Natureview Farm case analysis

BACKGROUND

1989

• Founded in 1989, Natureview Farm

manufactured and marketed refrigerated cup

yogurt under the Natureview Farm brand

name.

1999 • Natureview Farm’s revenues had grown from less than $100,000 to $13 million.

2000 • Natureview Farm produced twelve refrigerated yogurt flavors in 8-oz. cups and four flavors in 32-oz. cups and also started exploring multipack yogurt products

WHO IS WHO IN THE COMPANY

• Barry Landers, Chief Executive Officer (CEO)

• Jim Wagner, chief financial officer (CFO)

• Christine Walker, vice president of marketing

• Walter Bellini, vice president of sales

• Jack Gottlieb, vice president of operations

• Kelly Riley, the assistant marketing director

Present situation

VC needed to cash out of its investment

Need to find a path to grow revenues by over 50% before the end of 2001 ($20 mil)

Should Natureview Farm expand into supermarket channel?

SWOT ANALYSISstrength weakness

1)Strong brand2)Low cost3)No artificial thickeners

used4)Unique, smooth and

creamy texture of yogurt

5)Usage of natural ingredients

6)Longer shelf life

1)No alternative financing available

2)Lacks potential of taking higher risks and costs

3)Doubt on sales team’s ability

OPPORTUNITY threats1)Strong relationships

with leading natural foods retailers

1)Accumulation of cash by Horizon from IPO

2)Being dropped out of traditional channel

Yogurt Market Share by Packaging Segment

74%

9%

8%

9%

8-oz. cup smallerChildren's multipacks32-oz. cupsothers

Yogurt Market Share by Region

26%

22%25%

27%Northwest

Midwest

Southwest

West

Yogurt Distribution Channel

Super-markets

97%

Natural food stores3%

Length of Channel to Market

Supermarket Channel Natural

Foods ChannelManufactu

rer

Distributor

Retailer

Customer

Manufacturer

Natural Foods

Wholesaler Natural Foods

Distributor Retailer

Customer

15%

27%35%

9%

7%

Yogurt Market Share by Brand

Dannon33%

Yoplait24%

Others23%

Private Label15%

Columbo5%

Supermarket Channel

Natureview Farm24%

Brown Cow15%

Horizon Organic

19%

White Wave7%

Others35%

Natural Foods Channel

Yogurt Production Costs and Retail Prices by Channel

Natural Food

Channel

Supermarket Food Channel

Manufacturing Cost

8-oz. cup $ 0.88 $ 0.74 $0.31

32-oz. cup $ 3.19 $ 2.70 $0.99

4-oz. cup multipack

$ 3.35 $ 2.85 $1.15

OPTION 1: Expand 6 SKUs of the 8-oz into eastern and western supermarket regions

PROs

• 8-oz have highest incremental demand• High potential to increase revenue• First mover as organic yogurt brand to enter

supermarket channel

CONs

• High risk & high cost (marketing)• Require quarterly trade promotions• Advertising plan would cost $1.2 million per

region per year• SG&A expenses increase by $320,000 annually • Need to pay one time slotting fee

Supermarket Channel Margin Analysis

Channel Selling price

Margin Cost price

Retailer $0.74 27% $0.74 x 73% = $0.54

Distributor

$0.54 15% $0.54 x 85% = $0.46

Natureview

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

$0.31

Projection Income Statement2000 2001

Unit Sales 35 000 000 35 000 000 x (1+20%) = 42 000 000

Revenue Growth

$ 35 000 000 x $ 0.74 = $ 25 900 000

42 000 000 x 0.74 = $ 31 080 000

Projected Revenue

$ 13 000 000 + 25 900 000 = $ 38, 900 000

$ 13 000 000 + 31 080 000 = $ 44, 080 000

Cost 35 000 000 x $ 0.31 = $ 10 850 000

42 000 000 x 0.31 = $ 13 020 000

Gross Profit $ 28, 050 000 $ 31, 060 000ExpensesAdvertisement $ 1 200 000 x 2 region = $

2,400 000$ 2,400 000

SG&A $ 320 000 $ 640 000Slotting Fee 6 x $ 10 000 x 20 retails =

1200 000Broker’s Fee $ 16 100 000 x 0.04 = $

644 000$ 19 320 000 x 0.04 = $ 772 800

Net Profit $ 23, 486 000 $ 27, 247 200

OPTION 2:Expand 4 SKUs of

the 32-oz size nationally into

supermarket regions

PROs

• Generate higher profit margin than 8-oz size• Strong competitive advantage: longer shelf life• Lower promotion expenses

CONs• Doubt on claim of new users would readily “enter

the brand” via a multi-use size • Doubt on sales team’s ability to achieve full

national distribution in 12 months• Needs to hire sales personnel and establish

relationships with supermarket brokers• The 32-oz. expansion option would increase SG&A

expense by $160,000

Supermarket channel margin analysis

Channel

Selling price

Margin Cost price

Retailer

$2.70 27% $2.70 x 73% = $0.1.97

Distributor

$1.97 15% $0.54 x 85% = $1.67

Natureview

$1.67 ($1.67/$0..99)/$1.67 =41%

$0.99

Perceived income statement2000 2001

Unit sales 5,500,000 5,500,000Revenues growth 550000 x 2.70 =

14,850,000 14,850,000

Projected revenue 14850000 + 13000000 = 27,850,000

27,850,000

Cost 5500000 x 0.99 = 5445000

5445000

Gross profit 9,405,000 22,405,000Expense:

Slotting fee 4 x 10000 x 64 = 2,560,000

0SG & A 160,000 160,000Marketing 120000 x 4 = 480000 480,000Broker's fee (4% revenues)

367,400 367,400

Net profit 18,837,600 21,397,600

OPTION 3:Introduce two SKUs of a children multipack into the natural foods

channel

PROs • The sales team was confident that they could

achieve distribution for the two SKUs.• The financial potential was very attractive.• It would yield the strongest profit contribution of

all the strategies under consideration.• The natural foods channel was growing almost

seven times faster than the supermarket.

CONs • There were many potential conflicts and other

uncertain factors that the manager could not determine.

• Can not achieve the target objective of Natureview farm

Nature Food Channel Margin Analysis

channel Selling Price

Margin Cost Price

Retailer $3.35 35% $3.35 x 65% = $2.18

Distributor

$2.18 9% $2.18 x 91% = $1.98

Nature foods

wholesalers

$1.98 7% $1.98 x 93% = $1.84

Natureview

$1.84 ($1.84 - $1.15) / $1.84=38%

$1.15

Perceived Income Statement2000 2001

Unit sales 1,800,000 1,800,000 x 1.15 = 2,070,000

Revenue growth 1,800,000 x 3.35 = 6,030,000

2,070,000 x 3.35 = 6,934,500

Revenue projection 6,030,000 + 13,000,000 = 19,030,000

6,934,500 + 13,000,000 = 19,934,500

Cost 1,800,000 x 1.15 = 2,070,000

2,070,000 x 1.15 = 2,380,500

Gross profit 16,960,000 17,554,000Expense:

Marketing 250,000 250,000Complementary

cases6,030,000 x 2.5% =

150,7506,934,500 x 2.5% =

173,363Net profit 16,559,250 17,130,637

Comparison of Options for Year 2001Option Option 1 Option 2 Option 3

Gross Margin 33% 41% 38%

Unit sales 42, 000 000 5,500,000 2,070,000

Revenue projection 44, 080 000 27,850,000 19,934,500

Cost $ 13 020 000 $ 5 445 000 $ 2,380,500

Gross profit $ 31, 060 000

22,405,000 17,554,000

Expense:

SG & A $ 640, 000 160,000 0

Marketing $ 2, 400, 000 480,000 250,000

Broker's fee (4% revenues)

$ 772, 800 367,400 0

Complementary cases

0 0 173,363

Net profit $ 27, 247, 200

$ 21,397,600 $ 17,130,637

DECISION Go for option 1

Reach beyond the target objective of 20 million revenue by end of 2001 with projected of

$31 060 000 8 –oz yogurt is the highest demand In supermarket, can expose to more

range of customers Will have the first mover advantages of

natural product to enter supermarket A bit risky but in a long term will

generate revenues of 200% (as looking at two other competitors)

• Created by Kolagani Harichandana,NIT Raipur,during a marketing internship under Prof.Sameer Mathur,IIM Lucknow.

• K.Harichandana Prof.Sameer Mathur

DISCLAIMER