Marketing Management Report

Michel and Gloria Jean’s in Australia Coffee Canyons: Karan Shah, Sanchita Dhara, Kaushik Mandy, Ramkumar Ganeshan, Yao Ma, Van Tran

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April 19 2012

# 1685

Executive Summary: Coffee drinking is an inseparable part of Australian culture. There is huge untapped potential in this market for coffee chain franchisees. Australian market has both local and International players who compete towards this goal. Mischel’s Patesserie is an Australian company which is one of the major players in the business of coffee chains. Gloria Jean’s is a US based company and a competitor for the Michel’s Patesserie. StarBucks, one of the largest coffee company and coffee house chain and known for its global presence, retreated from the Australian market in 2008. This has opened up new opportunities for Australian coffee players. Michel’s Patesserie when compared against Gloria Jean’s is a winner due to various reasons which ranges from quality of coffee , the experience of coffee drinking , customer satisfaction and diversity of product portfolio. However, Gloria Jean’s although viewed as a superior coffee maker is failing in its service and its impact on customer satisfaction. For both the companies it is recommended by us to strike the market when it is still “hot”, Starbucks has opened new opportunities for these coffee players. For Michel to continue its position they must continue to improve their Brand awareness through aggressive promotional strategies to gain access to the huge pool of customers left by the Starbucks. Major challenge, however, lies on the managers of Gloria Jean’s. Although Gloria has been in Australia for a long time, it is still been observed as an American brand. The managers need to improve its presence and brand loyalty. Customers need to be educated about the brand and efforts to be made to retain their loyalty with the brand. Customer incentives in the form of “gift cards”, “birthday cards” should be provided. The COO effect can phase out over time, managers should try to promote Australian culture in all points of contact with the customers, ie. through promotional advertisements and through the coffee shop ambiance. Co-sponsoring with Australian sports events can also improve the Brand image. The recommendation provided by us can help both the companies to grow in this competitive coffee chain market.

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Introduction : Australian Coffee Culture A thorough research on coffee drinking habits reveals that more than one in four of the city’s adult population visit cafes 4-7 times per week. People in Sydney enjoy up to four cups of coffee daily and visit coffee outlets at least ten times per week. Coffee is an accompaniment to breakfast in the morning and a kick-starter in the afternoon — it's a crucial part of anyone's day in Australia. In Australia, obsession with coffee is real. It is part of the social fabric, “you meet for coffee, not meet and have coffee.” Overall, 76 per cent of adult Australians visit cafés at least once a month, with only 11 per cent declaring they never visit. Sydney is at the forefront of Australia’s deepening coffee culture with more than three in five Sydney-siders visiting a cafe at least once a week, with only 9 per cent of residents never visiting a cafe. In second place was Melbourne, with one in five Melbournians visiting cafés 4-7 times per week for their coffee. In Australia there is a belief that “to drink one cup of coffee together guarantees 40 years of friendship”. Coffee culture varies around the globe, but there are some commonalities. For centuries people have gathered at cafes for friendship, conversation, news and connection. No matter where in the world and when, coffee always brings people together. The coffee culture of Australia and neighbouring New Zealand, driven by waves of Italian immigrants that have historically settled in the region, is widely considered light-years ahead of the relatively fledgling one in the States. Almost 80% of coffees that are made in a typical Australian café consist of just three coffees: the cappuccino, the flat white and the cafe latte. It is amazing to see just how the coffee culture in Australia (and New Zealand, for that matter) is different from Asia and the US. The industry boasts a huge number of independent cafés born from the Greek and Italian immigrants that loved and wanted to share espresso with the rest of the country. With the coffee market in Australia still continuing to be attractive , we will observe more cafés and coffee chains setting up shop and for that matter, more coffee roasters as well. It’s full steam ahead for the coffee industry in down under. A recent study forecasts Australian coffee sales will hit almost $800 million in 2013.

Primary and Competitive brand: For our analysis we have considered Gloria Jean’s as our primary and global brand and Michel’s patisseries as our secondary and global brand.

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Gloria Jean’s While Gloria Jean’s emerged from a small town north of Chicago in the US, its success in the US was at that time was limited. Gloria Jean’s only really became a success when in 1996 two Australians – Nabi Saleh and Peter Irvine – became master franchisors, resulting in huge expansion within Australia. Having purchased the international non-US rights to the Gloria Jean’s name in 2004, Jireh International bought the US rights in 2009. Since acquiring the non-US international rights for Gloria Jean’s in 2004, Jireh International has worked to expand its operations internationally. With 468 outlets in Australia, opportunities for further expansion in the country are limited, so Gloria Jean’s has established 432 outlets internationally. It has establishments in an array of markets throughout Asia, including nations such as Kazakhstan and Uzbekistan. Due to Gloria Jean’s’ US origins there was for a long time a perception that it was an American brand, despite being owned by an Australian company. Gloria Jean’s has been the largest beneficiary of the retreat of Starbucks from Australia. It has since then slipped back, however, due to the competition by Michel’s and the rapid expansion of McCafé. Gloria Jean’s promotes its coffee with a personal touch as it can be seen by its products. The focus of Gloria Jean’s remains on coffee and other beverages. As other players focus more on their food offerings, Gloria Jean’s’ focus on only coffee will put Gloria Jean’s at a disadvantage. Michel Patisseries It began with a passionate European pastry chef. His vision: to share with Australians his love of exquisite cakes and pastries from the northern hemisphere. Michel Cattoen started small, baking delicacies for a select group of cafes and restaurants in 1982. But as his reputation flourished, the business grew, and naturally his irresistible range of gateaux, tortes, fruit flans, quiches, pies, cookies, cakes, croissants and Danish pastries needed a bigger stage. Michel’s Patisserie customers’ hunger for more of this wonderful stuff meant national expansion was inevitable. Careful planning for a national group of stores included long and intensive work on quality products, distribution systems and staff training programs, so that every aspect of the Michel’s Patisserie experience could be delivered consistently, whether the customer was enjoying a banana cake in Bundaberg or a custard tart in Campbell town. The Michel’s Patisserie franchise system was soon born. The first stores were in Newport and Castlecrag, where the vision was tested rigorously before being rolled out nationally in 1990. In 2007, the Retail Food Group - Australia’s leading retail food brand manager and franchisor - acquired the franchise network, and the famous Michel’s Patisserie brand now incorporates more than 340 individual stores, employing more than 3,100 staff and selling 9.5 million slices of cake every year. The stores continue to be run as 4|Page

family owned and operated businesses, guaranteeing the same attention to detail and commitment to taste and quality that’s made Michel’s Patisserie such a wonderful success for nearly 30 years. Looking at exhibit 1, it is clear that Gloria Jean’s focus has always been coffee and Michel Patisserie’s focus has been on the café as a whole with different food offerings.

Managerial problem: The comparison of the two leading brands of coffee chain in Australia - Michel’s Patisserie and Gloria Jean’s, makes our primary brand i.e., Michel’s a clear winner. The challenges that are faced by the managers of Gloria Jean’s are to survive the competitive environment amidst the rich coffee culture. The major challenges are to tap the untapped opportunities left at the retreat of Star Buck’s. The huge customer base created by the void in the market as a result of Star Buck’s is something which is mind boggling and needs careful attention. Second the stagnant market share of the company even after the retreat of major competitors clearly shows that the company has not yet put up extra efforts to gain market share. But on close observation of all these gives us only one question, how to solve these major issues? How to expand diversify its product? How to integrate into the food business? How to become a part of the coffee culture of Australia? What can make Gloria Jean’s inseparable entity of Australia?

Brand Comparison: Gloria Jean’s Product: The product portfolio of Gloria Jean’s includes flavoured coffees, varietal and blended coffees. Gloria Jean’s has faced the problem of being in constant comparison in Australia from its local counterparts. Gloria Jean’s in Australia failed in various aspects like, the taste, the colour and the very fact of creating an experience of coffee drinking. A recent survey on the coffee chains in Australia resulted in a striking difference in the coffee quality and brewing process for Gloria Jean’s. Gloria Jean’s has taken pride in the coffee beans it uses , however, a taste test , conducted by experts with sampled coffees at Gloria Jean's, Michel’s Patisserie and Starbucks, confirmed that there's more to a good brew than simply a good-quality bean. Moreover the test resulted in a very low score of Gloria Jean’s beans when compared to other coffee chain players in Australia. Gloria Jean’s was criticised for its “thin” cream, “strange aroma” and unpleasant flavour. Both were marked down for their “watery” mouth feel and “bitter” aftertaste. 5|Page

The inconsistency in coffee making among the franchisees of the company is another striking factor to b kept in mind. Gloria Jean’s exhibited extraction rates that were all over the place, which Matthew, the expert in the taste test, says possibly indicates a lack of knowledge about how the grinder works and its importance to taste. “One Gloria Jean’s barista didn’t use a thermometer and the milk wasn’t hot enough (ideally, it should be 65ºC).” Promotion: Being in a Franchisee business, the most important factor is the “Brand Image “. The entire branding process of the company is at stake. The very fact that the company has a misnomer name forms the basis of misinterpretation of the company. This creates a very bad impression on the brand. In fact there exists a similar company of same name with a difference in just an apostrophe “ ‘ “. Gloria Jean’s - coffee and Gloria jeans - garment. This imposes a very big challenge for recreating a brand image through the ABC of branding. Of late the company also suffered wrong promotion due The allegation of the company for being in the news for the wrong reasons due to its connection with an evangelical organisation called Mercy Ministries, whose promotional material was distributed in Gloria Jean’s’ cafés. Mercy Ministries is alleged to use exorcism and other non-medically proven methods to solve serious psychological problems suffered by young women in its care. Certain factors like weak advertising of the company and less allocation of funds in marketing is also another factor in its being having a wrong promotional strategy. Place and price for Gloria Jean’s when compared to the competitors are quite satisfactory. The price although viewed by customers to be slightly over priced still it has a back drop of its view point of being a high quality coffee makers’. Place of location for the company is in the most highly frequented places around Melbourne and Brisbane. Gloria Jean’s has also been in the news for the wrong reasons due to its connection with an evangelical organisation called Mercy Ministries, whose promotional material was distributed in Gloria Jean’s’ cafés. Mercy Ministries is alleged to use exorcism and other non-medically proven methods to solve serious psychological problems suffered by young women in its care. Gloria Jean’s has not invested much in the campaigns and advertisements. Of the very few campaign it did in Australia such as ‘Live Life One Sip at a Time’ and ‘Stop the world’, which were a limited success as it showcased the coffee and the emotions around it. But it never showed the coffee shop experience which it has. Place: The location of Gloria Jean’s is presently in the most coffee loved regions of Melbourne. As part of Gloria Jean’s attempts to expand within Australia, and find new sites for its stores, Gloria Jean’s has in recent years incorporated its outlets into Borders bookstores (a top book retail showroom). While this strategy has been successful, the entry of administration of RED Group Retail, which own Borders, is likely to put a significant dent in Gloria Jean’s’ Australian business. 6|Page

Michel’s Patisserie Michel’s Patisserie is a food outlet founded and based in Australia. It was founded in the year 1988 by Noel Carroll and Noel Roberts. Michel’s serves bakery products such as cakes, savouries, and breads. It is especially famous for its expertly blended coffee. It is also important to know that the Michel’s is owned and managed by Retail Food Group (RFG) as some of its advantages stem from the central bakery that RFG operates. Michel’s has about 340 stores in Australia. This number has remained constant over the last couple of years, owing to increasing preference of people for in-house entertainment. Product Michel’s Patisserie serves a wide variety of bakery products and its famous coffee. Some of the bakery products include: Cakes – Michel’s Patisserie specializes in over 13 types of full-size cakes for occasions such as birthdays and engagements. Cakes like Mud cakes, Sponge and Fresh cream cakes, Cheesecakes, Tarts and Flans are some of the customers’ favourite. There are also individual servings have a wide variety and are prepared for the Australian customers. Some of the products include: pastries, slices, tarts, muffins and cupcakes. These go along with the coffee or other beverages which is offered at Michel’s and has proven to a huge success and adds value to the coffee shop experience. Savories – Savories are targeted for people on the go, and can be consumed at any time of the day. The wide range of savories includes pies, sausage rolls, spinach rolls, pasties, filo pastries and quiches. Family and individual sized savories are made available to customers who want to use savories as dinner solutions. Breads – The variety of breads although a few, customers are known to get hooked to the Banana bread, Raisin toast, and the Apple & raspberry bread. What helps create an experience at Michel’s are these bakery products that serve as a perfect accompaniment with coffee. Catering Packs – this is a unique offering from Michel’s which simplifies any event. These packs are combinations of Michel’s bite-sized savories. There are four pre-designed packs namely Dessert Packs, Aussie Packs, Gourmet Packs, and Breakfast Packs. Each pack consists of a dozen each of 3-4 savories. The Aussie Pack shows us that Michel’s takes efforts to cater to the local tastes and understand the food and party preferences of the Australians. The Aussie pack consists of pies, sausage, and spinach roles – all mini-sized. The other packs are equally appealing, and as their names suggest, are designed to cater to parties at various times of the day.

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Gluten Free – Michel’s goes the extra mile to ensure that customers of all types are taken care of. It has gluten free sweets for customers with gluten intolerance. Although these are available only in-store, the product is definitely a differentiator. Drinks/Coffee – With all the products listed above, Michel’s certainly cannot miss serving coffee to its customers. Michel’s has a range of cold and hot coffees for the coffee connoisseurs. According to Michel’s, it prepares the coffee “with the respect it deserves”. We believe that this is a statement that can churn of a lot loyal customers since it has the capacity to evoke strong emotions. A lot of people around are very addicted to coffee, and this can be a ‘magnetic’ statement to attract customers. The investment and care that goes into making the “coffee” is enormous, and adds to the experience that Michel’s coffee can create for its coffee connoisseurs. Dwelling deeper into the making of the coffee, we know that Michel’s focuses on three areas to ensure its continued success in coffee-making: Control, consistency, and Training. The very fact that Michel’s lets its customers know of its process is a great way of catching customers’ attention. Here’s more about the three areas. Control – Michel’s goes to the extent of sending its Head Roaster, who is also an internationally certified (SCAA – Specialty Coffee Association of America) coffee roaster to ensure quality treatment and processing methods in plantations in Brazil, India and Australia to ensure top-notch quality standards of the beans. Consistency – Michel’s claims that is has perfected a secret roasting method (unlike some coffee firms that buy ready and roasted coffee beans) which results in the consistent taste. The coffee blend too is developed carefully to taste well with milk-base cappuccinos, and pastry items. Training – Michel’s even has its own academy, the Michel’s Patisserie Academy that teaches its franchisees to make coffee precisely how the customer wants it. The trained baristas ensure that the best practices are passed on to the new franchises and that the customers get the same coffee taste at any of the outlets. We see that the above are intangibles for the product, and makes Michel’s stand out among the other coffee shops. Michel’s has taken efforts to make the customers realize that it is not just another coffee shop. When customers know how their coffee is prepared, they are more likely to enjoy it more. There is ample to present Michel’s coffee. Through an independent customer satisfaction survey conducted by Roy Morgan Research, it was found that Michel’s was the highest rated coffee shop. This award was part of the inaugural Roy Morgan Research Customer Satisfaction Awards. Michel’s beat competitors such as McCafe, The Coffee Club, Gloria Jeans, Hudson’s Coffee, and Donut King. Place

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Michel’s Patisserie offers the perfect ambiance for customers to spend their time and relax. The patisserie details itself in comfortable seating arrangement, view of the coffee machine and condiments, which is really important to attract customers. The aroma of the coffee fills the place and makes the shop even more attractive to customers. Michel’s works on the franchise system and the franchise owners are proud of Michel’s as they think of it as a national brand, which has a wide range of products, which helps attract customers to the store. It is located at convenient places all across Australia. The franchise system was born in 1990 through its first stores in Newport and Castlecrag. Michel’s has a great distribution system, and apart from the award winning coffee, it sells about 9.5 million pieces of cake every year. Every store has the same commitment to quality and taste since all stores are operated as family owned businesses. Promotion Compared to the major coffee shops in Australia, Michel’s does a far better job of trying to connect with the customers. This is evident with kind of information available on the website of Michel’s. It mentions the process of acquiring the coffee beans, and the key areas it focuses on to maintain its quality. With the wide variety of products that Michel’s serves, which complements the coffee extremely well, Michel’s strives to create an in-store experience for its customers, where they can sit and enjoy the coffee along with the bakery products. Even when people are here to purchase the bakery products itself, the aroma of the coffee in the shop is likely to entice the customer into buying a cup of coffee. Customers are allowed to order online with certain stores. This is a very convenient option for customers since for the items that are available online, Michel’s specifies the prices and also has images of the food item for customers to help decide better. Party celebrations, especially Birthdays are an important factor in the promotion activities that Michel’s take part in. They also specialize in Epic cakes which creates a unique experience for the customer who will feel emotionally connected to the Michel’s Patisserie coffee shop. In terms of the television advertisements that Michel’s has created, we again come across that Michel’s focuses on its coffee, and creating an in-store experience. Advertisements of Michel’s are not only catchy, they also emphasize on its expertise of coffee making. Pricing

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Michel’s coffee is priced very competitively in Australia so as to attract the customers from all demographics. For e.g.: The price of a medium mocha coffee is priced at about $3. This is at par with the standard coffee price in the country. The other confectioneries are also priced strategically to attract the customers. For e.g. the price of the tarts and slices that go along with the coffee are at a maximum range of $4.5. The party cakes which are a speciality at Michel are also affordable and have value for price, which the Australian customers give high importance. For e.g. the Mud cakes are priced at $60 which gives about 20 servings. Thus Michel’s Patisserie has been intelligent enough not to price the beverages or confectioneries at a high rate and one of the main reasons that can be attributed to this price maintenance is the franchise model.

Recommendations: Michel Patisseries Michel’s Patisseries has been conducting its business in a very sensible way by diversification in the product portfolio. And the campaigns of Michel’s Patisserie has also been quite successful by showcasing the coffee shop experience and also the various services available at Michel’s such as online ordering and birthday parties. Here are some of the recommendations we have to ensure that Michel’s will continue to grow. As of now, only some of the products are available for online order. It will be ideal if all items be made available online, including coffee. We would like to go a step ahead to suggest that customers be allowed to order coffee that can be customized to their preferences. This way, customers need not have to spend time ordering coffee at the shop, but can experience it directly at the shop. Making other items available online will not only make it convenient for consumers, but also likely increase sales for Michel’s. Michel’s does not have brand merchandise. If Michel’s wants to increase its brand awareness, it certainly needs to introduce merchandise and start selling it through the store, events, and other promotional activities. This will help further Michel’s brand image and awareness. Another way to increase brand awareness would be to create online communities where customers can share their experiences at Michel’s, and also contribute ideas to create to new flavours of coffee. Michel’s can use the winning customer’s idea and also publicize the idea through the customer himself/herself in order create a connection with local customers. Last but not the least, Michel’s can partner with celebrities, particularly movie stars to endorse its products. Although Michel’s has to invest substantially in this idea, it has the potential to create increase Michel’s sales manifold when executed properly.

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Target segment Gloria Jean’s should expand its customer base to include people from 25 to 44 years old which are the target segment of Starbuck. Gloria Jean’s target market is considerably small, where there only target people aged 18 to 25 years old compared to other competitors. In the aftermath of the decline of Starbucks there was a gap in the market for a corporate-styled specialist coffee shop, particularly one able to capture the essence of “café culture”, designing its outlets like cafés and using young inner city white collar hipsters in advertising. Repositioning strategy The goal of the repositioning strategy is to build an emotional connection to show that ‘Gloria Jean’s Coffees is my kind of coffee place’ and promote the brand as offering an experience, not just a coffee. This will help retain loyalty with existing guests by demonstrating they could not get the same emotional connection that they get at Gloria Jean’s Coffees anywhere else. Product Include the food menu: Gloria Jeans should provide food to customers instead of only cakes and pies. This is because walk in customers would find it convenient to dine in instead of just buying coffee from the outlet. Menu such as breakfast sets and set lunch should be provided besides serving light food such as sandwiches and cakes. Decrease delivery time: Modern equipment such as The Clover®, which is a specialized brewing machine that allows a barista to quickly deliver one freshly brewed cup of coffee at a time, would be useful. It takes quite some time for a freshly brewed cup of coffee to be served to customers with traditional equipments, thus it might lose some customers whom could not wait. Increase coffee standard: Providing further training such as communication skills and management skills to baristas might improve their services. Baristas will feel more knowledgeable in handling situations that might occur. Giving baristas extra incentives such as entertainment allowance and company trips might boost up their morale, which might indirectly increase their productivity level and decrease the turnover rate. Promotion Increase advertising and promotions: To increase the customer loyalty, Gloria Jean’s should promote the instore experience rather than just the coffee products. In addition, Gloria Jeans hardly did any advertising and promotions. Therefore, it would be a challenge for Gloria Jean’s to reinforce its position as a top quality coffee provide despite its prevalence across Australia. They should advertise in local newspaper on their special promotions and their new products to gain customers awareness. Celebrity endorsement could also be useful in the sense that Gloria Jeans is their choice of coffee. This will gain attention of the fans of the celebrity and also people in public. 11 | P a g e

Local celebrities such as Nicole Kidman is prove to be useful as a marketing strategy in the sense of celebrity endorsement. Increase public relationship (PR): Social and environmental effort can be seen as a good way to increase customers’ awareness towards the brand name. Doing charity work such as funding the coffee bean farmers, building schools and clinics could be seen as a useful tool to gain worldwide attention towards what Gloria Jeans is doing for the world. They could also be part of Governments plan of reducing the consumption of electricity and water by doing so in the outlets itself. Increase customer incentives: Gloria Jean’s should reward their loyal customers with membership card or loyalty card to encourage them to stay loyal to the brand and also continue patronizing. These rewards will be beneficial to them and make them feel happy and treasured. They could provide them with discounts coupons and free refills for them who have the membership card, and encourages those that have not sign up, to sign up for these benefits, thus creating the Gloria Jean’s community. Place Amplify the in-store experience: Most walk in customers look for a cozy and warm place to hang out when they enter the outlet. Gloria Jeans could provide a better environment for them by using comfortable sofas and furniture, warm ambience with music and also providing handicap facilities. This will improve consumers’ perception towards the outlet. Provide free WIFI: Many people patronize coffee outlet is because it is a neutral place for people to talk about business and do their homework and assignment. This means that internet connection is very useful for them, including students whom usually do their assignments and homework at the outlet. Providing free Wi-Fi service to them might benefit Gloria Jeans, as more people will patronize the outlets for usage of Wi-Fi, which will indirectly linked to purchasing of coffee in the outlet. Build mobile app: The mobile app targets to the loyal customers of Gloria Jean’s so that they can easily figure out the nearest Gloria Jean’s store. Using this app, Gloria Jean’s can also advertise its promotion programs.

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Conclusion: Based on our analysis of the Australian coffee market, and our in-depth analysis of the primary brand – Michel’s Patisserie, and competitive brand – Gloria Jean’s, we can state that Michel’s emerges as a winner. The managerial problems that Gloria Jean’s faces were identified and solutions to overcome these issues have been suggested. Careful implementation of these suggestions will boost Gloria Jean’s brand identity, increase customer satisfaction and gain the market share after the retreat of Starbuck. In addition a, Australians being connoisseurs of coffee are very selective and picky in their choices of beverages. So Gloria Jean’s will have to suit their products according to the Australian palate, to avoid the failure like Starbucks and compete with other chains like Michel’s and McCafe which is growing in popularity in the recent years.

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FIGURES AND TABLES: Competitive Position 2010 Product type

Value share (%)

Rank

Jireh International

Chained specialist coffee Shops

31.90%

2

Retail Food Group

Chained cafes

47%

1

Chained specialist Coffee

2.40%

7

Chained bakery products fast food

7.40%

2

Source: Euromonitor International Michel’s Patisserie

Award winning coffee

Our coffee is a sip above the rest, recently winning Coffee Shop of the Year 2011 from Roy Morgan Research.

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Epic Cakes at Michel’s

Various confectionories showcased by Michel’s

Gloria Jean’s Advertisements:

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Online Ordering in Michel’s

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