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Acli-mate Case Preview

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ACLI-MATE® FORMULATIONS
PART A

INTRODUCTION


Rob Strickland, marketing manager for Acli-Mate® Formulations, LLC (Acli-Mate), of Gunnison, Colorado, is approaching your management team for advice. Rob is responsible for the sales and marketing of the company's energy supplements. Established in 2006, Acli-Mate distributes sports drinks that feature natural ingredients to promote optimal performance and recovery for athletes and others in high altitudes, such as the mountains of Colorado. The Acli-Mate products are the innovation of Dr. Roanne R. Houck, a naturopathic medical doctor who developed this natural remedy for altitude sickness and improved energy at elevation for use in her clinic. Regional marketing and distribution through acli-mate.com and retail outlets began in 2009, with unit sales doubling yearly.

The company states: "Our vision is to be a 'household' name amongst skiers, sportsmen, mountain athletes, recreationalists, and mountain travelers as the mountain sport supplement of choice." To fulfill this objective, Rob feels that the company's products need to appeal to a broader market. Pressure is increasing from customers, the distribution channel, and sponsored teams to provide products in more outlets, with packaging alternatives and lower prices. Rob wants to propose an aggressive strategy for expansion that will fit the company culture and mission. Knowing how complex this business decision is for a sports nutrition company, he has asked your team for recommendations for a growth strategy that would be acceptable to all parties.

COMPANY BACKGROUND AND CULTURE

Acli-Mate® Formulations, LLC, incorporated in 2006, produces natural energy drinks and acclimatization supplements. Its first product was a sports drink targeting mountain visitors, travelers, recreationalists, athletes, other mountain and outdoor enthusiasts, kids, seniors, runners, hikers, and skiers. It was formulated to prevent, decrease, and eliminate symptoms of altitude sickness, including fatigue, headaches, nausea, vomiting, dizziness, muscle cramping, insomnia, elevated blood pressure, shortness of breath, water retention, and dehydration. In 2011, the company introduced a new Acli-Mate® Mountain Sport Drink flavor and a natural performance sports drink for athletes named Acli-Mate® Endurance Sport Drink.

The company has four employees responsible for product development, sales, marketing, and community outreach. Support functions, such as accounting, are provided through contract services, and sales people are commission-based. The office atmosphere is that of a family – open doors, shared office space, and casual attire. It is common, for example, for the accounting contractor to bring baked goods for the staff. As a small company, all of the employees are encouraged and expected to contribute input in most strategic decisions.

Acli-Mate's mission is to provide a family of natural sports drink and supplement products for the health-conscious athlete, sportsman, and mountain traveler, as well as the average individual of any age, while embracing and striving for economic, social, and environmental sustainability. Its mission relates to business practices that allow the company to remain a viable enterprise. The economic dimension of the mission represents the financial impact of the organization and includes the sales of products, profits paid to investors or reinvested into the firm, and taxes paid. The environmental dimension centers on reducing waste that fills landfills and pollute waterways, reducing energy and complying with environmental regulations. The social dimension focuses on the influence the company has on people and includes respect for employees, customers and suppliers. Demonstrating its commitment to the community, Acli-Mate donates a portion of profits to support small businesses in Gunnison County. The company also sponsors local, state, and national organizations promoting athletic and recreational events.

Gunnison is a high-altitude area that depends on tourism dollars. Dr. Houck saw an opportunity to help businesses that suffer because of the ill effects of altitude on mountain visitors. The economic impact of the outdoor recreation industry in rural communities goes beyond retail sales and services. The industry creates jobs and provides state and local tax revenue. According to a 2006 Outdoor Industry Foundation report, outdoor recreation contributed $730 billion annually to the U.S. economy, including the ripple effects of jobs, tax revenue, and retail sales.[1] In the Mountain Region (Arizona, Colorado, Idaho, New Mexico, Montana, Utah, Nevada, and Wyoming), the snow-based recreation alone provides a total economic impact of over $10.5 billion dollars.

In 2003, Acli-Mate was trademarked, and the first Acli-Mate Mountain Sport Drink formulation was ready for product testing. After extensive studies of patients using the product, the formula evolved to what is marketed today. The company, Acli-Mate Formulations, began as a partnership between Dr. Houck and business entrepreneur Mark Pike. In 2009, thirteen investors provided the capital needed to fund marketing and distribution beyond Gunnison. The business plan projects a return within five years, with the reinvestment of earnings into business growth.

COMPANY PRODUCT OFFERINGS AND MARKETING

Acli-Mate products are powder mixes available in plastic tubs and individual-serving packets. One serving mixes with 10-12 ounces of cold or hot water. All products are made with high-quality, natural ingredients and are free of high fructose corn syrup, gluten, caffeine, soy, dairy, egg, yeast, artificial colors and flavors, and preservatives. Nutritional information is provided in the attachment.

With 35 calories per serving, Acli-Mate Mountain Sport Drink has only 8 grams of sugar per serving, compared to 14 or more grams of sugar in other popular sports drinks. It is available in three flavors: Colorado Cran-Raspberry, Elevation Orange, and Mountain Grape. Individual-serving packets are sold for $1 each or $27.99 for 30 packets. The 30-serving tubs sell for $25.99 each.

Acli-Mate Endurance Sport Drink has 80 calories and only 10 grams of sugar per serving and is available in an Orange-Mango flavor and Colorado Cran-Raspberry. Individual packets are $23.88 for 12, and a 35-serving tub is $31.99.

Currently, the Federal Drug Administration (FDA) classifies all of the Acli-Mate products as nutritional supplements rather than beverages. How a product is categorized dictates how it is regulated – regarding product labeling, health and nutrient claims, and food additive approvals. The validity of nutritional supplement product health claims are the responsibility of the manufacturer. Dr. Houck realized that consumer trust in label claims of sports nutrition products is essential, and sought an independent clinical trial to substantiate her research. However, the cost of such a trial is prohibitive for a small start-up company. Therefore, Acli-Mate relies on testimonials as substantiation for its claims.

The target market for Acli-Mate includes skiers, sportsmen, mountain athletes, recreationalists, and mountain travelers of any age. This includes amateur and professional athletes, who are held to strict anti-doping enforcement. Dr. Houck is proud that Acli-Mate's products do not include substances banned by the National Collegiate Athletic Association (NCAA). Sponsored team websites identify the ingredients as "all NCAA approved". The company is not aware of an independent, third-party certification that its products are free from banned substances, undeclared ingredients, and unsafe levels of contaminants.

Acli-Mate does not spend money on advertising, but uses publicity through trade magazine reviews, tasting events, sponsorships of local and regional sports events and teams, and athlete endorsements. The company also supports a non-profit organization that provides children in sub-Saharan Africa with medications, medical equipment and supplies, food, and training. Word of mouth attracts new customers through a Facebook page and a referral coupon program. Acli-Mate is also available as a product for an online affiliate-marketing program in Boulder, Colorado, called Performance-Based.com. In an online context, affiliate marketing refers to programs in which retailers pay a commission to web publishers when a sale is completed. Acli-Mate chose to offer its products on the Performance-Based.com website since it is "an affiliate network that focuses on green, eco-organic, sustainable merchants." [2]

Acli-Mate products are available directly from the company and through specialty retail locations in Colorado, California, Texas, Oregon, and Utah. Other than Rob Strickland, no other sales staff are employees of Acli-Mate® Formulations. Most sales are through commissioned sales contractors or brokers. Acli-Mate products are now available in the nutrition sections and at checkout counters in grocery stores such as Whole Foods. The outdoor retail industry includes specialty stores, core chains such as REI and Cabela's, and online retailers. In 2011, the outdoor retail industry generated almost $6.2 billion, an increase of 9 percent over 2010.[3] Core chains and online retailers experienced the greatest growth in 2011. The sales per venue for Acli-Mate products in 2011 are:

In-House Reps (selling to specialty shops) 50.5%
Google (online orders) 27.5%
Phone Orders 9.4%
Grocery 9.2%
Outdoor Retail (e.g., REI, outdoor sports stores) 3.3%
Facebook 0.1%

Initially, Acli-Mate production was based solely in Colorado – first at a now-defunct processing plant in Colorado Springs and then at a local Gunnison facility. Dr. Houck said, "We wanted to use local businesses as much as possible to contribute to the local economy." However, as sales increased through retail outlets, pressure for pricing concessions forced a change in the production source. The company found it more economical to move production to a larger nutritional supplement manufacturer in California, saving approximately $3 per unit in the cost of goods. Additionally, the plant is certified for anti-contamination in its mixing facilities. Raw materials arrive at the plant, which tests for purity. A July 2011 press release states "Acli-Mate® has also improved packaging and manufacturing processes to meet consumer demand, strict quality standards and rapid company growth."

Packaging is provided by another California company that offers savings in cartons through an Asian supplier. Packaging includes plastic seals for repelling moisture and a tamper-proof seal ring. The company is proud of the post-consumer recycled material in the boxes and #2 recyclable plastic tubs that buyers are encouraged to recycle after use.

Currently, packaged products ship in cartons to a warehouse owned by Acli-Mate. Typically, six months' sales inventory is on hand. When larger orders occur, the manufacturer will be able to drop ship products directly to major distributors.

INDUSTRY BACKGROUND

Acli-Mate competes in two industry categories – one relating to nutritional supplements and one relating to energy and sports drinks. Sports nutrition is a sub-category of the dietary supplement industry that has evolved from a niche category distributed through specialty retailers and gyms to mass-market retailers. In 2010, sports nutrition supplement sales were $3.6 million in the specialty channels and $7.3 million in mass retailers. As a leading industry journal reports, “Sports nutrition products are not just for bodybuilders and serious athletes anymore. The appeal has broadened to a more general, active audience – soccer moms, fathers-on-the-go, weekend warriors – who wants to increase energy, improve physical and mental performance, and simply stay in shape."[4]

However, the sports supplement industry has generated considerable controversy. Under the Dietary Supplement Health and Education Act (DSHEA) passed by Congress in 1994, products not claiming to treat diseases could potentially be sold without proof of effectiveness or safety. According to the FDA website, claims that can be used on dietary supplement labels fall into three categories: "health claims, nutrient content claims, and structure/function claims. The responsibility for ensuring the validity of these claims rests with the manufacturer, FDA, or, in the case of advertising, with the Federal Trade Commission."[5]

Acli-Mate products also compete in the industry of energy drinks, sports drinks, and health and nutritional drinks. These products include beverages designed to replace electrolytes and other nutrients lost during physical activity, as well as drinks with increased amounts of sugar or caffeine designed to boost energy levels. Companies that make beverages enhanced with vitamins and other nutrients, as well as powdered drink mixes, are included in this industry. The category had declined in 2010 but experienced a 14.9 percent increase in the first quarter 2011.[6] U.S. retail sales are more than $3.9 billion. Powdered mixes represent $63.5 million of the sports drink category sales, yet they are not experiencing the growth of bottled products. The leading brand, Gatorade's Propel®, reported a decrease of 10.6 percent in powdered mix sales.

Products in this category may be classified as beverages for FDA regulation under the criteria established in the 2009 Guidance for Industry: Factors that Distinguish Liquid Dietary Supplements from Beverages, Considerations Regarding Novel Ingredients, and Labeling for Beverages and Other Conventional Foods. According to the draft guidance, the FDA considers "a liquid product's name, packaging, serving size, and recommended conditions of use, as well as other representations about the product, to be important determinants of whether the product is represented as a conventional food and may not be marketed as a dietary supplement."[7]

Production and packaging of any dietary supplement, drug, or food product present potential dangers of contamination. Voluntary recalls of food and drugs in the United States include the presence of listeria or salmonella, incorrect labeling, foreign bodies such as plastic fragments, and elevated levels of mold from raw material or production/packaging sources. Manufacturers and distributors of potentially hazardous products are expected by the FDA to cooperate in expediting recall activities.

The marketing of sports nutrition products is big business. Gatorade® and PowerAde® are the leading brands, and their parent companies – Pepsi and Coke, respectively – contribute to the widespread marketing of sports nutrition drinks through paid advertising, sports sponsorships, and distribution agreements with major sports venues. Gatorade and other niche brands are developing products to create awareness of more reasons to consume sports drinks than hydration during sports and athletic activities. Newer formula claims include "linked to supporting muscle recovery," "to reduce inflammation," and "aiding hydration." While these claims generate revenue from a new market, the actual benefit to the consumer is questionable. One critic states: "The emotional appeal of recovery drinks is likely to exceed the actual need for these products, as the average American workout is only 40 minutes in length. That means true recovery needs are likely to be limited to a small audience."[8]

The marketing of sports drink and energy drinks to children and adolescents is scrutinized by parents, health organizations, athletic organizations, and schools. In the sports nutrition category, the words sports drinks and energy drinks are often used interchangeably, although there are significant differences between them. This bundling of sports nutrition products creates inherent conflicting conclusions regarding the suitability of these products for children.[9] On the positive side, sports drinks can influence the success and safety of young athletes. "Because children will voluntarily drink more of a carbohydrate-electrolyte sports drink (either commercial or homemade) compared to drinking plain water, providing sports drinks to young athletes to consume before, during and after sports significantly reduces the risk of dehydration which can lead to heat illnesses."[10]

However, a study from the University of Chicago shows that sports and energy drinks increase the risk of seizures, diabetes, and behavioral disorders in children. It finds that "youth-aimed marketing and risk-taking adolescent developmental tendencies combine to increase overdose potential."[11] Other consumer organizations suggest that the sugar in most sports drinks impacts dental health and contributes to childhood obesity. With sports drink sponsorship of youth sport organizations a common practice, studies show that the sponsorship of children's sports by companies selling unhealthy food products may contribute to poor food preferences and eating habits.[12]

CURRENT SITUATION

As Rob reviews the current situation in sales and distribution, he has identified some potential opportunities, as well as risks, that need to be considered as the company grows.

As a result of marketing campaigns, Acli-Mate is growing in popularity among amateur athletes. While feedback from customers is generally very positive, the company is seeing more comments like "Hard to find, no bottled or pre-made drink." Currently, Acli-Mate products are marketed as energy supplements (powder mix) that may be prepared hot or cold, meeting needs of year-round sports. Should other forms of the product be marketed? Additionally, some consumers remain skeptical about product claims: "When I used Acli-Mate I didn't feel more hydrated but I absolutely did not feel as tired or fatigued." How can the company build trust with its customers relating to benefits of the product?

Acli-Mate promotes the benefits of the Mountain Sport Drink for children on its website, along with recipes for popsicles, grape and orange smoothies, and snow cones. Sponsorship opportunities typically focus on regional adult or teen athletic teams and events. Should the company consider sponsorship of national youth sports programs? Should it focus on youth sports programs to educate young people about proper hydration and recovery?

Given the relatively flat growth in the sports and energy supplemental drink mix market, health risks of competitive energy drinks, potential regulation of energy supplements, and pressure from customers for new products and packaging, the Acli-Mate owners are looking for a recommendation on an optimal growth strategy for the next three years. This strategy should allow the business to increase responsibly within the financial limits of a start-up company. As an experienced management consulting group, your task is to present to them an acceptable plan.

Dr. Tracy Gonzalez-Padron, Assistant Professor of Marketing and International Business, University of Colorado Colorado Springs, wrote this case with the approval and collaboration of Dr. Roanne Houck of Acli-Mate® Formulations, LLC.

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