R&R Ice Cream to Reduce Sales Seasonality

Case Type: operations strategy.
Consulting Firm: Mars & Co second round summer internship interview.
Industry Coverage: Food & Beverages.

Case Interview Question #00615: Richmond Foods is the leading ice cream manufacturer in the United Kingdom. Headquartered at Leeming Bar, North Yorkshire, England, the company controls more than a third of the UK’s take home ice cream market. It supplies ice cream to many of the UK’s leading supermarkets, grocery stores, and restaurants.

In May 2006, Richmond Foods announced that it was to be taken over by Oaktree Investments, an American Investment Company, who will unite Roncadin, the biggest German own-brand label ice cream manufacturer, and Richmond, to make the largest ice cream manufacturer in Europe. The new company is now known as R&R Ice Cream.

Now R&R Ice Cream is the European market leader with a share of 31% of the overall ice cream market. The client, the CEO of R&R Ice Cream, is concerned because its ice cream sales are more seasonal than those of competitors, even though overall profits are excellent. How would you help the CEO to reduce sales seasonality?

Suggested Approach:

A good possible framework is to look at the 3C’s: Company, Customer, Competitors

• Company
  • Product mix: characteristics, seasonality, how perishable it is, etc.
  • Operations: is the manufacturing capacity used continuously or seasonally throughout the year? can we use the capacity to produce less seasonal products than ice creams?
• Customer
  • Segments, trends, characteristics in terms of seasonality
• Competitors
  • How do they differ from the client with regards to the two previous points: Company and Customer

It is important that the candidate recognizes that there are two ways to reduce seasonality here:

• Modify the seasonality of sales themselves
• Modify the production or the products to come to a less seasonal use of capacity.

Additional Information: (to be given to candidate if requested)

1. Products

• Ice creams, sorbets
• Very perishable products (by nature and regulation)
• Very extensive to store

2. Operations

• The client’s pduction follows seasonal sales pattern (too expensive to store)
• The production line could be used to produce other types of items.
• 90% of the production costs are fixed.

3. Customers: 3 main types of customers

• Ice cream stores: highly seasonal
• Retail / supermarkets: moderately seasonal
• Restaurants: almost not seasonal

4. Market situation

Possible Solution:

Interviewer: How would you go about approaching this problem?

Candidate: (The candidate should come up with a framework. See the 3C’s framework in the “Suggested Approach” section above.)

Interviewer: Good points. Where do you want to start?

Candidate: Let’s talk about the operations first. The demand for ice cream is by nature seasonal. Does the client currently produce ice cream continuously or seasonally throughout the year?

Interviewer: There are peaks in production to match demand. Why do you ask?

Candidate: Considering that 90% of the current costs are fixed, it might be less expensive to smooth production over the year. The capacity would not need to be as high since there would not be peaks anymore, therefore the fixed costs would be reduced. However, this would involve storage of ice cream during the months of low demand.

Interviewer: This is an interesting thought. However, our ice cream is too perishable to be stored for more than 2 weeks.

Candidate: Maybe we could modify our products by adding preservatives and stabilizers.

Interviewer: Not a bad idea. However, regulations prevent us from doing this.

Candidate: OK. It seems that production of our ice cream will remain seasonal then. To maximize the use of capacity and reduce our fixed costs burden, could the plants be used to manufacture other types of products during non-peaks periods?

Interviewer: This would be a possibility, but we have not explored it in details. What else would you need to know?

Candidate: We discussed the possibility to reduce the seasonality of operations. Now, I would like to talk about reducing the seasonality of sales. Who are our current customers?

Interviewer: Who do you think they might be?

Candidate: As a customer, I can buy ice cream at supermarkets, ice cream stores/chains, and restaurants. Do we sell to all of these channels?

Interviewer: Yes, they are all our customers. Which do you think has the most seasonal demand?

Candidate: Ice cream stores would definitely be the most seasonal. Supermarkets would be less seasonal because people still eat ice cream at home during winter watching TV, even though they buy less than during summer. Finally, I would say that restaurants are the least seasonal because they always have ice creams on their menu and add it with apple pies, chocolate tarts, etc. Does it seem reasonable?

Interviewer: Yes, it makes sense.

Candidate: How do we split our sales to these channels? And how does it compare to our competitors?

Interviewer: Let me give you the following data. We miss some client information here. Could you please calculate what’s left for me?

Candidate: You mentioned initially that the total market share of the client is 31%. Since retail/supermarket and ice cream stores contribute to 16% and 12%, restaurants must contribute to the rest (31% – 16% – 12% = 3%). Therefore, the client’s market share on restaurants channel must be 10% (3% / 30% = 10%)

Interviewer: Good. Based on everything we discussed, what would you recommend the client do to address its seasonality concern?

Candidate: Firstly, I would recommend targeting more strongly the restaurants, as their demand is less seasonal and the client is relatively weakly positioned there compared to competitors. Secondly, I would recommend looking at products we could manufacture in the current plants during non-peak times of the year, so as to optimize the use of the fixed cost capacities.

Interviewer: Great. Thank you.