Blue Mountain Coffee Case Analysis

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Blue Mountain Coffee Case Analysis

By Group 3

Yahui Zhang

02/ 17/ 2016

Executive Summary

This report provides analysis about how Blue Mountain Coffee should allocate the advertising budget to increase market share and profit by using ADBUDG model and Solver in Excel. Blue Mountain Coffee is an established company in the coffee business, whose market share suffered severely during past decades. The problem that the company faced was to increase share otherwise they would begin to lose distributors. All the calculations would be available in the appendix.

Objectives

Among all the goals, we primarily focus on the long term market share and long term profits because we thought that long term profit and market share would be more important for Blue Mountain’s future development. Besides, since Blue Mountain was aiming at increasing the market share towards 6% and becoming more profitable by the end of the next fiscal year, we should also try to use other strategies like increasing the media efficiency or copy effectiveness to increase the contribution.

Recommendations

In response to the objectives, we have come up with several recommendations for Blue Mountain Coffee. The recommendations discussed in the following report include:

1. Increase the copy effectiveness and media efficiency by 0.15
2. Emphasize long term goals for both share and profit
3. Increase the total budget by 10% per year

Analysis of Recommendations

Copy effectiveness and  Media efficiency from 1.0 to 1.15

We decided to increase the copy effectiveness and media efficiency to increase the overall contribution and market share. Based on our analysis, a 0.15 increase in copy effectiveness and media efficiency will increase overall contribution from $51.0.8 M to $61.6M. By doing so, the market share can also be increased from 6.66% to 8.0% by the end of Year 1. The scenarios are detailed in Exhibit 1. From these scenarios, we chose the fourth scenario as the optimal course of action.

Adjust weighted objectives by emphasizing long term profit and share

We adjusted weighted goals by focusing on long term share and long term profit, since we thought that long term share and profit would be more important. To illustrate this, we created different scenarios in Exhibit 2 to derive our recommendations by controlling other variables.

The first scenario is the base case which put equal weight on all the four goals (short term profit/share, long term profit/share). After maximizing the weighted objective by using solver, we found that the company can get 6.66% market share at the end of Year 3, and 5.73% by the end of the Year 1.

In the second scenario, we focused on the long term profit and share while minimized the short term share and profit. We found that the market share saturation can reach to 6.67% at the end, and 5.74% by the end of first year.

The third scenario was the opposite of the second scenario, which maximized the short term share and profit while minimized long term share/profit. We found the results were the same as the first scenario. Therefore, considering the overall market share of these three scenarios, we decided to choose the second one as our recommendation direction. We decided not to make our recommendation as exact the same as the second scenario because we wouldn’t want to totally ignore the short term share and profit. So, we decided to use the scenario 4 by giving weight of 0.2 to short term goals and slightly increasing weights the long term goals, which could give us the same optimal results as the second one.

Increase total budget by 10%

Based on the case, we found that the advertising was not as effective in increasing market share for the company. Even though the manage believed that 20% increase in the budget would help achieve 6% market share goal, we were trying to keep conservative by increasing overall budget by 10% from $8 M to $8.8M per year. As can be seen in Exhibit 3, we found that this allocation of budget could ensure the base line of 6% of the market share by the end of the next fiscal year. Also, it could help the company get 7.23% market share at the end. Moreover, the over contribution would increase from $51.0 M to $53.1M.

Combined Recommended scenario

Under our final budget plan, all the three recommendations above would go hand in hand to satisfy the long term profit/ share as well as the short term share. Then the final scenario in Exhibit 4 has changed four variables: copy effectiveness and media efficiency, four weight objectives, and the total budget. If all the recommendations could be accepted, we predicted that the company could reach 6.49% market year at the end of the first year, and 8.26% at the end. And the overall contribution would be $61.3M.

Justification of Assumptions

The first assumption of recommendation is that we could ask our advertising agency to increase copy quality and reallocate media mix to increase the efficiency. The reason we make our increase of copy effectiveness by 0.15 is that we thought this number is feasible, and the experts in the advertising agency for Blue Mountain claimed that they have confidence to increase the copy rate to 1.15. Also, we could increase copy effectiveness of our advertising through a number of methods. For example, by re-briefing our current agency on the new positioning of Blue Mountain Coffee, we could better align messaging efforts to the company’s business goals behind. If rebriefing is not effective, we would put our agency of record up for review in an effort to find a more effective agency, or motivate our current agency to reprioritize Blue Mountain Coffee as a client. Besides, the current media mix for Blue Mountain Coffee is 100% spot television. Based on the regional consumption of Blue Mountain Coffee, spot TV is a logical option, as national/cable TV would produce more waste by advertising in Non-BMC regions. In order to increase the efficiency of our media spend, we recommended reallocating spend to include Out of Home and Radio, which are far more efficient from a CPM (Cost per Mille/Thousand) standpoint. Moreover, we could improve the efficiency of our media by reducing spot TV spend, focusing out of home on high traffic billboards and targeting radio to PM and weekend drive time (prime shopping hours). Similar to copy testing levels, we feel that we can feasibly increase efficiency by 10-20%.