Class or Mass HBR Case By Megan Beatty. MGMT 430, Section D. A. Executive Summary

Transcription

1 Class or Mass HBR Case By Megan Beatty MGMT 430, Section D A. Executive Summary In the past three months, Neptune s finished goods inventory has raised twice their normal level (60 days supply). Company executives are plagued by what to do. Rita Sanchez has suggested cutting prices 40-50% and launching a mass-market brand. Meanwhile, Jim Hangrove feels drastic price cuts and a low-market plan will tarnish brand equity and cannibalize future profits. Excess supply presents Neptune with several growth opportunities. Successful opportunities will emphasize brand equity, low implementation costs, relationships with the Association, and use of current assets. My tactical recommendation is to sell current excess inventory at a markdown to bulk discount retailers, such as Costco. Because new laws and technology has increased Neptune s average catch size, excess inventory will continue to persist. My strategic recommendation is to sell ready-to-eat fish-based meals to their existing market using existing channels. This strategy aligns with the evaluation criteria outlined below and capitalizes on current market trends- sustainable fishing, frozen seafood, and healthy eating. B. Industry Dynamics Neptune is currently the most upmarket player in the $20 billion seafood processing and distribution industry, producing quality seafood for grocery chains, restaurants, cruise lines, wholesale distributors, and an independently operated fish market. Customer value is derived through the superior quality of Neptune s product advanced technology allows vessels to capture fish in an environmentally sustainable way and freeze them in a manner that preserves freshness. This contributes to higher than average operating costs (14% vs 11%). Having key contacts within the industry and the ability to control stock on hand are also crucial to remaining competitive in this industry. If the company pursues Neptune Silver, a mass-market brand, retaining profit and maintaining relationships with industry influencers will be major determinants of success. C. Situation Analysis Summary The root cause of Neptune s excess inventory is a combination of new fishing laws, a recent investment in advanced technology, and a lack of consumer demand (Appendix D). Many of Neptune s competitors are facing similar situations. New fishing laws have pushed all commercial fishing into deeper waters, contributing to larger catches and an industry surplus. Reducing prices 40-50% and launching a mass-market brand have the potential to reduce excess inventory. However, this plan is complicated by the market position they occupy. As an upmarket player, all of Neptune s products have the U.S Association of Seafood Processors and Distributors (ASPD) Gold-Seal. Additionally, a recent $54 million expansion in their equity base cost their biggest investor a 10% share dilution. In order to maintain relationships with the association, their investors and their customers, superior brand equity and high ROI is critical. As Hangrove points out, the launch of a low-cost product would threaten these relationships. D. Importance of Decision While dealing with Neptune s short term excess inventory is important, the larger issue concerns Neptune s potential long term inventory growth. The outcome of our decisions will determine if and how the company will grow and stimulate demand in a stagnant consumer market. Growing the company in the wrong direction could deteriorate industry and consumer channel relationships, thereby losing Neptune s Gold Seal of approval and the level of profits needed to maintain their high cost structure. However, growth in the correct direction will not only insure that Neptune keeps its place as an upmarket player, but also stimulate industry-wide demand. E. Evaluation Criteria and Definitions 1) Financial Investment- will the solution be expensive to implement? Neptune s equity base is currently tied up in six new freezer trawlers valued at $9 million apiece.

2 2) Long Term Profitability- will the solution increase gross margins? Neptune s fishing techniques contribute to a high cost structure, thus maintaining profits is critical. 3) Brand Equity will the solution contribute to or diminish Neptune s brand equity? 4) Association Approval will the solution meet the Gold Seal approval of ASPD? The solution must not disrupt the current market for their relationship to remain intact. 5) Competitor Response will the solution engage competitors in a price war or be easily copied? 6) Employee Morale will the decision be agreeable to key players involved in decision? 7) Low Risk will the solution have a high chance of success? F. Alternatives All considered solutions for this case are outlined in the Market Expansion Grid (Appendix F); however, selected solutions were chosen based on their alignment with evaluation criteria derived from the case and their potential long-term implications. I have developed two viable solutions and considered the mass-market solution, Neptune Silver, discussed in the case. 1) Launch a low-price mass-market brand, Neptune Silver. This option focuses on leveraging excess inventory into new sales by making Neptune product available to value-oriented consumers. Pro: May stimulate sales and consumer demand for seafood, due to lower prices. Con: Lowering the price point 40-50% sells product at a loss and engages competitors in a price war. If highend consumers switch to Neptune Silver over Neptune Gold, Neptune s cost structure is cannibalized. Pushing excess supply disrupts the industry and encourages overfishing, creating an unfavorable strain on their relationship with ASPS, and costing Neptune their Gold-Seal reputation. 2) Reduce inventory by selling old ships and reducing operating days/ hours. This option negates growth and focuses on creating long-term inventory control (aligning supply with demand). Pro: Operating costs are reduced, thereby increasing profit margins and allowing Neptune to continue hightech, environmentally sustainable fishing practices. Control of inventory is a driving success factor in this industry, where overfishing only reduces the bottom line (Appendix G3). Ensures brand equity and industry relations remain in check, while keeping competitors at bay. Con: Neptune is susceptible to stagnant sales as competitors capitalize on growth opportunities. Loss of jobs decreases employee morale. If schedule cutbacks endure and employees leave, then additional training costs may by incurred. 3) Sell ready-to-eat fish based meals. This option focuses creating new products for Neptune s existing customer base. Pro: Economies of scope and current distribution channels are utilized. Idea capitalizes on Neptune s key advantage new freezers extend product s shelf life. As a sustainable, locally sourced, and fresh product, this idea appeals to a growing sector of healthminded consumers (Appendix G5). Frozen seafood accounted for 31.7% of the industry in 2015, more than meat or poultry. Current market share concentration is low and expected to grow. (Appendix G7). Most successful frozen food wholesalers remain local; Neptune s dominant consumer base is local. Con: Additional marketing and labeling costs will be necessary to launch product. The product may fail to stimulate additional consumer demand for seafood.

3 The competitive landscape is identified as medium and steady (Appendix G7).While the industry is seeing growth, it is important for Neptune to create differentiation. G. Alternatives Evaluation Matrix Criteria Importance Option A: Launch Neptune Silver Option B: Reduce Fishing Operations Option C: Sell ready-to-eat fish based meals Low Financial Investment Med. 0 Limited additional costs, infrastructure in place + Will reduce operating costs - Storage of fish & meal-preparation requires additional costs Long Term Profitability High - Current consumers drift to lower price products + Increases profit margins, supply meets demand (Appendix G1) + Aligns with growth trends (Appendix G6) Retains Brand Equity High - Doesn't align with current brand image 0 Maintains current status + Strengthens brand reputation (desirable consumer mkt) Association Approval Med. - Disrupting market, will not get Gold Seal 0 Doesn't disrupt industry + Maintains relationship & encourages seafood consumption Competitor Response Med. - Likely to launch price war - May leave room for competitors to capitalize on larger catches 0 Medium competition (Appendix G7), first to market advantage Employee Morale Low 0 - Lost jobs + May create more jobs Low Risk High 0 likely to create low-end 0 Solve long term problem (+), 0 Same market, new product (marginal growth risk growing company (-) risk) TOTAL *Total calculated by multiplying importance weight (high = x3, medium = x2, low = x1) by (+,-, 0). H. Recommendations Short Term-- Discount Product: Tactical Excess inventory is valued at $109 million, thus Neptune needs to eliminate current excess inventory quickly. (Appendix G8). My recommendation is to offer excess product at a discount to a bulk resellers, such as Costco. Because excess inventory is a sunk cost, selling product at a loss is negligible. The limited time discount should have minimal impact on brand equity. Neptune may also consider donating excess inventory to charity as a tax write-off if distribution channels are unavailable. Long Term Sell Ready-to-Eat Fish-Based Meals: Strategic Based on the Evaluations Matrix above, it is clear that there are two viable solutions - reducing fishing operations and launching ready-to-eat fish-based meals. The difference in these strategies lies within the growth opportunities each offers. My recommendation is to pursue Option C, as it identifies new growth segments within Neptune s existing market. The created of a value-added product is favorable for an upmarket specialist and creates the closest correlation with the identified evaluation criteria. I. Key Implementation Actions 1) Identify bulk discount resellers, such as Costco, to sell 60-day-excess inventory. 2) Partner with local cooks to create fish-based meal recipes. It is advisable to use current operating facilities to produce and manufacture finished goods. This may involve increasing operating hours or hiring additional employees. 3) Work with marketing department to identify a price point and labeling. 4) Use current distribution channels and grocers to negotiate store and shelf locations. J. Impact to Resources and Capabilities on Competitive Advantages The recommendation to sell ready-to eat fish-based meals takes into account the most vital evaluation criteria. Because Neptune already has the necessary facilities, equipment, and supply chain, implementation costs are low and relatively simple. Their strong relationship with local grocers and consumers makes acquiring shelf space accessible, as well. Most importantly, launching this product takes advantage of an existing market. The product adds value to Neptune s traditional products, and aligns with several high growth trends- sustainable fishing, frozen seafood, and health food. Current competition in the market is low because the nature of frozen

4 wholesaling is localized an advantage for Neptune and is expected to see significant growth in the next five years, making current market entry ideal. This investment is low risk, with ultimately high reward. Appendix Table of Contents: A. PESTEL Framework B. 5 C s Analysis C. SWOT Analysis D. Root Cause Analysis E. Resources, Capabilities, & VRIO Framework F. Market Expansion Grid G. Outside Information Research 1) Information on Demand Determinants in Fish & Seafood Wholesaling 2) Major Markets in Fish & Seafood Wholesaling 3) Key Success Factors in Competitive Landscape 4) Industry Globalization 5) Industry Opportunities in Seafood Processing 6) Country Report on Fish & Seafood in the US 7) Frozen Food 8) Calculations A. PESTEL Framework Political ASPD influences US and global policies related to the fishing industry By Neptune flooding the market with excess supply, they may be damaging their relationship with ASPD, and thus, their political pull U.S. fishing industry is more regulated than foreign competitors Economic Recently expanded equity base allowed $9 million investment in technology (freezers) Investor diluted shares to do this --> ROI important Net Profit: 4% Sociocultural Sell to high end retailers Big concern is that selling excess supply through mass market brand will dilute their image & quality prestige Technological Inventors willing to spend on R&D New freezers prevent fish from getting ice crystals --> Has longer shelf life Environmental New freezers are environmentally sustainable Legal New laws make ships have to catch fish further away from shore, which harvests richer catches, thus contributing to increased inventory B. 5 C s Analysis Context & Industry: Profitability: Low profit industry due to high operating cost (Neptune: 4% after-tax Net Profit) Growth: Seafood demand is growing, but not as fast as supply is increasing Size: $20 billion industry

5 Life Cycle: Cyclical, slow winter sales usually bring discounted products to encourage sales Customers: 30%: U.S. Grocery Chains 33% Restaurants &Cruise Lines (within 250 miles of Fort Lauderdale) 33% Wholesale Distributers (for restaurants across the US) 4% Fish Market Trend: mainly B2B sales Future: All considered options make use of current consumer channels Target high-end consumers Competitors: Foreign seafood producers: China, Peru, Chile, Japan Other high-end domestic seafood producers Collaborators: High operating expenses, but new technology ensures that each catch is done efficiently and is well preserved U.S. Association of Seafood Processors & Distributors (ASPD) o Members (including Neptune) account for 80% of all seafood sales in the US o Influenced US and global policies related to the fishing industry & imposed quality standards o Published benchmark pricing policies for all seafood distributors and producers o Neptune's products all have prestigious Gold-Seal rating Company: 60 day excess inventory New ship technology & new fishing laws are producing larger on-average catches Supply of seafood is larger than current demand C. SWOT Analysis Strengths: The Best Seafood on the Water Planet Cutting edge technology o Environmentally sustainable method of freezing fish The most upmarket player in the $20 billion industry o Sell at 25-30% higher price point Recently expanded equity base allowed $9 million investment in technology (freezers) Higher Gross Contribution Margin and Net profit than median industry values o 2006: 20% vs. 17% (gross contribution margin) o 2006: 4% vs. 3% (net profit) Opportunities: Weaknesses: Excess inventory o 60 day supply- 2x the normal level & 3x what it had been a year ago o May be a problems competitors are facing as well New laws reduce access to shore fishing, resulting in fishing further out to sea o Richer fishing grounds + new technologies = larger catches Healthy eating is a growing trend, but seafood sales still lag behind poultry Demand for fish is growing, but not as quickly as supply Higher operating costs than competitors o 2006: 14% vs. 11% of operating income Threats: Launch ready-to-eat, fish based meals Cut prices 40-50% to launch low-priced seafood brand (mass-market brand) Get into private label business Offer 10% discount, acknowledging the seasonality of a highly perishable product Long Term: not about reducing inventory, but about introducing Neptune's products to a bigger market o Growth strategy Much competition o China, Peru, Chile o Poultry producers Cutting prices may: o Start price war with competitors o Dilute brand reputation Relationship with Association o Gold Seal on all products

6 D. Root Cause Analysis E. Resources, Capabilities, & VRIO Framework Resources & Capabilities: Tangible: Freezer trawlers Excess inventory Fleet of ships 2 "sophisticated" plants (Cedar Key, Florida & Norfolk, Virginia) Employees Expansive equity base & dedicated investors Intangible: Environmentally sustainable method of freezing seafood to capture peek freshness (IP) Quality reputation- most "upmarket-player" High brand equity Gold Seal on all products VRIO Framework under Option C: Sell Ready-to-Eat Fish-Based Meals Valuable: Yes Assets make the most upmarket player in the industry Solution uses current assets to create value added product Rare: Yes Neptune is the only competitors with the environmentally sustainable freezers and a Gold Seal on all products This extension line provides the same high end quality found in its traditional products, aligned with current market trends. This offers potential first mover advantage. Costly to Imitate: Yes Already a low profit industry, few competitors have the capital structure to invest in the technology Neptune has. Neptune s freezers create additional shelf life- a key component of successful frozen food lines. Competitors without this equipment will struggle to provide the same caliber of freshness and quality Neptune is able to provide with this resource. Organized to Capture Value: Yes Technology makes them a long term for-runner in this industry Value added product created for consumers using economies of scope for the company. = Sustained Competitive Advantage

7 F. Market Expansion Grid Existing Markets Existing Products Marking campaign to increase taste & awareness of fish Not grow market New Markets Create mass-market seafood brand (under Neptune's name) Create private label brand (separate from the Neptune brand name) Create additional fish markets New Products Launch ready-to-eat, fish-based meals (frozen fish) Introduce pet food line Fishing excursions near tourist sites Sell excess fish to fish oil plant G. Outside Information Research 1. Information on Demand Determinants in Fish & Seafood Wholesaling Seafood consumption drives demand for wholesaling in this industry. In turn, seafood consumption is driven by taste and price. Because there are many substitutes for seafood, such as meat and poultry, demand is highly dependent on price. Similarly, fish and seafood products are often consumed at restaurants. Generally, an increase in disposable household income means households eat out more, thereby increasing their demand for fish and seafood products. Environmentally friendly fishing practices are also an emerging trend. Conscious practices, made aware to customers by marketing and labeling, may help to increase and sustain consumer demand as well. Neptune has successfully mastered environmentally friendly fishing methods; however, they may consider advertising these methods more. It is also important for Neptune to consider the stagnant growth in consumer demand when deciding on a solution. 2. Major Markets in Fish & Seafood Wholesaling Major markets in this industry include: wholesale establishments for resale, restaurants, hotels, and food services, and contract feeding, and retailers for resale. Other markets account for 10.5% of the market segment and include oversea customers, manufacturers who use seafood as an input, and individual households. As the trend for locally sourced goods continues, revenue from this segment is expected to increase. Neptune may be able to capitalize on its ability to retain fresh taste to gain more local market share. 3. Key Success Factors in Competitive Landscape Success Factors: Having contact with key markets Guaranteed supply of key inputs. Ability to control stock on hand Use of specialist equipment & facilities Neptune: The Association, Local Restaurants, Wholesalers, Grocers Vertically integrated (inputs are guaranteed); Important to use sustainable practices to reduce overfishing in industry Current weakness- excess finished goods inventory is detrimental to bottom line New technology & cold storage facilities 4. Industry Globalization Globalization is low and the trend is steady. Imports are accounted for at the production and processing

8 level, but the most relevant players in the industry remain locally owned and operated. As a result, low levels of globalization are projected to continue indefinitely. Neptune should not consider global, or even nationally based solutions. Gaining a high percentage of market-share locally is key. Source (G1-4): IBIS World Report-- US Industry Report: Fish and Seafood Wholesaling- obtained through Foster Library Database on April 18th, Industry Opportunities in Seafood Processing Sustainable fishing coalitions are rapidly forming as retailers and consumers become increasingly aware of the problem of overfishing. Many retailers are announcing new "eco-label" standards, requiring fish sold to come from sustainable fisheries and processors. Other opportunities include: online sales, exporting alternative products, and creating value-added products. Neptune may consider creating ready-to-eat fish based meals as a value-added, alternative product. Source: Hoovers- Seafood Processing Trends and Opportunities - obtained through Foster Library Database on April 18th, Country Report on Fish & Seafood in the US "Sustainability" will continue to be the key, as labeling becomes more consistent and retailers and restaurants use sustainability and traceability to gain a marketing edge over competitors. The association between "fresh" and "healthy" will remain strong in the U.S. Thus, fresh fish will attract consumers who may have turned away from processed fish during the 2008 recession. Because Neptune s products retain freshness and have an extended shelf like, increasing eco and fresh / healthy labels and marketing campaigns may help increase and maintain sales. Source: Passport-- Fish & Seafood in the US --obtained through Foster Library Database on April 18th, Country Report on Fish & Seafood in the US The highest revenue-generating frozen products for consumers are poultry, meat, and fish. Seafood accounted for 31.7% of the industry in 2015, more than mean or poultry. Market share concentration in the industry is low. Frozen food wholesalers are recommended to remain localized, a specialty of Neptune. Additionally, this market segment is expected to grow in the next 5 years, making now an appropriate time to enter the market. Source: IBIS World Frozen Food Wholesaling obtained through Foster Library Database =972 on April 22, Calculations Cost of Excess Inventory: (COGS/ 365) = (x/ 60) (656.3/365) = ($109.38/60) $ * 1.25 (Sales Mark-Up) = $ million Worth in Sales /820 = 16.66% increase in sales needed to sell excess inventory