Reference no: EM131274854

CASE: Clover Valley Dairy Company In the fall of 1978, Vince Roth, General Manager of the Clover Valley Dairy Company, was considering whether a newly developed multipack carrier for yogurt was ready for market testing and, if so, how it should be tested. Since 1930, the Clover Valley Dairy Company had sold, under the trade name Valleyview, milk, ice cream, and other milk by-products-such as yogurt, cottage cheese, butter, skim milk, buttermilk, and cream-in Camden, New Jersey.

The raw milk was obtained from independent farmers in the vicinity of Camden and was processed and packaged at the Clover Valley Dairy. Clover Valley's sales had grown steadily from 1930 until 1973 to an annual level of $3.75 million. However, between 1973 and 1977, a series of milk price wars cut the company's sales to $3.6 million by 1977. During this time, a number of other independent dairies were forced to close. At the height of the price wars, milk prices fell to 75 cents per half-gallon.

In the spring of 1977, an investigation of the milk market in Camden was conducted by the Federal Trade Commission and by Congress. Since then, prices had risen so that Clover Valley had a profit for the year to date. Clover Valley served approximately 130 grocery store accounts, which were primarily members of a cooperative buying group or belonged to a 10-store chain that operated in the immediate area. Clover Valley no longer had any major chain accounts, although in the past they had sold to several.

Because all three of the major chains operating in the area had developed exclusive supply arrangements with national or regional dairies, Clover Valley was limited to a 30 percent share of the Camden area dairy product market. Although Clover Valley had a permit to sell its products in Philadelphia, a market six times the size of Camden, management decided not to enter that market and instead concentrated on strengthening their dealer relationships.

In addition, it was felt that, if a price war were to ensue, it might extend from Philadelphia into the Camden area. With the healthier market and profit situation in early 1978, Clover Valley began to look for ways to increase sales volume. One area that was attractive because of apparent rapid growth was yogurt.

During the previous three years, management had felt that this product could help to reverse Clover Valley's downward sales trend, if given the correct marketing effort. However, the financial problems caused by the loss of the national grocery chains and the price war limited the firm's efforts.

As a result, Mr. Roth felt that Clover Valley had suffered a loss of share of yogurt sales in the stores they served. Since 1975, Mr. Roth had been experimenting with Clover Valley's yogurt packaging with the hope that a new package would boost sales quickly. All dairies in Clover Valley's area packaged yogurt in either 8-oz or 1-lb tubs made of waxed heavy paper. Clover's 8-oz tub was about 5 in. high and in. in top diameter, tapering to in. at base.

The first design change to be considered was the use of either aluminum or plastic lids on the traditional yogurt tubs. However, these were rejected because the increased costs did not seem to be justified by such a modest change. Changing just the lid would not make their tubs appear different from their competitor's tubs, it was felt. By 1976, Mr. Roth had introduced a completely different package for Clover Valley's yogurt.

The 8-oz tubs were replaced by 6-oz cups, designed for individual servings. In addition, the new cups were made of plastic and had aluminum foil lids. The 1-lb tubs were unchanged. No special promotional effort was undertaken by Clover Valley, but unit sales of the new 6-oz cups were more than triple the unit sales of the old 8-oz tubs (see Exhibit I-1). While the increased sales volume was welcomed, the new plastic cups increased unit packaging costs from 7.2 cents to 12.0 cents.

This more than offset the saving of 4 cents because of the reduction in the amount of yogurt per container. Retail prices were reduced from 41 cents to 34 cents for the new 6-oz cup, while the price for the 1-lb tub remained at 75 cents. The increased sales then increased the total dollar contribution to fixed costs from yogurt by only 5 percent. (All dairies priced their yogurt to give retailers a 10 percent margin on the retail selling price.

Competitor's retail prices for their 8-oz tubs remained at 41 cents.) Mr. Roth felt that both the change to plastic and the convenience of the smaller size were responsible for the increased sales. However, he was disappointed with the high packaging costs and began to look at ways of reducing them, without changing the package much further. He felt another package change would be too confusing to consumers.

Because of the economies of scale needed to produce plastic containers, costs could be reduced if more units were produced and sold. Mr. Roth felt that packaging a number of cups together would make the 6-oz cups easier to carry home, which might increase sales, and would certainly reduce packaging costs.

By 1978, work had begun on developing a multipack holder to hold six cups together. A single strip of aluminized plastic would serve both as holder and as the top for two rows of three yogurt cups. A single cup could be readily separated from the others in the pack. Dairy personnel constructed wooden models of several different cups for use with the holder and with plastic-molding experts, choosing one that would mold easily and cheaply.

Eventually, some of these carriers were made to order for testing in the plant and among Clover Valley employee families. Several problems soon became apparent. The holder did not always fasten securely to all six cups in the multipack. While the holder strip was being put on, the side walls of the cups were slightly compressed, causing some cups to crack at the edges. When consumers tried to remove one of the cups, they sometimes pulled the top from an adjacent cup.

The problem was the strength of the aluminized plastic, which made it difficult to tear even when perforated. The multipack was redesigned and again tested in the plant and by employee families. It appeared that the new package was performing satisfactorily. Negotiations with Clover Valley's carton supplier resulted in an estimated price of 8.5 cents for the first 100,000 units.

Thereafter unit costs would drop to 7.5 cents per 6-oz cup. Mr. Roth decided that the best multipack carrier presently possible had been designed. His attention then turned to methods of testing the new packs for consumer acceptance. Mr. Krieger, his father-in-law and president of Clover Valley, sent him the following letter concerning market testing:

EXHIBIT I-1:

Clover Valley Dairy Company:

Sales Results 1974 1975 1976 1977 1978

Unit Sales of Yogurt-1-lb Tubs

a 6-oz tubs.

Dear Vince, Concerning the market test of the new cups and carriers, I have a few suggestions that may be helpful, although the final decision is yours.

I think we should look for a few outlets where we are not competing with the other dairies, perhaps the Naval Base or Bill's Market.

Actually, if we use Bill's, then the test could be conducted as follows:

1. Give Bill a special deal on the multipacks for this weekend.

2. In the next two weeks, we'll only deliver the multipacks and no single cups at all.

3. In the third week we'll deliver both the packs and the single cups.

4. During the third weekend we'll have someone make a survey at the store to determine its acceptance.

5. Here is how it could be conducted:

a. Station someone at the dairy case.

b. After the shoppers have chosen either single cups or the multipacks, question them.

c. If they chose the multipacks, ask them why.

d. If they chose the single cups ask them why they didn't buy the packs.

e. Thank them for their help and time.