The Venture Capital (VC) firm, which has invested in Sumul, is planning to withdraw its investment from the company. Thus, Sumul should position itself for acquisition or find another VC for equity infusion.
Companies such as Sumul are valued by the VCs on multiple of revenue rather than profit or cash flows because these VC firms invest in order to generate significant revenue growth.
Therefore, the company needed to increase its revenues by over 50% in order to achieve highest possible valuation by the VC firms. The revenue of Sumul in 2009 was Rs.13 Million and the growth required to position itself for acquisition was Rs.20 Million by the end of 2012.
The increase ...view middle of the document...
The product had a shelf life of 50 days and therefore had a competitive advantage which was longer as compared to the shelf life of 30 days of the competitors. There were fewer competitive offerings in this segment and several competitors were planning to launch their product line in this segment.
It was projected that with this option, Sumul could generate sale of 5.5 million incremental units resulting into 71% growth in revenues (Exhibit 1). This required introduction of the four SKUs into 64 supermarket chains and thus would involve high slotting fees of Rs.2.56 Million (Exhibit 1). Moreover, along with the high slotting fees, the option requires marketing expenditure of Rs.1200000,
which reduces the net margin to - 0.93%.
Owing to the sophistication involved in the supermarket channel, there is a need of experienced sales personnel, which would thus increase the SG&A cost for both, the first and the second option. Moreover, because price inhibits
58% of consumers for buying organic products, Sumul would have to execute a competitive pricing strategy against non-organic yogurts. Furthermore, it is doubtful whether the sales team would be able to achieve full national distribution.
The Sumul yogurt is positioned as a premium brand and therefore the price and emphasis on sales promotion is inconsistent with that required in supermarket retailing. Moreover due to the possible channel conflict, Sumul may
lose existing customers to competition. The marketing department was also
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unprepared to handle the demands on resources and staffing that entering the supermarket would impose.
The third option is to introduce two SKUs of a children’s multipack into the natural foods channel. The anticipated incremental unit sales with this option were 1.8 Million units, which would generate a revenue growth of 64%.
Moreover, owing to the existing functional resources Sumul would incur no additional SG&A cost to introduce the multipack and therefore the net profit
margin will be 27%.
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Which strategy for expansion to chose in order to achieve Rs.20 Million
revenue by 2011?
To expand six SKUs of the 100-gms product line into two selected supermarket chain
To expand four SKUs of the 500-gms product line in supermarket
To introduce two SKUs of a children’s multipack into the natural foods
Criteria for Evaluation
1. Projected Revenue growth
2. Loss of sales due to possible channel conflict
3. Additional expenses incurred
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Evaluation of Options
To expand six SKUs of the 100-gms product
line into two selected supermarket chain
1. Projected Revenue growth: The projected revenue with this option is Rs.37.08 Million. Due to the lack of the required necessary resources and skill set to sell effectively through supermarkets, achieving this projected revenue is difficult.
2. Loss of sales due to...