The business objective for Natureview is to reach $20 million in revenue by the end of 2001. To achieve this goal, we need to critically assess the placement of Natureview in the two dominant distribution channels to date.
Supermarket Currently, 97% of all yogurt consumed is distributed through supermarkets , representing a large consumer base and revenue generation opportunities. Research shows that 46% of organic food consumers purchase organic products at a supermarket .As consumers are increasingly interested in purchasing organic foods, supermarket chains will continue to look for ways to offer more organic products to avoid losing market share to other retail channels. Industry experts predict that supermarkets will grow their unit volume of organic yogurt by 20% per year from 2001 to 2006 . Furthermore, 44% of consumers identified a need to expand current selection of organic products in supermarkets .
This data indicates a great untapped opportunity for organic yogurt manufacturers – whoever can be the first to enter the supermarket channel will be able enjoy a first-mover advantage and address the unmet needs of consumers. However, there are some downsides to the supermarket channel. First, yogurt sales in supermarket are currently dominated by a few key players, namely Dannon (33% share) and Yoplait (24% share). Additionally, category growth for 8 oz.
and 32 oz. yogurt in 1999 was modest – 3% and 2% respectively5.There have also been rumors that other natural food competitors are considering selling their products in supermarkets, making it essential to enter this market first, if so desired, as supermarkets would likely authorize only one organic yogurt brand. Second, success in the supermarket channel requires small manufacturers to depend heavily on its broker’s knowledge and relationships. Third, supermarkets charge a one-time slotting fee of $10,000 per SKU, per retail chain in the first year, thereby increasing the entrance cost.
Manufacturers also risk paying this slotting fee again if the product is removed from the shelf and put back on in the future. Finally, the average retail price point for 8 oz. and 32 oz. yogurts in supermarkets is about 18% lower than that in natural food stores, thus reducing the profit margin.
Natural Food Stores Currently, Natureview is the market leader (24% share) of organic yogurt sold in the natural foods channel, followed by Horizon Organic and Brown Cow (19% and 15% respectively).As the organic food market is expected to grow rapidly from $6. 5 billion in 1999 to $13. 3 billion in 2003 , there is a huge revenue generation potential for organic food manufacturers.
In the yogurt category, natural food stores grew at 20% per year whereas supermarkets grew modestly at 3% per year over the last five years . Furthermore, the profit margin per unit of yogurt sold in natural food stores is higher than supermarkets as shoppers at natural food chains are typically less price sensitive to the higher retail price for the products.Although natural foods channel is growing almost seven times faster than supermarket channel, natural food stores still represent a smaller consumer base as compared to supermarket chains as only 29% of organic food consumers currently purchase organic products at natural food chains. Investment Considerations In determining Natureview’s direction, our primary decision factor is to ensure the $20 million in sales revenue goal is attainable. This must come from a combination of organic and external growth opportunities.
Once the $20 million sales revenue goal has been met, Natureview should focus on secondary factors such as long term profits, margins, and startup costs. We have several benefits on our side. First, organic growth is predicted to be very high within the existing natural foods channels. Yogurt sales through natural food stores have grown 20% per year, almost seven times the supermarket growth rate of 3%. Therefore, at the individual product line level, we expect a 21% and 14% growth for 8 oz. and 32 oz.
size per year, leading to total sales revenue of $18. 73 million by the end of 20118. With this revenue forecast, Natureview must find $1. 27 million in external growth revenues to reach the $20 million goal. All three options provide an incremental revenue total which exceeds the $20 million goal.
Therefore, Natureview must now factor in their secondary priorities to choose the best path forward. Entering twenty selected supermarket chains with six 8 oz. SKUs (Option 1), represents the greatest absolute incremental revenue increase at more than $16 million, but has the lowest margin at 33% . Further, this option has a high starting cost at $1.
2 million due to slotting fees at the supermarket chains, and much higher ongoing advertising and trade promotion costs.These costs return an overall negative profit for the first year of operation. However, long term prospects are very promising as the $1. 2 million slotting fees disappear after the first year, and Natureview will reach the 46% of consumers who buy organic products in supermarkets with a product placed at eye level. For Option 2, although expanding the 32 oz. line into supermarkets offers the same access to the 46% of organic consumers from this channel, this option targets a much smaller consumer base as 32 oz.
yogurt sales are only 8% of total yogurt sales.The 32 oz. size is also placed in the bottom “well”, making it difficult for casual consumer to see a new brand option, and even though Natureview offers a competitive advantage with a 50 day shelf life, the lack of brand recognition hinders growth without a more visible 8 oz. offering. With projected incremental sales volume at 5. 5 million units, and a 41% margin, Natureview can expect a $9.
2 million increase in revenues . Further, this option has higher startup costs as Natureview intends to have a more expansive footprint selling into 64 different chains with 4 SKU’s at each, resulting in $2. 56 million in slotting fees.While this option also meets the revenue targets to achieve $20 million and has a higher margin, the lower growth rate of the 32 oz.
line and smaller consumer base of this segment make it less attractive in the long-term than Option 1. Finally, Option 3 represents growth consistent with Natureview’s current core business but yields the lowest incremental revenue growth of the three options at just $3. 3 million. With margins at 38% and established distribution channels, the major question for Natureview will be the initial R&D and Operations costs from developing this new line of products.
While this is the only one of the three options that is profitable in year 1, profit numbers do not reflect upfront R&D costs and the long-term potential, is much less attractive than the other two options. Recommended Action Plan & Implications Based on our analysis of achieving the firm’s stated business objective and taking into account the long term growth potential of the company, pursuing Option 1 would be the most prudent course of action. Reflecting on our financial performance, although Natureview has been the market leader in the organic yogurt industry, we have not been able to maintain a consistent level of profitability.Barry Landers’s concerns about maintaining loyalty with current customers, suppliers, and distribution partners are genuine, but in reality, as the CEO of the company, Landers’s focus should be on what the company can be tomorrow. Thus, we need a strategy which maximizes Natureview’s growth opportunities, and Option 1 offers this potential.
Even more importantly, pursuing Option 1 does not limit Natureview’s potential to pursue Option 2 or 3 at later points in time. However, we recognize that selling our products to new retail channels is a riskier option as compared to Option 3.In particular, we would need to mitigate the risks of damaging our brand equity within the natural food consumers and our established relationship with our natural food channel partners. Further, the advertising costs and greater logistics and distribution requirements for the supermarket channel represent risks that must be considered. Nevertheless, these concerns can be alleviated by the fact that two other natural foods brands – Silk Soymilk and Amy’s Organic Food – had already set a precedent by successfully expanding their distribution into the supermarket channel.
These brands are still sold concurrently in both the natural foods and supermarket channels and increased revenues by over 200% in two years. In addition, Natureview will need to stress to our natural food chains partners that expanding access to consumers is simply part of growing and developing into a mature company. From a consumer standpoint, Natureview should position our products as the natural yogurt that offers higher quality and better taste. This is delivered through our new advertising campaigns highlighting these superior attributes regardless of purchasing channel.However, we may need to consider other ways to justify the price difference when selling our products in supermarket vs.
natural foods channels. Using different packages or offering different kinds of flavors in different channels are useful tactics to justify this price gap without affecting the quality. Thus, Natureview is able to deliver the yogurt’s value to consumers in different channels coupled with its attractive placement at eye level. Conclusion The supermarket channel is prime for the introduction of organic yogurt and the opportunity cost of missing this window is simply too high.
The first option provides Natureview the profitability and potential for long term growth while meeting shorter term objectives. It provides the greatest product visibility in store, in the highest demand product line, and keeps the other two options available for future growth targets. If Natureview did not expand into the supermarket channel now, it could potentially lock itself out of this market forever thus permanently handicapping the long term growth prospects of the firm.
