NatureView C14

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University of Toronto *

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MGMC14

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Marketing

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Feb 20, 2024

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- Textbook chapter 4 When it comes to product availability, more is always better. Such is not always the case. If products are too widely distributed, they can lead to price wars between retailers, and retailers may begin discontinuing the brand if they feel it isn’t worth having on board. This, of course, is dependent on the product category and brand. If the brand is incredibly well known, like Pepsi and Coke, they may choose other options. if a brand is easily replaceable with other alternatives, like, for example, Natureview yogurts, retailers may choose to completely discontinue the brand if it doesn’t bring in enough revenue. Bait and switch tactics - When a company distributes their product to more stores, stores get into a price war. Retailers who vouch for the brand and spend time and store layout on advertising the brand feel as though the brand is taking a “free ride” off of them as more customers who answer with the “I will think about it” begin coming in. As the brand distributes to more retailers, the original retailers begin to feel they are being taken advantage of and begin to offer bait and switch tactics. They will bait customers in with the brand they came in for and then offer customers a brand that they get higher margins on. Knowing this, producers may choose to set an RPM, limiting the lowest price that can be offered of the product. This means retailers will have to rely on the services associated with the products. This type of pricing is limited globally. For example, in the US, RPM is illegal. Balancing availability. Each retailer wants exclusive distribution of a product. However, creating a quasi-monopoly may mean complacency from the retailer. it is to the manufacturer’s advantage to balance the availability of their products to encourage intra-brand competition. In deciding how to balance the distribution, it is important to look at the product. Items that are convenience goods, like dairy products, printing paper, or meats, should be distributed intensively. Buyers will not tolerate stock outs. For more expensive products, balancing the distribution channels becomes more important. For small appliance goods, buyers may still spend some time looking, but for more expensive goods, we know buyers will research before purchasing. Brands need to identify the difference between selective distribution and poor coverage. Selective distribution is choosing which brands to provide products to; poor coverage is when retailers don’t want to carry the product in the first place. The exclusivity of the product determines the availability of products. For example, while you will see Calvin Klein at Walmart, you will never see Louis Vuitton anywhere but the original store. sometimes, more exclusive brands will set restrictions on how the retailer can sell their products. They will hold exclusive distribution as the carrot on the stick and force distributors to only provide absolute loyalty to the brand with exclusive set-ups, displays and more.

Natureview farms is a Yogurt manufacturer based out of Cabot, Vermont. They use natural products to produce their Yogurts and one of their USP is that, as a result of the ingredients used in the yogurt, their product has a longer than average shelf life of 50 days over the market average of 30 days. The company’s revenue has been growing rapidly and has grown from $100,000 in 1989 to $13M in 1999, in 10 years. Natureview offers organic natural yogurt products in 8 oz and 32 oz sizes with a range of 12 flavors in their small size and 4 flavors in their large size. Their marketing revolves around the health conscious where price is less important than the benefits of the product. They therefore advertised natural flavors with high quality and great taste. As part of their promotional campaign, they also utilized low cost guerilla marketing aimed at capturing attention. Their current distribution channel revolves around the natural food retailed instead of all the other options as Natureview believes, other than supermarkets, channels like warehouses, drug stores, convenience stores and mass merchandisers offered limited revenue generation potential. Natural and organic food consumers are generally associated with higher incomes. The market for organic products is predicted to grow from $6.5 billion in 1999 to $13.3 Billion by 2003. Natural food stores account for a total of 3% of sales for yogurt and have an annual growth rate of 20%, supermarkets account for 97% of sales and have an annual growth rate of 3%. The top competitors, Dannon, Yoplait, Breyers and Columbo control 50% of the market. Natureview Farms is limited to Natural food stores as of now. Optimal channel design presents 3 challenges. Natureview largely faces the first one as we will discover when defining the problem. What is the level of intensity needed: For natureview, this means how much coverage do they need? Where should they be available? And how easy should it be for a customer to buy the yogurt? We know that for cheaper products, products we consider staples, customers are less likely to care about the brand. Therefore, it is vital for Natureview to distribute as intensively as possible.

There are 2 main distribution channels available to Natureview. The supermarket channel, and the Natural foods channel, and the marketing flows and flows of responsibility are as follows. - Problem definition Natureview faces a problem Although their growth has been rapid over the years, Venture capitalists are pulling funding and they need to got from $13M to $20M in order to be attractive

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to the investors they need. NatureView will have to find way to increase their revenue if they want to attract investors. The challenge is to identify a path of growth to grow revenues by over 50% from $13M in 1999 to $20M by 2001. Their current costs and prices are as follows: - Agency theory In the case of NatureView farms, agency theory is found in their decision to expand into the supermarket channel. “"We owe it to our customers, our suppliers, and our distribution partners to make the right strategic choices regarding this revenue growth objective.” Natural food stores had to go through more channels and as a result, natural food stores had prices upwards of 15% more expensive when compared to supermarkets. Natural food stores had made NatureView what it is today. Agency theory lies in how the retailers would react to the lower prices at the supermarket. Would concessions follow? Would stores drop the brand and replace it with competitors? The particular concern was also with NatureView’s broker. Would he let everyone know about his displeasure? The decisions that follow would not only have to maximize the profit, but also minimize the damage to the channel support Natureview had established. - Segmentation Analysis There are a total of 6 segments that Natureview is targeting for their consumers. As mentioned, Natureview products are organic and natural. As a result, they look towards attracting people that specifically look for these features. Educated and higher income consumers: The primary target audience. These people are generally not sensitive to the price and care more about the quality than anything. This segment generally purchases more organic products more frequently regardless of whether they are shopping at supermarkets or natural food stores. Organic dairy product consumers and geographics: A significant portion of Natureviews customers are organic product consumers. 74% of these consumers are heavy organic food customers and 29% of them are light organic food customers.

Geographic Segmentation: Natureview Farm’s customers are generally located in the northeast and west regions of the United States Women: 70% of the shoppers are women and therefore represent a significant segment of the yogurt market. Health Conscious customers: These are customers that believe, even for organic products, the ingredients are a key purchasing criteria. This segment largely prefers quality over the price. Variety seekers in supermarkets: A portion of their target market are consumers looking for variety and a wider selection of organic products indicating a potential opportunity for Natureview’s expansion for people shopping in supermarkets looking for organic products. Channel design When designing a channel of distribution, it is important to remember the relationship between more stores and overall market share. Whilst Natureview operates in the organic sector, they have the ability to take market share from non-organic competitors, because for low risk and low impact goods, customers opt to simply select from what is available instead of looking specifically for their favorite brand, therefore proving this model. As Natureview becomes more available, their market share will continue to rise. At the moment, only being available and Natural food stores limits potential growth and adoption of organic products. - Gap analysis and Options analysis The gap analysis for Natureview is the difference between its current state and its ideal state particularly in terms of revenue growth and distribution. Natureview needs to get to $20M by

2001 to be appealing enough to investors and for an acquisition. Therefore, there are 3 main options for analysis Option 1: Expand 6 SKUs of 8 oz products into 1 or 2 selected supermarket channel regions Pros and Cons: 8 oz cups have the largest market and highest demand. There will also be a first mover advantage as an organic yogurt brand entering the supermarket channel. Other natural yogurt brands have successfully expanded into supermarkets, so there is a proof of potential. There is however a high level of trade promotion and marketing spend. There might be the agency theory conflict of interest discussed above. There is a lack of sales experience when dealing with supermarkets Financial analysis: 2000 2001 Total Net profit $686,000 $1,594,700 $3,173,200 Revenue $13,000,000 + $16,583,000 = $29,583,000 $29,583,000 Projected gross profit year 2000 2001 Incremental unit sales 35,000,000 35,000,000*103% = 36,050,000 Revenue 35,000,000*0.46 = $16,100,000 36,050,000*$0.46 = $16,583,000 Cost of Production 35,000,000*$0.31 = $10,850,000 36,050,000*$0.31 = $11,175,500 Gross profit $5,250,000 $5,407,500 Projected Net Expenses Year 2000 2001 Advertising Cost $1,200,000 * 2 regions = $2,400,000 $1,200,000 * 2 regions = $2,400,000 SG&A $320,000 $640,000

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Slotting fee $10,000*6 SKUs*20 retailers = $1,200,000 N/A Broker Fees $16,100,000*4% = $644,000 $19,320,000*4% = $772,800 Net expenses $4,564,000 $3,812,800 Projected net profit year 2000 2001 Gross Profit $5,250,000 $5,407,500 Net expenses $4,564,000 $3,812,800 Net profit $686,000 $1,594,700 Option 2: Expand 4 SKUs of the 32 oz size nationally Pros and Cons: 32 oz tubs have the highest margins and there are fewer competitive offerings at this size. There is a strong competitive advantage of long shelf life as shelf life matters for multiple use products and lastly there will also be a lower promotional expense. 32 oz products do however have a higher slotting fee due to nation-wide distribution. There would once again be a conflict of interest between supermarkets and natural food stores. Natureview would be a new brand in the supermarket and its unlikely that customers will try a new brand in a “heavy” consumption pack size. Furthermore, its doubtful is the sales team can achieve nationwide distribution in 12 months. Financial analysis: 2000 2001 Total Net profit $172,600 $2,572,600 $2,745,200 Revenue $13,000,000 + $9,185,000 = $22,185,000 $22,185,000 Projected gross profit year 2000 2001 Incremental unit sales 5,500,000 5,500,000

Revenue 5,500,000*$1.67 = $9,185,000 5,500,000*$1.67 = $9,185,000 Cost of Production 5,500,000*$0.99 = $5,445,000 5,500,000*$0.99 = $5,445,000 Gross profit $3,740,000 $3,740,000 Projected Net Expenses Year 2000 2001 Advertising Cost $120,000 * 4 regions = $480,000 $120,000 * 4 regions = $480,000 SG&A $160,000 $320,000 Slotting fee $10,000*4 SKUs*64 retailers = $2,560,000 N/A Broker Fees $9,185,000*4% = $367,400 $19,320,000*4% = $772,800 Net expenses $3,567,400 $1,167,400 Projected net profit year 2000 2001 Gross Profit $3,740,000 $3,740,000 Net expenses $3,567,400 $1,167,400 Net profit $172,600 $2,572,600 Option 3: introduce 2 SKUs of the children’s multi-pack into the natural foods channel Pros and Cons: There are already strong existing relationships with natural food channel retailers. The sales teams have tons of experience in this distribution channel and the natural foods channel is growing almost 7x faster than the super supermarket channel, which means it might be more financially attractive. However, by doing so, Natureview would miss out on the opportunity to become a first mover in the supermarket channel. Financial analysis: 2000 2001 Total

Net profit $909,200 $1,083,080 $1,992,280 Revenue $13,000,000 + $3,808,800 = $16,808,800 $16,808,800 Projected gross profit year 2000 2001 Incremental unit sales 1,800,000 1,800,000*115% = $2,070,000 Revenue 1,800,000*$1.84 = $3,312,000 2,070,000*$1.84 = $3,808,800 Gross profit $3,312,000*37.6% = $1,245,312 $3,808,800*37.6% = $1,428,109 Projected Net Expenses Year 2000 2001 Marketing Expenses 250,000 $250,000 Complementary cases 2.5%*$3,312,000 2.5%*$3,808,800 Net expenses $332,800 $345,220 Projected net profit year 2000 2001 Gross Profit $1,245,312 $1,428,109 Net expenses $332,800 $345,220 Net profit $336,112 $1,082,889 There are 3 main problems in this case 1) The $20M revenue goal to seek investment 2) The agency problem and potential conflict of interest between Natural food stores and Supermarkets 3) The ability to keep up with the potential demands of the supermarket distributors

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If we look at the 3 potential solutions, only solution 1 and 2 solve problem 1, which is the main issue. Solution 2 solves problems 2 and 3 by not involving the supermarkets at all. The main issue at hand is the revenue goal, while both solution 1 and solution 2 reach such a goal, solution 1 has the highest potential revenue at $29,583,000 . Furthermore, solution 1 is able to take advantage of the gap of no organic yogurt in supermarkets. By advancing into the supermarket, not only will they receive the maximum possible demand with 8 oz yogurt cups, they will also receive exposure to a larger range of customers which could boost their valuation compensating the short-term risk “and potential trauma” of working with supermarket distributors with a long term, sustained increase in revenue. Furthermore, this would create a more optimal channel design, increasing how available Natureview yogurt is in the market and how easy it is for customers to find and buy it. Option 1: Expand 6 SKUs of 8 oz products into 1 or 2 selected supermarket channel regions is the best strategic move to reach the valuation tactics even with the high risk of failing to mitigate the brand image issues that may arise as a result of this option.

NatureView C14

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