NATUREVIEW

FARM

Case Study

SWAPNIL GOYAL IIT KANPUR

1989

• Entered as a manufacturer of refrigerated cup yogurt • First enter market 8-oz and 32-oz with plain and vanilla flavor • Use natural ingredient with longer average shelf-life of 50 days

1999

• Company revenue growth from $ 100,000 to $13 million • Fruit on the bottom yogurt

2000 • Expand to 12 yogurt flavors & multipack yogurt (for children)

OVERVIEW

VC needed to cash out of its investment

Need to find a path to grow revenues

by over 50% before the end of 2001

($20 mil)

Should Natureview Farm expand into

supermarket channel?

ISSUES

THE 4Ps

PRICE

• Affordable according to it’s channel

PLACE

• Natural food channel

• Wholesale club

• National retailer channel

• Convenience and drug store

PROMOTION

• It’s natural flavor with high quality and great taste growth in the national distribution and natural food channel

• Low-cost guerilla marketing

PRODUCT

• 12 yogurt flavors in

8-oz

• 4 yogurt flavors in

32-oz

86%

14%

Revenues 2000

8-oz

32-oz

SWOT ANALYSIS

STRENGTH WEAKNESS

Strong brand

No artificial thickeners used

Usage of natural ingredients

Longer shelf life

No alternative financing available

Lacks potential of taking higher

risks and costs

Doubt on sales team’s ability

OPPORTUNITY THREATS

Strong relationships with leading

natural foods retailers

Accumulation of cash by Horizon

from IPO

Being dropped out of traditional

channel

Packaging type/size

Taste Flavor

Price Freshness Ingredient

Organic or not

Market Trend For Yogurt Product

Yogurt Market Share by Packaging Segment

74%

9%

8%

9%

8-oz. cup smaller

Children's multipacks

32-oz. cups

Others

Yogurt Market Share by Region

26%

22% 25%

27%

Column1

Northwest

Midwest

Southwest

West

Yogurt Distribution Channel

97%

3% Distribution Channel

Supermarkets

Natural food stores

Manufacturer

Natural foods

wholesaler

Natural foods distributor

Retailer

Customer

Manufacturer

Distributor

Retailer

Customer

Length of Channel to Market

Supermarket Channel Natural Foods Channel

Yogurt Market Share by Brand

Dannon

33%

Yoplait 24%

Others 23%

Private Label 15%

Columbo 5%

Supermarket Channel

Natureview Farm 24%

Brown Cow 15%

Horizon

Organic

19%

White Wave

7%

Others 35%

Natural Foods Channel

Yogurt Production Costs and Retail

Prices by Channel

Natural Food

Channel

Supermarket

Food Channel

Manufacturing

Cost

8-oz. cup $ 0.88 $ 0.74 $0.31

32-oz. cup $ 3.19 $ 2.70 $0.99

4-oz. cup multipack $ 3.35 $ 2.85 $1.15

OPTIONS AND DILEMMA

OPTION 1

• Expand in Northeast and West supermarket region

• Bring in the 6 SKUs of the 8-oz. size

OPTION 2

• Expand in supermarket nationally

• Bring in the 4SKUs of the 32-oz. size

OPTION 3

• Stay in natural food channel

• Introduce 2 children’s multipack

OPTION 1: Expand 6 SKUs of the 8-oz into eastern

and western supermarket regions

• 8-oz have highest incremental demand • High potential to increase revenue • First mover as organic yogurt brand to enter supermarket channel

PROs

• High risk & high cost (marketing) • Require quarterly trade promotions • Advertising plan would cost $1.2 million per region per year

• SG&A expenses increase by $320,000 annually • Need to pay one time slotting fee

CONs

Channel Selling Price Margin Cost price

Retailer

$0.74

27%

$0.74/1.27 = $0.58

Distributor $0.58

15%

0.58/1.15 = $0.51

Natureview

$0.51

64.5%

$0.31

Supermarket Channel

Margin Analysis

2000 2001

Unit Sales 35 000 000 35 000 000 x (1+20%) = 42 000 000

Revenue 35 000 000 x $ 0.51 = $17 850 000 42 000 000 x 0.51 = $ 21 420 000

Cost of goods sold 35 000 000 x $ 0.31 = $ 10 850 000 42 000 000 x 0.31 = $ 13 020 000

Gross Profit $ 7 000 000 $ 8 400 000

Expenses

Advertisement $ 1 200 000 x 2 region = $ 2 400 000 $ 2 400 000

SG&A $ 320 000 $ 640 000

Slotting Fee 6 x $ 10 000 x 20 retails = $1 200 000 $0

Broker’s Fee $ 17 850 000 x 0.04 = $ 714 000 $ 21 420 000 x 0.04 = $ 856 800

Net Profit $ 2 366 000 $ 4 503 200

Projection Income Statement

OPTION 2: Expand 4 SKUs of the 32-oz size nationally

into supermarket regions

• Generate higher profit margin than 8-oz size • Strong competitive advantage: longer shelf life • Lower promotion expenses

PROs

• Doubt on claim of new users would readily “enter the brand” via a multi-use size

• Doubt on sales team’s ability to achieve full national distribution in 12 months

• Needs to hire sales personnel and establish relationships with supermarket brokers

• The 32-oz. expansion option would increase SG&A expense by $160,000

CONs

Supermarket channel margin analysis

Channel Selling Price Margin Cost price

Retailer

$2.70

27%

$2.70 / 1.27 = $2.13

Distributor $2.13

15%

$2.13 / 1.15 = $1.85

Natureview $1.85 ($1.85-$0..99)/$1.85 =87%

$0.99

Projection income statement

2000 2001

Unit sales 5 500 000 5 500 000

Revenues growth 550000 x 1.85 = 10 175 000 10 175 000

Cost of Goods sold 5500000 x 0.99 = 5 445 000 5 445 000

Gross profit 4 730 000 4 730 000

Expense:

Slotting fee 4 x 10000 x 64 = 2 560 000 0

SG & A 160 000 160 000

Advertising cost 120000 x 4 = 480 000 480 000

Broker's fee (4% revenues)

407 000 367 400

Net profit 1 123 000 3 722 600

• It would yield the strongest profit contribution of all the strategies under consideration.

• The natural foods channel was growing almost seven times faster than the supermarket.

• The financial potential was very attractive. • The sales team was confident that they could achieve distribution for the two SKUs.

PROs

• There were many potential conflicts and other uncertain factors that the manager could not determine.

CONs

OPTION 3: Introduce two SKUs of a children

multipack into the natural foods channel

Nature Food Channel Margin

Analysis

Channel Selling Price

Margin Cost Price

Retailer $3.35 35% $3.35 /1.35 = $2.48

Distributor $2.48 9% $2.48 /1.09 = $2.28

Nature foods wholesalers

$2.28 7% $2.28 /1.07 = $2.13

Natureview $2.13 ($2.13 - $1.15) / $1.15

=85% $1.15

2000 2001

Unit sales 1 800 000 1 800 000 x 1.15 = 2 070 000

Revenue growth 1 800 000 x 2.13 = 3 834 000 2,070,000 x 2.13 = 4 409 100

Cost Of Goods sold 1,800,000 x 1.15 = 2 070 000 2,070,000 x 1.15 = 2 380 500

Gross profit 1 764 000 20 28 600

Expense:

Marketing 250 000 250,000

Complementary cases 3 834 000 x 2.5% = 95 850 4409100 x 2.5% = 11 02 28

Net profit 1 418 150 1 668 372

Projection Income Statement

WHICH ONE TO CHOOSE?

OPTION 1 OPTION 2

OPTION 3

Comparison of Options for Year 2001

Option Option 1 Option 2 Option 3

Gross Margin 64.5% 87% 85%

Unit sales 42 000 000 5 500 000 2 070 000

Revenue Growth 21 420 000 $10 175 000 $ 4 409 100

Cost $ 13 020 000 $ 5 445 000 $ 2 380 500

Gross profit $ 8 400 000 $ 4 730 000 $ 17 554 000

Expense:

SG & A $ 640 000 $ 160 000 0

Marketing $ 2 400 000 $ 480 000 $ 250000

Broker's fee (4%

revenues)

$ 856 800 $ 367 400 0

Complementary cases 0 0 $173 363

Net profit $ 4 503 200 $ 3 722 600 $ 1 668 372

DECISION

Go for option 1

Reach beyond the target objective of 20 million revenue by end of 2001 with projected of

$21 420 000

8 –oz yogurt is the highest demand

In supermarket, can expose to more range of customers

Will have the first mover advantages of natural product to enter supermarket

A bit risky but in a long term will generate revenues of 200% (as looking at two other competitors)

These slides were created by

SWAPNIL GOYAL (IIT KANPUR)

as part of an internship

under the guidance of

Prof. SAMEER MATHUR (IIM Lucknow)