Case Study: Alice's Dressings

Distribution systems may evolve over time as a business grows and changes. Consider
a small one-store family restaurant named Alice's, with delicious, unique, homemade
salad dressings (e.g., Pomegranate Vinaigrette, Rum-Raisin-range Ranch, !lue
Cheese Catalina". #nitially, the dressings were only available to customers eating at
Alice's. $hen customers begin requesting bottles to buy. #nitial sales and distribution of
Alice's Salad Dressings were from the restaurant to wal%-in customers. $he &roduct
was &ac%aged in a '(-ounce canning )ar with a handmade label.
New distribution channels cause packaging and pricing changes. $hen Alice's
Dressings were sold to a local grocery store at a discounted wholesale &rice, (* &ercent
less &er ounce than the retail restaurant &rice, &ac%aged in a smaller, (+-ounce bottle.
,s local demand grew, ,lice decided to have the dressings made in an inde&endent
&ac%ing facility and sold to other stores in the area, which initially raised the cost of
ma%ing the dressings. ,lice-s husband, brothers, and a sister-in-law divided u& initial
sales res&onsibilities to call on local and regional stores in their s&are time.
$he &o&ularity of Alice's Dressings caused ,lice to consider the &ossibility of selling
large &allet quantities to distributors in other states. $he distributors needed another (.
&ercent discount from wholesale &rice, along with free shi&&ing. /ales bro%ers were
also recommended, at . &ercent commission on net distributor sales, since the family
could no longer call on everyone. , se&arate com&any would have to be set u& to
mar%et the salad dressings0 an enter&rise requiring full-time management.
Distribution channels are key to pricing and packaging decisions. #n this case, a
se&arate business, new distribution channels and sales re&resentation grew out of
,lice-s initial one-store restaurant. Alice's restaurant was initially able to sell the salad
dressings at 1..22 &er '(-ounce )ar (3..+ cents &er ounce" directly to customers.
4owever, once a decision was made to sell ,lice-s Dressings as a shelf-stable item in
grocery stores, the bottles changed to a standard (+-ounce si5e to com&ete with other
dressings sold in this si5e.
,lice was concerned that grocery consumers, unfamiliar with the restaurant, would not
&ay over 1'.66 retail &er (+-ounce bottle when com&eting brands ranged from 13.(6 to
1(.+6 for the same (+-ounce si5e. 7holesale &rices were (* &ercent less than retail, at
1(.*6 &er bottle. 4owever, the cost of ingredients was substantially more than
com&eting brands, at 13.22 &er bottle, and &ac%aging and &rocessing costs added
another 12..2 &er bottle. Profits were reduced from restaurant sales &er bottle, but still
acce&table (i.e., from 1'..2 a bottle, or 33 cents &er ounce, to 13.'6 &er bottle, or five
cents &er ounce", since the total amount of sales and &rofits were e8&ected to be
substantially greater through grocery sales.
9urther research with mar%eting e8&erts in the industry and sales bro%ers indicated a
further :2 &ercent reduction in delivered distributor &rice (including bro%erage
commissions and shi&&ing costs". ,lice would net 13.;' &er bottle at delivered
distributor &rice with bro%erage commissions of . &ercent, leaving an unacce&table
gross margin of only (' cents &er bottle (3' &ercent", even at the higher retail &rice of
1'.66 &er bottle.
,lice finally decided to u&grade the bottle and label to a unique, tall, triangular, #talian
glass bottle and cor%, with gold and blac% labels and reci&e hang-tags by a local design
studio. /he sold the dressings directly to u&scale s&ecialty and grocery stores.
Distributors would not be used. /&ecialty bro%ers were hired to aid in selling directly,
at a 32 &ercent commission on net sales. $he &remium &ricing was also retained in this
non-elastic, low-&rice- sensitivity mar%et segment, with the new bottles retailing at
1:.66 each. 9inal net factory sales &er bottle were 1(.+6 after deducting 32 &ercent
bro%erage commissions, with net factory &rofits of 13.32<bottle. /&ecialty food stores
too% a :2 &ercent gross margin, but &aid for shi&&ing.
Pac%aging and &ricing decisions are intimately related to distribution and sales force
decisions= Alice's restaurant could have made several different distribution decisions,
with different &ac%aging and &ricing results=
Sell the salad dressings only from the restaurant in '(-ounce )ars with
handmade blac% and white labels at 1..22 each. $his distribution and sales
decision requires the least amount of e8tra resources, s&ending, and ris%. $his
also &rovides the smallest &otential sales return.
Sell the dressings directly to all consumers through mail order or other
mar%eting channels with family members handling both mar%eting and sales.
$his distribution and sales decision is a variation on selling only from the
restaurant and may require additional resources to manage and grow, but it
delivers better returns than selling only to local restaurant customers.
Sell through DSD (Direct Store Deliery! distributors. $his distribution and
sales decision requires financial resources, management time, &ersonnel, higher
margins, and s&ending su&&ort, but may be the fastest way to grow the
business.
"ire brokers for store and#or distributor sales. $his sales decision de&ends
u&on sco&e of o&erations and geogra&hic and distribution channel e8&ansion
&lans.
Combine seeral distribution channels simultaneously. $his distribution and
sales decision calls for the largest amount of resources, time and &ersonnel,
with the ob)ective of growing the business as fast as &ossible.
$icense the formulas and restaurant name to another manufacturer and
receive a : &ercent to . &ercent royalty on net sales. $his distribution and sales
decision is also low-ris%, with low-resource requirements. $he long-term
&otential return is much higher than selling out of a single restaurant.
Sell a different si%e bottle or &ar directly to stores only' as ,lice finally
decided to do. $his distribution and sales decision &reserves higher gross
margins and eliminates discounts to distributors and &ossibly sales
commissions to bro%ers, but requires more financing, management &ersonnel
and time.
$his case syno&sis can be found online. #t was last retrieved >an. ((, (22+ from=
htt&=<<www.tool%it.cch.com<te8t<P2'?+2:2.as&
@se the above case syno&sis, along with your own mar%eting research (select a target
mar%et &er your research", and the following questions as a guideline for your case
analysis=
3. 7hat should ,liceAs have doneB
(. !ased on your &ersonal research, what distribution a&&roach(es" would you use if
you ,liceAs was your com&anyB 7hyB
'. 4ow do your ideas relate to your target mar%et(s", does your research change the
a&&roach to the channel(s"B 7hy<why notB