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Structure for Market Entry/Production?

Anonymous A

I've recently stumbled upon a case where our client was a brand (and producer!) of a commodity product within the food industry. We produce this product, attach our label and sell it to supermarkets that sell it to the end consumer.

In this case, one of our biggest clients (a supermarket chain) said that he wants to sell our product under his own brand, with us producing it for him. The product and production line would remain absolutely the same, the client would just attach his own label on it in the end, and sell it in his shops. We need to decide if we should take this deal, or not. If we choose the latter, our client will no longer sell our product in his story and would probably produce it somewhere else.

How would you structure this case? A simple profitability evaluation and risk assessment seems a bit too basic for me?

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Vlad replied on 07/16/2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

Basically what you are talking about is private label production. I would look exactly at the profits and the risk assessment:

1) Volumes

  • What is the share of this chain in our sales?
  • Will the volumes decline / increase in case of PL?
  • Impact on other chains - would the others behave the same if we agree?
  • What will happen if we don't agree?

2) Profit per unit

  • How will the price change? (usually, the PL products are cheaper)
  • How will our margins change in case of PL production?
  • Will the change in volume increase / decrease the economies of scale?

3) Risks

  • Operational
  • Reputational / brand
  • Financial

Best

Tyrion Lannister replied on 07/16/2018

Dear Anonymous A,

I would structure this is a Don’t Act/Act decision protocol, and structure the decision criteria into two broad buckets (see below) for each option.

Under Don’t Act, I would test the financial implications of this decision (bucket I).

Under Don’t Act, I would test all other non-financial implications of this decision (bucket II).

I would do exactly the same under Act.

Now, you’ve asked how would you structure this.

For that, the starters above would form the top line of any eventual structure. But, I would have asked some clarifying questions first under two broad lines of enquiry:

  1. What financial and market power does the supermarket chain wield?
  2. What financial and strategic needs does our client face?

These two questions above are not my actual clarifying questions; rather, they are the two broad lines of enquiry I would pursue with appropriate questions as I see fit.

Returning to the structure, I would then establish a quick issue tree based on the identified (through the clarifying questions) power pull of the supermarket chain in all financial matters and in all other non-financial matters.

Then I would do the same for our client’s financial and strategic needs.

I would then establish a hypothesis:

Let us act (i.e., ‘franchise our product’ under the supermarket’s brand) if two conditions are met:

  1. Not acting would harm us in some financial or non-financial way and/or
  2. Acting would benefit us in some financial or non-financial way

otherwise, let's not act.

I know which way I already lean in this interesting Case based on the fact that our client produces a commodity product (easily replicable/attainable elsewhere?), that our Client can be shut out of a market (how big to be worried?) that our market player has other options (as stated in Case prompt/as implied by commodity product), but it could go either way.

This is the sort of case that requires some intellectual rigour whatever the final recommendations. In other words, whatever the ‘final answer’ ends up being, a complete solution must, of course, include a robust counter Case in the wrap-up.

(edited)

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