Volume Calculation

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					Mike Meserole Peter Stupak Ronald King

Agenda  Problem identification  Proposed solution  Company background  SWOT analysis  Porter’s five forces analysis  Analysis of the test market  Evaluation of alternatives  Recommendations

Problem Identification
To Determine the Future Marketing Strategy for Sun Chips Multigrain Snacks

Recommendation  National Rollout of Sun Chips
Increase A&M spending to $30M  Two Flavors



Natural and French Onion 2 ¼, 7, and 11oz



Three Package Sizes


Company Background  Division of Pepsi-Co, Inc.  Leading U.S. manufacturer of snack chips  8 of top 10 snack chips are manufactured by
Frito-Lay  U.S. sales of $3.5 billion in 1990

Results of Studies
Consumer Research  Favored three flavors 1. Original/Natural 2. French onion 3. Mild cheddar  Perceived as a “healthier product” and an “everyday snack” Premarket Test  $22 million advertising expenditure  First year sales of $113 million  Original/Natural and French onion produced the lowest cannibalization rate

SWOT Analysis: Strengths  Established company name  Capture nearly one-half of retail sales for
snack chips  Plenty of capital available  Test market research ability  Established distribution strategy

SWOT Analysis: Weaknesses  Competitive pricing  High new product failure rate  Manufacturing capacity is limited

SWOT Analysis: Opportunities  Develop products for fast-growing snack
food categories  Create new products to meet changing consumer preferences and needs  Grow established brands through line extension  International marketing of products

SWOT Analysis: Threats  Competitors could be first to market  Competitors can copy technology and
release similar product  Change in consumer preferences  Risk of losing capital investment

Porter‟s Five Forces

Competitive Rivalry within Industry

 Competitive advantage  Industry growth  Product differences  Switching costs  Brand identity  Exit barriers

Bargaining Power of Suppliers  Supplier concentration  Importance of volume to supplier


More important customers

 Presence of substitute inputs

Bargaining Power of Customers  Bargaining leverage  Buyer volume  Brand identity  Product differentiation  Price sensitivity

Threat of New Entrants  Brand identity  Access to distribution channels  Economies of scale  Capital requirements  Switching costs  Proprietary products and learning curve  Expected retaliation  Absolute cost advantages

Threat of Substitutes  Switching costs  Buyer inclination to substitute

Test Market

 Positive response of Consumer Research and
PMT lead to Test Market
Minneapolis-St. Paul, Minn. metropolitan area  1.98M households identified as snack chip users  Natural and French Onion flavors (2 ¼, 7, 11 oz)  Priced similar to Doritos  $22M A & M spending equivalent


What are the Numbers??? (Test Market Analysis)

Cumulative Trial & Repeat Rates
45 40 35

% of market

30 25 20 15 10 5 0 0 1 2 3 4 5 6 4-week period 7 8 9 10
Cumulative Trial % Cumulative Repeat %

Volume Calculation
Purchase Amount Trial Volume (6 oz) Repeat Volume (13 oz) Repeater Volume (13 oz) Volume Calculation Total Ounces 107,460,000

19.9% x 90,000,000 x 6oz

41.8% x (19.9% x 90,000,000) x 13oz

97,322,940

3.0rep x (41.8% x (19.9% x 90,000,000)) x 13oz 291,968,820 Total Volume (oz) 496,751,760 Total Volume (lbs) 31,046,985

Selling Price Calculation
Product Size 2.25 oz Selling Price $0.385 Price Per Ounce 0.1711 $/oz % of Purchases 15% Average Price Per Ounce 15% x 0.1711$/oz = 0.0257 $/oz

7 oz

$1.240

0.1771 $/oz

47%

47% x 0.1771$/oz = 0.0832 $/oz
38% x 0.1575$/oz = 0.0599 $/oz 0.1688 2.7004

11 oz

$1.732

0.1575 $/oz

38%

Average Price $/oz Average Price $/lb

Similar calculation yields Average Retail Price = 3.8726 $/lb

Projected Sales & Gross Profit

Total Volume = 31,046,985 lbs Average Selling Price = 2.7004 $/lb Projected Sales = $83,839,278

Projected Retail Sales = $120,231,344

Gross Profit = 1.30 $/lb x 31,046,985 lbs Gross Profit = $40,361,081

Cannibalization Analysis

Gross Margin Sun Chips = 1.30 $/lb Gross Margin Others = 1.05 $/lb Cannibalization = 30% Cannibalization Volume = 30% x 31,046,985 lbs = 9,314,096 lbs Profit Increase = (1.30 $/lb - 1.05 $/lb) x 9,314,096 lbs = $2,328,524

Incremental Profit Analysis
Sun Chips Incremental Volume = 70% x 31,046,985 lbs
= 21,732,890 lbs Incremental Profit = 1.30 $/lb x 21,732,890 lbs = $28,252,756 Cannibalization Profit = $2,328,524 1st Year Profit = $30,581,280*

*not including A&M spending

Sustained Sales & Profit
Repeater Volume = 18,248,051 lbs Average Price = 2.7004 $/lb (3.87 $/lb Retail) Sustained Sales = $49,277,037 ($70,666,692 Retail) Sustained Gross Profit = $23,722,467 Sustained Profit Increase with 30% Cannibalization = (70% x 18,248,051 lbs x $1.30) + (30% x 18,248,051 lbs x $.25)

= $17,974,330*
*not including A&M spending

Estimated 1990 US Retail Sales ($Millions) of Top Selling Snack Chips in Supermarkets
$600 $500 $400 $300 $200 $100 $0
ac k Sa nit as Sa le s Pr ing le s Th ing s Fr ito s ale s to s La ys ar ie ty P tY ea rS Ch ee Ru ffl es st ito s Do rit os

Sun Chips

Su st ain ed

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Fr ito

1s

To

Alternatives
1. 2. 3. 4.
• • • •

Continue the Test Market to collect more data Expand the Test Market Eliminate the Sun Chip project National introduction of Sun Chips
Use Test Market strategy Increase A&M spending Add larger package size Add additional flavor

Any Combination

Alternative 1: Continue Test Market and Collect More Data

 Pros  Cons



Obtain more accurate information  Lowers risk by performing more research


Opportunity cost
Lost revenue and market niche

Risk losing first to market advantage  Allows competitors time to develop a similar product


Alternative 2: Expand the Test Market

 Pros
  

 Cons


May be more representative of the entire U.S. population Lowers risk by performing more research Could provide key demographic information for products (size, flavor) Risk losing first to market advantage Allows competitors to develop products Original test market may have been accurate




Alternative 3: Eliminate the Sun Chip Product  Pros



Limit risk and potential losses Eliminate project’s future expenses


Funds can be spent elsewhere



 Cons
 

Company’s superior image will remain in tact Risk of losing potential profits Risk of losing access to a potentially growing and uninhabited segment of the market Not pursuing would violate company productmarketing strategies



Alternative 4: National Introduction of Sun Chips

 Pros

   

 Cons


Huge potential profits Portray healthier image First to market advantage Easy to add to distribution strategy Gain access to new segment of market
Risk of potential losses Potential damage to company image Segment of market may not be profitable




National Rollout Options (cont)  Increase advertising and marketing
expenditures
“…brand awareness would increase with additional spending and felt that spending the national introduction equivalent of $30 million could stimulate brand trial as well”

National Rollout Options (cont)
Original Test Market A & M Spending ($) 22,000,000 Increase A&M Spending 30,000,000

Trial Rate (%)
Projected Volume (lb) Projected Sales ($) 1st Year Profits ($) 1st Year Profits - A&M ($) Sustained Profits ($)

19.9
31,046,985 83,830,107 30,581,280 8,581,280 17,974,330

24.3
37,911,645 102,365,407 37,342,970 7,342,970 21,948,554

National Rollout Options  Increase advertising and marketing expenditures


Pros
Increase brand awareness and trial rates  Increase volume  Larger sustained profits




Cons
Reduced 1st year profits  Trial rates are projected based on PMT data


National Rollout Options (cont)  Add larger package size
“…a fourth, larger package could add about one-half ounce to the average annual purchase amount per repeat (and repeater) purchase occasion”

National Rollout Options (cont)
Original Test Market Repeat purchase size (oz) Repeater purchase size (oz) Projected Volume (lb) Projected Sales ($) 1st Year Profits ($) 1st Year Profits - A&M ($) Sustained Profits ($) 13.0 13.0 31,046,985 83,830,107 30,581,280 8,581,280 17,974,330 Additional Package Size 13.5 13.5 31,982,783 86,356,858 31,503,041 9,503,041 18,665,651

National Rollout Options (cont)  Add larger package size


Pros
Increases volume and profits  Additional purchase options




Cons
Stretches production capacity  Increases inventory  Increases number of SKU’s  Limits marketing efforts


National Rollout Options (cont)  Add new cheddar flavor
“…flavor extension could increase the „repeats per repeater‟ to an average of 3.5 times per year…addition of another flavor could increase the cannibalization rate to 35%”

National Rollout Options (cont)
Original Test Market 3.0 30 31,046,985 83,830,107 30,581,280 8,581,280 Added Cheddar Flavor 3.5 35 34,088,327 92,042,048 31,787,365 9,787,365

“Repeats per Repeater” Cannibalization (%) Projected Volume (lb) Projected Sales ($) 1st Year Profits ($) 1st Year Profits - A&M ($)

Sustained Profits ($)

17,974,330

19,852,359

National Rollout Options (cont)
 Add new cheddar flavor


Pros
More consumer options  Increase sales and profits  Increase “repeats per repeater”




Cons
Increases number of SKU’s  Expensive to produce  Higher cannibalization rates  May not be popular with consumers  Large scale production not perfected


Recommendation  National Rollout of Sun Chips
Increase A&M Spending to $30M  Two Flavors



Natural and French Onion 2 ¼, 7, and 11oz



Three Package Sizes


Future Considerations

 Additional flavors (mild cheddar)


Perfect large scale production of new flavors

 Larger package sizes (15 oz)
Once product has foothold in market  Consumer survey indicates demand for larger size


 Explore additional markets (International)


				
DOCUMENT INFO
Lingjuan Ma Lingjuan Ma MS
About work for China Compulsory Certification. Some of the documents come from Internet, if you hold the copyright please contact me by huangcaijin@sohu.com