Reference no: EM131481927

Golden Valley Foods, Inc.

It is 2012, and Neal Middleton, newly elected president of Golden Valley Foods, Inc. faces a severe decline in profits. GVF is a 127-year-old California-based food processor. Its multiproduct lines are widely accepted under the GVF brand. The company and its subsidiaries prepare, package, and sell canned and frozen foods, ncluding fruits, vegetables, pickles, and condiments. GVF, which operates more than 30 processing plants in the US, is one of the larger US food processors--with annual sales of about $650 million.

Until 2012, GVF was a subsidiary of a major Midwestern food processor, and many of the present managers came form the parent company. GVF's last president recently said: " The influence of our old parent company is still with us. As long as new products look like they will increase the company's sales volume, they are introduced. Traditionally, there has been little, if any, attention paid to margins. We are well aware that profits will come through good products produced in large volume."

Alex May, a 25-year old employee and now production manager, agrees with the multiproduct-line policy. As he puts it: "Volume comes from satisfying needs. We will can or freeze any vegetable or fruit we think consumers might want." May also admits that much of the expansion in product lines was encouraged by economics. The typical plans in the industry are not fully used. By adding new products to use this exces capacity, costs are spread over greater volume. So the production department is always looking for new ways to make more effective use of its present facilities.

GVF has a line-forcing policy, requiring any store that wants to carry its brand name to carry most of the 65 items in the GVF line. This policy, coupled with its wide expansion of product lines, has resulted in 88 percent of the firm's sales coming from major supermarket chain stores such as Safeway, Kroger, and A&P.

Smaller stores are generally not willing to accept the GVF policy. May explains, "We know that only large stores can afford to stock all our products. But the large stores are the volume! We give consumers the choice of any GVFproducts they want, and the result is maimum sales." Many small retailers have complained about the GVF policy, but they have been ignored because they are considered too small in potential sales volume per store to be of any significance.

In late 2012, a stockholders' revolt over low profits (in 2012, they were $500,000) resulted in GVF's president and two of its five directors being removed. Neal Middleton, (introduced earlier), an accountant from the company's outside auditing firm, was brought in as president. One the first things he focused on was the variable and low levels of profits in the past several years. A comparison of GVF results with similar operations of some large competitors supported his concern. In the past 13 years, GVF closest competitors had an average profit return on shareholders' investment of 5 to 9 percent, while GVF averaged only 1.5 percent. Further, GVF's sales volume has not increased much from the 1996 level (after adjusting for inflation)--while operating costs have soared upward. Profits for the the firm were about $8 million in 1996. The closest GVF has come since then is about $6 million--in 2002. The outgoing president blamed his failure on an inefficient sales department. He said, "Our sales department has deteriorated. I can't exactly put my finger on it, but the iverall quality of salespeople has dropped, and morale is bad. The team just didn't perform." When Middleton e-mailed Shelley Walton, the vice president of sales, with this charge, her reply was: "It's not our fault. I think the company made a key mistake in the late '80s. It expanded horizontally--by increasing its number of product oferrings---while major competitors were expanding vertically, growing their own raw materials and making all their packaging materials. They can control quality and make profits in manufacturing that can be used in promotion. I lost some of my best people from frustration. We just aren't competitive enough to reach the market the way we should with a comparable product and price."

In a lengthy e-mail from Shelley Walton, Middleton learned more about the nature of GVF's market. Although all the firms in the food-processing industry advertise heavily, the size of the market for most processed foods hasn't grown much for many years. Further, most consumers are pressed for time and aren't very selective. If they can't find the brand of food the are looking for, they'll pick up another brand rather than go to some other store. No company in the industry has much effect on the price at which its products are sold. Chain store buyers are very knowledgeable about prices and special promotions available from all the competing suppliers, and they are quick to play one supplier against another to keep the price low. Basically, they have a price they are willing to pay--and they won't exceed it. Then the chains will charge any price they wish on a given brand sold at retail. (That is, a 48-can case of beans might be purchased from any supplier for $23.10, no matter whose product it is. Generally, the shelf price for each is no more than a few pennies different, but chain stores occasionally attract customers by placing a well-known brand on sale.)

Besides insisting that processors meet price points, like for the canned beans, some chains require price allowances if special locations or displays are desired. They also carry nonadvertised brands and/or their own brands at a lower price--to offer better value to their customers. And most willingly accept producers' cents-off coupons, which are offered by GVF as well as most of the other major producers of full lines.

At this point, Neal Middleton is trying to decide why GVF isn't as profitable as it once was. And he is puzzled about why some competitors are putting products on the market with low potential sales volume. (For example, one major competitor recently introduced a line of exotic foreign vegetables with gourment sauces.) And others have been offering frozen dinners or entrees with vegetables for several years. Apparently, GVF managers considered trying such products several years ago but decided against it because of the small potential sales volumes and the likely high costs of new-product developement and promotion.

1. What do you think of GVFs' last president's comment?

2. What do you think of Shelley Walton's comment?

3. What is the primary strength of GVF?

4. What is the primary weakness of GVF?