KEL010 Revised June 14, 2010

TIM CALKINS A.1. Steak : Lawry’s Defense

Chuck Smith, senior brand manager on A.1. and Marinades, looked again at the e-mail message on his computer. “Oh, you’ve got to be kidding me,” he muttered. “This is definitely not a good thing.” It was Friday, February 14, 2003—Valentine’s Day. Smith sighed, knowing he was going to have to reschedule his weekend plans again. He called his wife, told her the bad news, and then turned back to his computer.

The e-mail was from Susan Connor, Kraft’s sales manager for Publix, one of the largest grocery store chains in the United States. She wrote:

Hey, Chuck, I just got a call from my contact at Publix. He said that Lawry’s is launching a new steak sauce product nationally with an April 1 start ship. Lawry’s is asking for the Memorial Day ad at Publix, with a two-for-$5 promotional price point. He wants to know if we will match the pricing or if he should go with Lawry’s for the ad. I have a meeting with him on Tuesday. What should I say?

Smith was surprised that Lawry’s was launching a steak sauce and very surprised at the aggressive promotion pricing. He knew that Lawry’s was almost certainly going to price its new steak sauce at the same level across the country to prevent diverting1 between regions.

Immediately Smith scheduled a meeting with the division general manager for Monday to talk about the situation. He knew he was going to have to provide a strong recommendation on how A.1. should respond to Lawry’s launch. Should A.1. defend itself against the launch and if so, what should A.1. do?

A.1. Steak Sauce

One of the premier brands in the Kraft portfolio, A.1. had little competition, substantial sales, and excellent margins. The product had a long history. It was first developed in about 1830 by Henderson William Brand, chef to England’s King George. The King was so delighted with the sauce that he proclaimed it to be “A1.” The product was first sold in North America in the early 1900s.2 acquired A.1. in 2000 as part of its acquisition of Nabisco.

1 If pricing on an item varies by region, retailers and distributors often purchase the product in the cheapest region and ship it to the more expensive regions. This practice is called “diverting.” 2 A.1. Web site, http://www.A1sauce.com.

©2004 by the Kellogg School of Management, Northwestern University. This case was prepared by Professor Tim Calkins. The situation described in this case is real, but specific product and business information and all of the characters are illustrative. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management. This document is authorized for use only by Shawn Graber ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. A.1. STEAK SAUCE: LAWRY’S DEFENSE KEL010

A.1. was the clear leader in the steak sauce category with a dollar share of more than 50 percent (see Exhibit 1). It had extremely high brand awareness, boasting that “Nine out of ten steak houses serve A.1.” Key ingredients included tomato paste, water, , corn , and salt (see Exhibit 2). It was packaged in a heavy glass bottle.

While dollar sales in the steak sauce category and for A.1. Steak Sauce had grown in recent years due to price increases, unit and volume sales had been flat. Despite efforts to expand usage, the majority of the volume was still used on steak. Beef consumption trends in the United States had stabilized in recent years after declining for much of the 1990s. Consumers used a small amount of steak sauce per occasion; a serving size was one tablespoon, and there were 17 servings in a 10-ounce bottle of A.1.

Loyalty in steak sauce was high and competition was limited. Private label products were available in almost all stores in the United States. Despite a large price gap, private label products had less than 20 percent of the category. 57 was A.1.’s largest branded competitor. The Heinz 57 product was quite different from A.1. in taste and appearance, and most of the marketing efforts focused on communicating a versatility message for the brand, not directly competing against A.1.

The bulk of the business was made up of A.1. Original, despite the fact that the brand had introduced a number of flavor varieties over the years. The A.1. Steak Sauce line included Original, Sweet & Tangy, Bold & Spicy, Thick & Hearty, and Smoky Mesquite.

Brand equity for A.1. was grounded in steak. Efforts to expand beyond steak, such as the launch of a “poultry sauce,” had been unsuccessful. The A.1. poultry sauce product was a dismal failure, and was later highlighted as an example of an ill-conceived line extension in the book The 22 Immutable Laws of Marketing.

Distribution of the product stretched across the United States, with A.1. available at virtually every grocery store as well as at most mass merchandisers and club stores. A.1. products made up a large part of the steak sauce shelf set at most stores (see Exhibit 3).

The retail price on A.1. was about $4.99 for a 10-ounce bottle (the most popular size). Retail margins in the grocery channel were about 30 percent for all items in the category. Retailers only rarely reduced their margin on a percentage basis. A.1. had taken consistent price increases over the years. The brand ran in-store promotions with discounted pricing only at the key holiday weeks of Memorial Day and the Fourth of July, holidays important for the steak sauce category because they were peak times for grilling. Approximately 10 percent of A.1.’s full-year volume was sold on each holiday week. At these holidays, A.1. ran promotional programs with retailers to secure a promotional ad in the store flyer, an in-store display, and a $4.49 promoted price. Retailers traditionally supported only one brand in a particular category during a promotional week, so A.1. attempted to lock up the steak sauce category for the key weeks and was generally successful.

About 10 percent of A.1.’s revenue was spent on in-store promotional efforts or trade promotions. Much of the trade promotion spending went to secure the key holiday promotions and fund the associated price reductions. It was standard practice in the industry that manufacturers covered the cost of in-store price reductions; retailers kept their margins constant on a percentage basis.

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Kraft Foods put strong consumer marketing efforts behind A.1. Steak Sauce. The brand spent about 15 percent of its operating revenue on advertising. In 2003, A.1. was planning to focus on television spots with advertising running throughout the year. Consumer promotions were 5 percent of operating revenue. A.1. planned to drop four FSIs (free standing inserts)3 in 2003, one in each quarter, at a cost of $1 million each. Each FSI included a 50-cents-off coupon good for one A.1. Steak Sauce product. A.1. was also supporting a partnership with beef producers.

Kraft’s revenue on A.1. Steak Sauce was about $150 million in 2002 and operating profit was approximately $60 million. Variable product cost was approximately 60 cents per unit for the 10- ounce size. A.1.’s 2003 plan anticipated flat revenue and slight profit growth on A.1. Steak Sauce.

A.1. had worked to broaden the brand beyond steak sauce. The brand launched a line of marinades in 2001 in order to enter the fast-growing marinades category. After initially disappointing results, the A.1. team successfully relaunched the line in 2002. At the end of 2002, Kraft’s revenue on the A.1. line was $15 million, and the line had a 10 percent share of the marinades category. A.1. was launching a new marinade item in 2003 and was planning to continue aggressively building trial on the marinade line. A.1.’s 2003 budget called for $10 million of advertising spending on the marinade line and $5 million of consumer promotion spending. The marinade line was projected to lose about $7 million in operating profit in 2003, though this was an improvement from a $10 million loss in 2002.

The total brand’s 2003 budget called for profit on the A.1. portfolio to increase 10 percent from the previous year (see Figure 1).

Figure 1: A.1. Steak Sauce Operating Profit ($ in millions)

2002 2003 Plan A.1. Steak Sauce 60 62 A.1. Marinades (10) (7) A.1. Total 50 55

Kraft Foods

Kraft Foods was the second largest company in the world and the largest food company in the United States. Kraft Foods had 67 major brands, each with more than $100 million in annual sales. Products spanned a wide range of categories, including coffee, yogurt, lunch meats, frozen pizza, dressing, , , boxed dinners, candy, cookies, crackers, nuts, cereal, , stuffing, and rice.

While it competed with virtually all the leading food companies, Kraft’s most direct competitors were General Mills, Unilever, Pepsi, and Nestlé.

3 These were coupons distributed with the Sunday newspaper. FSIs had wide circulation; a national FSI reached approximately 50 million households. It cost $400,000 in media fees for a national FSI, plus the cost of the redeemed coupons.

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Owned primarily by Altria Group, formerly Philip Morris, Kraft completed an initial public offering (IPO) for a small portion of its shares in 2001. Kraft Foods stock performed well immediately following the IPO, but then it fell back to slightly below the IPO price after the company reduced earning expectations in 2003. Kraft pointed to pension issues as the primary cause of its earnings miss, but many industry analysts were skeptical. There were major financial incentives for delivering the revised profit target, so that was a top priority for the senior executive team.

Lawry’s

Owned by Unilever, Lawry’s had 2002 brand sales well in excess of $100 million and a strong position in seasoning and marinades. Unilever described the brand as the “. . . USA’s leading provider of premium spice and seasoning blends, marinades, and other flavorings.”4

The Lawry’s brand was created in 1938 with the opening of Lawry’s, The Prime Rib Restaurant. The brand had an extensive product line that included more than 100 items. The lead product was Lawry’s Seasoning Salt. Other items in the line included taco seasoning and marinades, marinades constituting one of the fastest growing parts of the business. Despite the 2000 introduction of competitive marinade lines by Clorox (KC Masterpiece) and Kraft (A.1.), Lawry’s continued to lead the marinades category with a 50 percent share, and the marinades category was growing by 15 percent annually.

Unilever

One of the largest consumer products companies in the world, Unilever had annual sales of almost $50 billion (see Exhibit 4). The company had a vast and diverse collection of businesses. Brands included Dove, Vaseline, Close-Up, Breyers, Ragu, Hellmann’s, Knorr, Lipton, and Axe. Kraft Foods and Unilever competed aggressively in categories such as salad dressings (Kraft versus Wishbone), mayonnaise (Kraft Mayonnaise and Miracle Whip versus Hellmann’s and Best Foods) and marinades (A.1. versus Lawry’s). Financial results at Unilever had been disappointing in recent years.

Unilever was in the middle of implementing a new strategic program called “Path to Growth.” A key element of this program was rationalizing its brand portfolio focusing on the largest global brands. Even after the rationalization program, Unilever would have more than 200 brands. The company had challenged all of its brands to reach annual sales of at least one billion dollars.

4 Unilever Web site, http://www.unilever.com.

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Lawry’s Steak Sauce

In early 2003, Unilever announced plans to launch a Lawry’s steak sauce. The company chose April 1 for the first ship date in order to gain full distribution before the peak summer grilling season.

The Lawry’s steak sauce line included just one item: an 11-ounce product packaged in a plastic bottle. The product was a dark, intense sauce, similar to A.1. in taste and texture (see Exhibit 5). Everyday shelf pricing on Lawry’s Steak Sauce was significantly lower than A.1. Steak Sauce (see Exhibit 6 for everyday shelf pricing).

Lawry’s planned to put considerable marketing weight behind its new steak sauce. The company planned to drop five FSIs in 2003 and spend $20 million on advertising, concentrated in the months of May, June, and July.

Lawry’s was also supporting a large sampling program, called Lawry’s Live! The Lawry’s Web site said the following:

Lawry’s Live! is an interactive cooking show that gives event-goers the chance to learn the season’s hottest grilling trends in a fun and lively setting. During each cooking demonstration, Lawry’s Chef Brian Mannett shares recipe secrets and tasty new tips with grilling enthusiasts. Lawry’s Live! National Cooking Caravan will visit 17 popular fairs and festivals across the nation, showcasing the ease and versatility of cooking with Lawry’s® Marinades, Spice Blends, and NEW Lawry’s® Steak Sauce.5

Formulating the Plan

Smith called his cross-functional business team to his office. “You all have heard by now that Lawry’s is launching a steak sauce item. This is a direct attack on our business. We can’t let them succeed,” he stated. “We need to get to work on the defense plan.”

Jennifer Miller, Smith’s research manager, jumped in. “Wait a second, Chuck. You know A.1. has the strongest brand equity in the category. It is virtually untouchable. In addition, our initial product testing shows that the Lawry’s product isn’t quite as good as A.1. Original. Our consumers just aren’t going to go for some second-tier brand. Lawry’s is entering this category about a hundred years too late. The order-of-entry model suggests that the Lawry’s product will get, at most, a 10 percent share of the category. We shouldn’t overreact.”

Steve Johnson, the sales manager, interrupted Miller. “You can say all you want about having great brand equity, but Publix is ready to give Lawry’s the Memorial Day key week promotion because Lawry’s has much better pricing. We do 10 percent of our annual sales that week; we can’t lose that business. And every other grocery chain across the country will be calling soon, too, asking us to match Lawry’s. We have to at least match them on pricing across the country. I actually think we should go with a two-for-$4 promoted price to send them a signal.”

5 Lawry’s Web site, http://www.lawrys.com.

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Diane Sheridan, the finance manager, jumped right in. “Steve, are you nuts? How are we going to pay for that kind of program? Do you have any idea how much that would cost? I know defense sounds great, but we need to be a little realistic. We are struggling to get to our 10 percent profit growth target this year as it is, especially with the spending we are putting against the marinade line. We all know Kraft Foods needs us to deliver our profit number. I’m sitting on a lot of worthless stock options right now, so I want to help get the stock back up, too. Spending like drunken sailors is just a bad idea.”

The room fell silent. Smith knew that as senior brand manager he had to develop a plan quickly so he could put together a recommendation for Monday. He wondered if A.1. needed a defense. If so, he debated, what should A.1. do? Should the brand reduce its price, either through a list price roll-back or aggressive promotions? Or should A.1. simply spend more on its existing advertising campaign? Perhaps, Smith wondered, Kraft should quickly develop an A.1. line extension to meet the competitive threat. Timing would be terribly tight, but anything was possible if the team focused on it. In any event, Smith knew he had to keep in mind the 2003 profit target.

Smith looked at the group and then stepped up to the flip chart at the front of the room. “We need to lay out our options and figure out the financial implications. Then we can settle on the best plan and put together the recommendation. Who wants to start?”

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Exhibit 1: Steak Sauce Market Shares, 2002

Dollar Share Volume Share (lbs.) A.1. 54% 46% Heinz 57 16% 13% Private Label 14% 19% Others 16% 22%

Exhibit 2: A.1. Original Steak Sauce Ingredients Tomato puree (water, tomato paste), distilled vinegar, corn syrup, salt, raisin paste, spices and herbs, crushed orange puree, dried garlic and onion, caramel color, potassium sorbate, and xanthan gum.

Exhibit 3: Steak Sauce Shelving, 2002

Items Carried Shelf Facings A.1. Steak Sauce: Original 3 6 A.1. Steak Sauce: Flavors 4 8 Heinz 57 2 4 Private Label 1 3 Other Brands 5 8 Category Total 15 29

Exhibit 4: Financial Results, 2002 ($ in millions)

Kraft Foods Unilever Total Revenue $29,723 $48,270 Operating Income 6,114 5,041 Income After Taxes 3,398 2,441

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Exhibit 5: Lawry’s Steak Sauce Ingredients Tomato puree (water, tomato paste), distilled vinegar, raisin paste, high fructose corn syrup, salt, orange juice concentrate, malodextrin, modified food starch, dried garlic and onion, spices, caramel color, citric acid, molasses, yeast extract, potassium sorbate and sodium benzoate, xanthan gum, tomato powder, vinegar solids, natural flavor, tamarind, anchovies, and sugar.

Exhibit 6: Retail Everyday Shelf Pricing, 2003

Retail Shelf Retail Shelf Size (oz) Price Price/oz A.1. Steak Sauce $4.99 10 $0.50 Heinz 57 $4.79 10 $0.48 Private Label Steak Sauce $3.49 10 $0.35 Lawry’s Steak Sauce $3.99 11 $0.36

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