A case study analysis of Natureview farm - a Harvard Business school case study

1. NATUREVIEW FARM
CASE STUDY
By Gaurav Bansal
ICT Mumbai

2. • Natureview founded in 1989 which sells refrigerated yogurt cups.
• First enters market with 8-oz and 32-oz cups with plain and
vanilla flavor.
• Uses natural ingredient with longer average shelf-life of 50 days
1989
• Company revenue growth from $ 100,000 to $13 million
• Fruit on the bottom yogurt1999
• Expanded to twelve refrigerated yogurt flavors in 8-oz. cups
(86% revenues) and four flavors in 32-oz. cups (14%
revenues)
• Multipack yogurt products for children
2000
BACKGROUND

3. CHALLENGE
• Find a path to grow revenues by over 50% before
the end of 2001 to touch 20 million dollars?
Should natureview farm expand into the
supermarket channel in order to meet its revenue goal?
Possible solution

4. GENERAL MARKET TREND
• The organic foods market, worth $6.5 billion in 1999, is predicted to grow to $13.3
billion in 2003, that is only in 4 years
• In the previous five years, yogurt sales through supermarkets had grown an average
of 3% per year, while sales through natural food stores had grown 20% per year.
• 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.
• Industry experts were predicting unit volume growth of organic yogurt at
supermarkets of 20% per year from 2001 to 2006.

5. MARKET SHARE OF THE PRODUCTS
74%
9%
8%
9% 8-oz. cup smaller
Children's multipacks
32-oz. cups
Others

6. MARKET SHARE BY REGION
26%
22%
25%
27%
Northeast Midwest
Southwest West

7. OPTIONS
• Expand 6 SKUs of the 8 oz. Product line of the best selling
into one or two selected super market channel regions
OPTION 1
• Expand in supermarket nationally
• Bring in the 4 SKUs of the 32-oz. size
OPTION 2
• Stay in natural food channel
• Introduce 2 children’s multipack
OPTION 3

8. OPTION 1 -
PROs
• 8-oz have highest incremental
demand
• High potential to increase revenue
• First mover as organic yogurt
brand to enter supermarket
channel
• Unit volume growth of organic
yogurt at supermarkets of 20% per
year from 2001 to 2006 predicted.
CONS
•High risk & high cost (marketing)
•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

9. FINANCES OF OPTION 1
Channel Selling
price
Margin Cost price
Retailer $0.74 27% $0.74 x 73% = $0.54
Distributor $0.54 15% $0.54 x 85% = $0.46
Natureview $0.46 ($0.46/$0.31)/$0.46 = 33% $0.31

10. 2000 2001
Unit Sales 35,000,000 35,000 000 x 1.2 = 42,000,000
Revenue Growth $ 35,000,000 x $ 0.46 = $ 16,100,000 $42,000,000 x $0.46 = $
19320000
Projected
Revenue
$ 13,000,000 + 16100000 = $
291,00,000
$ 13,000,000 + $19320000 = $
32,320,000
Cost 35 000 000 x $ 0.31 = $ 10,850,000 $42 000 000 x $0.31 = $ 13 020
000
Gross Profit of
increased sales
$ 16,100,000- $ 10,850,000 =$5250000 $ 6,300,000
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
Broker’s Fee $ 16 100 000 x 0.04 = $ 644 000 $ 19 320 000 x 0.04 = $ 772 800
Net Profit $ $5250000-$4,564,000=$686,000 $ 2,487,200

11. OPTION 2
PROs
• Generate higher profit margin than 8-
oz size (43.6% vs 36%)
• Strong competitive advantage: longer
shelf life
• Much Lower promotion and
marketing expenses than option 1.
CONs
• 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
• The 32-oz. expansion option would
increase SG&A expenses by $160,000

12. FINANCIAL ANALYSIS OF OPTION 2
• Doing similar calculations as option 1, the net profit comes out to be
around $180,000 in year 2000 and $2,500,000 by the end of 2001.
• The revenue increases by around $9,000,000.
Channel Selling
price
Margin Cost price
Retailer $2.70 27% $2.70 x 73% = $1.97
Distributor $1.97 15% $0.54 x 85% = $1.67
Natureview $1.67 ($1.67/$0.99)/$1.67 =41% $0.99

13. OPTION 3
PROs
• The sales team was confident that they
could achieve distribution for the two
SKUs.
• The financial potential was very
attractive.
• It would yield the strongest profit
contribution.
• Lowest amount of risk.
• The natural foods channel was growing
almost seven times faster than the
supermarket.
CONs
• There were many potential conflicts
and other uncertain factors that the
manager could not determine.
• Can not achieve the target objective of
Natureview farm

14. FINANCES OF OPTION 3
channel Selling
Price
Margin Cost Price
Retailer $3.35 35% $3.35 x 65% = $2.18
Distributor $2.18 9% $2.18 x 91% = $1.98
Nature foods
wholesalers
$1.98 7% $1.98 x 93% = $1.84
Natureview $1.84 ($1.84 - $1.15) / $1.84= 38% $1.15
• Increased revenue of about 3.3 million dollars in 2000 and 3.9 million
dollars by
• end of 2001 which would be comparatively lesser than both the other
options
• Low risk but not higher and faster growth, safer method.
• Highest profit margin among the 3 options at about 37%.

15. RECOMMENDATION
Option 1 is the best
• Though risky, but to have a very bright future we need to take risks rather
than going safe, as was the case in option 3. As shown by other competitors,
expansion to supermarket have shown tremendous results.
• The brand already has a high brand equity and expansion would lead to
more more customers and fast growth.
• Deep market penetration
• Net profit is good enough as shown in the financial analysis.
• Will have the first mover advantages of natural product to enter
supermarket