United Beverages - Case Study

8/11/2019 United Beverages - Case Study

1/13

UV0900

This case was prepared by Raul O. Chao, Assistant Professor of Business Administration at the Darden School ofBusiness, and Stylianos Kavadias, Assistant Professor of Operations Management at the Georgia Institute of

Technology College of Management. The case should be used as a basis for class discussion rather than to illustrate

effective or ineffective handling of a managerial situation. All names and numbers have been changed to ensure

confidentiality. Copyright 2007 by the University of Virginia Darden School Foundation, Charlottesville, VA. All

rights reserved. To order copies, send an e-mail to [email protected] part of this publication

may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden

School Foundation.

UNITED BEVERAGES:

PRODUCT DEVELOPMENT GENIUS OR ONE-HIT WONDER?

Paul Diaz sat in his office late at night staring at the financial statements of the company

he had co-founded, United Beverages. He always enjoyed the view from his office high atopBrickell Avenue in Miami, Florida. On this night, there wasnt a cloud in the sky and the

moonlight lit up all of Biscayne Bay. Under normal circumstances it was a very soothing view.

Unfortunately, Diaz couldnt seem to relax. The year had just come to an end, and he wanted to

review the data given to him by his chief financial officer (Exhibit 1). He leaned back for amoment and realized that it was past midnight and for the first time in almost five years, he had

cause for concern.

United Beverages first product, GangBusters Interactive Beverages, was reaching the

stage of wide brand recognition. However, over the past 12 months, growth had stalled and

Diazs mind was already focused on the future. Would it be possible to develop anothersuccessful product like GangBusters? Could it be that United Beverages was just a one-hit

wonder? As an experienced entrepreneur, Diaz had gone through various ups and downs with his

previous ventures, and he did not want to see his latest and most successful creation fail. Severalideas for future growth had been discussed in previous meetings with his product development

team. The best candidate was a carbonated energy drink for kids aged 9 to 12. However, Diaz

was not completely sold on the idea. He grabbed a GangBusters bottle off his desk and stared at

it. Maybe United needed a revolutionary product idea in order to become a serious player in thehighly competitive beverage industry. For the past few weeks, he had been tossing around just

such an idea: flavor mixing as a revolutionary new interactive beverage. He was excited and

wanted to bring the development team up to speedtomorrows development meeting would bea milestone for United Beverages.


2/13

UV0900-2-

United Beverages History

In the early 1980s, University of Miami students, best friends, and business majors Paul

Diaz and Charles Smith combined their respective knowledge of marketing and finance to writetheir first business plan. The product: plastic clip-on sun visors that could be customized for

different corporate clients, branded, and used for marketing purposes. The idea took off and

catapulted Diaz and Smith into almost 15 years of entrepreneurship.

After flipping multiple successful businesses (with a few casualties along the way), the

two friends joined forces again in 1997 and formed United Beverages. They used past experienceto manufacture and market a full range of houseware products, including high-quality insulated

plastic cups, coffee mugs, plates, bowls, sports bottles, backpacks, and lunch kits.

During a joint project with Sea World in Orlando, Florida, Diaz identified an untapped

retail niche: interactive beverages. Sea World and United teamed up to apply the companysexpertise in a new directionthe creation of Looney Tunes character beverages for sale at Sea

World theme parks. The Sea World project was a tremendous success. While working thebeverage carts themselves and selling the Looney Tunes drinks to kids throughout the park, Diaz

and Smith realized that the interactive beverages category was going to be lucrative.

They spent several months redefining the product concept and brand strategy. The

GangBusters brand really took off in 1999 when United negotiated with Warner Bros. for the

retail rights to produce and market the first generation of interactive beverages featuring theScooby-Doo character. Publix signed on as the initial GangBusters retail partner in Florida, and

Scooby-Doos remarkably positive test results paved the way for a national rollout in the springof 2000. Because of their success with Publix, GangBusters won placements with other major

distributing chains (Kroger, 7-Eleven, and Target, among others). United Beverages has since

negotiated additional licensing agreements with Warner Bros., Disney, Universal Studios,Marvel Comics, DC Comics, 20th Century Fox, Sanrio, and more. The GangBusters character

variety multiplied from Scooby-Doo and Power Rangers in 2000 to 45 collectible characters

including Looney Tunes, the Powerpuff Girls, Spider Man, Superman, Batman, Cartoon

Network Originals, the Simpsons, Hello Kitty, and more (Exhibit 2).

Diazs intuition about the potential for the interactive beverage category was on target,

and the sales figures from U.S. retail stores backed him up (Exhibit 3). The nations second-largest grocer reported that GangBusters owned five of the top-ten selling spots in their canned

juice/fruit drinks aisle. Within months of launching in 7-Eleven stores, GangBusters held the

number-one and number-three top selling spots among non-carbonated beverages, outsellingbrands like Minute Maid, SoBe, and Kool-Aid Burst. GangBusters held the number-eight

position out of 100 total juice drink brands on Target shelves, outselling Ocean Spray, Sunny

Delight, Minute Maid, and Welchs. In addition, GangBusters held the number 13 position out ofthe top-50 juice drink brands on Kroger shelves, outselling Minute Maid, Hawaiian Punch,

Fruitopia, and Snapple.


3/13

UV0900-3-

The Development Team

Paul Diaz was a firm believer in the value of openness and flexibility. Red tape and

bureaucratic procedures were non-existent at United, and the company had maintained itsentrepreneurial spirit through five years of rapid growth. These values were reflected in the small

but highly efficient product-development team at United Beverages.

Katja von Robinsonwas Uniteds marketing guru. She had spent a great deal of time in

beverage marketing and was able to read between the lines of consumer research data. She was

also responsible for the market-introduction strategies of new products, as well as the brandingapproaches the company used for their existing products. Von Robinson and Mary Smithmade

up the marketing side of the development team; Smith was the production-marketing liaison,

ensuring that the correct products were on retail shelves during key marketing campaigns. Herexperience was invaluable, as she had spent the early years of her career cutting her teeth at

PepsiCo International.

Luis Hernandez brought production and packaging knowledge to the team. He alsobrought deep contacts with suppliersa result of a 15-year career with Coca-Cola. Hernandez

reported directly to Bill McBride, the head of operations. McBride had been with United since

the early days of the company and was responsible for the production success that Unitedexperienced with the ramp-up and rollout of GangBusters. Lastly, Bob Jones, an industrial

designer by training, claimed responsibility for the successful design of GangBusters. It was

Joness responsibility to provide ergonomic designs for the bottles United used for its products.Although development meetings were often enriched by the presence of other collaborators, the

core development team was the driving force behind innovation at United Beverages.

Re-Revolutionizing the Beverage Industry

The development team was set to meet at 9 a.m. The meeting started with Diaz outlining

his recent thoughts about the future of United Beverages. GangBusters are great products, and

theyve done very well for us. But I think we may be reaching a plateau in terms of sales. Weneed to seriously consider Uniteds futurewhat happens if Coke or Pepsi decide to get into the

interactive beverage category? Can we handle that type of threat?

Von Robinsons reaction was instantaneous: No waywed be wiped out! The

GangBuster concept is great, but its still vulnerable to the competition. I think we should expand

the flavors, introduce GangBusters in more countries, and hopefully create some barriers toentry. Hernandez shook his head, You dont need to worry about barriers to entry. Coke wont

even bother to deal with us. Believe me, they do not care about the interactive beverage

category.


4/13

UV0900-4-

At that point, Diaz grabbed the opportunity to outline his vision for United Beverages.

Folks, I think we need to revive some of the innovative spirit we had when we

launched GangBustersafter all, thats what weve done well. Real innovation isthe only way we can secure our future in this industry. Consider this: Last night I

was surfing on eBay and what I found was pretty remarkablean entire trading

category is listed under the GangBustertitle. I think GangBusters is a brand namethats on its way to becoming a product description maybe were on our way to

becoming the next Xerox or Kleenex!

As he spoke those words, Diaz reminded himself to relax. He continued, Seriously, the

mix of innovation and marketing we have is something special. Diaz described his idea for

United Beverages: dual-drinks and flavor mixing as the next big interactive beverage.

We could create an entirely new drink category. Two juices would be packaged ina dual-chamber bottle and at the top of the bottle would be a mixing chamber.

Kids could choose to drink one flavor, or mix two flavors together to get anentirely different color and flavor! I really think we can do thisdual-drinks

should be our next product!

As Diaz continued to outline his idea, Jones began to draw furiously. After about 10 to 15

minutes, he had something, Is this what you had in mind, Paul? (See Exhibit 4). Diaz was

elated, Excellent! This is real innovation; this is what United Beverages is all about! With thisproduct we can re-revolutionize the beverage industry! Diaz toned down his excitement just a

bit.Is re-revolutionize even a word?he thought to himself. It didnt matterhe was on a role.Lets take a few weeks to get some information together and see if this is feasible. Lets make it

happen, folks!

New Products: The Next United Beverages Generation

The team spent the next few days throwing around ideas, concepts, target markets, etc.The first meeting had planted the seeds, but dual-drinks were a completely unknown territory.

Despite their extensive experience, the development team was caught by surprise. Everyone

started searching for information that could help make sense of the pros and cons associated withthe development and marketing of dual-drinks. Two weeks later, the team met to discuss the

possibility of developing a dual-drink.

Von Robinson started by painting a vague picture. There is no real data on dual-drinks,

she said. Theres never been such a revolutionary concept and to be honest with you, we will

have to work from scratch on this one. I did some preliminary work with our standard focusgroup plus some initial survey work and heres a summary of what I found. (See Exhibit 5.)

Von Robinson continued:


5/13

UV0900-5-

To be honest, the market for dual-drinks is not well defined, but the potential may

be bigmaybe as much as four or five times the size of the GangBuster market.

We would have to conduct some more research and obtain better information. I

think the potential is definitely there, if we do some heavy product marketing.

Hernandez interrupted von Robinsons analysis. I think that there is some trouble if you

look beyond the market side, he said. Our suppliers are going to need big quantities to give uslow prices. In fact, theyre not even sure how this type of product would work. Hernandez was

painting a bleak picture.

I think the development costs are going to be substantial. The only good news is

that we might be able to patent the outcome. In addition to that, we need to

consider how were going to pay for this. Weve been pretty successful usingsales to fund new product development in the past, but Im not sure if we can pull

it off for the dual-drink idea.

Hernandez had a point. Diaz always considered innovation a fundamental part of theUnited Beverages culture. In Paul Diazs eyes, innovation wasnt just a slick buzzwordhe

backed up his ideas by always committing dollars to new product development based on a

percentage of revenue.

Mary Smith interrupted and delivered what seemed to be the last blow to the idea:

Paul, arent we a bit lean on resources? Jumping into a capital-intensive new

product idea, while were working on expanding GangBusters, might be tough.The dual-drink idea would require full commitment and significant ramp-up

investment. If we all dive into this new product as if its the holy grail we may be

spreading thin. After all, we arent Coke or Pepsi, and we cant spread ourresources around at whim.

As she spoke, Smith handed out a summary of some potential projects being considered

by the group (see Exhibit 6). She continued, I think GangBusters are still vulnerable as aproduct, and they account for almost all of our revenue. What if we ignore GangBusters and the

revenue stream dries up?

After a few long seconds of silence, McBride spoke up, I think Mary has a point. We

need to capitalize on what we learnedfrom the GangBusters experience. McBride emphasized

the word learned. What if kids dont like the dual-drink? We dont even have a good grasp onthe potential market size. Also, we would feel a huge crunch if we spread ourselves thin. As

usual, McBride had a knack for bringing Diaz down to earth.


6/13

UV0900-6-

McBride continued:

I think we should focus our efforts on improving GangBusters. If we concentrate

our effort, we can finish that project quickly and keep the sales coming in. Afterall, the guys at Coke are coming out with new derivative products every month

last month it was coffee-flavored Coke. God knows what will come next!

Diaz rebutted in a rather sarcastic tone, What do you propose, Bill? Stay with the

GangBusters forever? Not introduce any new products? That sounds like a great way to make

sure were still around in two years. Product development meetings often resulted in heatedexchanges, and McBride was not shy about putting in his two cents, even if it meant butting

heads with the founder of the company: Im not saying we should sit around and wait, Paul. If

we want to do more, we can always go back to the Kid-Energy drink that weve been discussing.The preliminary market numbers have been pretty encouraging for the Kid-Energy idea.

Hernandez jumped back into the fray. Im with Paul on this one. Sure, the Kid-Energy

drink may be easier to produce, but itll have plenty of competition and its not a guaranteedsuccess by any stretch of the imagination. I think it would be tough to repeat the GangBusters

success with an incremental product. It became clear that the team was not going to reach a

consensus. Diaz decided it was best to end the meeting on a positive note. All right guys, I thinkthis is a good start. Lets put all this information together and well make a decision the next time

we meet.

Expanding the Portfolio or Not?

Over the next few days, Diaz faced a complex decisionone that would determine the

future of United Beverages. There were convincing arguments for the tremendous payoff thatwas possible with a dual-drink. However, the development team was also clear about the dangers

associated with a rapid expansion of the portfolio. United was a young companystill feeling

the growing pains associated with 300% annual growth over the last five years, and the company

did not have the enormous financial pockets of some of its bigger competitors. Part of thedilemma was that United Beverages depended heavily on existing product sales to fund

development. In fact, the company had always committed 8% to 10% of revenue toward research

and development (R&D) and new product development.

Paul Diaz was back in his office looking over the data gathered by the product

development team. He wondered, Should we continue to invest in GangBusters, or should wedevelop one of the new product ideas? Biscayne Bay seemed more tranquil than ever.

Unfortunately, Diaz couldnt say the same for himself. He had to make a decision and the

development team was meeting again in two weeks to decide which way to go.


7/13

UV0900-7-

Case Questions

1. What are some of the pros and cons for each development project? What should United

Beverages take into account when deciding which product(s) to develop?2. Assume that the total development cost can be spread evenly over the development time.

Construct a graph of Development Time as a function of Monthly Investment for the

Kid-Energy drink and dual-drink projects.

3. If you were a member of the development team, which project(s) would you recommendUnited Beverages pursue? Analyze some of the potential scenarios based on the

information and data provided in the case. Present a best-case versus worst-case income

statement for the next two years (2003 and 2004). Be sure to outline all of yourassumptions.


8/13

UV0900

-8-

Exhibit1

U

NITEDBEVERAGES:

PRODUCTDEVELOPMENTGENIUSORONE-H

ITWONDER?

UnitedBeveragesSelectedFinancials(2002)


9/13

UV0900-9-

Exhibit 2

UNITED BEVERAGES:


The GangBusters Product Line


10/13

UV0900-10-

Exhibit 3

UNITED BEVERAGES:


Total U.S. Retail Sales by Brand

Source: ACNielsen Retail Measurement Insights

BEVERAGES: JUICE / FRUIT DRINKS

TOTAL U.S. RETAIL SALES BY BRAND

52 WEEKS ENDING 12/31/2002

Rank Dollar Sales Units Sold Price / Unit

1 CAPRI SUN 338,708,172 179,865,851 1.88

2 GATORADE 190,184,255 60,996,022 3.12

3 HI-C 115,491,369 51,623,576 2.24

4 GATORADE FROST 60,968,962 17,092,021 3.57

5 CRYSTAL LIGHT 50,174,257 14,077,239 3.56

6 GANG BUSTERS 49,293,568 21,851,283 2.267 KOOL-AID JAMMERS 48,547,696 23,713,561 2.05

8 MINUTE MAID 37,673,797 26,503,805 1.42

9 MINUTE MAID COOLERS 36,569,282 14,687,497 2.49

10 HAWAIIAN PUNCH 31,080,362 18,588,751 1.67

11 PRIVATE LABEL 26,718,739 15,317,983 1.74

12 OCEAN SPRAY 23,720,249 10,600,160 2.24

13 KOOL-AID BURSTS 22,505,338 21,094,365 1.07

14 MINUTE MAID EXTREME COOLERS 21,847,295 9,140,530 2.39

15 POWERADE 19,030,638 14,120,074 1.35

16 SOBE 14,979,807 12,011,925 1.25

17 NANTUCKET NECTARS 11,995,991 1,664,449 7.21

18 GATORADE ICE 8,819,913 7,643,481 1.15

19 FRUIT WORKS 8,749,124 8,212,728 1.07

20 SNAPPLE 6,062,151 5,138,558 1.18

21 TANG 5,535,787 1,195,947 4.63

22 DOLE 5,018,424 4,315,923 1.16

23 ODWALLA 4,961,934 1,709,108 2.90

24 COOL TOPZ 4,652,970 2,028,794 2.2925 FRUITOPIA 4,650,899 4,169,110 1.12

26 SUNNY DELIGHT 4,407,216 2,343,091 1.88

27 SUNNY DELIGHT 3,728,018 2,286,397 1.63

28 MINUTE MAID 3,058,651 1,515,730 2.02

29 OLD ORCHARD 2,468,795 1,465,710 1.68

30 WELCH'S 2,318,354 1,048,195 2.21

31 CTL BR 1,825,797 583,327 3.13

32 TROPICANA TWISTER 1,809,314 748,835 2.42

33 COUNTRY TIME 1,320,089 1,182,351 1.12

34 OCEAN SPRAY SWEETIE 1,012,230 398,985 2.54

35 SOBE LEAN 948,426 745,588 1.27

36 TAMPICO 926,610 544,499 1.70

37 LIPTON BRISK 892,482 768,194 1.16

38 BORDEN 346,021 323,790 1.07

39 MISTIC 271,524 291,857 0.93

40 SOBE SPORTS SYSTEM 211,796 150,571 1.41

41 ELEMENTS 178,470 144,823 1.23

42 MAD RIVER 172,140 150,861 1.14

43 FAYGO 169,619 269,721 0.63

44 ANDERSON ERICKSON 161,342 127,938 1.26

45 SANTA CRUZ ORGANIC 152,130 51,277 2.97

46 MOUNTAIN SUN 139,710 36,451 3.83

47 FAIRMONT-ZARDA 89,836 74,215 1.21

48 ARIZONA 88,254 57,495 1.53

49 MEADOW GOLD 82,457 54,925 1.50

50 FIVE ALIVE 81,434 36,479 2.23


11/13

UV0900-11-

Exhibit 4

UNITED BEVERAGES:


Bob Joness First Sketch of the Dual-Drink Bottle


12/13

UV0900-12-

Exhibit 5

UNITED BEVERAGES:


Results of Preliminary Market Research

PRELIMINARY MARKET RESEARCH ANALYSIS (01/15/2003)

CONFIDENTIAL - DO NOT DISTRIBUTE

Assumptions:

1) Continued growth for GangBusters in target customer segment (adolescents aged 9-14).

2) Cross-selling opportunity due to product familiarity with GangBusters.

Preliminary Conclusions for Dual Drinks:

1) Potential market is 4-5 times current GangBusters market in the long-run.

2) Slower acceptance rate (focus group was unsure about product use and understanding).

3) Approximately 50% of survey respondents were "not sure" regarding the idea.

Almost 25% of respondents expressed some sort of "positive" feedback.

Preliminary Conclusions for Kid-Energy Drink:

1) Potential market is smaller than current GangBuster market.

2) Fast acceptance rate (focus group indicated easy product use and understanding

due to the current market for energy drinks).

3) Approximately 80% of survey respondents expressed "positive" feedback.

UNITEDbeveragesUNITEDbeverages


13/13

UV0900

-13-

Exhibit6

U

NITEDBEVERAGES:

PRODUCTDEVELOPMENTGENIUSORONE-H

ITWONDER?

PotentialDevelopmentProjects

United Beverages - Case Study

Documents