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GOOD FOODS, INC.: "Introduction of Electrical Appliances"

Good Foods, Inc., primarily a food manufacturer, was considering a long range plan to undertake the manufacturing and marketing of small electrical appliances.

Product Lines: Good Foods marketed a wide range of food products.Among the best known were the "Ann Anderson" line of cake, frosting, and brownie mixes. Good Foods also marketed a number of cereals, flour products, frozen and refrigerated foods.The name "Ann Anderson" was one of Good Foods' prime assets. It had been carefully cultivated with over twenty million dollars having been spent to put the name across to the public.

Small Appliance Project: In 2006 a special project was started in which a group of engineers developed prototypes of various electrical appliances. Four products, a toaster, electric frying pan, iron, and coffeemaker were developed.

Several consumer tests of these four appliances had been conducted throughout the product development process.All four appliances compared favorably with competitors during home-use tests.These tests were conducted with appliance owners throughout the United States. While the new appliances were not major break-throughs in design, they did incorporate the most up-to-date features that characterize competitive appliances. All of Good Foods' home-use tests were conducted "blind": the appliance owner was not told who manufactured the appliances.

The competition in the appliance business was characterized as intense with many firms sharing the market.Several large manufactures such as General Electric, Sunbeam, Toast Master and others were well established in the traditional appliances distribution channels (appliance outlets, discount houses, hardware outlets, etc.)Annual growth rate for small appliances has been approximately 8% during the past ten years.Table I indicates the pattern of sales for the last few years by product type. Good Foods' executives considered a 10% penetration of this market potential a real possibility.

Good Foods, Inc. decided to competitively price the new line with the leading sellers in the field.The average unit selling price at retail was determined to be $45.In other words, consumers would pay $45 to purchase any of the 4 new appliances at their local supermarket.This pricing policy allowed a 55% mark-up on the retail selling price for the supermarkets.This mark-up represented a substantially higher margin than supermarkets receive on items such as cereal, canned goods, etc.Good Food Inc.'s unit costs are about the same for all four products.Management expected this margin to be a major incentive for the supermarkets to handle the new appliance line.

Because Ann Anderson was such a well-established brand name, only moderate advertising was planned for the new line. It was argued that homemakers visit supermarkets at least once a week and that they naturally will notice the appliance display.An advertising budget of $5.5 million a year was proposed for the first few years of new product introduction. A product manager from the cereal division was chosen to handle the marketing of the new line.(Cost data for the project are given in Table II.)

TABLE I

Kitchen Electrics Sales Patterns and Projections (individual units)

Product Type200820092010 (estimated)

1. Irons9,915,0009,475,0009,600,000 2. Coffeemakers8,200,0008,500,0008,800,000 3. Toasters5,800,0006,200,0006,600,000 4. Blenders4,900,0006,100,0005,900,000 5. Can Openers5,100,0005,500,0005,800,000 6. Mixers4,560,0004,900,0005,100,000 7. Frypans2,975,0003,300,0003,500,000 8. Broilers2,770,0002,640,0002,500,000 9. Cornpoppers1,850,0002,200,0002,600,000 10. Slicing Knives2,500,0002,100,0002,000,000

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TABLE II Cost Data _____________________________________________________________________

Variable Costs:Cost/Case ^a

Transportation$7.20 Broken Goods.60 Warehousing2.00 Parts and Materials66.00 Packaging6.20 Labor and Overhead14.00

Fixed Costs:

Bldg. Mach. & Equip.^b$9,850,000 Start Up Costs ^c1,300,000 Maintenance (annual)200,000 Other Expenses (annual)100,000

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^a Six units were packaged in one case. For example, six coffeemakers are to be shipped in one case.

^b To be depreciated over 10 years - standard accounting practice.

^c These costs represented the costs to develop the prototypes, conduct consumer tests

and other cost incurred in the new product development process.

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Questions

Evaluate the decision of Good Foods' management to enter the appliance business. What factors weigh in favor of the decision and what factors weigh against the decision?

Has an adequate market/financial analysis been presented? Support your position.

2.

On its website, Nestl, maker of some of the world's most famous and beloved food and beverage brands, states under its Ethical Business heading, "Performing in an ethical manner is at the core of Nestl's business approach. Upholding strong ethical principles, not only in our direct business, but also throughout our entire value chain, is fundamental to how we operate. It underpins the trust our consumers have in us as well as our license to operate. "We work to foster the 'do the right thing for the right reason' mindset throughout the organization. Everyone at Nestl contributes to Creating Shared Value, making our activities and operations more efficient and enhancing our competitive advantage, by reinforcing our reputation." Nestl fosters an internal and external environment of honesty, fair dealings and integrity in everything Nestl does. In today's world, being a good corporate citizen, encouraging fair play and generating a compelling corporate culture for employees and suppliers as well as all other stakeholders is essential. Increasingly, consumers make decisions relative to the behaviors of the corporate parent. Nestl's vision statement indicates that Nestl's ambition is "... to be a leading, competitive... company...." Nestled within their corporate values, being competitive seems just. On the Corporate Business Principles page is the heading, Nestl Code of Business Conduct. The basic tenets of behavior are stated, "Our Code of Business Conduct specifies certain non-negotiable minimum standards in key areas of employee behaviour, including compliance with laws, conflicts of interests, anti-trust and fair dealing, bribery, corruption (UNGC Principle 10), discrimination, harassment, and integrity. We believe in the importance of free competition and are committed to acting with integrity in all situations." So, it is deeply saddening and quite surprising that Nestl ran afoul of the EU's District Court in The Hague in Nestl's battle with Impossible Foods, maker of Impossible Burger. The Court had some harsh comments on Nestl's business practices. Nestl lost its trademark infringement case as the Court sided with Impossible Foods. But, it is clear from the Court's ruling that this food fight was more than a mere trademark infringement case. Based on the Court's rulings, it appears that Nestl made a decision to "frustrate the European launch of Impossible Burger." The Court became suspicious of Nestl's motives. The Court learned that Nestl had originally wanted to license Impossible Burger for Europe. After the initial approach and discussion occurred where Nestl learned a lot from Impossible Foods' documents, Nestl decided to create its own plant-based burger patty, named Incredible Burger in Europe. (The U.S. version is Awesome Burger.) The Court's opinion was that the confusion aspect of the case was in behest of Nestl wanting Impossible Burger's potential European market share for itself. The case of Impossible Burger vs. Incredible Burger is essentially a case of trademark infringement with an ulterior motive. In other words, Nestl violated its sanctified ethics and principles on the altar of market dominance. Impossible Burger is the U.S. brand launched from Impossible Foods in 2016. It is the epitome of the Impossible Foods mission to create products with taste and nutritional benefits of meat without all the environmental and health baggage of meat. A science-driven company, Impossible Foods research creates products with plant proteins that recreate meat nutrition as well as having all the hedonic effects of eating meat. Nestl saw an opening to get into the European market before Impossible Burger. Nestl ditched its desire to license Impossible Burger and created its own product, Incredible Burger. Impossible Foods brought the trademark infringement case stating that consumers would be confused, thinking that Incredible Burger was in fact Impossible Burger and of the same source as Impossible Burger. Confusion cases are frequent. The problem is that confusion is a consumer's perception when making a purchase decision. In the U.S., trademark infringement exists if a trademark owner can show that a competitor is using a similar trademark that is "likely to cause confusion, cause mistake or to deceive." Some cases are necessary and understandable such as Kimberly Clark's Huggie's diapers vs. H. Douglas Enter Inc.'s, Duggies diapers or W. L. Gore's Glide dental floss vs. Johnson and Johnson's Easy Slide. Others are head-shakers like General Mills 1983 case (which it ultimately dropped) against Richard Wehde's (pronounced Wee-Dee) and Charles Morris' Chicago area hot dog restaurant, Wee-Dee's Wee Nees. General Mills' argument was that Wee-Dee was too similar to Wheaties. Similarity between trademarks is considered "the most important consideration" and "seminal factor" in deciding whether there is confusion. In fact, similarity between names is the basis of many trademark infringement cases. Additionally, the U.S. courts have judged that similarity in sound and meaning are two separate, important criteria for determining confusion. The EU Court ruled that the similarity of the sound and meanings of the words Impossible and Incredible were very strong. The Court ruled that both words share visual similarity. Both words have the same number of letters and, interestingly, both words have same letters in same places of their spellings. These similarities could cause confusion. And, in deciding for Impossible Foods, the EU Court stated that already - without Impossible Burger yet in European markets - there were instances of customer confusion even though perceptions of Nestl's Incredible Burger are that it is of poorer quality. Nestl argued that Incredible Burger communicated that the burger would have exceptional quality and because the packaging also says "Gourmet Garden" that the name Incredible Burger described information as to the product itself. In other words, Incredible Burger with Gourmet Garden would communicate plant-based burger. The Court nixed this line of argument because Incredible Burger is just not the same as "Lentil Burger" or Cheese Burger" in that the word "Incredible" does not convey actual information about the product's makeup. It appears that the EU Court sensed Nestl's corporate behavior was sketchy. Not only did Nestl create a similar product with a similar name, but also the Court found that Nestl knew of the Impossible Burger trademark in advance of launching their Incredible Burger. This means that Nestl launched Incredible Burger "at risk" thereby exposing itself to not only legal measures but also financial consequences. Based on the judgment, Nestl has four weeks in which to change the name of its product, in other words, rebrand the plant-based burger. Nestl has agreed to change the name of its product to Sensational Burger even though a spokesperson indicated that Nestl would appeal the ruling. Sloppy naming is one thing. This happens often. IHG's Hotel Indigo is not trademarked, as it could not be owned worldwide. But, causing confusion in order to intentionally foil a competitor is bad behavior, especially from an enterprise that prides itself on its honest, above-board, ethical business practices Nestl is a big powerful company with many great brands. Why would a company besmirch its values and credibility by behaving in such an underhanded, unethical manner? The fact that the Court recognized how Nestl used what it learned from Impossible Foods to then quickly create its own brand, albeit of lesser quality, seems to fly in the face of the Nestl's own ethics proclamations. When younger consumers are increasingly making purchase decisions on the basis of corporate behavior, this Nestl behavior seems rather shortsighted. And, it undermines some of the principles that make Nestl so attractive relative to other corporations. Being big and powerful can be an enormous asset for a company, but only if that size and strength are used wisely. As the legal counsel for Impossible Foods, Dana Wagner, told Financial Times, "We're grateful that the court recognized the importance of our trademarks and supported our efforts to protect our brand against incursion from a powerful multinational giant." Competing with a competitor is acceptable: our brand landscape is filled with highly successful fast followers. Corporate conniving to shut off competition is unacceptable. Citizens expect corporations to do the right thing. Betraying the basics of good behavior has no place in our changing world.

Question 5 - Ethical gradualism (25 Marks) There are gradual approaches towards professional insight and skill development in the practical justification, implementation and commitment to corporate ethical cultures. This is referred to as ethical gradualism. Discuss ethical gradualism and use example of Nestle.