Nature View Farms is at a critical junction for its business. The company has grown rapidly since its inception, but is going to need an infusion of capital in order to replace the outgoing venture capital group. In order to attract new capital, and just as importantly to maximize the capital attracted, the company believes it needs to growth its revenues. The firm need not attract new venture capital, however; it can approach the capital markets for financing. However, no matter the type of financing sought a plan for growth must be developed. The company has placed priority on revenue maximization, although to improve value they should place more emphasis on profit. With these considerations in mind, NatureView Farms must now chart the course of their long-term growth.
SWOT and Industry: The industry in which NatureView Farms operates is generally favorable. Supplier power is relatively low. NatureView’s position in the organic yoghurt market gives them a good position for bargaining with producers of organic milk and other key food inputs. Buyer power, however, is moderate to high, with the moderate component (natural food stores) trending towards high as the major natural foods stores grow in size. Supermarkets in particular have high buyer power. There are moderate barriers to entry. There is room for larger players, especially established dairy firms, to enter the market. The main barrier is with respect to the established relationships that firms like NatureView have with suppliers of organic milk, the key input. The threat of substitution is moderate to high. In supermarkets, this threat is high since consumers tend to be more price sensitive. Price elasticity is lower among natural store consumers, such that the threat of substitution is lower. The degree of rivalry is low at present. There are low switching costs, but relatively few competitors in the organic segment, which is also growing more rapidly. The degree of rivalry in supermarkets is higher. Put together, the industry is favorable, although the supermarket industry is less favorable than the natural store industry.
NatureView’s strengths are its relationships with major natural food wholesalers and stores; its brand equity among consumers; its location close to the major northeast market and the lifespan of its product. The company has a few weaknesses, however. Their sales staff is not only inexperienced at working the supermarket channel but it appears to lack the confidence to do so. There are significant philosophical differences among management personnel with respect to corporate direction, which could compromise buy-in.
There are several opportunities that NatureView must choose between. They can move into the supermarket distribution chain. They can expand their SKUs in their existing natural foods chain. They can explore other chains, like volume discounters. NatureView also is faced with other opportunities, such as expansion internationally. There are also some substantial threats that they face, however. The first is the growing buying power of the major natural foods chains. They are expected to grow rapidly in the coming years and as such are also expected to behave more like conventional supermarkets. Another major threat is that of new entrants to the market, in particular the established mainstream yoghurt producers. Other potential new entrants could be niche competitors (Greek yoghurt, for example) or substitutes (non-dairy products that serve a similar function). The economy is a threat, since their premium positioning makes them something of a luxury product. Should the economy falter, growth in natural food sales could stall, taking growth in organic yoghurt with it. Lastly, there is the threat from their venture capitalists, who want out. If the company cannot find an alternate source of financing, the business as presently constituted could be compromised.
Analysis of Alternatives:
The first option, to take six 8oz SKUs into the Northeast and West grocery stores, gives NatureView Farms the highest incremental revenues, the highest incremental costs and the highest incremental profit. The venture will cost them $3.92 million in incremental costs. The revenues, net of all markups and production costs, will be $0.1966 per unit, which over 35 million units comes to $6.881 million, for a profit of $2.291. The return on investment of this venture is therefore 75.5%. Additionally, this option is in a strong growth market, with supermarket sales of organic yoghurt expected to increase 20% per year, meaning that unit sales would increase to 87 million by 2006, which would give NatureView a net revenue gain of $44 million for that year alone, and a net profit gain of $17 million.
The strong growth in this channel therefore makes it an extremely lucrative option. Supermarkets, which are facing slow growth, are looking to expand their portfolio of organic foods in response to rapid growth in the organic grocery sector. More organic food buyers purchase in supermarkets as opposed to natural foods stores, so utilizing this option would give NatureView greater access to a key but as yet untapped segment of their target market. Moreover, if they enter now they would gain first mover advantages.
There are several major risks to this strategy. They face new competition in organic yoghurt from existing players, in particular Dannon. They also face channel conflict with their existing natural foods competitors, although this risk is likely exaggerated given that the major natural foods stores are expected to move more towards a grocery store-type operating model. The internal issues can be addressed with strategic hiring of experience grocery people, who will be needed as this option would make that segment the most important one for the company.
The second option has the same set of risks, but is less lucrative. The 32oz option has a cost of $3.2 million. Net of markups and production costs, profit to NatureView is $0.8586 per unit, which over 5.5 million units is $4.722. The 20% annual growth in organic yoghurt in supermarkets cannot be expected in this size, however, since the size only appeals to heavy users, who are les sensitive to “organic” status. Even with the assumed 20%, 2006 sales would be 13.68 million units, good for incremental revenues of $25.288 million and incremental profits of $11.75 million. This option has a lower ROI (47.5%) and a lower overall revenue and profit gain than option 1.
The third option does not have the same channel conflict risks and has much lower costs. The gains are lower, too. The cost of option 3 is just $345,000. Given the gross profit expectation, this option yields $0.799 per unit to NatureView, which over 1.8 million incremental sales will give the company incremental revenues of $3.82 million and incremental profits of $1.097 million. Growth is strong; however, as this serving size has the strongest growth in yoghurt and this channel is also the fastest growing. This serving size will, however, never exceed the 6-8 oz size in popularity, although it has already eclipsed the 32 oz size.
Strategically, the third option is the most conservative. The company, however, does not have the luxury of remaining a quaint, conservative Vermont yoghurt operation. The venture capital situation overrides notions of remaining true to the company’s roots. They must find additional sources of capital at this point. While the conservative option may be in the strongest growth segment, it remains a minor segment and the incremental revenue may not be sufficient for the firm to meet its $20 million target. The two grocery store options must be weighed against strategy as well. The 8oz cups lend the firm more visibility, due to their better placement. Moreover, they are selling in markets that are ready and willing. Once they become established, then they can fill out SKUs including the 32oz size, and take their products to the Midwest and South. The 32oz option puts them at the bottom of the shelf, which will not contribute nearly as much to brand-building. Moreover, they will expend needless energy selling to people who do not want organic yoghurt. Strategically, the first option is the best fit given the financials, the revenue targets, and the way it sets the firm up to succeed immediately and subsequently expand into other segments and markets after meeting with this success.
Action Plan: The company should adopt option 1. This will require several changes. The current marketing team should be retained to work on the natural foods channel, which is rapidly growing. However, a new marketing team should be brought in to work on this initiative. This will allow the current staff to remain within their comfort zone and abilities. True grocery people will be needed because the business is more competitive and also because the company cannot afford any missteps as they introduce their yoghurts to this market. By operating the grocery and natural foods divisions separately, the company minimizes channel conflict, even if it costs a little bit more. Moreover, the two arms can be merged at a later date when the natural foods stores become more like grocery stores in their operations.
The company is taking its product to a ready market, but it will need to move quickly and aggressively in order to establish market share. Perhaps the most important aspect is to secure solid long-term agreements with the major suppliers of organic milk. Without sufficient access to this input, competitors will have a tougher time moving directly against NatureView. Moreover, NatureView will need this milk as growth may come very rapidly. The branding strategy should not change. Grocery store consumers of organic foods are not much different than natural foods consumers. They may be more price sensitive, but they are likely to respond well to seeing a name familiar from Whole Foods in their local store. The firm’s image must remain pure even as it moves into the mainstream.
Lastly, the marketing mix will need to focus more on some of the products other features, in order to overcome the price sensitivity. The company does not want to undercut its natural foods stores too much, so they must focus on product quality (the better taste and texture) and lack of perishability. This will allow them to retain a premium positioning strategy.
Porter, Michael. (1980). Porter’s Five Forces, adapted from Competitive Strategy. Retrieved July 16, 2009 from http://www.quickmba.com/strategy/porter.shtml
No author. (2007). SWOT Analysis. QuickMBA.com. Retrieved July 16, 2009 from http://www.quickmba.com/strategy/SWOT/