P&G Pet Food Approached by Wal-Mart

Case Type: new product; operations strategy.
Consulting Firm: Deloitte Consulting internship interview.
Industry Coverage: Household Goods, Consumer Products; General Merchandisers.

Case Interview Questions #00004: Your client Procter & Gamble Co. (P&G, NYSE: PG), a leading pet food manufacturer, has experienced a loss of market share and a downturn in top line revenue over the past 5 years. P&G’s primary channel of distribution is veterinarians who recommend the brand to their customers and sell directly from their offices. In fact, veterinarians are largely responsible for the launch of the company and the identity of the brand, as they contributed freely to the development of the quality formula that distinguishes P&G from competitors.

P&G now must make a decision critical to its future. The company has just been approached by retail chains Wal-Mart (NYSE: WMT) and asked to sell its most popular products through Wal-Mart’s chain of stores. There is one problem: Wal-Mart would sell the products at significantly lower prices than could the veterinarians. You have been asked to help P&G decide whether to pursue this alternative channel of distribution, and if so, how?

Additional Information: (to be given to you if asked):

• The number of veterinarians distributing P&G’s products has remained constant over the 5 year period in question.
• There are a number of customers who have been purchasing P&G products from veterinarians that continue to do so; however, an increasing number of customers are more resistant to paying the premium prices attached to P&G products and instead purchase pet food from discount retailers like Wal-Mart.
• After covering fixed costs the company enjoys a substantial profit off its premium priced goods.
• P&G products are only sold at veterinarians’ offices and consumers generally associate high quality and nutritious value with the pet food. Consumers that are willing to pay premium prices for P&G products believe that the food is superior to any close substitute on the market. Since these consumers trust that their veterinarians would only recommend the best, they subsequently choose only P&G products. The brand name is recognized widely and is always aligned with quality.
• While P&G’s current customers value perceived quality, Wal-Mart customers value price. As a result, Wal-Mart customers, who make purchasing decisions based on price, will not place high enough value on quality to pay a premium to obtain it. To cater to this potentially highly profitable customer segment, P&G must instead compete with other pet food companies in the Wal-Mart domain on price.

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