Kayem Foods: What Should Mr. Monkiewicz Do and Why?

I. Issues in the Kayem Foods Operation

Kayem Foods: Introduction to the Business

Kayem Foods is a family-owned enterprise with more than 100 years of history in the meat processing industry. It has a particularly strong position in its home region, New England: it follows two national giants and takes the third place with a revenue share of 7%. Between 2003 and 2005, the company strengthened its distribution in the Mid-Atlantic region and started operation in California and Florida.

The enterprise offers a wide assortment of meat products in a variety of brands and private labels. Branded delicatessen fresh meats, hot dogs, and sausages bring the largest part of sales. Kayem’s marketing program relies on the superior qualities of Kayem products, namely their freshness and high quality. The company distributes its products mostly via food chains and wholesalers, with 80% of the products offered at delicatessen counters in supermarkets.

Kayem is a medium-sized company with a limited marketing budget. Before 2004, the Kayem marketing programs included advertising in retail trade magazines and publicity on food TV shows. Despite limited advertising efforts, the company managed to increase performance of its higher-margin brands, such as Kayem and Al Fresco. The new buzz marketing program initiated by the Kayem’s marketing director, Mr. Monkiewicz, was expected to have particularly favorable effect on the Al Fresco brand positions. However, despite the very positive reviews from buzz agents, the program received the restrained reaction inside the Kayem team and was disapproved by retail executives.

The Problems to Solve in 2005-2006

Kayem Foods achieved significant success in its top-selling products that drove the sales volumes. However, the financial performance was controversial. The company had very large product assortment, often represented in multiple brands, with different margins, and miscellaneous effects on the bottom line. Kayem Foods often practiced longer-term price concessions to gain new distribution. Overall, the company did not have enough supply power and thus faced strong price pressure from distributors.

The growing power of supermarkets resulted in reduction of gross profit margins. Low-margin products in Kayem’s portfolio contributed to the high shares in sales; however, it operated at break-even or below break-even. Furthermore, retail trade executives and distributors put additional pressure on Kayem as they were convinced that only aggressive price promotions and extensive high-budget advertising would have effect on consumer awareness and drive sales. The additional argument was that main competitors relied on magazine (spending $200,000 to $1,000,000 annually) as well as TV and radio advertising (which was not feasible for Kayem).

The problem to solve in the next year was to sustain growth and increase operational profits while employing a moderate marketing budget of $185,000. In order to address the profit issues, the company relied much on its higher-margin products such as Al Fresco chicken sausage. Kayem Foods reached substantial growth in this segment in the same period when it launched the buzz marketing campaign in North-Eastern and Mid-Western areas (see Exhibit 1). Mr. Monkiewicz was therefore considering repeating the buzz marketing campaign in other areas, which would allow to expand the success in this segment at the lower marketing cost. The alternative would be to invest in more traditional marketing channels such as magazine advertising, consumer coupons, and promotions. Another question to be solved was whether marketing efforts should be concentrated on the same product segment or be expanded.

II. Objectives

Arguments to Focus on the Specialty Segment

In their estimates of the market potential, Kayem Foods focused on niche gourmet products to differentiate from competitors and conquer the higher-margin segment. Growing stronger ‘demand brands’ in the high-value product categories would allow to resist the supermarket pressure and mitigate price competition.

Among the higher-margin meat products, the specialty sausages were a particularly attractive segment as it met high customer demand and exhibited fast growth (10% in 2004). The other segment with high prospects was low-fat/lean sausage, capturing 19% of market revenues.

The high growth of these segments was explained by their central position in consumers’ food preferences. Overall, citizens of all income levels considered sausage a staple product in their daily meals. Besides, they liked different flavorings and were increasingly more interested in healthy food options.

Al Fresco chicken sausages became a hit that combined all those characteristics. The residents of the North-Eastern regions typically had high sausage consumption. In 2004, Al Fresco made 75% of total Kayem sales in New England (5.3% share of the total 7% in the region). In his marketing strategy, Mr. Monkiewicz placed special emphasis on buzz marketing program introduced for Al Fresco in 2004 and followed by strong sales growth. It is therefore critical to perform a thorough evaluation of this campaign in order to decide if the Kayem issues and objectives can be addressed with buzz marketing in FY 2006.

Overview of Buzz Campaign Mechanics

Buzz marketing is a technique to create word-of-mouth advertising of the product. The essential success factor of this type of marketing communication is that the participants are enthusiastic about the product and eager to pass the message. The buzz campaign does not necessarily rely on financial incentives or any other resources to stimulate communication and product trials. It is based on the inherent qualities of the product and the high relevance of the offer to the target audience. Furthermore, the product is easily available to anyone who is interested to try it.

This technique, if executed properly, creates a significant viral effect at a low cost. The effect is higher than in traditional marketing methods because people tend to trust unbiased recommendations from their friends and acquaintances more than rely on the information from the manufacturer or sales agents.

The buzz campaign executed by Kayem Foods and BzzAgent company in 2004 used a similar approach. BzzAgent was selected to match the profile of the Al Fresco target customers: 77% are women, the average age of 35, interested in food and cooking, seeking healthy food choices and original options to introduce variety to their meals. This group, although mostly having no previous experience with the category, was the right choice: the agents were very enthusiastic about the product. They enjoyed telling about their Al Fresco discovery to other people and readily put significant effort to promote the product among their circle and in supermarkets. However, the campaign execution had some shortcomings; they will be discussed below.

Analysis of the Summer 2004 Al Fresco Buzz Campaign

The Buzz campaign resulted in the increased brand awareness among the target customers, who showed the most enthusiastic reaction to the product quality. For the total campaign period, buzz agents made almost 15,000 buzz hits (see Exhibit 2). Al Fresco reached the revenue market share of 42% by September 2004 and showed volume growth of 54% compared to the previous year. The rate of quarterly sales growth as oppose to previous period was the highest in the campaign period, 40%, and sales increased steadily in the two consecutive months after the end of campaign (see Exhibit 1).

There are reasons to believe that the Buzz campaign made some contribution to this growth, but it was not the most significant factor. The supermarket price concession, which could have affected the sales volumes positively, reportedly had negligible effect in summer 2004. Another factor is the seasonal growth of the dinner sausage consumption: this category accounts for 60% of sausage sales, and 33% of all annual purchases fall on summer months. Yet, the growth rates in June and July (see Exhibit 1) were even lower than the ‘organic’ growth in April, which was presumably caused by the increased demand on Easter holidays. Revenues grew in July, which could be explained both by the Independence Day and the buzz marketing effects. There was a decline in sales revenues in August during the Buzz campaign period. Therefore, the Buzz campaign, although positively perceived by customers, had limited and inconsistent effects on the bottom line. By realistic estimates, its direct effect on operational profits was approximately $16,500, and the campaign accounted for about 6% of the summer sales revenues. In the worst case scenario, the campaign accounted for only 2% of summer sales and resulted in operational loss (see Exhibit 2).

The growth figures could be higher if not for the problems with distribution and product placement. Namely, there was overwhelmingly high rate of negative customer experience related to finding the product (95% of all customers involved via the Buzz campaign). Besides the limited awareness of supermarket managers, these issues could also be attributed to the gaps in supply management: Kayem might have underestimated the demand increase and supplied less products than required. Market reports show that Emeril, who competed with Al Fresco in the same geographic area, managed to reach almost twofold growth of revenue share in the months of Al Fresco Buzz campaign. Buzz reports imply that Emeril could actually benefit from Al Fresco buzz marketing in North-Eastern areas. More than 40% of customers heard about Emeril sausage, whereas 91% never tried Al Fresco. In some cases, customers were offered Emeril products in the store instead of Al Fresco. The contribution of the price factor remains unclear as there is no information about the Emeril pricing. At the same time, another competitor, Aidell, operating in Western areas, lost its positions. In part, this decline could be caused by the increased Al Fresco brand awareness after the Buzz campaign and the perceived higher price for Aidell products as compared to Al Fresco.

Despite the mentioned shortcomings in the Al Fresco campaign execution, the sales dynamics show that the combined effects of all activities that Kayem Foods undertook in summer 2004 could have longer-term effects. Namely, the company exhibited much stronger growth in September and October 2004 than in the previous year. This could be attributed to the delayed reaction from supermarket buyers who increased their purchasing of Al Fresco sausage in September, even after the end of the 10% discount campaign. As the summer results showed, in order to confirm these assumptions and take more advantage of buzz marketing, Kayem Foods should have overcome the existing issues in its supply management and distribution systems. More importantly, it would need to enlist full support from retailers and wholesalers.

III. Alternatives

A very positive feedback from buzz program participants and the steady improvement of Al Fresco performance in the last months contribute to the optimistic overview of Mr. Monkiewicz with regard to buzz marketing in 2006. Besides, his idea to run the campaign in a different geographic area is supported by the market statistics. First of all, marketing in southern regions, where Kayem has recently obtained some new supermarket distribution, can provide new opportunities for growth as the residents in the South eat sausages the most. Additionally, Al Fresco could benefit from weaker positions of competition brands: as of September 2003, a specialty Californian company, Gerhart, had a market share of 8% and the low growth dynamics.

However, the chicken sausage market was rather small, which raised the need to tap other market segments and other brands, besides Al Fresco. Furthermore, the average spending for sausage products is rather low ($16.95, corresponding to four packs of Al Fresco sausage per year). The company could focus the Al Fresco marketing on its highly targeted segment and additionally target the larger mass market groups with the other brands from the Kayem Foods portfolio. Kayem could strengthen its positions in mass brands; for instance, it could develop its specialty pork sausage brand to compete with the market leaders.

Another argument to expand the marketing to other brands is the structure and actual performance of Kayem’s current product portfolio. It can be seen that the company still has high revenue share in other brands; for instance, the Kayem branded line makes 16% of sales. The McKenzie products have strong positions in their historical area. Overall, different branded products make 60% of Kayem’s revenues. On the other hand, Al Fresco accounts for only 1% of the Kayem revenues. The company should increase profits in other brands as well. It would need to focus on several top-performing highest-quality products and divide its marketing efforts among those selected brands. Consequently, lessons from the Al Fresco buzz marketing provide solid base for these marketing programs.

IV. Recommendations

Al Fresco buzz marketing revealed some issues with supply management and distribution, even in the historically strongest areas for Kayem. The Kayem’s presence in other regions, besides North-Eastern and Western areas, remained weak. These were the arguments to hold the rapid expansion in other areas in 2006 until the company improved its distribution in New England and Mid-Atlantic areas. Instead, it could have relied on the momentum created for Al Fresco in New England and grown other brands in this area.

Exhibit 3 presents the sales structure of Kayem Foods by brands and business lines. It is evident that the company manages too many brand names. If they are marketed in the same areas and target segments, this could cause customer confusion and deteriorate the brand power. It is therefore recommended to revise the Kayem brand portfolio. Production for other brands, although taking a high revenue share (19%), is unprofitable. Private labels operate at break-even due to low pricing. Instead, more effort should be put in Kayem’s own brands.

Various hot dog offerings should be consolidated under one Kayem brand, keeping the high-value positioning of the hot dog product line. Genoa brand is clearly unprofitable; it could thus be rebranded and enhanced by adding more distinguishing features. The top-quality pork sausage could be used as a core product to enter the wider market with a sufficient high margin, compared to main competitors.

If Kayem Foods pursues these changes, the proven buzz marketing technique can be used to support the renewed brands. For instance, Kayem Foods could spend efforts to promote its specialty pork sausage products, starting with the strongest Kayem areas and using the same template as in the Al Fresco campaign. The company could plan for two waves of buzz marketing in peak consumption periods, before Easter holidays and in summer. This would allow to rely on superior quality of the product and increase local preference of the Kayem product with lower budget, while the competitors continue promoting the category on TV. Based on the Al Fresco experience, Mr. Monkiewicz should not rely on price coupons as they contributed significantly to the campaign expenses, while their excellent experience with the product was sufficient to stimulate them to continue purchasing. The cost of buzz marketing with these changes (pork sausage, limited geography) is yet to be estimated.

Returning to the Al Fresco buzz marketing lessons, Kayem Foods should strengthen the distribution and improve knowledge of its products among retailers. The company would keep the higher-value positioning as a core element of its marketing strategy and discard extensive price promotion practices. It is necessary to overcome the skeptical reaction of retail executives and persuade them in the high quality of the product. This would allow to enhance supply and distribution of Kayem products without eroding the margins. Specifically, the company should invest in the specialized trade advertising (estimated budget $80,000, see Exhibit 4). Given the high cost of full-scope magazine advertisements and supposedly limited effect of smaller ads, advertising in consumer magazines shall be discarded in favor of professional trade magazines.

In order to increase awareness and drive spontaneous purchases, investments in POS materials are recommended (marketing budget to be estimated). Using the POS print materials, Kayem could clearly identify the products and distinguish its offerings for delicatessen (premium value) and refrigerator (mass market) sections so that the customers and store managers would know exactly where these products can be found.

Finally, Kayem might consider a novel version of “buzz marketing” targeted at distributors, merchandise buyers, and retail partners. By engaging Kayem team members to organize networking events in their professional circle including store managers, it would be possible to personally familiarize the partners with the superior quality of the best Kayem products. A supporting argument is that Al Fresco buzz marketing brought 1/3 of all hits from contacts in various social events. Therefore, Kayem Foods should evaluate the business case for networking programs in formats of degustation brunches for new flavors, cooking classes, or free product samples for the families, collective barbecue parties, etc.

As elaborated above, the recommendations for Kayem Foods marketing program in FY 2006 focus on two main topics: restructuring of brand portfolio while investing only in the strong Kayem brands and emphasizing efforts to enhance the perception of Kayem high-value product among the retailers and distributors. By reusing the lessons of Al Fresco buzz marketing campaign, Kayem would reach wider coverage, keep the high-value positioning, and consequently improve its profit margins.

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