Kingsford Charcoal Case Study Solved

Executive Summary

This document presents analysis of the case “Kingsford Charcoal.” Kingsford Charcoal is facing a decline in its sales growth in 2000. Kingsford’s market share in the charcoal has increased relative to its closest competitors—Royal Oak and private label brands. However, its growth in total sales has seen a decline due to shrinkage in charcoal grilling category and customers switching towards gas grilling.

Kingsford’s brand team has a few options at their disposal to revive the growth: revise prices which they haven’t done in past several years; increase advertising to expand charcoal category pie; extend grilling season by adding new occasions; use promotions to partner with channels to encourage impulse buying; and finally, use a combination of these strategies to achieve the objective. Combination of advertising and promotions has been suggested. First, because recent price increases by Royal Oak and private labels have driven away customers from charcoal to gas grilling. Second, advertising can help change customers’ attitude, it can promote charcoal grilling as a natural and tasty way of grilling. Last, promotions can win channel support to provide discounts beyond the traditional summer grilling season.

First section of this document focuses on defining the problem and states the alternative solutions. The second part analyzes the alternatives in detail by performing quantitative and qualitative methods. It also comments on each solution’s feasibility and long-term implications. While the third section lays out the implementation plan for the chosen strategy.

Problem statement

Kingsford charcoal is a charcoal brand. Charcoal is used for grilling as an alternative to gas grilling. There are two methods of grilling: charcoal grilling and gas grilling. Gas grilling penetration has been historically slightly higher than charcoal grilling (Exhibit 6 in the case). Although charcoal grilling takes more time and effort to burn, most die-hard fans of grilling prefer it as a natural, suitable, and tastier way to grill. Therefore, the customers who use charcoal grilling are very loyal to the method. Kingsford has traditionally leveraged this attitude amongst Americans by providing superior quality charcoal at premium prices. However, the recent development is that gas grilling category’s sales are increasing (8% growth in 2000) while charcoal grilling category’s sales are declining (3% drop in the same year). As a result of decreasing pie for the charcoal grilling, Kingsford’s sales growth has started declining (See Exhibit 3 in the case) despite growth in its market share relative to its close competitors Royal Oak and Private label brands.

Thus, the challenge is: how to regain growth in revenue from charcoal, and expand the pie of charcoal grilling as a whole while also remaining in the budget of not more than $7 million.

There are four alternative areas where action can be taken to further the mentioned objective: pricing, promotion, advertising, and any combination of two or more among three.

First, prices are the handiest of the tools available. For several years, Kingsford hadn’t increased prices of its products. Now that both private labels and Royal Oak have increased prices, should Kingsford too? The payoff will be increase in the revenues. But costs will come terms of customers switching to competitors or worse even to gas grilling which Kingsford isn’t in position afford. One reason to expect the latter is the recent association between price surges by Kingsford’s competitors and customers’ switching towards gas grilling.

Second, advertising could help the brand stand out as a classic representative of grilling, the pure and natural way of grilling—with charcoal. Although Kingsford spends more on advertising than do its competitors, its advertising spending has declined over the past 5 years from $6 million to just one million. While advertising spending has been increasing advertising spending during the same period. Therefore, there seems more attraction towards this alternative. Moreover, co-adverting activities are common when increasing category share is the target.

Third, promotions are one thing Kingsford has more focused on in the past. This time, it is an option too. But promotions were a successful strategy to gain channel support mostly to wipe out competitors and not gas grilling. However, one attractive feature of this alternative is partnering with the channel to create promotions which could stretch the grilling season from a summer-oriented hobby to broader passion which encompassed sports.

The last, decision alternative is a combination of these three. Slightly increasing prices within customers’ just noticeable difference supported by advertising should help prevent customers from switching to competition or gas grilling. While, partnering with channels to offer discounts in newer occasions candidates for grilling, for example NASCAR, coupled with advertising focused mainly on ‘why charcoal grilling is better than gas grilling’ seems to be even better option. In the next section, we analyze each alternative in detail.

Analysis of alternatives

Pricing

Price elasticity what-if analysis (Exhibit 10 in the case) provides us with the expected pay offs and probabilities of different outcomes corresponding to different levels and types of price changes.

Price increases usually result in withdrawal of support from retailers because price increases can turn profitable customers away from a store. So, here we analyze how each price increase affects merchandising.

Frist, if the price are increased by 4% across Club/Home centers, three possible scenarios can occur: no merchandising loss resulting probable pay off of $648; 300 Msc loss at Costco with resulting payoff of only $0; and loss of 1000 Msc at Costco resulting in a loss of ($375). Therefore, the net payoff of this will be $283. (Exhibit 1 panel (1))

On the other hand, if price of Blue Bag were given minimal raise (2.5%), either no merchandising loss would be incurred (75% probability), or 10 of merchandising would be lost on 10 and 20 lbs. bags (25% probability). The resulting net payoff would be $217.5 (Exhibit 1 panel (2)).

Third a higher (5%) Blue Bag price increase would either result in no merchandising loss and generating $535, or 7% merchandising loss in of 10 and 20lbs. bags generating only $55. The resulting net payoff will be $585 (Exhibit 1 panel (3))

Lastly, a total line pricing increase of 5% would either result in no merchandising loss, which is only 30 percent likely and generates $561; or a combination of merchandising losses in different SKUs still generating $1204. Thus, total line increase of 5% results in net benefit of $1765 (Exhibit 1 panel (4)).

Now if we analyze, this last option is best of all. However, a mere price increase would result in long-term switching from charcoal grilling towards gas grilling. There is substantial number of customers who are not loyal to any brand or charcoal grilling. Therefore, a price increase without support of advertising is not a profitable move.

Advertising

If total $6 million are to be spent on advertising in 2001, assuming advertising has the same effects as in 1998, it would generate incremental volume both in 2001 and 2002. Additional fund required would be $5,000,000 and the accrued benefits would total $12.3 million. A net benefit of $7.3 million in sales at the static prices of 1999. (For a detailed calculation, see Exhibit 2 in Appendix 1). Besides these dollar-benefits, advertising could hit the real root of the problem: change attitudes about “gas vs. charcoal grilling” in the favor of the latter. Because charcoal category advertising has been continuously declining over the past few years while the same for gas grilling has been increasing, the switching behavior maybe associated to the increased advertising by the gas grilling category brands. Moreover, comarketing efforts can also expand the pie by increasing the number of grilling occasions.

Advertising message would need to be adjusted if the objective is to promote charcoal over gas grilling. Specifically, the message “lights twice as fast as other coals” was irrelevant in this case because customer were now comparing coal with gas not coal with different coal. Further, because the objective was to hit gas grilling, convenience and fast lighting feature was to be highlighted and at least parity with gas grilling should be achieved to stay relevant. As segmentation study showed Kingsford’s consumers consuming regular were more fond of charcoal grilling. Finally, care should be taken not to distort the original older associations with natural, and tasty. Otherwise brands identity would be hurt and even loyal customers might turn away.

Promotions

Besides all the regular benefits of promotions to the sales of Kingsford, promotions are very crucial tool to extend grilling occasions beyond summer season. One new occasion to turn into a grilling event is NASCAR which. Promotions could increase impulse purchase by attractive and appropriate displaying locations, they can increase trial on new occasions. In 2001, Kingsford’s promotional expenditure is estimated to be $39 million in terms of forgone revenue from price reductions—US $31 million—and sales promotions in terms of coupon redemptions—US $8million.

If additional dollars are expended on promotions, they might generate no benefit without advertising and bringing in new customers. Therefore, it is advisable to marry a combination of advertising and promotions. Price increases will drive customers away from charcoal category and cause Kingsford to lose channel support; given the objective of expanding the charcoal category, this strategy seem incompatible. Thus, the best of available alternatives is a combination of advertising and promotions. It may seem to be just a cost driver, but in fact it is an investment that will pay off. One drawback of this strategy would be that other charcoal brands might free ride the expansion of charcoal category. However, if designed carefully, advertising can strongly associate Kingsford (and only it) with charcoal that it might prevent new customers from going to Royal Oak and private labels.

Plan Development

Now that we have decided to use a combination strategy of advertising and promotions, we need to develop a plan of implementation of this strategy. We start with prices under this new strategy.

Prices

As we saw in the analysis section that price increases would result in higher revenues for the immediate periods, but we also stated that they would adversely impact the charcoal category hence Kingsford’s performance which holds more than 50 percent of the category. Therefore, in the initial phases as strategy become effective, prices remain at the same level (except for discounts).

Placement and Promotions

Placements are ensured at the same retailers but at the central Walmart stores a minimum of 5000 pounds is met by providing trade allowance to the retailer on Labor Day and then Memorial Day. Moreover, merchandize will be optimized using MAPS formula used by the company. $2 million additional will be spent on promotions at new occasions including NASCAR, since expected budget is $7 million and $5 million are dedicated to advertising.

Advertising and Message

The new advertising message for regular charcoal would be “grill as fast as gas” and “taste as great as charcoal.” This message highlights the superiority of charcoal grilled food’s taste (blind taste test has already supported this hypothesis) while tells that with Kingsford’s charcoal, convenience is not less than gas grilling. So, the net perceived benefit to the customer is greater and there is incentive to switch from gas to charcoal grilling. If prices are controlled for some time this advertising, Kingsford can become leader in grilling not only in charcoal. Therefore, as we saw while analyzing costs and benefits of advertising, volume increases will be the return on this investment. And once attitudes attitudinal loyalty is achieved, price premiums can become justifiable.

Production capacity

Production capacity decisions usually lie beyond the scope of brand teams. However, to support growth and investment in the brand with seamless supply brand teams need to recommend and forecast timely decisions for supply chain and production adjustments. If this plan is sustained for three consecutive years and 7% volume growth in 2001 3-4% in 2002, plants will be operating at their full capacity in three years. Given that building a new plant can take up to five years to be operational, a capacity increase is recommended by now.