Natureview Case Analysis

Natureview Case Analysis Marketing Principles Name 2 Natureview Yogurt’s Current Objective and Scope Natureview Farm, Inc., a small yogurt manufacturer of Cabot, Vermont, was started in 1989 using the founder’s family yogurt recipe. The yogurt is unique in that it lacks artificial thickeners that major brands do, as well as uses milk from cows that are not treated with artificial growth hormones, all contributing to a 50-day shelf life in comparison to its competitors’ 30-day shelf life. Natureview is now, in 2000, producing 12 flavors in 8-oz. cups, which equates to 86% of its revenues, and 4 flavors in 32-oz. cups (14% revenues), with total revenues equaling $13 million. Because of its “guerilla marketing” strategies and strong brand reputation for using natural ingredients and selling high quality, great tasting yogurt, Natureview raised its total revenues from less than $100,000 to $13 million in just 10 years and simultaneously secured powerful relationships with natural foods retailers, such as Whole Foods and Wild Oats, in the Northeast, Midwest, Southeast, and West regions of the United States. In 1999, natural food stores sold around 3% of all yogurt consumed in the U.S., but according to the case, “the organic foods market, worth $6.5 billion in 1999, was predicted to grow to $13.3 billion in 2003.” 40% of the U.S. population consumed yogurt (over 70% of which is women), and 6- and 8-oz. cups were the most popular sizes to purchase. Again according to the case, “forty-six percent of organic food consumers bought organic products at a supermarket, 25% at a small health foods store, and 29% at a natural foods supermarket.” For national yogurt sales, supermarkets were growing by 3% per year while natural foods stores were growing by 20% per year. Once again, it is February 2000, and a Venture Capitalist firm that funded Natureview in 1997 needs to cash out its equity infusion so Natureview must either locate another investor or position itself for acquisition to make up for the loss. To be most successful in this endeavor, Natureview needs to achieve a high valuation, which it should do by increasing revenues. The company is deciding how to meet its goal of growing by over 50% of revenues by the end of 2001, an increase that will push their total up to over $20 million in total revenue. A major debate among Natureview decision-makers at the time of this case is whether or not to expand into the supermarket channel, a sizeable step away from Natureview’s channel strategy, as a means of meeting its lofty revenue goal. Natureview’s objective is to grow its revenues to at least $20 million (by over 50%) and achieve maximum revenue growth to increase its valuation before the end of 2001 while still maintaining its strong brand reputation among its customers. Natureview’s Price Difference between Supermarket and Natural Food Stores To view Natureview Yogurt’s exact price differences between supermarket and natural food stores, see Exhibit 1 below. Overall, going through the supermarket channel results in lower retail prices than the natural food channel; $0.74 each for the 8-oz. cups and $2.70 each for the 32oz. cups in supermarkets and $0.88 each for the 8-oz. cups, $3.19 each of the 32-oz. cups, and $3.35 for the prospective kids multipack in natural foods stores. These price differences exist because of several factors that differentiate supermarkets from natural food stores. First, the distribution chains for supermarkets do not involve a wholesaler like natural food stores do, so less marginal costs are incurred and thus those savings can be translated into a lower retail price. The distribution chains are also more efficient for supermarkets; “suppliers to supermarkets typically sent products to a large distribution center, which in turn shipped directly to the supermarket chain’s warehouse.” According to Exhibit 1, Supermarkets themselves incite a lower retail margin (27% compared to 35%), in part due to scanner technology that allows them to know which products are profitable by tracking the SKU Name 3 codes, and in part due to the fact that they will only purchase products from suppliers as large cases, while natural food stores accept fractions of cases. Additionally, the consumers that shop at natural foods stores tend to earn higher incomes than that of the average supermarket consumer, meaning their price sensitivity is lower and thus they are willing to pay higher retail prices. Which Option Should Natureview Pursue? Based on several factors, Natureview should pursue Option 1, expanding six of the bestselling SKUs of the 8-oz. product line into one or two selected supermarket channel regions. In order to close the chasm per-se, Natureview (as the leading natural yogurt company) must make this decision to move into the supermarket channel so it has the first-mover advantage over other natural yogurt brands. Women represent 70% of the 40% of U.S. that consumes yogurt; positioning 8-oz. cups that women can use as an easy, healthy snack or meal alternative at work or school in a less-price sensitive consumer channel like the supermarket will add drastically to revenues. To be exact, Option 1 would increase revenues by $16,070,950 in the first year. Additionally, 46% of organic foods shoppers purchase products from supermarkets, in comparison to only 29% purchasing from natural foods stores. All of these factors contribute to achieving Natureview’s objective of at least $20 million in revenue in one year; from Exhibit 2: $13 million at present + the over $16 million in sales growth resulting from Option 1 = $29 million, well over the revenue goal. The only other option that would achieve $20 million in total revenues by 2001 is Option 2; $13 million + over $9.2 million in sales growth = around $22.2 million. However, Option 1 will achieve the highest revenue increase, which is Natureview’s immediate objective. In the Summary Table, Exhibit 3, where the PV after Year 5 is highest for Option 1 at $4,017,600, in Year 5, Option 1 has the highest profit at $5,903,173, and the NPV in Year 5 for Option 1 is about $500,000 greater than that of Option 2. Though it is about $1.6 million less than Option 3’s Year 5 NPV, the main objective of Natureview is to increase its revenues as much as possible by 2001 to achieve a high valuation, which will be maximized by pursuing Option 1. Though Option 1 incurred the highest initial expenses and high risks, in terms of profit, it takes only 5 years to achieve the highest profit of all the options ($5,903,173). Furthermore, Option 1 will still be maximizing revenue in 5 years, with total revenues of $33,324,722 in comparison to Option 2’s $19,107,032 and Option 3’s $5,801,581 after 5 years. In terms of market share... Sensitivity analysis – Given that a case provides data at a moment in time and forecasts for the future, you will want to explore in your sensitivity analysis: What is the relationship between market share and the forecasts? How implementing the Option you choose will impact existing sales and the forecast for the future? Name 4 Exhibit 1, Natureview Yogurt Margin Chain Calculations for Manufacturer’s Selling Price 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 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 32 oz $0.74 27.0% $2.70 27.0% $0.54 15.0% $1.97 15.0% $0.46 $1.68 $0.46 $0.31 $0.15 32.5% $1.68 $0.99 $0.69 40.9% 8oz 32oz Kids Multipack $0.88 35.0% $3.19 35.0% $3.35 35.0% $0.57 $2.07 $2.18 9.0% 9.0% 9.0% $0.52 7.0% $1.89 7.0% $1.98 7.0% $0.48 $1.75 $1.84 $0.48 $0.31 $0.17 35.96% $1.75 $0.99 $0.76 43.58% $1.84 $1.15 $0.69 37.60% Name 5 Exhibit 2, Natureview Yogurt Channel Option Growth Comparisons A table of calculations for the Yearly Revenue, Gross Margin, Required Investment, and Profit Potential for each channel. Option 1 (8 oz.) 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 6 20 2 $1,200,000 35,000,000 $10,000 $5,220,950 ($2,400,000) ($320,000) ($1,200,000) ($870,000) ($642,838) ($211,888) Sales Growth $16,070,950 Option 2 (32 oz.) 4 64 4 $120,000 5,500,000 $10,000 $3,769,425 ($480,000) Ad Plan Sales Slotting fees Gross Profit Less Ad Costs Less Incremental SGA Less Slotting Fees Trade Promotion Expense Less Broker's Commissions SKU to Supermarket Supermarket Chains Regions per region per annum units per annum per Chain per SKU ($160,000) ($2,560,000) ($1,024,000) ($368,577) SKU to Supermarket Supermarket Chains Regions per region per annum units per annum per Chain per SKU Name 6 Profit Contribution ($823,152) Sales Growth $9,214,425 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 SKU of Multipack to Natural Foods Channel $250,000 1,800,000 units per annum $82,927 2.5% of Manufacturer Sales $1,247,073 ($250,000) ($82,927) ($132,683) $781,463 $3,317,073 Summary Table: Exhibit 3, Natureview Yogurt Channel Option Comparisons Across 1 Year, 2 Years, and 5 Years, Including NPV and PV Values for Years 2 and 5 $'000 One Year Revenue One Year Profit Revenue in Year 2 Profit in Year 2 NPV of Profit in Year 2 Revenue in Year 5 Profit in Year 5 NPV of Profit in Year 5 PV of Profit in Year 2 PV of Profit in Year 5 Option 2 Option 1 (8 oz.) (32 oz.) 16,070,950 9,214,425 (211,888) (823,152) 19,285,140 11,057,310 1,903,734 2,417,018 1,435,953 1,310,025 33,324,722 19,107,032 5,903,173 5,387,998 11,013,067 10,640,076 1,632,145 2,072,203 4,017,600 3,666,981 Option 3 (Multipack) 3,317,073 781,463 3,814,634 3,101,548 3,382,655 5,801,581 4,847,286 12,617,036 2,659,078 3,298,981