Reference no: EM132962328

CASE: AUTHENTIC INDIAN MASALA COMPANY (AIMC)

You are Mr. Azeem Masalewala, the owner of a legacy family business in processing and trading of Indian spices. You have a pan-India network from where you source regional specialties, process them in company-owned facilities, and trade high quality masalas (spices) at premium prices serving the premium spice segment of the market. As your family business has been running across generations with unchallenged supremacy of premium products, the company is renowned and respected in the market. In FY2019, the turnover of your company was INR 120 crores while the total cost incurred (excluding tax) was INR 110 crores.

A month back, one of your suppliers informed you that he had obtained a batch of high quality turmeric. At a condition that you will buy the entire batch of 1000 kg, he offered you a price of INR 290 per kg. Knowing that the shelf life of turmeric is about two to three years (quality deteriorates over time) and with your extra sales efforts you will be able to sell the entire lot at a good margin, you decided to purchase the batch at the offer price. In your estimate, even with additional costs of cleaning and treating the raw spices to bring them to the premium quality mark/first-grade, your material cost will be INR 360 per kg. Second-grade turmeric sells in the market at a price of INR 320 per kg and it is utilized for most purposes.

In order for you to be able to sell the entire batch of premium quality turmeric, you will need to lookout for opportunities in the baby food or ayurvedic products segment. These are the segments where quality is of prime importance and customers are willing to pay extra for a superior quality product. In a very recent announcement, government mandated use of high quality ingredients in baby foods and also introduced a 10% subsidy[1] for manufacturers who use premium quality/first-grade ingredients.

The largest baby food company - Yum - recently contacted you with a proposal of buying 700 kgs of premium grade turmeric at a price of INR 390 per kg. You are happy with the offer and want to pursue it as it is from a top brand that you haven't been associated with in the past. While you know this is a great opportunity to start business with a top brand like Yum, you are also worried about the remaining 300 kgs of material. The company wants to finalize the deal within next 20 days so that quality of their stock remains at its peak.

In the meanwhile, you have also received an offer from Yum's competitor - Toddler Foodz. Though the specifics of the offer are yet to be worked out, Toddler Foodz is willing the buy the entire lot of 1000 kg immediately. Toddler Foodz was in the news for quality problems with one of its products and doesn't enjoy good relations with the government.

Such high quality of turmeric has not been offered in the market before and all baby food companies were using second-grade material in the past. As the premium spice market is not known to baby food companies, having a price estimate for premium quality turmeric is very difficult for them. Someone in your network also informed you that Toddler Foodz was also negotiating with a second-grade turmeric trader who quotes INR 310 per kg. The informer also suspected that Toddler Foodz may be exploring the option of mixing both qualities in 70:30 proportion (first-grade to second-grade ratio) and this may be still okay for getting past FDA if the turmeric supplier is renowned/best in class. As per your informer's estimate, the baby product that Toddler Foodz will sell using turmeric as an ingredient will be priced at INR 1000 for 500 gms. Each kg of product has 10 gms of turmeric and cost of other ingredients is INR 500 per kg of product. Toddler Foodz is expected to incur INR 1000 as other cost (inclusive of all other costs - advertising, marketing/branding, packaging, staff, distribution, etc.) per 1 kg box of product. Overall, Toddler Foodz likes to maintain 24.75% gross profit margin (profit before tax) across all products and they would want the same in this product.

Though you have two offers in hand, you would want to sell the stock quickly to ensure that the quality of turmeric stock is still at its peak at the time of sale and you are able to command a premium for quality. If you are able to sell the stock and find this model viable, purchasing more stock in future from your supplier with exclusivity clause is also a viable option.

Based on the case information presented above, answer the following questions:

1) Which company should Azeem negotiate with first - Yum or Toddler Foodz? Justify the choice.

2) If Azeem were to negotiate with Toddler Foodz:

a) What will be Azeem's target and resistance point?

b) What will be Toddler Foodz's target and resistance point?

c) What is the BATNA for Azeem and what is the ZOPA with Toddler Foodz?

d) What should be Azeem's opening offer?

e) What will be the way to develop and claim additional value in this negotiation?

What dilemmas would Azeem face as a decision maker in this case?

[1] 10% subsidy in this case means that the tax authority will consider only 90% of the profit before tax as taxable rather than 100%. So, the company will directly avoid tax liability on 10% of their gross profit margin. The current tax rate can be assumed as 30% (consider this as all-inclusive tax liability on the company).