Microsoft Word - 9b11B009.doc 9B11B009 HEALTHY LIFE GROUP Ian Dunn wrote this case under the supervision of Elizabeth M.A. Grasby solely to provide material for class discussion. The authors do not...

Microsoft Word - 9b11B009.doc 9B11B009 HEALTHY LIFE GROUP Ian Dunn wrote this case under the supervision of Elizabeth M.A. Grasby solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2011, Richard Ivey School of Business Foundation Version: 2016-04-20 It was early June 2010, and two months had passed since Heather Larson had been granted exclusive Canadian distribution rights to the Nutrifusion product. She had been very busy trying to develop the best strategy for this exciting new product. Nutrifusion had been sold successfully in the United States, and Larson believed it had the potential to earn strong profits and to provide her with a new career; however, as with any new venture, inherent risks were involved. Larson, in partnership with her father, Jeff Larson, was contemplating the launching of Healthy Life Group (HLG) to market Nutrifusion throughout Canada. The partners wanted to evaluate the product’s financial feasibility before deciding whether to proceed with the opportunity. If they did decide to proceed, HLG would incorporate and begin operations on January 1, 2011. NUTRIFUSION Nutrifusion was an intriguing new product in the health-food industry. A patented production process used select parts of the fruits and vegetables, namely the stem and core, and protected micronutrients1 and phytochemicals2 to retain 99.7 per cent of their nutritional value. The end result was a tasteless powder that could be added to baked goods or to liquids to provide additional servings3 of fruits and vegetables, thereby significantly increasing the food’s nutritional value. Nutrifusion also had the benefits of high levels of antioxidants, was an excellent source of plant-derived vitamins A and C, was 100 per cent natural, and had a shelf life of 36 months. See Exhibit 1 for a comparison of the nutritional value of normal tortilla chips and tortilla chips made with Nutrifusion. 1 Micronutrients are dietary organic compounds required by all living organisms for growth and metabolism. 2 Phytochemicals are chemical compounds that occur naturally in plants. Many are considered to have properties beneficial to human health. 3 One serving of Nutrifusion powder was equivalent to two to five servings of fruits and vegetables, based on the vitamins and nutrients provided by each. Page 2 9B11B009 HEALTHY LIFE GROUP The Partners Heather Larson was a fourth-year student at The University of Western Ontario. She was working towards a bachelor’s degree in management and organizational studies, with a double major in sociology. Larson had spent the previous summer working as an assistant product manager at Loblaws in the dairy, snack and beverage department. She had been exposed to entrepreneurial activities most of her life since her father had founded and owned several companies. Upon graduation, Larson hoped to have a full-time job in a venture that would allow her to start up her own company. Larson’s father, Jeff Larson, was eager to support his daughter with her business venture. He offered an array of experience in the retail food industry, including a valuable network of contacts. In 1994, Jeff Larson co-founded Concepts Food and also worked for Cott Corporation. While at Cott, he worked closely with Dave Nichol, the long-time president of Loblaws who launched the “President’s Choice” label. The pair was involved in the management buy-out of Destination Products, a division of Cott Corporation. Currently, Jeff Larson (no longer working for Cott Corporation) owned Innovative Food Group, a company that specialized in private-label sales and marketing. Objectives Larson and her father hoped HLG could earn a profit of $50,000 in its first year of operations, with plans to grow profits by 20 per cent each subsequent year. This growth could be achieved by broadening the product line and expanding into additional stores. Another of HLG’s goals was to help society move towards a healthier lifestyle: the Nutrifusion product would allow Canadians to improve their diets and overall health by supplying servings of fruits and vegetables in products like bagels, chips and cookies, which may otherwise be considered junk food. Investment In order to start the business Larson and her father planned to invest $25,000 each, and, in return, each would receive 1,000 common shares. The largest portion of this capital investment would be used to obtain the Canadian patent on the Nutrifusion production process. The company’s law firm, Stikeman Elliot LLP, estimated the drafting of this patent would cost $10,000, and the cost to prosecute the patent into issuance would be $12,000.4 HLG would also incur fees, estimated to total $8,000, to incorporate the business, obtain a master business licence and complete name registration. These start-up costs would be expensed in HLG’s first fiscal year. THE FOOD INDUSTRY Food sales of Canadian supermarkets and convenience stores surpassed $75,727 million in 2007. The Province of Ontario represented 33.5 per cent of the total sales. The grocery industry typically averaged a net profit margin of six per cent. Canadians had readily supported the movement towards healthier lifestyles, as reflected in an increased demand for organic and healthy foods, as well as vitamins and supplements, over the past five years; however, these nutritional products were often more expensive than 4 The patent would be amortized using the straight-line method over a 20-year useful life. Page 3 9B11B009 alternative food choices. Industry studies reported that high-income households most often met the recommended minimum fruit and vegetable intake; however, lower-income families and “on-the-go” individuals were less likely to consistently eat organic produce. Larson completed a survey of grocery shoppers, and her results showed a desire for higher nutritional value in bread products and snack foods. A recent study revealed that 75 per cent of U.S. residents failed to consume the minimum recommended intake of five servings of fruits and vegetables each day.5 In 2009, Canada was in the midst of an economic recession. In particular, Southwestern Ontario, a major automotive manufacturing centre, was hard hit, a circumstance that forced Canadian consumers to reduce their spending and to become more price-conscious. As a result, many Canadians eliminated non-staple items from their grocery lists, such as vitamins, supplements, and organic fruits and vegetables. Although the economy showed signs of improvement in 2010, economists predicted that Canadian consumers would remain price-conscious for some time. All products sold in the food industry were subject to approval from the Canadian Food Inspection Agency (CFIA). Before distribution occurred, companies had to submit nutritional and production information to CFIA for evaluation, a process that could take up to two years to be completed. THE COMPETITION Nutrifusion had no direct competition in Canada. It was the only product of its kind that offered full servings of fruits and vegetables in the form of a tasteless powder that retained micronutrients and phytochemicals. Furthermore, HLG had been granted exclusive distribution rights to the Nutrifusion product for Canada. To ensure that other companies could not duplicate this product in Canada, HLG planned to obtain a patent for the ingredients, the technology and the process used to break down fruits and vegetables into the powder. There was plenty of indirect competition facing both HLG and Nutrifusion. Consumers could readily purchase servings of fruits and vegetables and consume them on their own or use them as ingredients in various dishes; however, for the nutritional value offered by Nutrifusion, consumers would need to purchase organic fruits and vegetables for consumption. Alternatively, consumers could choose to forgo the fresh fruit and vegetable servings, instead opting to improve their diets through vitamins and supplements, which were widely marketed to provide similar benefits. Varieties of these products existed and were easily available throughout grocery stores, drug stores and nutritional supplement specialty stores, which were growing in popularity. Another form of indirect competition existed. If HLG chose to infuse products such as potato chips, cookies and bagels with Nutrifusion powder, it also had to convince consumers to purchase the company’s new line of these three items: potato chips, cookies and bagels. Consequently, all other brands of potato chips, cookies and bagels would become HLG’s competition. Because of their high fibre content, items such as multigrain and whole-wheat bagels had historically represented healthy-choice items to consumers, but they did not provide any fruit or vegetable servings. For potato chips, the closest competition likely came from kettle chips that were marketed as containing 65 per cent less fat than regular potato chips.