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Kingsford Charcoal Case

Kingsford Charcoal Case

Executive Summary

Kingsford Charcoal, one of the prominent charcoal producers in the USA, faced problems with sales in 2000. They were caused by several factors. First, the company almost did not use advertising because the managers considered it not necessary; moreover, other competitors did not advertise their products, too. Second, the weather was colder that year, and there were more rains. Therefore, the number of days good for grilling decreased. Third, gas grilling became more popular, and many consumers preferred it over traditional charcoal grilling.

The chosen alternative is a price increase by 5% for all company products in all stores. This alternative was selected because it has the highest expected value for total profits in 2002, even though the sales can go down. This situation happens because the price increase is not felt by most consumers. This alternative is good because it will help to receive additional money for advertising and promotion. The company can use it in the next period to increase sales. Thus, lower sales but higher profits in 2002 can help to increase sales and profit in the next year.

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Problem Statement and Statement of Alternatives

The problem was in declining sales growth in 2000. The issue was caused by three main factors. The first aspect was in growing popularity of gas grilling. Traditionally, charcoal grilling was used. It is considered to make food more delicious. However, it takes more time than gas grilling and is not very convenient. Therefore, in the beginning of 2000, gas grilling was becoming more and more popular, and gas sales were growing faster than charcoal sales. Gas grilling was popularized as more modern and convenient than traditional one.

The second factor that caused decline in sales was the problems of advertising and promotion. In the whole charcoal market, these instruments were not used often. Producers thought that consumers buy charcoal when they want grilling, and they do not pay attention to advertising. Like other competitors, Kingsford Charcoal did not focus on advertising and promotion, too. Finally, the third factor that influenced sales was bad weather. As it was colder and rainier than in previous year, number of days good for grilling decreased and charcoal sales fell. However, this factor does not seem to be constant. It is possible that weather will be absolutely different in the next year, and the sales can grow again. The company has to find a way to ensure revenue growth, to boost its sales volume given limited funds for advertising and sales promotion. Kingsford Charcoal should decide how to increase its revenues and return to the previous sales volume with the limited funds for advertising and sales promotion.

The company has four alternatives: price increase by 4% only for club stores, price increase by 2.5% only for blue bags but in all stores, price increase by 5% only for blue bags but in all stores, and price increase by 5% for blue and red bags in all stores. Slight rise in prices can help to receive additional revenues and money for advertising and promotion. The main dimensions are the decisions of retailers and customers. If prices go up, retailers may decrease their purchases or promotion efforts. Customers may prefer competitors’ products or gas grilling products because they are promoted more.

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Analysis of Alternatives

The expected values will be calculated for both sales and profit amounts.

1) The first alternative is a price increase by 4% only for club stores. Three states of nature are possible: no merchandising loss with 60% probability, 300 MSC losses at Costco with 25% probability, and 1,000 MSC losses at Costco with 15% probability. With the use of data from Exhibit 10, the expected values for all states of nature for sales and profit will be calculated.

States of nature Expected value for 2002 (sales) Expected value for 2002 (profit)
a. No merchandising loss (60% probability) 60% * $1,300 million = $780 million 60% * $1,080 million = $648 million
b. 300 MSC losses at Costco (25% probability) 25% * (-$1,110) million = (-$275) million 25% * $40 million = $10 million
c. 1,000 MSC losses at Costco (15% probability) 15% * (-$7,200) million = (-$1,080) million 15% * (-$2,500) million = (-$375) million

Total expected value for sales = $205 million

Total expected value for profit = $283 million

2) The second alternative is price increase by 2.5% only for blue bags but in all stores. Two states of nature are possible: no merchandising loss with 75% probability, and 10% merchandize loss with 25% probability. With the use of data from Exhibit 10, the expected values for all states of nature for sales and profit will be calculated.

States of nature Expected value for 2002 (sales) Expected value for 2002 (profit)
a. No merchandising loss (75% probability) 75% * (-$1,200) million = (-$900) million 75% * $560 million = $420 million
b. 10% merchandize loss (25% probability) 25% * (-$3,090) million = (-$772.5) million 25% * (-$810) million = (-$202.5) million

Total expected value for sales = (-$1,672.5) million

Total expected value for profit = $217.5 million

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3) The third alternative is price increase by 5% only for blue bags in all stores. Two states of nature are possible: no merchandising loss with 50% probability, and 7% merchandize loss with 50% probability. With the use of data from Exhibit 10, the expected values for all states of nature for sales and profit will be calculated.

States of nature Expected value for 2002 (sales) Expected value for 2002 (profit)
a. No merchandising loss (50% probability) 50% * (-$1,900) million = (-$950) million 50% * $1,060 million = $530 million
b. 7% merchandize loss (50% probability) 50% * (-$4,140) million = (-$2,070) million 50% * (-$110) million = (-$55) million

Total expected value for sales = (-$3,020) million

Total expected value for profit = $475 million

4) The fourth alternative is a price increase by 5% for all products in all stores. Two states of nature are possible: no merchandising loss with 30% probability, and a merchandize loss with 70% probability. With the use of data from Exhibit 10, the expected values for all states of nature for sales and profit will be calculated.

States of nature Expected value for 2002 (sales) Expected value for 2002 (profit)
a. No merchandising loss (30% probability) 30% * (-$2,820) million = (-$846) million 30% * $1,870 million = $561 million
b. Merchandize loss (70% probability) 70% * (-$4,020) million = (-$2,814) million 70% * $1,720 million = $1,204 million

Total expected value for sales = (-$3,660) million

Total expected value for profit = $1,765 million

As it can be seen, expected values are completely different. However, with the growing decrease in sales, profit is increasing. It happens because lower volume of sold products is covered by their higher prices.

Four alternatives were studied, and the values for each were calculated. The best approach is the fourth one. Therefore, Kingsford Charcoal should choose the fourth alternative. Although it will decrease its sales volume, profit will grow. Additional money received from increased profit can be used to promote and advertise products in the next period, and the company will be able to increase sales again.

Plan Development

In order to implement the fourth alternative, the company should develop a specific plan. It should involve all four elements of marketing mix.

Product

Charcoal products offered by Kingsford Charcoal may not be modified. The company can continue producing and selling the same products.

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Price

According to the expected values and the alternatives, it would be better to increase price for all products by 5%. It will help to increase total profit. This rise is slight and not felt by most consumers. The volume of products sold will be lower; however, as the prices are higher, total profit will grow.

Place

Kingsford Charcoal sells its products in club stores, retail chains, supermarkets, drug stores, and other types of stores. Therefore, the company cannot choose many additional places for selling its products. The only wise decision there will be to change placement of products in order to make them more visible for customers in comparison with competitors’ products.

Promotion

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As Kingsford Charcoal earns additional profits due to price increase, it will be able to spend more on advertising and promotion. The problem is that all competitors do not pay much attention to promotion. As a result, consumers usually do not choose the particular brand. Moreover, as gas grilling products are advertised and promoted better, their sales are rising. Therefore, Kingsford Charcoal should focus on advertising and promotion to increase sales. The campaign should be focused on the unique features of Kingsford Charcoal that make it better than competitors’ products. Moreover, it is necessary to stress on the traditional grill smell and taste of food cooked with the use of Kingsford Charcoal products, and to state that those taste and smell cannot be felt if customers use gas. Therefore, it is likely that clients refuse from convenient gas in favor of traditional taste and smell.

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