Marketing Analysis – Sunnyside Farms

By: Gavin P. Smith

Executive Summary – Decision

After careful analysis of the options, there are two options to pursue in tandem with a complete annual investment of approximately $1.3 million.  First, if $60,000 per year on advertising is yielding a return of $393,600 in sales annually, then quadrupling this budget may stand to do the same in terms of sales and market share.  The new budget will be $240,000 annually.  However, we cannot rely on advertising alone.  To place ourselves in a competitive position against future entrants and erect a barrier to entry, then we must cut out the margin markup that exists in the independent retailer stream and create our own distribution system.  We must innovate. If we completely cut out the independent distribution and essentially forward integrate into our own distribution system, we will completely negate the independent distribution markup and gain an additional $0.23 cents per head in MSP revenue.

We also in a low share market situation and must invest for growth, or get out.  We are underutilizing our production capacity (currently only 25% utilization), which is an inherent opportunity cost lost.  I propose that in order to raise this to full capacity, we should consider investing in 15 vans.  Doing so will potentially raise our market share to 23-24%, maximize sales growth and allow us to maximize our production capacity.  As for packaging, I believe that if we go this route, we will not need to change our packaging, as the faster-to-shelf shipping times will offset any quality/freshness issues derived from current packaging.

Analysis

Environment (Situation)

The lettuce market is comprised of two main types of lettuce:  1) ordinary, field-grown lettuce and 2) hydroponic lettuce.  We currently are only able to produce hydroponic lettuce in Boston and Leaf varieties.  We have recently been acquired by a large national produce company willing to invest to grow our business and share substantially.  We are currently serving all retail stores within 300 miles driving distance of our company headquarters in Washington, DC.

Industry (Five Forces Analysis)

High barriers to entry exist due to the nature of our style of growth.  To establish a hydroponic system and distribution requires capital investment that may be cost inhibitive to smaller start-ups.  We have limited supplier power in that we have to use chain distribution systems to be in chain stores.  We cannot change this.  We can, however, alter the independent distributor system if we wish.  The markups are also different with regard to these two distribution channels.  Buyer power is high as we must be in the major supermarkets and indies in order to reach the public.  Therefore, we have little control of their markups (with the exception of circumventing the indie distribution channel).  Competition and substitution threats come mainly from other small hydroponics firms and all field-grown greens due to cheaper price as compared to our premium priced hydroponic lettuce.

Organization (SWOT)

Strengths

Our hydroponic lettuce is not grown in soil, which means shelf life can be six times as long as regular lettuce.   In addition, this type of lettuce looks fresher to the consumer and maintains that look longer in the stores, making it more appealing than field-grown lettuce.  This gives us strength when it comes to the issue of potential spoilage and quality issues.  We need this strength as we are branded while chain/store types are not.  Therefore, if it has issues with spoilage or quality, our brand reputation is adversely affected.

Weaknesses

We are not producing/operating at full capacity.  We are not realizing 100% of our potential production capability, penetration or sales potential.  We must increase capacity and market penetration.  We also have issues with shipping and handling of those shipments is hurting/damaging the quality of our lettuce.  Plus, time-to-shelf is slower.

Opportunities

We are in both chain and indie stores, although indie stores are on the rise as consumers are beginning to prefer the higher quality of lettuce.  Better taste and appearance are growing factors that we can tap into, especially given the growing view of independent chains in this area also.

Threats

Field greens and regularly grown lettuce products are cheaper to produce and also have a cheaper selling price, which competes against our premium pricing.  These producers also have higher capacity generally and have higher budgets to push more into the market than we do.

Problems Faced – decisions to make

  1. We need to increase sales.
  2. We need to grow profits. Do we alter the packaging?
  3. We need to increase capacity.
  4. We need to grow market share – requires investment.
  5. Change the packaging
  6. Increase advertising
  7. Circumvent Independent Chain distribution channel and create our own.

Potential Strategies

Current Marketing Mix (Pentagon)

Product

Hydroponic lettuce in present bag – same.

Price
  • Weighted average MSP of $0.63 (includes additional $0.22 savings from removing Independent Distributor markup.
  • Weighted average RSP with all markups (either distribution channel) = $1.26 same (could increase this slightly as we are still on par with the rest of the industry average price of $1.25.

See Exhibit 1

Promotion
  • Current ad budget is centered on print advertising at $60,000/yr.  Increase to $240,000.

See Exhibit 5

Place/Distribution
  • Limited stores sell hydroponic:
    • Large Volume/Assortment stores
    • Fresh/Produce Oriented stores

 

  • Chains – 25% markup for Chain Distributors and 50% markup for chain retailer
  • Independent Retailers – 35% markup for Independent Distributors and 50% markup for retailer

See Exhibits 1 and 2 for breakdowns

People

 

No sales team per say, but would need a labor force for the vans if we go with our own independent distribution system.  See Exhibits 3 & 4.

New proposed Marketing Mix (Pentagon)

Product

Hydroponic lettuce in present bag.

Price
  • Weighted average MSP of $0.41 (fluctuates from $0.35 to $0.45 from summer to winter)
  • Weighted average RSP with all markups (either distribution channel) = $1.26

See Exhibit 1

Promotion
  • Current ad budget is centered on print advertising at $60,000/yr.

See Exhibit 5

Place/Distribution

50% of sales in chains, 50% sales in independent stores. Re-focus heavier to the independent channel.

 

  • Chains – 25% markup for Chain Distributors and 50% markup for chain retailer
  • Independent Retailers – Eliminate 35% markup for Independent Distributors and retain 50% markup for retailer (could also negotiate this down perhaps).

See Exhibits 1 & 2.

  • Launch of our own independent distribution system will require 15 vans at a yearly investment of $1,044,600.00. With this investment, we stand to increase to annual sales of $2,358,720.00 @.63 per head (.41 + extra .22 saved from eliminating distribution markup) and reach an output capacity of 3,744,000 heads/units sold (or 156,000 cases).  This would allow us to reach 97.5% capacity per year.

See Exhibits 3 and 4 for breakdowns.

People

 

New labor force for the vans for our own independent distribution system.  See Exhibits 3 & 4.

 

Appendix

Exhibit 1: Product/Price/preliminary Breakeven

See Excel Exhibit 1 Attached.

Exhibit 2: Sales figures/market/share:

See Excel Exhibit 2 Attached.

Exhibit 3: STore to door figures

See Excel Exhibit 3 Attached.

Exhibit 4: new breakevens tested for store to door option

See Excel Exhibit 4 Attached.

Exhibit 5: new breakevens tested for advertising option

See Excel Exhibit 5 Attached.

Exhibit 6: Positioning

SunnySide Farms Hydro Lettuce is __fresher and healthier__ (competitive frame – “coolest, best, etc”) among all __premium lettuce_  (smartphones, clothes, ketchup, etc.) because of _farm to store direct delivery and hydroponic growth methods.__(primary reason or support data).

Posted in W & M Mason MBA.