaining a licence from the necessary government agencies to produce and sell alcohol. After 
lengthy and rigorous negotiations, in December 2004, the Kellys finally secured provincial and federal 
licensing and declared the Black Fly Beverage Company to be Ontario’s first micro-distillery. 
 
Unlike most manufacturers, which typically operated in industrial areas on the outskirts of the city, the 
Kellys chose an old bank building in a high-traffic area in the heart of downtown London. Although the 
converted building was smaller than a typical warehouse, with only 140 square metres of production space, 
and was comparatively more expensive to lease, the location provided maximum exposure to the public 
and a prominent presence in the community. 
 
Recognizing the strong competition in the spirit cooler market from larger, established brands such as 
Mike’s Hard Lemonade and Smirnoff Ice, the Kellys focused on developing a premium product that was 
differentiated on many fronts compared to other vodka coolers available in Ontario. The Kellys’ recipe, 
designed for consumers seeking a fresh alternative to the mainstream vodka cooler, was made from 
natural-tasting, local and identifiably Canadian ingredients. It included real cranberry and blueberry juices 
and no chemical sweeteners; the product tasted much less sweet than other brands on the market. Many 
competing coolers were up to four or five times sweeter than the Black Fly recipe. The cooler retailed for 
$9.95 in packages of four 400-millilitre, wide-mouth plastic, resealable, ultra durable bottles, compared to 
the typical 330 millilitre glass bottles used by other brands. The Kellys chose Black Fly in branding their 
company and flagship vodka cooler because the name was reminiscent of the small flying insect 
6 The Association of Canadian Distillers estimated government markups and levies on spirit coolers to total 46 per cent of retail 
selling prices. Producer margins are estimated to be 33 per cent of retail selling prices. www.canadiandistillers.com. Accessed July 
2006. 
7 www.lcbo.com/aboutlcbo. Accessed June 2006. 
 
For the exclusive use of T. Veronez, 2015.
This document is authorized for use only by Tarik Veronez in Analise da Decis?o 2015 - 2 sem-1 taught by Fernando de Almeida, Universidade de Sao Paulo (USP) from March 2015 to 
September 2015.
Page 3 9B07D003 
 
 
indigenousto Canada’s northern regions and considered synonymous with cottage country, fun and 
relaxation. 
 
After the Kellys’ Black Fly product proposal was approved, the LCBO granted limited delivery of the 
cooler to six London-area stores. However, it made Black Fly responsible for arranging its own sales and 
promotional activities to stores outside of London, a formidable task for such a small and largely unknown 
alcohol producer. Furthermore, the production run to fill the first order encountered complications, ending 
with the discovery that the new bottle-labelling machine was incompatible with the other equipment on the 
production line. The Kellys had to call on family and friends to work day and night to attach 75,000 labels 
by hand to meet the LCBO’s first order! 
 
Customers received the cooler phenomenally well in its first months on the market. By November 2005, it 
was selling in almost 200 LCBO stores and in selected bars and restaurants in Southwestern Ontario. The 
Kellys were in the process of finalizing a deal with the John Labatt Centre, a sporting and special events 
arena right across the street from Black Fly’s facilities in London, to open a Black Fly branded lounge 
inside the facility. In addition, they were most pleased that the LCBO had granted their Black Fly vodka 
cooler with general listing status, making the product available to order year-round for all LCBO stores and 
thus securing Black Fly’s position within the Ontario beverage alcohol market. 
 
 
THE CURRENT PRODUCTION PROCESS 
 
From mixing to packing, the entire cooler production process could take up to 26 hours, including the time 
needed to clean and set up each tank. The first step was mixing. A cold mixture of juice, flavouring and 
ethanol, and a hot mixture of sugar and acids were combined into three 1,600-litre tanks. The resulting 
mixture was stirred for up to 1.5 hours to achieve the desired taste, colour and consistency. When the 
mixing stage was complete, the mixture was cooled to 00C, a process that could take up to five hours. The 
mixture then underwent a carbonation step for three hours and was then tested to ensure that the mixture 
contained no more than seven per cent alcohol, the maximum amount permitted by the Canadian 
government for vodka coolers. It took three hours to receive the results of the test, thus ending the 14-hour 
mixing process. All tanks needed to be drained before the mixing process could begin again. 
 
When the first tank was ready, the vodka mixture was drained into a bottling machine, where each bottle 
was loaded, filled, capped, labelled and packaged. The cases were transported to an offsite holding 
warehouse, where they were prepared for pickup by the LCBO. Overall, the bottling machine could 
complete 12,000 bottles in 12 hours, draining all three tanks and resulting in a total of 26 hours for each 
run. However, production was sometimes interrupted by delays that occurred throughout the process. 
 
In addition to Rob Kelly, who was primarily involved in the production side of the business, the company 
rotated between one full-time and 10 part-time workers to manage operations. The cooler production and 
bottling processes were scheduled during consecutive day and evening shifts, usually five days a week, to 
meet the LCBO’s average order lead-time of seven days. The LCBO’s average regular order totalled 1,200 
cases per month, but orders were often sporadic and could triple during the summer season between May 
and September and the holiday season in December.8 
 
 
 
 
8 Cases were shipped as six packages of four bottles, totaling 24 bottles per case. 
 
For the exclusive use of T. Veronez, 2015.
This document is authorized for use only by Tarik Veronez in Analise da Decis?o 2015 - 2 sem-1 taught by Fernando de Almeida, Universidade de Sao Paulo (USP) from March 2015 to 
September 2015.
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OPTIONS FOR THE FUTURE 
 
Although the Kellys had not yet been in business for a full year, they believed that the keen interest they 
had received so far from the LCBO indicated that the market was ready for a second Black Fly product. 
Rising sales, growing consumer demand, increased distribution to LCBO stores, and positive feedback 
from the media and the LCBO encouraged the Kellys to consider expanding. 
 
The most logical way to extend the Black Fly brand was to develop a second flavour using the base vodka 
recipe. Although the Kellys found it difficult to predict future sales because their cooler was still new and 
not representative of an established product, sales remained strong and consumer interest high, suggesting 
that increased product distribution could boost current sales levels by 50 per cent to 75 per cent. Most 
other cooler brands on the market offered several different flavour choices as part of an entire line of 
coolers. It was generally believed that additional choices allowed consumers to further explore their 
favourite brand rather than being forced to choose a competing product. However, the Kelly’s were 
unsure whether a second cooler flavour could maintain the same broad appeal that the flagship cranberry 
and blueberry brand possessed. But overall, the Kelly’s were most concerned with timing. Although the 
original Black Fly cooler was showing strong results for a product that had been on the market for less 
than a year, the brand still had only limited availability, i.e., in fewer than one third of all LCBO stores. 
The Kellys wondered whether it would be advantageous to maximize the growth potential of the existing 
cooler before launching a second flavour. 
 
Despite these uncertainties, the strongest benefit to developing a second cooler would be the potential 
economies of scale gained from the production process already in place. The Kellys believed that their 
current production process had enough capacity at present demand levels to produce a second flavour, 
avoiding the need for additional investment in equipment. The only associated cost would be a product 
development and merchandising fee of $30,000. The new cooler would also benefit from guaranteed 
shelf space in LCBO stores across the province. 
 
One major concern the Kellys had with introducing a second Black Fly cooler was the risk of 
cannibalization of their original recipe. Rather than serve to increase market share, a second flavour 
could instead split sales between the two products. If sales levels increased by only 10 per cent, the 
Kellys were unsure whether a second flavour would be worth producing. For this reason, the Kellys 
believed that they should consider a non-competing product that could provide better access to new 
customers, satisfy market demand for innovative concepts, increase brand awareness and ultimately grow 
market share. In keeping with the unique and exciting image the Black Fly brand sought to create, the 
Kellys considered developing a new specialty spirit-based product that would also capture the LCBO’s 
desire for a Canadian-inspired, inventive concept with creative packaging and non-breakable, 
environmentally friendly containers. 
 
The couple determined that a ready-to-freeze vodka cooler concept could be an answer to many of the 
product demands shared among themselves, the LCBO and the end consumers. The Kellys had 
considered a number of alternatives on how to produce and package a ready-to-freeze cooler, and they 
ultimately came up with a product they dubbed “Spiked Ice.” Much like the summer frozen treat known 
as a “Freezee,” Spiked Ice would come in a multi-pack of nine 100-millilitre, foil-packaged units with 
three vodka cooler flavours per box. Customers would purchase Spiked Ice from the LCBO unfrozen and 
then freeze the product at home before serving. 
 
At present, there was no other producton the Ontario market like Spiked Ice, giving the Kellys the 
opportunity to introduce customers across the province to an entirely new way to enjoy vodka coolers. 
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This document is authorized for use only by Tarik Veronez in Analise da Decis?o 2015 - 2 sem-1 taught by Fernando de Almeida, Universidade de Sao Paulo (USP) from March 2015 to 
September 2015.
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However, producing a ready-to-freeze, alcohol-containing cooler had some drawbacks. A frozen 
beverage of any kind could be considered a seasonal item, reserved for the hot weather of spring and 
summer. The Kellys wanted Spiked Ice to be self-sustaining. Without an ongoing large-scale 
commitment from the LCBO, they were unsure whether seasonal sales could justify the investment 
needed to produce and distribute an entirely new product. Additionally, launching Spiked Ice would be 
essentially like starting another business. Although there would be some economies of scale gained from 
added production, most of the equipment, materials and processes would be product-specific and not 
shared with cooler production. The Kellys expected to spend $500,000 on outfitting their facility with a 
new tank and machinery to mix, fill and package Spiked Ice for distribution; another $40,000 would be 
spent on merchandising and product development. Including cleaning, setup and testing time, the new 
machine would be able to produce 10,000 units every three hours. 
 
The LCBO was very enthusiastic about the Spiked Ice idea and made a commitment for the summer 
months for 200 of the top-selling stores across Ontario at a retail selling price of $8.75 per box, with a 
minimum four-month order of approximately 8,000 cases in total.9 If sales performed well, the Kellys 
knew they would have to be ready for a seasonal order that was three times that size. One potential 
constraint was that Black Fly’s current facilities were not equipped to produce Spiked Ice and the original 
vodka cooler at the same time. Although the Kellys were investigating upgrading their processes to permit 
simultaneous production, they were unsure to what extent the limitation would affect business if they opted 
to produce Spiked Ice with the present setup. 
 
 
THE DECISION 
 
As Cathy and Rob Kelly reviewed all the information they had collected regarding expanding Black Fly’s 
product line, they still had several questions. Although it would seem a natural progression to offer a 
second flavor in addition to the original cranberry-blueberry vodka cooler, the Kellys were drawn to all the 
challenges of introducing a brand new product to the market. They knew that their decision had to be 
justifiable from the perspectives of both marketing and operations. 
9 Cases would be shipped as 12 boxes of nine units each, totaling 108 units per case. 
 
For the exclusive use of T. Veronez, 2015.
This document is authorized for use only by Tarik Veronez in Analise da Decis?o 2015 - 2 sem-1 taught by Fernando de Almeida, Universidade de Sao Paulo (USP) from March 2015 to 
September 2015.