Revenue Analysis Case Study
Your client is a $500MM premium chocolate manufacturer who sells a establish brand through traditional retail channels and their own stores. The company has experienced years of double-‐digit revenue growth, however recently results have dipped below expectations. The leadership of your parent company is growing frustrated by the lack of organic growth and has hired us to investigate the causes of the stagnating revenue.
PART I: One of the solutions that your client is evaluating is an offer from Target to create a private label version of their products. In other words, in addition to the client’s chocolate which they already carry, they want the company to make an additional, lower-‐priced chocolate which will be under their “Archer Farms” brand. What are the pros and cons of this arrangement for your client?
PART II: Perform a break-‐even analysis to understand how many units of the Archer Brand they will have to produce to offset the profit loss from cannibalization of the current product. How much revenue will they gain at break-‐even? Ignore fixed cost effects in the calculation.
Additional Company Information
The company is a subsidiary of a large, global food company based in Europe. The client is the parent company’s largest US based business and it has been relying on the steady growth to fund other ventures. The company operates only in the US and Canada
Profit has remained relatively stable due to a series of effective cost savings initiatives
The company has relatively low market share in the chocolate category. Within the premium segment, they have been the share leaders but have recently lost ground and been overtaken by a major premium competitor. The competitor has launched several new products that have expanded the consumption of premium chocolate (e.g. new occasions).
The 4 P’s is an appropriate framework to start to analyze this case: Place
The company is highly dependent on large retailers (Walmart, Target, Costco, Drug, Grocery) – these account for >80% of revenue. They do operate a small number of retail locations in high-‐traffic tourist locations around the US. Their products can also be found online in most major channels but generally chocolate is an impulse purchase and no company has succeeded in ecommerce space.
The company is a “bean-‐to-‐bar” producer, meaning they control the chocolate making process from the farm to the final product and process the cocoa beans. They have had multiple new product successes in recent years that have helped to drive growth.
Historically has had 4 to 6 new flavors (sustaining innovation) per year and 1 new category (growth innovation) every two years).
The company is a premium brand with good brand equity and a loyal customer based. They demand a higher price and try to price on par with other premium competitors. Recently their competitors in the premium space have been gaining share not through price decrease but through new product introductions.
Marketing dollars are tightly controlled, but the client does have a series of TV and radio advertisements, as well as print ads. The ads are effective and advertising spending has been at a consistent level for years. There has been no real change in promotion frequency or depth of discount. The target market is decidedly female, and the marketers commonly refer to their prime prospect as “her”. Competition is not spending more on advertising or promotions in total but the focus has been on supporting their new products.
Current Product Information:
• Sells at $4 per unit (assume client gets all revenue – ignore the retailers margin)
• Average Volume is 300k units per month
• Our Margin is 60% ($2.4 / unit profit)
Archer Brands Product Information:
• Recommended Sales Price at $3 per unit
• Our Margin is 40% ($1.20 / unit profit)
• Anticipate 25% cannibalization of mainline business as a worst-‐case scenario