NATUREVIEW FARM

INTRODUCTION TO CASE

WHAT IS NATUREVIEW FARM ?

WHO ARE THE KEY PEOPLE ?

YOGURT MARKET SHARE

BY BRAND,

1999 (SUPERMARKET AND NATURAL

FOODS CHANNELS, IN

% U.S. DOLLARS)

NATUREVIEW FARM’S EARLY YEARS & CURRENT SITUATION

Since 1989 ,

revenues had

grown from less than

$100,000 to $13 million.

entered the market with 8-ounce (oz.) & 32-oz. cup sizes of yogurt in 2 flavors— plain , vanilla. •Later

added flavors to both sizes.

Flavored yogurt

production – led to

brand extension ;increased revenues

& need for new

equipment

Grew quickly

to national distributi

on & shared

leadership in the natural foods

channel.

Aided by

creative, low-cost

“guerilla

marketing”

tactic

EARLY YEARS

By 2000, produced

• 12 flavors in

8-oz. cups

(86% revenues)

• 4 flavors in 32-oz. cups

(14% revenues).

started exploring multipack

yogurt products

(children’s 4-oz. cups and

yogurt packaged in

tubes)

a typical case shipped to retailer

• 12 cups

for the 8-oz.

•6 cups for

the 32-oz.

Developed strong relationships with leading natural foods retailers chains ex - • Whole Foods

($1.57 billion

revenues in 1999)

• Wild Oats ($721 million revenues

AS OF 2000

Now NatureView management have to find another investor or position itself for acquisition, & increasing

revenues was critical in order to attain the highest possible valuation for the company.

The VC firm now needs to cash out of its investment in NatureView.

No one questioned Wagner’s recommendation in 1997 that NatureView arrange for an equity infusion from a venture

capital (VC)

Jim Wagner ,in 1996 as CFO -developed financial controls that brought steady profitability to the company

Despite the growth that NatureView Farm had been able to achieve since it began in 1989, the company - long struggled

to maintain a consistent level of profitability

WHAT IS THE PRESENT SITUATION ?

VC firm now needs to cash out of its investment

The management team needs to find a way to increase the firm’s revenues to $20 million by the end of 2001

Still need to take decision regarding its entry in super market channel

If the company enters supermarket channel then how to retain its traditional channel retailers , customers n suppliers?

SITUATION ANALYSIS

NATUREVIEW FARM INCOME

STATEMENT, 1999

4 ISSUES

HOW WILL THE

COMPANY MAKE

REVENUE $20 MILLION TILL

END OF 2001?

THE REFRIGERATED YOGURT CATEGORY AND THE YOGURT

CONSUMER

THE SALES AND DISTRIBUTION

PROCESS: SUPERMARKET CHANNEL VS.

NATURAL FOODS STORES

ANALYSIS OF THE SENIOR

MANAGEMENT TEAM’S THREE

OPTIONS

HOW WILL THE COMPANY MAKE

REVENUE $20 MILLION TILL END

OF 2001?

To increase its revenue by year end - 1.It needs to increase its product

sales 2.Cut down on total cost incurred 3.Increase efficiency 4.Increase product life & quality

INCREASING SALES BY:

Increasing its manufacturing - increase shelf space ; increasing more no. of packs in its typical case .

Increase number of cases in each size that it supplies to its distributors , retailers and natural

food channels.

Enter supermarket channel & explore other existing channels (the firm’s traditional

distribution channel was natural foods stores till now)

Brand extension in same line – increase flavors or related yogurt products .

THE REFRIGERATED YOGURT CATEGORY & THE YOGURT CONSUMER

YOGURT SALES DISTRIBUTION CHANNELS

% Sales

supermarket

natural foodsstores

Warehouse Clubs, Convenience stores, Drug stores, and Mass merchandisers.

Limited revenue generation

DOMAINANT CHANNELS

OTHER CHANNELS

% OF ORGANIC CONSUMERS

BUYING ORGANIC PRODUCTS FROM ? where did they buy ?

CONSUMER & HOUSEHOLD SURVEY RESULTS

0% 20% 40% 60% 80%

Price was barrier inpurchase of organic

products

Would buy more organicproduct if it were less

expensive

Need for a wider selectionof organic product in

supermarkets

% US HOUSEHOLDS &CONSUMERS

FACTORS DECIDING

WHICH YOGURT TO PURCHASE ?

PACKAGE TYPE/SIZE

TASTE

FLAVOR

PRICE FRESHN

ESS

INGREDIENTS

PRODUCT ORGANIC OR NOT

YOGURT MARKET SHARE BY

PACKAGING SEGMENT, 1999

(SUPERMARKET CHANNEL,IN % $ )

CONSUMER DISTRIBUTION 6/

8 O

Z P

AC

KS

• Target -Women

• Favorability – all flavors in market

CH

ILD

REN

'S M

ULT

IPA

CK

S

• Target – children & mothers

•6, 4-oz. cup servings

•8, 2-oz. tubes

• Favorability – all flavors in market

32 O

Z P

AC

KS

• Target – ‘heavy’ yogurt consumers

• Used for preparing dishes like smoothies

• Favorability – plain & vanilla

THE SALES & DISTRIBUTION PROCESS: SUPERMARKET CHANNEL VS. NATURAL FOODS STORES

Smaller manufacturers ex: NatureView Farms use sales brokers to sell their yogurt - both natural foods and supermarket chains

For yogurt, the broker’s fee - 4% of manufacturer’s sales

Broker’s fees - typically accounted for in SG&A (Sales, General & Administrative) expense.

SUPER MARKET CHANNEL

Monitor sales trends, esp. of new items, by region, area, & store, using sophisticated

scanner technology.

Relatively streamlined distribution systems allows to maintain lower prices.

Suppliers -> Large distribution center -> Chain’s warehouse.

Markup on each product by intermediaries. Typical Distributor margin - 15% &

Retailer Margin-27%.

SUPERMARKETS CHANNEL

AD

DIT

ION

AL

EXP

ENS

ES

Refrigerated yogurt, slotting fee averaged - $10,000 per SKU per

retail chain.

For 8 different flavors in 8-oz packs - $80,000 /retail chain

Northeast, Midwest, and Southeast of the U.S., advertisements -$7,500 (for

the size typically used by firm’s competitors. ) In the West, same

advertisements - $15,000 per ad per retailer.

Nationally, they cost $8,000 on average

NATURAL FOODS CHANNEL

Typically charge higher retail prices

for the same products than supermarkets .

Distributors deliver product to individual

stores, sometimes stock the shelves & track paperwork.

Manufacturer ships products ->

Wholesaler -> Distributor ->

Retailer

Intermediaries “break cases”. Typical natural

foods Wholesaler Margin 7%, Distributor Margin 9% Retailer

Margin 35%.

NATURAL FOODS

CHANNEL

AD

DIT

ION

AL

EXP

ENC

ES No slotting fees charged by

natural foods retailers .

Require a 1-time allotment of 1 free case of product for every

new SKU authorized for distribution in its 1st year.

Minimal advertisement fee

( all regions)

Yogurt Production Costs and Retail Prices by Channel

LENGTH OF CHANNELS TO MARKET

ANALYSIS OF THE SENIOR MANAGEMENT

TEAM’S 3

OPTIONS

OPTION 1

Expand 6 SKUs of the 8-oz.

product line into one or two selected supermarket channel

regions

The 6 SKUs chosen were the best-

selling SKUs of the 8-oz. line

ARGUMENT BASED ON 3 KEY POINTS

8-oz. cups - represent the largest dollar , unit share of the refrigerated yogurt market- providing significant revenue potential.

Silk Soymilk & Amy’s Organic Foods- increased

revenues by over 200% within 2 years of entering supermarkets. Natureview , uniquely positioned to capitalize on the growing trend in

natural & organic foods in supermarkets.

More competitors planning on extension to supermarket hence retailers would likely authorize only one organic yogurt brand.

DRAWBACKS OF OPTION 1

Higher risks and

costs. The 8-oz. size - highest level of

competitive trade promotion & marketing spending.

Supporting this cup size would require quarterly

trade promotions and much Marketing budget.

advertising plan (television, radio, outdoor & print

advertising) estimated to cost $1.2 million per region

per year + Trade promotions

SG&A expenses - increase - $320,000 /year ($200,000 + sales staff

managing supermarket brokers in the 2

regions; $120,000 - towards additional

marketing staff)

OPTION 2

Expand 4 SKUs of the

32-oz. size nationally

ARGUMENT BASED ON 3 KEY POINTS 32-oz. cups - smaller unit & dollar share of the

yogurt market but generate above-average gross profit margin for Natureview (43.6% vs. 36.0% for

the 8-oz. line).

Strong competitive advantage - product’s longer shelf life, fewer competitive offerings in this size.

Achieved a 45% share of 32-oz segment in the natural foods channel. Company can sell approx.

5.5 million incremental units in the first year.

Slotting expenses -higher because of national distribution , Promotional expenses - lower(32-oz.

size promoted only twice a year.)

For a 32-oz. expansion, marketing expenses

significantly lower —only 10% of cost for 8-oz. size in each region i.e. $120,000 / region per year

DRAWBACKS

OF OPTION 2

Risk whether new users would

readily “enter the brand” via a multi-

use size .

Additions to sales headcount for the 32-oz. expansion option - increase SG&A expenses by $160,000.

Need to hire sales personnel – should experience selling to

the more sophisticated supermarket channel ; need

to establish relationships with supermarket brokers

Sales team’s inability to achieve full

national distribution in

mere 12 months

OPTION 3

Introduce 2 SKUs of a

children’s multi-pack into the natural foods channel

ARGUMENT BASED ON 5 KEY

POINTS Expansion into the supermarket channel will affect

relationships with leading natural food channel retailers

According to Riley NatureView lacks in necessary resources / skill-set to sell effectively to & through

supermarkets

NatureView’s all-natural ingredients - provide the perfect positioning to launch its own children’s multi-pack product

offering into their core sales channel.

Financial potential - very attractive ; sales & marketing expenses in this channel –lower.

Natural foods channel growing almost 7 X faster than supermarket channel; Firm’s brand extension - further boost

sales performance;5-year projected unit growth CAGR of yogurt - to be 15%, according to industry market research.

DRAWBACKS

OF OPTION 3

Natural foods channel would soon make demands - like those that Riley feared from

supermarkets (real marketing plan; more

demands from logistical & technological standpoint

compared with distribution partners)

Retailers were likely to

demand more and more as they grew.

WHICH IS THE BEST OPTION

OUT OF THE 3

HERE ?

SALES PROJECTIONS FOR NATUREVIEW’S STRATEGIC OPTIONS

TOTAL FIXED COST IS SAME FOR ALL 3

OPTIONS

TOTAL COST = TOTAL FIXED COST + ADVERTISING COSTS + PROMOTION

COSTS + SKU COSTS

DIFFERENCES

I •According to cost analysis - option 3 is the best choice

II

•Taking other factors into consideration such as retailer , distributor relations option 3 contains no risk of loosing any but option 1 & 2 does

III •Also in case of option 2 & 3 sales teams capability for

expansion is questionable

IV

•Number risks to firm in option 3 is least so cumulatively it’s the best option for increasing revenue for the company with maximum probability of success

INFERENCES

RECAP

What is Nature View farm?

Who are the key people ?

Early years As of 2000

Situation analysis 4 issues

How to increase revenue Ways To increase sales

Survey exhibits

Factors used for yogurt selection

Super market channel – facts , additional expenses

Natural channel – facts , additional expenses

Options 1 ,2 ,3 and their respective drawbacks

Problem analysis , Differences & inferences

DISCLAIMER Created by Esha Singh , Bits Pilani , during a Marketing Internship by Prof. Sameer

Mathur ,IIM Lucknow