Case Study :
Read the Swiss Food case and use your knowledge of market orientation and competitor orientation to address the following topics (Approx 400 words)
* State the market-oriented approach that Switz Foods should take. Justify your answer.
* Recommend the competitor orientation that will allow Switz Foods to combat competition and remain as a market leader in eastern India.
In early summer, 2019, Arnab Basu, the managing director of Switz Foods Pvt. Ltd (SFPL)—which now owned the brand Mio Amore—looked at the quotation under the glass top of his office desk. It read, “The art of war teaches us to rely not on the likelihood of the enemy’s not coming, but on our own readiness to receive him.”1 From his office window, Basu saw the six-storey building where Monginis Food Products Limited (MFPL) had set up its factory. It was just 200 metres from his office in the Kasba Industrial Estate in Kolkata, West Bengal, India. SFPL was a ₹5 billion,2 West Bengal-based food products company manufacturing and selling gateaux, cakes, pastries, muffins, other bakery items, savouries, and packaged snacks. In 1989, Basu had taken on the franchise of the Monginis brand from MFPL to manufacture and sell similar food products in eastern India, in the states of West Bengal, Bihar, and Odisha,3 and in the northeast. Since approximately 2001, SFPL had invested heavily in advertising Monginis products and repositioning the brand.
THE BAKERY FOOD PRODUCT INDUSTRY IN INDIA
The food retail market experienced significant changes during 2015. SFPL was the market leader in eastern India. Several new multinational players, including Subway, McDonald’s, Domino’s Pizza, and Kentucky Fried Chicken, had opened franchise outlets in the quick-service restaurant segment in eastern India, but their product range did not match that of SFPL. Established bakery chains in the United States, namely Panera Bread (which had 1,600 outlets in the United States that generated a $3.7 billion4 annual turnover) and Au Bon Pain (the fourth-largest US chain) were either eyeing entry or had already entered the lucrative Indian market.5 National players, such as ITC (Indian Tobacco Company) and Britannia, were already in the biscuit segment and were seriously considering entering the fresh bakery segment of cakes and savouries. The growing affluence of India’s middle class, including higher disposable income for lifestyle products, also led to the expansion of modern-format supermarkets, such as Big Bazaar, Spencer’s Retail, and Lulu Hypermarket; these stores often included in-house bakeries or premium bakery brand outlets. Each week Indian consumers patronized their neighbourhood store five to six times more, on average, than organized retail outlets and modern-format stores.
Eastern India was a good market for bakery products and was home to many local players, such as The Sugarr & Spice, Just Baked, and Cakes; together, these offered stiff competition for SFPL. SFPL remained a notch above the competitors, offering 168 stock-keeping units in 11 categories7 (see Exhibit 2). New additions to a baked-product line required modifications both in the ingredients and the equipment and processes used, which could become a challenge for the bakers. The Indian cake and pastry market was growing exponentially and was currently estimated to be worth ₹30 billion. Ayyappan K. Swamy, the head of marketing and franchisee operations at MFPL, said, “The cake market is seeing an exponential growth and lots of small players are entering the fray. But as the market is expanding, our share has not been affected much.”
MONGINIS FOOD PRODUCTS LIMITED
In the early 20th century, two Italian brothers surnamed Mongini started a restaurant in Mumbai. In 1958, their restaurant was taken over by the Khorakiwala family, and became MFPL. The Monginis had started with one shop in Fort, a business district in Mumbai. Under the Khorakiwala family, the business grew to more than 1,000 locations throughout India. In 1971, the company adopted the franchise model. The company focused on serving food that suited the local palate. The brand was positioned as a “food boutique” focusing on quality, presentation, and service. It had subsequently expanded its business through franchisee agreements across the country with a turnover of ₹7 billion and more than 20 factories, largely in western and northern India, but also in eastern India. Monginis also provided accessorized carry-out catering, with telephone and Internet ordering options. SFPL was MFPL’s first franchise. The Monginis and SFPL signed a simple agreement that allowed SFPL to manufacture and sell cakes and other short- and long-shelf-life food products under the Monginis brand in eastern India. By the end of 2018, Monginis had more than 850 exclusive franchise retail outlets. It had at least one production centre in each of the 38 cities where it had presence, and more in western and northern India. It also had retail outlets in Egypt.
OTHER CONFECTIONER BRANDS IN KOLKATA
The Sugarr & Spice
The Sugarr & Spice, a Kolkata bakery brand and competitor of Mio Amore, was an ISO 90001-2008-certified bakery chain founded by Supriya Roy, who had been running the chain for 29 years. The Sugarr & Spice had a wide array of offerings in the packaged and ready-to-eat categories, including cakes, pastries, savouries, cookies, and daily breads. The Sugarr & Spice had 125 outlets (i.e., company-owned and franchises combined) in West Bengal; the majority were Kolkata. The Sugarr & Spice was slowly expanding beyond West Bengal through a network of dealers and distributors into the Indian states of Jharkhand and Odisha, and into the countries of Bhutan and Bangladesh. The company had a turnover of close to ₹1.0 billion in the 2018 financial year. More than 250 employees worked at the company’s manufacturing centre in Kolkata, and the company was planning for further expansion.
Flurys
Flurys was established in 1927 by a French couple, Mr. and Mrs. J. Flury, on Park Street, Kolkata. The company was subsequently bought by the Apeejay Surendra Group in 1965. The Flurys menu had never changed. Its most popular items included cakes, pastries, and puddings. Flurys inspired strong emotions across generations, and its loyal customers enjoyed the nostalgia of the company, which marked a part of Kolkata culture. Flurys operated on the tearoom concept, serving a different set of consumers than Mio Amore. Flurys’s annual revenue was estimated at approximately ₹6 billion. Flurys had 25 stores in Kolkata, and planned openings in Delhi, Noida, Gurgaon, and all metropolitan cities across India.
BACKGROUND OF SWITZ FOODS PVT. LTD.
SFPL was incorporated in May 1991, following a franchise agreement with Monginis and Arnab Basu. To use the Monginis brand, SFPL agreed to pay either ₹50,000 annually or 1 per cent of its annual revenue, whichever was higher. SFPL sold its products through dealer stores. After the agreement with MFPL, SFPL focused on dealership agreements with local stores to sell Monginis products, especially the fresh and short-shelf-life products. For long-shelf-life packaged products, SFPL rolled out a retail distribution network, as SFPL was first of its kind in the territory and did not have a distribution network in place. Other bakery chains included Mio Amore, Monginis, Kathleen Confectioners, and The Sugarr & Spice, which catered to the masses; semi-premium bakeries such as Cakes, The French Loaf, and Kookie Jar; and premium bakeries such as The Belgian Bakery and Flurys Bakery. The market share of the three types of bakeries was approximately 85 per cent for the bakery chains, 10 per cent for semi-premium bakeries, and 5 per cent for premium bakeries.
The company also invested in state-of-the-art equipment, which had been fabricated locally under Basu’s supervision. This equipment functioned as efficiently as imported equipment but was made at a much lower cost. As SFPL experienced steep growth, it opened two more factories in the suburbs of Kolkata to produce industrial bakery products. At the same time, the company also opened a factory in Siliguri for its retail products, to capitalize on the government’s concession to entrepreneurs who set up factories in the northern part of West Bengal. Basu created a new brand in Siliguri named Cakes R Us. This group of companies expanded to other states in eastern India by setting up subsidiary companies, such as Kalinga Bakery in Bhubaneswar, Odisha, which produced retail bakery items, and Brahmaputra Foods Private Limited in Guwahati, Assam, and Southern Bakery Private Limited in Bangalore, Karnataka, which produced industrial bakery items.
SFPL continued the growth trajectory of Monginis. Basu, keeping a long-term business plan in mind, had invested approximately ₹700 million in building manufacturing and delivery infrastructure for the group of companies, a large part of which was for Monginis products. In addition to its manufacturing facilities in different states in eastern India, the group also had 70 refrigerated vans outfitted with the Global Positioning System (GPS) in Kolkata to supply freshly baked short-shelf-life Mio Amore bakery items. It was one of the largest fleets of refrigerated vans owned by any firm in eastern India. Basu said: For a customer, a pre-ordered birthday cake that would cost as low as even ₹400, still held emotional value. Therefore, with GPS, the shop owner was able to easily tell the customer where the van was located. In 2005, the company increased its distribution by opening outlets in large railway stations. These food plazas experienced high foot traffic, which increased steadily, generating high revenue. In 2015, the group launched a new brand, Winkies, for industrial bakery products. As per a Nielsen Retail Audit in 2019, Winkies was the second-largest brand in India after Britannia.
DEALER STORES
Before SFPL entered the bakery market, both The Sugarr & Spice (established 1990) and Kathleen Confectioners (established 1978) had their businesses in Kolkata, which had contributed to spreading the bakery culture to reach Kolkata’s middle-class consumers. Basu preferred neighbourhood shopping areas (i.e., bazaars) for Monginis dealers because such shop owners generally built personal connections with their regular customers. Basu said, “In these bazaars, the quality of the product and the reputation of the person selling it were as important as the store ambience or other aspects of presentation.” SFPL preferred to work with dealers who owned their property rather than those who rented. Basu said, “A property owner had a stake in making the business work unlike a tenant who could easily close shop and move out of the area.” The average store size was 150–250 square feet (14–23 square metres). The stores were air-conditioned, clean, attractively furnished, and well lit, the first of their kind in the region. SFPL adopted a new tagline—“Your friendly neighbourhood cake shop.” Basu mentioned that although Monginis shops had an upper-class feel because of the store ambience, most of the products on the shelf were affordable for middle- and low-income customers. He insisted on displaying the prices outside the store to ensure that the middle-class customers did not feel that the products were unaffordable because of the plush interiors. By late 2014, SFPL had approximately 210 stores.
By 2014, in addition to its 210 franchise stores, SFPL’s group of businesses (which primarily consisted of Monginis products along with the Winkies and Bauli brands of products) had developed more than 160,000 retail outlets with 400 distributors in eastern India. Of these, 17,000 were in Kolkata. These retail outlets were mainly mom-and-pop stores that also sold several other food categories. These outlets were a common distribution mechanism for Mio Amore and its competitors. SFPL delivered products to its retail store twice daily, at seven- to eight-hour intervals, and accepted the return of unsold items without imposing penalties on the store franchisees. This approach ensured that the stores always sold fresh-quality products and the retail franchise did not incur penalties, which contrasted the conventional processes followed by competitors who typically discouraged stock returns and penalized franchisees by deducting from their commissions. However, SFPL closely monitored store-wise returns and rationalized future order quantities to minimize wastage accordingly. Compared with its competitors, SFPL offered a 5 per cent lower margin to its franchisees, and unlike its competitors, supplied packing material for free (see Exhibit 4). During the initial years, MFPL supplied SFPL with the recipes and skilled employees from its Mumbai operations. As SFPL gained experience in bakery products and better understood the tastes and preferences of local customers, the company started developing its own product mixes for singara, patties, and rolls to suit the local palate. This product mix became so popular that regional film songs started featuring them. Monginis had become a part of the Bengali lifestyle. SFPL kept its product mix in such a way that its products were affordable to lower- and middle-income buyers. See Exhibit 5 for a price list of comparable items sold by different outlets in the city.
Response of the Franchisees
After the name was finalized, retail franchisee store owners were apprehensive about their sales, as the brand they had been selling for almost 20 years would change overnight. Some owners asked, “What if our income goes down?” Basu understood their concerns were genuine but was confident the new brand would work, saying, “I told them we will protect your income, month to month whatever you had in the previous year. If your commissions fall short, we will pay. That ended the apprehensions of the owners and they were happy.”
Response of the Consumers
Consumers were initially apprehensive, believing that a foreign company had taken over Monginis. Sales slowly grew by approximately 2.5 per cent without any price increase. Customer perceptions of the brand change revealed that the change was welcome, but many expressed higher expectations from Mio Amore.23Like its competitors, Mio Amore operated on wafer-thin margins. Thus, a 3–4 per cent growth in business made a big difference. Basu said, “It was better to stay grounded so that there were more people together and there was no fear of being docked off from the top” (see Exhibits 6, 7, 8, and 9).
THE RE-ENTRY OF MONGINIS IN WEST BENGAL
After four years, Monginis re-entered West Bengal. Ganguram, a city-based Bengali sweets and confectionery chain, had become West Bengal’s master franchisee for manufacturing and retailing Monginis bakery products in the state. About re-entering eastern India, and especially Kolkata, Zoher Khorakiwala, chairman and managing director of Monginis, said, “We plan to open 60 shops under the franchise model over the next two months here in the city. The target will be to have 100 by the end of this fiscal [year; 2019–20].” As soon as it relaunched, Basu kept track of Monginis’s performance. People were enthusiastic about Monginis and soon, its revenue was close to what Mio Amore stores were making in similar localities. There was considerable press coverage of the return of Monginis. Basu was not surprised, as people in West Bengal were curious about any new product, trying it as soon as they could. In the first phase, Monginis expanded within the city. Then, the company planned to enter the suburbs and non-metros of West Bengal. The company also planned to increase its portfolio by adding chocolates and other savouries. Bakery products, cakes, and quick snacking items were to continue as they had been before Monginis left Kolkata. At the time Monginis exited, West Bengal accounted for nearly ₹1 billion of its revenue, which was a substantial portion of its turnover. The revenue of Monginis during that time was more than ₹4.5 billion (with nearly 25 per cent from operations in Egypt). An article quoted Khorakiwala: “The brand still has a good recall here, despite not being present for years. We do find some dedicated customers. We hope to create a buzz with the re-launch,” Zoher said. Compared with Mumbai, where the average sale per store varies between ₹10,000 and ₹50,000 daily, Kolkata should, in the initial days, give the company average sales of ₹10,000 to ₹20,000 a day. “The challenge is to ensure a 5 per cent year-on-year growth in sales for the same store, as competition heats up. This is something we are working on,” he said. For the financial year 2019-20, the company had targeted a 15–20 per cent growth in turnover.
Monginis’s prices were initially aggressive and almost at par with Mio Amore and two other competitors in the same segment, Kathleen Confectioners and The Sugarr & Spice. Basu thought Monginis had probably decided to grab market share as soon as possible by attempting to reach every Bengali’s home.
BASU’S DILEMMA
The Sun Tzu quote caught Basu’s eye again. “How do we prepare ourselves?” Basu wondered. SFPL had invested a considerable amount in technology upgrading. It had reduced overall costs for the company and had increased intangible values for the customers. But was it adequate to fight such a strong competitor? Basu had doubts. Mio Amore had a strong head start in the West Bengal market. Its consumer base was strong and had been reasonably loyal, so far. But would they maintain their loyalty? He wondered what strategy he should use to fight this competition. Another Sun Tzu quotation on his desk caught his eye: “If you know the enemy and know yourself, you need not fear the result of a hundred battles.