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Case Study: Annie's: Growing Organically

It was a grey day in February 2012 as the train pulled out of the Amtrak station in Berkeley, California and headed east. John Foraker, CEO of Annie's, Inc., a rapidly growing natural and organic food company, sank into his seat and began to unwind from the stream of meetings and decisions that consumed his day and moved into a part of the day that he anticipateda chance to look out the window and think about his business at a higher level. Big things were in the works for Annie's and there were key decisions to be made over the next few months in terms of entering a new category.

Annie's had been enjoying strong and steady success in the marketplace with their healthy offerings in shelf stable prepared foods across three product categories (Meals, Snacks, and Dressings), led by the Meals category (macaroni & cheese), with Snacks (Cheddar Bunnies, Fruit Snacks, Pretzels, etc.), and Dressings (condiments and dressings) following respectively. But the company was about to make significant moves in terms of expanding into new categories.

Annie's had strong investor support due to increasing sales and profits over the past few years (net sales had increased from $76.8 million in fiscal 2008 to $141.3 million in fiscal 2012) and it was likely they would be moving toward an IPO soon. They had also achieved a significant level of success competing in non-traditional ways in very traditional CPG (consumer packaged goods) categories. As a Berkeley-Haas Schoolof Business graduate (MBA'94), this was particularly satisfying to Foraker. Less certain was whether Annie's could continue to achieve this level of success in new categories while playing by their own set of rules.

As the team assessed expansion options, they kept two primary goals in mind. The first was to age up the franchiseAnnie's had developed a strong following among younger kids and their moms. The kids liked the taste and saw the products as fun, while the moms appreciated the fact that they could provide healthy products for their kids that the kids actually liked. But there was an inherent challenge with having such a strong, positive franchise with younger kids. At some point, they would outgrow the brand.

The second goal was to broaden the target audience. Annie's success to date had been driven largely bya group they identified as "Core Consumers". This group felt very strongly about making healthy choices for their families, and was comfortable with the extra effort and money required to do so. They were committed and loyal, but their attitudes were outside the mainstream. To grow the business, the Annie's team felt they needed to broaden their target and attract more mainstream consumers to the brand. They set their sights on a group they called "Prime Prospects", who valued healthy alternatives to the extent they were available and convenient, but were more moderate in their attitudes.

Background

Annie Withey and Andrew Martin started Smartfood in Boston in 1982 with their first and best known product, a cheesy popcorn snack. They sold the company to PepsiCo in 1986 for $15 million. A few years later, Withey took essentially that same cheese sauce and used it in Annie's Homegrown Shells and Cheddar, a stovetop macaroni & cheese dinner, and in 1989, Annie's was born.

Over time, the company grew through new products as well as greater acceptance of its existing line. Annie's was able to appeal to consumers seeking healthy/natural/organic choices as well as more mainstream food products, and felt they were in a sweet spot that allowed them to grow their healthy food business by taking share from traditional CPG brands as well as the organic/natural sector. As such, their product line and their growth efforts were focused on both areas.

Financially, the company was in good shape. In 2001, the same year Foraker joined Annie's, Solera Capital, a New York women's private equity firm, acquired a major stake in Annie's and that support continued to fuel their growth. Sales and profits had been growing steadily as Annie's was able to maintain their price points even as they competed with larger, more heavily supported brands with lower price points. Trends and projections were strong and investors remained bullish.

Annie's Culture

Like many small companies, Annie's was strongly driven by its culture during the early days. And Annie's was fiercely determined to preserve their culture as they grew. Annie's was a company that was passionate about food, people, and the planet, and their actions needed to reflect that orientation.

For example, the company was careful about the suppliers it worked with, preferring to seek out smaller, local farmers whenever possible. They were also committed to non-GMO (genetically modified organisms) products. Although Annie herself was removed from the business operations and living on her certified organic farm in Connecticut, the Annie's team made an effort to integrate her persona into products and marketing efforts whenever possible. And they also viewed corporate social responsibility as something that needed to be integrated across all the company's activities. According to Foraker: "Social responsibility is part of the Annie's brand DNA. We've always tried to do things differently and set an example for the broader world."

Growth

Annie's had developed a core proposition that included four pillars: authenticity, social responsibility, great taste, and simple, healthy ingredients that positioned them well for growth over the long haul. The Annie's team felt that this core proposition could be effective in a number of areas in the grocery store. It was a proposition that made sense in terms of broad consumer trends as well as distribution patterns that would address those trends.

Annie's management team was not content to rest on their successes and simply grow with the category as consumers moved steadily toward healthier options, in particular organic. They felt that Annie's could lead that charge rather than sit back and simply ride the wave. To be sure, there were also a number of offsetting factors that represented hurdles, mainly a still sluggish economy. Despite the continuing slow recovery from the recession, which could affect the willingness of consumers to purchase premium products, Foraker felt the time was right for growth. The core business was strong and there was a window of opportunity in terms of available funding for the company so a few months earlier they had decided to make their move.

Frozen Foods

For a variety of reasons, the Annie's team felt that their next area for growth was in the frozen foods category, a huge category of $12 billion in retail sales. And this was not just an attempt to get placement for one particular product line, but an assault on the entire section of the supermarket. They had a plan in place for a series of new product launches in frozen foods, and it began with frozen pizza.

The decision to move into frozen was not an easy one. Natural/healthy/organic foods as a segment was not well developed in the frozen section, due to a combination of factors, including:

A general perception of frozen foods as less healthy

Strong consumer demand in the frozen section for desserts and snack items

A limited number of "doors" in the frozen section.

In addition, Annie's Core Consumers were not big users of frozen food items. But Foraker and his team had an "aha moment" on this issue when they realized that their success in the frozen category might also be good for their retail partners if they could convince more Core Consumers to shop the frozen section, thus creating a "win-win" situation for both Annie's and their partners.

Within the frozen category, multiple opportunities existed and the Annie's team had a plan in place to expand into each area, but they had to decide where to start. There were numerous areas that made sense in terms of both potential volume and fit with Annie's. For example, frozen entrees seemed like an obvious fit based on their success in macaroni and cheese. However, frozen pizza was also attractive, and represented some opportunities beyond the obvious, and the decision was made to start there. Sarah Bird, Chief Mom Officer for Annie's said: "We know that cooking a meal from scratch can be a challenge for busy families. Annie's frozen pizza was a convenient solution for parents who wanted to provide great taste as well as better ingredients they can feel good about giving their families."

Frozen Pizza

Once the decision had been made to move forward with frozen pizza, there were tough marketing mix decisions to be made. The first was around the product itself. The initial product developed was an all-organic product, which meant that 95 percent of the ingredients were certified organic. The USDA had very strict definitions for products using any type of organic terminology, as well as restrictions governing where on the package these claims could be made. But would enough consumers respond to the idea of Annie's offering frozen pizza, or would it be seen as too extreme in a category not generally known for healthy offerings? And how would the channel react?

The alternative would be to come out with a "made with" option, meaning the product was made with organic ingredients, such as the cheese, tomatoes, crust, etc. The "made with" organic option needed to have 70 per- cent or more of total ingredients as organic.

Some within the team felt the "made with" organic was the better option. They felt it would still allow for the positive imagery connected with organic products and remain consistent with the Annie's brand, but at the same time, this strategy would take the product line closer to the mainstream and to their competitors in the frozen pizza section.

The product had been tested successfully in Whole Foods in the San Francisco market. The version tested was organic and there were four flavors in test: Four Cheese, Supreme, Spinach & Mushroom, and Pepperoni. Although discussion continued about whether this was the right mix, the plan was to move forward with these same four flavors.

Closely linked to the product decision were issues about distribution. Annie's products were sold through the natural foods channel in chains like Whole Foods, as well as mainstream supermarkets such as Safeway and Dominick's. Annie's also enjoyed a strong relationship with Target, as well as other mass merchandisers. Their current business was divided roughly equally across these three channels.

If Annie's decided to launch their frozen pizza product with the all-organic product, would it sell at Safeway or Target? On the flip side, would a "made with" approach be right for natural retailers? A bigger distribution question was whether Annie's would even get distribution in Safeway. Although mainstream supermarkets had begun to create separate areas in the frozen section for healthy offerings, progress had been slow, and there was some question whether it was really an advantage to be located in these sections and away from the rest of the category.

Restricting distribution to natural retailers did not seem to be an option, as it would not meet their volume goals or their goal of engaging Prime Prospects. Grocery still did the lion's share of business in frozen pizza, but that percentage was declining and the growth was coming from the natural and mass channels.

A longer-term issue was rattling around in the back of Foraker's mind. As mentioned, Annie's had been successful in achieving a delicate balance amongst three different channelsmainstream supermarkets (Safeway, Dominick's), natural retailers (Whole Foods), and mass merchandisers (Target). But as the company's volume grew and covered more categories, would they be able to maintain that balance?

Each channel had demands and expectations. Target in particular had a tendency to take brands under their wing in the food section of their stores and often chose upstart independent brands like Annie's rather than those owned by major CPG companies. Although the Annie's team had worked hard and been effective to date in keeping all channels happy, this was clearly an area of sensitivity and had to be monitored carefully going forward.

Annie's also had a strong partnership with natural retailers that had been in place from the beginning. And although traditional grocery relationships were newer and growth was slower in this channel, the big volume over the long haul was still going to come from traditional grocery.

The pricing decision was also tightly tied to the product and distribution issues. Annie's products had competed successfully in other categories at significant price premiums relative to the competition. Consumers had bought into Annie's philosophy of simple, quality ingredients providing a healthy option that kids liked, and were willing to pay more for it.

Certainly, Foraker and his team's intent was to carry that philosophy forward into frozen pizza and other categories in the future, as it was a philosophy that not only worked with consumers, but also with the bottom line. But frozen pizza was new territory, and had a very different competitive landscape. There were many competitorsstrong national brands, smaller national brands, and regional competitors. The price points for these competitors were all over the map.

More importantly, the category was heavily deal driven, and the reality was that new product trial appeared to occur primarily as a result of a promotional offer. "I'm really excited about that product. I'll try it the next time I see a coupon" was a typical response from consumers talking about new products in the category (based on focus groups conducted in early 2012).

As mentioned earlier, a competitive landscape that was fragmented, aggressive, and price-driven was new for Annie's. In macaroni & cheese, the primary competitor was Kraftcertainly formidable and aggressive. However, Kraft was a single competitor, and the differences between Kraft and Annie's were quite clear. The situation was similar in snacks, where Goldfish (Campbell Soup) and Cheez-it (Kellogg's) were the main competitors. The competitive challenges in frozen pizza were myriad. How would Annie's get trial, given the entrenched brand loyalty combined with price competition and heavy dealing in the category?

In frozen pizza, there were closer-in competitors in the "healthy" space such as Amy's, Newman's Own, and Kashi. Although they represented tough competition, they had also paved the way (with consumers and the distribution channels) in terms of seeding the idea of a healthier frozen pizza, including higher price points. A more traditional brand, Di Giorno, was the category leader but there were other significant national competitors, private label, and many smaller and regional brands. And Di Giorno was pricing aggressively relative to Annie's and the other healthy brands.

Another important marketing mix issue involved promotion, specifically advertising. Typical CPG new product efforts, particularly when venturing into a totally new category, were backed by substantial advertising budgets.

The Annie's formula to date included virtually no media advertising. Although they were active on the promotion front, they leaned towards grassroots efforts, social media, and other areas that were executed on the ground at the local level and with very low levels of spending.

By spending less on traditional advertising, they had even more to spend on trade promotion on top of their non-traditional efforts. The formula had worked well; this approach was consistent with their grassroots imagery and had proven successful even against heavy spenders like Kraft. But Kraft was one brand in a category with few competitors. How successful would this grassroots marketing and advertising strategy be against the well-known brands and big spenders in frozen pizza? And advertising was only the beginning, as the leading competitors were also spending heavily on consumer and trade promotion.

Many of Annie's promotional efforts were both creative and effective. Such advertising was different and helped position Annie's as a brand that could compete in traditional categories, but still do things a little differently. Foraker felt satisfied that Annie's was doing things their own way and having some success across their product line. However, he was aware that Annie's was lagging significantly in awareness and penetration so there was lots of room to grow. And the bigger question was whether this approach could continue to have success as they moved into frozen pizzaand beyond.

Without traditional advertising to help with messaging, the role of packaging became more important in communicating key features and benefits to consumers. Like the mix of flavors, the team was satisfied with the current packaging based on its test market performance and planned to roll that out. But this was an ongoing topic of discussion and was occasionally covered in market research as well.

When thinking of getting trial, the source of volume was a basic question the Annie's team had to answer. Although this was a typical CPG variable (i.e., consumers trying Annie's frozen pizza would be substituting that product for what product they were currently consuming?), it was also an important target issue.

Although it was agreed that one of the key goals was to engage Prime Prospects, what did that group actually look like in the frozen pizza category? Specifically, was Annie's hoping to attract current frozen pizza users and persuade them to try a "better for you" frozen pizza? Or were they trying to persuade loyal Annie's users from snacks and macaroni & cheese to follow them and consider adding frozen pizza to their meal repertoire because Annie's was now an option?

All these decisions at some level kept coming back to the question of target audience. The right choice on each of these variables was driven, to a great extent, by whether Annie's saw Prospects or Core Consumers as the key to growth. Was the high potential opportunity to get Core Consumers to buy more from Annie's or to attract new users?

Although both were needed to reach their volume goals, where should the emphasis be from a marketing point of view? Although the groups were "close" to each other in many ways, there were clear differences in terms of demographics, current shopping patterns, and maybe most importantly, attitudes.

Future Growth

As Foraker looked out the window at the fast-moving and changing northern California landscape, he wondered whether there were marketing tactics that would satisfy both of Annie's target groups. For example, was there a combination of price point and dealing level that would attract trial from potential new users, but still deliver the necessary margins?

And even if there was such a price point, would it make sense to go there when Core Consumers were already comfortable paying a healthy premium for current Annie's products? This was the dilemma Annie's faced across the board in all their marketing decisionscould they retain the high margin approach that had been successful to date even against bigger, stronger competitors, or did they need to move to a more aggressive, lower margin approach to attract new users?

Another way to look at the decision was to ask the question of whether Annie's could walk the line between these alternatives or did they need to commit to one side or the other as a way to move forward? Importantly, this was not a totally marketing-driven question eitherbecause of the company's focus on organic as well as simple, high quality ingredients, part of their pricing decision was driven by cost factors.

After all, it wasn't just frozen pizza that was on Foraker's mind as the train headed over the Carquinez Bridge and neared Davis. He and his team had worked hard to develop a well-thought-out plan for moving into different product lines within the frozen section and eventually, different categories around the grocery store.

They had identified the categories and the order in which they would expand into each one. It worked conceptually, and the numbers worked as well. But the questions on the table for frozen pizza applied to all the categories in this growth plan. So the answers to these questionsproduct, pricing, distribution, advertising, and targetwere critical to their success in frozen pizza; but the implications went far beyond frozen pizza.

Moreover, assuming frozen pizza was successful, where in the grocery store should Annie's go next? Did it still make sense to follow their plan to move into new categories at regular, pre-planned intervals? And if so, what adjustments should the Annie's team make going forward? Stepping back, Foraker felt the two biggest challenges ahead for Annie's and his team were: 1) keeping the brand fresh and 2) keeping their relationships strong across all their channels.

Question 1

In assessing the new market opportunity for frozen pizza, Annie's identified that the category was heavily deal driven.Applying the principles of consumer behaviour, propose one promotion that leverages the principle of classical conditioning and another promotion that leverages operant conditioning that could be applied by Annie's to support the launch of frozen pizza.For your promotion based on operant conditioning, clearly identify whether you are proposing a fixed or variable ratio reward.