QUESTION 2: After reviewing the key factors RefreshNow! should consider in deciding whether to launch O-Natura, your team wants to understand the beverage market and consumer preferences to gauge potential success of O-Natura.
The bottled market splits into non-sparkling, sparkling, and imports. Flavored water falls within non-sparkling. Your team has gathered the following information on the U.S. bottled water market. The information shows an estimate for the share of flavored water, as well as the current share for the two main products: Cool and O2Flavor.
Based on the target price and upfront fixed costs, what share of the flavored non-sparkling bottled water would O-Natura need to capture in order to break even? Here is some additional information for you to consider as you form your response:
- O-Natura would launch in a 16 oz. presentation (1/8 of a gallon) with a price of $2.00 to retailers.
- In order to launch O-Natura, RefreshNow! would need to incur $40 million as total fixed costs, including marketing expenses as well as increased costs across the production and distribution network.
- The VP of Operations estimates that each bottle would cost $1.90 to produce and deliver in the newly established process.
Helpful Hints
- Ask for clarification of information, if necessary
- Take notes of the numbers
- Take time to plan out how to approach the calculation
- Describe your approach and talk the interviewer through your calculation. The more you talk the easier it will be for your interviewer to help you
Reveal answer
A very good answer would include the following:
O-Natura would need to capture a 12.5% market share of flavored non-sparkling bottled water in order to break even. Therefore, O-Natura would need to be the Number 2 product in the market:
- O-Natura would need to sell 400 million units in order to break even:
- Variable profit per unit = $2.00 - $1.90 = $0.10
- Break even units = Total fixed costs / Variable profit per unit = $40 million / $0.10 per unit = 400 million units
- O-Natura would need to capture a 12.5% market share:
- Non-sparkling flavored bottled water market = 5% * 8,000 million gallons = 400 million gallons
- O-Natura sales in millions of gallons = 400 million units / 8 units per gallon = 50 million gallons
- Market share = 50 million gallons / 400 million gallons = 12.5%