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Family Commitment to Quality Since 1920.

Perdue Farms
Marketing Management IMGT 8571, Spring 2011 Professor Ronald Schill Monterey Institute of International Studies Melissa Summers, Nicholas Taylor, William Gao, Yi Roy Lu, and Larisa Makshanova March 12, 2011

Perdue Farms

Perdue Farms is researching the viability of launching a new product line of chicken hot dogs. In order to provide a definite recommendation, our team conducted in- depth research in order to answer several questions that were on the minds of the executives. The questions we addressed were: How big is and what demographics comprise the total hot dog market and the target market that Perdue plans on marketing to? How can Perdue advertise this product and at what price should they sell the hot dogs in order to cover all costs, including overhead? Is there a way for Perdue to guarantee that the quality of the new chicken hot dogs does not tarnish the overall companys high quality image? With these questions answered, we have decided to recommend that Perdue Farms not launch this product at this time. However, we also recommend that Perdue Farms continue to research the market and options, increase their numbers of cockerels, and look into acquiring hot dog production facilities that they can control all aspects of quality. We feel that chicken hot dogs may be a more viable option at a later date if Perdue is able to increase its facilities and meat supply.

I. Executive Summary

II. Problem Definition

Given Perdue Farms high quality image, the poor public image of mechanically deboned meat (MDM), and the possible future ban of MDM all together, the supply of cockerels limiting the number of hot dogs that can be produced in a week, and the lack of control over the production process should Perdue Farms considered the viability of launching a line of chicken hot dogs. In response to the industry trend moving away from dressed fowl and towards processed meat, Perdue Farms is determining whether to enter the chicken hot dog market. The decision to launch the chicken hot dogs will be determined based on whether or not the venture meets three criteria. The first criterion is that the quality of the Perdue hot dog must surpass all competitors on the market. Second, the revenue generated from the hot dogs must cover all costs, including overhead. Finally, the hot dog must be made entirely of Perdue meat. From here we will go into detail, exploring the various components that will lead to a recommendation to launch the new product or to scrap the idea.

III. Decisions To Be Made

Decision 1: Target Market Selection Market Definition The national hot dog market is broken down into two primary segments of retail and institutional/concessionary and is believed to be worth nearly $2 billion annually. The national market is then broken down into geographical markets, which tend to be delineated further into regional segments. Currently, Oscar Mayer holds 25% of the Northeast regional market, while the top fourteen hot dog brands share 90%. The hot dog market is also separated into segments based on individual consumption levels, falling into the categories of: heavy consumers (who comprise

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26% of the market), medium consumers (comprising 33%), light consumers (representing 29%), and non-consumers (12%). Option 1: Heavy consumers Pros Cons l Very likely to consume hot dogs l Not sensitive to taste and nutrition often of hot dogs, which are the strength l Relatively ignorant about whether of the Perdue Brand MDM is used in producing hot dogs l Their brand loyalty is low l Highly competitive Option 2: Medium consumers Pros Cons l Account for the largest percentage of l may damage the reputation of the hot dog market Perdue brand l More aware of the taste and l price sensitive nutrition l highly competitive too Option 3: light consumers and non-consumers Pros Cons l huge market potential (31% of the l may damage the image of Perdue market) brand when they know MDM is used l tend to choose hot dogs based on l require higher advertising budget to their taste and nutrition instead of promote Perdue hot dog among price them l Perdue brand is more recognizable to them as a high quality brand l relatively lower competition l brand loyalty may be high once they recognize Perdue hot dogs as the best quality hot dog in the market Final Decision: light consumers and non-consumers Given the fact that Perdue is a highly recognized brand that is associated with high quality, and that the Perdue hot dog will be the best hot dog on the market with a relatively higher price, we would choose light consumers and non-consumers as our target market. The first reason for this choice is that light consumers and non- consumers combined compose a larger percentage of the market than heavy consumers. Another reason is that these consumers are more interested in the taste and nutrition of hot dogs so that price will not be their priority when buying the hot dog. In addition, their brand loyalty may be high because they tend to buy the best hot dog in the market. Perdue would go further to target those new and light

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consumers who do not have children and therefore are more likely to enjoy greater disposable income, causing them to be less influenced by product price. Given this decision, our value proposition will be the unique and newly-invented formula which makes our hot dog tastes better than our biggest competitor Oscar Mayers, and the high quality of Perdue chicken meat that is used in producing hot dogs.

Decision 2: Pricing Strategy Option 1: $1.23 per pound Pros l Very competitive compared to competitors price (lower than our major competitor Oscar Mayers, $1.45)

Cons l Low contribution margin l Hard to breakeven l Consumers may doubt the quality of Perdue hot dog l High units of production will require of high supply of cockerel meat, which is limited.

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Summary: No Potential Given the suggested advertising expense, pricing our product at $1.23 per pound is not viable option, we would not be able to achieve breakeven point (refer to Appendix). Option 2: $1.49 per pound Pros Cons l Easier to breakeven l May stimulate sales volume which l Competitive compared to exceeds Perdues capacity of competitors price (only a little bit producing hot dogs, as a result, higher) affect the consistency of its quality l Better image of Perdue hot dog as l Low profit margin ($0.31 with nutritious and high-quality 100,000 units production, and $0.26 with 200,000 units) given the advertising expenses of $2,1 million l High units of production will require of high supply of cockerel meat, which is limited. Summary: No Potential Only substantially lowering the advertising cost this price strategy will be beneficial to the company. Recommendation: spend more time estimating the necessity of high priced advertising, keeping in mind that a) Perdue Farm has already established themselves as a suppler of quality chicken on the market; b) with relatively high retailers margin of 35%, they should consider push strategy. Option 3: $1.99 per pound Pros Cons l High contribution margin which l Too high to attract light consumers means easy to breakeven and non-consumer l The potential sales volume is more l Not very competitive compared with likely to be within Perdues control other major brands so that the quality is ensured l Hard to expand its business in the l Consumers tend to consider future Perdues hot dog as the best in the l Pricing at premium price will market due to its high price require higher advertising expenses, l Profit potential: with estimated capturing/unique value proposition production of 100,000 per week the less market share estimated profit margin is $527,690 while using MDM in the product, per year high profit margin ($0.6- charging the premium price is not 100,000 pounds production; $0.56- reasonable

Perdue Farms 200,000 pounds) premium price will fit the quality image of Perdue Farms Summary: Low potential It is unclear what the demand will be at a premium price, and not to forget about the limited supply of cockerel meat, which can be only enough to produce the 67,000 pounds per week, and thus, 3,484,000 pounds is the highest production capacity of Perdue Farms, at this point.

Final decision: If choose to launch, price at $1.99 per pound Given the fact that current Perdues capacity of producing hot dogs is very limited and the fact that Perdue values its quality most, the price of $1.99 is more likely to keep the sales volume within Perdues control so that Perdue will be able to guarantee the quality. The price of $1.99 can also differentiate Perdue hot dog with other brands as a premium product in the market which means consumers are more likely to link Perdue hot dog with nutritious and best quality. In addition, this price gives Perdue high contribution margin that will enable Perdue to have more money for promotion and future expansion. Decision 3: Positioning v Roll Out One option considered in the position strategy was that of using a Roll Out strategy to introduce the product to a specific regional market segment. This strategy is evaluated below. Pros Cons l Ability to test the market first before l With 5% share in the first test going into mass production will help market, Perdue Farms will be able to estimate the market demand for to sell only 5 000 hot dogs per week the hot dogs l No potential for profit during first 6 months of roll out Final Decision: Roll Out Given the predicted cost structure, the current facilities at Perdues disposal, and the current available supply of cockerels, if Perdue goes ahead with the venture, we have decided that a Roll Out strategy would be the best approach. v Distribution The hot dog market is broken down into the retail and institutional/concessionary segments. Given that Perdue values its image as a producer of quality meat products, the company will not be considering distribution through

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institutional/concessionary channels. The options considered for chicken hot dog distribution are mass-market retail stores, or small neighborhood stores. Option 1: Mass Market Retail Stores Pros Cons l Sells to a larger portion of l Have to fight for shelf space consumers l Competitors have considerable l Lower advertising costs due to leverage with retail stores sharing of the cost with the store l Trend of declining profits for stores l More processed food competitors appearing in stores Summary: Low potential The presence of so many competitors, who are able to offer lower prices and negotiate more shelf space and better placing, makes this a less attractive option. This is especially true considering that our only viable price option is considerably higher than what is charged by our competitors. Option 2: Small Neighborhood Stores Pros Cons l Can negotiate placement and facing l Sells to a smaller portion of with the store consumers l Few competitor brands available l Requires a higher advertising l More likely to specialize in quality budget to promote Perdue without brands, supporting Perdue image sharing the cost l Competition not based on price Summary: High potential The presence of fewer competing products, and the fact that competition in these stores does not tend to be based on price makes this a more attractive distribution channel for Perdue hot dogs. Final Decision: Small Neighborhood Stores If Perdue chooses to launch this venture, the chosen distribution channel would be small neighborhood stores where consumers expect to find quality meat and are happy to pay premium prices. Decision 4: Advertising Strategy In order to sell the hot dogs, Perdue Farms should pay attention to advertising and promotion. Perdues advertising agency suggested that they should spend $2.1 million on trade advertising, promotions, etc, while the management executives

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wanted to cut that down to $1.4 ($189,000 + $1,205,000) million. It is critical that the company should find some effective & low cost ways to do the advertising. Heres some way that Perdue Farms could take into consideration in introducing the chicken hot dog to the market. Option 1: In-store Promotion Pros Cons l The most accessible and efficient l Have to fight for shelf space with way to reach potential consumers other competitors l Wide variety of advertising choices l Easy to copy by competitors to attract consumers attention such as providing samples, placing products at eye-catching places, etc. l Give consumers a chance to visualize Perdue hot dogs best quality so that increase their brand loyalty Option 2: TV and Radio Commercials Pros Cons l It can reach a large number of l Very expensive especially during consumers including heavy hot dog season consumers, light consumers and l Rely on a good commercial, which non-consumers is appealing enough to consumers. l Very effective during hot dog Such a commercial requires extra season such as when Super Bowl is money to produce. taking place l Easy to get statistics needed to evaluate the effectiveness of the commercial Option 3: Internet advertising Pros Cons l The cost is low compared to other l Words spread quickly too if Perdue promotion channels fails to position its hot dog as the l More likely to achieve a best quality sensational effect if there is an l Since Internet may provide excellent idea about starting a additional information related to internet campaign hot dog, consumers are more likely l Easy for consumers to spread the to realizing the MDM issue words about Perdue hot dogs best quality.

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Option 4: Coupons and other ways of discounts Pros Cons l More light consumers and non- l Hard to breakeven if setting a low consumers may be attracted to buy price Perdue hot dogs l Since Perdue relies on two l A shortcut to make people realize producers to make hot dogs for that Perdue is producing hot dog them, production control is critical l May increase the sales volume to them. The sales volume during which is good for market the discount may be higher than penetration they expected, the volume after the discount is over may be much less than they expected. As a result, it is difficult for them to control the production and the quality Final Decision: Mainly focus on in-store promotion, supported by TV and radio commercials during the hot dog season Given the fact that we choose to target Perdue hot dogs at light consumers and non- consumers and sell Perdue hot dogs in small neighborhood stores, this advertising strategy is the best way to reach our potential consumers as well as encourage them to buy our hot dogs. Moreover, we can better control, predict and evaluate our advertising strategy which is very important for a new product. IV. Recommendation Given the results of our research, we recommend that Perdue not launch a line of chicken hot dogs. Perdue Farms does not currently have the capacity to produce chicken hot dogs that meet their three determining criteria at a cost that would provide an acceptable level of revenue. Given that Perdue does not currently own the packaging or processing facilities needed to produce the final product, or a sufficient supply of cockerel meat to ensure that the product is 100% Perdue meat after a certain level of production, this is not a viable venture for Perdue at this time. Even if Perdue were to launch the hot dogs and charge $1.99 per pound, the resulting revenue would not be enough to justify the venture. Perdue does not have the resources to make this a profitable venture that would leave room for growth. However, given that the venture could produce a reasonable profit at $1.99 per pound, we recommend that Perdue continue to research their options. If Perdue were to acquire the facilities needed and were able to increase their supply of cockerel meat to ensure sufficient supply for large-scale operations, then the cost structure of this venture would change entirely. If Perdue were able to considerably lower the overhead and fixed costs entailed in this venture, it would become far more viable and worth a second consideration.

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V. Appendix with internal supply of cockrel meat (15% formula in a hot dog) at estimated production of 100,000 pounds per week variable cost: 58.2 cents fixed cost: 225,210 equipment 32,500 salaries 15,600 maintenance 219,000 research 492,310 total of fixed costs 58.2 cents variable cost (plus 4% admin expenses)=61.2 cents at price $1.23, the net price is 76 cents (after 35% retailer, and 5% distributors margins) the contribution margin is 14.8 cents (76-61.2) breakeven point is 3,326420 pounds per year (1,826 938 half year), at price $1.49, the net price is 92 cents (after 35% retailer, and 5% distributors margin) the contribution margin is 30.8 cents (92-61.2) breakeven point is 1,598 409 pounds at price $1.99, the net price is $1.22 (after 35% retailer, and 5% distributors margins) the contribution margin is 60 cents breakeven point is 820 517 THE ABOVE BREAKEVEN POINTS ARE BEFORE THE ADVERTISING EXPENSES! 100,000 times 52 weeks = 5,200 000 pounds this is the amount Perdue Farms can only produce per year! at estimated production of 200,000 pounds per week 345,210 equipment 45,000 salaries 20,800 maintenance 219,000 research

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630 010 total of fixed costs 63.2 cents variable cost (65.7 cents with 4% admin expenses) at price $ 1.23, the net price is 76 cents the contribution margin is 10.3 cents (76-65.7) breakeven is 6,300 100 pounds per year ( 3,695 977 half year) WITHOUT AD YET! at price $1.49, the net price is 92 cents (after 35% retailer, and 5% distributors margin) the contribution margin is 26.3 cents (92-65.7) at price $1.99, the net price is $1.22 (after 35% retailer, and 5% distributors margins) contribution margin is 56.3 cents (1.22-65.7) breakeven is 1,119 02