Case 3: Competitive Threat Case 3: Competitive Threat

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Brief overview: This case is an assessment of the threat posed by private labels. The candidate will be required to deeply explore all internal and external issues impacting the client and will be asked to justify his/her recommendation.

The Problem and Background

Your client is a European 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 are made by the same manufacturers who make branded cookies; they are just sold under the name of the retailer.

Your task – 1

How large would you estimate the overall European cookie market to be in EUR  terms?

Expected Response

The first question has no right or wrong answer. One response would be to estimate the number of European households, estimate household consumption over some period of time, estimate the average cost of a bag of cookies, and project out for a year. After an estimate has been made, the candidate would be told to assume the market size is EUR 1 Billion to simplify future calculations.

Your task – 2

How large of a threat do you believe the trend in private label cookie sales to be to your client?

Data to be provided (during the course of the interview)

Private Label Information

  • 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 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

Competitive Landscape

  • Your client, who makes only branded cookies
  • A second major player, who makes both branded cookies and supplies cookies for private labelers
  • A collection of small outfits who make branded cookies and supply private labelers

Distribution Strategy

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 90% of total cookie sales
  • Mass merchandisers (for instance, Wal-Mart, Sam’s, etc.): sell only branded cookies

What are the sales trends for the client over the past five years?

Your client’s sales have been flat at EUR 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 EUR 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 sub-segment 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 sub-segment; 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.

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 EUR 1.50 to manufacture a bag of private label cookies which will sell for EUR 2.00 to retailers. It costs approximately EUR 2.00 to manufacture a bag of branded cookies which will sell for EUR 2.75.

How do the same numbers translate at the retail level?

A retailer, paying EUR 2.00 for private label cookies can sell that product for EUR 2.50. The EUR 2.75 bag of branded cookies can be sold for EUR 3.50.

The key finding is that from a cost-price-margin perspective it is advantageous for both the manufacturers and the retailers, all else being 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, and consumer). The following questions can help fill in the details:

Has there been excess capacity at your client, its main competitor or the smaller competitors that has been used up via 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.

Are grocery stores using private labels in other food categories?

Yes, there has been a major push by grocery stores to populate shelves.

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 increased over the past five years.

What general macroeconomic trends have occurred over the past five years?

The economy has been slowing. There is concern about recession.

Expected Response

This 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 on 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.

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 labels first cut into the branded segment, they came in 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.

Also, the above information exposes a clearer story. A host of factors have contributed to the emergence of private label segment: the manufacturer’s desire to utilize excess capacity, the grocer’s desire to sell products with their name, and consumers concerns about a troubled economy (price vs. quality tradeoffs).

Your task – 3

Upon assessment, what is an appropriate strategy for your client to follow?

Expected Response

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. The candidate should state the basis of his/her assessment.

High Threat Factors: Revenue decline, recession concern, grocery chain strategy, etc.

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 is primarily cost. At the same time, the client’s branded product should be protected. Here are some tactics:

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

•   Ensure that there is no customer confusion between a private label offering and a branded product

•  Seek partnering agreements with retailers

•  Joint advertising and promotions

•   Explore deals with mass merchandisers to enter private labels

Low Threat Factors: Client market share not negatively impacted, not much excess capacity, product quality differentiation, etc.

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 differentiation. Additionally, your client should do all it can to halt or reverse the momentum of the private label segment. Here are some tactics:

Pursue a maximum differentiation strategy:

•   Invest in brand image to support premium price

•  Make it difficult to copy the product: innovate wisely through product advances, smart product line extensions, etc.

•  Manage the price gap: explore price increases where appropriate

•  Explore exclusive partnering with mass merchandisers

•   Consider alternative distribution channels

•  Seek partnering agreements with grocers regarding branded products

•  Educate grocers as available 

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