American Connector Company Free Sample

Executive Summary: In order to make their plant globally competitive, American Connector Company’s Sunnyvale facility needs to improve on production, process, quality control and inventory control. They should optimize the production line to smoothen the process flow, increase the yield and reduce overall costs. They need to analyse and standardize their product mix. Also, schedule optimization will go a long way to minimize start-up and end costs and to avoid wastage. Work in process inventory needs to be controlled. Quality control measures and checkpoints should be introduced to reduce rejections.

Indirect staff for monitoring and production control needs to be minimized to increase the overall productionunits per employee. Also, they should revamp their pricing strategy and implement activity based-costing. Statement of Issues: Sunnyvale would be competing directly with Kawasaki’s high volume / low cost products and faces the possibility of losing lower margin, price sensitive customers. A plant modeled on DJC’s Kawasaki production facility has a tremendous manufacturing advantage over ACC’s Sunnyvale facility.

Also, given DJC’s goals strong product quality(1 defect in a million), ACC needs to come up with an action plan to avoid losing their market share to DJC. Criteria: A good criteria for the decision will help in eliminating all the inefficiencies form the process of ACC Sunnyvale plant and will also help them to compete with the competitor if they set up the plant in north America . Analysis DJC Corporation, dedicated to process positioning and robust systems engineering, required that the Kawasaki facility be highly automated.

Particular emphasis was placed on what they termed “pre-automation. ” DJC’s belief was that a production process could only be fully automated following when the process was fully understood and properly designed. They were concerned that automating a production line too early might result in investing in an inefficient process. This pre-automation process helped analyze process flows, worker movements, and raw material consumption. As a result, the warehouse facility was centrally located and intentionally right-sized, leaving no room for excess material or products.

Additionally, each production line was equipped with a dedicated injection mould press, and was a complete line from raw material in-flow to packaging. DJC also believed it better to utilize an older, more established process, rather than implementing newer unproven processes. Continuous improvement of existing processes was highly relied upon. DJC also emphasized reliability of equipment and invested significantly in repair and maintenance to ensure the most critical portions of the manufacturing process were well maintained.

DJC staffed experts in polymer physics and former employees of mold manufactures, and followed a strict process of mould replacement and upgrades. This dedication to process reliability helped protect DJC from unexpected down time and profit losses due to unexpected failures. Furthermore DJC developed in-house workshops in their factories in order to protect proprietary processes, believing their competitive edge would be eroded if equipment suppliers had insight into their processes.

DJC’s “Technology Development Division” coordinated the product planning session, materials section, process engineering, and the mouldingtechnology group. It was TDD’s responsibility to make certain these sections operated together in the achievement of efficient resource utilization, design quality and manufacturability, smooth manufacturing introduction, shortened development cycle, and continuous process improvement. Furthermore, TDD coordinated efforts to ensure product improvement. The remaining portions of the Kawasaki facility were sourcing, quality control, and production and inventory control.

Sourcing developed close relationships with material suppliers and insisted they meet rigorous standards and frequent delivery. Quality control was tasked with improving product quality control standards, improving the process inspection system, improving the precision of moldedcomponents, improving the quality of product designs, and reducing the plant’s waste. Production and inventory control’s responsibility was to minimize yield and capacity losses. DJC’s goal with respect to their workforce was to gradually reduce direct production workers, support, and overhead staff.

As the processes matured and became more and more automated, fewer direct production workers would be required. American Connector Company’s Sunnyvale facility was divided into five separate production areas: terminal stamping and fabrication, terminal plating, plastic housing moulding, assembly and testing, and packaging. Typically, terminals were cut or stamped, then transported to a holding area to await plating. Concurrently, the mouldingdivision fabricated the plastic housings, which were then shipped to the work-in-process holding area to await plating of the terminals.

Following plating, the batches of housings and plated terminals were shipped to assembly, where most of the units were assembled through an automated assembly process (10% of production we subjected to manual assembly). The completed batches of connectors were then tested and sent to packaging. Packaging incorporated many different methods, from a 10-piece bag to 1500-piece loaded reels. Furthermore, Sunnyvale’s manufacturing was handicapped when production runs were slowed or stopped in order to inject a specialty or custom order.

When the market was good, growing sales allowed ACC to cover carrying costs of the finished goods inventory. This work-in-process inventory also allowed ACC to react quickly to customer’s needs. However, due to increased competition and a deflated market, ACC’s Production Control section was under pressure to lower work-in-process inventory. Sunnyvale’s finished inventory traditionally maintained for an average of 38 days. As a result, various production scheduling methods were implemented. Shorter production runs, while a simple alternative, impacted costs through decreased utilization.

ACC invested $500,000 in a new computer system and software to assist in production scheduling. ACC’s quality had declined over time with defect rates reaching as high as 26,000 per million units produced. These defects did not typically reach the customers as in-house inspection processes ensured these parts never left the facility. Statistical process control measures offered some progress, but defect rates remained high. New products usually experienced yield rates as low as 55% as production began, but typically improved to 98% following one year of production. ACC’s Concerns with DJC’s New Manufacturing Facility

Sunnyvale would be competing directly with Kawasaki’s high volume / low cost products and faces the possibility of losing lower margin, price sensitive customers. A plant modeled on DJC’s Kawasaki production facility has a tremendous manufacturing advantage over ACC’s Sunnyvalefacility. Kawasakimaintained a highly efficient, integrated production facility with meticulously maintained equipment, a low workforce requirement, with fully implemented continuous improvement plans. Furthermore, the Japanese manufacturing philosophy of one defect per million ensures customer satisfaction.

Now, if we consider the difference in raw material costs and electricity due to production inefficiencies, then we will find that only 16% of the manufacturing cost difference is due to the production inefficiencies. However, the Total labour costs(both direct and Indirect) are a direct result of the different marketing and customer satisfaction strategies of the two companies. This accounts for almost 45-50% of the differences in the total manufacturing costs! Also, attached is the sheet showing the major differences between the two facilities and their affects on operations and total costs Plan of Action:

In order for American Connector Company Sunnyvale facility to compete with a locally established DJC facility similar to Kawasaki, they should begin with a review of ACC Sunnyvale’s current corporate objective of competing globally, increasing growth and maintaining profitability. With sales growing from $252 million in 1984 to $800 million in 1991, but gross margins dropping from 52% to 43% during the same period, we recommend ACC Sunnyvale revise their objective from simply maintaining profitability, to focusing on profitability enhancement by increasing gross margins back to 52% within two years.

The actions Sunnyvale must undertake may be categorized into five different efforts: 1) product analysis, activity based costing, and pricing strategy; 2) production line optimization; 3) process reconfiguration; 4) implementation of inventory control measures; and 5) minimization of indirect staff. ACC Sunnyvale should immediately implement an activity based costing system and an aggressive pricing scheme. This first action will involve a thorough examination and measurement of the current processes and their associated costs in order to determine minimum efficient batch sizes.

This data will permit surcharge pricing to be applied to special or custom orders and will outline a plan for minimum order fees. Competitive pricing analysis combined with internal cost accounting will permit ACC to determine which product lines are profitable at current volumes and will determine what customers are willing to pay. ACC’s connectors should be evaluated for any potential optimization as part of the cost analysis. This analysis might uncover complex design features that may be removed or modified in order to reduce costs further.

The data gathered through cost and product analysis will allow for product line optimization. This may lead to elimination of lower profit products which will further reduce SKU’s and the burden on strained production resources. Following product line optimization, the processes may be reconfigured in order to capitalize on efficient production. Sunnyvale should reconfigure their facility with a continuous process batch production line to support non-custom orders and specialization cells to support custom orders.

The continuous batch orders account for 85% of Sunnyvale’s orders and improved efficiency in production will improve product margins. Individual specialization cells will cater to Sunnyvale’s 15% custom order business, for which higher premiums can be demanded. ACC will still be allowed to concentrate on their customers who require specialized services, but in an even more profitable manner. Inventory control measures must be implemented in order to control cost associated with raw material and finished goods inventory, but should be coupled with optimization of the plant layout to ensure a smooth material flow.

This measure will improve margins on the traditionally low margin batch process. The improvements realized through optimization of the product lines, production processes, and inventory control will allow for opportunities to minimize indirect staff. ACC Sunnyvale should follow DJC Kawasaki’s lead and further refine this process through scheduled re-examinationof these steps. This continuous improvement process will further improve efficiency and increase profit margins

Ambush Marketing – ‘An Olympic Event

The Olympic Games is arguably the world’s biggest sporting and cultural event and is commonly referred to as ‘the greatest show on earth’. Each fourth year as the Olympics approach, sponsorship assumes ever greater importance as a marketing communication tool for many companies. Sponsorship has outperformed all other marketing communication tools in terms of growth throughout the 1990s.

The Olympic Games with its huge audience is perhaps the premier place for companies to showcase their brand(s). But an increasing number of corporate contestants find themselves in a gruelling struggle against ambush. Ambush marketing entails: A planned effort by an organisation to associate themselves indirectly with an event in order to gain at least some of the recognition and benefits that are associated with being an official sponsor. ‘Ambushing’ companies are usually the competitors of an official sponsor.

Companies that cannot afford to buy a sponsorship, or choose not to, may be attracted to an ‘ambush’ strategy for defensive and not just offensive reasons. It represents a way to associate themselves with the event but it also represents a way to try to blunt and perhaps even neutralise their competitor’s move in buying up the official sponsorship. Nike – an example Nike is considered the benchmark when formulating and implementing successful ambush marketing strategies for the Olympic Games. Nike has a history of ‘ambushing’ the Olympic Games since 1984.

On each occasion, Nike has successfully associated itself with the popularity of the event and has liquidated its investment in ambush marketing activities via increased sales. Nike ‘ambushed’ Reebok’s sponsorship of the 1996 Atlanta Olympics by strategically blanketing the city’s billboards with its ‘swoosh’ symbol. Likewise, Nike employed this tactic in ‘ambushing’ Converse’s sponsorship of the 1984 Los Angeles Olympics. Given Nike’s history, the Sydney Organising Committee for the Olympic Games (SOCOG) would have been working around the clock to devise strategies to combat Nike’s anticipated ‘ambush’ tactics.

However, the late and sudden withdrawal of Reebok from its $10 million sponsorship of the Sydney 2000 Olympics has seen Nike transform itself from a potential Olympic villain to an Olympic sponsorship saviour. In light of Reebok’s decision, Nike was quick to fill the void created by its competitor and become an official sponsor. Nike marketing executives would have undergone a complete turnaround from devising a comprehensive ‘ambush marketing’ campaign to planning value-added sponsorship leveraging activities.

The prevention of Nike rejoicing in a successful ‘ambush marketing’ campaign for the fifth consecutive quadrennial is one less task Olympic authorities have to worry about. Ambush marketing: cost-effective alternative Ambush marketing is used by companies to intrude upon public consciousness surrounding a sports property Thus, ambush marketers avoid the cost of paying expensive sponsorship fees while gaining the benefits of associating with a sports property at the expense of the sponsor. This renders the practice of ambush marketing as a tempting and attractive alternative to sponsorship.

Ambush marketing tactics allow a company to associate with a major sports property without large-scale investment in securing sponsorship rights, thereby, creating the opportunity to achieve brand awareness and brand image objectives at a low cost. 5 In other words, successful ambushing strategies allow companies to circumvent competitors in achieving communication objectives. At the very least, ambush marketing creates confusion in the consumer’s mind which may deny the legitimate sponsor recognition for its investment.

The adoption of ambush marketing strategies by companies may be aligned to the perpetual rise of sports sponsorship fees, thereby rendering companies financially unequipped to secure the rights to a sports property. The practice of ambush marketing came to prominence at the 1984 Los Angeles Olympic Games when Eastman Kodak employed ‘ambush’ tactics to attack Fuji’s Olympic sponsorship.

Consequently, many consumers mistakenly believed that Kodak was the official sponsor of the Los Angeles Olympics. On a global scale, proactive ambush marketing efforts and debate are also ostensibly prevalent in the beverage (eg Coca-Cola and Pepsi), fast-food (eg Burger King, McDonald’s and Wendy’s), credit card (eg American Express, MasterCard and Visa) and sports apparel (eg Adidas, Nike and Reebok) industries.

The effects of ambush marketing In quite a number of circles, ambush marketing is considered an unethical business practice. It is, therefore, not surprising that companies who execute successful ambush marketing campaigns are hesitant to publicly release information about campaign results. Nothing is gained by deliberately inviting the possibility of a public backlash. While some companies do not deny that they indulge in ambush marketing activity (eg Nike), others strongly object to this description and argue that the timing of their activity was just coincidence and not ambush.

These are just some of the reasons why research on ‘ambush marketing’ is both sparse and difficult. In addition, there are notable problems in evaluating the effects of sponsorship and hence in evaluating the bottom line effects of ambush marketing. It is generally acknowledged that the rapid growth of sponsorship has not been accompanied by a comparable increase in a systematic, coherent body of research and the same can be said of ‘ambush marketing’. In the research that has been conducted, a disturbing number of apparently effective cases of ‘ambush marketing’ have been revealed — enough to ring some early-warning alarm bells.

One study investigated the 1994 Winter Olympics using controlled testing to evalu- ate sponsorship awareness effects on brand attitudes and brand purchase intention. 10 Ambush marketing efforts were reported to have a marked impact on respondents. Only one official sponsor out of four product categories tested demonstrated a significantly higher mean score in relation to the sponsorship’s effect on brand attitude than its ambushing competitor. Moreover, three ambush marketers obtained higher levels of mean brand purchase intention than the official sponsors in their respective product categories.

In another study of the same event, the ‘ambusher’ in the fast food category, Wendy’s, appeared to outperform the Olympic sponsor, McDonald’s, in terms of consumer attitude toward advertising and the brand.  Although, at the same time in the credit card category, the official Olympic sponsor, Visa, appeared to successfully fend off ‘ambusher’ American Express, overall, the findings from those 1994 studies are worrying. They offer evidence that it may be cheaper and more cost-effective for a company to adopt ambush marketing practices than to purchase an official sponsorship package.

Much of the evaluation as to the impact of ambush marketing has been measured in terms of recognition and recall tests (ie sponsorship awareness). On such measures, the effects of ambush marketing appear to have been quite evident at the 1988 Winter Olympics in Calgary. Sandler and Shani  found that in only four out of the seven product categories studied, was the official sponsor able to achieve significantly higher levels of awareness than its ambush marketing competitor.

These results are reinforced by another study that revealed ambush marketers at the 1992 Albertville Winter Olympics were identified as ‘sponsors’ more often than official sponsors that failed to sufficiently associate themselves with the event.  European Soccer Championship also cited evidence of ambush marketing effects.  Nearly a quarter of those surveyed identified Nike as an official sponsor, thereby, achieving for Nike a higher awareness response than five of the official sponsors of the tournament.

Nike’s ‘ambush’ campaign used international soccer players not selected to play in the tournament as well as national soccer teams that were eliminated in the early stages of the tournament.In cases like this, particularly where the ‘ambusher’ is the market leader, a major limitation arises with evaluating ambush marketing solely on the basis of awareness measures.

Incidental ambush may be inherent in research findings because unpremeditated ambushing is frequently recorded due to inaccurate information processing by consumers, hence biasing research findings. This simply refers to the situation where respondents incorrectly identify non-sponsors as official sponsors, despite these companies not participating in any ambush marketing activities. Responses may also be influenced by the market leader ‘owning’ the category itself.  This claim is supported by empirical evidence detailing that non-sponsors may be wrongly mentioned as official sponsors because of their status and position in a given product category.

Nevertheless, on the basis of the limited findings that have emerged so far, the practice of ambush marketing must represent an undeniably, attractive, strategic option to many companies — especially for those who cannot afford sponsorship. So although it is a strategy that is overlayed with ethical questioning, it is clear that it is unlikely to be ignored or eschewed in the competitive battle of the survival of the brands.

Sydney 2000 Olympics In the lead up to the Sydney 2000 Olympics, ambush marketing issues have been in the spotlight already. In Australia, Qantas and the National Australia Bank have been accused of ambushing Olympic sponsors and direct competitors, Ansett Australia and Westpac respectively. Most of the criticism is levelled at these companies signing and using individual Olympic athletes in their advertising and promotion.

By associating themselves with these athletes, there is a smudging of peoples’ nderstanding of what is Olympic sponsorship and who is the official Olympic sponsor. To the extent that it does this and diverts public attention from the official Olympic sponsor, it can devalue the competitor’s official sponsorship investment. Importantly, these ambush tactics are well within legal parameters. The International Olympic Committee (IOC) does not own Olympic athletes and any legal threat from the IOC against the usage of Olympic athletes by non-sponsors would be deemed an infringement upon restraint of trade legislation.

Regardless of SOCOG’s attempts to prevent it, outdoor advertising around Olympic venues provides a tempting opportunity for ambush marketers. Restricting ambush marketing at outdoor events (such as beach volleyball) is especially impossible to control as it is in the public domain. Despite a ‘memorandum of understanding’ with some major outdoor advertising companies outlining that prime outdoor sites be offered to Olympic sponsors before non-sponsors, SOCOG was unable to achieve a legally binding agreement enforcing that sponsors have first right of refusal.

Furthermore, some major outdoor advertising companies explicitly advocated they would not give preference to Olympic sponsors over nonsponsors.  Olympic promotions are undertaken by both individual sponsors (including co-operative sponsorship advertising) and the Olympic authorities such as the IOC and SOCOG. With so many sponsors promoting their Olympic involvement simultaneously, there is high probability of confusion from clutter as well as an erosion of any perceived uniqueness from Olympic association in the minds of consumers. With so many companies in the mental equation, a kind of camouflage is created for the ambush marketers.

Moreover, the recent introduction of virtual signage (ie digital billboards) during particular sports telecasts provides another potential vehicle for marketers to ambush a sports property. Sponsor subcategories within the event and exploit this investment aggressively As exemplified by Kodak and Canon earlier, if a competitor has the major category sponsorship locked up, the ambusher may be able to sponsor a lesser category associated with the event and undertake intensive promotional activity to magnify the extent of its involvement.

Purchase advertising time around relays of the competitor’s event An ambusher can deny a competitor receiving the full benefits of their event or broadcast sponsorship by purchasing advertising time in the slots around television or radio relays of the event (eg commercial breaks). Engage in major non-sponsorship promotions to coincide with the Event Utilise mainstream media advertising and/or below-the-line promotions in order to achieve its marketing communications objectives during the course of the sports event.

Firstly, the sponsor should focus on effectively exploiting and leveraging its purchased association with the sports property. The most successful ambush marketing campaigns arise when a sponsor has left the door open by not properly leveraging its investment.  The benefits of properly leveraging sponsorship is reinforced by empirical research which discovered that sponsors who exploited their sponsorship investment diminished the effects of ambush marketing, while those sponsors who did not leverage their investments witnessed ambush marketing efforts confuse consumers when attempting to identify official event sponsors. Secondly, by sponsoring both the event and the broadcast of the event, the sponsor gains the dual benefit of communicating its sponsorship to both audiences and closes off the opportunity for ambush via the broadcast sponsorship.

This may involve seeking a package where sponsorship of the sports property and the broadcast are bundled together, as a single investment rather than two separate outlays and enabling the sponsor to have a direct contractual relationship with the sports property owner and the broadcaster. In undertaking a broadcast sponsorship, sponsors should seek an arrangement with the broadcaster to prevent competitor advertising before, during and immediately after the event broadcast.

However, as this activity attempts to reduce competitive activity, sponsors must be wary of violating restrictive trade practices prohibitions. A future ambush marketing remedy might entail the design of an integrated sponsorship package which incorporates broadcast sponsorship and advertising. For example, instead of a television broadcaster paying for the television rights of the event, the event owner or the sponsor funds the television broadcast on behalf of the broadcaster in return for advertising space.

This would enable the sponsor to gain exclusivity to both the event and the broadcast. Official sponsors can sometimes bring pressure to bear on the event owners to introduce anti-ambush marketing campaigns. The IOC has introduced such a program. It now takes the practice of ambush marketing so seriously that guidelines, under which proposals are submitted by countries wishing to host the Olympics, must take into consideration the adequacy of the domestic law in guaranteeing the integrity of rights granted to the event sponsors.

This emergence of sponsorship as a promotional tool resulted from a trial and error process31 with companies having to acquire corporate sponsorship ‘know-how’ or expertise through their own experiences. Success in sponsorship can therefore be correlated to a learning curve over time. The growth in sponsorship led to the creation of sports marketing/sponsorship departments within large multinationals and the emergence of a new profession — sports marketing/sponsorship consultants. Also, advertising and public relations agencies have taken to providing their clients with sponsorship advisory services and acquiring established sponsorship consultancies.

For example, the Interpublic Group, after acquiring Advantage International and API Sponsorship Ltd, recently placed the two sports marketing companies under a single division called Octagon which is accessible to clients of agencies within the Interpublic Group’s global network. ) In the 1980s the sponsorship industry was said to be ‘blowing out of proportion’ with companies attempting to outbid one another in securing exclusive sponsorship rights.

If marketers in the 1980s thought that sports sponsorship expenditure was getting out of hand, they would be in for a bigger surprise the following decade. Otker implied that prices paid by companies to sponsor major sports properties had reached a premium in the 1980s and forecast that prices for major sponsorships in the future would stabilise or possibly decrease. A decade later, that estimate has been shown to be highly inaccurate.

From the early 1980s to the turn of the millennium, sponsorship has generated triple-digit and double-digit growth rates vis-a-vis other promotional tools.  The Olympic Games exemplifies the escalation. Individual sponsorship rights for this event have grown from a minimum of $4 million for the 1984 Los Angeles Olympics to a record minimum of $40 million for the 1996 Atlanta Olympics and the forthcoming Sydney 2000 Olympics. The emergence of ambush marketing has followed closely on the heels of the ever-rising costs of securing sponsorship rights. As sponsorship fees demanded by event owners continue to increase, many marketers are forced to look for communication.

An Olympic event alternatives if the sponsorship-asking price is not within reach of their promotional budgets. When put in this position, it should not surprise that ambush marketing makes it into the consideration set of a growing number of marketers. The ethical issue Debate is perpetual whether ambush marketing is ethical, immoral, illegal, an acceptable competitive business practice or simply a creative form of competition. Interpretation of ambush marketing is obviously affected by whether you are a stakeholder in the outcome. Typically, sports property owners and sponsors view the practice as being unethical, immoral and sometimes illegal.

On the other hand, many companies unable to afford sponsorship fees will regard the practices involved as a legitimate form of defensive, competitive behaviour and perhaps even deny that what they are doing is ambush marketing. There can be little doubt, however, that ambush marketing depreciates the value of the official sponsorship by reducing the benefits of the sponsor associating with that event. As such it poses a serious threat to the future of sports sponsorship. It is conceivable that it could financially undermine the future staging of some events if sports property owners find they are no longer able to guarantee the promised benefits to sponsors. Without capital injection from sponsors, it is questionable whether the average taxpayer would be willing to finance many of the current sporting events. So this is a threat to sponsors and ambushers alike.


As sport has become a central element of an emerging global culture, marketers have recognised sports sponsorship as an international communication tool of commerce40 with the capability of providing a vehicle for firms to procure a sustainable competitive advantage. Farrelly and Quester go so far as to suggest that sports sponsorship will become the optimal positioning tool for international marketers seeking to communicate global messages. With sponsorship assuming both increasing importance and cost, it is likely that the presence of ambush marketing activity will not diminish but in fact increase in its application and level of sophistication.

Part of the rise in ambush marketing activity can be attributed to sponsors not being pre-emptive and failing to effect plans to maximise the leveraging capability of their sponsorship investment. In doing so, they leave windows of opportunity open for would-be ambushers. The appeal of the Olympic Games and the audience it lures is a strong incentive for companies to attempt to showcase their brand(s) during this period, either as an Olympic sponsor or non-sponsor. Despite the IOC’s comprehensive ambush marketing prevention programme, the practice of ambush marketing will not be eradicated but will hopefully be minimised. The studies reported here, reinforce the argument that the practice of ambush marketing poses a serious threat to the longevity of sponsorship as a cost-effective promotional tool.

To the extent that ambush marketing succeeds, it risks devaluing official, corporate sponsorships and could conceivably threaten the financial viability of sporting events that are highly dependent on successful sponsorship funding like the Olympics. The forthcoming Olympiad in Sydney is shaping up as the official battleground for the next major war between sponsors and ambush marketers. The outcome of that will not only be important to Olympic competitors and sponsors, but to the marketing industry as a whole.

Marketing The Glacier: Evian

Despite its global success, Danone’s Evian bottled water brand has experienced a decline in sales growth and market share in the U.S. The entry of competing bottled water brands from cola giants Coke and Pepsi, such as Dasani and Aquafina, has caused Danone’s Evian brand to lose 50% of its market share in the U.S.

In 2001, CEO Franck Riboud prioritized improving Evian’s market presence in the U.S., as it only held a 3.5% market share. Thus, enhancing Evian’s future in the U.S. became Riboud’s top priority.

S. Riboud examined the competition from Coca-Cola in the specific market of bottled water in the United States. In an unprecedented move, Danone announced a partnership with this major competitor in April 2002, which granted Coke control over the Evian brand in North America. Analysts from J.P. Morgan stated that this agreement gives Coke exclusive privileges for distributing Evian, encompassing tasks such as promotions, customer marketing, in-store displays, sales through bottlers and food service establishments.

The financial details of the agreement between Danone and Evian were not disclosed. However, Bloomberg reported that Coke has incentives to increase demand based on a target of 5-10% annual sales growth. This could potentially result in a yearly return of $8.5 to $17 million. In 2001, Evian accounted for around 22% of Danone’s U.S. water sales which amounted to approximately $780 million. If the incentives lead to an average sales increase of $12 million, it would represent less than 1% of Danone’s total sales.

In June 2002, Danone also entered into another significant agreement with Coke involving the production, marketing, and distribution of their own branded retail bottled spring and sourced water within the U.S. For example, Danone’s Dannon brand sources its spring water domestically. The terms of this complex agreement are as follows: Danone contributes their retail bottled spring and source water assets in the U.S.

S., including five production facilities, a license for the use of the Dannon and Sparkletts brands, and ownership of several value brands. Furthermore, Coke paid Danone $128 million in cash for a 51% ownership interest and will provide marketing, distribution, and brand management. The agreement is particularly important as it includes volume and profit guarantees from Coke, which require sales volumes to grow in line with the market’s large brands (currently growing at a rate of 20% annually). This ensures a stable market share and guarantees a certain level of profitability. However, it remains uncertain what consequences Coke will face if it fails to achieve this growth target.

J. P. Morgan states that the volume involved is 135 million cases and predicts that the joint venture could generate revenues in the $200 million dollar range. The three main obstacles for Danone in gaining market share in the U.S. are the consumer’s lack of preference for specific water types, challenges in entering cola-controlled distribution systems, and price-sensitivity towards bottled water. In Europe, consumers are more knowledgeable about different types of bottled water and are willing to pay a premium for the Evian brand due to the high transportation costs from the French Alps to the states. Equity analyst estimates show that Evian’s average price per case is approximately 80% higher than Aquafina or Dasani. However, U.S. customers place little value on this premium and prefer to choose cheaper alternatives. Wall Street analysts have debated whether Danone’s deals with Coke will lead to growth for Evian or signal Danone’s unofficial withdrawal from the U.S. bottled water market.

The completion of the Coke joint venture may not have assured Evian’s gain in market share in the U.S. This left Riboud with many questions. How can a CEO deny the need for the U.S. market but still proceed with a major deal in that same market months later? Will the partnership with Coke guarantee success for Danone and Evian? Was this deal a desperate move? Could Danone have pursued a U.S. market strategy independently? How should a CEO handle rumors of future mergers with U.S. food giants like Kraft, in order to create a truly global food services company?

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