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CRACKER JACK
An analysis of potential brand acquisition by Diversified Products Corporation
John BrySonja GesslingPhil Mark Sara MeinkeJordan Schulz Som ThammaCindy Tsai Cohort C ‐ Team 4
i
CURRENT SITUATION ANALYSIS:
Cracker Jack (CJ) is a classic American caramel-coated popcorn and peanut snack that was acquired
by Frito-Lay (FL) in 1997.1,2 Sales peaked in 1998 to $100M but soon sank back to $30M per year
and has remained at that level since.3 Several factors are attributed to this sales slump. FL
incorporated CJ into its existing distribution model that utilizes Direct Store Delivery and packaged
CJ in Mylar bags (as opposed to the classic boxes).They also shelved CJ with other Frito-Lay salty
snack products such as Lays Potato Chips, despite 98% of consumers rating CJ as a sweet snack and
not a salty one. 4 Although priced lower than the leading caramel corn brands, CJ still appears
expensive when merchandised next to inexpensive potato chips. Consequently CJ has numerous
misalignments and a comparatively low profit margin (8.2% compared to snack average of
20.5%).5,6 The low price point combined with rising commodity prices has forced FL to
substantially cut the quality of the prizes found inside each box to control costs, angering long time
consumers.7 CJ, having stagnant sales for the past ten years, has not received the support required
for brand revitalization, instead relying on steady baseball stadium sales to survive.8 Overall CJ has
become a neglected brand and is ripe for acquisition.
MARKETING RECOMMENDATIONS:
First, DPC will merchandise CJ with other caramel popcorns, which will permit a price increase of
$0.29 (19.5%). This will temporarily decrease sales by 6% but provide an increase in operating
income by $3.96M. We will also repackage CJ in the classic cardboard box at a price of 2.3 cents
per box. The new boxes will permit a price increase of $0.10 (operating income increase of $0.74M)
with no direct impact on sales volume. We will include higher quality prizes in each box of CJ at 3
cents per box, permitting a $0.09 price increase with no impact on sales volume. The cumulative
price increase will be $0.45 (average retail price from $1.49 to $1.94) for a total impact on
operating income of $1.5M.
We will develop our website to establish an online presence to listen, respond, and communicate
6 PepsiCo 2009 Annual Report 7http://www.planetfeedback.com/frito+lay/price/value/cracker+jacks+not+all+theyre+cracked+up+to+be/290600 8 Interview with Don Helm, Cracker Jack Brand Manager, 11/17/2010
1 PepsiCo 1998 Annual Report 2 “Cracker Jack”, Wikipedia Foundation, Inc. 8, October 2010 3 PepsiCo 1999 Annual Report 4 Consumer Survey 12/2010
ii
with our customers with a one-time cost of $200,000. Additionally we will donate a portion of sales
to Little League Baseball (capped at $50,000 in the first year) in an effort to secure a positive public
relations image. We anticipate this will increase sales by 0.5% through increase purchases from
parents who will have an emotional connection to youth sport causes.
CJ’s brand awareness is 90%, however only 33% of people report purchasing CJ in the last two
years.9 Because of this fact, an aggressive advertising campaign will focus on increasing purchase
intentions by communicating the new toys and emphasizing an association between CJ and family
events. Using 50% of manufacturer revenues after COGS and SGA we calculated our marketing
budget to be $3.9M. This will reduce operating income by $3.75M after the expected 5% sales
increase. We will utilize a mix of approximately 65% advertising and 35% sales promotions, which
will give us an expected ROI of 31%.10
ORGANIZATIONAL RECOMMENDATIONS:
Internally we will seek alignment by emphasizing family on the corporate level. We will host
family events and foster a close-knit, entrepreneurial work place while emphasizing collaborative
management. Externally we will capitalize on CJ strengths of American history and nostalgia by
focusing on family values. We will not bring staff from Frito Lay, however we will consult Don
Helm, a former CJ brand manager, as needed. We will use a combination of new and existing DPC
staff to support CJ.
FINANCIAL IMPACT:
Our initial offer for CJ will be $17.9M based on the baseline projections of CJ as it currently stands.
We project a NPV of $62.37M after all recommendations are implemented and a maximum offer
price of $48.8M from the expected cash flows and the internal rate of return required to make the
acquisition of CJ worthwhile. Based on the Monte Carlo simulation, our expected NPV range is
from $37.3M to $172.5M, and there is an 81% probability that the actual NPV of CJ will be above
the maximum acquisition price. We expect that the return on assets and return on equity will be
higher after implementation, but will continue to see a downward trend. This is consistent with CJ’s
market position as a cash cow (high market share but very low growth).
9 Consumer Survey 12/2010 10findarticles.com/p/articles/mi_m3065/is_n7_v18/ai_7381940/
� iii
Table of Contents
Target Acquisition: Cracker Jack ...................................................................................................... 1
The Snack Food Industry ................................................................................................................... 2
Frito Lay and Cracker Jack ................................................................................................................ 3
Misalignments .................................................................................................................................... 4
Supply Chain & Dsitribution ................................................................................................. 5
Pricing and Profitibility .......................................................................................................... 6
Promotions ............................................................................................................................. 7
The Cracker Jack Consumer ............................................................................................................. 8
Baseline Financials and Initial Offer Price ................................................................................... 10
Cracker Jack SWOT Analysis .......................................................................................................... 11
A New Cracker Jack Generation ..................................................................................................... 13
New Organizational Structure and Culture ...................................................................... 14
Bringing Back the Boxes ..................................................................................................... 17
Cracker Jack Prizes ............................................................................................................. 19
New Marketing Campaign .................................................................................................. 21
Advertising ................................................................................................................ 23
Non-Traditional Marketing ..................................................................................... 25
New Distribution Channels .................................................................................... 26
Marketing Budget .................................................................................................... 29
Cracker Jack Financial Analysis ................................................................................................. 31
WACC .................................................................................................................................... 32
Financials and Sensitivity Analysis ............................................................................................ 33
References ................................................................................................................................... 38
Cracker Jack under Frito Lay
Steady monthly sales since 20051
Cracker Jack is a renowned caramel popcorn market leader owned and operated by Frito Lay North America with a rich brand history and deep consumer connection, and DPC recognizes that this brand is an attractive target for acquisition:
Target Acquisition : Cracker Jack
Current market leader in caramel popcorn market1 2009 Cracker Jack sales have been steady for 5 years and estimated at $32.6M for 20091 Strong baseball stadium revenue estimated at $9M Cracker Jack has highest brand awareness in caramel popcorn market (81%) 2 Currently sold in 3oz & 7oz Mylar bags and recently started offering 1oz box 3‐packs Frito Lay distributes Cracker Jack using both direct store and warehouse delivery3
0
1
2
3
4
2005 2006 2007 2008 2009 2010
Mon
thly Reven
ue M
$
$32.6M Annual Revenue
Cracker Jack81%
Other brands 19%
High brand awareness amongst caramel corn consumers2
DPC believes that Frito Lay has made a number of negative changes to Cracker Jack since its acquisition which have ultimately affected Cracker Jack’s brand equities and limited its growth potential. By implementing structural and marketing changes to Cracker Jack and striving to grow at minimum by the current pace of the snack food market, we believe this beloved snack food can reconnect with consumers and realize a significant increase in profits.
1AC Nielsen2Consumer Survey3PepsiCo 1999 Annual Report
1
Snack food market breakdown1 Overall snack food manufacturing market growth1
Caramel Popcorn market leaders 2009 sales2
Revenue in the snack food industry is approximately $25.8B with expected annual growth of 2.1%
In 2009 the snack food industry as a whole realized profits of $5B
Salty snack foods in particular were able to thrive during the economic downturn because consumers want foods that are cheap and satisfying
Increased on‐the‐go snacking The healthy snack market between 2010 to 2013 is
forecasted to increase sales by 9%
Snack food industry shows steady growth over the past several years, yet Cracker Jack has been unable to capitalize
Cracker Jack
($32.6M)24%
Crunch N Munch ($28.4M)21%
Poppycock ($21.3M)16%
Smartfood ($4.1M)3%
Other ($48.6M)36%
Caramel Popcorn market leaders: 2009 sales2
The caramel corn market has shown growth of 0.1% over the past 5‐years, essentially holding steady with annual retail sales of roughly $100 million
Cracker Jack is the caramel popcorn leader with 24% of the market
30% of Cracker Jack’s revenue is from baseball stadium sales which have been steady over many years and is a relatively uncontested channel
Cracker Jack shows moderate sales increases during the baseball season, increasing 12.3% compared to non‐baseball months
Poppycock sales peak significantly during the holidays with nearly 25% of annual sales coming in November/December
There are growth opportunities in the convenience and food channels, particularly to gain market share in light of the recent decline in sales of private label caramel corn brands
Frito Lay has not given Cracker Jack the opportunity to grow at the same rate as the overall snack food market, allowing Cracker Jack competitors to steal market share.
1IBISworld Snack food manufacturing2AC Nielsen
$0
$5
$10
$15
$20
$25
$30
$35
2002 2003 2004 2005 2006 2007 2008 2009 2010
B$
2
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
Lay's PotatoChips
Doritos Cheetos Tostitos Fritos
Total retail sales ($B
)
Frito‐Lay $18.9BOther
$11.7B
ConAgra $2.3B
Kraft ‐$2.1B
General Mills ‐ $2B
Frito Lay dominates snack food industry2
Highest selling Frito Lay brands $B3
Despite steady sales and high brand awareness, Cracker jack has glaring misalignments due to Frito Lay ownership that has hurt brand perception, sales, and growth
Frito Lay purchased Cracker Jack in 1997 from Borden Foods, Inc. There is currently no Cracker Jack brand manager; instead the brand is managed by a group of assistant brand mangers. Frito Lay began manufacturing Cracker Jack in 3oz and 7oz Mylar bags in order to fit their distribution system. They lowered the budget for the “prize inside” each box, diminishing the prize quality and lessoning the value add for the Cracker Jack consumer. These changes to Cracker Jack’s key differentiators have created a consumer uproar about the quality about the product. Cracker Jack’s history and connection with consumers has been weakened by the top down corporate structure and salty snack focus of Frito Lay.
DPC recognizes that concerns over Cracker Jack’s brand perception and current misalignments are currently neglected by Frito Lay. We believe that reestablishing the connection with target Cracker Jack consumers is paramount to the growth of the brand. On the following slides we go into further detail regarding the following misalignments:
Distribution misalignment Competitive misalignments Pricing misalignments Promotional inconsistencies Loss of consumer confidence due to changes of
Cracker Jack’s primary differentiators: Packaging: Boxes to Bags Prizes: Actual toys to pieces of paper
Brand misalignments due to Frito Lay ownershipFrito Lay North America1Frito Lay North America is the US leader in salty convenience snack foods. They have a strong brand portfolio and product mix with over 35 different brands.
Subsidiary of PepsiCo 2009 Profit margin of 25% 48,000 employees All products manufactured and packaged in Plano, TX Top down corporate structure
1PepsiCo2IBIS Snack Food Production
3AC Nielsen
3
CRACKER JACK MISALIGNMENTS
4
DrugStores
Baseball Stadiums
Frit
o La
y D
istr
ibut
ion
Chan
nels
1
Vending Distribution
Warehouse Distribution
Direct Store Deliveries
FLRoute ServiceReps
Sports & Entertainment VenueDistributors
MassMerchants
GroceryStores
+
Wholesale Distributors
ConvenienceStores
+
+
+
Com
peti
tion
Mis
alig
nmen
t in
dif
fere
nt c
hann
els
Com
peti
tion
Mis
alig
nmen
t in
dif
fere
nt c
hann
els
Frito Lay Salty Snacks• Doritos• Fritos• Cheetos• Smartfood
Hot Dogs Cotton Candy Peanuts
Caramel Popped Corn• Crunch n’
Munch• Poppycock• Private
Labels Pric
ing
mis
alig
nmen
ts d
ue t
o co
mpe
titi
onPr
icin
g m
isal
ignm
ents
due
to
com
peti
tion
Frito Lay’s distribution channels: competitive misalignment for Cracker Jack
Cracker jack has been priced to compete with other Frito Lay salty snacks whose COGS are much less than Cracker Jack’s
Traditionally sports venues charge much higher prices for Cracker Jack.
Cracker Jack is the lowest priced caramel popcorn in the food and mass merchant channels, but sales are not increasing. There is a lot of room for price increases which we will see on the next slide.
1PepsiCo 1999 Annual Report
5
$0 $1 $2 $3 $4
Cracker Jack
Cheetos
Doritos
Fritos
Lays
Cracker Jack has not raised MSP to account for rising commodity prices or to compete with caramel corn competitors
CJ price in DSD channels vs FL snacks1 CJ price in food channels vs caramel corns1
$0 $1 $2 $3 $4
Smartfood
Poppycock
Crunch n’ Munch
Cracker Jack
Cracker Jack has not been increasing retail prices to match the rise in commodity prices to compete with all other channels
70.0%
72.6%
51.0%
22.6%
19.1%
28.5%
7.4%
8.3%
20.5%
All Industries
Cracker Jack
Snack FoodsCOGS
OtherExpenses
Operating Profit
The main drivers of profits in the snack food industry is the cost of commodities for manufacturing the snack foods
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00 Cracker Jack
Caramel Corn Competitors
Caramel Corn MSP compared to materials costs1
Cracker Jack and other caramel corns have much more expensive materials (corn, peanuts, and sugar) than most snack foods which typically only have one main commodity (such as potatoes or corn). By not increasing prices, Cracker Jack is leaving a significant amount of profit on the table. Maintaining the low price point has had a negative effect on promotional allowances as well.
Operating profits2
*Price scale highlights the difference in FL snacks vscaramel corn brands
1AC Nielsen2IBIS Snack Food Production
2004 2005 2006 2007 2008 2009 2010
6
Promotional misalignments hurt profits
Cracker Jack’s promotional mix of features and displays is misaligned compared to the major competitors
Cracker Jack generates a higher proportion of its sales from promotions than the two main caramel corn competitors Relative volume between Warehouse and DSD is
fairly consistent between all three caramel corns, with DSD channels generating 65% higher sales from promotion than Warehouse channels on average1
In order to achieve higher sales from promotions and to achieve the mix of volume within each channel, Cracker Jack has been offering much higher price reductions on average during promotions This results in a much lower promotional
efficiency because Cracker Jack has to discount more than its competitors to generate similar sales volumes
The higher price reductions result in less revenue for Cracker Jack
Bringing Cracker Jack into alignment with competition would mean that discounts could be reduced while maintaining sales volume which will generate more revenue
Promotional ACV1
Percent of sales coming from promotions1
Avg % price cut during promotion w/ results1
0
5
10
15
20
25
30
Crunch N Munch Poppycock Cracker Jack
Feature
Display
05
1015202530
Crunch N Munch Poppycock Cracker Jack
% Price CutPromotional Efficiency
Cracker Jack promotional misalignments hurt the bottom line across all retail channels
There is promotional misalignment across all channels and this is an area that needs considerable attention moving forward. Next we will examine the target consumers and how to best reach them.
1AC Nielsen
0%
10%
20%
30%
40%
50%
60%
Crunch N Munch Poppycock Cracker Jack
Warehouse
DSD
7
These consumers are price sensitive: Households with lower incomes tend to buy more. 70% of parents look for snacks that are inexpensive 29% of parents are willing to sacrifice
nutrition in order to save money
Consumers buy Cracker Jack primarily at grocery stores (36%) followed by baseball parks (32%).
122
572745
423303 291
0200400600800
18‐24 25‐34 35‐44 45‐54 55‐64 65+Years Old
(thousands of units sold)
Cracker Jack consumers are typically lower income families who enjoyed the snack as children
00.20.40.60.81
1.21.41.61.8
Cracker Jack
Snack Foods
Target consumers are 35‐44 y/o1
Cracker Jack consumers are price sensitive3
y = ‐3760.2x + 25913
0
5000
10000
15000
3.5 4 4.5 5 5.5
Volume
Price ($)1MRI Cracker Jack Data22009 US Community Census3AC Nielsen
Cracker Jack has been unable to fully capture its target consumer base because Frito Lay has failed to listen to the consumer voice.
The primary buyers of Cracker Jack: Women (6x more likely than men to purchase) Aged 35‐44 Parents of children ages 6‐17 White Less educated Living in the southern region (48%) Living in smaller cities, populations < 20,000
Lower income HH buy more Cracker Jack1,2
8
The current packaging, shelf location and low prize quality decrease the perceived value of Cracker Jack to consumers*
I prefer bags, 28%
I prefer boxes, 72%
Sweet snack, 98%
Salty snack, 2%
Consumers prefer Cracker Jack in traditional boxes1
Consumer perception Cracker Jack as sweet snack1
Consumers buy Cracker Jack for taste and “Prize Inside” 1
0%
10%
20%
30%
40%
50%
Taste Prize Convenience Nostalgia Baseball Frito Lay abandoned the classic Cracker Jack boxes in order to
integrate the brand in to existing production processes despite strong nostalgic appeal of the box. This move upset many Cracker Jack consumers.
Frito Lay has placed Cracker Jack with its salty snacks in the DSD channels, while Cracker Jack consumers view it as a sweet snack. This misalignment causes Cracker Jack to lose potential consumers who choose a different snack because of this placement.
30% of those surveyed said that they purchase Cracker Jack for the “Prize Inside”.
Cracker Jack traditionally offered an actual toy inside the box, but in an effort to cut costs Frito Lay abandoned the prize for paper pencil toppers and bad jokes.
The decision to decrease prize quality is viewed by consumers as a cost cutting move that undermines the brand’s tradition.
Below are examples of consumer’s feelings of prizes on Twitter2:
1Consumer Survey2Twitter
The changes made by Frito Lay to Cracker Jack’s core brand characteristics have done little to increase overall profitability and will be primary starting points for future efforts to revitalize the brand.
9*One online survey was conducted to gather primary consumer data. There are inherent limitations in this biased selection of the population and adjustments were made as needed.
Assumptions: Percentage of fixed costs in COGS
base year: 10% Percentage of fixed costs in SG&A
base year: 70%
Definitions: Input percentages and inputs based on percentages were calculated by averaging PepsiCo and ConAgra industry averages1 Revenues, variable COGS, and variable SG&A follow Cracker Jack’s growth over the past 5 years
*Assumptions were made due to the high variability of costs as sales increase in the snacks industry
Cracker Jack is seeing a very slow increase in cash flow under current operating conditions
Offer Price $17.90MCracker Jack P/E 8.76PepsiCo P/E 16.4ConAgra P/E 14.54*Golden Enterprises P/E 9.36
BRAND Projections (in millions)2010 2010 2011 2012 2013 2014 2015% $ Brand Sales Growth Assumption (from Mintel):
0.14% 0.14% 0.14% 0.14% 0.14%
Sales 35.00 35.05 35.10 35.15 35.20 35.25 Retail Margin @ 30% 10.50 10.51 10.53 10.54 10.56 10.57 Revenues 100% 24.50 24.53 24.57 24.60 24.64 24.67 Expenses
COGS Expense 72.6% 17.79 17.81 17.83 17.85 17.88 17.90 Selling and Admin Exp 19.1% 4.68 4.68 4.68 4.69 4.69 4.69
Operating Income 8.3% 2.03 2.04 2.05 2.06 2.07 2.08
Interest Expense (@ 7.13%) 0.84 0.87 0.91 0.95 0.98 Earnings before Tax 1.20 1.18 1.15 1.13 1.10 Tax Expense (@ 38%) 0.42 0.41 0.40 0.39 0.39 Net Income 0.78 0.77 0.75 0.73 0.72
2011 2012 2013 2014 2015 FutureDiscounted Free Cash Flow 1.17 1.17 1.18 1.19 1.19 18.03Current Valuation $23.9M
1FirstResearch
Comparable P/E ratios with an expected offer price of $17,9M
* Golden Enterprises is regional snack food manufacturer with annual sales of $120M as being used as a comparison for Cracker Jack as extracted from Frito Lay.
10
• Strengths Historically rich brand heritage and consumer connection Strong consumer voice 81% brand awareness among target consumers1
Current market share leader amongst caramel popcorn brands2
High potential to reconnect with consumers Ball park sales are strong and with increasing stadium
attendance, Cracker Jack sales will look to remain steady at around $9M annually3
Healthier ingredients compared to most current sweet and salty snacks4
“Prize Inside” is historically a huge brand differentiator in saturated marketplace
Anticipated increase in snack food and popcorn product sales5
Potential to demand a higher price Frito Lay offers Cracker Jack across a vast distribution
network
• Weaknesses Initially strong consumer connection has diminished
since 1999 Brand heritage might be perceived as dated by new
consumers Strong link to baseball might hurt retail potential Consumers view prizes as substandard6 FL uses push marketing strategies rather than pull Retail placement in DSD channel creates competition
with salty snacks Cannot compete on shelves with lower cost
salty snacks Cracker Jack is currently a low priced caramel
popcorn product2 Poor shelf appearance compared to other caramel
corn brands7 Consumer perceive Cracker Jack as a sweet snack1 Cracker Jack has to discount more than its
competitors to receive similar sales volume2 No devoted Cracker Jack staff under Frito Lay8
WS
The acquisition group of DPC believes that Cracker Jack’s current weaknesses can be remedied by listening to the consumer voice. Changing the location of the product in DSD locations, reinstating the traditional box, and adding actual toy prizes will help Cracker Jack deliver more value to the consumer. Although we believe that Cracker Jack is a strong caramel corn snack, its true value lies in these key brand differentiators that Frito Lay has neglected.
Understanding Cracker Jack market strengths and weaknesses will help DPC rebuild the brand
1Consumer Survey2AC Nielsen3ESPN Attendance Report
4PepsiCo Nutrition Website5Mintel Salty Snacks6Storyify Twitter Feeds
7Retail Observations8PepsiCo Phone Interview 11
• Opportunities ThreatsO T Continued growth of snack food and popcorn markets1 Increased opportunities for snacking in the current
weak economy Distribution channels and promotional activities can be
aligned to maximize brand’s market potential Relocating Cracker Jack within retailers will allow
consumers to better access Cracker Jack to satisfy their sweet craving
New technologies and a flexible management style can allow for innovation and different packaging and distribution options
Opportunity to portray Cracker Jack as a family snack could increase market perception
Potential for new product launches and seasonal offerings
Increasing commodity prices may continue to erode profit margin
Push towards healthy eating may push people away from traditional snack foods
Saturated sweet snack market Without attracting younger consumers, existing
consumer base will age out of being able to consuming Cracker Jack
Ball Parks are increasingly shifting towards gourmet foods, and away from traditional favorites
Understanding the opportunities and threats will enable DSP to find success as we move forward with Cracker Jack acquisition
On the following pages the acquisition group of DPC has laid out short term and long term recommendations for the future of the Cracker Jack brand. We believe that there are areas of the snack food market where Cracker Jack can thrive and we have tailored our recommendations to account for the market opportunities and threats that Cracker Jack currently faces.
We realize the snack food market is highly saturated and differentiation is difficult to achieve, however Cracker Jack’s brand heritage and American roots will spark the older generation of Cracker Jack enthusiasts to share the snack with the younger generation and help DPC to create A New Cracker Jack Generation.
12
A NEW CRACKER JACK GENERATION:
Recommendations for the future success of Cracker Jack
13
How DPC plans to create a New Cracker Jack Generation
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Step 1: Organizational restructuring and institution of new corporate cultureOur first step in revitalizing the Cracker Jack brand will start at the organizational level. Within DPC we will emphasize a collaborative environment and promote a family‐centric culture. Externally we will capitalize on CJ’s strength of American pastime and nostalgia to communicate our internal and external alignment.
Step 2: A New Cracker Jack GenerationOur strategies to revitalize the Cracker Jack brand center on returning Cracker Jack to its previous aligned state. We will merchandise Cracker Jack with other caramel corn products, institute a competitive price increase of 30%, repackage Cracker Jack into the original style of cardboard boxes, and reinstate higher quality toys.
Step 3: Communicating the new messageDPC Acquisitions Department believes that marketing Cracker Jack with the recommended changes is critical to the success of brand revitalization. CJ’s brand awareness is above 90%, however only 33% of people report purchasing CJ within the last two years. Cracker Jack will rely heavily on proposed marketing and advertising campaigns to increase purchases by communicating the message and increased value of our product.
14
“To provide a superior snack that connects families young and old through shared traditions, old and new”
Creating a corporate culture that emphasizes the importance of family is paramount to Cracker Jack’s success
Our first step in revitalizing the Cracker Jack brand for our customers is to build an internal corporate culture that is aligned with the brand’s core values of family and fun. Creating an environment that fosters communication, collaboration, and togetherness will ultimately shape a productive workplace.The first step in cultivating the Cracker Jack family will be to share the company’s mission statement and values. Cracker Jack’s mission is “to provide a superior snack that connects families young and old through shared traditions, old and new.” Employees will truly understand what the Cracker Jack brand was built on and connect a bridge between the brand and their daily work.But it takes more than communicating the message. Cracker Jack will implement the following initiatives at the corporate level to support its employees:
Quarterly family picnics ‐ a way for employees to bring their families together Bring your children to work day ‐ twice a year Day care partnership ‐ discounts for all employees
Employees on the Cracker Jack team will not just be workers; rather they will be part of the “Cracker Jack Family”. We will ensure all‐member involvement by:
Hiring a staff that is committed to adopting the mission of the brand Focusing on collaborative rather than top‐down management Collaborating with all members when decisions are being considered Encouraging accountability by holding bi‐weekly meetings to address current state of the
brand, and by educating employees by presenting facts, figures, and future goals
The combination of these initiatives and employee involvement will build a strong advantage over our competitors. We will see in the following pages how these internal communications align with the external recommendations.
15
Staff
No carry over from Frito Lay Need based consulting with Don Helm (former Cracker Jack brand manager under Frito Lay)
Contacts with MLB, Players Association, Champs, etc) Input on marketing, consumer, and distribution
Initial hiring after DPC acquisition Roster of potential hires has been created and readied for a fast start for the 2011 season The appropriate range of salaries has been taken into best and worst‐case budget projections Target personnel would ideally come from top family‐friendly companies such as General Mills and Astra‐
Zeneca Pharmaceuticals. A preliminary roster of potential candidates has been generated.
Organizational Restructuring
COLLABORATION LEVEL II - GROUND CREW
COLLABORATION LEVEL II - GROUND CREW
COLLABORATION LEVEL I
COLLABORATION LEVEL I
LEADERSHIPLEADERSHIP BRAND VPBRAND VP
BRAND MANAGER
BRAND MANAGER
MARKETINGMARKETINGROAD CREWROAD CREW
INTERNSINTERNS
CFOCFO
SALESSALES PURCHASINGPURCHASING
PRODUCTION MANAGER
PRODUCTION MANAGER
PLANT &PRODUCTION
PLANT &PRODUCTION
Finding personnel that will fit new culture of Cracker Jack will be important to future success
16
Bringing back boxes will help reconnect with consumers Bosch Module++ packaging equipment capacity with 2‐head model
80 boxes per minute x 60 minutes = 4800 boxes per hour 4800 boxes per hour x 24 hours = 115,200 boxes a day 115,200 boxes per day x 22 days per month = 2,534,400
boxes per month 2,534,400 boxes per month x 12 months = 30,412,800
boxes per year at 100 % utilization Real world manufacturing at 80 % uptime delivery =
24,330,240 boxes per year Estimated capital cost of new equipment: $1 million Three employees required to run assembly
24 hr shift needed to fulfill current volume capacity $15/hr + 25% benefits expenses $39,000 per employee
$351,000 direct labor for assembly line
Depreciating the equipment over 5 years plus the cost of employees to operate machinery is an additional $530,000 per year (2.3 cents per unit sold)
81% of survey respondents indicated preferring boxes to bags for Cracker Jack Box brings back nostalgic appeal
Frito‐Lay switched from the boxes because of existing infrastructure necessitated bags (the packing type of all other products manufactured) and concern that Cracker Jack would go stale in a non‐sealing box
New technologies have made creating sealing boxes more easily produced
Boxes will differentiate Cracker Jack from other salty snacks Materials are estimated to cost an additional 2.3 cents per
equivalent unit to use paperboard rather than Mylar bags Switch will not initially grow sales volume, but instead adds
nostalgic value to the product to allow for the initially price increase
Bringing back the boxes…
New packaging machine
17
Financial projections with box implementation
70% of surveyed consumers said they would prefer Cracker Jack in a box With added value from boxes the unit price of
Cracker Jack can be increased approximately 10 cents
30% of consumers who do no prefer boxes would not be willing to pay a higher price
Sales volume growth assumptions is a weighted average based on Cracker Jack consumer price sensitivity
Breakdown of new packaging
Best and worst financial cases
Net effect of switching to boxes
Estimated $600K growth in annual operating income from switching to boxes
Best case scenario would be that all consumers would be willing to pay 10 cents more per unit
Increase in operating income of $1.04M Worst case scenario is no price increase is possible
Decreases operating income $430k
Net effect of switching to boxes is expected to be a 7 cent increase in retail price, assuming no change in volume growth Increases operating income by $610k
2010 Before+7 cents +10 cents +0 cents
%Brand Sales Growth Assumption: 0.1% ‐0.6% 1.7%Units Sold 23.20 23.22 23.06 23.59Avg. Eq. Price($) 1.49 1.56 1.59 1.49Retail Sales($M) 34.57 36.23 36.67 35.16Retail Margin @ 30% 10.37 10.87 11.00 10.55Revenues 100% 24.20 25.36 25.67 24.61Expenses
Fixed COGS 1.78 1.78 1.78 1.78Variable COGS 16.01 16.03 15.91 16.28Added cost of Boxes/ Eq Unit $0.023 0.00 0.53 0.53 0.54
Added cost of Prizes/ Eq Unit $0.00 0.00 0.00 0.00 0.00COGS Expense 73.5% 17.79 18.34 18.22 18.60Fixed SG&A 3.28 3.28 3.28 3.28Added Marketing Expenses 0.00 0.00 0.00 0.00One‐time Web Upgrade 0.00 0.00 0.00 0.00
Variable SG&A 1.40 1.40 1.39 1.42Selling and Admin Exp 19.3% 4.68 4.68 4.67 4.70
Operating Income 7.1% 1.73 2.34 2.77 1.30Difference 0.61 1.04 (0.43)
After
18
•Current prize budget under Frito Lay is 1 cent per unit•By increasing Cracker Jack MSRP, DPC can add prizes at roughly 3 cents per unit •New prizes will cost a total of $650,000•Procure various toys through wholesale channels
Bringing back actual toys to Cracker Jack boxes will satisfy unhappy consumers and add value to the brand
• The goal of this recommendation is to rekindle the nostalgic appeal of having a small toy to play with while eating Cracker Jack
• Bringing back a real toy has a dual purpose:1. Give parents what they remember from their
childhood• This adds to the family appeal of Cracker Jack
where parents have the shared experience of playing with their kids and sharing something from their childhood
2. Give kids something to want to play with, encouraging repeat parental purchase
• Although there are cost concerns with adding an actual prize, the benefits outweigh the risk, and add value that can allow for the initial price increase
• Small prizes would cost less than the price increase, meaning a net gain in operating income despite increased cost
Increase price per prize
Adding value with new prizes
Potential drawbacks of actual prizes
Shaped rubber bands have become extremely popular with kids and at 2‐3 cents per unit, this is a cheap way to generate value to consumers and their children.
Who doesn’t love a bouncy ball? These balls would only cost 1.5 cents per unit
New “Surprise Inside”
A fake mustache makes every day a party. For 3 cents per unit this would help make Cracker Jack fun again. 19
Financial projections with expected prize addition cost
44% of surveyed consumers said they would prefer more relevant prizes
With added value from new prizes, unit price of Cracker Jack can increase approximately 20 cents without changing purchase intention
56% of consumers who do not feel the prize influenced them to purchase Cracker Jack would see no added value from new prizes and would not pay more or increase purchases of Cracker Jack beyond normal levels
Sales volume growth assumptions is a weighted average based on Cracker Jack consumer price sensitivity
Cost breakdown for adding actual prizes
Best and Worst Cases
Net Financial effect of adding actual prizes
Bringing back the “Prize Inside” generates a $740K increase in net operating income for Cracker Jack
Best case scenario is that all consumers will be willing to pay 20 cents more per unit
Increase in operating income of $2.31M Worst case scenario is no price increase is possible
Decrease in operating income of $560K
Net effect of adding prizes is expected to be an 8.8 cent increase in retail price, assuming no change in sales volume growth
Increases operating income by $740k
Cracker Jack’s current customer base have reported that poor prizes are a major reason for the lack of recent purchases and the expectation is that better prizes will result in improved sales. Cracker Jack is currently the most recognized caramel corn brand, and with the added value of prizes and the proposed focus on family Cracker Jack aims to create “The Next Cracker Jack Generation”.
2010 Before+8.8 cents +20 cents +0 cents
%Brand Sales Growth Assumption: 0.1% -2.5% 2.0%Units Sold 23.20 23.22 22.61 23.66Avg. Eq. Price ($) 1.49 1.58 1.69 1.49Retail Sales ($M) 34.57 36.65 38.21 35.26Retail Margin @ 30% 10.37 10.99 11.46 10.58Revenues ($M) 100% 24.20 25.65 26.75 24.68Expenses ($M)
Fixed COGS 1.78 1.78 1.78 1.78Variable COGS 16.01 16.03 15.60 16.33Added cost of Boxes/ Eq Unit $0.000 0.00 0.00 0.00 0.00Added cost of Prizes/ Eq Unit $0.03 0.00 0.70 0.68 0.69COGS Expense 73.5% 17.79 18.50 18.06 18.80Fixed SG&A 3.28 3.28 3.28 3.28Added Marketing Expenses 0.00 0.00 0.00 0.00One-time Web Upgrade 0.00 0.00 0.00 0.00Variable SG&A 1.40 1.40 1.36 1.43Selling and Admin Exp 19.3% 4.68 4.68 4.64 4.71
Operating Income 7.1% 1.73 2.47 4.04 1.17Difference 0.74 2.31 (0.56)
After
20
Cracker Jack’s marketing will target current consumers best positioned for sustaining our legacy
Creating the “Next Cracker Jack Generation” will depend on targeting not only kids who enjoy the “prize inside,” but to families as a whole. By focusing on families we will be able to bring back the nostalgic feeling of what Cracker Jack was to parents when they were young and compel them to pass on the tradition to their children.
The Cracker Jack target market is defined as families with children under age 18, in which the parents are between the ages of 25 to 44. Just over 30% of U.S. households are families with children. The younger adults in this segment, ages 25 to 34, are projected to increase at a rate faster than any other segment under the age of 55.
Projected Demographic Growth by Age (in millions) 1
“Kidfluence”: The influence that children and teens exert over parents and family purchases is clearly an important driver of sales in a variety of categories including snack purchases. However, regulatory agencies such as the FTC are now making greater efforts to monitor food advertising directed at children. This fact is important to our marketing efforts and is another reason why we must not focus our targeting only to kids, but to the family as a whole.
In order to target the family demographic, Cracker Jack will implement a marketing strategy utilizing a variety of mediums positioned to spread Cracker Jack’s marketing message. Cracker Jack marketing message is twofold and will focus on brand revitalization through neglected brand equities while also promoting Cracker Jack as a family snack. Initial advertising will focus on current markets where Cracker Jack has traditionally strong sales to capture lapsed buyers.
12% increase in growth
1 Mintel2 MRI
21
Our primary message to consumers is that Cracker Jack is a brand that is central to the family. For any occasion that brings families together, be it a sporting event or game night at home, Cracker Jack is the snack of choice. Having a variety of fun new prizes for kids coupled with Cracker Jack’s rich brand heritage will send the message that this tradition is one worth passing on.
In tandem with targeting families, Cracker Jack will also address the growing concerns of parents trying to find healthier snacking options. Parents at all income levels report paying increased attention to the nutritional value of the food they serve their families. Parents’ closer scrutiny of nutritional labels is motivated at least in part by rising childhood obesity rates and the news coverage that this has received. In addition, the USDA has reinforced the need for easy‐to‐understand nutritional information.
To address this, DPC will highlight the fact that Cracker Jack,although a sweet popcorn snack, is low in calories compared to many other alternatives such as other caramel popcorn brandsand even baked potato chips. Our unique “Low Calorie” label will beplaced on all packaging and in select communications to consumers.
Family, fun, and low calorie snacking are key to Cracker Jack’s new marketing message
Advertising
Electronic Communications
Public Relations
Sales Promotions
Targeted placement based on demographics: outdoor, magazine, and internet
Website offering an interactive platform for communication among consumers and for DPC to monitor consumer voice
Corporate allegiance initiative with Little League of America
Marketing Mix
With the aforementioned price increases, DPC will look to better align Cracker Jack’s promotional mix in all channels
Two‐fold marketing message
22
23
Cracker Jack will launch a fun campaign based on the slogan“The Prizes Are Back”. The images will showcase the prizes and start the conversation among the younger parents and kids. The purpose behind this campaign is to remind consumers how fun the small prizes can be and to gain buzz around the Cracker Jack brand.
“The Next Cracker Jack Generation” campaign will target parents and will create a link between the Cracker Jack brand and the shared experiences between family members. The slogan “The Next Cracker Jack Generation” will reinforce the message that Cracker Jack is a tradition that should be passed on to children. These images will also feature our unique “Low Calorie” label to remind parents that Cracker Jack is a low calorie snack suitable for the entire family.
Aggressive advertising campaigns are needed to both reconnect with lost consumers and help generate new onesCracker Jack currently has very high brand awareness: 91% of responders have eaten Cracker Jack, and 80% report it’s the most recognizable caramel popcorn brand. However, 57% of people who buy Cracker Jack have not done so in the last 2 years. Because of the lack of purchase follow through we have developed two primary advertising campaigns that communicate Cracker Jack’s core competencies:
These campaigns will undergo both quantitative and qualitative market research before implementation. One online survey (sample size of 400), and 2 focus groups of 15 located in primary target areas (west/south). This will allow Cracker Jack to make any needed changes to the campaigns in advance of a nationwide rollout. For the “Prizes are Back” campaign, Cracker Jack will utilize social networking platforms, snack food blogs, message boards, RSS Feeds, and other online outlets to spread the word of the new Cracker Jack brand. The cost will be minimal and will include the salary of one employee to implement this strategy and periodic studies to track performance. Cracker Jack will be able to measure the strength of these tactics using online analytical company Radian6. With traceable data, Cracker Jack will gain insights into how the brand is performing on various social media channels.
“The Prizes are Back.” “The Next Cracker Jack Generation.”
1 Consumer survey2 “10 Social Media Monitoring Tools for Measuring Social Media Analytics”
Location and Reach: Los Angeles (1,171,400), Seattle (361,400), Houston (229,200), Miami (224,500), Orange County (165,700), Dallas (130,400)Price: $250 average per month per bench (minimum 10 locations per city). $500 average per month per bus wrapQuantity: 15 benches per location, 10 bus wraps per location
These specific locations have some of the highest average daily bus ridership in the nation. With a 97% recall rate and 96% of respondents saying mobile advertising are more effective than billboards, this method of advertising will bring significant attention to the newly revitalized Cracker Jack brand. DPC will use periodic market research to continually measure effectiveness of bus and bench advertisements.
Bus B
ench
& Banne
rBu
s Ben
ch
& Banne
rBillboards
Billboards
Location and Reach: LA (82,000) , San Diego (89,500), San Francisco Bay Area (80,000), Atlanta (75,000), Houston (11,500)Price: $1,500 per month on averageQuantity: 5 in each market
The vast majority of adults use automobiles as their primary method of transportation in these markets, allowing for the high number of impressions per billboard. Tracking the effectiveness of these advertisements will be conducted by Nielsen using their GPS tracking methodology.
Magazine and Reach: Better Homes and Garden (7.6 million readers), People Magazine (3.8 million readers) Price: $150,000 on average, half pageQuantity: 4 publications per magazine
According to MRI data, Cracker Jack consumers read a variety of magazines, most notably female oriented and entertainment publications. Better Homes and Garden and People Magazine are two of the most popular magazines with our customers.
Advertising
Advertising
Market tests of proposed advertising campaigns and production of final advertising materials.
Start creating the buzz with “The Prizes Are Back” campaign online, focusing on social media platforms.
Rollout outdoor campaigns incurrent markets where CJ is strong (western and southern regions).
Rollout print advertisements in magazines targeted to our market.
3 months 8 months6 months 1 year
Out-of-home advertising is a low cost way to communicate Cracker Jack message with broad, continuous coverage
Timeline for Marketing Mix Implementation
In addition to these traditional forms of outdoor marketing, DPC will use non‐traditional marketing mediums to communicate the message that Cracker Jack is a fun snack for the whole family.
1 Rates and Markets, http://lamaroutdoor.com/index.html2 “10 Social Media Monitoring Tools for Measuring Social Media Analytics”2Wrap advertising http://en.wikipedia.org/wiki/Wrap_advertising3List of United States local bus agencies by ridership, http://en.wikipedia.org/wiki/List_of_United_States_local_bus_agencies_by_ridership4http://www.techdirt.com/articles/20030528/0118259.shtml5Magazine Rate Cards6Costs of Billboard Advertising, http://www.gaebler.com/Billboard‐Advertising‐Costs.htm7 MRI
24
Cracker Jack’s new web site will be a platform for communication from Cracker Jack to consumer, and between consumers themselves. The site will essentially be an open forum where visitors can:
• Use an on‐site message board platform for open discussions, enabling them to provide suggestions, feedback, and comments.
• See live Twitter feeds and Facebook updates• Create personal/family accounts where consumers can post photos of themselves with Cracker
Jack and their prizes.The new crackerjack.com will provide a place to promote new prize releases, news on sponsorships, upcoming events, baseball scores, and any other future communications the brand will need to forward to consumers. The fact that consumers will potentially create accounts online will allow Cracker Jack to capture valuable customer data. This website redesign will be low‐cost, consisting of one initial design investment plus the salary of one employee to monitor and maintain the site.
Potential risks of having an open‐forum style website will be the threat of negative comments exposed to customers. While we will avoid overtly censoring of our customers, it will be imperative to monitor the site and respond to criticism in an efficient and professional manner.
Non-traditional marketing is key to communicating Cracker Jack’s message
To show our commitment to families and support for the “Next Cracker Jack Generation,” we will form an allegiance with Little League Baseball and Softball. This sponsorship will leverage the baseball heritage that the Cracker Jack brand is known for in a way that will increase our relevance to American youth. Cracker Jack will pledge to donate 10 cents for every box purchased (up to $50,000) to Little League camps per year.
CrackerJack.com homepage with integrated Facebook and Twitter feeds
• Association created between fun and healthy wholesome activities
• Connect families over a shared experience
• Remind parents of the tradition of the Cracker Jack brand
• Increase sales among our target market
• A proportion of underprivileged youth will be able to attend camps at no charge
• Increased visibility and registration from kids
• Potential for a long term relationship with Cracker Jack and increased donations for the future
CrackerJack.com redesign
Little League Baseball Sponsorship
Cracker Jack Little League Baseball
After aligning Cracker Jack’s marketing message, the last piece of the marketing strategy will focus on the promotional mix and realigning current Cracker Jack shelf placement in DSD channels.
Benefits:
25
Baseball Stadiums
Vending Distribution
Sports & Entertainment VenueDistributors
+
DrugStores
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DPC
Warehouse Distribution
MassMerchants
GroceryStores
DPC Distribution Channels with retailers placing Cracker Jack on shelves
ConvenienceStores
+
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+
Com
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Hot Dogs Cotton Candy Peanuts
Caramel Popped Corn• Crunch n’
Munch• Poppycock• Private
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Redesigned distribution channels create competitive alignment for Cracker Jack
• With the new retail placement Cracker Jack no longer has to compete with Frito Lay’s other lower priced snack food and can comfortably increase prices due to new shelf competition
• Because Cracker Jack is already a low price caramel corn, as our situation analysis shows that a price increase would allow for increased revenue with minimal sales volume declines
• The added value from returning to boxes, adding quality prizes, and a new marketing push will allow much of the sales volume declines to be offset and allow Cracker Jack to grow its market share
• By not competing with current Frito ay snacks, DPC can realign Cracker Jack’s promotional mix and eliminate lost revenue due to larger than necessary price cuts
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0%
5%
10%
15%
20%
25%
30%
35%
40%
2005 2006 2007 2008 2009
Promotional mix breakdown To make promotional campaign more effective
Cracker Jack will need to focus on high growth,high potential segments Cracker Jack sales have been declining in
the warehouse channel and increasing in the DSD channel
DPC will limit promotional distribution (ACV) to narrow focus and offer only slightly higher price cuts than competitors to maintain retailer cooperation This will eliminate wasted revenue
from higher than needed price cuts caused by competition with other Frito‐Lay products
With the increasing trend in the market for impulse buys, the focus of Cracker Jack’s promotional efforts should primarily be to obtain prime shelf display.
Cracker Jack sales growth per distribution channel
Proposed promotional price cuts
27
Warehouse DSDFeatures Displays Features Displays
Cracker Jack 14% 10% 37% 9%Poppycock 12% 9% 36% 7%Crunch N Munch 4% ‐2% 35% 18%
These price cuts will only cost $1.41M, compared to $1.91M under the old pricing model.
Warehouse
DSD
After distribution realignment, it is necessary to correct promotional mix so Cracker Jack can stop losing revenue from excessively large price cuts
Because of change in location within the convenience and drug retail channels, competing with higher priced caramel corns would lead to a one‐time price increase of 29 cents to be priced just above Crunch N Munch, but remain below the price of Poppycock Cracker Jack would remain a low price
competitor in the caramel corn market Without competition from other Frito‐Lay
snacks, Cracker Jack would no longer lose potential customers who change their purchase decision at the retail site
The cost of the new shelf space is offset by the current cost of the existing shelf space resulting in no change to expenses
2010 Before% $ Expected Best Worst
Volume groth rate due to price increase -6.5% -4.0% -9.6%Price Growth 19.5% 19.5% 19.5%Units Sold 23.20 21.69 22.27 20.97Avg. Eq. Price 1.49 1.78 1.78 1.78Retail Sales 34.57 38.61 39.64 37.33Retail Margin @ 30% 10.37 11.58 11.89 11.20Revenues 100% 24.20 27.03 27.75 26.13Expenses
Fixed COGS 1.78 1.78 1.78 1.78Variable COGS 16.01 14.97 15.37 14.47Added cost of Boxes/ Eq Unit $0.000 0.00 0.00 0.00 0.00Added cost of Prizes/ Eq Unit $0.00 0.00 0.00 0.00 0.00COGS Expense 73.5% 17.79 16.75 17.15 16.25Fixed SG&A 3.28 3.28 3.28 3.28Added Marketing Expenses 0.00 0.00 0.00 0.00One-time Web Upgrade 0.00 0.00 0.00 0.00Variable SG&A 1.40 1.31 1.34 1.27Selling and Admin Exp 19.3% 4.68 4.59 4.62 4.55
Operating Income 7.1% 1.73 5.69 5.98 5.33Difference 3.96 4.25 3.61
After
Shelf relocation and price increase are estimated to generate a $4M increase in operating profitRelocation in convenience and drug channels
Sales volume would drop roughly 6.6% initially due to price sensitivity of consumers and level off in subsequent years
Based on the regression model (SE=1.4%), we have 95% confidence that the worst scenario is Operating income would increase only $3.61M and the best scenario would be $4.25M After price increase, Cracker Jack’s retail price would continue to grow in‐line with price growth of the caramel corn industry at 1% per year
Net effect of increasing the price 29 cents (19.5%), which will decrease sales volume, is expected to be a $3.96M increase in operating income
Net effect of price increase to $1.78
Outcomes of price increase and shelf relocation
Financial projections with price increase and shelf relocation
28
29
A study by Magazine Publishers of America indicates that brands who spend a higher percent of their marketing budget on advertising (vs. promotions) received a higher return on their overall marketing investment. Bnet.com reports that with a marketing mix of 65% advertising and 35% promotions, brands can expect to see a 31% return on their marketing investments. Accounting for the value we’ve added through the recommended changes to Cracker Jack (including the revamping of prizes and the sponsorship with Little League) we predict this number to be slightly higher. In the end, we predict that the new marketing plan will raise sales of Cracker Jack by approximately 5%.
Proposed Budget for Marketing Mix
Market Research $78,000Online marketing $30,000Advertising production costs $50,000Billboard advertising $450,000Bus bench/wrap advertising $630,000Magazine advertising $1,200,000Little league sponsorship $50,000Sales promotions $1,412,000
Total $3,900,000
Incorporating all of the aforementioned marketing recommendations into proposed Cracker Jack Budget
Marketing Budget Breakdown
1 “Advertising yields higher ROI than sales promotion; study results are contrary to most marketing plans” http://findarticles.com/p/articles/mi_m3065/is_n7_v18/ai_7381940/
Judging from our situational analysis, Cracker Jack will still have great returns on marketing investments with relatively small budget of $3.9M.
Financial impact of proposed marketing plan
In order to strengthen and grow the Cracker Jack brand, a heavy marketing push would begin within 6 months of acquisition
The marketing campaign would help offset sales volume drops caused by the price increase associated with the relocation of Cracker Jack In later years we predict sales volume growth would
return to historical rate and begin to grow closer to the expected rate of the popcorn industry of 1.9%
With the added income from price increases due to switching to boxes, adding toys, and relocation, a marketing budget of 50% of income after cost of goods and SG&A would be reasonable $3.9 million in first year plus $200k as a one‐time web
upgrade expense
Marketing plan breakdown
Net Impact of Marketing plan
2010 Before% $ Expected Best Worst
Volume Growth due to marketing 5.1% 7.1% 0.1%
Units Sold 23.20 24.38 24.85 23.22Avg. Eq. Price ($) 1.49 1.49 1.49 1.49Retail Sales ($) 34.57 36.33 37.02 34.60Retail Margin @ 30% 10.37 10.90 11.11 10.38Revenues ($) 100% 24.20 25.43 25.92 24.22Expenses
Fixed COGS 1.78 1.78 1.78 1.78Variable COGS 16.01 16.83 17.15 16.03
Added cost of Boxes/ Eq Unit $0.000 0.00 0.00 0.00 0.00Added cost of Prizes/ Eq Unit $0.00 0.00 0.00 0.00 0.00COGS Expense 73.5% 17.79 18.61 18.93 17.81Fixed SG&A 3.28 3.28 3.28 3.28Added Marketing Expenses 0.00 3.90 3.90 3.90
One‐time Web Upgrade 0.00 0.20 0.20 0.20Variable SG&A 1.40 1.47 1.50 1.40Selling and Admin Exp 19.3% 4.68 8.85 8.88 8.78
Operating Income 7.1% 1.73 (2.03) (1.89) (2.37)Difference (3.75) (3.62) (4.09)
After
Assuming an expected 5% sales volume increase, the marketing expense alone would decrease operating income $3.75M
With an above average marketing effect of 7%, operating income would only go down $3.62M
With a completely ineffective marketing campaign, operating income would go down $4.09M
Projected financial impact of marketing plan
Depending on volume growth that Cracker Jack can achieve due to new marketing presence, the cost of marketing will be offset by a larger contribution from sales.
30
CRACKER JACK FINANCIAL ANALYSIS
31
BetaCracker Jack = .554 We used Golden Enterprises, Inc. (GLDC), a small snack food producer in Alabama with roughly $120 million in sales to
estimate market risk and compared with conglomerates to estimate beta for Cracker Jack itself and within DPC BetaGLDC = .558 BetaPepsiCo = .504 BetaConAgra = .604
Market Risk has historically been roughly 7% Cracker Jack Return on Equity: 8.17%
30‐year Treasury Bond December 2010 is 4.3% Cracker Jack Return on Debt estimated from Golden Enterprises’ return on debt of 10.3% 2:1 Debt:Equity ratio With estimated Operating Profits under $10 million, Cracker Jack’s corporate tax rate would be 34% WACC = 7.13%
(E/V)*Re+(D/v)*Rd*(1‐Tax Rate) = .33*8.17%+.67*10.3%*(1‐34%)
Estimating Cracker Jack’s WACC
32
Expected NPV after recommendations $62.37M
Maximum offer price of $48.5MMinimum Offer price $17.9M
Monte Carlo simulation to achieve Cracker Jack brand valuation
Cracker Jack valuations Valuation probabilities
Using a Monte Carlo simulation, the brand valuation was estimated with probabilities to estimate expected benefit to DPC of owning Cracker Jack
Sales volume growth input assumptions were based on the four recommended changes utilizing expected‐worst‐best estimations indicated in each situational analysis
Minimum offer price of $17.9M was determined by calculating required internal rate of return needed for a positive valuation under the financial situation prior to acquisition (see baseline financials in previous section)
Maximum offer price of $48.5M was determined in a similar fashion based on cash flow estimates (see financials that follow)
Cracker Jack valuations show that implemented recommendations will add a great deal of value to DPC
This maximum offer allows for DPC to increase net value by $13.87M. With a long right‐tailed distribution of expected brand values, DPC has an 81% probability of adding a positive net value, assuming maximum offer price is required for acquisition. 33
Income Statement for projected Cracker Jack outcomes
BRAND Projections (in millions)2010 2010 2011 2012 2013 2014 2015% $ Brand Sales Growth Assumption (from Mintel):
Volume Growth ‐6.6% 0.0% 0.0% 1.0% 1.9%Price Growth 30.0% 1.0% 1.0% 1.0% 1.0%Units Sold 23.20 21.67 21.67 21.67 21.89 22.30 Privce per Unit 1.49 1.94 1.96 1.98 2.00 2.02 Retail Sales 34.57 42.04 42.46 42.88 43.74 45.02 Retail Margin @ 30% 10.37 12.61 12.74 12.86 13.12 13.51 Revenues 100% 24.20 29.43 29.72 30.02 30.62 31.51 Expenses
Fixed COGS 1.78 1.78 1.78 1.78 1.78 1.78 Variable COGS 16.01 14.95 14.95 14.95 15.10 15.39 Added cost of Boxes/ Eq Unit $0.023 0.00 0.50 0.50 0.50 0.50 0.51 Added cost of Prizes/ Eq Unit $0.03 0.00 0.65 0.65 0.65 0.66 0.67 COGS Expense 73.5% 17.79 17.88 17.88 17.88 18.04 18.35 Fixed SG&A 3.28 3.28 3.28 3.28 3.28 3.28 Added Marketing Expenses 0.00 3.90 3.63 3.77 3.99 4.27 One‐time Web Upgrade 0.00 0.20 0.00 0.00 0.00 0.00 Variable SG&A 1.40 1.31 1.31 1.31 1.32 1.35 Selling and Admin Exp 19.3% 4.68 8.69 8.21 8.36 8.59 8.89
Operating Income 7.1% 1.73 2.86 3.63 3.77 3.99 4.27
Interest Expense (@ 7.13%) 0.79 0.86 0.96 1.05 1.15 Earnings before Tax 2.06 2.77 2.81 2.93 3.12 Tax Expense (@ 34%) 0.70 0.94 0.96 1.00 1.06 Net Income 1.36 1.83 1.86 1.94 2.06
Tax on Operating Income 1.09 1.38 1.43 1.52 1.62 NOPAT (Unlevered Net Income) 1.77 2.25 2.34 2.47 2.65 34
Cracker Jack Projections as of End of (in millions)2010 2011 2012 2013 2014 2015
$ % Brand Sales Growth Assumption:‐6.6% 0.0% 0.0% 1.0% 1.9%
AssetsCash 0.60 2.9% 1.67 3.86 5.79 7.69 9.56Inventory 2.35 11.4% 2.19 2.19 2.19 2.21 2.26A/c Receivable 2.18 10.6% 2.04 2.04 2.04 2.06 2.10Other Current Assets 0.89 4.3% 0.83 0.83 0.83 0.84 0.85
Intangibles (net) 1.24 6.0% 1.15 1.15 1.15 1.15 1.15PP&E (net) 8.05 39.1% 8.52 8.52 8.52 8.61 8.77Other Assets 5.29 25.7% 5.29 5.29 5.29 5.29 5.29
TOTAL ASSETS (85% of Revenue) 20.59 100.0% 21.70 23.89 25.82 27.85 29.98
LiabilitiesAccounts Payable 3.89 18.9% 3.64 3.64 3.64 3.67 3.74
Long Term Debt 11.14 54.1%12.0410
092813.50055893
14.78813254
16.11840874
17.49161127
Owners' Equity
Total Owners' Equity 5.56 27.0% 6.026.750279465
7.394066272
8.059204372
8.745805636
TOTAL LIABILITIES & OE 20.59 100.0% 21.70 23.89 25.82 27.85 29.98
Fixed Asset annual depreciation charge 20.0%No sales of PP&E
Depreciation Expense (buried in COGS and S&A) 1.61 1.70 1.70 1.70 1.72Capital Expenditures 2.08 1.70 1.70 1.79 1.88
Current Assets (other than cash) 5.42 5.06 5.06 5.06 5.11 5.21Current Liabilities 3.89 3.64 3.64 3.64 3.67 3.74Net Working Capital 1.52 1.42 1.42 1.42 1.44 1.46
Balance Sheet for projected Cracker Jack outcomes
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Cracker Jack ratio trends
Projections (in millons)2011 2012 2013 2014 2015 Future
Unlevered Net Income (NOPAT) 1.77 2.25 2.34 2.47 2.65add back Depreciation Expense 1.61 1.70 1.70 1.70 1.72minus Change in Net Working Capital 0.10 0.00 0.00 ‐0.01 ‐0.03= Unlevered Cash Flow from Operations (UCFO) 3.48 3.95 4.04 4.16 4.34
minus Capital Expenditures on PP&E& Investing ‐2.08 ‐1.70 ‐1.70 ‐1.79 ‐1.88Minus Investing (Intangibles) 0.08 0.00 0.00 0.00 0.00
= Unlevered Free Cash Flow (UFCF) 1.48 2.25 2.34 2.37 2.46 60.10Net Annualized Growth 2.92%WACC of 7.13% 1.39 2.10 2.18 2.22 2.29 56.10Net Future Cash Flows 66.28Discount Rate 7.13%IRR @ $48.5M acquisition 7.14%
Acquisition Price $48.5MCracker Jack P/E 16.98PepsiCo P/E 16.4ConAgra P/E 14.54
Although return on both equity and assets is showing slight declines, this is consistent with its market position as a cash cow, with high market share, but very low growth, which is true for all major caramel corn brands.
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5%
10%
15%
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25%
30%
2011 2012 2013 2014 2015
ROE After Recs.
ROE Before Recs.
ROA Before Recs.
ROA After Recs.
Projected Cash Flows and Selected Ratios
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DPC understands that there are many inherent risks in acquiring and revamping a neglected brand such as Cracker Jack. The simulations DPC have conducted in preparation for acquisition have taken into account both best and worst case scenarios of each major recommendation.
The major changes we have proposed to implement may have the following risks:
Boxes instead of bags New prizes: The current generation of children have so many options for both snacks
and games that they may not find even the new prizes as exciting as the older generation once did.
Moving location: Cracker Jack’s position with new competitors could have unforeseeable effects
Price: Consumers may not accept the higher price we have proposed Marketing: The nostalgic feeling of Cracker Jack could have fallen so flat over the years
that even strong marketing efforts will not be enough to raise the brand’s strength
A maximum offer price of $48.5M has been established as a threshold where these risks are not worth DPC’s acquisition of Cracker Jack. After careful consideration of these risks, DPC still believes that the brand is a good target at a price lower than this threshold.
Risks of Cracker Jack Future Recommendations
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