Ingredient Branding at the Osum Cheese CooperativeIn April 2019, Sonia Terner, the vice president of marketing and product development for the Osum CheeseCooperative (Osum), was reviewing a proposal for a new brand of artisan cheeses. Osum’s board of directorshad asked Terner’s team to develop, evaluate, and present a proposal to representatives from the familyfarms in the cooperative at the next meeting. The proposal included a new line of artisan cheeses that usedbranded ingredients, a licensing agreement with Pernod Ricard USA (PR–U), a leading distributor of spirits andwine in the United States, a pricing strategy, and a communications strategy. Terner wanted to increase thelikelihood that, if approved, the proposal would increase Osum’s sales and profits.Terner had just returned from a preliminary meeting of the Board of Directors, where she was surprised todiscover strong disagreement among board members about the proposal. Katherine Ryan remarked, “Weshould focus on developing our own products without outside partners.” Patrick McNeil disagreed: “This is anoutstanding opportunity. We should sign the agreement. It will allow us to borrow brand equity to boost salesquickly.” Terner believed that developing a new line of artisan cheeses through a licensing agreement withPR–U was a good opportunity but also had risks. She also wanted to assess how the proposed line would fitwith Osum strategically and financially.Osum Cheese CooperativeOsum was founded in Wisconsin in the early 1900s by five dairy farmers. One of the founding farmers—Liam O’Donnell—was a well-known master cheesemaker who specialized in cheddar using a family recipe fromNorthern Ireland. Osum capitalized on O’Donnell’s skills and the cooperative’s steady access to milk inputsfrom the family farms.1
| | Whiskey Cheddar: Ingredient Branding at the Osum Cheese Cooperative
By 2018, Osum comprised almost 300 family farms. Like many other cheese cooperatives, each family farmhad one vote. Osum’s board of directors hired executive-level managers responsible for finance, marketingand product development, operations, and human resources.Osum focused on natural cheddars. Its product lines were classic, flavored, and artisan cheddars, alongwith noncheddars. It sold classic, flavored, and noncheddars through supermarkets and other food retailers,and sold artisan directly to the consumer. Unlike its natural cheeses, Osum’s artisan cheeses were producedprimarily by hand, in small batches, using as little mechanization as possible. Occasionally, Osum alsoproduced a special type of artisan cheese known as farmstead, which was produced from the milk collected onthe same farm that the cheese was produced.Osum’s retail cheeses were available in eight-ounce bars wrapped in vacuum-sealed, waxed paper.Nationwide, cheeses were sold to consumers via a wholesale channel from food distributors to supermarkets’dairy section. Osum’s cheeses were priced competitively with other high-quality national brands such asCracker Barrel, Cabot, and Sargento and were targeted to upper-middle class households. The manufacturer’ssuggested retail price (MSRP) per eight-ounce unit was $4.59. Exhibit 1 lists product items available throughretail channels and the percentage of retail sales by product.Osum’s customers perceived cheese as high-quality, healthy, and good for snacking. Branding emphasizedauthenticity and its Irish family-farm tradition. The Osum logo included the phrase “Farmer-Owned Since1905.” Packaging for cheddars emphasized the origin and the lack of processing (“Natural Cheddar Made inWisconsin”). However, Osum had a low brand awareness relative to other national brands among its targetmarket, with only a 25% unaided brand recall; other national brands had recall of 45% to 55%.Based on its customer surveys, Osum primarily targeted two market segments, which it termed “Foodies”and “Socially Conscious” buyers. Both segments tended to be young to middle-age professionals who werewell-educated and had middle- to upper-class household incomes. Both segments consumed natural cheesesevery week, often as a snack or part of a meal. Osum differentiated the groups by the product attributes eachemphasized. Foodies emphasized taste, quality ingredients, and variety. Socially conscious buyers put moreimportance on Osum’s history and farmer-owned status. Osum estimated that foodies accounted for 45% ofits total revenue, while socially conscious buyers accounted for 40% of its total revenue.Osum cheeses were made in a cooperative-owned cheese factory with areas for receiving, processing,aging, packaging, and tasting. In 2018, Osum generated more than $50 million in revenue, with a vast majority
of sales (98%) from its retail channels. Approximately 2% of total revenue was generated from direct-to-consumer sales via the Internet, which sold exclusive, limited- edition artisan cheeses for $8.00 per seven-ounce bar. Exhibit 2 provides a consolidated income statement for 2018.
2
Whiskey Cheddar: Ingredient Branding at the Osum Cheese Cooperative | |
In 2018, Osum earned an average wholesale price of $3.00 per unit for cheeses sold through retailchannels. Its variable costs included raw materials (18%), production (28%), and distribution (20%). In 2018,the average retail price for its cheeses was $4.04 per unit. Osum had been under increasing pressure from its
food distributors to reduce the wholesale price of its natural cheeses by $0.50 per unit to be more price-competitive in an increasingly crowded market. Given supermarkets’ frequent price discounts and the ever-increasing frequency of price discounts of competitors, Osum’s food distributors believed dropping the
wholesale price was necessary to maintain existing retail accounts. Although this price decrease wouldreduce the per-unit revenue Osum paid its distributors from $0.60 to $0.50, Osum’s food distributorsencouraged the change because they believed a reduction in the wholesale price would generate morevolume.At the same time, Osum’s distributors had also expressed interest in carrying Osum’s artisan cheddar(seven-ounce bars) with a wholesale price of $4.45 per unit and an MSRP of $6.99. While artisan cheddars hadhigher gross margins, they also had a higher cost of goods sold. Exhibit 3 provides the average costs per unitfor natural and artisan cheese for 2018 and the costs per unit for the distributors’ proposals.Cheese Production in the United StatesIn 2018, the United States was the single largest cheese producer in the world. In 2018, estimated saleswere $48.8 billion ($2.1 billion in profit), with projected annual growth of 0.8%.ProductsCheeses could be described by texture, milk type, and place of origin. Texture related to moisture contentand included soft (e.g., Brie), semisoft (e.g., Havarti), firm (e.g., Gouda and cheddar), and hard (e.g.,Parmesan). Milk types were pasteurized or unpasteurized cow, goat, or sheep milk. Cheeses were made bymass production or handcrafted in small batches. The U.S. Food and Drug Administration (FDA) and the U.S.Department of Agriculture (USDA) regulated the production of cheese and other dairy products.In 2018, the largest category of cheese by sales was American-made Italian cheeses (41.7%), includingmozzarella (32.4%) and provolone, parmesan, and ricotta (8.4%). The second-largest category was Americancheeses (37.5%), including cheddar (27.0%) and brick, Colby, and cheese curds (10.5%).3 Other cheeses, suchas cream (7.2%), Gouda (4.6%), and Swiss (2.5%), accounted for 20.8% of revenue. In 2017, the United Statesproduced 5.38 billion pounds of Italian cheeses and 5.07 billion pounds of American cheeses, an increase of1.5% and 6.4% from 2016, respectively. However, the average retail price of cheddar had decreased annuallyfrom a high of $5.87 per pound in 2012 to $4.95 per pound in 2017.According to Dairy Foods’ 2018 Cheese Industry Outlook Study, demand for natural, artisanal, and organiccheeses, including traditional and flavored varieties, was expected to grow. Industry revenue was projected tostay the same.New product launches also provided growth opportunities. According to Mintel’s Global New ProductsDatabase (GNPD) (2018), there were 5,396 cheese products launched in the United States from 2008 to 2017,including new varieties/ranges (37%), new products (29%), new packaging (29%), relaunches (4%), and newformulations (1%). In 2017, 697 cheese products were launched in the United States; more than half were hardcheeses and semihard cheeses. In 2017, most cheese products launched in the United States were pricedbetween $0.99 and $5.18 (71%). Twenty-one percent were
3
| | Whiskey Cheddar: Ingredient Branding at the Osum Cheese Cooperative
priced between $5.19 and $9.38, and 8% were priced above $9.39. Top claims were low-/no/reduced allergen (28%),convenient packaging (26%), gluten-free (25%), hormone-free (17%), and low-/no/reduced fat (16%).Competitive LandscapeIn 2018, the top five competitors accounted for less than 25% of the U.S. industry. 9 Independentcheesemakers were located throughout the United States, but many were concentrated in Wisconsin andCalifornia. Increased consumer demand for artisanal, organic, and gourmet cheeses had further encouragedfragmentation. Key success factors included access to reliable milk input suppliers, economies of scale, andproduct differentiation.In 2018, the largest competitor was Kraft Heinz (8.0%), which produced cheese and cheese products usingbrand names such as Kraft, Cracker Barrel, Philadelphia, Deli Deluxe, Velveeta, Cheez Wiz, Athenos, andBreakstone’s. Sargento (4.9%) produced a wide variety of consumer cheeses using the Sargento name;product lines included shredded, sliced, sticks, snack bites, and breaks (i.e., packaged cheese snacks pairedwith nuts, seeds, dried fruits, etc.). Both Cabot Creamery in Vermont (2.2%) and AMPI in Minnesota (1.9%)operated as dairy cooperatives. Cabot Creamery was known mainly for the cheddar varieties it sold toconsumers through retail distribution. AMPI sold primarily wholesale and bulk cheese to the food-service andsupermarket deli markets.Competitors attempted to market and differentiate cheeses using a variety of attributes, including price,brand image, quality, taste, and convenient packaging. Store brands competed on price, and national brandscompeted somewhat more on product attributes. For example, Sargento offered a wide variety of cheeses inconvenient-for-snacking forms (sticks, slices, and bites). Cabot emphasized its quality in a wide variety ofunique tastes and flavors.There were also independent and government-sponsored associations to support the cheese industry. Forexample, Dairy Management Inc.TM (DMI) was funded by America’s 41,000-plus dairy farmers, as well as dairyimporters, to help increase sales and demand for dairy products through research, education, and innovation,and to maintain confidence in dairy foods, farms, and businesses. In 2018, U.S. dairy farmers paid 15 cents forevery hundred pounds of milk (or the equivalent) sold into a generic dairy product promotion fund that DMImanaged along with state and regional promotion groups. That money—with USDA oversight—was used tofund programs to promote dairy consumption and protect the image of dairy farmers, dairy products, and thedairy industry.Cheese Markets and Distribution in the United StatesMajor U.S. markets for cheese included food services and restaurants (32.2%), retail (29.2%), wholesale(19.5%), processing (13.5%), exports (2.7%), and other (2.9%).Food services and restaurants used cheeses asan ingredient to create menu items. The processing market used cheeses to create food products like frozendinners, sauces, snacks, and flavorings. Hypermarkets and supermarkets had a retail market share of 83%.Retail cheese sales via the internet accounted for only 1.2% of market share in 2018, but sales via the internethad increased by 234% since 2013.While some major competitors sold directly to large accounts, many cheesemakers sold consumer cheesesthrough food brokers, food distributors, and retailers. Because Osum employed in-house salespeople, it soldto retailers through food distributors, which typically took ownership of the product upfront and resold tofood services and retailers for a markup of 15% to 30%. Retailers
4
Whiskey Cheddar: Ingredient Branding at the Osum Cheese Cooperative | |
purchased from food distributors, marked up the wholesale price by 30% to 50%, and sold to consumers.Consumer ConsumptionIn 2018, annual per capita consumption of cheese in the United States was estimated to be 37 pounds (anincrease from 33 pounds in 2010). Consumption was projected to grow to 38.3 pounds by 2025. Demanddeterminants included price, health trends, and consumer preferences, but they varied by cheese variety. U.S.consumers showed a preference for natural cheese, particularly when offered in packaged and premiumvarieties.Most U.S. consumers ate natural, cow’s milk cheese (86%); most of those consumed cheese weekly (85%).The most popular varieties purchased were cheddar (86%) and mozzarella (79%). Consumption of cheddar wasdriven by taste (91%), the ability to pair with other food (66%), and convenience as a snack (64%). Consumersbelieved cheese was part of a healthy diet (78%) and that eating cheese was a good way to add protein totheir diet (81%). However, some consumers worried about saturated fat (36%) and salt (31%). Mostconsumers liked to try different types of cheese (81%) and considered it a good option when packing a meal toeat on the go (79%). Consumers indicated that the factors they considered when they purchased cheeseincluded brand (43%), resealable packaging (42%), and bolder flavors (34%). Consumers reported purchasingcheeses from multiple places, including the cheese case in supermarkets (63%), mass merchandisers (47%),supermarket deli departments (45%), club stores (28%), and natural/specialty markets (25%).Whiskey Cheddar Ingredient Branding ProjectStarting in 2003, Osum began to produce limited production, artisan, or farmstead cheddars that it soldexclusively online. These varieties were produced mainly for regional and national cheese competitions, withthe goals of building brand awareness and developing a reputation for quality and taste. By 2018, Osum hadwon 11 awards from the American Cheese Society, the National Milk Producers Federation ChampionshipCheese Contest, and the Wisconsin Cheese Makers Association.In 2017, Osum developed and tested a recipe for whiskey cheddar because it wanted to compete with aflavor it did not offer through its retail channels and to develop something new. Osum’s master cheesemakerexperimented with numerous flavorings, including fruits, herbs, wines, and spirits; his team chose to develop a
whiskey cheddar after he noticed guests dipping cheddars into shots of whiskey at Osum’s annual cheese-pairing party. After tasting and testing multiple versions, the master cheesemaker developed a flavor that was
preferred 2 to 1 in blind taste tests over Kerrygold’s Aged Cheddar with Irish Whiskey and Cahill’s FarmCheddar–Irish Whiskey.In 2018, Osum produced a limited-edition Farmstead Irish Whiskey Cheddar that won first place in theflavored cheddar category and second place overall at a national competition. After the competition, PR–Uapproached Osum about a strategic partnership. PR–U wanted to launch artisan cheddars in supermarketsusing branded ingredients and was inspired by the successful launch of Guinness Cheddar, which wasproduced by a partnership between the world’s leading spirits distributor and a UK cheesemaker. PR–Uwanted to start the new line with Jameson® Irish Whiskey Artisan Cheddar. If successful, the partnership couldbe expanded to add wine-flavored artisan cheddars using Jacob’s Creek® wines. Jacob’s Creek was the mostawarded winery in Australia, and its products were distributed by PR–U.
5
| | Whiskey Cheddar: Ingredient Branding at the Osum Cheese Cooperative
Total sales of Irish Whiskey accounted for only 7.5% of the total whiskey market in 2018, but Jameson®was the best-selling Irish whiskey brand with a 78% market share. Analysts suggested that its popularity wouldcontinue to grow due to its brand loyalists and unique flavors. Total whiskey sales were projected to grow by26% between 2018 and 2023. Loyal Irish whiskey drinkers were typically young to middle age, lived inmetropolitan areas, and had high disposable incomes.While other whiskey-flavored cheddars were available, none used a branded whiskey as an ingredient. PR–U also had no interest in selling Jameson® Irish Whiskey Artisan Cheddar through direct-to-consumerchannels. Both Osum and PR–U agreed that offering only through retail channels provided greaterpromotional opportunities and avoided the potential for channel conflict.Taste Testing and Concept TestingIn March 2018, Osum hired a research firm to conduct taste tests of its Jameson® Irish Whiskey ArtisanCheddar. The firm recruited 200 adult shoppers in supermarkets in five major markets. In blind taste tests,consumers were asked to select among three products: Osum’s Jameson® Irish Whiskey Artisan Cheddar,Kerrygold’s Aged Cheddar with Irish Whiskey, and Cahill’s Farm Cheddar–Irish Whiskey. Again, Osum’s offeringwas preferred 2 to 1 over both Kerrygold and Cahill.In April 2018, Osum hired a research firm to gauge purchase intent for the concept. This firm used A/Btesting, which compared two offerings to determine which one performed better. Consumers reviewedproduct descriptions for six cheddars: three from a leading brand and three from Osum. Of the six offerings,the test varied one of Osum’s offerings by use of ingredient branding and price: Irish Whiskey Artisan Cheddaror Jameson® Irish Whiskey Artisan Cheddar.The firm recruited 1,000 consumers representing a national sample of adults; consumers were provided asmall incentive for participation. To participate, consumers must have purchased cheddar priced above $9.40per pound from any supermarket’s specialty cheese department at least once in the past three months; 40%of all potential respondents qualified for participation. Respondents were provided with pictures anddescriptions of the cheddars and instructed to add the ones they would want to purchase into a shopping cart.Respondents also had the option not to purchase. Exhibit 4 provides the survey results. Based on past marketresearch experience, Sonia Terner expected half the respondents who expressed purchase intent would buythe product in a store.Marketing ProgramBy March 2019, Osum and PR–U drafted the licensing contract (see Exhibit 5). Jameson® Irish WhiskeyArtisan Cheddar would be sold in seven-ounce, wax-wrapped bars in supermarket specialty cheese sections.Wax-wrapping best protected the moisture content and flavor, and consumers perceived it as being premiumquality and authentic. The front of the packaging would include the product name, the Osum logo, theJameson logo, the award logo, artisan and origin logo (“Artisan Cheddar Made in Wisconsin”), and adescription indicating that the cheese was made in small batches using an original family recipe. It stipulated alaunch in January 2020.Terner set the MSRP to $7.49 per unit, which matched competitor prices and prices tested in the A/Bconcept test. The wholesale price to retailers would be $4.75 per unit. Osum would pay food distributors 20%of the wholesale price and pay PR–U $0.25 per unit. The plan allocated $0.07 per unit for consumer couponsand $0.13 per unit for retail trade allowances.
6
Whiskey Cheddar: Ingredient Branding at the Osum Cheese Cooperative | |
Osum and its food distributors asked 100 supermarkets that currently sold Osum cheddar about theirinterest in carrying Jameson® Irish Whiskey Artisan Cheddar. Osum stipulated that the cheese would beoffered in the supermarkets’ specialty cheese section at the proposed price point, margins, and trade
allowances. Seventy-five percent of the supermarkets indicated a willingness to carry the product for a three-month trial period. Only 10% were willing to commit to a longer trial.
Osum’s previous research had determined that launching an artisan whiskey cheddar on its own wouldrequire a marketing investment of $1.8 million in fixed costs, $0.09 per unit for coupons, and $0.15 per unitfor trade allowances to achieve a $2 million in sales within the first two years (Exhibit 6). Osum believed
Jameson’s brand equity, combined with communication efforts from PR– U, would enable it to reach its two-year sales goal with only a $1.4 million marketing investment.
DecisionSonia Terner had to decide whether to support launching the new product with or without the brandedingredient. The former option would require a lower marketing investment and was forecasted to have bettersales potential. The licensing agreement had risks, however, and would lower Osum’s gross margin per unit.Terner could also propose not launching a new product or focusing on selling more direct to consumersonline. However, given the pressures to reduce Casesan’s natural cheddar MSRP and the limits of the onlinecheese market, Terner and the board of directors did not believe these options were viable.After the debate at the preliminary meeting, Osum’s board chair, Chloe Crowley, stated, “Let’s meet in oneweek to review the breakeven analyses for both options and discuss the merits of the licensing agreement.
Sonia, you need to make a strong case for our best option.” For Osum, launching a new product carried long-term implications. Personally, Terner believed her recommendation could be either a major achievement or a
miss, so she needed to decide correctly.
Questions to be Answered1. Evaluate the product-company and product marketing fit of the line extension options.2. What are the strengths and weaknesses of the proposed marketing program?3. Calculate the number of units sold for each product item sold through supermarkets and compare it tobreakeven sales volume (on new product launch).Note: Make proper assumptions about the missing data, if any, and write it clearly._________________________________________________________________________________________________
7
| | Whiskey Cheddar: Ingredient Branding at the Osum Cheese Cooperative
Exhibit 1 Osum Product Lines by Percentage of Retail Revenue (2018)Classic Cheddars (%) Flavored Cheddars (%) Non-Cheddars (%)Medium 18.5 Garlic and herb 10.8 Brick 8.4Sharp 13.7 Spicy 9.7 Monterey Jack 5.6Extra sharp 10.5 Smoked 5.5White 10.3Reduced-fat medium 7.0Exhibit 2 Osum Consolidated Income Statement (Annual 2018)U.S.$ % of RevenueRevenue 50,584,000 100.0Retail 49,560,000 98.0Direct to consumer 1,024,000 2.0Variable costsCost of goods—raw materials 9,124,800 18.0Cost of goods—production 14,227,200 28.1Cost of goods—distribution 9,910,400 20.0Gross profit 17,321,600 34.2Fixed costsSelling expenses 5,482,000 10.8General and administrative expenses 3,630,000 7.2Operating profit 8,209,600 16.2Exhibit 3 Osum Cheese Gross Margins per Unit (Annual 2018 and Proposed)
2018Retail
2018Consumer
ProposedNatural
ProposedArtisanRevenue per unit $3.00 $8.00 $2.50 $4.45Variable costsCost of goods—raw materials $0.548 $0.561 $0.548 $0.561Cost of goods—production $0.853 $1.060 $0.853 $1.060Cost of goods—distribution $0.600 — $0.500 $0.890Gross profit per unit $0.999 $6.379 $0.599 $1.939Exhibit 4 Results of A/B TestBrand Cheese Product n Cart (%)Competitor Natural cheddar ($4.59) 1,000 64Artisan cheddar ($6.99) 1,000 18Irish whiskey artisan cheddar ($7.49) 1,000 12Osum Natural cheddar ($4.59) 1,000 61Artisan cheddar ($6.99) 1,000 15Irish whiskey artisan cheddar ($7.49) 500 10Jameson® Irish Whiskey Artisan Cheddar ($7.49) 500 17
8
Whiskey Cheddar: Ingredient Branding at the Osum Cheese Cooperative | |
Exhibit 5 Summary of Draft Licensing AgreementOsum Cheese Cooperative (hereafter, “Osum”) receives exclusive licensing rights to utilize the Jameson®Irish Whiskey trademark in connection with natural cheese it sells in the United States and Canada, as long asthe cheese meets or exceeds established quality standards.Osum will not produce, market, or sell any other version of whiskey cheddar (natural, artisan, farmstead,or variations thereof) for the period of the agreement.Osum pledges to use its best efforts in marketing Jameson® Irish Whiskey Artisan Cheddar. Pernod RicardUSA (hereafter, “PR–U”) promises to provide limited support for marketing and communications through itswebsite, media relations, and cooperative advertising.Osum will pay a royalty of $0.25 to PR–U for every unit of Jameson® Irish Whiskey Artisan Cheddar sold atwholesale.Jameson® Irish Whiskey Artisan Cheddar is required to meet a series of steadily increasing annual net salestargets during the first two years of the agreement. The sales targets must also be met in each subsequentyear.The Jameson® Irish Whiskey brand name will be displayed prominently on each unit. All advertising andpromotional materials for Jameson® Irish Whiskey Artisan Cheddar require written approval from PR–U priorto publication or use.PR–U may terminate this agreement during 2020 if, in PR–U’s sole judgment, sales of Jameson® IrishWhiskey Artisan Cheddar adversely impact sales of Jameson® Irish Whiskey or any derivative thereof.
Exhibit 6 Two-Year Budget for New Product Launch (U.S.$)Investment Irish WhiskeyArtisan Cheddar
Jameson® Irish WhiskeyArtisan CheddarStaff ($75,000/year) $150,000 $150,000Factory equipment $200,000 $200,000Packaging materials $150,000 $150,000Branding and testing $50,000 $50,000Traditional paid advertising $750,000 $500,000Digital and social media advertising $200,000 $100,000In-store sampling and trade shows $300,000 $250,000TOTAL $1,800,000 $1,400,000