BASIC MARKETING 18th Edition by Jerome McCarthy William Perreault, Joseph Cannon

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Sunnyvale Foods, Inc.
It is 2010, and Tron Faulk, newly elected president of Sunnyvale Foods, Inc., faces a severe decline in profits. Sunnyvale Foods, Inc., is a 127-year-old California-based food processor. Its multiproduct lines are widely accepted under the Sunnyvale Foods brand. The company and its subsidiaries prepare, package, and sell canned and frozen foods, including fruits, vegetables, pickles, and condiments. Sunnyvale Foods, which operates more than 30 processing plants in the United States, is one of the larger U.S. food processors-with annual sales of about $650 million.
Until 2008, Sunnyvale Foods was a subsidiary of a major midwestern food processor, and many of the present managers came from the parent company. Sunnyvale Foods' last president recently said:
The influence of our old parent company is still with us. As long as new products look like they will increase the company's sales volume, they are introduced. Traditionally, there has been little, if any, attention paid to margins. We are well aware that profits will come through good products produced in large volume.
Pierce Cassedy, a 25-year employee and now production manager, agrees with the multiproduct-line policy. As he puts it: "Volume comes from satisfying needs. We will can or freeze any vegetable or fruit we think consumers might want." Pierce Cassedy also admits that much of the expansion in product lines was encouraged by economics. The typical plants in the industry are not fully used. By adding new products to use this excess capacity, costs are spread over greater volume. So the production department is always looking for new ways to make more effective use of its present facilities.
Sunnyvale Foods has a line-forcing policy, which requires that any store wanting to carry its brand name must be willing to carry most of the 65 items in the Sunnyvale Foods line. This policy, coupled with its wide expansion of product lines, has resulted in 88 percent of the firm's sales coming from major supermarket chain stores, such as Safeway, Kroger, and A P.
Smaller stores are generally not willing to accept the Sunnyvale Foods policy. Pierce Cassedy explains, "We know that only large stores can afford to stock all our products. But the large stores are the volume! We give consumers the choice of any Sunnyvale Foods product they want, and the result is maximum sales." Many small retailers have complained about Sunnyvale Foods' policy, but they have been ignored because they are considered too small in potential sales volume per store to be of any significance.
In late 2010, a stockholders' revolt over low profits (in 2010, they were only $500,000) resulted in Sunnyvale Foods' president and two of its five directors being removed. Tron Faulk, an accountant from the company's outside auditing firm, was brought in as president. One of the first things he focused on was the variable and low levels of profits in the past several years. A comparison of Sunnyvale Foods' results with comparable operations of some large competitors supported his concern. In the past 13 years, Sunnyvale Foods' closest competitors had an average profit return on shareholders' investment of 5 to 9 percent, while Sunnyvale Foods averaged only 1.5 percent. Further, Sunnyvale Foods' sales volume has not increased much from the 1990 level (after adjusting for inflation)-while operating costs have soared upward. Profits for the firm were about $8 million in 1990. The closest Sunnyvale Foods has come since then is about $6 million-in 1998. The outgoing president blamed his failure on an inefficient sales department. He said, "Our sales department has deteriorated. I can't exactly put my finger on it, but the overall quality of salespeople has dropped, and morale is bad. The team just didn't perform." When Tron Faulk e-mailed Melanie Davi, the vice president of sales, with this charge, her reply was
It's not our fault. I think the company made a key mistake in the late '80s. It expanded horizontally-by increasing its number of product offerings-while major competitors were expanding vertically, growing their own raw materials and making all of their packing materials. They can control quality and make profits in manufacturing that can be used in promotion. I lost some of my best people from frustration. We just aren't competitive enough to reach the market the way we should with a comparable product and price.
In a lengthy e-mail from Melanie Davi, Tron Faulk learned more about the nature of Sunnyvale Foods' market. Although all the firms in the food-processing industry advertise heavily, the size of the market for most processed foods hasn't grown much for many years. Further, most consumers are pressed for time and aren't very selective. If they can't find the brand of food they are looking for, they'll pick up another brand rather than go to some other store. No company in the industry has much effect on the price at which its products are sold. Chain store buyers are very knowledgeable about prices and special promotions available from all the competing suppliers, and they are quick to play one supplier against another to keep the price low. Basically, they have a price they are willing to pay- and they won't exceed it. However, the chains will charge any price they wish on a given brand sold at retail. (That is, a 48- can case of beans might be purchased from any supplier for $23.10, no matter whose product it is. Generally, the shelf price for each is no more than a few pennies different, but chain stores occasionally attract customers by placing a well-known brand on sale.)
Besides insisting that processors meet price points, like for the canned beans, some chains require price allowances if special locations or displays are desired. They also carry nonadvertised brands and/or their own brands at a lower price-to offer better value to their customers. And most will willingly accept producers' cents-off coupons, which are offered by Sunnyvale Foods as well as most of the other major producers of full lines.
At this point, Tron Faulk is trying to decide why Sunnyvale Foods, Inc., isn't as profitable as it once was. And he is puzzled about why some competitors are putting products on the market with low potential sales volume. (For example, one major competitor recently introduced a line of exotic foreign vegetables with gourmet sauces.) And others have been offering frozen dinners or entrees with vegetables for several years. Apparently, Sunnyvale Foods' managers considered trying such products several years ago but decided against it because of the small potential sales volumes and the likely high costs of new-product development and promotion.
Evaluate Sunnyvale Foods' present situation. What would you advise Tron Faulk to do to improve Sunnyvale Foods' profits? Explain why.