Natureview has, to this point, been successful operating within the natural foods channel. The company has expanded its product range over the years and has become one of the industry leaders in the natural foods segment. Natureview has attained within ten years of startup national distribution in its segment. The company has captured a 24% share in the natural foods market. While this equates to just a 0.7% share of the total yoghurt market, it is a strong starting position. Given the expected growth of the natural foods channel, maintaining this market share in that channel would give Natureview total sales of $26.6 million by 2003. Thus, its objective of increasing sales to $20 million by 2001 is not unrealistic at all. It equates to a 25% revenue increase in each of the next two years. The company has enjoyed a compound average growth rate of 62.5%, while the natural foods industry has enjoyed a 20% compound growth rate over the past ten years. These figures indicate that Natureview would only need to grow slightly faster than the industry in order to meet its objectives; the industry projection of doubling in size in two years implies that Natureview would succeed even if it failed to keep up with industry growth.
Natureview has built its success in the natural foods channel on the basis of a strong product. The product has a long shelf life and it is noted for a smooth texture. The 8oz. package size has proven to be especially popular with consumers, and accounts for 86% of the company's revenues. Natureview has also enjoyed success with its marketing programs. The company has employed a variety of low-cost guerrilla marketing strategies that have proven successful, delivering a strong impact to the company without high cost.
Now that the company is losing its VCs, it is in all likelihood going to seek new ownership. Management has determined that increasing revenues to $20 million will be sufficient. For Natureview, however, this issue is more about corporate philosophy. There are three main options that the company can pursue in order to meet its objectives. However, it must first understand what those objectives are. The $20 million target may have been carefully calculated, but it is arbitrary. The main issue for Natureview is to determine what type of company it wants to be, and from this what type of ownership it wants to have. For example, the decision that is made by Natureview at this time could set the company up for an IPO, or it could leave the company in position to remain as a self-sustaining niche market entity.
2/3) The first option is to enter the mainstream supermarket channel. This option has significant risk in that the companies to have made the leap from natural foods to mainstream before offer broader portfolios of products whereas Natureview is strictly a yoghurt provider. This move would mark a seismic shift in the business, but there is strong growth potential and significant first mover advantages. Establishing a stake in the supermarket business would allow Natureview to go public in order to find additional financing.
The costs associated with the first option are as follows. Annual expenses, including new advertising, would increase $1.84 million. Natureview expects to sell 35 million units, which at 50.66 cents per unit would deliver an additional $17.73 million in revenue. This option clearly pays for itself in the short-run. It allows Natureview to meet its sales targets, assuming there is no significant cannibalism from the organic channel, something that could well happen. The sales projections, however, seem questionable given that Natureview would only enter select markets, meaning that it would need a much higher share in those markets in order to meet a national 1.5% share target.
The second option for Natureview is to produce more SKUs of the 32oz size, for the supermarket channel. This size has higher margins, and appeals to the "heavy" yoghurt user. The assumption of 5.5 million additional units relies on national distribution. This strategy would involve marketing in all four regions, at a cost of $480,000 per year. The assumption is for 5.5 million extra sales. These generate to the company an additional $14,850,000 in revenue or $6,446,000 in gross profit. As with option #1, option #2 pays for itself.
The assumption of 5.5 million units is perhaps somewhat questionable, however, for a couple of reasons. The first is that "heavy" yoghurt consumers already have favored brands, and are more likely to be price sensitive than are organic consumers. Unless such users are...
The second assumption that is faulty here is the idea that four SKUs are needed. This segment favors only two types -- natural and vanilla. Indeed, fruit mix yoghurt is typically single-serving, and few people eat 32 oz. Of yoghurt in a sitting.
The second option would deliver the increased revenue for the company, if the assumptions hold, but there is no strategic rationale for entering this specific market in this specific way. This does not bring Natureview to the bulk of supermarket customers, and it would involve establishing national channels, each selling low volumes of yoghurt. From a marketing perspective, it may be cheaper but it is decidedly ineffective with respect to building the brand. Given that this channel operates significantly differently from the natural foods channel, it is unwise to tackle that learning curve with a low volume product.
The third option is to hold in the natural foods channel, introducing a children's multi-pack. This option leverages the existing channel, which is not only easy from a strategic sense but allows the company to maintain its niche focus. Strategically, this would strengthen the company's position in the natural foods channel.
Financially, the estimated cost of this option is $250,000 per year, plus the cost of complimentary cases. The revenues, if sales projections are met, would be $6.03 million. After COGS, marketing expenses and the complimentary cases, this leaves $3.559 million in profit. The $6.03 million would bring revenue to $19 million, short of the objective, but this does not take into account the growth that is projected for the natural foods channel nor the rate of growth that Natureview is already predicting for the next two years. The company would not likely have difficulty in topping $20 million.
However, the assumptions are faulty. The assumption that an addition 10% of the total natural foods yoghurt market can be capture with children's multipacks is baseless. The entire segment is only worth 9%, and Natureview cannot expect to capture the entire segment. If multipacks are 9% and Natureview captures 24% of that, this equates to an additional $1.17 million in sales. This would, all other things being equal, cause Natureview to fall well short of its $20 million sales goal.
That goal, however, may be reached with organic growth in the industry. The base case scenario, without growing share or adding new products, and assuming that yoghurt growth in the natural foods channel matches total channel growth, would see Natureview sales increase to around $26 million in two years, give or take a few hundred thousand. This is enough for the company to meet its objectives. This should be considered option #4, as management has neglected to consider the base case, assuming that something must be done. In truth, given the growth in the industry, nothing may need to be done.
3) There are also channel conflict issues to consider. There are two main such issues. The first is with respect to pricing. If Natureview moves into supermarkets, it will undercut its own product at natural food stores. The degree to which this cannibalization will occur is unknown. There are only a couple of previous examples of firms making the jump from the natural foods channel to the mainstream. Their experience is unknown, but may come in handy. The other channel conflict issue is internal. Moving into supermarkets would force Natureview to change the way it does business. This would place incredible strain on the current resources. If they are not up to the task, failure would result. In addition, such a move would change the entire culture of the organization. It can reasonably be argued that this move will be required sooner or later anyway, as firms like Whole Foods and Wild Oats grow and begin to function more like mainstream grocery stores. However, that would be a case of Natureview growing with its retail partners, as opposed to having to make a rapid adjustment.
4) It is recommended, therefore, that Natureview focus on the natural foods channel. The introduction of the children's multipack is highly unlikely to meet bring the company's revenues up to $20 million, it should be remembered that organic growth rates within the industry will likely push revenue far beyond that point anyway. The company can expect that the do-nothing option will bring revenues up to $26 million in…
