This is the case of the Cascade Foods company and the analysis of the decision they were trying to come to about introducing a new product using new technology.
Before beginning to get into the meat of the case, it should be noted that since the data and all relevant information was presented during the middle 1980's, this analysis shall continue on in that vane and assume that it is still 1984, the period in which the problem was being presented. This case will be broken down into two main parts: 1.) The SWOT analysis and 2.) the financial analysis.
Problem Statement
The main problem and concern of this case are whether or not Cascade Foods should, given the current conditions, go ahead and launch a new fruit drink line into the market using a relatively new packaging technique.
SWOT
Strengths
One of the main deciding factors of a company and/or its products are their strengths. One of the main emphases in this case was put upon the quality of the fruit drinks they will be distributing. It is felt that this product is of a higher standard than most of the others on the market, and in fact, the company as very popular public opinion of their drink. When doing a taste test, it was found that 65% of the people preferred Cascades drink over that of its competitors. And since it is the public that ultimately decides the fact of products, this is a strong nod towards Cascade. This goes along well with their distribution, which is very well established and services many supermarkets in the Midwest.
Financially, they have made a good decision in that they will be out sourcing the production of their drinks, but yet still maintain very high and strict standards for these manufacturers, therefore reducing the chances that while one manufacturer may do an excellent job in making the drinks, another may decide to cut corners and produce an inferior drink. Cascade has also come to the conclusion that they will be letting others package their drinks using the fairly new Brik Pak aseptic packaging, which is cheaper to produce and fill than glass bottles and aluminum cans. This packaging also brings along many good points with it, including: improved taste, shorter and better sterilization techniques that help preserve the flavours, and since they are square, they stack better therefore making a better display material for the centre aisles of stores. And since this packaging is fairly new in America, it will have some novelty appeal to those who want to try new things.
And it is also shown that aseptic packaging has a longer shelf life, therefore reducing the need for frequent expiry date checks and sales before a product does expire. On a non consumer end, it will also help the supermarket conserve energy, lowering their costs for refrigeration for storage and shipment. This small boxes also take up to 2/3 less space on a shelf. This company is also willing to give a product a chance, giving it 2-3 years to break even.Weaknesses
With every strength, their usually comes a weak link, as is the case here.
In its history, Cascade Foods has experienced a 40% product failure rate when introducing new products into the market, or 3 out of 5 products survive the introduction phase. Cascade is also fairly inexperienced in the whole fruit beverage market, having so far only had a line of apple juice on the shelves at the supermarkets. This leads into another potential weakness, in that what they are seeking to produce is a fruit drink, which contains additives like sugar and flavour, and many people are health conscious and will instead opt for the natural fruit juices. Charging a higher price could also be looked at unfavourably, as many consumer are looking for a good buy, and are often willing to sacrifice a bit of quality to get it.
Opportunities
Their are many opportunities available to Cascade with the introduction of this new line of drinks. One could be that with the advent of these aseptic containers, they will be able to create sort of a niche market, as people start to find that taste is improved in these containers over that of bottles and cans. Also, they are very conveniently located in the United States Mid-west region, allowing for their distribution to expand in both and easternly and westerly directions, facilitating the chance that this brand could go national without the aid of a bigger subsidiary.Considering the variety of tastes out in the market, it may be found that in the future three flavours may not be enough to suit the public, and therefore new flavours can be used to expand the line more.Threats
Competitors very rarely sit on their haunches when they notice that a trend is catching on. If and when aseptic packages becomes desirable, then the competition is sure to pick up on this and exploit the cheaper production of the aseptic containers.
If Cascade decides to go with a premium price, then this could lead to losses and eventually Cascade would have to lower their prices or drop the line. Continuing on this thread, the aseptic packages are still fairly new in America, and therefore some people are resistant to change, and will stick with the old bottles and cans.So, to review the facts just presented, Cascade has many strengths in its product, distribution, and packaging. But unfortunately, the determining factor will be the price they decide upon, and this shall be gone over in the next section
Financial Analysis
Before looking at the exact specifics for Cascade Foods, the condition of the market must first be looked at. Since 1979, there has been an 80% in the fruit drink market.
This is shown in the following table and graph.Table 1
Sales perYear
YearSales
19791708
19801903
19812240
19822847
19833040
(sales 000's of cases)
So, it is definitely obvious that sales have increased to a higher level in that 4 year period, but when it is broken down to the percentage increase for each year, we start to see a much different picture, one that is perhaps not as rosy as the previous data might have led one to believe.Table 2
Year%Increase
19790%
198011%
198118%
198227%
19837%
As is shown in fig.2, sales to keep increasing, but not at the same level.
In fact, sale increases were dramatically higher in 1982 than in 1983. Since the assumption for this case is that the current year is 1984, this should hold some influence in the decision making process. So, moving on to the specifics for Cascade Foods, they have decided for the introductory phase to go with three flavours: apple, grape, and mixed, and will carry each of them in two sizes of the Brik Paks: 1litre and a 250ml. It was predicted that when they entered the market, they would have a market share between 8.5% and 11.5%, giving an average market share of 10%.
Calculating the total average growth for the entire market between 1979 and 1983, the figure of 15.75% increase is found, but considering that in 1983, sales increased by only 7%, a conservative figure of 9% for sales increase will be used. So, in 1983 the sales for the market were 3,040,000 cases, and if we add our 9% increase, than in 1984 our predicted sales for the total market would be 3,313,600. The predicted market share for Cascade was an average of 10%, so that would give them predicted sales of 331,360 for the first year.
When calculating the fixed costs, two different advertising expenses were taken into consideration, as is seen below
Fixed Costs
Advertising....
.. 500,000$Advertising....
..1,000,000$
Promotions...
... 350,000$Promotions...
... 350,000$
Sales Force.
..... 225,000$Sales Force.
....
. 225,000$
Salaries....
.....
.. 250,000$Salaries...
....
.... 250,000$
Total..
....
.....
.... 1,325,000$Total.
......
....
.... 1,825,000$
Now, it was given that for each case sold, the contribution margin was 4$(this is based on a certain price that will be given later on) so for 313,600 cases, we would expect a profit of
1,254,400$. So the company would not break even during the first year of production.
Yet, it must be taken into account that during the introductory phase, the company allocates 50% more funds to a new product line than it does an established one. As mentioned previously, the contribution margin of 4$ was depend on a certain price. Below, we can see the three options that Cascade has decided upon.
Parity PriceRegular PricePremium Price
1.19$ 1L1.
29$ 1L1.39$ 1L
.35$ 250ml .40$ 250ml .
45$ 250ml
With the contribution margin being based up the Regular Price. To change from the Regular Price will cause the contribution margin to change by .90$.
Price Contribution MarginProfit
Parity3.
10$972,160$
Regular4.00$1,254,400$
Premium4.90$1,536,640$
It can now be said that if Cascade Foods wants to break even during the first year, it seems that they would have to charge a premium price for the fruit drinks . Yet, this may not be entirely feasible.
Cascade realized this and accordingly performed a 4 month trial in 24 supermarkets in 4 different cities where price and advertising fund were used as variables in determining what the market would be like. The contains a table and graph show the summary of this trial period.
Table 3
4 MonthTest
SalesSalesType%Decrease
Month 1+2Month 3+4
14571032LN29.17%
23571598LH32.20%
1153910RN21.
08%
17191126RH34.50%
1010708HN29.90%
1164823HH29.30%
The key for the preceding table and graph is as follows:
LN- Low Price/ Normal Advertising(500,000$)
LH- Low Price/ High Advertising(1,000,000$)
RN- Regular Price/ Normal Advertising
RH- Reg.
Price/ High Adver.HN- High Price/ Normal Adver.HH- High Price/ High Adver.
As can be seen, sales in the first two months were always higher than the sales of the last two months. The two best combinations seemed to be Low Price/ High Advertising and the second best was the Reg Price/High Advertising. It is noteworthy that the decreases are pretty much the same, and that if we average them out we get 29.
8% drop in sales after the first two months. Again, this has been graphed out and can be found below.
So, to sum up the financial aspect of things, it is possible for Cascade Foods to break even during the first year providing that the circumstances that would make it possible do occur. This would of course be the usage of the Regular Price of 1.29$ for the 1 litre and .
40$ for the 250ml aseptic packages, and using a normal advertising budget of 500,000$. It was remarked upon earlier that Cascade need not worry about the production cost or the filling of the packages as they have contracted that out to outside manufacturers. The one thing that was lacking in the information provided was specifics on the various flavours for the fruit drinks, and they were of course apple, grape, and mixed. It was stated that during the 4 month trial period that not enough of a difference was noticed to be of any significance, but again this could change very rapidly after the first year. They would also have to be careful that their fruit drink line did not start to interfere with their apple juice line, as then it might be a difficult decision about which one should suffer at the hands of the other.
Executive Summary
In summing up this analysis, my opinion would be that the goods far outweigh the negatives. Cascade Foods has given a grace period of 2-3 years before they expect this product line to break even, and it is clear that even during the first year it is possible to break even, given that they use Premium Pricing and the lower advertising budget. It could also be that the total market estimations were under applied, and therefore it is even more likely that this product line will succeed. They will however have to keep a close watch on the flavours to see if one particular one is bringing the other two down, or if having two sizes of containers for one particular flavour is actually profitable. Aseptic packaging will be the new thing, and it wont be long before many more competitors jump on the bandwagon.
Its cheaper cost and improved flavour retention capabilities will prove it to be the most logical choice, not only for fruit drinks but also for fruit juices as well. It is therefore my recommendation that Cascade Foods take this opportunity while they still have a bit of an edge and enter the fruit drink market, using Premium Pricing until the competition starts arriving. At this point the Cascade brand of fruit drinks should be established enough that dropping down to Regular Pricing will not be a problem, considering that they will be able to reduce their advertising and promotion budgets.
