A Case Study of Wal-Mart and Vlasic Pickles

I. Executive Summary

Vlasic Food International offers the best pickle brand in America in the late

1970s. However, in the year 2000, this food brand faced a problem in their profitability

since the formation of agreement with Wal-Mart which offers their main product in the

lowest price possible leaving a cent or two as their profit per gallon. The main problem

seen in this case is that, the marketing logistics as well as the financial capability is not

seen and not properly evaluated before closing an agreement with Wal-Mart. Herewith,

this problem has rooted into a lot more problems faced by Vlasic, more specifically, with

Steve Young, vice president of Grocery Marketing, about the profitability as well as the

production capacity that Wal-Mart is trying to push through limits with the sudden

expansion and increase of demand made by a single supplier which gains only a little,

given the volume that Vlasic is selling. Though this happened, Vlasic cannot include

eliminating Wal-Mart from its suppliers given that they hold the 30% of the total sales of

Vlasic Food International. However, Young focused more on terminating the deal and

blaming the deal itself as the primary root of the problem which is answered by Hunn,

team leader of Wal-Mart Sales as “not his problem anymore.”

The researchers found and recommend some ways in order to improve

profitability without terminating the deal. The first one is to improve costing. In order to

reduce the cost of the product, Vlasic Foods must look for new potential suppliers who

could offer raw materials with the same quality but in lower price. This technique

reduces the cost of the product itself leaving room for more profit and expecting for a

25% decrease in operating cost. The next alternative solution is intended to improve the

profitability. In this area, Vlasic Foods may search for possible distributors and retailers

of their products, not only the pickles but the other Vlasic products as well, that can

leverage the offerings and sales that are higher than the current distributors. This is

since, even before the deal happened between Vlasic and Wal-Mart, Vlasic has already

occupied a great market share making it not too hard to look for potential distributors.

The last one is the development in the production capacity of Vlasic. The company is
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suggested to acquire additional machineries that they could use in producing Vlasic

pickles than the additional manpower. This could also reduce the cost since instead of

increasing the expenses in employees’ salary by adding manpower, machineries could

even produce more and faster. The return from the acquisition of machineries gives a

bigger allocation in profit.

This study has revealed that the problem is not the deal itself but the lack of

analysis and further investigation before entering the deal caused by too much

dependence with Wal-Mart. And since, leaving the deal is not a good choice, the only

solution is to reduce cost and make it more profitable by doing the adjustments in

production.

II. Statement of the Problem

The incremental increase of Vlasic pickles under the promotional strategy made

by Wal-Mart can be commonly seen as a positive and highly beneficial in the view of

other organizations. However, this positive trend in sales of Vlasic pickles is seen as an

obstacle in obtaining profit of Vlasic Food International.

Vlasic’s deal with Wal-Mart seemed that it would be a good promotional strategy

for both the company, given that Wal-Mart is the world’s largest retailer and the world’s

largest company. It has boosted the sales volume of Vlasic pickles and also covers the

30% of the Vlasic Food International overall sales. However, the deal that happened as

continuously made and some marketing designment happens, it has been discovered

that there is a problem with the establishment of the deal itself as some marketing

logistics and financial factors were not considered before making this deal.

From a marketing standpoint, the deal that happened is not properly evaluated

thus, resulting to the insufficiency of supply and shortage of the production in which it is

unable to aim on the planning, delivering and controlling the flow of physical goods,

marketing materials and information from the producer to the market as well as to meet

customer demands while still making a satisfactory profit. The planning of the
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production process and the supply chain management is not properly forecasted before

the agreement of the $2.97 deal.

As to financial standpoint, a profit and loss statement should have been

developed to see just how many of the discounted gallon pickle jars they could sell, this

also would have been a good way to review the cost that would incur in the production

and distribution of these jars. The forecasting and the accurate estimation of is not

properly made in order to know if their agreement on the new selling price of $2.97 is

still profitable and could sustain future expenditures. The cost allocation on the supplier

of raw materials up to the process of packaging as well as the promotional expenditures

are not projected appropriately that leaves no more room for profit.

The problem given above branches another problem with the production of other

products offered by Vlasic Food International since Vlasic pickles is not the only product

that they offer. The production for these products slowed down and the constant

increase in demands for Vlasic pickles gives a tighter space for the organization to

focus on the production of other products that they have.

III. Causes of the Problem

Vlasic Food International depends on its major distributor which is the Wal-Mart

to generate sales that lead to strong economic ties between their activities. There are a

lot of benefits associated having Vlasic reliance to Wal-Mart because there will be fewer

people to talk to, accounting transactions are simplified and better service are provided

since Vlasic can focus and invest time in what is expected by the Wal-Mart.

Vlasic was willing to do that deal with Wal-Mart to access the 100 million

consumers who visit a Wal-Mart once a week and spend more than 5 cents of every

dollar with them when they do. For Vlasic, Wal-Mart accounted for 30 percent of their

sales and was thus a very important channel of the business to the customer. Wal-Mart,

as a powerful intermediary between Vlasic and its customers, negotiated accordingly.

The contract with Wal-Mart was very important to Vlasic’s growth and success.
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Doing business with Wal-Mart makes Vlasic more efficient. Wal-Mart continually

improves the procedures with which it handles its merchandise and it expects Vlasic to

be fully compatible. The only way for Vlasic to do business with Wal-Mart is to

repackage its product according to Wal-Mart specification and to adopt a hardware and

software interface, which is compatible to that of Wal-Mart’s. The reliance of Vlasic with

Wal-Mart needed them to buy acres of cucumbers, new machinery, real-estate to house

the new operation, personnel to meet the increased demands and undergo software

and hardware infrastructure changes to manage the increased production and achieve

compatibility to the Wal-Mart systems in order to access millions of consumers.

Wal-Mart demanded that products be manufactured to stringent tolerances and

unique design specifications, which may require Vlasic to invest heavily in relationship-

specific assets that cannot be redeployed for alternative uses. In addition, Wal-Mart with

strong bargaining power can extract significant price concessions which can

significantly diminish gross margins for Vlasic.

The great American pickle “Everyday Low Price” promotion at Wal-Mart was

reported to have moved 240,000 gallon jars of pickles each and every week at Wal-

Mart’s 3,000 stores. Walmart and Vlasic made the prices of pickles so insanely cheap

that if people wanted to buy pickles, Wal-Mart was the place they went to buy them.

There is also no question that doing business with Wal-Mart can give Vlasic a fast,

heady jolt of sales and market share. The volume gave Vlasic strong sales numbers,

strong growth numbers, and a powerful place in the world of pickles at Wal-Mart. But

that fix can come with long-term consequences for the health of Vlasic.

The promotion increase the volume of Vlasic pickles but the sales revenue of

Vlasic was higher than before the gallon jar promotion. Simply put, the gallon jar of

pickles at Wal-Mart became a devastating success, giving Vlasic strong sales and

growth numbers but slashing its profits by millions of dollars. The gallon jar promotion,

due to lack of proper consideration to marketing logistics and financial factors of the

company was hoisting Vlasic and hurting it at the same time.

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Vlasic too much reliance on Wal-Mart involves more risk. They rely so much to

Wal-Mart because they have full trust with them for it accounts 30% of their sales for the

past years. Subsequently, they did not focus much with the marketing logistics and

financial factors that might happen if the promotional deal got approved and move to an

end aisle.

The deal itself was a good promotional deal for both Vlasic and Wal-Mart, and

would have been successful both in sales and revenues if marketing logistics and

financial factors were able to consider before closing the deal. The root causes of the

problem here lies with too much reliance to Wal-Mart knowing that it is the number one

retailer and distributor in America. Vlasic becomes increasingly more dependent on the

Wal-Mart. In effect, Vlasic did not given proper attention to the factors that may affect

the operations of the business to which $2.97 is the everyday low price: did not gather

the information that will have impacts to the production and marketing materials and; did

not plan and control the flow of the physical goods. A clear income statement did not

develop to see how much will be the profit in the $2.97 being the everyday low price. An

income statement is a scorecard of the financial performance of the business that will

reflect and draw information with regards to the revenues, expenses and costs of

pickles to measures whether the operation receive gain or incur losses. These factors

that have not given proper attention rooted to the devastating success of the

promotional deal. Vlasic expose to higher business risks even when they harbour

relationships with financially stable Wal-Mart.

IV. Decision Criteria and Alternative Solution

There is a problem with the establishment of the deal itself as some marketing

logistics and financial factors were not considered before making this deal, the following

will be the alternative solutions:

 Cost-cutting. Vlasic can reduce costs associated with production activities

without affecting the quality of products and services. The following are the

considerations in order for Vlasic to cut costs.

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o New Supplier. Vlasic Food International can seek for other suppliers of

raw materials with lower offered price compared to their existing supplier.

o Cutting the Shipping Cost. Look for a nearer supplier who offers lower

cost and nearer in vicinity to be able to cost-cut the shipping fee. Instead

of ordering it from Michigan, its existing supplier, the Vlasic Food

International can choose the suppliers from Massachusetts.

o Cutting the Shipping Time. Look for a nearer supplier who offers lower

cost and nearer in vicinity to be able to cost-cut the shipping fee. Instead

of ordering it from Michigan which will take 12 hours, the Vlasic Food

International can choose the suppliers from Massachusetts with 3 hours

only. Cutting the time of delivery from supplier can make the production

process even more stable making it more possible to meet the customer

demands.

 Promotion. The Vlasic Food International can offer promotion to non-Wal-Mart

businesses who patronize their Vlasic products. They will give discounts to

the loyal customers who purchase pickles products in bulk, depending on the

quantity they acquire, to show their utmost appreciation to them. They can

also make promos on selected dates to encourage and attract customers to

try and buy their products. This will increase sales and make sales of slow

moving products faster and stabilize fluctuating sales pattern.

 Advertising Campaign. The corporation can make an advertising program

promoting the Vlasic products and services they provide and offer to

customers of non-Wal-Mart businesses including its benefits to their lifestyle.

This advertisement will create awareness in the minds of people about the

availability of products and services and influence them to buy the same, and

enhance the sales of the organization because it complements and

supplements the company’s selling efforts. This will also motivate the dealers

to buy high volumes of products and push more of the brands that are on

promotion.
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 Increase the number of manpower. Since there are 240,000 demand of gallon

jars that has to be met weekly, there must be an increase in productivity by

adding more manpower in the production area. If there are more employees

that would act and work with making the pickles, then the productivity per day

would increase as well.

 Acquire additional machineries and equipment. Additional machineries and

equipment would make the production faster than relying with the existing

manpower only. These machines and equipment carry out the functions of the

human beings at relatively higher speed as compared to them. Using these

will reduce the cost of operation by reducing the number of people needed for

the job.

 Alternative Distributor. Alternative distributor who will purchase Vlasic's

products at much higher prices will make room to earn profit. The incentive on

the part of Vlasic to cooperate with new distributor will be strong sales

numbers and growth associated with any profit. The distributor's interests of

entering an agreement will converge with the interests of Vlasic that will

refrain to run into problems.

Decision Criteria

The following considerations are the criteria in the decision-making process.

1. Cost. Vlasic Food International needs to cut cost for 25%.

2. Profitability. Increase in profit by 10%.

3. Customer Satisfaction. The number of recurring customer would increase.

4. Delivery Time. The delivery time would be deducted by 5 hours.

5. Productivity. The number of finished products made per day is increased.

6. Production Capacity. The demand made by the retailers would be met.

3 -Neutral 4 -Affects Positively 5 -Extremely Affects Positively Legend:
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V. Recommended Solution, Implementation and Justification

In light of the previous analysis, alternatives that best solve the problem are

selected and the following recommendations are hereby presented:

1. Cost-cutting or cost reduction shall be made to increase the profit without

sacrificing the quality of the finished products. Vlasic Food International shall find

new supplier of cucumber in the neighbor city who offers products lower in price

and to which discounts could be claimed when purchasing in bulk. In this way,

shipping costs will be reduced by 10% and the cost of raw materials will be

brought down by 15%.

Supplier is an important factor for Vlasic. According to Porter (1980) in his

Five Forces Model, suppliers to an industry are powerful if suppliers' outputs are

important inputs to the customers’ business. This attribute influence the initial

power distribution in the customer to supplier relationship. This implies that Vlasic

can make strategic decisions as well as operational decisions that alter the

power to which they are subject. Vlasic may make decisions which can alter both

the environment in which they operate, and the extent to which they must go to

the environment for inputs.

Porter predicted that firms in subordinate or weak positions would seek to

reduce the power to which they are subject. Vlasic will not only examine the

simple make or buy decision, but asks to what extent Vlasic can do to reduce its

dependence on a particular supplier or class of suppliers. Their power must be

examined along with other suppliers in each product supply channel. Choosing

the right supplier involves much more than scanning a series of price lists then

select the lower one. Vlasic shall choose supplier considering wide range of

factors which are value for money, quality, reliability and service the supplier

could offer.

2. Vlasic shall not rely solely to Wal-Mart and shall find alternative retailers or

distributors who are willing to purchase products in bulk at $3.47 in price. They
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shall ensure that the financial stability and statistical information of this distributor

are good and can add value in the organization. The manufacturer – not the

distributor or retailer – must make consumers want to buy the products through

cooperative advertising campaign with retailers, display stands and other

marketing materials. However, the business’ success came with the help of

distributors. These allies can pioneer the products into new geographic areas,

get into stores and provide valuable services, such as fast order fulfilment.

Transaction cost theory is an economic approach that seeks to describe

how the decisions which define the firm's boundaries of actions are made. It has

primarily been applied to operating decisions, not strategic or interdivisional

decisions. It is basically seeks to answer and to describe the process of

answering the question "should a firm make or buy?" The decision is examined

in the same manner whether the question regards making a component,

developing software in house, or performing distribution functions. Regardless of

the specific decision, the decision to "make or buy?" takes place in a larger

framework, that of the technology matrix.

In the manufacture of pickles, there are many activities that must take

place to get pickles into the hand of the end-user. On the output side there may

be one customer demanding Vlasic's output, or many potential customers and

retailers. By the time Vlasic perform all of the tasks necessary to bring a product

to its end user, the decisions that define a firm's boundary of actions in

distribution, procurement and selling are very important. Vlasic should not only

rely to the biggest customer such as Wal-Mart because when they are unable to

provide the products and services according to terms and conditions, Wal-Mart

will switch the source of purchases which has an adverse impact in the Vlasic’s

business and financial conditions.

Transaction cost theory is the cornerstone of much of the extant theory of

channel design. There are three frameworks based upon this theory that lend
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insight into the decision to utilize distributors in product supply channels or

integrate distributor functions. These frameworks are the Market Characteristic,

Product Characteristic and Business Function Frameworks. The decision to use

distributors or to integrate distributor functions is a critical component of a firm's

marketing channel strategy. The distribution system structure decision and the

selection and allocation of its ensuing activities and tasks should be viewed as a

strategic decision because of its impact on a company or company's product's

success. Further it should feel that the distribution system structure decision is

best examined as question of what form will allow all necessary functions to be

completed satisfactorily to the retailers.

When Vlasic sells both directly and through a distributor, it has options in

the provision of service. It may weigh the option of focusing on manufacturing

against maintaining control over service quality. Vlasic may let distributors

provide service and receive the profits associated with the service in exchange

for alleviating the service requirement from the manufacturer. Such a decision

should not be made lightly because it has strategic consequences.

3. The enormous success in sales of the promotional deal put a strain on the

production and procurement system. Instead of hiring personnel to satisfy the

increasing demands of the customers, Vlasic Food International shall purchase

new machineries and equipment to save money and reduce time or effort

required to perform the activity. This will make the production faster than relying

to the skills of the newly hired employees. This is also a great help to reduce the

spending of the Vlasic because no additional salaries to pay because the

machineries and equipment will carry the functions of manpower and will do the

labor itself.

Cost Benefit Analysis outlines the procedure for estimating all costs

involved and possible profits to be derived from a business opportunity or

proposal. It is the exercise of evaluating a planned action by determining the net

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value it will have for the company. Basically, a cost-benefit analysis finds,

quantifies, and adds all the positive factors which are the benefits. Then it

identifies, quantifies, and subtracts all the negatives, the costs. The difference

between the two indicates whether the planned action is advisable and literally

worth the price. It is the fundamental assessment behind virtually every

business decision, due to the simple fact that business managers do not want to

spend money unless the benefits that derive from the expenditure are expected

to exceed the costs. As companies increasingly seek to cut costs and improve

productivity, cost-benefit analysis has become a valuable tool for evaluating a

wide range of business opportunities such as major purchases.

The cost-benefit analysis in the case of Vlasic Food International includes

whether or not to introduce or purchase new machineries and equipment.

Costs
Purchase of Machine (₱1,000,000/10 ₱8,333

years/12 months)
Machine Operator ₱8,216
Utilities Expense ₱500
Total ₱16,833

Benefits
Increased Revenue ₱6,000
Quality Increased Revenue ₱2,500
Reduced Labor Costs ₱26,648
Total ₱33,148

In evaluating opportunities, list the benefits first. The machine will produce

100 more units per hour. The machine will replace five workers currently process

pickles by hand. The units will be of higher quality because they will be more

uniform.

Then calculate the selling price of the 100 additional units per hour

multiplied by the number of production hours per month. Add another two percent

for the units that are not rejected because of the higher quality of the machine
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output. Then add the monthly salaries of the five workers. It is a pretty good total

benefit.

Then the machine costs $1 million and it will consume electricity and an

operator who will operate the machine. Calculate the monthly cost of the

machine by dividing the purchase price by 12 months per year and divide that by

10 years, the useful years of the machine. By subtracting the total cost figure

from your total benefit value, the analysis shows a healthy profit. This cost-

benefit analysis will identify the hard savings which are the money or actual and

quantitative savings from soft savings or things like management time or facility

space. Vlasic Food International shall purchase of new machineries and

equipment because it will eliminate the future costs like employees’ overtime or

equipment leasing, improve productivity and increase profitability.

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Contingency Plan for Vlasic Food International

Possible Problems Actions to be Undertaken

 No available suppliers with the same  The company may look for the same

quality and nearer to the factory. location of supplier that offers a price

lower than the original suppliers.

 The machineries that they could  Vlasic must assess the usage of the
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acquire is more expensive than what machine if it is worth buying and

they have planned. replacement for manpower. If the

machine costs higher than the same

productivity than additional manpower

could give, then there is no need to

buy the machine. Vlasic can choose to

outsource additional employees.

 Alternative raw materials do not have  Vlasic has to still choose the original

the same quality than the original has raw materials for the quality must not

but lower in cost. be sacrificed. On the other hand, they

could cut cost on the packaging and

other materials.
 Breakdown of machineries and  Vlasic’s machinery and equipment

equipment insurance will cover its repair costs

and reimbursing the business for lost

income.

External Sources

An Expert Guide to Cost Benefit Analysis. 2019. Bellevue, Washington: Smartsheet Inc.

https://www.smartsheet.com/expert-guide-cost-benefit-analysis

Case Study 2: Wal-Mart’s 12lb (5.45kg) jar of pickles. http://www.kosmosbusiness.com/

UserFiles/File/Books/CaseStudy2.pdf
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Freedman, Scott D. 1994. The Role of Distributors in Product Supply Channels: Theory

and Practice, 14-17, 24.https://dspace.mit.edu/bitstream/handle/1721.1/38025/32

162085MIT.pdf?sequence=2

Freedman, Scott D. 1994. The Role of Distributors in Product Supply Channels: Theory

and Practice, 45-47.https://dspace.mit.edu/bitstream/handle/1721.1/38025/32

162085MIT.pdf?sequence=2

Reh, John F. 2019. How to Run a Cost-Benefit Analysis. Broadway, New York: The

Balance Careers. https://www.thebalancecareers.com/cost-benefit-analysis-

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