Natureview Farm Strategy Case Analysis

Natureview Farm Case Analysis

Natureview Farm is a company that manufactures organic yogurt and is the industry leader with 24% market share. Its manufacturing process including the special recipe, longer shelf-life, no artificial ingredients, and product variety differentiated the brand and positioned it distinctively. The yogurt was produced in Vermont and sold in natural food stores only. The current predicament is for them to create a strategic plan, based primarily on distribution-oriented options, to exceed the $20 million revenue mark by the end of FY 2001. This was fueled by the withdrawal of the venture capitalist firm. The distribution strategies revolve around staying in the natural foods stores or further expanding out in to the supermarket channel. Therefore, the problem definition is that there is a need to expand and increase customer base to drive sales which would result in increases in revenues to meet corporate objective. Appendix 1 has a SWOT analysis that will help guide the rest of the discussion.

Appendix 2 briefly explains the three options in question and has a financial forecast for all three options if they were pursued. Option 1 seems to attain the highest revenue and profit. The firm however would be risking entering the mass market distribution channel which would be a significant shift with its current operations i.e. both the marketing and operations of the firm would need to be re-aligned to meet the large distribution channel. Setting up and effective execution may not be reliably predicted given the 12 month implementation plan. Moreover, horizontal channel conflicts would also possibly be occur due to the customers buying the same product at a cheaper price at a more accessible location. This would give the supermarkets more channel power due to them being able to drive higher sales. Overall, the 8oz market has a 3% expected growth rate, and this number needs to be taken into account as well since it’s not as high as some of the other realized trends which will be discussed below.

Option 2 has the next best revenue but not a great profit margin. Again, similar to the previous option, the firm would be entering the mass market distribution channel with all the risks highlighted above including horizontal channel conflict. With this option, the growth rate of the size of the yogurt is at 2% per year; however, the gross profit per sale is relatively high at 43.6%. Again, there is a slower growth rate present here but what’s more important to note is the lack of support provided by retailers for this size of the product. Given that a significantly smaller population purchases the larger tubs, the supermarkets place it in the lowest shelves in-stores and thus, may be overlooked in most scenarios.

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Finally, Option 3 gives a better profit than the former but not sufficient revenue. Nevertheless, this option highlights the trend and the researched growth rate of 12.5% with the children’s market and multi-pack sales which is an opportunity to capitalize on. This option also bears the least amount of risk due to minimal investment, maintaining and enhancing relationships with existing intermediaries and channel partners, and not having to undergo marketing changes such as brand positioning, or significant production changes. Gross profits with product sales here are 37.6%.

There are some critical issues and analysis that need to be investigated before recommending which option be best for Natureview Farm. The first critical issue is that of keeping the company’s existing stance in mind: “We owe it to our customers, our suppliers, and our distribution partners to make the right strategic choices…” The second is that of not being able to secure other financing options for the company which implies that high-risk initiatives need to be chosen with extra caution.

The channel flow analysis in Appendix 3 shows the differences between the supermarket channel and the natural foods channel. The relationship of the incentive compatibility with the service output of bulk-breaking is important since bulk-breaking is one of the primary value-added services that the intermediaries provide, which in turn increases the price of the yogurt for the end consumer. In addition, the product shelf-life is another factor that’s relevant with regard to service output demands. Both these factors are high in demand for the natural foods channel but not the supermarket channel which implies higher incentive compatibility with the former channel partnership. Consumers in turn would also want to be able to purchase a product that lasts longer and is broken down for them already. In the supermarket channel it can also be seen that there are more responsibilities added for Natureview to deal with such as merchandising, payments such as the slotting fee, and added promotions. The natural foods channel has these responsibilities eliminated and has further benefits such as tracking paperwork being down with the intermediaries and the information being passed upstream to Natureview. This does end up increasing the cost due to the additional work done by the intermediaries. The key issue is the horizontal conflict that could potentially occur due to channel power shifts and lack of control from the natural foods channel. Research showed that 67% of the US consumers find that price is a barrier to them purchasing the organic yogurt; this implies that these price sensitive individuals would be more inclined in purchasing the product at the supermarket.

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Based off the analysis, the best alternative to go forth with would be Option 3. This is mainly because it is the best channel that would avoid any horizontal conflicts stemmed because of a power struggle between the two separate channels. Option 3 also capitalizes on a growing trend in the market and the natural foods industry is expected to grow at 20% annually as well. It would be of interest to maintain and enhance the existing relationships with the channel partners since adding the supermarket channel into the system would make the partnership with the natural foods channel incompatible due to lack of incentives. Furthermore, this is the least risky option that they can invest in with higher returns on investment in comparison with the other options. With existing happy customers, a premium brand position, and strong partnerships with distributors like Wholefoods, Natureview can leverage its equity sources to increase revenue and market share by manufacturing the multipacks targeted towards the younger population. The decision matrix in Appendix 4 further supports this recommendation.

Appendix 1 – SWOT Analysis

SWOT ANALYSIS – NATUREVIEW FARM

STRENGTHS:

No artificials, natural ingredients

Market leader with 24% share in Natural Foods Channel

Highest shelf-life products

Strong Channel Partner Relationships

WEAKNESSES:

Highly dependent on brokers

Only in natural food channel/not supermarket

Still a small share in the full yogurt market

OPPORTUNITIES:

12.5% growth rate with multi-packaged products for children

Supermarket channel

THREATS:

Not sufficient capital and financing options

No experience with supermarket channel

Competition intensifying; Horizon Organic with 19% market share

Cannibalization of sales

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Appendix 2 – Three options: Financial forecast

Option 1 Forecasted Income Statement (Isolated)

Price = $0.74

Revenue

$25,900,000

COGS

$10,850,000

Gross Profit

$15,050,000

Expenses

Advertising

$2,400,000

Sales

$200,000

SG&A

$320,000

Marketing

$120,000

Slotting Fee

$1,200,000

Trade Promotions

$3,840,000

Broker Fee

$1,036,000

Net Income

$5,934,000

Option 2 Forecasted Income Statement (Isolated)

Price = $2.7

Revenue

$14,850,000

COGS

$5,445,000

Gross Profit

$9,405,000

Expenses

Advertising

$0

Sales

$160,000

Marketing

$120,000

Slotting Fee

$2,560,000

Trade Promotions

$4,096,000

Broker Fee

$594,000

Net Income

$1,875,000

Option 3 Forecasted Income Statement (Isolated)

Price = $3.35

Revenue

$6,030,000

COGS

$2,070,000

Gross Profit

$3,960,000

Expenses

Advertising

$0

Sales

$0

Marketing

$250,000

Slotting Fee

$0

Trade Promotions

$0

Cost of Complementary Cases

$150,750

Broker Fee

$241,200

Net Income

$3,318,050

All the tables presented above have used data from the case for the numbers. The cost of each SKU is derived from Exhibit 3. The Expenses have been derived from the options described in the case. The statements are isolated i.e. they do not take into consideration existing operations and sales of products through the nature foods channel – they are only assessing the options themselves at an individual level.

Appendix 3 – Channel Flow Analysis and Incentive Compatibility

Supermarket Channel

15% Markup

27%

$0.74

Natureview

Physical possession ƒ 

Ownership ƒ 

Promotion ƒ 

Payment (Slotting Fee) ƒ 

ƒŸMerchandising

ƒŸOrdering

ƒŸPayment

ƒŸSales data

ƒŸRiskingƒ 

ƒŸNegotiationƒ 

Distributor

Physical possessionƒ 

Ownershipƒ 

Promotionƒ 

Paymentƒ 

ƒŸMerchandising

ƒŸOrdering

ƒŸPayment

ƒŸSales data

ƒŸRiskingƒ 

ƒŸNegotiationƒ 

Retailer

Physical possessionƒ 

Ownershipƒ 

Promotionƒ 

ƒŸPayment

ƒŸSales data

ƒŸRiskingƒ 

Consumer

Natural Foods Channel

7% Markup

9%

35%

$0.88

Naturev-iew

Physical possession ƒ 

Ownership ƒ 

Free product caseƒ 

ƒŸOrdering

ƒŸPayment

ƒŸSales data

ƒŸTracking paperwork

ƒŸRiskingƒ 

ƒŸNegotiationƒ 

Natural Foods Wholesaler

Physical possession ƒ 

Ownership ƒ 

Free product caseƒ 

ƒŸOrdering

ƒŸPayment

ƒŸSales data

ƒŸTracking paperwork

ƒŸRiskingƒ 

ƒŸNegotiationƒ 

Natural Foods Distributor

Physical possessionƒ 

Ownershipƒ 

Stocking shelvesƒ 

Bulkbreakingƒ 

ƒŸPayment

ƒŸSales data

ƒŸRiskingƒ 

Free product caseƒ 

ƒŸOrdering

ƒŸPayment

ƒŸRiskingƒ 

ƒŸNegotiationƒ 

Retail-er

Physical possessionƒ 

Ownershipƒ 

ƒŸPayment

ƒŸRiskingƒ 

Consumer

Appendix 4 – Decision Matrix


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