Natureview Farm Case Study

1989

• Founded and manufactured in Cabot, Vermont• First enter market 8-oz and 32-oz with plain and vanilla

flavor• Use natural ingredient with longer average shelf-life of

50 days

1999• Company revenue growth from $ 100,000 to $13 million• Fruit on the bottom yogurt

2000• Expand to 12 yogurt flavors & multipack yogurt (for

children)

About Natureview

Issues

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?

•Natural yogurt (organic)•8 –oz. size with 12 flavors

•32-oz. size with 4 flavors

•Affordable according to it’s channel

•Natural food channel•Wholesale club•National retailer channel•Convenience and drug store

• It’s natural flavor with high quality and great taste growth in the national distribution and natural food channel

•Low-cost guerilla marketing

86%

14%

Revenues 2000

8-oz32-oz

Start exploring kid multipack yogurt product (4-oz)

• 12 YOGURT FLAVOURS IN 8-OZ• 4 YOGURT FLAVOURS IN 32-OZ

Product

• Strong brand• Low cost• No artificial

thickeners used• Unique, smooth

and creamy texture of yogurt

• Usage of natural ingredients

• Longer shelf life

• No alternative financing available

• Lacks potential of taking higher risks and costs

• Doubt on sales team’s ability

• Strong relationships with leading natural foods retailers

• Accumulation of cash by Horizon from IPO

• Being dropped out of traditional channel

Market Trend

Packaging

type/size

Taste

Flavor

Price

Freshness

Ingredient

Organic or not

74%

9%

8%

9% 8-oz. cup smaller

Children's multipacks

32-oz. cups

Others

YOGURT MARKET SHARE BY PACKAGING SEGMENT

26%

22%25%

27%Northwest

Midwest

Southwest

West

YOGURT MARKET SHARE BY REGION

97%

3% Distribution Channel

SupermarketsNatural food stores

Yogurt Distribution Channel

LENGTH OF CHANNEL TO

MARKETSupermarket Channel Natural Foods Channel

Manufacturer

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%

Pri-vate Label15%

Columbo5%

Supermarket Channel

Na-tureview Farm24%

Brown

Cow15%Horizon

Organic19%

White Wave

7%

Others35%

Natural Foods Channel

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

OPTIONS AND DILEMMA

OPTION 1• Expand in

Northeast and West supermarket region

• Bring in the 6 SKUs of the 8-oz. size

OPTION 2• Expand in

supermarket nationally

• Bring in the 4SKUs of the 32-oz. size

OPTION 3• Stay in natural

food channel• Introduce 2

children’s multipack

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 $2.70 27% $2.70 x 73% = $1.97

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

Natureview

$1.67 ($1.67/$0.99)/$1.67 =41%

$0.99

Projection income statement

2000 2001Unit 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 0

SG & 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 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 analysisChannel Selling

priceMargin 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

Projection income statement

2000 2001Unit 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 cases

6,030,000 x 2.5% = 150,750

6,934,500 x 2.5% = 173,363

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

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 Analysischannel Selling

PriceMargin 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

Projection income statement

2000 2001Unit 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 cases

6,030,000 x 2.5% = 150,750

6,934,500 x 2.5% = 173,363

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

What should we choose??

Comparison of Options for Year 2001

Option Option 1 Option 2 Option 3Gross Margin 33% 41% 38%Unit sales 42, 000 000 5,500,000 2,070,000Revenue projection 44, 080 000 27,850,000 19,934,500Cost $ 13 020 000 $ 5 445 000 $ 2,380,500Gross profit $ 31, 060 000 22,405,000 17,554,000Expense:SG & A $ 640, 000 160,000 0Marketing $ 2, 400, 000 480,000 250,000Broker's fee (4% revenues)

$ 772, 800 367,400 0

Complementary cases 0 0 173,363Net profit $ 27, 247, 200 $ 21,397,600 $ 17,130,637

`Decision Parameter Option 1 Option 2 Option 3 Revenue Objective Exceeds Exceeds Falls Short Short Term Profits No No Gain Long Term Profits High High Low Channel Partners 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

Decision Matrix

Possible Conclusion: If we really hard press to answer the $20 million question, then it’s fairly simple answer. Go with option 1.We recommend Nature view to expand the multi pack into supermarket channel in Northeast and West

BenefitsThe benefits would include the following :• High growth (more than 12% from last year)• Minimized channel conflicts : Through this expansion, Nature view can make it’s revenue goal by 2001• No cannibalization or alienation• New target customers : Supermarket will be selling these multi packs relatively cheap• Higher expected annual demand.

Final 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)

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DisclaimerCreated by Abhishek Goyal of IIT Kanpur during a Marketing Internship by Prof. Sameer Mathur, IIM Lucknow.