Case Study

1/25/2012 Submitted to: Mr. Imran Hafiz

Giant Consumer Products: The Sales Promotion Resource Allocation Decision

Submitted by: Maria Iftikhar Javeria Taqriq Khaula Basalat Iram Iqbal Kundan Wasim Ali Husnain Rubbani

This case practically provides an opportunity to get familiar with formulating and implementing sales promotion. Frozen food division of GCP plays a vital role in regards to profits, for it has expanded successfully over the past 30 years, with a compound annual growth rate of 2.8%. There are two main categories in FFD: Dinardos Brand: This brand generated over $425 million in revenues annually. This brand offered spaghetti & meatballs, lasagne, and chicken cacciatore. More importantly, it is the use of quality ingredients and seasonings that made Dinardos meals taste better than those of other producers. The Natural Meals Brand: This is a selection of organic frozen foods. This section accounted for roughly 25% of the frozen food divisions revenue (almost $150 million per year). Since, it promoted organic food type; it was quite appealing to the health-conscious consumers. However, recently FFD has encountered a shortfall in sales volume and gross revenues. FFD sales volume was 3.9% behind plan, and gross revenue was under plan by 3.6%. Consumers were just buying less and they were buying in a different product mix than expected. Moreover, analyst in Wall Street, were wondering whether GCPs above-industry average growth could be maintained. Now, Allan Capps, the CEO of GCP, is hesitant about running a trade sales promotion with retailers. Allan Capps has met with Byron Flatt, BCPs vice president of sales to discuss the shortfall in FFDs results. Byron Flatt has suggested undertaking a sales promotion. Cannibalization was also a problem. Cannibalization is a phenomenon that results when a firm develops a new product or service that steals business or market share from one or more of its existing products. Thus one product may take sales from another offering in a product line. Sanchez was also concerned about the indirect cost of cannibalizationnon-promoted items in FFDs product portfolio that would have normally been purchased, but were not because consumers switched to the promoted FFD item instead. Information was provided on past promotions that had been run on Dinardo 32 and Dinardo 16 to evaluate how the past promotions had fared. They also have to make decision about Natural Meals that should that brand be promoted or not. Along with that there are other decisional criteria about method of promotion to retailers. In execution mode, the standard was to fund retailers for providing an end-aisle display, offering a Page

retailers weekly circular.

temporary price reduction to consumers, and featuring the lower price to consumer (PTC) in the

12000000 10000000 8000000 6000000 4000000 2000000 0 Dinardo 32 Dinardo 16 Dinaro's Other Natural Meals

This is the graph showing total sales of GCPs frozen food department over 2year spam. If we closely study this graph well see the other Dinardo products and Natural Meals products have quite a steady market but FFD faced a lot of fluctuation in the sales of Dinardo 16 and Dinardo 32. The peaks in both graphs show when each product was promoted (Dinardo 32 was promoted 4 times and Dinardo 16, 5 times). Each time when one was promoted sales of the other got cannibalized yet sales of Natural Meals proved to be unaffected by promotions and got steady throughout 2 years. Therefore we wont compare Natural Meals with Dinardo 16 and 32, instead will carry out a separate study to check the effects of promotion of Natural Meals on its sates and if it is feasible or not. Decision about Natural Meals Considering promotion Impact of Natural Meals Average monthly incremental volume for NATURAL Average % Store promoting Average Monthly Incremental Volume/ Promo Point Incremental Volume from 25% promo point Revenue change from promotion Variable cost change from promotion Promotion cost change from promotion Marketing Margin Change from promotion 705251.95 7.6125 92643.9 2316098.35 2645230.65 634726.755 4125425 -211491.1 Page

Sep.06 Oct.06 Nov.06 Dec.06 Jan.07 Feb.07 Mar.07 Apr.07 May.07 June.07 July.07 Aug.07 Sep.07 Oct.07 Nov.07 Dec.07 Jan.08 Feb.08 Mar.08 Apr.08 May.08 June.08 July.08 Aug.08

As the impact of promotion of Natural Meals is considered, marketing margin would move in negative direction resulting overall decline in the marketing margin of FFD. Natural Meals are representing a major chunk with 6.5% of marketing margin and 25% overall FFD sales. Promotion of this category can affect the brand image as well. Revenue is not changed with that large amount but on promotion cost is increased by relatively larger amount. So, it would not be a wise decision of promoting Natural Meals. It has already captured a huge market share, more appropriately niche market, with customers who are interested in least processed food. With such a strong customer base and brand image, this category does not need any promotional tactics. Risking the brand image would mean that giving the chance to other brands to capture market. Another reason is, it does not have any variety in sizes so it has a fixed retail cost, so it does not have any margin for promotion.

Promotion of Dinardo 16 and Dinardo 32 considering Cannibalization effect:

Now we are left with to either chose Dinardo 16 or Dinardo 32 to promote to increase our sales and maximize our profits. We have to choose the one that will give us more marketing margin and will least cannibalize others sale. Average monthly volume for: When the item is ON promotion When the Item is NOT on promotion When Nothing is ON promotion Incremental Volume from Promotion Revenue Change from Promotion Variable cost Change from Promotion promotion cost change from promotion Marketing margin change from promotion Dinardo 32 10460942.5 6816235 7542113.8 2918828.7 6129540.27 2159933.23 550722.24 3,418,884.8 Dinardo 16 6210220.4 2900022.89 3857002.6 2353217.8 5647722.72 1953170.774 600865.24 1,741,381.172

Considering within-brand cannibalization Effects of promotion

Average monthly Volume When the other Dinardo's item is ON promotion When Nothing is ON promotion Volume change from promotion of other item Revenue change from promotion of other item variable cost change from promotion of other item promotion cost change from promotion of other Product Dinardo 32 5740724.2 7542113.8 1801389.6 3782918.16 1333028.3 550722.24 Dinardo 16 424773 3857002.6 3432229.6 8237351.04 2848750.5 Page 600865.24

Marketing Margin change from promotion of other product Total brand impact from promotion on top-line revenue Total Effect of D32 promotion Total effect of D16 promotion Total brand impact from promotion on Marketing Margin Total effect of D32 promotion Total effect of D16 Promotion

1899167.62

4787735.3

-2107810.77 1864804.56

-1368850.5 -157786.448

Decision has to make within these two brands that which brand should be promoted? Dinardo brand is offering three kinds of packages: Dinardo 32, Dinardo 16 and Dinardo 8oz. Dinardo 32 is a pack which serves 4 persons and that is a family pack. Dinardo 16 is packing for 2 persons and Dinardo 8 is per person pack. These all packages are provided by FFD to fulfil the demand of each customer who is willing to buy rather than spending that amount in any expensive restaurant. It also increases the consumer base, because every individual living with family or alone can buy according to his need. Major threat in promoting these products was brand switching and premium image because promoting on product means creating less demand of the other product. Above tables are drawn from last 2 years data of these products to calculate which item should be promoted. Data is shows that: Promoting Dinardo 32 marketing margin is increased by almost 3 Millions in comparison with Dinardo 16 which increased Marketing Margin by almost 1 million on promotion. Calculating brand impact on top line revenue, Dinardo 32 is decreasing the revenue and Dinardo 16 has positive impact on it. Dinardo 32 has a larger negative impact on Marketing Margin, which is actually the return on marketing investment. Dinardo 16 has smaller impact as compared to Dinardo 32. It shows that Dinardo 16 is not cannibalizing Dinardo 32 on promotions but promoting Dinardo 32 means cannibalizing the other brand. These two brands in case of promotion can increase the gross revenue and marketing margin separately but they are cannibalizing each other that are why, it is a crucial decision that which brand should be promoted. Page

It can be shown in the graphs below as well

14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 Dinardo 32 dinardo 16

14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 Dinardo 32 Dinardo 16

The two graphs above shows sales revenue of past two years. These graphs clearly indicate that in those 4 months when Dinardo 32 was promoted, Nov 06, March 07, Sept 07, Feb 08, sale volume of Dinardo 16 was cannibalized and its sales volume fell down drastically, but in those months when Dinardo 16 is promoted, there is no significance impact on Dinardo 32. Reason could be when pack of 4 is available at cheaper rate then why should not buy that and buy a packing of 2 servings. So, this sales volume graph is also depicting very clearly that cannibalization impact of Dinardo 32 is higher than Dinardo 16. Considering this fact under consideration, promoting Dinardo 32 would not be a wise decision.

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90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 Dinardo 32

Marketing Margin
Planned JULY August After promotion

Marketing margin calculated here is actually RETURN ON MARKETING INVESTMENTS, the contribution attributable to marketing (net of marketing spending), divided by the marketing 'invested' or risked." "ROMI is a relatively new metric. It is not like the other 'return-on-investment' metrics because marketing is not the same kind of investment. Instead of moneys that are 'tied' up in plants and inventories, marketing funds are typically 'risked.' Marketing spending is typically expensed in the current period." It involves all the costs related to investments as well as related to product cannibalization. Planned Marketing is so high for these both categories. These products are not giving the desired Return on marketing investments. But after promotion of Dinardo 32 an increase is expected in marketing margin without cannibalizing the margin of Dinardo 16. After promotion their marketing margin would rise but due cannibalization impact it would again come down to the usual level of margin. Actual decline in marketing margin of FFD is due to these two brands because other brand like Natural meals is making a reasonable marketing margin. So, to increase that level of margin, these two brands need to be promoted at optimal level.

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12000000 10000000 8000000 6000000 4000000 2000000 0 Dinardo 32 Dinardo 16

Therefore as a conclusion to all this discussion above well suggest Giant Consumer Products to promote Dinardo 16 rather than Dinardo 32 or Natural Meals. Natural Meals because they have a steady market unaffected by other products and only people having a palate for organic healthy food will buy then no matter the price at which it is available to them. And as far as Dinardo 16 and 32 are concerned, Dinardo 32 will cannibalize sales of Dinardo 16 at a much higher rate than that harm Dinardo 16 will bring to Dinardo 32. Therefore the optimal decision will be to promote Dinardo 16 to give an immediate sales boost and attain targeted sales.

Sep.06 Oct.06 Nov.06 Dec.06 Jan.07 Feb.07 Mar.07 Apr.07 May.07 June.07 July.07 Aug.07 Sep.07 Oct.07 Nov.07 Dec.07 Jan.08 Feb.08 Mar.08 Apr.08 May.08 June.08 July.08 Aug.08

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Question 1: Would the promotion end up being a win for not only FFD but also for retailers and consumers?
The promotion will expectedly have 3 impacts Increase in overall growth (market growth), Purchase time acceleration (stockpiling) and Brand switching (potentially including switching from GCPs products too).

These three points in themselves explains the interest of three parties i.e. firm, retailers and customers. Start with the firm, as promotions will improve the possibility of brand switching this implies that there is a long term incentive in it in the shape of a greater customer base. Stockpiling at lower cost than regular days means an increased chance of saving money on favourite products and will leave customer better off at the end of a shopping day. And as the market will grow the retailers will have an increased traffic for FFDs product line and increased traffic means increase in their own revenue. Retailers can attract more traffic on promotion and FFD can earn a marketing margin on promotion on Dinardo 16 and Natural Meal. FFD s popularity makes it in a strong position to influence retailers to promote their desired brand, retailers on the other hand have sensed a upward trend in the sails of GCPs products. Promoting these products will intern increase traffic in their areas and will increase their sales. And as for customers, they can stockpile things at lower rates then regular days and save valuable dollars. This might cannibalize sales of FFDs other products but this opportunity cost will be little as compared to the customer this promotion will get who before will be using some other companys product. In the short run this promotion will just give increased ROMI to the company but in the long run these increased ROMI can be used to build brand image in a better way than now by ways such as advertising, packaging enhancements and new product introduction. To get the best from this promotion the company should promote Dinardo 16 because by promoting that FFD can attain their required targets without cannibalizing sales of Dinardo 32 and Natural Meals. That might to some extent reduce margins of other FFD products but the increases

be a win situation for all parties.

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in total sale they will bring are worth this opportunity cost. Therefore promotion at this instance will

Question 2: How should FFD structure ---------------------------------- hit some pre-establish target?
As mentioned in the case study that if we give off invoice pricing to the retailers that can results in two situation that are against producers interest. The retailers can indulge in forward buying i.e. purchasing product in bulk when it is on promotion and getting a lower price to retailer PTR (Price to retailers). Then they might do two things: 1. They retailers can charge same price to consumer to increase their own margin because PTR is reduced and PTC (price to customers) is high. The customer might purchase your products but their satisfaction will reduce and instead of directly blaming the retailers as a human psyche they will get frustrated with the brand and if this situation pertains to all the promotions a time will come when promotions will lose their effects on sales until the retailers dont change their unethical practices. 2. The 2nd thing a retailer can do is to keep charging the promotion price even after the promotion is over making the consumer to believe that their trusted products are on deal. This will create an expectation in customers that their products are sold for lower price or that it can be sold on lower prices and when units on promotion will end the prices will again come to regular one it will have a effect similar to inflation and the demand might reduce below the normal levels Keeping in view these two possibilities, off invoice pricing has more negative affects then it have its benefits. This will motivate retailers to buy in bulk when the price is low and they might stock some excess units to sell in the future but when the promotion will end retailers might be still using the stockpiled unites, thus reducing the sales of period after promotion. Thus the optimum strategy here will be pay-for-promotion. Retailers should only be compensated only for the actual sales during the promotion period. This will increase the sails and retailers will indirectly help in increasing sales because increased sales mean increased compensations for them. Therefore it will create a win-win situation for both parties and consumers will get their favourite products at reduced price. Compensation should not be based on set targets instead they should be given on the total sales a retailer makes.

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