Ts1

PAGES-12

Task 1 Scenario

The Situation

You are the director of product management at the Owasis Drinks Company (ODC) and have been tasked with exploring brand development opportunities within the energy drinks category. Senior management is aware of consumer health trends impacting the food and beverage industry, including the energy drinks category, and believes this may create a growth opportunity for the ODC business.

The Owasis Drinks Company is a house of brands with an expanding portfolio to meet evolving consumer needs. The company is a medium-size, employee-owned business based in the Northeast region. It has focused its sales efforts on penetrating the Northeast U.S. market through the development of local and rural markets. This sales strategy has enabled ODC to avoid competing directly with the major beverage companies and to cultivate locally engaged brand advocates. While ODC brands are well known in the Northeast, they are virtually unknown in other regions. ODC recognizes that this sales strategy will require significant investment if it pursues new market expansion.

The senior management team would like to grow its business and believes there are many possibilities to do so through the development of new markets and products as well as the diversification of its product portfolio. As the director of product management, you will work with a cross-functional team to assess market opportunities and threats relative to ODC’s strengths and weaknesses and ultimately recommend a go-to-market growth strategy.

Consumer Trends

According to industry reports, consumers continue to seek healthier products and variety. Additionally, consumers are looking for brands that align with their principles, such as reducing carbon footprints, advocating for greener production, and respecting human rights. While consumers do seek variety and more organic and sustainably sourced products, consumers are becoming more price- and value-sensitive due to global economic pressures.

ODC Brand/Product Portfolio

Hadlock Falls Spring Water represents 39% of the total revenue of ODC’s portfolio, followed by Deer Isle Iced Tea (26%) and Blue Hill Juices (19%). Natural Energy is the newest product for ODC, representing 9% of the portfolio revenue, and it is the fastest-growing brand. Figure 1 shows the company’s brand share by revenue.

· The Original Root Beer is ODC’s iconic and legacy brand, often referred to within the company as “the brand that started it all.” Original Root Beer is known in the market for its distinctive glass bottle that has changed little since 1929. Its thick, natural foam and its natural flavors are unique features of Original Root Beer.

· The Original Cream Soda, launched in 1943, was ODC’s second brand in the market. It was highly regarded in local markets, with natural flavors such as grape, cherry, apple, lime, and cranberry. The brand has been declining steadily in recent years, as it is not appealing to the younger generation, who perceived it as a drink for older people. It currently represents 2% of the company’s total revenue.

· Deer Isle Iced Tea is one of the most successful and profitable brands in the current portfolio (26% share by revenue). It is a ready-to-drink natural green tea, lightly sweetened with cane sugar and natural flavors such as peach, elderberry, lemon, mint, and apricot, among others.

· Hadlock Falls Spring Water is the portfolio's biggest brand by sales and volume. The company sells primarily bottled water in single-serve PET (plastic) bottles (8 oz., 16 oz., 20 oz. sports cap) and multi-serve sizes (64 oz. and 128 oz.).

· To quickly address the growing juice category, the company acquired Blue Hill Juices. The brand is known for its core cranberry, apple, and grape flavors but has recently introduced additional natural flavors such as watermelon and honeydew melon. Currently, the brand only sells multi-serve sizes (64 oz. and 128 oz.) and enjoys a loyal following among consumers. The brand now contributes 19% of the total revenue but has had a flat performance in recent years.

· PB Cola was intended to bring the idea of “the original cola” to the market. It is made with extracts of kola nuts, unbleached cane sugar, purified carbonated water, and citric acid. However, the brand was regarded as more of a niche brand, appealing to drink purists who prefer a strong and slightly bitter cola drink. The brand contributes 1% of the total revenue but has been declining over the years.

· A potential star in ODC’s portfolio is Natural Energy, which successfully established itself as the “better for you” energy drink.

Figure 2 shows the Boston Consulting Group (BCG) matrix for the Owasis Drinks Company.

Figure 2: The Owasis Drinks Company BCG matrix

ODC’s Natural Energy Drink

Natural Energy is positioned as a natural, organic, and healthy alternative in the energy drinks market. Its plant-based caffeine comes from green coffee extract (180 mg in a 12 oz. can); it is lightly sweetened with stevia and flavored with natural flavors such as lemon, orange, and grape. The brand targets active, health-conscious young adults seeking natural energy that enables them to fully enjoy a boost of energy without the perceived harmful effects of artificial ingredients. The brand is marketed as an organic, natural energy drink that sources its “energy” directly from farmers and is acquired through fair trade practices. This brand positioning strategy enabled the Natural Energy brand to quickly find shelf space in convenience stores, grocery stores, and small markets in the Northeast.

Natural Energy offers three flavors (lemon, orange, and grape) in one package and size (12 oz. can). Lemon is the most popular flavor, representing 46% of total sales, followed by orange (35%) and grape (19%).

Recent beverage reports show that energy drink sales in the U.S. represented $14 billion in sales with an annual growth of 12.6%[footnoteRef:1]. Sales of Natural Energy totaled $24.6 million in the [1: ]

last year with a compound annual growth rate (CAGR) of 32.4%, representing the fastest growing brand in ODC’s portfolio. Figure 3 shows the sales of Natural Energy since Year 1.

Figure 3: Natural Energy sales in the last five years. Source: ODC’s annual report.

The primary channels of distribution for Natural Energy by sales are convenience stores (59%), supermarkets (21%), small grocery stores (12%), and vending machines (8%). A 12 oz. (355 mL) can is sold for $2.75, which usually represents a 10% premium over a

regular (nonnatural) energy drink ($2.50 for a 16 oz. can). Figure 4 shows a perceptual map representing the top competitive energy drink brands sold in the Northeast U.S. region.

Figure 4: Perceptual map. Top energy drinks in the Northeast. Source: Brand Health Report 2021.

The Energy Drink Competition

Blue Danube dominates the market. It targets all consumers who have a bias for action. This is reflected in the company’s advertising showcasing extreme actions through sports and acts of heroism. Blue Danube offers consumers a single flavor with a distinctive sweet taste that comes in a regular or sugar-free version, both containing all the energy drink ingredients that have defined the category—ginseng, taurine, guarana, and caffeine. Blue Danube is offered in sleek, 8 oz. cans at $3.50 per unit (45% market share) with primary distribution through convenience stores and supermarkets

Dynamo targets young partygoers with a great-tasting energy drink in larger sizes and priced more affordably than competitors. Dynamo differentiates itself in the market with a variety of delicious flavors such as pineapple, red cherry, blue ice, orange citrus, and purple rain, and it offers a variety of packages for various occasions. It came onto the market with its original 16 oz. can and owns 16% market share. The 16 oz. can is priced at $2.50 with primary distribution through convenience and supermarkets.

Dragon Juice focuses on athletes and gamers who need the energy to reach peak performance. Dragon Juice offers consumers four basic flavors of lime, orange, grape, and cherry in 16 oz. and 24 oz. resealable cans. Dragon Juice commands a 35% market share. Dragon Juice has a strong presence on social media as it works with influencers who frequently post sponsored videos showcasing the brand. The 16 oz. can is priced at $2.75, and the 24 oz. can is priced at $3.25 with primary distribution through convenience stores.

While Dynamo and Dragon Juice barrage Blue Danube with pricing promotions and guerilla marketing tactics, Blue Danube continues to protect its premium, market leader position with consistent quality and functionality.

Natural Energy Profit and Loss (P&L) Statement

An analysis of the latest P&L statement of Natural Energy’s brand revealed that despite the impressive growth in recent years and healthy gross margin (64.63% YTD), the brand has relatively low net profitability (7.93%). This might be because sales, marketing, research, and development expenses increased dramatically in the last year. Currently, sales and marketing expenses are at 19.31% of total sales. The industry average is 20% of total sales. Furthermore, the cost of goods or ingredients is relatively high (35.37% versus the industry average of 25%) because natural ingredients are more expensive to source.

Natural Energy Profit and Loss Statement
Company Name: Owasis Drinks Company
Current Gross Margin	64.63%
Current Return on Sales	7.93%
Summary	Total Prior Period ($MM)	Total Budget ($MM)	Total Current Period ($MM)	Total Current Period as % of Sales	Total % Change from Prior Period	Total % Change from Budget	Total per Unit ($)*
Total Sales Revenue [A]	$16.30	$22.00	$24.60	100.00%	50.92%	11.82%	$1.75
Total Cost of Sales [B]	$5.80	$8.10	$8.70	35.37%	50.00%	7.41%	$0.62
Total Sales and Marketing Expenses [C]	$2.00	$3.20	$4.75	19.31%	137.50%	48.44%	$0.34
Total Research and Development Expenses [D]	$1.00	$2.00	$2.50	10.16%	150.00%	25.00%	$0.18
Total General and Administrative Expenses [E]	$0.00	$0.00	$0.00	0.00%	0.00%	0.00%	$0.00
Total Other Operating Expenses [F]	$3.30	$3.80	$4.10	16.67%	24.24%	7.90%	$0.29
Other Income [G]	$0.00	$0.00	$0.00	0.00%	0.00%	0.00%	$0.00
Total Taxes [H]	$1.30	$2.60	$2.60	10.57%	100.00%	0.00%	$0.19
Gross Margin [I = A – B]	$10.50	$13.90	$15.90	64.63%	51.43%	14.39%	$1.13
Total Operating Expenses [J = C + D + E + F]	$6.30	$9.00	$11.35	46.14%	80.16%	26.11%	$0.81
Income from Operations [K = I – J]	$4.20	$4.90	$4.55	18.50%	8.33%	–7.14%	$0.32
Net Profit [L = K + G – H]	$2.90	$2.30	$1.95	7.93%	–32.76%	–15.22%	$0.13

Table 1: P&L statement. Natural Energy brand. Current year (figures in $MM).

*Based on the volume of 14,057,142 units (12 oz. cans)

Research and Development (R&D)

Recently, the R&D team tested popular consumer flavors to potentially be used in the Natural Energy brand. These included flavors such as cherry, watermelon, and cranberry; energy shots (50 mL or 2 fl. oz.); and energy drinks fortified with herbs such as ginseng, guarana, and maca, as well as vitamins such vitamins B and C. These varieties could be introduced between six months to one year.

Furthermore, a recent research study found that preferences toward flavors varies by region. For example:

West	Citrus flavors such as lemon, orange, and grapefruit and exotic flavors such as kiwi
South	Tropical flavors such as mango, banana, guava, and papaya
North (including Northeast)	Seasonal flavors such as apple, cranberry, blueberry, and white grape
East	Traditional flavors such as cranberry, strawberry, blueberry, watermelon, and white grape

Table 2: Flavor preferences by region. Source: Internal market research.

To introduce any of the flavors indicated above, there will be extra R&D expenses of up to $500,000 with a timeline of up to one year. There is no guarantee that any of these flavors will be successful, and further consumer research will be required.

Finally, the R&D team is considering introducing heritage flavors such as root beer flavor. This could be an innovative flavor, but more research will be required. Heritage flavors could be introduced between one and two years, with an additional impact in research and development of an extra $500,000.

Introducing new packaging innovations will likely incur one-time operating expenses of about $1 million. This is due to the need to adapt existing production lines and buy new packaging machinery if ODC decides to use its own production facilities, which are located in the Northeast.