Background and Problem Definition
First in Show Pet Foods, Inc. is a manufacturer and seller of dog food products whose primary brand is the unique Show Circuit. The company plans to expand into the retail sector in Boston, Massachusetts, where it sees growth potential particularly for Show Circuit, using supermarkets as the distribution channel
The dog food market in the U.S is currently worth more than $ 10 billion. However, with the country’s total dog population, this is less than half the market potential. The market size indicates the presence of some incremental carrying capacity, which the management of First in Show Pet Foods, Inc. can explore to expand the firm. The market also presents several opportunities for growth. For instance, consumer behavior is changing. First, dog ownership is on the increase (the population of dogs currently stands at 65 million), which indicates increasing market carrying capacity for the company to take advantage of. The Boston area boasts 1.2% of the population of the U.S., which can be estimated to be 1.2% of the dog population (780,000 dogs), which is an even bigger advantage as that is the target market. Secondly, more people now recognize dogs as family members; hence they are likely to spend on their dogs, for example, buying premium and super-premium dog foods, such as Show Circuit. Thirdly, there is a growing influx of premium and super-premium dog foods, which could be both an opportunity and a threat as the market is already tested, and there is likely to be competition from well-known brands such as Nestle Purina Petcare, Hill’s Pet Nutrition, Master-Foods USA, and Del Monte Foods, LLC.
Evaluation of Alternative Courses of Action
The company has two alternative courses of action, going ahead with the plans to enter the Boston market through supermarkets, and continuing with the current operations.
Alternative 1: Go into the Boston retail market: the company has no active retail market participation; thus, option one will contribute 100% of the sales in retail.
The fixed cost associated with this alternative is the total program ($ 700,000) and the space slotting fee, which is $ 30,000. The evaluation is done based on the higher costs to ensure sustainable profitability. Thus, the total cost of the option comes to $730,000.
The production price of the product is $ 7.87 per case. Therefore, assuming the company sells at a 15% return on sales (including the food brokers’ fees), the price to the supermarkets will be $ 8.46. As such, the company will need to sell $730,000/$8.46 = 86289 cases to break even.
For a 15% return in the first year, the total revenue will be $839,500 within the first year obtained by selling 99,232 cases or 8270 cases per month (1 case to each of 1.1% of the dog population in Boston per month), which is feasible.
Alternative 2: The fixed cost will be the program cost, which is $ 700,000. The breakeven will be attained from the sale of 77,778 cases of the product.
First in Show Pet Foods, Inc. should go ahead with the plans to enter the retail market with supermarkets as the main distribution channel. The market has sufficient carrying capacity and is expanding and the company will only require heavy marketing to create brand awareness to succeed.
|Option||Contribution||Sale Price||Fixed Costs||Breakeven|
|A: Boston Market||100%||(1.15 *$ 7.87) = $9.05
Supermarket sale price (SS) + broker fees (BS) = $ 9.05
BS = 7% of SS
SS = 9.05- 0.07SS
SS = $ 8.46
|$ 730,000||$ 730,000/$ 8.46 = 86289 cases
For 15% return in year 1:
Total sales = 1.15*730,000 = 839,500
Breakeven = $839,500/$8.46 = 99,232 cases
|B: Avoiding the Boston Market||100%||1.15%* $ 7.87 = $ 9.05||$ 700,000||$ 700,000/$ 9.05 = 77,778 cases|