NATUREVIEW FARM CASE STUDY

SECTION A

GROUP 5

Roll Numbers :

FPM/04/005 (SUPRIYA K. K.) PGP/14/005 (AMIT KUMAR) PGP/14/015 (ARITRA BASU ROY) PGP/14/025 (DEVARAJAN K) PGP/14/035 (KRISHNAN VR) PGP/14/045 (SAURABH MAHAJAN) PGP/14/055 (TANOY DHAR)

Issues Natureview Farm needs to choose between 3 pricing options to increase its revenues to $20 million before the end of 2001 from $13 million reported in 1999. Recommendation: Natureview Farm should choose Option 2 in this case. Analysis Analysis of the three pricing options has been provided below:
TABLE 1: Margin Chain for Manufacturer Selling Price (Natureview Yogurt) Supermarket Channel Retail Price Retail Margin Retail Purchase Price (RPP) Distributor Margin Distributor Purchase Price (DPP) Manufacturer Sales Price (MSP) Cost Per Unit Contribution per Unit Sold Manufacturer Gross Margin 8oz $0.74 27.0% $0.54 15.0% $0.46 0.459 0.31 0.149 32.46% 32 oz $2.70 27.0% $1.97 15.0% $1.68 1.675 0.99 0.685 40.91%

Natural Foods Channel Retail Price Retail Margin Retail Purchase Price (RPP) Natural Foods Distributor Margin Natural Foods Distributor Purchase Price Wholesaler Margin Wholesaler Purchase Price (WPP) Manufacturer Sales Price (MSP) Cost Per Unit Contribution per Unit Sold Manufacturer Gross Margin

8oz $0.88 35.0% $0.57 5.0% $0.54 7.0% $0.51 0.505 0.31 0.195 38.66%

32oz $3.19 35.0% $2.07 5.0% $1.97 7.0% $1.83 1.832 0.99 0.842 45.96%

Multipack $3.35 35.0% $2.18 5.0% $2.07 7.0% $1.92 1.924 1.15 0.774 40.22%

Table 2: Evaluation of Growth Options Option 1 (8 oz.) 6 20 2 $2,400,000 16,065,000 $1,200,000 $4,470,000 $2,400,000 $320,000 SKU to Supermarket Supermarket Chains Regions

Ad Plan Sales Slotting fees Gross Profit Less Ad Costs Less Incremental SGA

Less Slotting Fees Trade Promotion Expense Less Broker's Commissions Profit Contribution Sales Growth

$1,200,000 $640,000 $642,600 (-$732,600) $16,065,000 SKU to Supermarket Supermarket Chains Regions

Option 2 (32 oz.)

4 64 4 $480,000 9,214,425 $2,560,000 $3,769,425 $480,000 $160,000 $2,560,000 $1,024,000 $368,577 (-$823,152) $9,214,425

Ad Plan Sales Slotting fees Gross Profit Less Ad Costs Less Incremental SGA Less Slotting Fees Trade Promotion Expense Less Broker's Commissions Profit Contribution Sales Growth

Option 3 (Multipack) Ad Plan Sales Free Cases (slotting) fee Gross Profit Less Ad Costs Less Free Cases Less Broker's Commissions Profit Contribution Sales Growth Year 1

2 $250,000 3,462,878 $86,572 $1,302,042 $250,000 $86,572 $138,515 $826,955 $3,462,878

SKU of Multipack to Natural Foods Channel

Table 3: Market Share Analysis of Yogurt Market: Channel, SKU and Regions Market Dollar Size Total Refrigerated Yogurt Market Supermarket Channel Natural Foods Channel Total Refrigerated Yogurt Market 6 oz. & 8 oz. $ 1,800,000,000 1,746,000,00 0 $ 54,000,000 $ 1,800,000,000 1,332,000,00

Annual Growth Rate

3.0% 20.0%

3.0%

0 144,000,00 32 oz. Children's Multipack All Other Total Refrigerated Yogurt Market Northeast Midwest Southeast West 0 162,000,00 0 $ 162,000,000 $ 1,800,000,000 468,000,00 0 102,960,00 0 25,740,00 0 6,949,80 0 12.5% 2.0%

As can be deducted, Option 3 does not satisfy the objective of increasing revenues to $20 million although the profit is positive in this case. However, in case of Option-1 and Option-2, the negative profit is due to the high slotting fees which is a just a one-time payment and gets eliminated after the first year. Both Option-1 and Option-2 satisfy our objective (Option-1: Expected Revenue = $29.065 and Option-2: Expected Revenue = $22.214 million). We prefer Option-2 because of the following reasons: In case of the 8-oz market, competition is greater and expansion into this segment might be viewed as a greater threat by Natureviews competitors. Advertising costs which is a recurring cost is $2.4 million in case of Option-1 and is much greater than the $0.48 million of Option-2. Launching a 32-oz offering will be noticed by competition and can acquaint supermarket customers with the brand before Natureview pursued the 8-oz size in the supermarket channel at a later stage.