Case 2 - Whisky Brand Turnaround
Type: Profitability, market sizing, etc.
Our client has been in business for close to 90 years. The founder started in the whiskey business and over time expanded the product line. Today it is a multi-million-dollar business with less than 5% of sales coming from whiskey.
The whiskey market in the US (our relevant market) has been declining at 2% over the last 20 years and our client’s brand has been declining at the same rate.
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While the company has a great passion for the whiskey brand, in recent years they have been paying limited attention to it. Last year, however, events happened that caused our client to pay attention to their whiskey brand. While sales of the market declined at 2% our client’s brand declined by 15%, despite selling 10m bottles.
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Our client has come to us to understand what has happened and how to grow the brand back without lowering the profits they were making on it.
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There might be several internal or external reasons for this decline in the client’s whiskey brand.
Possible Internal reasons may be:
• Reduction in marketing spend
• Decline in quality of marketing or product quality
• Product availability (production/supply chain)
Possible External reasons may be:
• Negative PR
• New competitor launch
• Increase in competitor marketing
• Pricing effects
To pinpoint the cause we need further data from the client.
First, we need to gather information on our marketing spend to have a basis for comparison. Secondly, we need to determine our competitors’ marketing spend, which we could do through several sources:
• Internal interviews.
• External benchmarking through competitor company reports.
• Analyze the number of pages in various publications.
• Interviews with experts within the advertising and marketing industry.
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We get the following Data from the client:
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COMPETITOR ANALYSIS
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Interviews with advertising experts and an examination of competitors’ ad pages have shown that while marketing spend hasn’t changed significantly, there has been significant changes in prices within the industry.
From these data provided we have to identify the problem and make suitable recommendations.
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Some of the preliminary questions to be answered will be:
What conclusions can we draw from the table? What are the options our client has assuming they want to stay in the whiskey business and how should they price their whiskey brand?
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-> We have 2 main competitors, each with two different brands (premium and own brand). Competitors have been steadily raising prices in their premium category, aiming at a segment of consumers who are willing to pay more. These consumers it seems prefer to buy at speciality stores. It is likely that our competitors have succeeded to capture a lucrative share of the market.
Additionally, both competitors have launched this past year “own brands” and selling them through grocery stores. These own brands are significantly cheaper than the premium brands and have a lower cost to produce.
It seems that competitors have been capturing the lucrative top end of the market while also launching new own brands that have captured the price-sensitive consumers, effectively squeezing our client's brand out of the market.
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->It is important to realize that our client’s product is a premium product and that is based on the cost to produce. Given this information, it would seem that our client needs to try and increase prices in order to be perceived as a premium product compared to the competitor premium brands.
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It would be reasonable to suggest a price of $19.00-$20.00 for our client’s brand.
Further inputs we receive after discussion -
Upon discussing the options we get the following information from the clients:​
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Based on market research our client believes that if they increase their price to $20.00 they will be able to sell
8 million bottles. The costs of producing whiskey are 75% variable and 25% fixed.
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Calculations:
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Current pricing option:
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Total Revenue= 10 million*$15 = $150 million
Fixed Cost = 25%*$8*10million = $20 million
Variable Cost = 75%*$8*10million = $60 million
Profit= $150m -$20m -$60m = $70 million
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New pricing option:
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Total Revenue= 8 million*$20 = $160 million
Fixed Cost = $20 million (remains same)
Variable Cost = 75%*$8*8 million = $48 million
Profit= $160m -$20m -$48m = $92 million
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​Examining the two options it seems that an increase of price to $20.00 would increase total profits by $22m an increase of ~30%
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Conclusion and Recommendations:
It appears that higher pricing option is a very favorable and viable path for our client. But there might be some complications that might arise due to this increase in price.
In the short term, we need to be aware of how our competitors react to this move in pricing, branding and advertising. Our move could provoke additional price increases from our competitors leaving us in the same position as we were before. We should also be aware of possible difficulties in marketing our brand in the premium category as the third mover.
Further complications could arise given that our changes in our whiskey brand may impact negatively our wider liquor portfolio if customers who stop purchasing our whiskey brand will also stop purchasing other liquor brands that our client owns. Lastly, we should be careful with the number of 8 million bottles as given to us by the client. If this number is too optimistic the results could be significantly different in the actual scenario.
Final Recommendations
Our client should increase its price to $20.00 per bottle. This increase will generate an additional $22m in profits, an increase of 30%.
Some potential risks of this move include: competitor response, optimistic data from client and consumer perception of our brand. Some next steps include: Validating data, creating a marketing and advertising plan, preparing the market for a significant price increase.
This is a preliminary suggestions that could be considered for further calculations only after discussion and further inputs from the client.