Breakaway Running the Show
June 22, 1998 – By Michael Selz
Here’s the Problem…
A specialty food maker wants to expand into supermarkets but its resources are extremely limited. Trombly’s Fresh Roasted Peanut Butter
In each issue Breakaway will present a case study of a real world business problem, in this issue that of a company examined at Harvard Business School. We’ve asked two small business experts to offer their advice. Then, you can compare that with what the company actually did.
Trombly’s was a small, Boston-based maker of gourmet peanut butter mixed with either chocolate, raspberry jam, honey and cinnamon, or banana chips. Formed as a food stall that sold the spread on sandwiches, the company early on abandoned a plan to franchise its retail concept, choosing instead to distribute its products in specialty-food stores and catalogs.
The next year, Trombly’s goods were available in more than 700 such outlets, though sales remained below management’s expectations. To accelerate its growth, Trombly’s considered expanding into supermarkets. The idea faced the following obstacles:
Distribution. Accustomed to dealing in low-margin, high-volume goods, supermarkets were more reluctant than specialty food stores and catalogs to take on Trombly’s relatively exotic and costly product. Without its own sales force, Trombly’s had used sales representatives at specialty-foods distributors to pitch its products. But such firms, while more attentive to Trombly’s, lacked the clout of large food brokers and distributors that mainly supplied supermarkets.
Marketing. Trombly’s would be taking on peanut butter’s Big Three: Jif, Skippy and Peter Pan, which account for about two-thirds of industry sales. To compete with the deep-pocketed corporate parents of the leading brands, the company would have to sharply increase promotion and advertising. A week of television ads in the Boston market alone may have cost $20,000.
Lack of Resources. Trombly’s, which had nearly exhausted $400,000 raised recently from a group of 20 investors, estimated it needed at least another $300,000 to execute its expansion proposal. Financial Condition. During its most recent year of operation, Trombly’s net loss widened to $338,000 on a 45% jump in sales to $448,000. It had $79,000 in bank debt and a negative net worth of $643,000.
Where do you think Trombly’s is in its Lifecycle?
Should Trombly’s pursue its plan to expand into supermarkets?
What the Experts Advise
No way, says Ichak Adizes, president of the Adizes Institute, a Los Angeles consulting group specializing in organizational change, and the author of several books on business management.
Trombly’s “is going for a big market it has no business being in,” Dr. Adizes says. “This reminds me of the parable by the French poet La Fontaine about the frog that wants to be a bull. The company is dreaming.”
The disappointing results of selling through specialty-food stores and catalogs probably arise from unrealistic goals rather than a flawed strategy, Dr. Adizes says. By maintaining relations with the specialty-food reps and slowly expanding its product line and the outlets the company stocks, Trombly’s may thrive.
Instead of entertaining a new costlier plan, the company should be striving to slash expenses, Dr. Adizes adds. Trombly’s financial statements indicate it is moving inventory and collecting bills too slowly and operating with too much overhead and debt. If it increases spending on anything, it should be on hiring a financial adviser to rein in costs to make the firm look more attractive to potential investors, he says.
Trombly’s “needs a wake-up call,” Dr. Adizes argues. In its current condition, “I cannot believe anybody would give this company money.”
Nancy Pechloff, the St. Louis-based managing director of Arthur Andersen’s Enterprise Group, which counsels smaller companies, says she would support the supermarket strategy, but only if the company recruited plenty of help. “It doesn’t look like Trombly’s has its arms around what is involved to get onto supermarket shelves,” Ms. Pechloff says. “I don’t see the resources or staying power to launch this.”
To obtain the necessary skills, Ms. Pechloff recommends hiring a sales executive who has “experience taking a product into national distribution through supermarkets.” Much of the knowledge Trombly’s requires also should come from the people who are financing the firm, she says.
“I didn’t see any of the talent or brainpower coming from the investor group,” which should include a venture capitalist or someone with industry experience, Ms Pechloff says. Such individuals “would be more particular about the experience and credentials of people in key positions and would require more discipline in the process of changing strategies.”
She says it is doubtful the company so far “has done enough thinking and analysis before making a virtually irrevocable decision.”
Recruiting a venture capitalist or investor with industry expertise also is probably the only hope Trombly’s has for funding its marketing effort, Ms. Pechloff says. “A dynamite advertising campaign costs a fortune just to come up with the ads, let alone the air time.”
If Trombly’s fails to land a seasoned sales manager or investor, Ms. Pechloff says it should stay the course. The company’s specialty-outlets strategy “makes a lot of sense,” she says. Even though sales so far were less than expected, there was still plenty of room for growth. “I’m not sure they are giving that approach a chance to work,” she adds.
What Trombly’s Did
Convinced that only a sharp increase in volume would make it profitable, the company in 1988 pursued its plan to expand into supermarkets. One encouraging sign: More grocery stores were allowing specialty foods space next to the big brands; previously such products had been restricted mainly to out-of-the-way sections that food makers called the “gourmet graveyard.”
Trombly’s hired a former manager of a specialty-food distributor to oversee a sales effort that focused initially on grocers in Northeastern and Mid-Atlantic States. It replaced most of the small, specialty –food representatives with more than a dozen big brokers and distributors and, in early 1989, set out to persuade supermarkets to carry its goods. To build brand awareness- and retailers’ willingness to stock its products- Trombly’s employed inexpensive so-called guerrilla-marketing techniques. It obtained favorable coverage from food editors and televised food shows, organized tastings at local events and gave stores free cases.
But, by 1990, only 1,200 individual stores- an estimated 5% of the market the company had targeted- had agreed to carry Trombly’s peanut butter. Moreover, the product had yet to appear in most of those stores, because the fight for shelf space can take moths even after a specialty-food company receives a retailer’s authorization.
Such delays, in addition to Trombly’s limited market penetration, compounded a cash crunch that turned eventually into a cash crisis.
The company had hoped initial supermarket sales would supplement income from its existing network of specialty stores and mail-order catalogs until it raised an additional $300,000 of equity investment. But that expected long-term financing also failed to materialize when a deep recession turned off interest among potential investors. With its cash flow insufficient to fill what orders it had, Trombly’s ceased operations in mid-1990.