Case study for Natureview farm- HBR Case review

1. NATUREVIEW
FARM
Case Study
SWAPNIL GOYAL
IIT KANPUR

2. 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

3. 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

4. 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

5. PRODUCT
• 12 yogurt flavors in
8-oz
• 4 yogurt flavors in
32-oz
86%
14%
Revenues 2000
8-oz
32-oz

6. 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

7. Packaging
type/size
Taste Flavor
Price Freshness Ingredient
Organic
or not
Market Trend For Yogurt Product

8. Yogurt Market Share by Packaging Segment
74%
9%
8%
9%
8-oz. cup smaller
Children's multipacks
32-oz. cups
Others

9. Yogurt Market Share by Region
26%
22%
25%
27%
Column1
Northwest
Midwest
Southwest
West

10. Yogurt Distribution Channel
97%
3%
Distribution Channel
Supermarkets
Natural food stores

11. Manufacturer
Natural foods
wholesaler
Natural foods
distributor
Retailer
Customer
Manufacturer
Distributor
Retailer
Customer
Length of Channel to Market
Supermarket Channel Natural Foods Channel

12. Yogurt Market Share by Brand
Danno
n
33%
Yoplait
24%
Others
23%
Private
Label
15%
Colum
bo
5%
Supermarket Channel
Nature
view
Farm
24%
Brown
Cow
15%
Horizo
n
Organi
c
19%
White
Wave
7%
Others
35%
Natural Foods Channel

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. • 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

22. 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

23. 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

24. WHICH ONE TO CHOOSE?
OPTION 1
OPTION 2
OPTION 3

25. 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

26. 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)

27. These slides were created by
SWAPNIL GOYAL
(IIT KANPUR)
as part of an internship
under the guidance of
Prof. SAMEER MATHUR
(IIM Lucknow)