THE CHALLENGE
Parson Foods Vegetable Company (PFVC) is a newly
created, wholly owned subsidiary of Parson Foods, one of the
oldest and largest fluid milk processors in the United States.
Parson was founded in 1925 and grew through a series of
acquisitions, first in milk processing and later in frozen and
canned vegetables.
Parson’s operating strategy was to provide capital and
management expertise to acquired entities while giving local
management significant decision-making autonomy. This
strategy worked well with fluid milk processors who tended
to compete in local or regional areas. As Parson moved into
frozen and canned vegetables, it increasingly found that
these firms were competing nationally. Multiple vegetable
companies under the Parson Food umbrella were competing
for the same business, often undercutting one another on
price to “win” business. These activities threatened financial
performance, resulting in lower profits and even losses in
many of these vegetable companies.
Parson’s management decided that a strategic change
was needed to return its vegetable companies to profitability.
This resulted in the creation of PFVC where all the
vegetable companies were consolidated. Richard Lawson
was named CEO of the new company. His charge was to
improve the lagging performance in the vegetable group.
Changes were expected and fast. Richard and his new
executive team were feeling the pressure to find a way to
“turn this thing around.”
THE OPPORTUNITY
Richard knew he and his team faced many challenges. In recent
months, they had been working on operational and structural
changes designed to reduce administrative and selling costs. He
also realized that continuing the turnaround requires the firm to
improve sales of continuing and new products.
Several months ago, Carlos Rico, the company’s
marketing manager, approached Richard with an idea for a
revolutionary nutritious convenience frozen food product.
The new product, Chicken Sensations—consisting of
frozen vegetables, spaetzels (a coated seasoned pasta),
and chicken—would compete against frozen pizza and
microwaveable dinners. Based on initial projections, Chicken
Sensations had the potential to be a homerun with company
sales, expected to increase by 20% and with gross margins
double current vegetable offerings.
While the potential for Chicken Sensations was
palpable, Richard was a realist given PFVC’s history of new
product introduction. The most recent, Soup-in-a-Flash—a
microwaveable soup starter kit—failed miserably with the
company writing off $10 million in unsold finished goods.
As a result, corporate executives were not enthusiastic about
investing in another PFVC new product launch. Richard
mused, “If Chicken Sensations fails, my tenure as CEO may
be short-lived.”
IMA EDUCATIONAL CASE JOURNAL VOL. 10 , NO. 2 , ART. 3 , JUNE 20171
ISSN 1940-204X
The Chicken or The Egg: Hatching a New and Innovative Product
©2017 IMA
Robert Rankin
Texas A&M Commerce
Martin Stuebs
Baylor University
THE TEAM
Richard decided to assemble a cross-functional team of
PFVC’s best sales, production, and financial professionals to
evaluate the feasibility of Chicken Sensations. Along with
Carlos, team members included Gary Smits, the production
manager, and Vicki Hoerning, the chief financial analyst. At
the team’s first meeting Richard began: “Congratulations and
welcome. You have been selected to evaluate the feasibility
of a new product, Chicken Sensations. This product has the
potential to create a new category of convenience frozen
foods and to dramatically increase company profits. Our
challenge is to objectively evaluate the potential of this
product idea. Introducing a product and having it fail is not
an option. Carlos had the idea for this product, so I will let
him explain.”
Carlos stood up and moved to the front of the
conference room. “Thanks, Richard. Good afternoon. As
many of you are aware, we currently produce Pasta Done,
a microwaveable product consisting of frozen vegetables
and spaetzels. This new product idea takes that concept
one step further. We are going to add protein, in this case
chicken, into the microwaveable bag with the vegetables
and spaetzels. Competing products separate chicken, frozen
vegetables, and a sauce in multiple pouches. Combining
all of the ingredients enhances convenience and simplifies
the cooking process for consumers. They simply empty the
contents into a bowl, add a tablespoon of water, microwave
for six minutes, and voila! Dinner is ready.
“That delicious aroma you smell coming from the test
kitchen is a sample of Chicken Sensations. Let’s eat!”
While the team was sampling the product, Richard
continued, “Thanks, Carlos. I think this could be a winner,
but we need to make certain it is financially feasible. If we
launch Chicken Sensations, we need to produce a price-
competitive, high-quality product that delivers a profit
superior to our current offerings. We know that a significant
challenge to launching Chicken Sensations is getting USDA
approval to handle meat in our processing facility. We have
limited institutional knowledge of the process, because it
was 30 years ago when we last applied for USDA approval.
We also need to consider how our competitors will react to
the new product and document market issues related to
product costs and distribution. At our next meeting, I want
to review your initial findings on the financial feasibility of
Chicken Sensations.
“Carlos, I would like for you to evaluate the selling prices
of current convenience frozen food products; propose a
selling price; recommend the mix of chicken, spaetzels, and
vegetables; forecast first-year sales; and quantify incremental
sales and marketing costs.
“Gary, I would like you to estimate the costs associated
with retrofitting (preparing) your facility for USDA approval
and estimate product costs.
“Vicki, would you work with Carlos and Gary to generate
a financial feasibility analysis? You will probably need to
perform analyses to evaluate the expected overall first-year
profitability, breakeven sales level, and margin of safety.
‘What-if’ analyses can assess the impact of sales forecast
errors and changes in the sales price, product costs, and
quantity inputs. With our recent history of new product
introduction, our goal is to far exceed breakeven in the first
year. Anything less would not be acceptable to Parson’s
corporate executives.”
Vicki commented, “Richard you can count on me. I think
I speak for the entire team when I say we are excited to be
part of the team and will do everything possible to ensure
the success of Chicken Sensations.”
Addressing the entire team, Richard reiterated, “I do
not think I need to remind you of the importance of this
project. Because of the failure of Soup-in-a-Flash and limited
financial resources, corporate executives will be reluctant to
authorize the launch of any new products. We need to ensure
our analysis is rock-solid before requesting any funds.”
TWO WEEKS LATER
“Good afternoon gentlemen,” Vicki began addressing Carlos
and Gary. “I know you have been busy with your Chicken
Sensations assignments. My goal today is to discuss the
information you have gathered so that we can put together
the initial feasibility analysis that Richard wants. I will record
and summarize the information you provide. Carlos, what
did you determine about pricing and other expected costs
associated to launch Chicken Sensations?”
“First, I looked at comparable frozen convenience food
products with package sizes ranging from 20 to 30 ounces,
the retail price per ounce is from $0.16 to $0.20—or $3.20
to $6.00 per package. Since I expect consumers to assign a
higher nutritional value on Chicken Sensations than other
products, I suggest we target a retail sales price of $0.1875
per ounce or $3.75 per bag for a 20-ounce bag. With retailers
IMA EDUCATIONAL CASE JOURNAL VOL. 10 , NO. 2 , ART. 3 , JUNE 20172
requiring a minimum 20% gross margin for new products, I
recommend that our selling price to them be $3 per bag or
$36 per case of 12.”
Carlos further explained some of the sales expenses
and other expected costs, “To encourage consumer trial of
Chicken Sensations, we will have to offer coupons of $0.20
per bag or $2.40 per case for all cases sold in the first year. To
gain access to convenience frozen food distribution channels,
we will have to pay a brokerage commission of 6% of our
sales price. In addition, retailers (in total) require a one-time
slotting allowance of $6 million to purchase shelf space.”
Vicki noted that the slotting allowance costs would need to
be expensed in the first year.
Continuing, Carlos explained estimates for other costs:
“Package design costs for artwork and photography expected
to be $2 million will have to be paid in the first year. To
support Chicken Sensations, we will need to hire additional
salespeople at total annual cost of $400,000. I anticipate we
will sell 65,000 cases in the first month with sales increases of
15,000 cases per month for the first year when we will reach a
maximum of 230,000 cases per month.”
“Great. Before we discuss the production and cost
assumptions, Gary do you have any questions for Carlos?”
Vicki asked.
“Thanks for asking. I do have a few questions. Based on
your comments, it looks like our case configuration would
be 12, 20-ounce bags or a 15-pound case. Is that correct,
Carlos?” Gary questioned.
“Yes, I feel a 20-ounce bag allows for us to be competitive
on a price per ounce with other convenience frozen food
products,” Carlos clarified.
“That package size works great. We anticipate producing
Chicken Sensations at the Oakdale facility where we already
make spaetzels and have the capability and capacity to
package 20-ounce bags. Are you comfortable with your sales
forecast? As I recall, the sales forecast for Soup-in-a-Flash
was overly optimistic, causing us to over-produce a product
that never sold.” Gary said.
