P&G Pet Food Approached by Wal-Mart

Case Type: new product; operations strategy.
Consulting Firm: Deloitte Consulting internship interview.
Industry Coverage: Household Goods, Consumer Products; General Merchandisers.

Case Interview Questions #00004: Your client Procter & Gamble Co. (P&G, NYSE: PG), a leading pet food manufacturer, has experienced a loss of market share and a downturn in top line revenue over the past 5 years. P&G’s primary channel of distribution is veterinarians who recommend the brand to their customers and sell directly from their offices. In fact, veterinarians are largely responsible for the launch of the company and the identity of the brand, as they contributed freely to the development of the quality formula that distinguishes P&G from competitors.

P&G now must make a decision critical to its future. The company has just been approached by retail chains Wal-Mart (NYSE: WMT) and asked to sell its most popular products through Wal-Mart’s chain of stores. There is one problem: Wal-Mart would sell the products at significantly lower prices than could the veterinarians. You have been asked to help P&G decide whether to pursue this alternative channel of distribution, and if so, how?

Additional Information: (to be given to you if asked):

• The number of veterinarians distributing P&G’s products has remained constant over the 5 year period in question.
• There are a number of customers who have been purchasing P&G products from veterinarians that continue to do so; however, an increasing number of customers are more resistant to paying the premium prices attached to P&G products and instead purchase pet food from discount retailers like Wal-Mart.
• After covering fixed costs the company enjoys a substantial profit off its premium priced goods.
• P&G products are only sold at veterinarians’ offices and consumers generally associate high quality and nutritious value with the pet food. Consumers that are willing to pay premium prices for P&G products believe that the food is superior to any close substitute on the market. Since these consumers trust that their veterinarians would only recommend the best, they subsequently choose only P&G products. The brand name is recognized widely and is always aligned with quality.
• While P&G’s current customers value perceived quality, Wal-Mart customers value price. As a result, Wal-Mart customers, who make purchasing decisions based on price, will not place high enough value on quality to pay a premium to obtain it. To cater to this potentially highly profitable customer segment, P&G must instead compete with other pet food companies in the Wal-Mart domain on price.

Possible Answer:

Suggested Frameworks:

In establishing a framework for this case, be sure to look at these three factors:

• The reasons for the downturn in revenue and loss of market share
• The impact of increased sales volume
• The importance of P&G’s unique positioning

Possible Solution:

1. Create a new line of products under the P&G name with cheaper/lower quality inputs — while this may initially draw customers at Wal-Mart, I would not recommend this strategy. I think P&G would lose nearly its entire veterinarian business as it may damage its brand image through the new offering. P&G would no longer be associated with its current superior standing in the industry.

2. Create the new product line and sell Wal-Mart the rights to sell the goods generically, under the Wal-Mart name — while I think this strategy would work, I think P&G is not leveraging one of its core strengths: its brand. So while it will sell more volume with this strategy, I do not think it will reach its potential earnings if it employed a different strategy.

3. Create a new line of products under a new name that is just endorsed by P&G – this may be the most feasible solution. While the new product line would enjoy benefits being associated with the major brand, it still stands on its own with a new, unique name. Thus, the two offerings will be differentiated and neither should cannibalize the other’s sales.

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