Mit Case Study

BCG Join BCG converse planning Practice Cases Distribution http//www. bcg. com/join_bcg/interview_prep/practice_cases/dis The Boston Consulting Group family line Join BCG Interview Prep Practice Cases Distribution Strategy Distribution Strategy Crafting a Distribution Strategy for a Sugar Cereal producer Your client is the sugar cereal division of Foods Inc. , a U. S. -based distributor and manufacturer of packaged foods. According to the division president, Foods Inc. s traditional strength has been with market place storehouses, which tranquillize account for the majority of its $1. billion in sugar cereal sales. But broad M marketplace, a discount chain, has been growing at a sanitary rate of almost 15 percent per year and has without delay become Food Inc. s largest node. Your client is not sure how to react, and has asked BCG for assistance with its dispersal strategy. pass Understanding of the Case First, let me cultivate sure I understand the line. Our client specifys in sugar cereals traditionally distributed through grocery stores. Sales to heavy(p) M Mart, a discount chain, have been growing at 15 percent per year, and the chain has recently become the largest distributor of the clients harvest-time nationwide.We be present to help evaluate the dispersion strategy in light of prodigious M Marts growth. That is correct. Could you explain to me how grocery stores differ from discount stores? Sure. Grocery stores generally specialize in food, as well as selling some household goods and over-the-counter pharmaceuticals. Discount stores, on the other hand, offer food alongside a wide variety of merchandise, including clothing, home electronics, and housew atomic number 18s. Does adult M Mart merchandise its food proceedss differently than do grocery stores? Discount stores advertise lower prices for a wide variety of foods, particularly staple, nonperishable foods.Could I take a moment to write a few notes to myself? Plea se feel free. Set Up the modeling Before making recommendations, I think we would need to evaluate whether sales growth at monolithic M Mart is good or frightful for Foods, Inc. To do that, I would first demeanor at how its sugar cereal performance at Big M Mart compares with that in other distribution channels. Second, I would look at its performance at Big M Mart in relation to competitors performance. Next, I would determine what drives customer purchases. Finally, I would emergency to understand the supply chain.That certainly sounds manage a reasonable turn up. Lets proceed. Evaluate the Case Using the Framework 1 of 6 10/2/09 657 PM BCG Join BCG Interview Prep Practice Cases Distribution http//www. bcg. com/join_bcg/interview_prep/practice_cases/dis First, I would same(p) to get a better sense of where Big M Mart stands in relation to our clients other distribution channels by examining the clients sales data and margins, by distributor. The marketing department d oes not have margins by channel, but tracks sales and volume for its top five distributors.What does this imply ab bug out Big M Mart as a distribution outlet? It looks as if the top distributors have been growing more heavy, but particularly Big M Mart, which is growing faster than all the others. This is particularly true when we look at volume, where Big M Marts growth is much higher than that of the other four channels. And how could you interpret what these data says about margins? While the clients sales through other distribution channels are growing faster than volume, Big M Mart volume and sales growth are the same, so the average price paid by Big M Mart has remained constant.That implies that sales growth at Big M Mart could have negative implications for our clients margins. Next, I would like to look at how our client is doing in relation to the competition within Big M Mart. Have they been urinateing or losing market share? How might you find that out? I would try t o interview Big M Marts purchasing personnel, since they would probably track those data for their own purposes. Why would they want to talk to you? How might you approach such an interview? I would approach the purchasing personnel and suggest that our client and Big M Mart work ogether to identify best practices to bowdlerize costs and increase sales of sugar cereals at Big M Mart. Lets say in a perfect world you could get a dislocation of Big M Mart sales for the four largest competitors (see market shares below). 2 of 6 10/2/09 657 PM BCG Join BCG Interview Prep Practice Cases Distribution http//www. bcg. com/join_bcg/interview_prep/practice_cases/dis What can we infer about our clients competitors within this channel? Who should they be worried about? It looks like our client is losing market share, as is Tasty Breakfast, while Cereal Co. nd Private Label are gaining share. Private Label, however, looks to be growing from a very small base. I would like to explore why our client is losing market share to Cereal Co. at Big M Marts. Are their prices better than those of our client? After a stay of price wars six to seven years ago that lowered industry margins, the cereal companies have refrained from price competition within the same channel. If prices are not driving the difference, I would look at other factors such as brand selection, percentage of ledge space, product placement, and in-store promotions.Visits to Big M Marts indicate that each name-brand company holds 30 percent of the shelf space, while private label has 10 percent. Cereal Co. brands, however, tend to be placed lower on the shelf than your clients products. Well, I suspect that children are a large target market for the sugar cereal manufacturers. The lower shelf placement could be especially important to children who are looking at the different types of cereals. Are in that location any other promotions? Some Cereal Co. brands have sales promotion tags, and the team notes tha t store flyers advertise specials on Cereal Co. rands for Big M Mart customer cardholders. So, even if all the companies are maintaining product prices, maybe Cereal Co. is strategically discounting prices to gain market share. It seems as if on that point is evidence of cooperation amidst Cereal Co. and Big M Mart. Do we know anything about their relationship? During earlier discussions with Big M Mart, you discovered that your clients competitors have 50 sales representatives dedicated to the Big M Mart account. Your client has seven. Cereal Co. calculates to be dedicating more resources to its relationship with Big M Mart than our client is.This may explain its better product placement and promotion programs. 3 of 6 10/2/09 657 PM BCG Join BCG Interview Prep Practice Cases Distribution http//www. bcg. com/join_bcg/interview_prep/practice_cases/dis I think I have a good sense of distribution and competition. I would now like to look at the customers and understand why they select the products they do. One hypothesis I have is that shifting brand loyalties are hurting our clients market share at Big M Mart. Thats interesting. What do you think might motivate purchases of sugar cereals?There are lots of factors, such as the games in the boxes, the price of the cereal itself, how it tastes. To better understand consumer expression, we might conduct market research, possibly through focus groups, customer observation, and price sensitivity studies. BCG teams often do such research. Lets assume your team conducts some analysis. Your research concludes that most buyers tend to fall into two categories. Approximately 60 percent of buyers go straight to bingle cereal and grab it. We can call this group the brand-loyal shoppers.Another 40 percent of shoppers look at all the cereals and so select one that interests them. Lets call this group the impulse buyers. For the brand-loyal shopper, the priority would be product availability, while product placement would be important for consumers who like to shop around. Within these groups, are consumers price minute such that one brand can lure shoppers loyal to another brand? In general, your research indicates that consumers are not price sensitive and are extremely loyal to their preferred brand.But when the preferred cereal is unavailable, the brand-loyal customers will purchase discounted cereals virtually 35 percent of the time. Well, from that information, it appears that price is not a major driver of purchases unless the preferred cereal is out of stock. In these stock-out situations, you said, brand-loyal customers will purchase discounted cereals 35 percent of the time. What happens when the customer does not purchase a discounted cereal? In approximately 25 percent of cases, the customer paseos away without purchasing any cereal at all.In the remaining 40 percent of cases, the brand-loyal customer will act like an impulse shopper and select another brand. Interesting. It see ms as if product availability could be a major driver of total cereal volume for Big M Mart. Of course, we would need to know how often stock-outs occur that cause consumers to walk away without purchasing cereal occur. Since I have a pretty good accord of customer motivation, Id now like to ask a few questions about the clients supply chain. I would want to talk to our clients distribution personnel to understand the distribution process and to determine how often stock-outs occur.Can you describe how our clients cereal is distributed at Big M Mart? Cereals are distributed from the factory to the distributors warehouse twice monthly. The retailer then stocks the shelves itself. Do we have any knowledge about when the individual stores are out of stock? No, we do not, since our client only delivers to the warehouses and has no direct ingress to in-store inventory information. Since we identified product availability as a key success factor earlier on, I would want to make sure tha t the stores were stocking the product correctly.Lets say that in your earlier in-store investigations, you found out that Big M Mart stores averaged 15 percent of sugar cereal brands out-of-stock, across all brands. 4 of 6 10/2/09 657 PM BCG Join BCG Interview Prep Practice Cases Distribution http//www. bcg. com/join_bcg/interview_prep/practice_cases/dis Stock-outs would be a major problem for our client, since 60 percent of customers look for a specific brand of cereal and 35 percent of them would buy a discounted brand in a stock-out situation.Big M Mart would also have an incentive to reduce out-of-stock incidents, since 25 percent of the time, a brand-loyal customer will walk away without buying anything. Summarize and make recommendations Big M Mart is our clients leading customer, accounting for more than 20 percent of our clients sugar cereal revenue. Although sales to Big M Mart are increasing on an absolute basis, our clients margins there are lower than in its other c hannels and its competitive position is eroding in that channel. At Big M Mart, our client faces competition from both private label and Cereal Co. although the latter appears to be the greater threat. There appears to be a relationship between Big M Mart and Cereal Co. as evidenced by their joint promotions, the superior placement of the Cereal Co. product, and the substantial resources that Cereal Co. has dedicated to the Big M Mart account. We learned that 60 percent of customers are brand-loyal, implying product availability is most important. However, 40 percent like to try different kinds of cereal, indicating product placement is also important.Purchasers do not appear to be price conscious, unless the type of cereal they are looking for is out of stock, in which case there is a stronger tendency to base purchases on price promotions. In terms of distribution, our client is making deliveries twice a month to Big M Marts warehouses. Big M Mart, in turn, is responsible for stoc king the shelves. We currently have no direct knowledge of when our clients items are out of stock at the individual stores, but there is evidence that stock-outs do occur with some frequency. Well, it sounds as if you understand the situation. What would you recommend the client do?The sales through Big M Mart appear to have a negative impact on the bottom line, as they have lower margins than sales through grocery stores. The client could work with grocery stores to ensure that they are able to compete effectively with Big M Mart in the sugar cereal market. This strategy could be risky, however, since Big M Mart is a large and important customer. Therefore, I would recommend that our client work more collaboratively with Big M Mart. To defend its current position at Big M Mart stores, the client should move toward a partnership with Big M Mart and dedicate more resources to the relationship.The customer and competitor data indicate that our clients first priority should be to cor rect distribution to ensure better product availability. In addition, it should push for product placement equal to, if not better than, that of its competitors. Why would Big M Mart be willing to enter into a partnership with Foods Inc? Foods Inc could offer to share its information about customer behavior to help increase revenues for both itself and Big M Mart. Stock-outs hurt Big M Mart in two ways. First, some brand-loyal customers simply walk away without purchasing cereal whenever their preferred brand is unavailable.Second, we know that other brand-loyal customers purchase lower-priced cereal whenever they encounter a stock-out of their preferred brand. Both of these instances lower Big M Marts revenue. By eliminating stock-outs, Big M Mart could increase its sales by simply ensuring that customers dont walk away without making a purchase. Converting these purchase cause to sales would increase Big M Marts sales of sugar cereals by more than 2 percent(1). Better availabilit y also helps Big M Mart and our client increase their revenue by deterring the brand-loyal shoppers from trading down to lower-priced cereals.Recall that 35 percent of the brand-loyal shoppers purchase a discounted cereal if their preferred brand is not available. If change distribution now makes the preferred brands more consistently available, the customers will pay a higher price for these products. Finally, we could use the information about consumer purchase behavior to help persuade Big M Mart to 5 of 6 10/2/09 657 PM BCG Join BCG Interview Prep Practice Cases Distribution http//www. bcg. com/join_bcg/interview_prep/practice_cases/dis share information about product availability in its individual stores.We could work with our client and Big M Mart to improve the current distribution system to allow for more economical deliveries, while at the same time ensuring that our clients product is consistently available in the store. give thanks you. Those sound like solid recomm endations, but I would suggest that you fully understand the root cause of the stock-out situations and the cost to eliminate them before moving ahead. (1) 15 percent out of stock x 60 percent brand-loyal customers x 25 percent willing to forgo purchase = 2. 25 percent 6 of 6 10/2/09 657 PM