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CraftingaDistributionStrategyforaSugarCerealManufacturer1OverviewActivelylistentothecaseYourclientisthesugarcerealdivisionofFoodsInc.,aU.S.-baseddistributorandmanufacturerofpackagedfoods.Accordingtothedivisionpresident,FoodsInc.'straditionalstrengthhasbeenwithgrocerystores,whichstillaccountforthemajorityofits$1.1billioninsugarcerealsales.ButBigMMart,adiscountchain,hasbeengrowingatahealthyrateofalmost15percentperyearandhasnowbecomeFoodInc.'slargestcustomer.Yourclientisnotsurehowtoreact,andhasaskedBCGforassistancewithitsdistributionstrategy.ClarifyEstablishunderstandingofthecaseFirst,letmemakesureIunderstandtheproblem.Ourclientspecializesinsugarcerealstraditionallydistributedthroughgrocerystores.SalestoBigMMart,adiscountchain,havebeengrowingat15percentperyear,andthechainhasrecentlybecomethelargestdistributoroftheclient'sproductnationwide.WeareheretohelpevaluatethedistributionstrategyinlightofBigMMart'sgrowth.Thatiscorrect.Couldyouexplaintomehowgrocerystoresdifferfromdiscountstores?Sure.Grocerystoresgenerallyspecializeinfood,aswellassellingsomehouseholdgoodsandover-the-counterpharmaceuticals.Discountstores,ontheotherhand,offerfoodalongsideawidevarietyofmerchandise,includingclothing,homeelectronics,andhousewares.DoesBigMMartmarketitsfoodproductsdifferentlythandogrocerystores?Discountstoresadvertiselowerpricesforawidevarietyoffoods,particularlystaple,nonperishablefoods.CouldItakeamomenttowriteafewnotestomyself?Pleasefeelfree.CraftingaDistributionStrategyforaSugarCerealManufacturer2ApproachSetuptheframeworkBeforemakingrecommendations,IthinkwewouldneedtoevaluatewhethersalesgrowthatBigMMartisgoodorbadforFoods,Inc.Todothat,IwouldfirstlookathowitssugarcerealperformanceatBigMMartcompareswiththatinotherdistributionchannels.Second,IwouldlookatitsperformanceatBigMMartinrelationtocompetitors'performance.Next,Iwoulddeterminewhatdrivescustomerpurchases.Finally,Iwouldwanttounderstandthesupplychain.Thatcertainlysoundslikeareasonableapproach.Let'sproceed.EvaluateEvaluatethecaseusingtheframeworkFirst,IwouldliketogetabettersenseofwhereBigMMartstandsinrelationtoourclient'sotherdistributionchannelsbyexaminingtheclient'ssalesdataandmargins,bydistributor.Themarketingdepartmentdoesnothavemarginsbychannel,buttrackssalesandvolumeforitstopfivedistributors.Sales($M)1997199920015-YrCAGRBigMMart14216224614.7%R.J.'s1571852006.2%BozoMart1431751897.3%AceGrocery10110915311.0%ShoppersMart5762674.0%TotalTop56006938569.3%TotalAllDistributors1,0001,0791,1503.6%Volume(Mboxes)1997199920015-YrCAGRBigMMart657411314.7%R.J.'s7281854.2%BozoMart6577805.2%CraftingaDistributionStrategyforaSugarCerealManufacturer3AceGrocery4647648.8%ShoppersMart2627282.0%TotalTop52743073707.8%TotalAllDistributors4504684872.0%WhatdoesthisimplyaboutBigMMartasadistributionoutlet?Itlooksasifthetopdistributorshavebeengrowingmoreimportant,butparticularlyBigMMart,whichisgrowingfasterthanalltheothers.Thisisparticularlytruewhenwelookatvolume,whereBigMMart'sgrowthismuchhigherthanthatoftheotherfourchannels.Andhowcouldyouinterpretwhatthesedatasaysaboutmargins?Whiletheclient'ssalesthroughotherdistributionchannelsaregrowingfasterthanvolume,BigMMartvolumeandsalesgrowtharethesame,sotheaveragepricepaidbyBigMMarthasremainedconstant.ThatimpliesthatsalesgrowthatBigMMartcouldhavenegativeimplicationsforourclient'smargins.Next,IwouldliketolookathowourclientisdoinginrelationtothecompetitionwithinBigMMart.Havetheybeengainingorlosingmarketshare?Howmightyoufindthatout?IwouldtrytointerviewBigMMart'spurchasingpersonnel,sincetheywouldprobablytrackthosedatafortheirownpurposes.Whywouldtheywanttotalktoyou?Howmightyouapproachsuchaninterview?IwouldapproachthepurchasingpersonnelandsuggestthatourclientandBigMMartworktogethertoidentifybestpracticestoreducecostsandincreasesalesofsugarcerealsatBigMMart.Let'ssayinaperfectworldyoucouldgetabreakdownofBigMMartsalesforthefourlargestcompetitors(seemarketsharesbelow).Whatcanweinferaboutourclient'scompetitorswithinthischannel?Whoshouldtheybeworriedabout?Itlookslikeourclientislosingmarketshare,asisTastyBreakfast,whileCerealCo.andPrivateLabelaregainingshare.PrivateLabel,however,lookstobegrowingfromaverysmallbase.CraftingaDistributionStrategyforaSugarCerealManufacturer4IwouldliketoexplorewhyourclientislosingmarketsharetoCerealCo.atBigMMarts.Aretheirpricesbetterthanthoseofourclient?Afteraperiodofpricewarssixtosevenyearsagothatloweredindustrymargins,thecerealcompanieshaverefrainedfrompricecompetitionwithinthesamechannel.Ifpricesarenotdrivingthedifference,Iwouldlookatotherfactorssuchasbrandselection,percentageofshelfspace,productplacement,andin-storepromotions.VisitstoBigMMartsindicatethateachname-brandcompanyholds30percentoftheshelfspace,whileprivatelabelhas10percent.CerealCo.brands,however,tendtobeplacedlowerontheshelfthanyourclient'sproducts.Well,Isuspectthatchildrenarealargetargetmarketforthesugarcerealmanufacturers.Thelowershelfplacementcouldbeespeciallyimportanttochildrenwhoarelookingatthedifferenttypesofcereals.Arethereanyotherpromotions?SomeCerealCo.brandshavesalespromo