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Copyright © 2013, Richard Ivey School of Business Foundation Version: 2013-11-12 INTRODUCTION Elsie Maya, vice-president of marketing at Grupo Dulces Sueños (GDS), was walking back to her office in Mexico City on a hot July day in 2013 and staring at what appeared to be a confidential internal document belonging to her company’s greatest rival, Caramelo Confectionary. Even more perplexing was that Roberto Liendo, president of that company, had given it to her. Her boss, Daniel Scudero, chief executive officer (CEO) of GDS, had directed Maya to meet with Liendo who had a very important document to give her. Scudero had remarked that he would have met with Liendo himself had he not been in Europe for the week. She was also instructed to call him in Europe as quickly as she could upon returning to the office. Unbeknownst to her, this nondescript brown envelope would begin to answer a series of questions that had been lingering in her mind since she had joined the chocolate maker in early 2011. MEXICAN CHOCOLATE CONFECTIONARY MARKET The Mexican chocolate confectionary market had sales of $224.2 billion 1 (Cdn$18.3 billion) in 2013 and was dominated by only a handful of major multinational firms. These firms included GDS, Pluton Inc., The Hilario Co. and Caramelo (see Exhibit 1). The sales for these firms were split between base confectionary items, such as branded bars and seasonal items that were distributed for holidays such as Cinquo de Mayo, Easter and Christmas. Despite the prominence and history of these firms’ branded products, recent sales performance had been subpar because of increasing health concerns and changing customer preferences. The industry-wide Mexican annual revenue increases for 2013 were 1.2 per cent (see Exhibit 2). Lagging demand had fueled the motivation for firms to try more creative means to drum up sales. This came primarily in the form of increased trade spending where the firms would, at their own expense, work 1 Currency is represented in pesos unless otherwise noted (12.5 Mexican peso = US$1). Authorized for use only by Zaid Khartabil in BUAD 301-26 at California State University – Fullerton from 1/24/2022 to 5/18/2022. Use outside these parameters is a copyright violation. 9B13A024 9B13A024 with retailers to offer price discounts, promotions and displays. 2 Popular among chocolate manufacturers were point-of-sale deals that offered two bars for $10. Large grocery and pharmacy chains sourced their products directly from the manufacturers and crafted promotional campaigns in tandem. However, more than 60 per cent of chocolate products were sold through discount stores, independent groceries, convenience stores and gas stations. These retailers often sourced their products through independent wholesale distributors who themselves were members of a national distribution network that worked directly with manufacturers. As a result, the retailers were often three degrees removed from the makers of the product. In Mexico, the chocolate manufacturers worked with LAWTI, a national distribution network of wholesale distributor members that operated 149 warehouses from Tijuana in the northwest to Cancun in the southeast in both urban and rural markets of all sizes. LAWTI positioned itself as a ‘middleman’ that was not only an ally of a large buying group but also a ‘selling group’ that provided manufacturers an extension of their selling and distribution activities. This was exemplified by LAWTI’s motto: ‘United We Are Strong!’ ELSIE MAYA’S TENURE AT GRUPO DULCES SUEÑOS Maya had been working in the chocolate business in some capacity her entire life. Growing up in a Cuban neighbourhood in Miami, she spent her evenings and weekends working at her family’s candy store. At university, she parlayed this intimate knowledge of the chocolate market and her undergraduate business courses into a summer internship in brand management at Hilario and later a full-time job at Hilario’s headquarters in the United States. As a brand manager at Hilario, Maya was involved in all aspects of the business from product development to production to marketing and distribution. She thrived in this position that endowed her with a unique set of skills, which would ultimately make her an attractive candidate for competing firms. In 2011, Maya was approached with a job proposal that she couldn’t refuse. The past eight years at Hilario was rewarding, but she was ready to step up to a new challenge. GDS was looking for a new vice-president of marketing for its Mexican chocolate confectionary business, and there could not be a better fit. This position would allow her to enter a firm that offered great opportunities for mobility and advancement. Combined with the excitement of this new position was the fact that GDS had recently announced the promotion of Scudero to president of its Mexican operations. Maya would work closely with Scudero, who had spent the past few years abroad as a regional president in South America. Maya had heard that his success in a challenging economic context would position him well to ascend to the highest levels of the firm. Early into her tenure at her new job, Maya found that the Mexican market and GDS’s position in it presented some unique challenges. First, despite decreasing demand, Scudero was opposed to the historic levels of trade spending to which the firm had been accustomed. It was widely known that he strongly disagreed with the prevailing approach that all the major manufacturers had been taking. As a result, revenue growth would have to come from some other means. Second, the major manufacturers were heavily reliant on LAWTI for helping to move product. Competition among distributors in the United States had given the manufacturers greater power in the value chain; however, this was not the case in Mexico where LAWTI had the power to dictate which retailers would receive product and the 2 In 2011, consumer packaged goods companies in Mexico spent approximately $200 billion on promotions that would fall within the category of trade spend. This makes it the second largest expense line after cost of goods sold (COGS). These firms average 20 to 25 per cent of top-line sales on activities such as volume discounts or rebates for retailers/distributors, shelving fees to stores to better position products, refunds for unsaleable or returned items, coupons, cooperative advertising, temporary price reductions, bonus goods in lieu of price reductions and display allowances. Authorized for use only by Zaid Khartabil in BUAD 301-26 at California State University – Fullerton from 1/24/2022 to 5/18/2022. Use outside these parameters is a copyright violation. Page 2 Page 3 9B13A024 pricing/promotions that they would be permitted to run. Maya quickly found out that these two challenges were not mutually exclusive. One of Maya’s first priorities in her new position was to get well-acquainted with GDS’s top customers. She had been handed over the files on each with what she expected to be a relatively straightforward task. However, when flipping through the LAWTI file, she came upon a mystifying letter that had been sent to her predecessor by Gustavo Silva, CEO and president of LAWTI, and copied to executives at Caramelo, Hilario and Pluton. The letter, dated February 21, 2010, referred to the use of trade spend by the industry. After a lengthy discussion on the practices of GDS and its competitors, the letter concluded with the following statement: At the ‘end of the day,’ it is only the suppliers’ control and discipline of trade spending that can restore the functionality of the marketplace. The problem is very serious and completely out of control on the part of the suppliers. I am being forced to re-examine how we operate in the market and I am not sure it would be in the best interests of Grupo Dulces Sueños. I urge you to meet and take action before this chocolate bar ‘bubble bursts.’ The tone and direction of this letter left Maya uneasy with what appeared to be going on. She was unaware of the serious problems to which Silva had been referring, but it seemed as if he had been directing the competing firms to coordinate their marketing practices. A month after coming upon the letter, Maya received a fax from LAWTI titled ‘Take Action Now (TAN): Bulletin #19.’ This fax, dated April 25, 2011, had again been copied to executives at all the major competing firms and revealed an even more distressing plea. It read: We have considerable discussion on the disfunctionality of 2/$10 pricing on single bars. Although good progress has been made, please find attached a store outlet and pictures of current such activity at Pesorama. The product in the pictures is fresh, having been shipped and produced in 2011. With a price increase soon to be implemented, this situation becomes even more incredible. Please Take Action Now! Gustavo Silva TAN. It was unclear again to Maya why such pricing choices should be a group concern for the major chocolate manufacturers or why a distributor should coordinate particular decisions over trade spending. Back in her old job, these choices were made strategically with an aim to drive revenue growth and this would be a challenge if all competitors knew each other’s moves and acted accordingly. TAN Bulletin #19 was soon followed by TAN Bulletin #20 a week later, this time requesting a meeting between LAWTI executives and the vice-presidents of marketing at the major firms. The fax stated that they had to ‘come to grips with pricing issues or everybody loses!’ Maya could no longer sit back as it was becoming clear that these communications were a regular occurrence. She approached Scudero to discuss what had been going on and whether it was appropriate for her to respond to this request. He was remarkably sympathetic to her concern and recounted a similar experience at an industry conference a few months back. At that time, Liendo of Caramelo had pulled him aside, welcomed him to the chocolate business and said that he wanted him to ‘hear it from the top — I take my pricing seriously and we are going to soon take a price increase.’ In an effort not to be rude, Scudero said he had agreed with Liendo Authorized for use only by Zaid Khartabil in BUAD 301-26 at California State University – Fullerton from 1/24/2022 to 5/18/2022. Use outside these parameters is a copyright violation. LAWTI AND THE ‘TAKE ACTION NOW’ NOTICES Page 4 9B13A024 and probably left him with the impression that GDS may or may not follow Caramelo’s lead. Scudero then told Maya not to worry about it and that he would handle things with LAWTI. A challenging year and a half had passed since Maya had discussed the industry practices with her boss. Her marketing group was under severe pressure to both reduce trade spending per Scudero’s request and make up lost revenue through multiple price increases over that period. Maya knew there were other ways to achieve her targets, but the executive team was adamant that this was the best way to proceed. She followed her colleagues’ direction, but what was disconcerting was how GDS’s price increases always followed that of Caramelo, Hilario and Pluton. For instance, in December 2012, Hilario increased its prices to one retailer by 16.7 per cent, only to have Caramelo increase its prices by 17.04 per cent and Pluton by 15.6 per cent a few weeks later. Scudero directed Maya to follow suit with a 16.2 per cent increase. Maya had remained suspicious but was not entirely sure what to do. She wanted to succeed in her role at GDS but also recalled the challenges that her family’s candy store faced when such price increases were passed down and what this meant for the kids who saved up their money for their favourite chocolate bar. She hoped that her meeting with Liendo in July 2013 would shed more light on the situation. A meeting with the president of her firm’s greatest competitor was out of the ordinary for Maya. As per Scudero’s direction, she used his contact list to access Liendo’s phone number and called his office to arrange a time. Liendo met Maya downstairs at Caramelo’s headquarters and remarked that it would be better if he were not seen handing the envelope to her in his office. She politely thanked him on behalf of her boss and returned to her office at GDS. On her way back, she opened the envelope to find an internal Caramelo document on corporate letterhead postdated July 19, 2013. The memo detailed how Caramelo would increase the price of its confectionary portfolio by approximately 5 to 8 per cent, effective October 31, 2013 for base confectionary and April 18, 2014 for seasonal confectionary. Maya did not know what to make of this and had an uneasy feeling. She called Scudero immediately to let him know what was in the envelope. Scudero responded, ‘If Caramelo is going to take a price increase, then we will too. Agreed?’ Authorized for use only by Zaid Khartabil in BUAD 301-26 at California State University – Fullerton from 1/24/2022 to 5/18/2022. Use outside these parameters is a copyright violation. THE BROWN ENVELOPE Page 5 9B13A024 Caramelo The Hilario Co. Grupo Dulces Sueños Schokoladefabriken Lindt & Sprüngli AG Pluton Inc Gordon Bros Group LLC 2012 15.8 16.3 13.7 5.0 4.1 4.0 2013 16.0 15.7 13.7 5.1 4.1 4.0 Source: Euromonitor International EXHIBIT 2: CHOCOLATE CONFECTIONARY ANNUAL MEXICAN REVENUE GROWTH 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2008 Source: Euromonitor International 2009 2010 2011 2012 2013 Authorized for use only by Zaid Khartabil in BUAD 301-26 at California State University – Fullerton from 1/24/2022 to 5/18/2022. Use outside these parameters is a copyright violation. EXHIBIT 1: MARKET SHARE OF MAJOR FIRMS (%) Syllabus for Spring 2022 BUAD X F Portal Documenti – Word View Home Layout References Review Insert Design Mailings Developer Help 2 Arial A A Aa : ST – 11 AaBbCcDc AaBbcc ? B I Uabe X, X A-ay-A- ????, 1 Normal 1 No Spac Font Paragraph 1 Styles rd Problem Statement: Analysis, Objective and Long-term goal: Solution 1: Solution 2: Recommendation: Conclusion Action Steps: 1 of 1 14 words ? Executive Summary 4/11/22 (A summary of a larger report) Casc Analysis 1 2/16/22, in class. (Full written case analysis, in-class, timed exam) Case Analysis 2 Type here to search 14/13/22 in class E WE Purchase answer to see full attachment Explanation & Answer: 1 Page Tags: increment in sales strategic marketing companys profits User generated content is uploaded by users for the purposes of learning and should be used following Studypool’s honor code & terms of service.