Maximillian Lazlo (known as "Max" or "86" to his friends) was the marketing manager for Lazlo Vitamins Pty Ltd. Lazlo made a variety of vitamins and nutritional supplements that it sold to retailers throughout South Australia. Lazlo had been established in Adelaide in 1986 by Max's father, Augusto. The company began life in the back room of the Lazlo's Croydon home. Max's father was a chemist by training, who also had an interest in the use of therapeutic herbs. During the day, Mrs. Lazlo would operate the small tablet-pressing machine and at night, the family would spend several hours packing the vitamins and other herbal tablets into small containers. Augusto sold the vitamins and health tablets in his Chemist shop situated at Bowden in Adelaide's Western suburbs. Max had always wanted to be in the business, during his school years and at University while he did his Bachelor of Science degree. By 1998, demand for Lazlo products grew to the point where Augusto was able to sell the product through three other retail pharmacies in the local area. Over the next five years, Lazlo products were taken up by several retailers. By 2004, Lazlo was selling $2,000,000 of product each year. Of this total, three quarters was Vitamin supplements (namely Vitamins A, B, C (Lazlo's best seller) and Vitamin E. The remainder was mineral supplements or herbal remedies. Lazlo sold seven of these products: Calcium, Zinc, Iron, Magnesium; as well as Glucosamine (thought to be good for human soft tissue), Valerian, and lastly horseradish tablets that were thought to ease hay fever. The Lazlo product line is manufactured in Adelaide's North-West, at a new facility considered to be state of the art. Augusto had always believed in re-investing back into the business, primarily in manufacturing equipment and systems. A team of about 12 staff operated the plant. Lazlo imports raw materials from all over the world, and manufactures the end product under strict supervision from a graduate from UniSA pharmaceutical science degree. Recently Lazlo had purchased new packaging equipment, which, while expensive, helped reduce unit costs and made production runs somewhat faster. Lazlo bought the packaging (containers, etc.) from a local plastics supplier and other paper-based packaging from Amcor. The factory ran on weekdays, 8 am to 5 pm and at approximately 70% of full capacity. The company's small call centre for phone-in orders and customer service was located at the same premises. Two part- time staff run the call centre, which readily copes with incoming enquiries, enters customer orders into a computerized system which tracks the status of the order and generally results in a 90% fulfilment rate within 24 hours. This is considered to be good performance by Lazlo clients. Lazlo has reasonable awareness among SA consumers, more specifically older ones, as indicated by market research. Resellers also consider that the product is good overall, and that the company is sound. Some customers like it because it is SA based, but to many others this is not particularly important. Many consumers perceive Lazlo as a good brand from the point of view of scientific expertise, from Augusto's forays into the media. In the late 1990's and early 2000's Augusto was sought out by local news and current affairs programs on TV and radio, for his extensive pharmaceutical and natural remedy knowledge. But he had not been on 1 All names are disguised June 2014 the airwaves for around ten years, as he entered his seventh decade he felt he could not keep as up to date as before and had less to contribute. Marketing The company split its sales organisation into four sales regions. These were Central, which included the city centre and adjacent suburbs, out to approximately 10 km South; West which was essentially everything West of the city of Adelaide, East which was all suburbs east of the city; South which covered the populated areas south of O'Halloran Hill; and North being essentially what Adelaide people know as the Northern Suburbs. Lazlo does little advertising / sponsorship with an annual spend in 2012 of $45,000. It traditionally places advertisements on morning radio at certain times of year, and co-sponsors a South Australian National Football League team. Sales – in terms of general agreements to stock and sell by Lazlo's principal retailer customers, namely National Pharmacies and the IGA (Independent Grocers) in SA, were negotiated by Lazlo's Account Manager, Gwenyth Strunk. Gwenyth had joined Lazlo just over a year ago and had a fairly long background in sales management with Unilever. She had not dealt with the National Pharmacies group (a national chain) in terms of its NSW and Victorian operations during her time at Unilever, though. These top two customers, National Pharmacies and IGA, both in SA, comprised 80% of Lazlo's total sales. In annualised terms, in 2013 in SA, National Pharmacies bought $1,600,000 worth from Lazlo and IGA bought $800,000 worth. Lazlo's sales to independent health food retailers (bricks and mortar) stores in SA totalled an additional $600,000 annually. It sold to approximately 10 such stores. There were no other significant orders except for an occasional order from the Northern Territory from an old pharmacy friend, for several hundred dollars at a time. Lazlo calculated it had 7% of the SA vitamin and mineral/herbal supplement market. Market-wide, in SA National Pharmacies accounted for 15% of total sales for the product category, it purchased $7.5 million from all suppliers in annualised terms in 2013. The IGA has 5%, and independent health shops (numbering around 60 in SA) have 20% of the market. Other pharmacy chains including Chem-mart and PriceLine sold 20%. The supermarket giants Coles and Woolworths accounted for 18% and 22% respectively in SA. Nationally, these two chains account for about 40% of the category. Coles and Woolworths sell a wide variety of vitamin and mineral products, primarily for brands with national recognition and wide range. More recently they had started to source private-label vitamins from overseas suppliers and planned to roll out more of such product. The grocery industry in Australia had been abuzz with the conflicts in play between these two big retailers and their suppliers of branded products in categories like milk, bread and soft drink, as they placed pressure on price levels and reduced their numbers of manufacturer brands for private label brands. Lazlo had four 'merchandisers' whose job it was to ensure that allocated shelves were stocked with Lazlo product. These merchandisers worked two full working days per week for Lazlo, as they were assigned from an agency who handled merchandising arrangements for similar companies who sold small-value grocery or health products in such channels - such as shampoo, perfume and so on. During customer visits, Max noticed that sometimes the allocated area for Lazlo products was not fully utilised, and that competitor products had taken some Lazlo space. He thought this might be due to the agency merchandisers, who because they were not tied to any particular company, lacked dedication. Max was bemused on occasion when he visited clients by the apparent popularity of fish oil, it seemed that every time he visited a retailer he saw displays and purchasing of this product. He wondered where it all must come from. The logistics for the product must be impressive, he mused, as he knew from experience that retailers were quite sensitive to order delays, and disliked part-order fulfilments in the vitamin/mineral/supplement sector that left them with less than complete displays and stockholding in-store. Lazlo had a good reputation for supply reliability. Consumer behavior Consumers in Australia, like in many other countries, were getting 'fatter' on average each decade. Factors such as office work, good public transport, cheaper cars, more shopping centres and the growing plethora of entertainment options meant many Australians simply do not exercise enough to keep their weight down. Added to that, higher calorie diets and meant calorific intake was simply much higher than the typical Australian's energy burn during a day. Consequently, diseases such as heart disease and diabetes are more prevalent. Australians also love pills – guzzling vitamins, mineral supplements and herbal 'remedies' at a high rate. The growth rate for vitamin sales over the past two years was 4.9% in volume terms. For mineral supplements it was 5.2%. Almost all vitamin and mineral sales was 'over the counter' through pharmacies, supermarkets and independent health shops or small chains. Little was sold online, and that which was tended to be oriented towards people such as bodybuilders or endurance athletes in the forms of protein supplements and questionable 'muscle growth' and metabolism-altering products. Most Australians tended to be fairly brand-conscious in the sense they bought with not too much deliberation from known brands, but also were quite happy to take the recommendation of a retailer's assistant if unsure of the brand to choose. Many Australian families tended to have a 'medicine storage' cupboard stuffed with semi-used cough and cold medicines, various brands of vitamin tablets, analgesics and other remedies. To cater for this appetite for pills, potions and powders, retail outlets such as supermarkets, chemists, and health food chains and stores all sold a bewildering variety of products. The health good chains prided themselves on their superior knowledge and approach, and very much liked the idea of selling well-known products that were nevertheless not available everywhere, so as to differentiate their own stores. Other Issues During his weekly visits to customers in October 2013, several customers pointed out, as they had before, to Max that some new, modern products would be valuable additions to Lazlo's range. Some such products were already very popular, or becoming more popular in all sorts of categories. One that customers were asking about was cholesterol-lowering tablets. Approximately fifteen years ago a pharmaceutical breakthrough had led to the development of a substance called a sterol, that could lower a persons' cholesterol. This product had been offered in margarine spreads for over a decade, and as a drink. More recently, tablets to lower lipids (fats and fatty acids) had been launched by Health-EE. Max pondered these questions as he thought about how to grow the business. He considered an appropriate objective was to increase dollar sales by 10% per year each year for the next two years, but how to do it ? Lazlo had in fact plans to launch its own cholesterol-reducing product based on Augusto's research (since retiring from the company he had been working as a research professor in a University chemistry research centre). The Lazlo product had been through all required government trials and performed at least as well as anything else on the market. He had planned to launch the product locally in January 2013 but didn't quite get to do it. In fact the product was ready and could be on the market at any time, with a cost of approximately $175,000 to finalise production adjustments, packaging, and raw material sourcing. Indeed, Lazlo could make virtually any vitamin or mineral product if it wished to. Lazlo's principal competitors are: Health-EE, a national company with sales of over one hundred and fifty million dollars annually. Health-EE was sold though all major supermarket and pharmacy chains. It had a branch office in South Australia with an account manager and two sales reps, who also looked after merchandising. The cost of a full-time sales rep was similar to about eight equivalent full-time days for an agency merchandiser. Health-EE had high awareness among consumers and was a well-regarded brand. It regularly advertised on television and radio, and sometimes featured in healthrelated TV shows about weight loss. Health-EE offered a wide range of around 40 products including all vitamins from A seemingly to Z, including Vitamin M or Folate which was linked to desirable health outcomes for pregnancy; as well as products such as Selenium, believed to aid sleep. Health-EE recently invested in updating its brand logo making its signature font (a stylized action-evoking font) more prominent with bolder colours and new attractive packaging. Max thought their new look was tacky, but his good friends in the industry joked with him that he tended to be a bit odd in relation to judging artistic aspects of marketing, and that he was at heart more of a scientist. Max really did like the Lazlo branding, featuring a stylish but subtle cursive font with a discreet blue background. Health-EE announced in November that it was planning to launch two new 'macro vitamin' products by June 2014. It would be aggressively looking to expand its presence in its retailers by increasing allocated space. Lazlo wondered what this would mean for his company. While he was reading the daily newspaper, he noticed that IGA was planning to open two new outlets in Adelaide. He wondered if one of them might be closer to the family home as they did not like shopping at the supermarket that was currently close by. Another large competitor was Blackstone. Blackstone manufactured at a facility at Wetherill Park in the outer suburbs of Sydney. As well, it imported oils, mineral supplements and herbal products from Thailand and India. Blackstone, like Health-EE offered a range of at least twenty different vitamin products as well as the principal mineral products that Australians liked. Blackstone had current sales levels of approximately one hundred and ten million dollars around the country. And finally, the third principal competitor was Switz. Switz offered a vast range of health products (over 50 varieties) backed by heavy TV advertising featuring various sports personalities past and present. Switz, despite its European sounding name, was an Australian company with manufacturing in Melbourne and Sydney as well as importing approximately 30% of its product from an array of countries. Switz was somewhat more of a premium brand than Health-EE, Blackstone or Lazlo, with prices approximately 20% higher. Nevertheless the brand enjoyed healthy sales levels. Recent newspaper reports discussed how Switz had vaulted from being a small brand to virtually market leader by over-investing in mass media advertising. That report also put the value of the Australian market at over a billion dollars, but when Lazlo read it, he thought it must include weight loss and other 'health' products (teas etc.) as well as homeopathic and naturopathic remedies with doubtful efficacy. Switz sold approximately one hundred million dollars worth of product nationally in the past year. Apart from those three competitors there were approximately another eight small players with single digit market shares adding up to about seventeen percent of the national market, who variously offered somewhat ranges that were somewhat narrower than the market leaders, of primarily imported products. Later that day, while waiting to catch up with Max, Gwyneth was musing over the fact that her two young daughters had recently been diagnosed with a mild Vitamin D deficiency. The girls' school had a fairly strict policy that children wear hats when outside at School, and applied copious sunscreen when playing sport. Her doctor had recommended a small daily dose of Vitamin D to remedy the situation, and had mentioned that this condition was much more common nowadays that as people became more sun-smart, and also spent less time outdoors, that they lacked the natural sunlight needed for normal rates of Vitamin D production in the body. The doctor joked about Australia being a sunburnt country, but so many people now lacked Vitamin D. Gwyneth read the morning news on her ipad while getting a little impatient for Max, who was running a little late. She read a news story about a government advertising campaign to encourage Australians to lower their cholesterol starting in 2015. Gwyneth had presented an ambitious plan for Lazlo the week before, in which she recommended the company add a new product range – namely, cosmetics. She argued that the manufacturing plant, with some excess capacity, could be readily adapted to make products such as cleanser, skin foundation, moisturizer and mascara. She suggested the Lazlo name and company expertise would be a good match for an entry into the multi-billion dollar cosmetics industry. Cosmetics, as was the case for vitamins and minerals, posed an issue for importers such that product shortages did occur reasonably often due to shipping delays, unloading and customs delays. Gwyneth certainly saw potential for Lazlo to break into this big business as a local producer. Since working at the company, she had been impressed with how things just seemed to work well as a system at Lazlo. Yes, the manufacturing plant was very good, and yes the production, R&D and logistic staff were good, but somehow the total seemed to add up to something much more special than the sum of the separate parts. How someone else could replicate the way in which the various parts of the admittedly small Lazlo business could work so well was beyond Gwyneth. Gwyneth noticed the news story about the Australian dollar settling at around 95 US cents, she knew a friend who had engaged in currency speculation that it would stay above parity with the US dollar – only a year ago it was at about $1.05 US. She wondered just how much money he had lost recently. She shook of these thoughts, as today was meant to be the day that Max would decide whether to invest further money exploring the feasibility of her proposed action. Table 1. Incidence of consumption of vitamins among …. Total population Men age 14+ Women aged 14+ Mothers