11/16/2009 MRK526MT CASE ANALYSIS-NATUREVIEW FARM SUBMITTED TO DONNA GEARY | BY MAHMOUD ISSA

TABLE OF CONTENT EXECUTIVE SUMMERY THE PROBLEM CHANNEL ANALYSES SITUATION ANALYSES FINANCIAL ANAL YSES ORGANIZATIONAL OBJECTIVES ALTERNATIVES/ OPTIONS RECOMMENDATION IMPLEMENTATI ON PLAN BIBLIOGRAPGHY PAGE 3 4,5 6,7 7,8 9 9 10-16 17 18 19 2

Executive Summery The Problem Natureviews main problem is that they have to make strategic marketing decisions to grow revenues to $20,000,000 from their curren t $13,000,000 before the end of the 2001 fiscal year. Channel Analyses Supermark et channel offers more potential for sales and revenue but also is very costly d ue to technology and slotting fee requirements and is also risk filled due to ma ny unknown variables. However despite the risk, this channel provides the most e xposure and market base. The Nature foods channel offers less risk, but only ser ves niche market of organic food purchasing consumers. It is cheaper to invest a nd is expected to grow by 20% annually Strength Long product shelf life Reputati on of high quality, taste and natural ingredients Strong relationship with natur e store retailers Opportunities Organic food market expected to grow to $13.3 bi llion in 2003 Nature store channel sales up 20% 12.5% growth in 4oz multipack In crease in consumer interest in organic foods Threats Competition(both in regular yogurt and organic yogurt) Increasing nature store channel demands on logistics or technology Increasingly price sensitive consumers due to economical slowdown Weaknesses Small manufacture, low funds and revenue Relies on brokers that may n ot be adequate for supermarket channel Current marketing strategy based only on nature store channel Organizational Objectives Grow revenues to $20,000,000 from their current $13,00 0,000 before the end of the 2001 fiscal year Alternatives/Options Option 1: Expa nd into the supermarket channel with 6 SKUs of 8oz yogurt in two regions Option 2: Expand into the supermarket channel with 4 SKUs of 32oz yogurt in all regions Option 3: Introduce 2 SKU of children multi pack into natural foods channel Rec ommendation - Option 3 due to: Low risk factors Low cost Take advantage of curre nt relationships and growth of nature foods channel Implementation Plan Approval Meet with R&D, brokers, sales, retailers Product test and approval Product and promotion launch First status report Final yearend report 1 week nd rd 2 week 3 week th 4 week nd 2 month th 6 month th 12 month st 3

The Problem Natureview Farm I was established in 1989 and since then in a span o f just 10 years, Natureview farms has increased their annual revenues from $100, 000 to $13,000,000. This growth was largely due to creating a tasty, flavourful, organic yogurt that niche consumers crave. In fact Natureview has been known fo r their reputation of high quality, natural ingredients, flavourful texture and great taste. Since Natureview is a small company, they had limited cash assets. So in 1997, Natureview open their doors to venture capital firms in order to rec eive funds that were desperately needed. About 3 years after Natureview began be ing funded by venture capital, they were troubled to learn that the venture capi tal firm had to withdraw and cash out their investment, leaving Natureview Farms with a lack strategic funding. In order to get funded with another venture capi tal firm and continue marketing efforts to maintain their leading 24% market sha re, Natureview Farms needed to become valuated by other possible venture capital investment firms. This means that they had to raise their revenue to $20,000,00 0 per year or they will have no choice but to consider being part of an acquisit ion. Natureviews main problem is that they have to make strategic marketing deci sions to grow revenues to $20,000,000 from their current $13,000,000 before the end of the 2001 fiscal year. This is about a 54% increase, with will seems quite tough considering that Natureview Farms only has 12 months to do so in a market that serves a specific niche of intelligent, high income, price flexible consum ers who want organic all natural products with no artificial growth hormones or any other types unnatural ingredients. In order to solve this problem, Naturevie w must make numerous strategic marketing decisions. The main decision would be w hether Natureview should expand their products distribution through the supermark et channel within the northeast, southeast, midwest and west 4

regions of the United States. Natureview also could also follow the status quo r oute and remain in the nature food stores channel where they enjoyed 10 years of success that found them on top with 24% market share. To make an informed marke ting decision, Natureview must first vigorously analyse each channel and their q ualities. Channel Analyses Supermarket Channel This channel consists of many supermarket c hains scattered across the northeast, southeast, midwest and west regions of the United States. The yogurt industry in this channel is dominated by large yogurt products manufacturers such as Dannon and Yoplait who have 33 % and 24% market share respectively. In this channel there are 4 steps in the distribution table. The manufacture sells the product to the distributor who sells the product to t he retailer on its way to the end consumer. In this channel an 8oz and a 32oz cu p of yogurt go for $0.74 and $2.70, while a 4oz cup multipack can sell for $2.85 . Compared to the nature store channel, this channel is much more technologicall y driven. In fact due to channel size, most retailers require scanning devices a nd automated inventory tracking systems to be used to organise the channel produ ct flow. This technology run operation is rather quite costly. However it is bal anced by the expensive investment needed by manufactures who want to enter this channel. These new manufactories must pay a $10,000 slotting fee for each stock keeping unit (SKU) per retailer chain in each of the four regions. This channel also requires each manufacture to contribute funds a minimum of every 3 months f or cooperative weekly trade promotions that average $8,000 nationally per ad, pe r retailer chain. This fee is in addition to any advertising expenditures that t he manufacture may have. If the manufacture product continuously does not make a profit for the retailers, it can be pulled from the channel. The Manufacture wo uld then have to repay the slotting fee when applying for 5

re-entry. Because of the multiple fees and uncertainty, this channel provides th e most risk for smaller manufacture but also provides a high level of potential. Nature Stores Channel Unlike the supermarket chain, the nature store channel is friendly to small manufactures whose funds are lacking. The only one-time SKU f ee for new manufactures in this channel is a allocation of one complementary cas e of product for every new SKU in the first year. This would usually equate to b eing less than the supermarket channel slotting fee. Along with this fee, manufa ctures will often use sales brokers to attract retailers. These brokers charge a bout 4% of manufacture sales in the yogurt category. In this channels distributi on, there are 5 steps a product goes through. First the product is manufactured by the manufacture and then is sold to natural foods wholesalers. Then it is sol d to distributers who do bulk breaking and then sell and deliver to the retailer s who sell to the final consumer. Generally in this channel, prices are usually higher since the niche target consumers are less price sensitive. An 8oz and a 3 2oz cup of yogurt go for $0.88 and $3.19, while a 4oz cup multipack can sell for $3.35. Even though this channel is small and generally more expensive it is gro wing 7 times faster than the supermarket and offers continued potential for smal l manufactures such as Nature view. 6

Situation Analyses SWOT Strength Long product shelf life Reputation of high qual ity, taste and natural ingredients Strong relationship with nature store retaile rs Opportunities Organic food market expected to grow to $13.3 billion in 2003 N ature store channel sales up 20% 12.5% growth in 4oz multipack Increase in consu mer interest in organic foods Weaknesses Small manufacture, low funds and revenue Relies on brokers that may n ot be adequate for supermarket channel Current marketing strategy based only on nature store channel Threats Competition(both in regular yogurt and organic yogurt) Increasing nature store channel demands on logistics or technology Increasingly price sensitive c onsumers due to economical slowdown Strength On huge strength for Natureview Farms is their products shelf life. Bec ause Natureview uses organic, natural ingredients with now growth hormones, thei r yogurt stays fresh up to 50 days. This is huge considering that the completions product only stays fresh for 30 days. This means there will be less product los s and thus the cost of goods sold will be lower. Natureview also has a strong re putation based on quality, taste and natural ingredients. This will help Naturev iew when introducing any new product consumers will be more willing to try it. T his reputation is one of the reasons why Natureview has strong relationships wit h nature store retailers. This relationship entitles Natureview to be able to wo rk with the retailers to try and sell the product more efficiently and thus incr ease profit and most likely sales. 7

Weakness Natureview is a small manufacture. It has limited funds to which it can use to make marketing decisions. Thus, marketers for Natureview must take this in mind when creating a strategic marketing plan. Also because Natureview is sma ll, their revenues are generally low. This affects Natureviews abilities to atta in valuation amongst venture capital firms. Another weakness of Natureview is th at their current strategy is not very flexible. It is based for the nature store channel. Thus if Natureview decides to expand to the supermarket channel, they will have to revise their entire marketing strategy. Opportunity The organic foo d market is expected to grow tremendously over the next few years due to increas ing consumer interest. This will create new opportunities for product line exten sions or other new product launches. The rise to organic foods is also why natur e food stores have rising by 20%. The annual rise of 12.5% in 4oz multipacks giv e Natureview an opportunity to take advantage of this and expand their product o ffering and thus revenues. Threats Competition is by far Natureviews biggest thr eat. Companies such as Horizon Organic and Brown Cow in the nature store channel are competing directly with Natureview to gain a strangle hold in the organic y ogurt industry. There is also competition from national brands such as Dannon an d Yoplait who are rumoured to be launching their own organic yogurt. Another hug e threat is the possibility of nature store channel retailers increasing the dem and on logistics and technology criteria. If these retailers begin demanding the use of scanning devices and automated inventory tracking systems, Natureview wi ll be hard-pressed to find the funds necessary to facilitate those demands. 8

Financial Analyses Natureviews revenues are not that bad since they do hove 24% market share to lead their competitors. However the advertising and sales expens es seem Cost of Goods Sold $ $ 8,190,000 4,810,000 63% 37% Revenues $ 13,000,000 100% Natureview Farms Income Statement to be a little when compared to the gross profit. This is the main reason why th e final net income is just 2% of revenue. If Natureview wants to gain more profi ts they will have to find ways to reduce expenses or increase revenue, which is the logical option since Natureview wants to increase revenues to $20 million by the end of 2001. Organizational Objectives Grow revenues to $20,000,000 from th eir current $13,000,000 before the end of the 2001 fiscal year This objective is largely due to necessity. Natureview farms must be able to meet this objective if they can attain validation for venture capital firms to invest and infuse the m with funds that can be used toward strategic investments. If this objective wa s not met Natureview would have no choice but to consider being part of an acqui sition. Gross Profit Expenses Advertisng/ Freight Sales Marketing Research & Development Net Income $ $ $ $ $ 2,210,000 1,560,000 390,000 390,000 260,000 17% 12% 3% 3% 2% (Income statement retrieved from Natureview Farm case) 9

Alternatives/Options Option 1: Expand into the supermarket channel with 6 SKUs o f 8oz yogurt in two regions Option 1 is that Natureview expands into the superma rket channel with 6 SKUs of the 8oz product size. This expansion will cover the west and the northeast regions. Expansion into the west region will include the top 9 retail chains, while the northeast region will include the top 11 retail c hains. This will equate to 20 total retail chains. The main reason why the 8oz p roduct was chosen for this option is because it represents a large part of the t arget group. The 8oz size is the most popular and thus offers the best potential . In fact this whole option offers great potential. Expected sales are at $25.9 million from this option alone. By choosing this option Natureview will be able to gain a first move advantage on their organic yogurt competitors. Getting your foot first in the door means you will have a heads up on the market by the time the competition arrives. This is crucial for success. This option is expected t o get the most unit sales out of all the options. It is expected to get 35 milli on units sold to receive revenue of $25.9 million. When that is added with Natur eviews current revenue of $13million, it will equate to $38.9 million, well over the $20 million objective. Advantages High potential for increased revenue Consu mers in NE and W region are most likely to purchase organic st Disadvantages High risk High advertising cost of $1.2 million per region per yea r($2.4 million total) Expenses will increase by $320,000 ($200,000 for sales sta ff,$120,000 for marketing staff) Direct competition with national brands(Dannon, Yoplait)

Expected 1.5% market share after 1 year (35 million unit sales)

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Option 1 Financial Information Region Information Number of Regions Region 1(# o f Retailers) Region 2(# of Retailers) Income Information Expected unit sales Pri ce per Unit Expected Revenue Unit Cost COGS $ $ $ $ 35,000,000 0.74 25,900,000 0 .31 10,850,000 Cost Per Promotion Region 1 Per Retailer Slotting Fee Information Number of Retailers In Region 1 Cost Per Promotion Region 2 Per Retailer Number of SKUs Single SKU Slotting Fee Per Chain Total Slotting Fee Per Chain Number o f Retail Chains Total Slotting Fee $ $ $ 6 10,000 60,000 20 1,200,000 Number of Retailers In Region 2 Total cost per promotion Region 1&2 Promotions Per Period Promotions Periods Required Per Year Total Promotions Total Cost of Promotions $ $ 11 $ 9 $ 217,500 4 4 16 3,480,000 15,000 7,500 Trade Promotion Information 2 Northeast(11) West(9) Expense Information Advertising Per Region Total Advertisi ng Broker Fee(4% of sales) Sales, General & Administrative Sales Force Marketing Staff $ $ 200,000 120,000 $ $ $ 1,200,000 2,400,000 1,036,000 Option 1 Income Statement Revenues Cost of Goods Sold Gross Profit Expenses Adve rtising/ Freight Sales Marketing Research & Development SKU s Slotting Fee Trade Promotions Broker Fee Net Income $ $ $ 25,900,000 10,850,000 15,050,000 100% 42 % 58% Current Income Statement With Option 1 Revenues Cost of Goods Sold Gross Profit Expenses Advertising/ Freight Sales Marketing Research & Development SKU s Slott ing Fee Trade Promotions Broker Fee Net Income $ 38,900,000 $ 19,040,000 $ 19,86 0,000 100% 49% 51% $ $ $ $ $ $ $ $ 2,400,000 200,000 120,000 1,200,000 3,480,000 1,036,000 6,614,000 9% 1% 0.46% 0% 5% 13% 4% 26% $ $ $ $ $ $ $ $ 4,610,000 1,760,000 510,000 390,000 1,200,000 3,480,000 1,036,000 6,874,000 12% 5% 1.3% 1% 3% 9% 3% 18% 11

This option seems to give the most potential. However it also has a lot of risks and cost associated with it. The only way this would be a liable investment wou ld be if some of the risks were abolished. Otherwise this option seems to be too expensive and risky to pursue. Option 2: Expand into the supermarket channel wi th 4 SKUs of 32oz yogurt in all regions Like option 1, option 2 also has Naturev iew expand their product into the supermarket channel. However unlike option 1, option 2 has Natureview expand with 4 SKUs of not 8oz but the 32oz of yogurt. Th e reasoning behind this is that there will be less competition in the 32oz categ ory and that the profit margin for 32oz option is 63% versus 51% for the 8oz. it is expected that a sales volume of 5.5 million units will be sold in the first year. This will bring revenues from this option alone to $14.85 million. When ad ded with Natureviews current revenue of $13million, it will equate to $27.85 mill ion, well over the $20 million objective. This option will expand into all for r egions, with a total of 64 retail chains. The SKU slotting fee is extremely high at $2.56 million, but on average the trade promotion will be lower since the 32 oz size will only be promoted twice a year, rather than the normal four times a year. Advantages Fewer competition Lower on average trade promotion expense Disa dvantages High risk Higher profit margin for 32oz versus 8oz Expected 1st year s ales of 5.5 million units New users may not want to purchase large 32oz quantity of product Very difficult to achieve full national distribution within one year

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Option 2 Financial Information Region Information Expense Information $ $ $ 594,000 Number of Regions Total # of Retailers 4 64 Advertising Per Region Total Advertising Broker Fee(4% of sales) Income Information Sales, General & Administrative Expected unit sales Price per Unit Expected Revenue Unit Cost COGS $ $ $ $ $ 5,500,000 2.70 14,850,000 0.99 5,445,000 Sales Force Marketing Staff $ $ 160,000 120,000 Trade Promotion Information Ave. Cost Per Promotion Per Retailer Slotting Fee Information Number of Retailer s $ 8,000 64 Number of SKUs Single SKU Slotting Fee Per Chain Total Slotting Fee Per Chain Nu mber of Retail Chains Total Slotting Fee $ $ $ 4 10,000 40,000 64 2,560,000 Total Cost Per Promotion Promotions Per Period Prom otions Periods Required Per Year Total Promotions Total Cost of Promotions $ $ 5 12,000 4 2 8 4,096,000 Option 2 Income Statement Revenues Cost of Goods Sold Gross Profit Expenses Adve rtising/ Freight Sales Marketing Research & Development SKU s Slotting Fee Trade Promotions Broker Fee Net Income $ 14,850,000 $ 5,445,000 $ 9,405,000 100% 37% 63% Current Income Statement With Option 2 Revenues Cost of Goods Sold Gross Profit $ $ 160,000 $ 120,000 $ $ 2,560,000 $ 4,096,000 $ 594,000 $ 1,875,000 0% 1.1% 0. 8% 0% 17% 28% 4% 13% Expenses Advertising/ Freight Sales Marketing Research & De velopment SKU s Slotting Fee Trade Promotions Broker Fee Net Income $ 27,850,000 $ 13,635,000 $ 14,215,000 100% 49% 51% $ $ $ $ $ $ $ 2,210,000 1,720,000 510,000 390,000 2,560,000 4,096,000 594,000 8% 6% 2% 1% 9% 15% 2% 8%

$ 2,135,000 13

This option seems to be taking a differentiation approach. If this option is cho sen by Natureview, they would be one of only a few companies to offer the 32oz s ize of organic yogurt in the supermarket chain. That fact that there is not many competitors is a huge advantage. However this option is also very risky and has many unknown such as whether it is plausible to distribute nationally within on e year. For this option to be acceptable the risk and unknowns must be dealt wit h. Option 3: Introduce 2 SKU of children multi pack into natural foods channel In t his option, Natureview will not expand into the supermarket channel. Instead Nat ureview will introduce a new line of products for children in the nature foods c hannel. They will introduce 2 SKUs of 4oz multipacks. The multipack market was i dentified earlier in this analyses because of its annual growth rate of 12.5%. E ven thought multipacks are only 9% of total organic yogurt sales, the tremendous growth rate give this market a huge amount of potential without much risk. This is a huge reason why this option is valuable. Another reasons is that cost will be done since SKU slotting fees will no longer be changed. There will be a requ ired allocation of one complementary case of product for every new SKU in the fi rst year. This would usually equate to being less than the supermarket channel s lotting fee. This option will also require a broker fee of 4%. Total revenues wi th this option will be about 6 million with 1.8 million units sold at a price $3 .35 per unit. These figures are less than the other options but are based on a l ow risk plan. 14

Advantages Take advantage of current relationships within nature foods channel ow risk factors Natureview positioned nicely for option Low cost Take advantage of growing natural foods channel Disadvantages Low expected revenue Requires R&D to develop product

Option 3 Financial Information Income Information Expense Information Expected unit sales Price per Unit Expected Revenue Unit Cost COGS 1,800,000 $ 3.35 Total Advertising Broker Fee(4% of sales) $ $ 6,030,000 $ 1.15 $ 241,200 $ 2,070,000 Sales, General & Administrative Slotting Fee Information Sales Force Marketing Staff $ $ 250,000 Number Of SKUs Total Cost Of Complementary Cases $ 2 150,750 15

Option 3 Income Statement Current Income Statement With Option 3 Revenues $6,030,000 100% Revenues $19,030,000 100% Cost of Goods Sold $2,070,000 34% Cost of Goods Sold Gross Profit Expenses Advertising/ Freight Sales Marketing Re search & Development Cost Of Complementary Cases Broker Fee Net Income $10,260,000 $ 8,770,000 54% 46% Gross Profit Expenses Advertising/ Freight Sales Marketing Research & Developmen t Cost Of Complementary Cases Broker Fee $3,960,000 66% $ $ $ 250,000 $ $ 150,750 $ 241,200 0% 0% 4.1% 0% 2.5% 4% $ 2,210,000 $ 1,560,000 $ 640,000 $ 390,000 $ 150,750 $ 241,200 $ 3,578,050 12% 8% 3% 2% 1% 1% 19% Net Income $3,318,050 55% This option is by far the most conservative of the three. It presents the least amount of risk because the basis of this option is to stick with what is known. Natureview knows the natural foods channel. They know the distributors, retailer s, consumers and anyone in between. There are very few unknown variables. Howeve r because there is so few risk involved, reward is also few. The revenues from t his options is the lowest of the three options. Combined with the current $13 mi llion revenue, it equates to just over $19 million. This is under the objective of $20 million. This must be taken in consideration when choosing the recommenda tion.

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Recommendation After careful review and thorough analyses of the problem, situat ion and available options, It is recommended that Natureview Farms chooses the t hird option. The reason why this option was chosen was because it offered very f ew risk and had a vide variety of known variables. It also took advantage of the growing nature food channel and the multipack market segment. This option also did not require an entire marketing strategy change. It used the same distributo rs, retailers and consumers. However, because this option ends up being $1 milli on short of the objective, it is highly encouraged that Natureview Farms invest more funds in marketing the launch of childrens multipack. Natureview must ensure that they can increase the expected revenues by $1 million or more in order to meet or beat the objective of $20 million. Perhaps a more intensive concentrated promotion plan would yield $1million or more in extra revenue. If this option i s followed with the suggested revisions, it has the potential to increase Nature views success tremendously. 17

Implementation Plan Implementation Gain full approval of recommendation from mar keting manager and financial advisor Managers meet with R&D department to discus s multipack produce qualities Managers meets with brokers and sales staff to dis cuss new product sales plan Managers meet with retailers to discuss future launc h and financial information First production of product for testing and approval Official product launch and distribution Official launce of product consumer pr omotions First product income status report Continue with plan or revise it depe nding on report End of year report Time Frame 1st week 2nd week 3rd week 3rd wee k 4th week 2nd month 6th month 12th month 18

Bibliography All statistical and strategically information in this report was re trieved from the following source: Fleming, Karen. "Natureview Farm". Brief Case s. Boston : Harvard Business Publishing , 2007. 19