PMBA 8145

Memo
To: From: CC: Date: Re:

Mr. Chuck Smith 001-85-0139 Professor David Nasser 6/18/2012 A.1 Steak Sauce Lawrys Defense Strategy

Chuck, Please find attached our recommendation for the Lawrys defense strategy. Thanks!

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Situation Analysis: A.1 Steak Sauce is one of the premier brands in the Kraft Foods portfolio with little competition, substantial sales, and excellent margins. Developed in England during the 1800s and first sold in North America in the early 1900s, its name originated from King George declaring the Steak Sauce as A.1. A.1 Steak Sauce is the industry leader boasting 2002 annual sales of $150 million with 54% dollar share and 46% volume share and forecasting $165 million of annual sales in 2003 (see Exhibits A, E, F). A.1 retails at $4.99 per 10 ounce bottle, which is $0.20 higher than its primary competitor (Heinz has 16% dollar share) and $1.50 higher than Private Labels (competitors with combined 14% dollar share). Due to high loyalty in steak sauce and limited competition, A.1 has successfully positioned its steak sauce as a product quality leader with extraordinary brand equity. While A.1 dollar sales have consistently grown due to price increases, the volume demand and production has been and is expected to remain relatively flat. As a result, A.1 Marinades were launched in 2001 with little success and then re-launched in 2002 and captured 10% market share in the Marinades category (Calkins, 2010, p. 3). Despite generating $15 million in annual sales, however, the line netted a $10 million loss. Due to Kraft Foods reduced earnings expectations for 2003, the stock fell below the initial 2001 IPO price and triggered skepticism by several industry analysts. As such, significant financial incentives were instituted for senior executives to deliver the revised profit targets. As such, the budget called for the A.1 portfolio to contribute a 10% increase in operating profit despite an estimated $7 million loss from the Marinades line. The Marinades category anticipates 15% annual growth and the industry leader is Lawrys with a 50% market share and annual sales well in excess of $100 million (Calkins, 2010, p. 4). Lawrys is one of Unilevers 200+ global brands (after a rationalization project) contributing to its $50 billion annual sales. However, due to disappointing financial results the company had challenged all of its brands to reach at least $1 billion in annual sales. Accordingly, Lawrys announced plans to launch a steak sauce in early 2003 targeting an April 1st first ship date in order to be fully distributed before the peak summer season. Lawrys steak sauce was similar to A.1 in taste and texture and would retail at $3.99 for an 11 ounce bottle. Essentially, Lawry is attempting to persuade consumers they are introducing an A.1-type quality substitute closer to the Private Label brands price point. Utilizing this market-penetration objective Lawrys is attempting to set the lowest price assuming the steak sauce market is price sensitive. In addition, Lawrys is launching an aggressive $20 million advertising campaign concentrated from May thru July and including an attempt at an exclusive Publix Memorial Day ad with a two-for-$5.00 promotional price point (Calkins, 2010, p. 5). Being that A.1 Steak Sauce achieves 10% of its annual sales during Memorial Day holiday (and an additional 10% during the July 4th holiday), the question is whether management can afford to ignore or disregard Lawrys strategic actions. The order-

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of-entry model suggests that Lawrys steak sauce product will obtain a maximum of 10% market share (Calkins, 2010, p. 5), or approximately $30.6 million in annual sales (See Exhibit A) primarily derived from an aggressive advertising spend and low price point in an industry where demand is expected to remain relatively flat. The challenge for the A.1 Portfolio is to quickly assess the new competitive landscape and mitigate the potential adverse financial impact of Lawrys product launch by developing an exhaustive pricing and promotions strategy that will (1) maintain and improve A.1 Steak Sauces brand equity, (2) support Kraft Foods short-term profit objectives, (3) continue to position the A.1 Marinades line for long-term sustainable and profitable market share growth, and (4) avoid triggering an industry price war that could lead to both short and long-term profit loss. Potential Alternatives: Alternative 1: Should management assume the status quo by ignoring the Lawrys steak sauce product launch and wholly rely on the strong A.1 Steak Sauce brand equity anchored in full scale distribution, consumer awareness, and a century of consumer repeat purchases? There is a high probability that Lawrys steak sauce can secure 12% volume market share and 10% dollar market share if A.1 Steak Sauce does not implement a defensive marketing strategy (See Exhibit A). Our marketing analysis considers minimal growth for the beef industry, few steak sauce competitors, and Lawrys new product launch with an aggressive marketing plan during the industrys peak summer season months. While the barriers to entry in the steak sauce industry are relatively high due to customer loyalty, Lawrys product is relying on the brand equity success of its Marinades category that is a 50% market share leader. If Lawrys steak sauce were to obtain 10% dollar market share the result could be a 6% decrease in A.1 Steak Sauces dollar market share and result in a $7.7 million shortfall of the 2003 A.1 Portfolio profit target set for senior management (See Exhibits A, B). From a short-term perspective senior management would not earn the financial incentives put in place for 2003. From a long-term perspective the A.1 Portfolio may have to divert funds from expanding into the Marinades line to attempt to regain steak sauce market share and to help ensure long-term profits. Alternative 2: Should A.1 match or beat the Lowry steak sauce promotional price of two-for-$5? Based on the data illustrated in Alternative 1 it is clear that the A.1 Steak Sauce senior management team must implement a strategic marketing plan to limit the potential loss of market share. In order to gain the exclusive Publix Memorial Day advertisement, A.1 would have to match the 2-for-$5 promotional price extended by Lowrys. While this strategy would significantly damper the product launch and consumer awareness of Lawrys new product, the cost-benefit analysis does not support

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engaging in a matching promotion. Despite thwarting Lawrys aggressive marketing campaign and driving consumer repeat behavior, because the retail price point of A.1 Steak Sauce is 4.99 the tangible cost of this promotion would be the equivalent to a $2.50 coupon on 10% of A.1 Steak Sauces annual sales. This move could also trigger an industry-wide price war that would result in even more losses and potential devaluation of A.1s brand equity. While this alternative would provide a 100% offset of the anticipated market share loss identified in Alternative 1, it would also result in a 2003 A.1 Portfolio shortfall of $11.8 million dollars (See Exhibit C). Management must ascertain whether such a trade-off to preserve market share and protect brand equity will be deemed appropriate by Kraft Foods senior management and external investors as this alternative will prevent the A.1 portfolio from meeting the 2003 profit target and senior management will forego the financial incentives as well. Alternative 3: Should A.1 management develop an alternate promotion and adjust the Marinades budget to protect the more lucrative A.1 Steak Sauce market share? As mentioned earlier, the challenge is to protect market share over the long-term while delivering 2003 target profit from the A.1 portfolio over the short-term despite a new product launch of a successful brand extension with an aggressive marketing budget. Instead of ignoring or matching Lawrys promotional price of two-for-$5, A.1 Steak Sauce should develop a promotion that partially negates Lawrys aggressive strategy without sacrificing the 2003 profit targets. A.1 can also take a more strategic approach by adjusting the timing of its promotions, diverting a portion of marketing funds from the Marinades line throughout the year without jeopardizing the continued positioning of the line, and deliver close to the 2003 profit targets. In addition, while A.1 currently holds 54% of the steak sauce dollar market the remainder of the market is highly fragmented with the closest competitor having only a 16% market share. As such, other industry competitors will engage in marketing strategies to protect their respective market shares as well.

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Final Recommendation: My recommendation is based on the logic presented in Alternative 3. I recommend that A.1 launches a two-for-$9 promotion price at Publix the week prior to the Memorial Day holiday. This avoids having to match the price and creates an adverse impact for the Lawrys advertisement due to the fact that an A.1 Steak Sauce 10 ounce bottle contains 17 servings. The demand for steak sauce would have been met and a significant portion of Lawrys target audience will still have at least one full bottle of A.1 Steak Sauce in their pantry for the Memorial Day holiday! This promotion cost is the equivalent of the historical $0.50 coupon on 10% of annual steak sauce sales. To offset the promotion cost A.1 will only drop 2 FSIs (free standing inserts) costing $1 million each instead of the 4 planned at the beginning of the year. The remaining FSI will be launched during the 4th of July holiday consistent with prior years. Based on A.1 Steak Sauces performance through the summer, management must be willing to reduce the Marinades advertising budget to $6.5 million and the promotions budget to $2.4 million, if necessary, to help ensure the A.1 Portfolio profit target is achieved. According to our analysis the A.1 Steak Sauce brand will generate $57.9 million in operating profit and retain 51% dollar market share assuming the promotion will result in a 50% offset of the Alternative 1 anticipated market share loss due to Lawrys product launch (See Exhibits A, D). As long as senior management can monitor the marinades line and limit losses to $2.8 million, primarily by minimizing marketing spend but carefully monitoring volume sales, the 2003 A.1 Portfolio target profit can still be achieved (See Exhibit D). This recommendation (1) achieves the short-term profit target without compromising the 100 years of brand equity; (2) protects dollar and volume market share; and (3) still allows the marinades line to be positioned to grow and increase market share in the years to come.

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EXHIBIT A
STEAK SAUCE CATEGORY 2003 BUDGET Dollar Brand A.1 Heinz 57 Private Labels Others Mkt Share 54% 16% 14% 16% 100% 2003 $ Annual Sales $ $ $ $ $ 165,000,000 48,888,889 42,777,778 48,888,889 305,555,556 2003 Units 47,237,332 13,349,681 19,511,072 22,591,767 102,689,852 2003 Ounces 472,373,318 133,496,807 195,110,718 225,917,674 1,026,898,518 2003 Pounds 29,523,332 8,343,550 12,194,420 14,119,855 64,181,157 Volume Mkt Share 46% 13% 19% 22% 100%

DO NOTHING Dollar Brand A.1 Heinz 57 Private Labels Others Lowry's Mkt Share 48% 13% 14% 16% 10% 100% 2003 $ Annual Sales $ $ $ $ $ $ 145,663,924 39,515,956 42,079,702 47,740,418 30,555,556 305,555,556 2003 Units 41,701,667 11,785,254 17,224,602 21,038,280 10,940,049 102,689,852 2003 Ounces 417,016,672 117,852,538 172,246,017 199,442,756 120,340,534 1,026,898,518 2003 Pounds 26,063,542 7,365,784 10,765,376 12,465,172 7,521,283 64,181,157 Volume Mkt Share 41% 11% 17% 19% 12% 100%

2-for-$5 PROMO Dollar Brand A.1 Heinz 57 Private Labels Others Lowry's Mkt Share 54% 13% 14% 9% 10% 100% 2003 $ Annual Sales $ $ $ $ $ $ 165,000,000 39,515,956 42,079,702 28,404,342 30,555,556 305,555,556 2003 Units 47,237,332 11,785,254 17,224,602 15,502,616 10,940,049 102,689,852 2003 Ounces 472,373,318 117,852,538 172,246,017 144,086,111 120,340,534 1,026,898,518 2003 Pounds 29,523,332 7,365,784 10,765,376 9,005,382 7,521,283 64,181,157 Volume Mkt Share 46% 11% 17% 14% 12% 100%

2-for-$9 PROMO Dollar Brand A.1 Heinz 57 Private Labels Others Lowry's Mkt Share 51% 13% 14% 12% 10% 100% 2003 $ Annual Sales $ $ $ $ $ $ 155,331,962 39,515,956 42,079,702 38,072,380 30,555,556 305,555,556 2003 Units 44,469,500 11,785,254 17,224,602 18,270,448 10,940,049 102,689,852 2003 Ounces 444,694,995 117,852,538 172,246,017 171,764,434 120,340,534 1,026,898,518 2003 Pounds 27,793,437 7,365,784 10,765,376 10,735,277 7,521,283 64,181,157 Volume Mkt Share 43% 11% 17% 17% 12% 100%

*Annual Sales calculations assume 30% margin on MSRP s for all brands identified in case.

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EXHIBIT B
DO NOTHING A1 Price (MSRP $4.99) Estimated Annual Units Memorial Day Units $ 3.49 41,701,667 4,170,167 TOTAL A1 Steak Sauce Revenue Variable Costs / Unit Gross Profit / Margin Advertising Consumer Promotions Trade Promotions FSI (Free Standing Inserts) Marketing Expenses Fixed Costs / Unit Operating Profit / Margin 15% 5% 10% $ 145,663,924 25,021,000 $ 120,642,923 21,849,589 7,283,196 14,566,392 4,000,000 $ 47,699,177 $ 18,678,177 $ 54,265,569 TOTAL A.1 Marinades Revenue Advertising Consumer Promotions Variable & Fixed Costs Operating Profit Total A.1 Portfolio Profit Total A.1 Portfolio Target Target Profit Surplus (Shortfall) $ 19,000,000 (10,000,000) (5,000,000) (11,000,000) (7,000,000) PER UNIT $ $ $ $ $ $ $ $ $ $ 3.49 0.60 2.89 0.46 0.15 0.31 0.08 1.01 0.45 1.44

$ 47,265,569 $ 55,000,000 $ (7,734,431)

Assumptions
Do Nothing volume estimate based on extrapolation of 2003 volume estimate and Lowrys 10% market penetration evenly allocated across all brands (See Exhibit A) 2003 A.1 Steak Sauce financials based on volume estimate and 2002 per unit costs (See Exhibit F) 2003 A.1 Marinades revenues and costs grossed up to arrive at targeted loss provided in the case

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EXHIBIT C
2-for-$5 PROMO A1 Price (MSRP $4.99) Estimated Annual Units Memorial Day Units $ 3.49 47,237,332 4,723,733 TOTAL A1 Steak Sauce Revenue Variable Costs / Unit Gross Profit Advertising Consumer Promotions Trade Promotions 2-for-$5 Promo ($2.50 coupon) FSI (Free Standing Inserts) Marketing Expenses Fixed Costs / Unit Operating Profit 15% 5% 10% 2.50 $ 165,000,000 28,342,399 $ 136,657,601 24,750,000 8,250,000 16,500,000 11,809,333 4,000,000 $ 65,309,333 $ 21,157,601 $ 50,190,667 TOTAL A.1 Marinades Revenue Advertising Consumer Promotions Variable & Fixed Costs Operating Profit Total A.1 Portfolio Profit Total A.1 Portfolio Target Target Profit Surplus (Shortfall) $ 19,000,000 (10,000,000) (5,000,000) (11,000,000) (7,000,000) PER UNIT $ $ $ $ $ $ $ $ $ $ 3.49 0.60 2.89 0.52 0.17 0.35 0.08 1.13 0.45 1.31

$ 43,190,667 $ 55,000,000 $ (11,809,333)

Assumptions
Two-for-$5 volume estimate based on assumption that promo will completely offset decrease in Do Nothing market share (Exhibit D) by 100% 2003 A.1 Steak Sauce financials based on volume estimate and 2002 per unit costs (See Exhibit F) 2003 A.1 Marinades revenues and costs grossed up to arrive at targeted loss provided in the case

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EXHIBIT D
2-for-$9 PROMO A1 Price (MSRP $4.99) Estimated Annual Units Memorial Day Units $ 3.49 44,469,500 4,446,950 TOTAL A1 Steak Sauce Revenue Variable Costs / Unit Gross Profit Advertising Consumer Promotions Trade Promotions 2-for-$8 Promo ($0.50 coupon) FSI (Free Standing Inserts) Marketing Expenses Fixed Costs / Unit Operating Profit 15% 5% 10% 0.50 $ 155,331,962 26,681,700 $ 128,650,262 23,299,794 7,766,598 15,533,196 2,223,475 2,000,000 $ 50,823,064 $ 19,917,889 $ 57,909,310 TOTAL A.1 Marinades Revenue Advertising Consumer Promotions Variable & Fixed Costs Operating Profit Total A.1 Portfolio Profit Total A.1 Portfolio Target Target Profit Surplus (Shortfall) $ 16,500,000 (6,500,000) (2,400,000) (10,500,000) (2,900,000) PER UNIT $ $ $ $ $ $ $ $ $ $ 3.49 0.60 2.89 0.49 0.16 0.33 0.04 1.03 0.45 1.42

$ 55,009,310 $ 55,000,000 $ 9,310

Assumptions
Two-for-$9 volume estimate based on assumption that promo will offset decrease in Do Nothing market share (Exhibit D) by 50% 2003 A.1 Steak Sauce financials based on volume estimate and 2002 per unit costs (See Exhibit F); $2 million FSI reduction; and up to $4 million advertising reduction and up to $2.5 million promo reduction (mgmt. discretion) 2003 A.1 Marinades revenues and costs grossed up to arrive at targeted loss provided in the case

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EXHIBIT E
2003 BUDGET A1 Price (MSRP $4.99) Estimated Annual Units Incremental Budget 2003 Annual Units Memorial Day Units $ 3.49 42,943,029 4,294,303 47,237,332 4,723,733 TOTAL A1 Steak Sauce Revenue Variable Costs / Unit Gross Profit / Margin Advertising Consumer Promotions Trade Promotions FSI (Free Standing Inserts) Marketing Expenses Fixed Costs / Unit Operating Profit / Margin 15% 5% 10% $ 165,000,000 28,342,399 $ 136,657,601 24,750,000 8,250,000 16,500,000 4,000,000 $ 53,500,000 $ 21,157,601 $ 62,000,000 TOTAL A.1 Marinades Revenue Advertising Consumer Promotions Variable & Fixed Costs Operating Profit Total A.1 Portfolio Profit Total A.1 Portfolio Target Target Profit Surplus (Shortfall) $ 19,000,000 (10,000,000) (5,000,000) (11,000,000) (7,000,000) $ $ $ $ $ $ $ $ PER UNIT 3.49 0.60 2.89 0.52 0.17 0.35 0.08 1.13 0.45 1.31

17% 83% 15% 5% 10% 2% 32% 13% 38%

$ 55,000,000 $ 55,000,000 $ -

Assumptions
2003 volume estimate based on reconstructed 2002 budget (See Exhibit F) and serves as basis for Exhibit A Industry Analysis 2003 budget based on volume estimate and 2002 per unit costs (See Exhibit F) 2003 A.1 Marinades revenues and costs grossed up to arrive at targeted loss provided in the case

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EXHIBIT F
2002 ACTUALS A1 MSRP A1 Sales Price Estimated Annual Units Memorial Day Sales $ $ 4.99 3.49 42,943,029 4,294,303 TOTAL A1 Steak Sauce Revenue Variable Costs / Unit Gross Profit / Margin Advertising Consumer Promotions Trade Promotions Marketing Expenses Fixed Costs / Unit Operating Profit / Margin 15% 5% 10% $ 150,000,000 25,765,817 $ 124,234,183 22,500,000 7,500,000 15,000,000 $ 45,000,000 $ 19,234,183 $ 60,000,000 PER UNIT $ $ 3.49 0.60 2.89 0.52 0.17 0.35 1.05 0.45 1.40 83% 15% 5% 10% 30% 13% 40%

$ $ $

Assumptions
Serves as basis for 2003 Budget reconstruction (See Exhibit E) A.1 Steak Sauce financials reconstructed based on information provided in the case A.1 Marinades financials reconstructed based on limited data provided in the case

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References Calkins, Tim (Revised June 14, 2010). A.1 Steak Sauce: Lawrys Defense. Kellogg School of Management (KEL010).

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