案例面世真题8：ATK Case 2

Case setup (facts offered by interviewer):
 Your client is a U.S. based manufacturer of branded cookies (cookies that carry the name of the manufacturer)
 Recently private label cookies (those carrying the name of the retailer) have emerged and threatened branded cookies
 Private label cookies emerged five years ago
 Two and one-half years ago they made up 10% of the overall cookie market (brand being the other 90%)
 Today they make up approximately 20% of the overall cookie market (i.e., there has been a steady, linear increase of private label portion of the overall cookie market during the past five years)
 The overall cookie market has been relatively flat over the past five years
 Private label cookies are made by the same manufacturers who make branded cookies, they are just sold under the name of the retailer
 There are essentially three major competitors to consider:
 Your client, who makes only branded cookies
 A second major player, that makes both branded cookies and supplies cookies for private labelers
 A collection of small outfits, that make both branded cookies and supply private labelers
 Distribution occurs primarily through one of two types of outlets:
 Grocery outlets: all grocers sell branded cookies, most also carry their own private label cookies. This represents approximately 90% of total cookie sales
 Mass merchandisers (ex. Walmart, Sam’s, etc.): sell only branded cookies

Question:
 How large would you estimate the overall U.S. cookie market to be in terms of $?
 How large of a threat do you believe the trend in private label cookie sales to be to your client?
 Based on your assessment, what is an appropriate strategy for your client to follow?

Suggested solutions:
The first question, estimating the size of the U.S. cookie market, has no right or wrong answer. It is a test of a candidate’s ability to make reasonable assumptions and work quickly with numbers on an “order of magnitude” level. One acceptable response would be to estimate the number of U.S. households, estimate household consumption over some period of time, estimate the average cost of a bag of cookies, and project out for one year. In this case, after an estimate has been made, the candidate would be told to assume the market size is $1Billion to simplify any future calculations. As stated in the upfront information, the market is assumed to have been flat for the past five years.

The second question is more involved. It involves determining to what extent your client is threatened by the increasing percent of the overall cookie market represented by private label sales. To better answer this question information should be gathered pertaining to what is driving the demand for private label cookies, to what extent this has already affected your client’s sales, and what the likelihood is for the trend to continue. The following are questions and answers that would be provided in an interview scenario.

 What are the sales trends for the client over the past five years?
Your client’s sales have been flat at $600M for the time frame of five to two and one-half years ago. Over the past two and one-half years, sales have decreased steadily down to a present level of $560MM.

 How has market share of the private label segment been split over the past five years between your client’s main competitor and the other smaller players?
The smaller players combined had 100% of the private label subsegment five years ago. Two and one-half years ago your client’s main competitor began supplying private labelers. Today, this main competitor owns 40% of the private label subsegment, the smaller players own the remaining 60%

 How has market share of the branded segment been split over the past five years?
Your client held 60% of this segment five years ago, 67% two and one-half years ago and 70% today. Its main competitor held 30% five years ago, 25% two and one-half years ago and 23% today. The combined smaller players owned 10% five years ago, 8% two and one-half years ago and 7% today.

Analysis of the above information tells a very important story. The private label segment was launched five years ago by the smaller players. As private label first cut into the branded segment, it came at the expense of your client’s main competitor and the smaller players, not your client. In response to this, your client’s main competitor entered into the private label segment two and one-half years ago. This further hurt their own sales and those of the smaller players, but also began to hurt your client’s sales. Additional information is required to understand what is driving the demand for private label cookies

 How does the quality of a private label cookie compare to that of a branded cookie?
Consumer studies have shown that there is a noticeable difference in taste, texture and quality in favor of the branded cookies

 At the manufacturing level, what is the difference in cost of production and price between branded and private label products?
It costs approximately $1.50 to manufacture a bag of private label cookies which will sell for $2.00 to retailers. It costs approximately $2.00 to manufacture a bag of branded cookies which will sell for $2.75.

 How do the same numbers translate at the retail level?
A retailer, paying $2.00 for private label cookies can sell that product for $2.50. The $2.75 bag of branded cookies can be sold for $3.50.

The key finding is that from a cost-price-margin perspective it is advantageous for both the manufacturers and the retailers, with all else equal, to sell a bag of branded cookies. Other factors must be contributing to the demand for private label cookies. Think about the incentives at each level in the chain (manufacturer, retailer, consumer). The following questions can help fill in details

 Have any of the manufacturers been able to gain additional shelf space for branded products by supplying grocers with private label products?
No

 Has their been excess capacity at your client, its main competitor or the smaller competitors that has been used up through the manufacturing of private label products?
There was some excess capacity at the smaller competitors and your client’s main competitor (your client is unsure as to how much).. There is little excess capacity anywhere in the industry today.
.
 Has your client’s relationship with its retailers suffered as a result of it not supplying private label products?
Not noticeably

 Are grocery stores using private labels in other food categories?
Yes, there has been a major push by grocery stores to populate shelves with private labels

 Is competition increasing or decreasing among grocers?
Generally increasing. Grocer chains are expanding and the number of grocers to be found serving a given area has generally increased over the past five years

 What general macroeconomic trends have occurred over the past five years?
The economy has been slowing over the past five years. There is concern about recession

The above information begins to expose a clearer story. A number of factors have contributed to the emergence of the private label segment: manufacturer’s interest in utilizing excess capacity, grocer’s desire to sell products with their name on it (they may believe this creates return customers in an increasing competitive environment), consumers concerns about a troubled economy (price vs. quality tradeoffs).

At this point the candidate would be encouraged to state what they believe the magnitude of the private label threat to be to the client. There is no right answer. One can argue either way.

If the threat is seen as high, the likely recommendation is for your client to begin supplying private label products. The candidate should recognize that in competing in the private label segment, the basis of competition is primarily cost. At the same time, the client’s branded product should be protected. The following tactics might prove appropriate:

 Seek to wring costs out of all phases of the operation
 Utilize all existing excess capacity
 Gain maximum product knowledge as quickly as possible
 Understand low cost positions on product ingredients and mix
 Review process improvement/ manufacturing efficiency opportunities
 Undertake overhead reduction efforts
(Any of these points could be discussed in great detail)
 Ensure there is no customer confusion between private label offering and branded product
 Seek partnering agreements with retailers
 Joint advertising and promotions
 Explore deals with mass merchandisers to enter private labels (remember, mass merchandisers presently sell no private label)

If the threat is seen as low, the likely recommendation is for your client to stay with branded cookies only. The candidate should recognize that in competing in the branded segment the basis of competition is one of differentiation. Additionally, your client should do all it can to halt or reverse the momentum of the private label segment. The following tactics might prove useful:

 Pursue a maximum differentiation strategy
 Invest in brand image to support premium price
 Make it difficult to copy product: innovate wisely through product advances, smart product line extensions, frequent changes to the product
 Manage price gap: explore price increases where appropriate
( Again, any of these points could be discussed in great detail)
 Explore exclusive partnering with mass merchandisers
 Consider alternative distribution channels
 Seek partnering agreements with grocers regarding branded products
 Educate grocers as available
 Customers who buy private labels are the most price sensitive. They also tend to be the least loyal customers and spend less per store visit.
 Grocers financial stake in private label products extends beyond the product margins. There is lost profit from branded products that could occupy the same shelf space, advertising costs of the private label products, etc.

Key takeaways:

This case has no right or wrong answer. It forces the candidate to take a stand in a “grey” situation and defend it. It also provides a large amount of data upfront which the candidate must quickly sort through and determine what is important and what is not. The key is to understand the story behind the data. How did the private label segment emerge? What is driving it? How has it affected manufacturers, retailers and consumers?