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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 ANALYSES ORGANIZATIONAL OBJECTIVES ALTERNATIVES/ OPTIONS RECOMMENDATION IMPLEMENTATION PLAN BIBLIOGRAPGHY

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3 4,5 6,7 7,8 9 9 10-16 17 18 19

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 current $13,000,000 before the end of the 2001 fiscal year. Channel Analyses Supermarket channel offers more potential for sales and revenue but also is very costly due to technology and slotting fee requirements and is also risk filled due to many unknown variables. However despite the risk, this channel provides the most exposure and market base. The Nature foods channel offers less risk, but only serves niche market of organic food purchasing consumers. It is cheaper to invest and is expected to grow by 20% annually Strength Long product shelf life Reputation of high quality, taste and natural ingredients Strong relationship with nature store retailers Opportunities Organic food market expected to grow to $13.3 billion in 2003 Nature store channel sales up 20% 12.5% growth in 4oz multipack Increase 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 not 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 $13,000,000 before the end of the 2001 fiscal year Alternatives/Options Option 1: Expand 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 Recommendation - Option 3 due to: Low risk factors Low cost Take advantage of current 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
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The Problem Natureview Farm I was established in 1989 and since then in a span of 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 for 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 receive funds that were desperately needed. About 3 years after Natureview began being funded by venture capital, they were troubled to learn that the venture capital 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 capital firm and continue marketing efforts to maintain their leading 24% market share, Natureview Farms needed to become valuated by other possible venture capital investment firms. This means that they had to raise their revenue to $20,000,000 per year or they will have no choice but to consider being part of an acquisition. Natureviews main problem is that they have to make strategic marketing decisions 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 consumers who want organic all natural products with no artificial growth hormones or any other types unnatural ingredients. In order to solve this problem, Natureview must make numerous strategic marketing decisions. The main decision would be whether Natureview should expand their products distribution through the supermarket channel within the northeast, southeast, midwest and west

regions of the United States. Natureview also could also follow the status quo route 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 marketing decision, Natureview must first vigorously analyse each channel and their qualities.

Channel Analyses Supermarket Channel This channel consists of many supermarket chains 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 the retailer on its way to the end consumer. In this channel an 8oz and a 32oz cup 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 technologically driven. In fact due to channel size, most retailers require scanning devices and automated inventory tracking systems to be used to organise the channel product flow. This technology run operation is rather quite costly. However it is balanced 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 for cooperative weekly trade promotions that average $8,000 nationally per ad, per retailer chain. This fee is in addition to any advertising expenditures that the 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 would then have to repay the slotting fee when applying for

re-entry. Because of the multiple fees and uncertainty, this channel provides the 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 fee for new manufactures in this channel is a allocation of one complementary case of product for every new SKU in the first year. This would usually equate to being less than the supermarket channel slotting fee. Along with this fee, manufactures will often use sales brokers to attract retailers. These brokers charge about 4% of manufacture sales in the yogurt category. In this channels distribution, 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 sold to distributers who do bulk breaking and then sell and deliver to the retailers 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 32oz 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 growing 7 times faster than the supermarket and offers continued potential for small manufactures such as Nature view.

Situation Analyses SWOT Strength Long product shelf life Reputation of high quality, taste and natural ingredients Strong relationship with nature store retailers Opportunities Organic food market expected to grow to $13.3 billion in 2003 Nature store channel sales up 20% 12.5% growth in 4oz multipack Increase in consumer interest in organic foods

Weaknesses Small manufacture, low funds and revenue Relies on brokers that may not 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 consumers due to economical slowdown

Strength On huge strength for Natureview Farms is their products shelf life. Because Natureview uses organic, natural ingredients with now growth hormones, their 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 loss and thus the cost of goods sold will be lower. Natureview also has a strong reputation based on quality, taste and natural ingredients. This will help Natureview when introducing any new product consumers will be more willing to try it. This reputation is one of the reasons why Natureview has strong relationships with nature store retailers. This relationship entitles Natureview to be able to work with the retailers to try and sell the product more efficiently and thus increase profit and most likely sales.

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 small, their revenues are generally low. This affects Natureviews abilities to attain valuation amongst venture capital firms. Another weakness of Natureview is that 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 food market is expected to grow tremendously over the next few years due to increasing consumer interest. This will create new opportunities for product line extensions or other new product launches. The rise to organic foods is also why nature food stores have rising by 20%. The annual rise of 12.5% in 4oz multipacks give Natureview an opportunity to take advantage of this and expand their product offering and thus revenues. Threats Competition is by far Natureviews biggest threat. 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 yogurt industry. There is also competition from national brands such as Dannon and Yoplait who are rumoured to be launching their own organic yogurt. Another huge threat is the possibility of nature store channel retailers increasing the demand on logistics and technology criteria. If these retailers begin demanding the use of scanning devices and automated inventory tracking systems, Natureview will be hard-pressed to find the funds necessary to facilitate those demands.

Financial Analyses Natureviews revenues are not that bad since they do hove 24% market share to lead their competitors. However the advertising and sales expenses 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 the final net income is just 2% of revenue. If Natureview wants to gain more profits 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 their 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 them with funds that can be used toward strategic investments. If this objective was not met Natureview would have no choice but to consider being part of an acquisition.
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)

Alternatives/Options Option 1: Expand into the supermarket channel with 6 SKUs of 8oz yogurt in two regions Option 1 is that Natureview expands into the supermarket 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 chains. This will equate to 20 total retail chains. The main reason why the 8oz product was chosen for this option is because it represents a large part of the target 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 to get the most unit sales out of all the options. It is expected to get 35 million units sold to receive revenue of $25.9 million. When that is added with Natureviews current revenue of $13million, it will equate to $38.9 million, well over the $20 million objective. Advantages High potential for increased revenue Consumers in NE and W region are most likely to purchase organic
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Disadvantages High risk High advertising cost of $1.2 million per region per year($2.4 million total) Expenses will increase by $320,000 ($200,000 for sales staff,$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(# of Retailers) Region 2(# of Retailers) Income Information Expected unit sales Price 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 of 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 Advertising 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 Advertising/ 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 Slotting Fee Trade Promotions Broker Fee Net Income $ 38,900,000 $ 19,040,000 $ 19,860,000 100% 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%

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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 would 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 with 4 SKUs of 32oz yogurt in all regions Like option 1, option 2 also has Natureview 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. The reasoning behind this is that there will be less competition in the 32oz category 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 added with Natureviews current revenue of $13million, it will equate to $27.85 million, well over the $20 million objective. This option will expand into all for regions, 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 32oz 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 Disadvantages High risk Higher profit margin for 32oz versus 8oz Expected 1st year sales 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 Retailers

8,000 64

Number of SKUs Single SKU Slotting Fee Per Chain Total Slotting Fee Per Chain Number of Retail Chains Total Slotting Fee $ $ $

4 10,000 40,000 64 2,560,000 Total Cost Per Promotion Promotions Per Period Promotions Periods Required Per Year Total Promotions Total Cost of Promotions $ $ 512,000 4 2 8 4,096,000

Option 2 Income Statement Revenues Cost of Goods Sold Gross Profit Expenses Advertising/ 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 & Development 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

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This option seems to be taking a differentiation approach. If this option is chosen by Natureview, they would be one of only a few companies to offer the 32oz size 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 one year. For this option to be acceptable the risk and unknowns must be dealt with.

Option 3: Introduce 2 SKU of children multi pack into natural foods channel In this option, Natureview will not expand into the supermarket channel. Instead Natureview will introduce a new line of products for children in the nature foods channel. They will introduce 2 SKUs of 4oz multipacks. The multipack market was identified earlier in this analyses because of its annual growth rate of 12.5%. Even 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 required allocation of one complementary case of product for every new SKU in the first year. This would usually equate to being less than the supermarket channel slotting fee. This option will also require a broker fee of 4%. Total revenues with 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 low risk plan.

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Advantages Take advantage of current relationships within nature foods channel Low 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

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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 Research & 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 & Development 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, retailers, consumers and anyone in between. There are very few unknown variables. However because there is so few risk involved, reward is also few. The revenues from this options is the lowest of the three options. Combined with the current $13 million 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 recommendation.

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Recommendation After careful review and thorough analyses of the problem, situation and available options, It is recommended that Natureview Farms chooses the third option. The reason why this option was chosen was because it offered very few 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 distributors, retailers and consumers. However, because this option ends up being $1 million 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 is followed with the suggested revisions, it has the potential to increase Natureviews success tremendously.

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Implementation Plan Implementation Gain full approval of recommendation from marketing manager and financial advisor Managers meet with R&D department to discuss multipack produce qualities Managers meets with brokers and sales staff to discuss new product sales plan Managers meet with retailers to discuss future launch and financial information First production of product for testing and approval Official product launch and distribution Official launce of product consumer promotions First product income status report Continue with plan or revise it depending on report End of year report Time Frame 1st week 2nd week 3rd week 3rd week 4th week 2nd month 6th month 12th month

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

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