Natureview Farm

Tuck School of Business

Prof. Y. Jackie Luan

Marketing Management Framework

MarketingTactics(4Ps)

Situation Analysis(3Cs)

MarketingStrategy(STP)

Segmentation, Targeting, and Positioning (STP)

Product (Choose Value)

Place/Distribution(Deliver Value)

Promotion (Communicate Value)

Price(Capture Value)

Customer Analysis Competition Analysis Company Analysis

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

Present

New

Present New

Products

Markets / Channels

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

Market Penetration

Market Development

Product

DevelopmentDiversification

Example: Supermarket, 8 oz.

Cost Selling Price Margin

Manuf.

(Natureview)

Distributor

Retailer $0.74 27%$0.54= $0.74 (1 - .27)

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

$0.46$0.31 33%= ($0.46-0.31)/0.46

$ Selling Price - $ Cost% Margin = $ Selling Price

Selling Prices and Margins by Product / Channel

8-oz. 32-oz. multi-pack

Supermarket Natural Foods Supermarket Natural

Foods Supermarket Natural Foods

Retailer Selling Price $0.74 $0.88 $2.70 $3.19 $2.85 $3.35Distributor Selling Price $0.54 $0.57 $1.97 $2.07 $2.08 $2.18Wholesaler Selling Price n/a $0.52 n/a $1.89 n/a $1.98

Manuf. Selling Price $0.46 $0.48 $1.68 $1.75 $1.77 $1.84

Manuf. Cost $0.31 $0.31 $0.99 $0.99 $1.15 $1.15Contribution Per Unit Sold $0.15 $0.17 $0.69 $0.76 $0.62 $0.69

% Manuf. Margin 32.5% 36.0% 40.9% 43.6% 35.0% 37.6%

1. Calculate Natureview’s Selling Prices

2. Calculate Incremental Revenues

= Manufacturer Selling Price X Incremental Volume

3. Calculate Incremental Profits

= Incremental Revenue – Incremental Cost

Steps:

Revenue and Profit under Each Option

Two Promotion Strategies: Push vs. Pull

Manufacturer Retailer Consumer

PULL strategy

PUSH strategy

Advertising; Consumer sales promotions

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: $16,070,950

Costs Advertising $1.2MM per region Slotting fees $10,000 per chain per SKU Incremental sales org. $200,000 Incremental marketing org. $120,000 Trade promotion (NE) $7,500 per chain, 4 times Trade promotion (W) $15,000 per chain, 4 times Broken commission 4% of sales

Calculation Incremental Revenue $16,070,950 Incremental Gross Profit $5,220.950 -Total Advertising ($2,400,000) -Incremental SG & A ($320,000) -Slotting fees ($1,200,000) -Trade promo costs ($870,000) -Broker’s commissions ($642,838)

Incremental Net Profit ($211,888)

Revenue and Profit Projections: Option 1

Year: 1 2 3 4 5Sales 35,000,000 42,000,000 50,400,000 60,480,000 72,576,000

Revenue 16,070,950 19,285,140 23,142,168 27,770,602 33,324,722

Less COGS (10,850,000) (13,020,000) (15,624,000) (18,748,800) (22,498,560)

Gross Profit 5,220,950 6,265,140 7,518,168 9,021,802 10,826,162

Less Broker Commissions (642,838) (771,406) (925,687) (1,110,824) (1,332,989)

Less Advertising Cost (2,400,000) (2,400,000) (2,400,000) (2,400,000) (2,400,000)

Less Trade Promotions (870,000) (870,000) (870,000) (870,000) (870,000)

Less Slotting Fees (1,200,000) 0 0 0 0

Less SG&A (320,000) (320,000) (320,000) (320,000) (320,000)

Net Profit Contribution (211,888) 1,903,734 3,002,481 4,320,978 5,903,173 NPV (196,193) 1,435,953 3,819,419 6,995,467 11,013,067

Summary of Financial Calculations (in 1000s)

Option 1(8 oz. Supermarket)

Option 2 (32 oz. Supermarket)

Option 3 (Multipack

Natural Foods)Year 1 Revenue $16,071 $9,214 $3,317

Year 1 Profit ($212) ($823) $781

Year 2 Revenue $19,285 $11,057 $3,815

NPV of Profit Over 2 Years

$1,436 $1,310 $1,608

Year 5 Revenue $33,325 $19,107 $5,802

NPV of Profit Over 5 Years

$11,013 $10,640 $4,798

Incremental Market Share

2%(Supermarket 6-8 oz.)

10.6% (Supermarket 32 oz.)

11.2 % (Natural Foods)

Which Option to Pursue?

Option 1 Option 2 Option 3

Revenue Objective Exceeds Exceeds Falls Short

SR profitability Loss Deep Loss Gain

LR sales/profits potential

HighFirst-mover

HighFirst-mover

LowMight miss the boat

Channel Partnership Highly Alienating Alienating Enhancing

Competitive Response Very Risky Risky Low

Cost to Induce Trial High Very High Low

Brand Equity Dilution Possible Possible No

Organizational capabilities Low Low High

Expanding into Supermarkets

Risks Possible Solutions

Alienating Current Partners

• Category expansion• Exclusive products• Co-Advertising; Co-promotions (e.g. “cross-ruff”)

Attracting Major Players’ Response

• Adopt “niche” positioning in supermarkets• Premium pricing: Avoid price wars• Partnership / M&A

Brand Equity Dilution

• Strengthens brand (health benefits + all natural, eco-friendly image): advertising, cause marketing, product innovation

• Maintains price premium

Lack of organizational capabilities

• 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)