Profitability And Risk Essay, Research Paper
Qualitative Criteria and Evaluations
Profitability and Risk
Alternative one offers the highest profitability. The net income after taxes for alternative two is $104,996,299 compared to $160,658,065 for alternative one. Alternative two also offers a high profitability, but not as much as the first alternative. The risk for alternative one is very high. The risk for the second alternative two is average. Purchasing Nestea is risky because the alternative beverage industry is declining. Coca-Cola?s dissolution of their alliance with Nestea also raises some concerns of risk and profitability. The additional profits received from alternative one are not a large enough amount to consider taking this high of a risk.
Competitor?s reactions were thought to be more prevalent in alternative two. The repackaging and offering the non-tea products in cans would cause an immediate reaction. The expected increase in sales would cut into the competitor?s share of the market. When Snapple refocuses itself in the international market, the other alternative beverage companies will also enter the market. Competitor?s reactions for alternative one are expected to be low. The main competitor left after the purchase of the alternative beverage division of Nestea from Nestle would be Pepsi?s Lipton product. There are no clear strategic actions to counteract this movement from Pepsi Lipton.
Society?s reactions for both alternatives would be high. Buying Nestea, alternative one, would give Snapple the profits they would receive from loyal Nestea customers. This brand loyalty might also help the image of Snapple?s drinks. The convenience of having Snapple in a can, included in alternative two, should have a positive reaction. The slightly lower price of Snapple, for both alternatives, should create increased sales because consumers always appreciate being able to purchase goods at a lower price.
The timing of both alternatives is crucial because of Snapple?s declining market share and the slowing growth of the industry. It may also be a good idea to wait a while to purchase Nestea because of its declining sales, which could lower the purchase price. This is the right time for Snapple to enter the international market due to the industry?s growth decline in the alternative beverage market in the United States. Entering the international market should increase Snapple?s sales in a market that is not yet overcrowded.
Purchasing the Nestea division of Nestle could be difficult to accomplish. It is unknown if Nestle is willing to sell Nestea. Also, acquiring the amount of capital needed to purchase Nestea would be complex. Alternative two is more feasible. There are some promising prospects for international trade markets. It should be easy to offer Snapple in cans because the costs are lower and the company does not produce its own bottles. However, Snapple would be forced to find companies that produce cans and will be willing to bottle the product in cans.
Both of the alternatives address the problem that Snapple is facing. Alternative one solves the problem of Snapple?s declining market share by purchasing the Nestea division of Nestle. Alternative two solves this problem by entering the international market. The key success factor of maintaining and improving the image of the company is included in alternative two. Both suggested methods of cutting costs, that would lower the price to the consumer, would also help to improve Snapple?s image Lowering the amount of flavors offered would make it easier to obtain shelf space for Snapple?s products.
Alternative two is the chosen solution. This decision was based on its strong numerical rating as well as its strengths. Alternative two was rated at 3.9 compared to 3.05 for alternative one. Entering the international market will increase the sales at less of a risk than alternative one. Alternative two also requires a considerably lessor amount to invest than the other alternative.
Alternative One Description
As the sales in the alternative beverage industry have slowed, Snapple has to figure out new ways to survive. Snapple needs to look at cutting prices, varieties, and acquiring other investments. These suggestions lead to an alternative which will help Snapple survive and grow in the industry.
Snapple needs to cut their prices to some extent, since they have a profit margin of 42.11% according to 1993 standings. They can cut this to 30 percent and still make a great return without starting a big price war. By doing this, Snapple will gain an increase in sales and possibly hurt other firms in the industry. This drastic reduction of consumer costs would threaten weaker firms to seriously consider leaving the alternative beverage industry. Since Nestle and Coke have separated, Nestea ( a division of Nestle) could be in serious financial trouble. The price cuts could hurt or eliminate Nestea and other small firms in the industry. In an industry with sales that are slowing, Snapple needs to try to acquire as much of the industry?s sales as possible in order to survive.
Along with the cutting of prices, Snapple needs to acquire other investments. One way of doing this would be to buy out Nestle?s alternative beverage division (Nestea). Snapple has a great amount of assets and leverage for financing to buy Nestea. If Snapple can acquire Nestea, it would increase its market share substantially. At this point , Snapple would only have Pepsi Lipton as a major rival in which to contend. When acquiring Nestea, Snapple will take the name, product, and other patents and copyrights. Snapple will not buy the production or distribution buildings. Snapple will also have Nestea?s products subbed out to other distributors and bottlers in the same fashion as Snapple?s current plan.
If Snapple and Nestea become one they could combine their products together for better sales and cheaper production. Since costs of supporting brands are on the rise and shelf space is limited, combing products packaging would be wise. Snapple will continue to not advertise its products as individual flavors but as the entire product line of Snapple. Also, they could use plastic bottles instead of glass, with the exception of ice teas. The use of plastic could also save money and possibly increase sales because of the convenience.
Alternative Two Description
Despite the fact that Snapple was doing well within the alternative beverage industry in 1992-1993, sales began to fall while inventories rose in 1994. In order to combat the loss of sales and shelf space in convenience stores and supermarkets this alternative consists of three key components.
The first component is to cut back on the number of flavors produced. Currently Snapple is distributed in 16 ounce bottles that tend to be bulky and more expensive than the competitors canned and bottled products. To compete with our competitors one option is to change the packaging to cans for the non tea beverages, like Mango Madness and Kiwi Strawberry. These cans will be more convenient for the consumer in cost and the ability to recycle. The cans will also be more convenient to the supermarkets because they will be able to stock them more easily. Snapple would keep its tea beverages in bottles because of the unique technique used in the brewing process.
A second aspect of the change in packaging is to sell packs of the drink to consumers. The packs would consist of four bottles or six cans. The bottles would be advertised mainly in supermarkets as ?buy three get one free?. These bottle four packs would consist of the consumers own assortment pack, in that the customer can choose which of the eight flavors of tea will go in their pack. The cans will be sold in six packs that are prepackaged in the same flavor.
The third component of alternative two is to expand Snapple?s focus to include international markets. In 1994 Snapple began to introduce itself to the European market. They began selling Snapple in Britain, Ireland and Norway and then moved into Denmark, France and Spain. However, by the end of 1994, only one percent of total Snapple sales were from international sales. This alternative proposes that Snapple increase their marketing strategies and attempt to contract more international distributors in order to increase global sales by ten percent. This component would cause the marketing department to expand their resources in order to market the product accurately in foreign lands. However, the timing is good at the current time in Europe to introduce Snapple. Snapple?s Research and Development staff would also have to research the flavors to see which ones are appealing to European tastes. Hopefully, Snapple will ultimately be able to expand to other markets like Sou!
th America, Asia and Central America.
At the current time Snapple?s primary focus has been to pique consumer interest consistently with the introduction of new flavors regularly. Snapple is also entering the international market. Although, a lack of focus has not made sales strong in the international market. Another aspect of Snapple?s strategy has been to introduce varieties of their product in the soda, sport drink and diet form. Unfortunately these techniques have not been as successful for Snapple as they had hoped.