HBR: NatureView Farm (Case Study Analysis)

Natureview Farm is a leading yogurt brand in the natural foods channel, known for its high-quality, organic products. It has built strong relationships with health-conscious consumers, particularly through natural food stores. They are the market leaders when it comes to organic yogurt sales in natural food channels and hold a market share of 24%. Over the last 10 years (1989–1999) they have grown from $100,000 to $13M

Questions:

1. How has Natureview succeeded in natural food channel?
2. What are the two primary types of growth strategies under consideration by Natureview?
3. How do the three options compared financially in terms of yearly revenue, gross margin, required investment, and profit potential?
4. If the venture capitalist extended their deadline for meeting the $ 20 million revenue target by 12 to 18 months, would that change your recommended action plan?
5. What are the strategic advantages and risks of each option? What channel management and conflict issues are involved?
6. What action plan should the company pursue? What changes in the current marketing mix (4 Ps), sales, brand, and channel partner arrangements do you recommend in order to implement the action plan?
7. If you forecast each option for two years and five years out, does your recommendation change?

Value Proposition:

NatureView Farm sells organic Yogurt in Vermont. Their products are popular among organic food users because:

• No Artificial Thickeners
• Cows are untreated with rGHB, an artificial growth hormone for increased milk production
• Shelf life is 50 days (Competitors shelf life is 30 days)

Problem Statement

The current revenue of the company is $13M. The company needs to increase its revenue to $20M in the next 2 years. To do this, they must decide if they should stay within the existing distribution channel (Natural Food market) or expand to supermarkets.

Why is this necessary?

• The VCs who were onboarded in 1997 on Equity infusion are looking to cash out.
• Therefore the company must increase revenue to increase its valuation.

Understanding the Market

Revenue and Sales in 1999 in the USA

Market Leaders:

The market is concentrated by the top four leaders: Dannon, Yoplait, Breyers, and Columbo. These Top Players sell mostly in Supermarkets.

Nature View Position:

3% of $1.8B = ($1,800,000,000*0.03)=$54M

24% (nature view) of 3% — -> $12,960,000 (12.960M almost 13M)

Supermarket vs Natural Food Store

Break down of the major shareholders in Supermarket and Natural Food stores.

Understanding Consumers:

Natural Food Store

• Educated, Earn higher incomes, and older than supermarket shoppers
• Lives mostly in North East and West
• Gives priority to Organic food

Supermarket

• Price is a major standpoint
• Looks for options

Buyer behavior:

The above chart shows the break-up of places where our target audience prefers to shop.

The above chart shows the Product size preferences of the shoppers.

Understanding Purchasing Power

Options Available

1. Expand 6 SKUs of 8 Oz sizes into 2 Eastern and Western supermarket regions
2. Expand 4 SKUs of 32 Oz size into all 4 supermarket regions
3. Introduce 2 children’s multipacks into natural food regions.

The first two options suggest that we enter a new channel with an existing product and the third option suggests that we enter a known channel with a new product.

Criteria for Evaluation

1. Revenue Growth Potential
2. Profit Margins
3. Advantages and Disadvantages

Evaluation of Options

Option 1: Expand 6 SKUs of 8 Oz sizes into 2 regions North-Eastern and Western supermarket regions

1. Profit Margins

The supermarket channel, goes through 2 channels before reaching the customer from the manufacturer. The 8oz cups see a profit margin of 32%.

Cost Price formula = [1-(profit percentage/100)*selling price)

Profit Margin = (Selling Price — Cost Price)/100

Gross profit margin for 8 oz cup is (0.46–0.31)=0.15 per cup

As per exhibit 6, expected sales is $35M, therefore profit margin would be = (35,000,000*0.15)= $5,250,000

2. Revenue Growth Potential

3. Pros and Cons:

Pros:

• Best in class shelf life
• No Artificial thickeners
• High potential to grow
• 8 oz cups provided larger dollar value
• North East and West people are more inclined towards organic food

Cons:

• Brand dilution in supermarket
• Need to convince and educate natural food market that the audience is different
• High competition from larger established yogurt brands
• Cannot think of alternate financing
• High slotting fees and advertisement costs

Option 2: Expand 4 SKUs of 32 Oz size into all 4 supermarket regions

1. Profit Margins

The supermarket channel, goes through 2 channels before reaching the customer from the manufacturer. The 32 oz cups see a profit margin of 41%.

2. Revenue Growth Potential

3. Pros and Cons:

Pros:

• Profit Margin is extremely high
• Best in class shelf life
• No Artificial thickeners
• High potential to grow
• Reduced Advertisement costs as you have to advertize only twice a year

Cons:

• High Slotting charges
• Heavy Yougurt users would only be Natureview’s consumers, which might dilute the sales
• Acquiring new customers might be difficult with a large size
• Dannon, is planning to launch an organic brand which would be a direct competitor to Natureview farm. The size of the product is not mentioned. However if it is 32oz, then it be difficult to crack the sales.

Option 3: Introduce 2 children’s multipacks into natural food regions

1. Revenue Growth Potential

2. Profit Margins

The supermarket channel, goes through 3 channels before reaching the customer from the manufacturer. The 4oz cups see a profit margin of 38%.

Pros and Cons

Pros

• Already a market leader in Natural Food market
• Targeted Audience
• No additional SGA costs
• No slotting or broker costs

Cons:

• Revenue projection is less than the target
• Have to release a new product

NPV calculation

What is NPV?

Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment or project. It represents the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV accounts for the time value of money, which means that it considers the fact that a dollar today is worth more than a dollar in the future.

Key Components:

• Cash Inflows: The expected benefits or revenues from the investment.
• Cash Outflows: The initial and ongoing costs of the investment.
• Cashflow = Cash inflow — Cash outflow
• Discount Rate: The rate used to discount future cash flows to their present value. This rate often reflects the opportunity cost of capital or the required rate of return.

Formula:

Using this in our data:

Option 1:

Need to do the calculation for option 2 and 3

Recommendation

• Option 2

Contingency Plan

Maintaining relationships:

In order to maintain the relationship with natural food chains, Natureview can:

• Offer exclusive flavours to natural food chains
• Make 32oz / 4oz exclusive to natural food chains

Advertisement costing

• Plan with 2 regions and and 2-3 chains before going all in. This will also allow you to scale production gradually.
• Try negotiating with supermarkets for advertisement and slotting fees

Exit Strategy

• Define clear metrics for evaluating success in the supermarket channel, and set a pre-defined timeline for reassessing the decision. If performance does not meet targets, Natureview should have an exit strategy to refocus on core channels or shift resources to more successful areas.

Conclusion

By preparing for these risks with a well-thought-out contingency plan, Natureview can proactively manage potential setbacks while maximizing the benefits of entering the supermarket channel. This approach helps ensure that the company is equipped to handle challenges and adapt as needed to achieve sustainable growth.