Break Even with TRUE vermicelli

Aurofood imported Italian pasta machinery to manufacture wheat vermicelli - the first automated processed vermicelli.The plan was imported for Rs.25 crores and could produce 12000 tons per annum.

'True' Vermicelli from Aurofood was positioned as the best vermicelli for the best payasam ( Kheer).The product was a long format smooth and straight strand ( Long Vermicelli) and did not become squishy or pasty like the local brands. With high quality packaging and classy advertising, the brand stood out in the market like a giant amidst the locally manufactured brands. Aurofood clocked 200 tons/ month and after 10 months of market development captured 80% of the branded/advertised market

True Vermicelli 200 g pack was sold at Rs.20 ( Price to consumer)

Retailer mark-up margin was 20% and distributor mark-up margin was 10%. Luckily for the company and for you there was no tax on the product

The direct variable cost per kg was Rs.25.

Monthly operating cost for Aurofood was Rs.50 lakhs. The marketing spend was Rs.25 lakhs in year-1 and the monthly trade schemes were in the order of 10% on the billing price.

After a year, Bambino imported Italian machinery that made short vermicelli.It was shorter and thinner, and Bambino positioned it for Upma.

Bambino imported 2 plants each with 6000 tons capacity per annum at a total cost of Rs.30 crores

Bambino did not get too classy about their packaging and unlike True which used a long, rectangular, and opaque pack, they chose a transparent, cheaper, and square pack

Bambino conducted cookery contest, promoted new recipes, and took the market by storm to clock 500 tons/ month at the end of the first year. Aurofood had moved from 200 tons/ month to 250 tons.

Bambino 200 g pack was sold at Rs.15 ( Price to consumer)

Retailer mark-up margin was 20% and distributor mark-up margin was 10%. No tax on the product

The direct variable cost per kg was Rs.25.

Monthly trade schemes were in the order of 10% on the billing price.

The market was polarized by usage with True being used for sweet dishes and Bambino being used for Savory dishes

SM Patel of Aurofood called the marketing team for discussion. After a lot of deliberation, he realized that the team wanted a strong counter to Bambino in the form of short vermicelli.

SM Patel concluded " I will import another 6000 tons plant for short vermicelliat Rs.15 crores. If we add the investment in long vermicelli the total capex is Rs.40 crores and we will achieve payback in 7 years only if we are able to achieve a total of 1200 tons sales per month by the third year"

After a detailed working the marketing head felt that they may reach at best 900 tons sales per month.

Discussion Questions

a)SM Patel has to now take a decision to import or not import the short vermicelli plant. What is your advice?

b)SM Patel was continuously getting feedback that they should drop the prices from Rs.20 for 200g to Rs.12 for 200g or keep the price at Rs. 12 and increases the quantity to 300g. He was ready to do that if net contribution was protected. What is the breakeven quantity for each proposal, and which is a better option? You can assume additional trade scheme can be dropped with either proposal while all other elements will remain unchanged.

SM Patel wanted to explore an option of asking Bambino to pack for them ( True) under a new product specification arrangement. When this was proposed to Bambino, they were ready to pack and supply on the condition that the product specification was significantly different from that of Bambino and the packaging was different and the MRP was pegged at Rs.20 for the 200 g pack. They wanted a minimum guarantee revenue offer for first 3 years. Bambino proposed to supply at Rs.11 per 200 g pack. Is this an acceptable deal? What is the minimum price Bambino would like to realize? What is the maximum price Aurofood would be ready to offer?