Nutripremium

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Here the interviewee should dive into the potential of the new market.

• Usage of such products by customers
• Willingness to pay by customers
• Total market size for each of Nutripremium’s product lines
• Customer segments
• Market trends

With the given information it should be possible to estimate the total market:

Pregnant women market

Assume that, on average, a Chinese woman has 2 babies in her lifetime (pregnancy: 18 months = 1½ years).

If we assume a life expectancy of 75 years, then we have on average 2% of all female population pregnant at a given time.

Sick patients market

Using a similar estimation strategy, we can assume that on average 2% of the population has cancer at some time in their lives and on average for a duration of 5 years (after that they either are cured or passed away).

We have then, at a given time around 0.13% of the population sick of cancer (2% of (5 years/ 75 years)), around 2 million people.

To simplify the calculation, we assume 10 times more people have diabetes, i.e. 20 million people.
So we have a total of 22 million sick people. Out of these, we assume that about 10% of sick patients actually use special nutrition products. The total market is then:

The interviewee should also come to the conclusion (by asking whether the customers in China would like to buy the same product sold currently in Europe) that new types of products would need to be created to suit the Chinese taste.

The cost for this would be around €2 m.

Information that can be shared if the interviewee specifically asks for it:

• Nutripremium had been consistently expanding its production capacity. However, since the European market showed signs of slowing down 3 years ago, it stopped the production capacity extension. Factories are now being run at 98% of capacity.
• Nutripremium has no distribution channels nowadays in China. In Europe it sells its “Pregnant women” line in retail stores and its “Sick patients” line through hospitals and treatment centers.
• A new factory in Spain that produces €100 m worth of products per year would require €500 m investment. The same factory in China would cost €300 m.
• The company has around €600 m available for investments in its expansion.

Here the candidate should inquire about the company’s capabilities of expanding to a new market abroad.

• Company’s capabilities and expertise
• Capacity to serve the Chinese market
• Money needed to invest in the market expansion
• Would the company continue producing in Spain to export to China? Probably not, as food is somewhat heavy and the shipping cost would most likely make the product too expensive for China.

Key insights

• Capacity of factories is being used to 98% today. An expansion to a new market would require investments in one or more new factories. Since the factories are supposed to serve the Chinese market and building a factory there is cheaper than in Spain, the factory should be built in China.
   
• The infrastructure investments of €300 m would cover 11% of the Chinese market.

• The company has enough money available to build 2 such factories and a chance of 22% market share.
• A lot of money and effort would have to be invested in building networks and contacts so that Nutripremium manages to engage the necessary distribution channels in China.

It is evident that there are three main competitors and that the government holds big shares in them.

Therefore the interviewer should share the following information if the candidate asks:

• The market of special nutrition food is new in China. Old regulations contrary to it have been dropped upon Chinfoo’s request. Lobbying by Chinfoo (government is a major shareholder) has been essential for the regulation-cancellation.
• Competitors are building at the time 4 new special nutrition food factories.
• Nutripremium’s more advanced technology would allow it to produce 10% cheaper than the current competitors in China.

This is the most important part of the case. Although the market seems promising from its size and growth, the assessment of the competitive landscape should compel the candidate to take a position against the expansion.

• Competition landscape for the products in China (monopolies, cartels)
• Special regulations or other entry barriers
• Market saturation

Key insights

• There appears to be a semi-monopoly in the market.
• The government seems to be highly involved as a shareholder in the main competitors. This does not seem like a good panorama for a competitor coming from abroad and aiming at stealing market share from local players.
• Competitors are expanding capacity which might lead to a decrease in market price (more offer).

At the end of the case interview, the interviewee should wrap up the case referring back to the main findings throughout the case in a summarized and logical way.

A possible closing to this case could be:

I think Nutripremium should not expand to the Chinese market at this moment for 3 main reasons:

• The competition seems to be fierce and government-controlled. The biggest three players in the market hold 90% of the market share. Government has 49% of the shares of the biggest player, which would definitely bring us disadvantages in many circumstances (getting licenses, paperwork, and bureaucracy for commercializing our products among others).
• Since we are producing near to capacity, we would need to make new investments in infrastructure (build new factories). Although we do have the money for that, doing it in a very different market from ours – where the customer’s taste is different and where we have no experience of manufacturing our products – could end up being a problem if we fail to adapt.
• There must be other markets where the competition is more diluted among more players and where the market has still a big size and potential for growth.
  Emerging countries in South America like Argentina and Brazil are good examples of possible candidates. The population has also more similar tastes to Europe than in China. The investment could yield a much better return in these countries.

Suggested answer:

We have a total cost of € 15m (10m + 200k * 25) excluding the direct costs of the doses.

 €10m + 200k * 25 = €15m

The number of doses a client takes per year is 480 (4 * 30 * 4).

Since the margin is 20% for each dose, each customer means a profit per year of around €100.

We conclude than that we need approximately 150,000 customers for break-even in our cancer product.