Natureview Farm

Tuck School of Business Prof. Y. Jackie Luan

Marketing Management Framework

Situation Analysis (3Cs)

Customer Analysis

Competition Analysis

Company Analysis

Marketing Strategy (STP)

Segmentation, Targeting, and Positioning (STP)

Marketing Tactics (4Ps)

Product (Choose Value)

Place/Distribution (Deliver Value)

Promotion (Communicate Value)

Price (Capture Value)

Key Discussion Points

How has Natureview succeeded so far?

Which growth option should Natureview pursue?

How can it manage the risks associated with the chosen option(s)?

Growth Options: The Ansoff Matrix

Markets / Channels Present Present Products New Market Penetration New Market Development

Product Development

Diversification

Adapted from Ansoff, Igor, Strategies for Diversification, Harvard Business Review, 35 (5), 1957.

Example: Supermarket, 8 oz.

Cost Manuf. (Natureview) Distributor Selling Price Margin

$0.31 $0.46
= $0.54 (1 - .15)

$0.46 $0.54

33%
= ($0.46-0.31)/0.46

15%

Retailer

$0.54
= $0.74 (1 - .27)

$0.74
% Margin =

27%
$ Selling Price - $ Cost $ Selling Price

Selling Prices and Margins by Product / Channel

8-oz.
Supermarket Natural Foods

32-oz.
Supermarket Natural Foods

multi-pack
Supermarket Natural Foods

Retailer Selling Price Distributor Selling Price Wholesaler Selling Price

$0.74 $0.54 n/a

$0.88 $0.57 $0.52

$2.70 $1.97 n/a

$3.19 $2.07 $1.89

$2.85 $2.08 n/a

$3.35 $2.18 $1.98

Manuf. Selling Price Manuf. Cost Contribution Per Unit Sold % Manuf. Margin

$0.46 $0.31 $0.15 32.5%

$0.48 $0.31 $0.17 36.0%

$1.68 $0.99 $0.69 40.9%

$1.75 $0.99 $0.76 43.6%

$1.77 $1.15 $0.62 35.0%

$1.84 $1.15 $0.69 37.6%

Revenue and Profit under Each Option

Steps:
1. Calculate Natureviews Selling Prices 2. Calculate Incremental Revenues = Manufacturer Selling Price X Incremental Volume 3. Calculate Incremental Profits = Incremental Revenue Incremental Cost

Two Promotion Strategies: Push vs. Pull

PULL strategy
Advertising; Consumer sales promotions

Manufacturer

Retailer

Consumer

PUSH strategy
Trade promotions; Sales force calls

Year 1 Incremental Profits: Option 1

Plan 6 SKUs of 8 oz. yogurt to 20 supermarkets in two Regions (11 Northeast, 9 West)

Incremental Revenue:
Costs Advertising Slotting fees Incremental sales org. Incremental marketing org. Trade promotion (NE) Trade promotion (W) Broken commission

$16,070,950
$1.2MM per region $10,000 per chain per SKU $200,000 $120,000 $7,500 per chain, 4 times $15,000 per chain, 4 times 4% of sales

Calculation

Incremental Revenue Incremental Gross Profit -Total Advertising -Incremental SG & A -Slotting fees -Trade promo costs -Brokers commissions Incremental Net Profit

$16,070,950 $5,220.950 ($2,400,000) ($320,000) ($1,200,000) ($870,000) ($642,838) ($211,888)

Revenue and Profit Projections: Option 1

Year: Sales Revenue Less COGS Gross Profit Less Broker Commissions Less Advertising Cost Less Trade Promotions Less Slotting Fees Less SG&A Net Profit Contribution NPV

1 35,000,000 16,070,950 (10,850,000) 5,220,950 (642,838) (2,400,000) (870,000) (1,200,000) (320,000) (211,888) (196,193)

2 42,000,000 19,285,140 (13,020,000) 6,265,140 (771,406) (2,400,000) (870,000) 0 (320,000) 1,903,734 1,435,953

3 50,400,000 23,142,168 (15,624,000) 7,518,168 (925,687) (2,400,000) (870,000) 0 (320,000) 3,002,481 3,819,419

4 60,480,000 27,770,602 (18,748,800) 9,021,802 (1,110,824) (2,400,000) (870,000) 0 (320,000) 4,320,978 6,995,467

5 72,576,000 33,324,722 (22,498,560) 10,826,162 (1,332,989) (2,400,000) (870,000) 0 (320,000) 5,903,173 11,013,067

Summary of Financial Calculations (in 1000s)

Option 1 (8 oz. Supermarket) Year 1 Revenue Year 1 Profit Year 2 Revenue NPV of Profit Over 2 Years Year 5 Revenue NPV of Profit Over 5 Years Incremental Market Share $16,071 ($212) $19,285 $1,436 $33,325 $11,013 2% (Supermarket 6-8 oz.) Option 2 (32 oz. Supermarket) $9,214 ($823) $11,057 $1,310 $19,107 $10,640 10.6% (Supermarket 32 oz.) Option 3 (Multipack Natural Foods) $3,317 $781 $3,815 $1,608 $5,802 $4,798 11.2 % (Natural Foods)

Which Option to Pursue?

Option 1 Revenue Objective SR profitability LR sales/profits potential Channel Partnership Competitive Response Cost to Induce Trial Brand Equity Dilution Organizational capabilities Exceeds Loss High First-mover Highly Alienating Very Risky High Possible Low Option 2 Exceeds Deep Loss High First-mover Alienating Risky Very High Possible Low Option 3 Falls Short Gain Low Might miss the boat Enhancing Low Low No High

Key Discussion Points

How has Natureview succeeded so far? Which growth option should Natureview pursue? How can it manage the risks associated with the chosen option(s)?

Expanding into Supermarkets

Risks
Alienating Current Partners Attracting Major Players Response Brand Equity Dilution Lack of organizational capabilities

Possible Solutions
Category expansion Exclusive products Co-Advertising; Co-promotions (e.g. cross-ruff) Adopt niche positioning in supermarkets Premium pricing: Avoid price wars Partnership / M&A Strengthens brand (health benefits + all natural, ecofriendly image): advertising, cause marketing, product innovation Maintains price premium Builds up its marketing function Partnership / M&A

What Happened?
Stonyfield Farm, Londonberry, NH Undertook a mix of all 3 options Less successful with 8-oz than 32-oz in supermarkets; ran into stiff competition but did gain foothold. A new multipack targeted to babies and toddlers (Yobaby) was a runaway success 50% of $200 million revenue in 2007

What Happened? (cont.)

New products introduced a year earlier in natural foods stores than supermarkets.
Competitors attempted supermarket entry with mixed results; Stonyfield is typically the single organic yogurt. Acquired by Groupe Danone in 2001.

Lessons
The distribution channel is not just a conduit; also customers with their own needs. Channel expansion is an attractive growth strategy but can be risky. Different channel choices often have different financial impact (i.e., gross margin, revenue, cost, profit; short-run & long-run). Strategic impact is often more challenging to gauge and manage (e.g., channel conflicts; brand equity dilution; competitive reaction; organizational capabilities)