Natureview Farm Yogurt: Natural vs. Supermarket Channel Strategy

Natureview's Position in the Natural Foods Channel

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. Within ten years of startup, Natureview has attained national distribution in its segment and captured a 24% share of the natural foods yogurt market. While this equates to just a 0.7% share of the total yogurt market, it represents a strong starting position.

Given the expected growth of the natural foods channel, maintaining this market share would give Natureview total sales of $26.6 million by 2003. Its objective of increasing sales to $20 million by 2001 is therefore not unrealistic. 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 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 pace with overall industry growth.

Natureview has built its success in the natural foods channel on the foundation of a strong product. The product has a long shelf life and is noted for a smooth texture. The 8oz. package size has proven especially popular with consumers and accounts for 86% of the company's revenues. Natureview has also enjoyed success with its marketing programs, employing a variety of low-cost guerrilla marketing strategies that have delivered strong impact without high cost.

Now that the company is losing its venture capital backing, it will in all likelihood seek new ownership. Management has determined that increasing revenues to $20 million will be sufficient to facilitate this transition. For Natureview, however, the deeper issue is one of corporate philosophy. There are three main options the company can pursue to meet its objectives, but it must first understand what those objectives truly are. The $20 million target may have been carefully calculated, yet it is somewhat arbitrary. The central issue for Natureview is to determine what kind of company it wants to be — and from that, what kind of ownership it wants to pursue. The decision made at this juncture could set the company up for an IPO, or it could leave Natureview in a position to remain a self-sustaining niche market entity.

Option 1: Entering the Mainstream Supermarket Channel

The first option is to enter the mainstream supermarket channel. This carries significant risk, in that companies that have previously made the leap from natural foods to mainstream typically offered broader product portfolios, whereas Natureview is strictly a yogurt provider. This move would mark a seismic shift in the business, but there is strong growth potential and meaningful first-mover advantages. Establishing a stake in the supermarket business would also position Natureview to pursue a public offering in order to access additional financing.

The costs associated with this option are considerable. Annual expenses, including new advertising, would increase by $1.84 million. Natureview expects to sell 35 million units which, at $0.5066 per unit, would deliver an additional $17.73 million in revenue. On its face, this option pays for itself in the short run and would allow Natureview to meet its sales targets — assuming there is no significant cannibalization from the natural foods channel, which is a real possibility. The sales projections are also questionable given that Natureview would only enter select markets, meaning it would need a disproportionately high share in those markets to achieve a national 1.5% share target.

Option 2: Expanding 32oz SKUs Nationally

The second option is to produce additional SKUs of the 32oz size for the supermarket channel. This size carries higher margins and appeals to the "heavy" yogurt user. The strategy would involve marketing across all four regions at a cost of $480,000 per year, with an assumed 5.5 million additional units sold. These would generate an additional $14,850,000 in revenue, or $6,446,000 in gross profit. Like Option 1, this option pays for itself if the assumptions hold.

However, the assumption of 5.5 million units is questionable for several reasons. First, heavy yogurt consumers already have established brand preferences and are more likely to be price-sensitive than organic consumers. Unless such users are already predisposed to organic yogurt but have been unwilling to visit a natural foods store, they are unlikely to try Natureview in a 32oz format. Second, the assumption that four SKUs are needed is questionable. This segment tends to favor only two varieties — natural and vanilla. Fruit-mix yogurt is typically a single-serving product, and few consumers purchase 32oz containers of it.

Even if the revenue assumptions held, there is no compelling strategic rationale for entering this specific segment in this specific way. This approach does not bring Natureview to the bulk of supermarket customers, and it would require establishing national distribution channels, each moving low volumes of product. From a brand-building perspective, it may be cheaper than Option 1, but it is decidedly less effective. Given that the supermarket channel operates significantly differently from the natural foods channel, it would be unwise to tackle that learning curve with a low-volume product.