Download “Class—or Mass” HBR Case By Megan Beatty

“Class—or Mass” HBR Case
By Megan Beatty
MGMT 430, Section D
A. Executive Summary
In the past three months, Neptune’s finished goods inventory has raised twice their normal level (60 days’
supply). Company executives are plagued by what to do. Rita Sanchez has suggested cutting prices 40-50%
and launching a mass-market brand. Meanwhile, Jim Hangrove feels drastic price cuts and a low-market plan
will tarnish brand equity and cannibalize future profits. Excess supply presents Neptune with several growth
opportunities. Successful opportunities will emphasize brand equity, low implementation costs, relationships with
the Association, and use of current assets. My tactical recommendation is to sell current excess inventory at a
markdown to bulk discount retailers, such as Costco. Because new laws and technology has increased
Neptune’s average catch size, excess inventory will continue to persist. My strategic recommendation is to sell
ready-to-eat fish-based meals to their existing market using existing channels. This strategy aligns with the
evaluation criteria outlined below and capitalizes on current market trends- sustainable fishing, frozen seafood,
and healthy eating.
B. Industry Dynamics
Neptune is currently the most upmarket player in the $20 billion seafood processing and distribution industry,
producing quality seafood for grocery chains, restaurants, cruise lines, wholesale distributors, and an
independently operated fish market. Customer value is derived through the superior quality of Neptune’s product
– advanced technology allows vessels to capture fish in an environmentally sustainable way and freeze them in
a manner that preserves freshness. This contributes to higher than average operating costs (14% vs 11%).
Having key contacts within the industry and the ability to control stock on hand are also crucial to remaining
competitive in this industry.
If the company pursues Neptune Silver, a mass-market brand, retaining profit and maintaining relationships with
industry influencers will be major determinants of success.
C. Situation Analysis Summary
The root cause of Neptune’s excess inventory is a combination of new fishing laws, a recent investment in
advanced technology, and a lack of consumer demand (Appendix D). Many of Neptune’s competitors are facing
similar situations. New fishing laws have pushed all commercial fishing into deeper waters, contributing to larger
catches and an industry surplus.
Reducing prices 40-50% and launching a mass-market brand have the potential to reduce excess inventory.
However, this plan is complicated by the market position they occupy. As an upmarket player, all of Neptune’s
products have the U.S Association of Seafood Processors and Distributors (ASPD) Gold-Seal. Additionally, a
recent $54 million expansion in their equity base cost their biggest investor a 10% share dilution. In order to
maintain relationships with the association, their investors and their customers, superior brand equity and high
ROI is critical. As Hangrove points out, the launch of a low-cost product would threaten these relationships.
D. Importance of Decision
While dealing with Neptune’s short term excess inventory is important, the larger issue concerns Neptune’s
potential long term inventory growth. The outcome of our decisions will determine if and how the company will
grow and stimulate demand in a stagnant consumer market. Growing the company in the wrong direction could
deteriorate industry and consumer channel relationships, thereby losing Neptune’s Gold Seal of approval and
the level of profits needed to maintain their high cost structure. However, growth in the correct direction will not
only insure that Neptune keeps its place as an upmarket player, but also stimulate industry-wide demand.
E. Evaluation Criteria and Definitions
1) Financial Investment- will the solution be expensive to implement? Neptune’s equity base is currently tied
up in six new freezer trawlers valued at $9 million apiece.
2) Long Term Profitability- will the solution increase gross margins? Neptune’s fishing techniques contribute to
a high cost structure, thus maintaining profits is critical.
3) Brand Equity – will the solution contribute to or diminish Neptune’s brand equity?
4) Association Approval – will the solution meet the Gold Seal approval of ASPD? The solution must not
disrupt the current market for their relationship to remain intact.
5) Competitor Response – will the solution engage competitors in a price war or be easily copied?
6) Employee Morale – will the decision be agreeable to key players involved in decision?
7) Low Risk – will the solution have a high chance of success?
F. Alternatives
All considered solutions for this case are outlined in the Market Expansion Grid (Appendix F); however, selected
solutions were chosen based on their alignment with evaluation criteria derived from the case and their potential
long-term implications. I have developed two viable solutions and considered the mass-market solution,
Neptune Silver, discussed in the case.
1) Launch a low-price mass-market brand, Neptune Silver. This option focuses on leveraging excess
inventory into new sales by making Neptune product available to value-oriented consumers.
Pro:
 May stimulate sales and consumer demand for seafood, due to lower prices.
Con:
 Lowering the price point 40-50% sells product at a loss and engages competitors in a price war. If highend consumers switch to Neptune Silver over Neptune Gold, Neptune’s cost structure is cannibalized.
 Pushing excess supply disrupts the industry and encourages overfishing, creating an unfavorable
strain on their relationship with ASPS, and costing Neptune their Gold-Seal reputation.
2) Reduce inventory by selling old ships and reducing operating days/ hours. This option negates growth and
focuses on creating long-term inventory control (aligning supply with demand).
Pro:
 Operating costs are reduced, thereby increasing profit margins and allowing Neptune to continue hightech, environmentally sustainable fishing practices.
 Control of inventory is a driving success factor in this industry, where overfishing only reduces the
bottom line (Appendix G3).
 Ensures brand equity and industry relations remain in check, while keeping competitors at bay.
Con:
 Neptune is susceptible to stagnant sales as competitors capitalize on growth opportunities.
 Loss of jobs decreases employee morale. If schedule cutbacks endure and employees leave, then
additional training costs may by incurred.
3) Sell ready-to-eat fish based meals. This option focuses creating new products for Neptune’s existing
customer base.
Pro:
 Economies of scope and current distribution channels are utilized.
 Idea capitalizes on Neptune’s key advantage— new freezers extend product’s shelf life.
 As a sustainable, locally sourced, and fresh product, this idea appeals to a growing sector of healthminded consumers (Appendix G5).
 Frozen seafood accounted for 31.7% of the industry in 2015, more than meat or poultry. Current
market share concentration is low and expected to grow. (Appendix G7).
 Most successful frozen food wholesalers remain local; Neptune’s dominant consumer base is local.
Con:
 Additional marketing and labeling costs will be necessary to launch product.
 The product may fail to stimulate additional consumer demand for seafood.

The competitive landscape is identified as “medium” and “steady” (Appendix G7).While the industry
is seeing growth, it is important for Neptune to create differentiation.
G. Alternatives Evaluation Matrix
Criteria
Importance
Low Financial
Investment
Long Term
Profitability
Retains Brand
Equity
Association
Approval
Competitor
Response
Employee Morale
Med.
Low Risk
High
Option A: Launch Neptune
Silver
Med.
0 Limited additional costs,
infrastructure in place
- Current consumers drift to
lower price products
- Doesn't align with current
brand image
- Disrupting market, will not
get Gold Seal
- Likely to launch price war
Low
0
High
High
Med.
Option B: Reduce Fishing
Operations
+ Will reduce operating costs
+ Increases profit margins, supply
meets demand (Appendix G1)
0 Maintains current status
0 Doesn't disrupt industry
- May leave room for competitors
to capitalize on larger catches
- Lost jobs
0 likely to create low-end
0 Solve long term problem (+),
growth
risk growing company (-)
TOTAL
-10
5
*Total calculated by multiplying importance weight (high = x3, medium = x2, low = x1) by (+,-, 0).
Option C: Sell ready-to-eat fish based
meals
- Storage of fish & meal-preparation
requires additional costs
+ Aligns with growth trends (Appendix
G6)
+ Strengthens brand reputation
(desirable consumer mkt)
+ Maintains relationship & encourages
seafood consumption
0 Medium competition (Appendix G7),
first to market advantage
+ May create more jobs
0 Same market, new product (marginal
risk)
7
H. Recommendations
Short Term-- Discount Product: Tactical
Excess inventory is valued at $109 million, thus Neptune needs to eliminate current excess inventory quickly.
(Appendix G8). My recommendation is to offer excess product at a discount to a bulk resellers, such as Costco.
Because excess inventory is a sunk cost, selling product at a loss is negligible. The limited time discount should
have minimal impact on brand equity. Neptune may also consider donating excess inventory to charity as a tax
write-off if distribution channels are unavailable.
Long Term—Sell Ready-to-Eat Fish-Based Meals: Strategic
Based on the Evaluations Matrix above, it is clear that there are two viable solutions - reducing fishing
operations and launching ready-to-eat fish-based meals. The difference in these strategies lies within the growth
opportunities each offers. My recommendation is to pursue Option C, as it identifies new growth segments
within Neptune’s existing market. The created of a “value-added” product is favorable for an upmarket specialist
and creates the closest correlation with the identified evaluation criteria.
I.
Key Implementation Actions
1) Identify bulk discount resellers, such as Costco, to sell 60-day-excess inventory.
2) Partner with local cooks to create fish-based meal recipes. It is advisable to use current operating
facilities to produce and manufacture finished goods. This may involve increasing operating hours or
hiring additional employees.
3) Work with marketing department to identify a price point and labeling.
4) Use current distribution channels and grocers to negotiate store and shelf locations.
J. Impact to Resources and Capabilities on Competitive Advantages
The recommendation to sell ready-to eat fish-based meals takes into account the most vital evaluation criteria.
Because Neptune already has the necessary facilities, equipment, and supply chain, implementation costs are
low and relatively simple. Their strong relationship with local grocers and consumers makes acquiring shelf
space accessible, as well. Most importantly, launching this product takes advantage of an existing market. The
product “adds value” to Neptune’s traditional products, and aligns with several high growth trends- sustainable
fishing, frozen seafood, and health food. Current competition in the market is low because the nature of frozen
wholesaling is localized – an advantage for Neptune—and is expected to see significant growth in the next five
years, making current market entry ideal. This investment is low risk, with ultimately high reward.
Appendix
Table of Contents:
A.
B.
C.
D.
E.
F.
G.
PESTEL Framework
5 C’s Analysis
SWOT Analysis
Root Cause Analysis
Resources, Capabilities, & VRIO Framework
Market Expansion Grid
Outside Information Research
1) Information on Demand Determinants in Fish & Seafood Wholesaling
2) Major Markets in Fish & Seafood Wholesaling
3) Key Success Factors in Competitive Landscape
4) Industry Globalization
5) Industry Opportunities in Seafood Processing
6) Country Report on Fish & Seafood in the US
7) Frozen Food
8) Calculations
A. PESTEL Framework
Political
 ASPD influences US and global policies related to the fishing industry
 By Neptune flooding the market with excess supply, they may be damaging their relationship with
ASPD, and thus, their political pull
 U.S. fishing industry is more regulated than foreign competitors
Economic
 Recently expanded equity base allowed $9 million investment in technology (freezers)
 Investor diluted shares to do this --> ROI important
 Net Profit: 4%
Sociocultural
 Sell to high end retailers
 Big concern is that selling excess supply through mass market brand will dilute their image & quality
prestige
Technological
 Inventors willing to spend on R&D
 New freezers prevent fish from getting ice crystals --> Has longer shelf life
Environmental
 New freezers are environmentally sustainable
Legal
 New laws make ships have to catch fish further away from shore, which harvests richer catches, thus
contributing to increased inventory
B. 5 C’s Analysis
Context & Industry:
 Profitability: Low profit industry due to high operating cost (Neptune: 4% after-tax Net Profit)
 Growth: Seafood demand is growing, but not as fast as supply is increasing
 Size: $20 billion industry
 Life Cycle: Cyclical, slow winter sales usually bring discounted products to encourage sales
Customers:
 30%: U.S. Grocery Chains
 33% Restaurants &Cruise Lines (within 250 miles of Fort Lauderdale)
 33% Wholesale Distributers (for restaurants across the US)
 4% Fish Market
 Trend: mainly B2B sales
 Future: All considered options make use of current consumer channels
 Target high-end consumers
Competitors:
 Foreign seafood producers: China, Peru, Chile, Japan
 Other high-end domestic seafood producers
Collaborators:
 High operating expenses, but new technology ensures that each catch is done efficiently and is well
preserved
 U.S. Association of Seafood Processors & Distributors (ASPD)
o Members (including Neptune) account for 80% of all seafood sales in the US
o Influenced US and global policies related to the fishing industry & imposed quality standards
o Published benchmark pricing policies for all seafood distributors and producers
o Neptune's products all have prestigious Gold-Seal rating
Company:
 60 day excess inventory
 New ship technology & new fishing laws are producing larger on-average catches
 Supply of seafood is larger than current demand
C. SWOT Analysis
Strengths:





“The Best Seafood on the Water Planet”
Cutting edge technology
o Environmentally sustainable method
of freezing fish
The most upmarket player in the $20
billion industry
o Sell at 25-30% higher price point
Recently expanded equity base allowed $9
million investment in technology (freezers)
Higher Gross Contribution Margin and Net
profit than median industry values
o 2006: 20% vs. 17% (gross
contribution margin)
o 2006: 4% vs. 3% (net profit)
Opportunities:





Launch ready-to-eat, fish based meals
Cut prices 40-50% to launch low-priced
seafood brand (mass-market brand)
Get into private label business
Offer 10% discount, acknowledging the
seasonality of a highly perishable product
Long Term: not about reducing inventory,
but about introducing Neptune's products
to a bigger market
o Growth strategy
Weaknesses:

Excess inventory
o 60 day supply- 2x the normal level & 3x
what it had been a year ago
o May be a problems competitors are
facing as well
 New laws reduce access to shore fishing,
resulting in fishing further out to sea
o Richer fishing grounds + new
technologies = larger catches
 Healthy eating is a growing trend, but seafood
sales still lag behind poultry
 Demand for fish is growing, but not as quickly
as supply
 Higher operating costs than competitors
o 2006: 14% vs. 11% of operating income
Threats:



Much competition
o China, Peru, Chile
o Poultry producers
Cutting prices may:
o Start price war with competitors
o Dilute brand reputation
Relationship with Association
o Gold Seal on all products
D. Root Cause Analysis
E. Resources, Capabilities, & VRIO Framework
Resources & Capabilities:
Tangible:
 Freezer trawlers
 Excess inventory
 Fleet of ships
 2 "sophisticated" plants (Cedar Key, Florida & Norfolk, Virginia)
 Employees
 Expansive equity base & dedicated investors
Intangible:
 Environmentally sustainable method of freezing seafood to capture peek freshness (IP)
 Quality reputation- most "upmarket-player"
 High brand equity
 Gold Seal on all products
VRIO Framework under Option C: Sell Ready-to-Eat Fish-Based Meals
Valuable: Yes
 Assets make the most upmarket player in the industry
 Solution uses current assets to create value added product
Rare: Yes
 Neptune is the only competitors with the environmentally sustainable freezers and a Gold Seal on all
products
 This extension line provides the same high end quality found in its traditional products, aligned with
current market trends. This offers potential first mover advantage.
Costly to Imitate: Yes
 Already a low profit industry, few competitors have the capital structure to invest in the technology
Neptune has.
 Neptune’s freezers create additional shelf life- a key component of successful frozen food lines.
Competitors without this equipment will struggle to provide the same caliber of freshness and quality
Neptune is able to provide with this resource.
Organized to Capture Value: Yes
 Technology makes them a long term for-runner in this industry
 Value added product created for consumers using economies of scope for the company.
= Sustained Competitive Advantage
F. Market Expansion Grid
Existing Products
Existing
Markets


New Markets



New Products
Marking campaign to increase taste &
awareness of fish
Not grow market

Launch ready-to-eat, fish-based
meals (frozen fish)
Create mass-market seafood brand (under
Neptune's name)
Create private label brand (separate from
the Neptune brand name)
Create additional fish markets


Introduce pet food line
Fishing excursions near tourist
sites
Sell excess fish to fish oil plant

G. Outside Information Research
1. Information on Demand Determinants in Fish & Seafood Wholesaling
Seafood consumption drives demand for wholesaling in this industry. In turn, seafood consumption is
driven by taste and price. Because there are many substitutes for seafood, such as meat and poultry,
demand is highly dependent on price. Similarly, fish and seafood products are often consumed at
restaurants. Generally, an increase in disposable household income means households eat out more,
thereby increasing their demand for fish and seafood products.
Environmentally friendly fishing practices are also an emerging trend. Conscious practices, made aware
to customers by marketing and labeling, may help to increase and sustain consumer demand as well.
Neptune has successfully mastered environmentally friendly fishing methods; however, they may
consider advertising these methods more. It is also important for Neptune to consider the stagnant
growth in consumer demand when deciding on a solution.
2. Major Markets in Fish & Seafood Wholesaling
Major markets in this industry include: wholesale establishments for resale, restaurants, hotels, and food
services, and contract feeding, and retailers for resale.
Other markets account for 10.5% of the market segment and include oversea customers, manufacturers
who use seafood as an input, and individual households. As the trend for locally sourced goods
continues, revenue from this segment is expected to increase.
Neptune may be able to capitalize on its ability to retain “fresh” taste to gain more local market share.
3. Key Success Factors in Competitive Landscape
Success Factors:
Having contact with key markets
Neptune:
The Association, Local Restaurants, Wholesalers, Grocers
Guaranteed supply of key
inputs.
Vertically integrated (inputs are guaranteed);
Important to use sustainable practices to reduce overfishing in
industry
Current weakness- excess finished goods inventory is detrimental
to bottom line
New technology & cold storage facilities
Ability to control stock on hand
Use of specialist equipment &
facilities
4. Industry Globalization
Globalization is low and the trend is steady. Imports are accounted for at the production and processing
level, but the most relevant players in the industry remain locally owned and operated. As a result, low
levels of globalization are projected to continue indefinitely.
Neptune should not consider global, or even nationally based solutions. Gaining a high percentage of
market-share locally is key.
Source (G1-4): IBIS World Report-- US Industry Report: Fish and Seafood Wholesaling- obtained through
Foster Library Database http://clients1.ibisworld.com/reports/us/industry/competitivelandscape.aspx?indid=976
on April 18th, 2015.
5. Industry Opportunities in Seafood Processing
Sustainable fishing coalitions are rapidly forming as retailers and consumers become increasingly aware
of the problem of overfishing. Many retailers are announcing new "eco-label" standards, requiring fish
sold to come from sustainable fisheries and processors.
Other opportunities include: online sales, exporting alternative products, and creating value-added
products.
Neptune may consider creating ready-to-eat fish based meals as a value-added, alternative product.
Source: Hoovers- Seafood Processing Trends and Opportunities - obtained through Foster Library Database
http://subscriber.hoovers.com/H/industry360/trendsAndOpportunities.html?industryId=2033 on April 18th, 2015.
6. Country Report on Fish & Seafood in the US
"Sustainability" will continue to be the key, as labeling becomes more consistent and retailers and
restaurants use sustainability and traceability to gain a marketing edge over competitors.
The association between "fresh" and "healthy" will remain strong in the U.S. Thus, fresh fish will attract
consumers who may have turned away from processed fish during the 2008 recession.
Because Neptune’s products retain freshness and have an extended shelf like, increasing eco and
“fresh”/”healthy” labels and marketing campaigns may help increase and maintain sales.
Source: Passport-- Fish & Seafood in the US --obtained through Foster Library Database
http://portal.euromonitor.com.offcampus.lib.washington.edu/portal/analysis/tab on April 18th, 2015.
7. Country Report on Fish & Seafood in the US
The highest revenue-generating frozen products for consumers are poultry, meat, and fish. Seafood
accounted for 31.7% of the industry in 2015, more than mean or poultry.
Market share concentration in the industry is low. Frozen food wholesalers are recommended to remain
localized, a specialty of Neptune. Additionally, this market segment is expected to grow in the next 5
years, making now an appropriate time to enter the market.
Source: IBIS World—Frozen Food Wholesaling—obtained through Foster Library Database
http://clients1.ibisworld.com.offcampus.lib.washington.edu/reports/us/industry/competitivelandscape.aspx?entid
=972 on April 22, 2015.
8. Calculations
Cost of Excess Inventory: (COGS/ 365) = (x/ 60)  (656.3/365) = ($109.38/60)
$109.38 * 1.25 (Sales Mark-Up) = $136.25 million Worth in Sales  136.25/820 = 16.66% increase in
sales needed to sell excess inventory