Now assume Foto Moto has decided to look at the operations side of launching the
ID: 1209494 • Letter: N
Question
Now assume Foto Moto has decided to look at the operations side of launching the new line Fujun. You have been assigned the role of key decisions maker. After speaking with manufacturing, they suggest they will need a new plant to make the new product since the other plants are at capacity. They estimate it will cost $18,000,000 in manufacturing and facilities to launch the new product line. Marketing estimates the new product would require $3.2 million in promotion spending the first year to introduce the new product, but then only require $2.0 million per year in promotion each year after. The feasibility study indicated that they expected contribution (sales minus cost of goods sold) including everything but the new promotion spending would be $7.2 million in year 1, $9.3 million in year 2, $10.4 million in year 3, and $8.0 million in year 4.
You ask your team to give you their best estimates as to a discount rate. Your two most trusted managers suggest 10% and 20% respectively. Should you launch Fujun based on this information alone?
Foto Moto Company:
On January 25, 2014, Bill Zou, Foto Moto's recently appointed chief executive officer, met with his management team to set out Foto Moto's new strategy for film products in China. During the past week (between January 17 and January 24), Foto Moto stock had lost 8% in value on rumours of a price cut on film in their main market, China.
While Foto Moto was the market leader of the photo film market, its market share in China had eased from about 76% to 70% over the past five years "as competitors like Hiku Photo Film Co. offered consumers lower-priced film." Now Foto Moto proposed to introduce a brand at Hiku's price level, 20% below the price of Foto Moto's flagship Gold Star brand. The new brand, Fujun, was to be available only in limited quantities during two off-peak selling seasons.
THE CHINA PHOTO FILM MARKET
In 2013, approximately 16 billion color exposures were made - the equivalent of 670 million 24-exposure rolls. Typically, a consumer paid the equivalent of between 15 Yuan (about $2.50 in U.S. dollars) and 20 Yuan (about $3.50 in U.S. dollars) for a 24 exposure roll. (Note: For ease of comparison’s and application, the remaining prices will be given in U.S. Dollars). Over the past five years, the market's annual unit growth rate averaged only 2%.
Analysts' estimates of unit market shares by manufacturer are shown in Table A.
Table A Approximate Unit Market Shares in 2013 (China Market)
_____________________________________________
Foto Moto 70%
Hiku 11%
Private Labels 9%
Nica 5%
Other 5%
_____________________________________________
Hiku and Foto Moto were locked in a battle for dominance of the photographic market in China. Hiku started its serious incursion into Foto Moto territory in 2008, when it captured consumers' attention throughout China, but particularly in Beijing, by becoming the official film of the 2008 Summer Olympics in Beijing.
Hiku's CHINA dollar sales grew at over 15% in the past year, compared with Foto Moto's 3% growth rate. An industry expert stated, "Hiku's gains are largely based on the market’s response to prices."
Category Pricing
Foto Moto's Gold Star brand was the standard of the industry. Exhibit 1 shows the average retail prices for a single 24-exposure role of ISO 100 film.
As shown in Exhibit 1, there were four price tiers in the market. Foto Moto Gold Star, the largest-selling brand by far, set the Premium Brand price at $3.49. Foto Moto's gross margins were about 70%. Hiku's key brand, Hikucolor Super G, anchored the Economy Brand tier at 17% below the Premium tier. Hiku's gross margin was believed to be about 55%. Generally, trade margins averaged about 20%.
Consumer Behavior
Film usage rates varied widely across Chinese households with a mean of 15 rolls per year. A recent industry report estimated that 20% of Chinese households bought less than 5 rolls per year, 22% bought between 5 and 9 rolls, 28% bought 10 to 15 rolls, 16% bought 16 to 25 rolls, and 13 % bought more than 25 rolls. Often, these rolls were purchased in "multipacks" containing 2-3 rolls of film. Foto Moto advertised heavily, e.g., spending approximately $50 million on camera and film supply advertising in the China in 2013. (This was about 4 times Hiku's CHINA advertising spending.)
Actual quality differences among films were unclear. Both Foto Moto and Hiku tried to position themselves as providing superior quality film through their advanced technology. However, independent university researchers conducted a test of films and reported, "We found most films to be no better or worse than their competitors of the same speed. The top six ISO films scored so similarly that we think all will yield pictures of comparable quality." In order of overall quality score (score out of 100 in parenthesis), these top six films were:
1. Panda High Definition (95)
2. Hiku Super G (94)
3. Foto Moto Gold Star (93)
4. Nica Super SR (93)
5. Foto Moto ES (92)
6. KColor (92)
KColor was also sold as private label from big retailers in China, as shown in Exhibit 1. Hiku Superpremium brand Real had a score of 90, and Agfacolor IRG scored 88. The independent university researchers regarded score differences of less than 5 points as "not significant."
According to a 2011 survey, more than half of the picture takers in the China claim to know "little or nothing about photographs." As a result the article claimed, "Consumers tend to view film as a commodity, often buying on price alone." The article also quoted Tse Xin, Foto Moto's manager of general merchandise marketing, "The importance of brand name in consumer decision making is still strong. On the other hand, there is a growing body of price-sensitive consumers there. We are seeing growth in private label film activity." Foto Moto research had shown that 50% of buyers were "Foto Moto-loyal," 40% were "samplers" relying heavily on Foto Moto, and 10% shopped on price.
The Fujun Strategy
For 2014, Foto Moto planned a major repositioning of its film product line. A new emulsion technology would increase exposure latitude. Three films would be offered:
1. Gold Star - to remain the flagship brand at a price unchanged from 2013 levels. Gold Star would receive 60% of the dollar advertising support.
2. Regal Gold - to replace ES in the Superpremium segment. Whereas ES had been targeted to professionals and serious amateurs, Regal Gold would be targeted to a broader audience for "very special" occasions. Offering richer color saturation and sharper pictures, it would be positioned as especially appropriate for those occasions when the consumer may wish to make enlargements. Regal Gold would be heavily supported by advertising (40% of the total film budget) and by promotion and would be priced lower than ES was selling to the trade at a 9% premium over Gold Star. Cooperative advertising allowances were to be offered to the trade to provide the incentive to maintain Regal Gold retail prices at 20% above Gold Star, thereby offering superior trade margins.
3. Fujun - to give Foto Moto a presence in the Economy Brand Tier at a price 20% below Gold Star on a per roll basis.
Key aspects of the Fujun marketing plan:
No advertising support
Offer only twice a year at off-peak film use times, viz. for 2-3 months beginning in April, and again for 2-3 months beginning in September.
Available in limited quantities.
Offer in only the two most popular speeds, ISO 100 and 200. (In contrast, Regal Gold would be eventually offered in five speeds).
Available to all classes of trade.
Packaged only in "value packs," specifically in two forms:
1. 2 rolls of 24 exposures
2. 4-roll package
(3 rolls of 24 exposures and 1 roll of 36 exposures)
Sun Wu, vice president and general manager of Foto Moto Consumer Imaging in China and Singapore, explained the strategy:
This repositioning is intelligent risk taking that will drive both our market share and earnings. . . [it] will allow us to be more selective in targeting certain customer segments. We now have Regal Gold film for those very special memories - the birth of a baby, the graduation. We continue to offer Gold Star film for capturing those unexpected moments - the baby smiling, the father and son playing catch in the backyard. And now we will offer a special promotion twice a year, featuring Fujun at a slightly lower price than our other films.
Commenting on the strategy, Nica's director of marketing said, "There will be an opportunity for us at Nica. It seems like a desperate move to regain market share. Not a way to make the industry more profitable."
Exhibit 1 Price Tiers in Film Market Defined by Average Retail Price Paid.
(Relative price compared to Foto Moto Gold Star film in parentheses—100% = same price)
____________________________________________________________________
Superpremium Brands
Hikucolor Real -- $4.69 (134)
Foto Moto ES -- $4.27 (122)
Premium Brands
Foto Moto Gold Star -- $3.49 (100)
Agfacolor XRG -- $3.49 (100)
Economy Brands
Hikucolor Super G -- $2.91 (83)
Nica Super SR -- $2.91 (83)
KColor -- $2.69 (77)
Price Brands
(S) Panda High Definition -- $2.49 (71)
(S) Kroer -- $2.49 (71)
(A) Wals -- $2.49 (71)
(S) Yu -- $2.40 (69)
(A) Cleer Color -- $2.35 (67)
(S) Kshop Focal -- $2.29 (66)
(S) Sharpest -- $2.19 (63)
Explanation / Answer
No i cannot launch Fujun based on this information as life cycle of new plant is missing so when assuming that it is 4 years then discount rate told by 1 manager suggests that money should be invested while discount rate suggested by other tells not to invest so the decision in inconclusive
t=0 t=1 t=2 t=3 t=4 Initial cost 18000000 Revenue r 7200000 9300000 10400000 8000000 Promotion Expenditure E 3200000 2000000 2000000 2000000 Net Annual revenue 4000000 7300000 8400000 6000000 Present value at 10% -18000000 3636364 6033058 6311044 4098081 Present value at 20% -18000000 3333333 5069444 4861111 2893519 NPV sum of all present value at 10% 2078547 NPV sum of all present value at 20% -1842593Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.