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Stuck with excess inventory, Neptune Gourmet Seafood is toying with the idea of launching a second,
inexpensive product line. But if Neptune stoops to conquer, rivals might retaliate with price cuts, and
the new line might end up cannibalising the old. Should Neptune launch a mass-market brand?

It had been a long day for Hargrove, marketing director of $820 million Neptune Gourmet Seafood,
North America¶s third-largest seafood producer. When the firm¶s chairman and CEO, Stanley Renser,
had invited his senior managers to sail with him to inspect one of Neptune¶s new freezer trawlers,
Hargrove had demurred. He hated sailing on small boats ² they made him sick. Renser had pointed
out that the 120-foot yacht he owned wasn¶t exactly small. Renser had won him over and Hargrove
had arrived that morning as eager to see the yacht as he was to visit one of the state-of-the-art fishing
vessels on which Neptune had bet its future.

Hargrove was exploring the yacht¶s galley when Sanchez, his counterpart in sales, had walked in.
³Hey, Jim. You better ?´ she had asked solicitously .³I¶ll survive,´ Hargrove had grimaced. ³We can¶t
be too far from home now. But let¶s not talk about it. What¶s happening topside?´

³Oh nothing much. Stanley¶s showing people the garage where he parks the water scooter and
Windsurfers,´ Sanchez informed him. She gave Hargrove a challenging look and added: ³You want to
hear something that¶ll really take your mind off your seasickness? I¶m convinced that we have to drop
our prices by 40% to 50% ² and soon.´

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Hargrove snatched a stack of cocktail napkins to mop up the cola, but his eyes never left Sanchez¶s
face. He hoped she¶d break into a smile to indicate she was teasing him about the price cut. It had to
be a joke, right? Seafood was a high-end business in North America and Neptune was an upmarket
² many believed the most upmarket ² player in the $20 billion industry. During the past 40 years,
the company had earned a reputation for producing the best seafood, and Neptune did everything it
could to preserve that premium image among customers.

The company reached its customers who were extremely demanding, through various channels. The
Gold line of seafood products dominated most segments in terms of quality, and therefore sold at
premiums compared with other brands. Some brands enjoyed 30% and 25% higher price points, on
average , than other brands. The company had emerged as the supplier of choice to the best
restaurants within 250 miles of its Fort Lauderdale headquarters as well as to the biggest cruise lines,
which together accounted for a third of the company¶s sales. Another 33% came from wholesalers
that distributed the company¶s products to restaurants all over the United States.

It wasn¶t easy to live up to the tagline ³The Best Seafood on the Water Planet.´ Dogged by
competition ² especially from China , Peru, Chile, and Japan ² as well as tough fishing laws,
Neptune invested heavily to stay ahead of rivals. A capital infusion allowed Neptune to invest $9
million in six freezer trawlers of the kind Hargrove had visited.



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To Hargrove, the company¶s premium image, investments in new technologies, and obsession with
quality made any price cut ² let alone the notion of chopping prices in half ² unthinkable . But
Sanchez refused to back down. ³I¶m not kidding, Jim. It¶s pretty clear that we have a big inventory
problem. We have to slash prices to get rid of those excess stocks.´
In the past three months, Neptune¶s finished goods inventory had shot up to 60 days¶ supply ² twice
the normal level and three times what it had been a year ago. Like many of his colleagues , Hargrove
considered the inventory pileup a temporary phenomenon. Sanchez, and her sales team, however,
were convinced that they faced a more enduring situation. ³I told you this a month ago, Jim, and I¶ll
say it again. The new laws have reduced our access to fish near the coast and forced us to go farther
out to sea. Because the fishing grounds are richer there, and because we¶re using new technologies,
our catches have grown bigger on average. Although we¶ve seen demand reach an all time high, our
inventory has continued to grow.´

³But think about how customers would perceive a large price cut,´ Hargrove said. ³If you slash prices
by 50% people will think there¶s something wrong with the fish ² it¶s rotten or full of mercury! It would
destroy our premium image and permanently erode our brand equity.´ Hargrove pointed out, ³Why not
just offer customers a 10% discount? I can see us doing that in the winter, when the sales are slow,
anyway.´

Sanchez shook her head, ³It won¶t work, Jim. Our warehouses are so full that it¶s going to take a lot
more than that to make a difference. And with $9 million tied up in the new ships, you know we won¶t
be keeping them in harbour. Our inventories are going to keep growing unless we do something
radical.´

³Selling product at a loss is radical, all right,´ Hargrove muttered grimly. On many of its products,
Neptune wasn¶t making enough profit after manufacturing costs to sustain a deep price cut. In fact,
the company¶s margins had already shrunk by 10% in the past year because of rising costs and
growing competition.

³You are talking about sunk costs,´ Sanchez shot back. ³Selling product at a loss to generate some
revenue is better than throwing it away.´

³Have you considered how our competitors will react? ³ Hargrove cut in. ³If we do this. Some of them
are bound to retaliate with even deeper price cuts, and then we¶ll be in a price war none of us can
afford ² Neptune least of all, given our cost structure.´

Sanchez held up a hand. ³Of course, of course. But you¶re assuming it says µNeptune¶s Gold¶ on the
discounted product. I actually envision a new brand.´

Hargrove exploded. ³You don¶t create a new brand to deal with a temporary increase in supply!
Besides, you won¶t fool anybody. Everyone will know who¶s responsible for flooding the market and
eroding margins.´

Look Jim, this really isn¶t the place for this discussion and perhaps I¶m not being as clear as I should
be. I want to put this issue on the MOC¶s agenda Friday.´ The Marketing and Operations Council,
which comprised Neptune¶s top executive, met twice a month.

  
  

A day before the MOC meeting, Sanchez received an unexpected visitor. It was Nelson Stowe, the
company¶s legal counsel and a long time confidant of the Renser family.

Realising this was no ordinary vist, Sanchez quickly invited him into her office. After they settled in,
Stowe got slowly to the point. ³ I¶ve been hearing that you want to launch a mass-market brand.
Interesting ! I¶m sure you¶re thinking through the implications of your strategy,´ he continued, ³but one
issue concerns me. Have you thought about how the association will react?´ Stowe was referring to
the powerful U.S. Association of Seafood Processors and Distributors . The ASPD influenced
American and global policies related to the fishing industry and imposed quality standards on
members. Also it published benchmark prices that influenced the pricing policies of seafood
producers and distributors.

³I don¶t know, Nelson,´ Sanchez sighed. ³But I doubt that the Association can do anything.´

³I wouldn¶t be so sure,´ said Stowe. ³At the prices you are suggesting, you¶re likely to endanger our
ASPD Gold Seal of Approval. We¶re the only company that has that seal on every product we sell. But
the Association could easily change that.´

³No!´ Sanchez cried out. ³Regardless of the prices, our products will still meet the quality standards .
We¶re just selling the same fish under a different brand name.´

³Don¶t fool yourself, Rita. The Association has a great deal of discretion about who gets the Gold Seal
and who doesn¶t . I¶d like us to remember that the Association isn¶t going to stand by idly while we
disrupt the industry,´ Stowe warned as he got up to leave. ³Keep me posted, will you?´




At 8am on Friday, Sanchez walked into the conference room on Renser¶s heels. Once everyone had
settled down, Hargrove got the meeting under way. Sanchez and Hargrove ran through the issues
they had discussed on the yacht.

As they concluded their summaries, Bernard Germain , Naptune¶s COO, spoke up. ³Do we know
which of our rivals are considering price cuts? We aren¶t the only company facing overcapacity. It
would be naïve of us to believe that all our competitors will hold process for the industry¶s good´

³I can¶t believe it!´ Hargrove burst out. ³You¶re in favour of price cuts?´

³I don¶t know yet, Jim. I¶m trying to understand why Rita¶s suggestion that we introduce a low-priced
seafood brand is so off-the-wall . Why can¶t we use a new brand to appeal to value-minded
customers? Seems to me that we have the product; we can distribute it using our existing channels;
and we can achieve a new positioning through packaging, advertising , and pricing. I don¶t see the
difference between this strategy and what companies like Kellogg do with their private-label
businesses. In fact, if we don¶t want to launch a second brand, we could think about supplying
retailers with private-label products.´

³I¶m not suggesting that we get into the private-label business,´ Sanchez was quick to reply. ³That can
pose problems, as many consumer goods manufacturers have discovered. I feel we should create a
mass-market brand called, say, Neptune¶s Silver.´

³That¶s terrible!´ snapped Hargrove. ³By calling it Neptune¶s Silver, you¶re positioning the cheap
product right next to Neptune¶s Gold in the eyes of consumers . Then they¶ll be more likely to try it
and, once they do, they¶ll realize there¶s no difference in quality . We¶ll end up cannibalizing our own
sales. Why would any company in a high-end segment do something so crazy?´

³I guess you don¶t remember what transpired in the wine industry a couple of years ago,´ responded
Pat Gilman, the head of Neptune¶s institutional business, whose taste for high-end products was well
known. ³A California vintner, Bronco Wines, did something exactly that µcrazy.¶ It was the same kind of
situation: a glut of grapes, huge inventories . They slapped a new brand name on the stuff and sold it
through Trader Joe¶s for $1.99 a bottle. It¶s called Charles Shaw, but people nicknamed it Two-Buck
Chuck.´
³Not only do I know about it, but I¶ve also tried it,´ Sandy McKain, head of the company¶s consumer
business, piped in. ³I can tell you, it¶s worth every penny. But Pat, I don¶t think the scenario is exactly
the same. Even in Bordeaux, a lot of winemakers offer a premium wine and several cheaper wines,
but they use grapes of different qualities to make the different grades. Would we be doing that?´

³In Bronco¶s case, it was the same grapes they¶d been using for higher-priced wines,´ Gilman said.
³As for Jim¶s point, I¶m sure they had some customers migrate to the cheaper stuff. But think about
the upside. In the United States, 88% of wine sold is consumed by 12% of the population ´ ³Hey, Pat,´
Hargrove called out. ³How much of that do you personally account for?´

Gilman joined in the laughter before continuing; ³The point is, more people will opt for a bottle of wine
with dinner if they can get a passable one on the cheap. Wine sales have grown at the expense of
other beverages in recent years. The same thing could happen to us. Even with people eating
healthier things, seafood sales lag behind those of beef, chicken, and pork. The way I see it, this isn¶t
about reducing inventory . It¶s about introducing our products to a bigger market: the more budget
conscious consumer . And if it¶s like wine, the educated consumer will then trade up to Neptune¶s
Gold.

A furious discussion followed about how hard it would be for Neptune to win shelf space in
supermarkets for a new brand, particularly for a lowpriced product that might go head-to-head with the
grocers¶ own private label offerings. The group was also divided about whether it should sell a second
brand through the same channels or through different ones. Germain wondered aloud whether
Neptune should target new geographic markets-like South America and Central Americawith low-
priced offering.


³Hang on!´ exclaimed a clearly frustrated Hargrove. ³When we started, weren¶t we debating whether it
made sense to launch a new brand to deal with a temporary inventory problem? That would mean
we¶d kill it once we solved that problem.´

³If customers like our new brand, it might constitute a better growth strategy,´ Sanchez interrupted.
³The way I look at it, the second brand could prove to be a win-win proposition.´

³I don¶t know if it¶s as simple as that,´ Germain said slowly. ³Every luxury company I know of ± Gucci,
Mercedes-Benz , BMW, Tiffany, even Hyatthas struggled to go mass without destroying its premium
image. For that matter, when fashion designers like Isaac Mizrahi create an affordable line for a
retailer like Target, I wonder if that adds to the brand¶s luster or tarnishes it?´

Renser, who had been quiet until then, cleared his scratchy throat. His colleagues were starting to
rehash territory they had already covered, and instead of sharpening their arguments, they seemed to
be obfuscating them. On one hand, they appeared to agree that it would be important to keep the two
brands separate. On the other hand, they were talking about migrating customers from the low-end
brand to the high-end brand, which would mean linking the two. Renser knew that the group was
waiting to hear where he stood, but he didn¶t yet know what to say. How long could he leave them
hanging ± along with his company¶s fortunes- between the devil and the deep blue sea?