Smith must not overreact with the challenge posed by Lawry’s. He must keep in mind that A1 still dominates the market for steak sauce. Furthermore, Lawry’s has not yet proven its capability to take a major slice of the market share enjoyed by A1. Thus, the best course of action is to implement a reduction in price starting April 1. The price reduction can be increased a week before the Memorial Day and Fourth of July weekends.
Lawry’s initiated an aggressive marketing campaign wherein they are offering a two-for-$5 promotional price. It threatened to erode market share because the current financial position of A1 precludes management to drastically reduce the profit margin of their product. However, Publix one of the largest grocery store chains in the U.S. hinted that they may give the Memorial Day ad to Lawry’s. A1 had to come up with an effective defence plan.
A1 enjoys market dominance in the steak sauce industry. The product enjoys a 54% dollar share. The most significant competitor comes at a distant second with a mere 16% dollar share. Furthermore, it boasts of high brand awareness.
In fact, the company asserted that 9 out of 10 steak houses serve A1. Heinz 57 maybe the largest branded competitor but it tastes significantly different from A1. Thus, customers who are used to the taste of the A1 sauce cannot immediately switch to Heinz 57 even if Heinz decided to drastically lower the price of their product.
Based on these figures, the strong reaction of Chuck Smith, the Senior Brand Manager on A1 was a puzzle to many people including those who worked closely with him. But there are other factors that greatly affected the point of view of Smith when it comes to the aggressive challenge of Lawry’s. There is one thing that weighed heavily on his mind. Smith was well aware of the fact that unit and volume sales had been flat in recent years.
The reason for the stagnant growth when it comes to volume sales is the inability of the company to expand the usage of A1. The sauce is primarily used on steaks and nothing else. At the same time beef consumption in the United States had already stabilized. It can be argued that A1 had saturated the market and reached its highest level of growth.
There is another major reason why Smith was worried when he received the news about the competitor’s bold marketing scheme. He realized that he was up against Unilever, one of the largest consumer products companies in the world. More importantly, Smith was well aware of the fact that Lawry’s sauce is similar to A1 in terms of taste and texture. It is the combination of product quality and price that compelled Smith to cancel his weekend plans and called a meeting with the managers of the various departments at A1.
Smith was already overwhelmed with the need to defend his turf. But the executives above him added more heat to the already critical situation. They made it clear to the managers that Kraft needed to improve their financial standing. The key strategy mentioned was to help the A1 marinade product line to generate a profit for the company.
The fact that the marinade line incurred losses of up to 10 million dollars in 2002 and 7 million dollars in 2003 exacerbated the problem because it reduced the cash reserves that A1 can use to bolster its marketing campaign.
One of the strategies that can be used to defend against Lawry’s aggressive marketing scheme is to increase the budget for advertising. A drastic solution is to discontinue the manufacture of the marinade product line. It will save them money.
Consider how far a $7 million marketing budget will do to A1. But the executives at A1 and Kraft may not accept this proposal. The possible explanation is that the marinade product line can be improved even further. The reduction in the losses made can be seen as an encouraging sign by the executives.
The second possible alternative is to match the price offered by Lawry’s. Based on the current price of A1 at $4.99 per bottle, this will mean that a two-for-$5 scheme can reduce their revenue by as much as fifty percent. Smith may be forced to accept this proposal because he feared losing that business, specifically the income generated through Memorial Day and Fourth of July celebrations.
The third major alternative is to simply increase the budget of their existing advertising campaign. They need to spend more on TV advertising and spend more on FSI’s. It is a sure way to connect with their target market. Finally, A1 can modify the marketing scheme of Lawry’s and instead of offering a two-for-$5 they can offer a reduced price, say for example $8 for two bottles of A1.
Key Decision Criteria
If A1 tries to match the aggressive marketing campaign of Lawry’s, it means that they will have to incur huge losses. Based on a 62 million operating profit and a $4.99 price tag, the estimated loss will be more or less $3 million. Thus, it is more prudent to add another $1 million to their advertising campaign rather than absorb a $3 million loss in profit.
But it has to be pointed out that this figure is only based on the sales for the Memorial Day and Fourth of July weekends because the company claimed that 10 percent of their revenues come from the upsurge in sales during these two events. If A1 matches the marketing scheme of Lewry’s then it means that they will have to offer the two-for-$5 as early as April 1. The financial loss can be much greater.
The suggestion to increase the money spent on advertising may not work based on the fact that volume sales were flat in recent years. It can be argued that A1 had already saturated the market and that there is no more room for expansion. Thus, A1 must carefully consider the offer of a discount in order to slightly increase their market share.
Course of Action
A1 must offer a discount. The rationale for this course of action is based on the fact that Lawry’s is not yet an established product. The assertion that nine out of ten steak houses serve A1 has not yet been debunked. A1 still enjoys extremely high brand awareness all over America. Thus, Smith need not overreact. He has to study first how the market reacts to the discounted price as well as the aggressive marketing scheme initiated by Lawry’s.
A1 must decline the offer made by Publix and other major grocery stores if they want to entice A1 to match the pricing scheme of Lawry’s. Smith must be willing to lose the Memorial Day ad at Publix because this does not mean that they will suffer a major setback. Lawry’s has not yet proven itself that it can topple A1 from its current perch. However, modest price reductions must be made beginning April 1.
Smith must carefully monitor the impact of the price reduction. If there is positive response between April 1 and the week before Memorial Day then the best thing to do is to increase brand awareness through a much improved advertising campaign on TV and newspapers.
But if Lawry’s steak sauce can cut into the market share of A1 within the same period, then, Smith must approve further reduction in the price of A1 sauce the week prior to the Memorial Day and the Fourth of July weekends. The strategy ends after the Memorial Day celebration and will be initiated again during the Fourth of July celebration.