MEMORANDUM January 11, 2009 Isabel Eckstein Brand Manager FROM: Brett Matlack RE: Introduction of Whole Grain Pizza Product The slowing growth of Cucina Fresca’s sales has placed our competitive edge in the fresh Italian food DATE: TO:
category in jeopardy. In an attempt to retain our leadership position and extend our product line, we have invested in the development of a new whole grain pizza. We must decide whether to launch our pizza offering. Our decision must take into consideration that the new product’s wholesales volume estimates must exceed $12 million to meet our return requirements. The decision-making process is time sensitive because one of our competitors, Rigazzi Brands, has already tested a whole grain pizza concept and is not far from introduction. Given these factors, we can either debut or suspend the product. Based on sales volume estimates and situation analysis, I recommend that the company launch the pizza. The introduction will result in a wholesales volume that exceeds our return requirements and these additional funds can be reinvested into the firm. Option I: Launch Whole Grain Pizza Product The launch of a whole grain pizza kit will capitalize on the same consumer trends that prompted the release of Cucina Fresca: growing demand for quick, customizable home meal replacements that are refrigerated and available in tasty, whole grain options. Also, pizza is a core component of the ItalianAmerican food category that we cannot ignore because it is frequently purchased by customers on a monthly basis. Our whole grain pizza product resolves the time- and health-related concerns of American consumers in one of their favorite dishes (see Exhibit 1: SWOT Analysis for Whole Grain Pizza Product). The growing demand for a whole grain crust has been addressed by local pizzerias and take-out franchises, but not in the store-bought refrigerated pizza market. The immediate release of the pizza kit would allow us to penetrate this market before Rigazzi and benefit from first mover advantages. As a result, our 1st year wholesale volume estimates would exceed our return requirements by approximately $4.5 million (see Exhibit 2: Whole Grain Pizza Concept Purchase Volume Estimate, Year 1 [Excellent]). The excess returns can be reinvested into the firm and used to expand our manufacturing facilities or further extend our product line. If the pizza kit is launched, the firm must consider the potential consequences. We must assess the
impact it will have on Cucina Fresca’s success and production, as well as the TruEarth image if the product flops (see Exhibit 1: SWOT Analysis for Whole Grain Pizza Product). Likewise, we must review the potential consequences if the wholesale volume estimate is calculated using the percentage repurchases when the product is perceived to be of mediocre or average quality (see Exhibit 3: Whole Grain Pizza Concept Purchase Volume Estimate, Year 1 [Mediocre, Average]. Option II: Do Not Launch Whole Grain Pizza Product The competitive environment of the pizza market and quality-related issues discovered in the BASES studies indicate that the whole grain pizza product should not be launched. Although the market generates high sales, it is extremely crowded and dominated by powerful players like Kraft and Nestle. Furthermore, the ability to market a tasty whole-grain pizza crust and communicate its benefits will be difficult because the American public perceives whole grains to be less appetizing than white flour. Attempting to change consumer preferences is timely and costly. By foregoing the release of the pizza kit, the company can focus solely on Cucina Fresca. The operating facilities will not have to worry about manufacturing two different product lines and our distribution infrastructure will not be overworked (see Exhibit 1: SWOT Analysis for Whole Grain Pizza Product). Likewise, our marketing team could concentrate on attempting to revive the pasta meals. This product has proven to be successful at one time. Investing all of our resources into the pizza product could be both disastrous and expensive considering we have no experience in this market category. However, by shelving the pizza, an opportunity is lost because our company would be ignoring the needs of a potentially profitable market. The health-conscious trend is not going away and our firm needs to expand our product line in order to retain our leadership as a gourmet, healthy alternative. Recommendation At this time, our company would benefit the most by launching the new whole grain pizza product. By not launching the pizza kit, our investments and time can be focused on expanding the pasta line and retooling the marketing campaign to improve sales; however, in order to diversify the TruEarth brand name, innovation is needed. Although the pasta market may seem safe, we must venture into new categories in order to raise brand awareness, seek new customers, and increase our profits.
Exhibit 1: SWOT Analysis for Whole Grain Pizza Product Strengths Weaknesses Highly selective about ingredients Pizza kit only feeds 2-3 people Existing infrastructure for coupons, magazine Consumers have to buy toppings separately advertisements, in-store demonstrations Limited selection of toppings and varieties offered Existing formal 4-step process for research and Considered too expensive ($12.38 vs. $10.09 for development other refrigerated options, $11.72 for takeout) Incremental investment for pizza less than pasta Only received 10% favorable to product in overall Higher awareness of pizza product among taste, texture, and quality Cucina Fresca customers Limited time to product expiration (similar Successful market experience in launching new refrigerated manufacturing issues as Cucina products (brand name awareness) Fresca) o If using same equipment, this may lead to Existing manufacturing equipment and bottlenecks in both operating facilities and distribution infrastructure to get fresh food to distribution network shelves quickly Easy preparation, but gives customers the chance to be involved in the cooking process Permits customers to customize Refrigerated pizza is considered tastier, more authentic than frozen pizza Is a product for the whole family (8.6/10 in mallintercept) 28% of home-trial users believe there is no need for improvement 33% of respondents in mall-intercept considered the TruEarth name a favorable advantage Opportunities Threats Leverage relationship with North Dakota durum Health conscious mindset (e.g. low carbohydrate wheat supplier to supply wheat for pizza dough diet) has hurt key demographics in pizza demand Expand serving size options Consumers may not purchase additional toppings o Offer single serving sizes for individual meals; Rigazzi has tested a pizza concept and is whole pizzas to feed a family preparing to introduce it Expand topping offerings Competitors may quickly replicate whole-grain pizza kit and price them lower to win larger share Contract with local cafes and other gourmet of the market specialty restaurants to offer products in other store formats Nestle and Kraft dominate the frozen-pizza market Create a packaged bundle which includes Cucina Fresca and the pizza kit Our pizza dough’s quality may not be comparable to freshly made takeout Leverage TruEarth brand name to enter the pizza market Pizza market is extremely crowded (options o TruEarth is well-liked and considered to be include takeout, delivery, refrigerated) high quality Utilize this to demonstrate the If product succeeds, product facilities may benefits/product attributes of the pizza struggle to manufacture two lines (Cucina Fresca product placed on back burner, limited production) If product fails, damage to TruEarth name may make it harder to launch new products in future
Exhibit 2: Whole Grain Pizza Concept Purchase Volume Estimate, Year 1 (Excellent) Total Purchase Intent Definitely would buy % of “Definites” who actually buy “Definite” Purchases Probably would buy % of “Probables” who actually buy “Probable” Purchases Trial Rate
18.00% 80.00% 14.40a% 43.00% 30.00% 12.90b% 27.30c%
Marketing Plan Adjustment Target Households Cucina Fresca Pasta Customers Non- Cucina Fresca Pasta Customers Customer Awareness Non-Customer Awareness All Commodity Volume Distribution (ACV)
58,500,000 6,435,000d 52,065,000e 50.00% 12.00% 40.00%
Marketing Adjusted Trial Rate Cucina Fresca Pasta Customers Adjusted Trial Rate Non- Cucina Fresca Pasta Customers Adjusted Trial Rate Cucina Fresca Pasta Customers Trial Purchases Non- Cucina Fresca Pasta Customers Trial Purchases Total Trial Purchases
5.46f% 1.31g% 351,351h 682,051.5i 1,033,402j,k
Repeat Purchase Inputs Repeat Purchase Occasions
2.00
Repeat Rate, by Product Services Excellent Product
49%
Repeat Volume, by Product Scenario Excellent Product Total Purchases
1,012,733l,m 2,046,135n
Definitely would buy x % of “Definites” who actually buy: 80% x 18% Probably would buy x % of “Probables” who actually buy: 30% x 43% c “Definite” Purchases + “Probable” Purchases: 14.4% + 12.9% d Target Households x 11%: 58,500,000 x 11% e Target Households x 89%: 58,500,000 x 11% f Trial Rate x Customer Awareness x ACV: 27.3% x 50% x 40% g Trial Rate x Non-Customer Awareness x ACV: 27.3% x 12% x 40% h Target Households x Cucina Fresca Pasta Customers Adjusted Trial Rate: 58,500,000 x 5.46% i Target Households x Non- Cucina Fresca Pasta Customers Adjusted Trial Rate: 58,500,000 x 1.31% j Cucina Fresca Pasta Customers Trial Purchases + Non- Cucina Fresca Pasta Purchases: 351,351 + 682,051.5 k Rounded down because cannot include 0.5 of a household l Total Trial Purchases x Repeat Purchase Occasions x Excellent Product Repeat Rate: 1,033,402 x 2.00 x 49% m Rounded down because cannot include 0.96 of a product n Trial Purchases + Repeat Purchases: 1,033,402 + 1,012,733 a
b
Total Sales Volume Retail Sales Volume TruEarth Sales Volume In Excess of Return Requirements
o p q
Total Purchases x Average Spent per Purchase: 2,046,135 x $12.38 Retail Sales Volume x (1-Food Retailers 35% Gross Margin): $72,835,811.1 x (1-0.35) TruEarth Sales Volume – Minimum Return Requirement: $16,465,248.35- $12,000,000
$25,331,151.30o $16,465,248.35p $4,465,248.35q
Exhibit 3: Whole Grain Pizza Concept Purchase Volume Estimate, Year 1 (Mediocre, Average) Inputs from Exhibit 2 Trial Rate Total Trial Purchases Repeat Purchase Occasions
27.30 1,033,402 2.0
Repeat Rate, by Product Services Mediocre Product Average Product
21% 37%
Repeat Volume, by Product Scenario Mediocre Product Average Product
434,028.84r 764,717.48s
Total Purchases Mediocre Product Average Product
1,467,430t,u 1,798,119v,w
Total Sales Volume Retail Sales Volume (Mediocre Product) TruEarth Sales Volume (Mediocre Product) Retail Sales Volume (Average Product) TruEarth Sales Volume (Average Product)
$18,166,783.40x $11,808,409.21y $22,260,713.22z $14,469,463.59aa
Based on these wholesales volumes, the average product perception meets our return requirements. We would gain $2,469,463.59 in extra cash if we were to launch this product. However, the mediocre product does not meet our return requirements (off by $191,590.79). We are only off of our return requirements by a small margin (1.596%bb); thus, we may consider taking on this initial loss for the first year. Considering the growth rate of Cucina Fresca’s retail sales between the 3rd quarter of 2006 and 2007 (194.44%cc), we may predict that the initial sales volume will grow between the first and second year of the product launch. Our future sales volume will most likely cover our initial return requirements in the 2nd year and our losses from the 1st year. Total Trial Purchases x Repeat Purchase Occasion x Mediocre Repeat Product Rate: 1,033,402 x 2.0 x 21% Total Trial Purchases x Repeat Purchase Occasion x Average Repeat Product Rate: 1,033,402 x 2.0 x 37% t Total Trial Purchases + Mediocre Product Total Purchases: 1,033,402 + 434,028.84 u Rounded down because cannot have 0.84 of a purchase v Total Trial Purchases + Average Product Total Purchases: 1,033,402 + 764,717.48 w Rounded down because cannot have 0.48 of a purchase x Total Purchases for Mediocre Product x Average Spent per Purchase: 1,467,430 x $12.38 y Retail Sales Volume for Mediocre Product x (1-Food Retailers 35% Gross Margin): $18,166,783.40 x (1-0.35) z Total Purchases for Average Product x Average Spent per Purchase: 1,798,119 x $12.38 aa Retail Sales Volume for Mediocre Product x (1-Food Retailers 35% Gross Margin): $22,260,713.22 x (1-0.35) bb (TruEarth Sales Volume (Mediocre Product) – Return Requirement)/Return Requirement: ($11,808,409.21$12,000,000)/$12,000,000 cc [{ (2007 Retail Sales-2006 Retail Sales)/(2006 Retail Sales)} + 1] x 100%: [{($35,000,000$18,000,000)/($18,000,000)} +1] x 100% r
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