PMBA 8145_A.1 Memo_001-85-0139_02Mar12

PMBA 8145

MemoTo: Mr. Chuck Smith

From: 001-85-0139

CC: Professor David Nasser

Date: 4/7/23

Re: A.1 Steak Sauce Lawry’s Defense Strategy

Chuck,

Please find attached our recommendation for the Lawry’s defense strategy.

Thanks!

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PMBA 8145 001-85-0139

Situation Analysis:

A.1 Steak Sauce is one of the premier brands in the Kraft Foods portfolio with little competition,

substantial sales, and excellent margins. Developed in England during the 1800s and first sold in North

America in the early 1900s, its name originated from King George declaring the Steak Sauce as “A.1”.

A.1 Steak Sauce is the industry leader boasting 2002 annual sales of $150 million with 54% dollar

share and 46% volume share and forecasting $165 million of annual sales in 2003 (see Exhibits A, E,

F). A.1 retails at $4.99 per 10 ounce bottle, which is $0.20 higher than its primary competitor (Heinz has

16% dollar share) and $1.50 higher than Private Labels (competitors with combined 14% dollar share).

Due to high loyalty in steak sauce and limited competition, A.1 has successfully positioned its steak

sauce as a product quality leader with extraordinary brand equity. While A.1 dollar sales have

consistently grown due to price increases, the volume demand and production has been and is

expected to remain relatively flat. As a result, A.1 Marinades were launched in 2001 with little success

and then re-launched in 2002 and captured 10% market share in the Marinades category (Calkins,

2010, p. 3). Despite generating $15 million in annual sales, however, the line netted a $10 million loss.

Due to Kraft Foods’ reduced earnings expectations for 2003, the stock fell below the initial 2001 IPO

price and triggered skepticism by several industry analysts. As such, significant financial incentives

were instituted for senior executives to deliver the revised profit targets. As such, the budget called for

the A.1 portfolio to contribute a 10% increase in operating profit despite an estimated $7 million loss

from the Marinades line.

The Marinades category anticipates 15% annual growth and the industry leader is Lawry’s with a 50%

market share and annual sales well in excess of $100 million (Calkins, 2010, p. 4). Lawry’s is one of

Unilever’s 200+ global brands (after a rationalization project) contributing to its $50 billion annual sales.

However, due to disappointing financial results the company had challenged all of its brands to reach at

least $1 billion in annual sales. Accordingly, Lawry’s announced plans to launch a steak sauce in early

2003 targeting an April 1st first ship date in order to be fully distributed before the peak summer

season. Lawry’s steak sauce was similar to A.1 in taste and texture and would retail at $3.99 for an 11

ounce bottle. Essentially, Lawry is attempting to persuade consumers they are introducing an A.1-type

quality substitute closer to the Private Label brands price point. Utilizing this market-penetration

objective Lawry’s is attempting to set the lowest price assuming the steak sauce market is price

sensitive. In addition, Lawry’s is launching an aggressive $20 million advertising campaign

concentrated from May thru July and including an attempt at an exclusive Publix Memorial Day ad with

a two-for-$5.00 promotional price point (Calkins, 2010, p. 5). Being that A.1 Steak Sauce achieves 10%

of its annual sales during Memorial Day holiday (and an additional 10% during the July 4th holiday), the

question is whether management can afford to ignore or disregard Lawry’s strategic actions. The order-

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of-entry model suggests that Lawry’s steak sauce product will obtain a maximum of 10% market share

(Calkins, 2010, p. 5), or approximately $30.6 million in annual sales (See Exhibit A) primarily derived

from an aggressive advertising spend and low price point in an industry where demand is expected to

remain relatively flat.

The challenge for the A.1 Portfolio is to quickly assess the new competitive landscape and mitigate the

potential adverse financial impact of Lawry’s product launch by developing an exhaustive pricing and

promotions strategy that will (1) maintain and improve A.1 Steak Sauce’s brand equity, (2) support Kraft

Foods’ short-term profit objectives, (3) continue to position the A.1 Marinades line for long-term

sustainable and profitable market share growth, and (4) avoid triggering an industry price war that could

lead to both short and long-term profit loss.

Potential Alternatives:

Alternative 1: Should management assume the status quo by ignoring the Lawry’s steak sauce product

launch and wholly rely on the strong A.1 Steak Sauce brand equity anchored in full scale distribution,

consumer awareness, and a century of consumer repeat purchases?

There is a high probability that Lawry’s steak sauce can secure 12% volume market share and 10%

dollar market share if A.1 Steak Sauce does not implement a defensive marketing strategy (See Exhibit

A). Our marketing analysis considers minimal growth for the beef industry, few steak sauce

competitors, and Lawry’s new product launch with an aggressive marketing plan during the industry’s

peak summer season months. While the barriers to entry in the steak sauce industry are relatively high

due to customer loyalty, Lawry’s product is relying on the brand equity success of its Marinades

category that is a 50% market share leader. If Lawry’s steak sauce were to obtain 10% dollar market

share the result could be a 6% decrease in A.1 Steak Sauce’s dollar market share and result in a $7.7

million shortfall of the 2003 A.1 Portfolio profit target set for senior management (See Exhibits A, B).

From a short-term perspective senior management would not earn the financial incentives put in place

for 2003. From a long-term perspective the A.1 Portfolio may have to divert funds from expanding into

the Marinades line to attempt to regain steak sauce market share and to help ensure long-term profits.

Alternative 2: Should A.1 match or beat the Lowry steak sauce promotional price of two-for-$5?

Based on the data illustrated in Alternative 1 it is clear that the A.1 Steak Sauce senior management

team must implement a strategic marketing plan to limit the potential loss of market share. In order to

gain the exclusive Publix Memorial Day advertisement, A.1 would have to match the 2-for-$5

promotional price extended by Lowry’s. While this strategy would significantly damper the product

launch and consumer awareness of Lawry’s new product, the cost-benefit analysis does not support

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PMBA 8145 001-85-0139

engaging in a matching promotion. Despite thwarting Lawry’s aggressive marketing campaign and

driving consumer repeat behavior, because the retail price point of A.1 Steak Sauce is 4.99 the tangible

cost of this promotion would be the equivalent to a $2.50 coupon on 10% of A.1 Steak Sauce’s annual

sales. This move could also trigger an industry-wide price war that would result in even more losses

and potential devaluation of A.1’s brand equity. While this alternative would provide a 100% offset of

the anticipated market share loss identified in Alternative 1, it would also result in a 2003 A.1 Portfolio

shortfall of $11.8 million dollars (See Exhibit C). Management must ascertain whether such a trade-off

to preserve market share and protect brand equity will be deemed appropriate by Kraft Foods senior

management and external investors as this alternative will prevent the A.1 portfolio from meeting the

2003 profit target and senior management will forego the financial incentives as well.

Alternative 3: Should A.1 management develop an alternate promotion and adjust the Marinades

budget to protect the more lucrative A.1 Steak Sauce market share?

As mentioned earlier, the challenge is to protect market share over the long-term while delivering 2003

target profit from the A.1 portfolio over the short-term despite a new product launch of a successful

brand extension with an aggressive marketing budget. Instead of ignoring or matching Lawry’s

promotional price of two-for-$5, A.1 Steak Sauce should develop a promotion that partially negates

Lawry’s aggressive strategy without sacrificing the 2003 profit targets. A.1 can also take a more

strategic approach by adjusting the timing of its promotions, diverting a portion of marketing funds from

the Marinades line throughout the year without jeopardizing the continued positioning of the line, and

deliver close to the 2003 profit targets. In addition, while A.1 currently holds 54% of the steak sauce

dollar market the remainder of the market is highly fragmented with the closest competitor having only

a 16% market share. As such, other industry competitors will engage in marketing strategies to protect

their respective market shares as well.

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Final Recommendation:

My recommendation is based on the logic presented in Alternative 3. I recommend that A.1 launches a

two-for-$9 promotion price at Publix the week prior to the Memorial Day holiday. This avoids having to

match the price and creates an adverse impact for the Lawry’s advertisement due to the fact that an

A.1 Steak Sauce 10 ounce bottle contains 17 servings. The demand for steak sauce would have been

met and a significant portion of Lawry’s target audience will still have at least one full bottle of A.1 Steak

Sauce in their pantry for the Memorial Day holiday! This promotion cost is the equivalent of the

historical $0.50 coupon on 10% of annual steak sauce sales. To offset the promotion cost A.1 will only

drop 2 FSIs (free standing inserts) costing $1 million each instead of the 4 planned at the beginning of

the year. The remaining FSI will be launched during the 4th of July holiday consistent with prior years.

Based on A.1 Steak Sauce’s performance through the summer, management must be willing to reduce

the Marinades advertising budget to $6.5 million and the promotions budget to $2.4 million, if

necessary, to help ensure the A.1 Portfolio profit target is achieved. According to our analysis the A.1

Steak Sauce brand will generate $57.9 million in operating profit and retain 51% dollar market share

assuming the promotion will result in a 50% offset of the Alternative 1 anticipated market share loss due

to Lawry’s product launch (See Exhibits A, D). As long as senior management can monitor the

marinades line and limit losses to $2.8 million, primarily by minimizing marketing spend but carefully

monitoring volume sales, the 2003 A.1 Portfolio target profit can still be achieved (See Exhibit D). This

recommendation (1) achieves the short-term profit target without compromising the 100 years of brand

equity; (2) protects dollar and volume market share; and (3) still allows the marinades line to be

positioned to grow and increase market share in the years to come.

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EXHIBIT A

2003 BUDGET

Dollar 2003 2003 2003 2003 Volume

Brand Mkt Share $ Annual Sales Units Ounces Pounds Mkt Share

A.1 54% 165,000,000$ 47,237,332 472,373,318 29,523,332 46%

Heinz 57 16% 48,888,889$ 13,349,681 133,496,807 8,343,550 13%

Private Labels 14% 42,777,778$ 19,511,072 195,110,718 12,194,420 19%

Others 16% 48,888,889$ 22,591,767 225,917,674 14,119,855 22%

100% 305,555,556$ 102,689,852 1,026,898,518 64,181,157 100%

DO NOTHING

Dollar 2003 2003 2003 2003 Volume


A.1 48% 145,663,924$ 41,701,667 417,016,672 26,063,542 41%

Heinz 57 13% 39,515,956$ 11,785,254 117,852,538 7,365,784 11%

Private Labels 14% 42,079,702$ 17,224,602 172,246,017 10,765,376 17%

Others 16% 47,740,418$ 21,038,280 199,442,756 12,465,172 19%

Lowry's 10% 30,555,556$ 10,940,049 120,340,534 7,521,283 12%

100% 305,555,556$ 102,689,852 1,026,898,518 64,181,157 100%

2-for-$5 PROMO

Dollar 2003 2003 2003 2003 Volume


A.1 54% 165,000,000$ 47,237,332 472,373,318 29,523,332 46%

Heinz 57 13% 39,515,956$ 11,785,254 117,852,538 7,365,784 11%

Private Labels 14% 42,079,702$ 17,224,602 172,246,017 10,765,376 17%

Others 9% 28,404,342$ 15,502,616 144,086,111 9,005,382 14%

Lowry's 10% 30,555,556$ 10,940,049 120,340,534 7,521,283 12%

100% 305,555,556$ 102,689,852 1,026,898,518 64,181,157 100%

2-for-$9 PROMO

Dollar 2003 2003 2003 2003 Volume


A.1 51% 155,331,962$ 44,469,500 444,694,995 27,793,437 43%

Heinz 57 13% 39,515,956$ 11,785,254 117,852,538 7,365,784 11%

Private Labels 14% 42,079,702$ 17,224,602 172,246,017 10,765,376 17%

Others 12% 38,072,380$ 18,270,448 171,764,434 10,735,277 17%

Lowry's 10% 30,555,556$ 10,940,049 120,340,534 7,521,283 12%

100% 305,555,556$ 102,689,852 1,026,898,518 64,181,157 100%

STEAK SAUCE CATEGORY

*Annual Sales calculations assume 30% margin on MSRP s for all brands identified in case.

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PMBA 8145 001-85-0139

EXHIBIT B

DO NOTHING

A1 Price (MSRP $4.99) 3.49$

Estimated Annual Units 41,701,667

Memorial Day Units 4,170,167

TOTAL PER UNIT

A1 Steak Sauce Revenue 145,663,924$ 3.49$ Variable Costs / Unit 25,021,000 0.60$

Gross Profit / Margin 120,642,923$ 2.89$

Advertising 15% 21,849,589 0.46$ Consumer Promotions 5% 7,283,196 0.15$ Trade Promotions 10% 14,566,392 0.31$ FSI (Free Standing Inserts) 4,000,000 0.08$ Marketing Expenses 47,699,177$ 1.01$

Fixed Costs / Unit 18,678,177$ 0.45$

Operating Profit / Margin 54,265,569$ 1.44$

TOTAL

A.1 Marinades Revenue 19,000,000

Advertising (10,000,000) Consumer Promotions (5,000,000)

Variable & Fixed Costs (11,000,000)

Operating Profit (7,000,000)$

Total A.1 Portfolio Profit 47,265,569$ Total A.1 Portfolio Target 55,000,000$

Target Profit Surplus (Shortfall) (7,734,431)$

Assumptions − “Do Nothing” volume estimate based on extrapolation of 2003 volume estimate and Lowry’s 10% market penetration evenly

allocated across all brands (See Exhibit A)− 2003 A.1 Steak Sauce financials based on volume estimate and 2002 per unit costs (See Exhibit F)− 2003 A.1 Marinades revenues and costs grossed up to arrive at targeted loss provided in the case

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PMBA 8145 001-85-0139

EXHIBIT C

2-for-$5 PROMO

A1 Price (MSRP $4.99) 3.49$



TOTAL PER UNIT


Gross Profit 136,657,601$ 2.89$

Advertising 15% 24,750,000 0.52$ Consumer Promotions 5% 8,250,000 0.17$ Trade Promotions 10% 16,500,000 0.35$ 2-for-$5 Promo ($2.50 coupon) 2.50$ 11,809,333 FSI (Free Standing Inserts) 4,000,000 0.08$ Marketing Expenses 65,309,333$ 1.13$

Fixed Costs / Unit 21,157,601$ 0.45$

Operating Profit 50,190,667$ 1.31$

TOTAL






Target Profit Surplus (Shortfall) (11,809,333)$

Assumptions − “Two-for-$5” volume estimate based on assumption that promo will completely offset decrease in “Do Nothing” market share (Exhibit

D) by 100%− 2003 A.1 Steak Sauce financials based on volume estimate and 2002 per unit costs (See Exhibit F)− 2003 A.1 Marinades revenues and costs grossed up to arrive at targeted loss provided in the case

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PMBA 8145 001-85-0139

EXHIBIT D

2-for-$9 PROMO

A1 Price (MSRP $4.99) 3.49$



TOTAL PER UNIT


Gross Profit 128,650,262$ 2.89$

Advertising 15% 23,299,794 0.49$ Consumer Promotions 5% 7,766,598 0.16$ Trade Promotions 10% 15,533,196 0.33$ 2-for-$8 Promo ($0.50 coupon) 0.50$ 2,223,475 FSI (Free Standing Inserts) 2,000,000 0.04$ Marketing Expenses 50,823,064$ 1.03$

Fixed Costs / Unit 19,917,889$ 0.45$

Operating Profit 57,909,310$ 1.42$

TOTAL






Target Profit Surplus (Shortfall) 9,310$

Assumptions − “Two-for-$9” volume estimate based on assumption that promo will offset decrease in “Do Nothing” market share (Exhibit D) by 50%− 2003 A.1 Steak Sauce financials based on volume estimate and 2002 per unit costs (See Exhibit F); $2 million FSI reduction; and up

to $4 million advertising reduction and up to $2.5 million promo reduction (mgmt. discretion)− 2003 A.1 Marinades revenues and costs grossed up to arrive at targeted loss provided in the case

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PMBA 8145 001-85-0139

EXHIBIT E

2003 BUDGET

A1 Price (MSRP $4.99) 3.49$

Estimated Annual Units 42,943,029 Incremental Budget 4,294,303 2003 Annual Units 47,237,332


TOTAL PER UNIT

A1 Steak Sauce Revenue 165,000,000$ 3.49 Variable Costs / Unit 28,342,399 0.60 17%

Gross Profit / Margin 136,657,601$ 2.89$ 83%

Advertising 15% 24,750,000 0.52$ 15%Consumer Promotions 5% 8,250,000 0.17$ 5%Trade Promotions 10% 16,500,000 0.35$ 10%FSI (Free Standing Inserts) 4,000,000 0.08$ 2%Marketing Expenses 53,500,000$ 1.13$ 32%

Fixed Costs / Unit 21,157,601$ 0.45$ 13%

Operating Profit / Margin 62,000,000$ 1.31$ 38%

TOTAL






Target Profit Surplus (Shortfall) -$

Assumptions − 2003 volume estimate based on reconstructed 2002 budget (See Exhibit F) and serves as basis for Exhibit A Industry Analysis− 2003 budget based on volume estimate and 2002 per unit costs (See Exhibit F)− 2003 A.1 Marinades revenues and costs grossed up to arrive at targeted loss provided in the case

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PMBA 8145 001-85-0139

EXHIBIT F

2002 ACTUALS

A1 MSRP 4.99$ A1 Sales Price 3.49$


Memorial Day Sales 4,294,303

TOTAL PER UNIT

A1 Steak Sauce Revenue 150,000,000$ 3.49$ Variable Costs / Unit 25,765,817 0.60

Gross Profit / Margin 124,234,183$ 2.89$ 83%

Advertising 15% 22,500,000 0.52 15%Consumer Promotions 5% 7,500,000 0.17 5%Trade Promotions 10% 15,000,000 0.35 10%Marketing Expenses 45,000,000$ 1.05$ 30%

Fixed Costs / Unit 19,234,183$ 0.45$ 13%

Operating Profit / Margin 60,000,000$ 1.40$ 40%

Assumptions − Serves as basis for 2003 Budget reconstruction (See Exhibit E)− A.1 Steak Sauce financials reconstructed based on information provided in the case− A.1 Marinades financials reconstructed based on limited data provided in the case

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PMBA 8145 001-85-0139

References

Calkins, Tim (Revised June 14, 2010). A.1 Steak Sauce: Lawry’s Defense. Kellogg School of

Management (KEL010).

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