Strategy and Strategic Factors at Montego Dog Food Company

Peter Smith, CEO of Montego Dog Food (MDF), sat at his desk and thought of the board meeting that was about to begin. At the meeting, he would have to make proposals for what his company should do next. Despite a long record of achievement, the company faced numerous challenges, and shareholders needed certainty in its future.

The History of the Company
Smith and his twin brother, Gregory, had founded MDF as a family company in Johannesburg, Gauteng, in 1962. They had both been interested in dogs as children. At the University of Pretoria, Peter studied biology and Gregory studied mathematics. They both took jobs in Tshwane after graduation, but they wished to return home eventually to family and friends. When they returned to Johannesburg, the twins opened a dog food business.

The Smiths were quickly successful. They found suppliers that cooperated with them so they could provide very high-quality dog food to customers. They were able to gather feedback from their local customers and were delighted to hear that customers thought the quality of dog food made MDF different and drew many more clients than dog food from competitors. Of course, MDF’s dog food was pricier than most competitor dog food, but many customers thought the distinction was worth it. MDF dog food came in several variations that included chicken, beef, pork, lamb, venison and several blends of these ingredients. MDF packaged these ingredients into various recipes so that customers could express a preference based on the types of dogs they owned by buying one pack of dog food versus another.

Suppliers were not plentiful and MDF could choose from less than a handful of large, reliable, inexpensive suppliers. These did offer very significant volume discounts should MDF buy enough meat and other ingredients. All the suppliers were very happy to work with MDF, as the company was expanding fast and buying the highest quality, highest margin ingredients. MDF embodied good business for its suppliers.

MDF began by marketing the dog food exclusively in pet stores, which retained 40% of the sales price. After starting in Johannesburg, the company quickly expanded from the Gauteng province to the North West, and ultimately to KwaZulu-Natal and the rest of South Africa. As pet stores discovered of the quality of the product, it made sense for them to offer MDF dog food to their customers. Sales grew rapidly as MDF expanded geographically.

In 1994, with annual sales exceeding ZAR 300 million and annual profit of ZAR 12 million, MDF went public with an initial public offering (IPO) of stock. The issuance of stock was successful, and the company raised millions of rands with which to fuel further growth.

Growth focused on two key areas. First, the company was able to sell dog food in smaller residential and rural communities, expanding its reach to more of the population. Second, MDF began to sell dog food to retailers beyond smaller pet stores. MACRO, Pick n Pay, and Checkers all stocked MDF. By 2010, sales exceeded ZAR 1.5 billion. This represented approximately 22% of the total dog food market, making MDF the leading player in the industry in South Africa.

Since 2010
Dog food consumers were aware of environmental trends, including scientific research indicating that climate change threatened some rare dog breeds, and many people were interested in helping by providing food.

Approximately two million people bought dog food every year, and another one million participated in dog shows around the country. However, the Great Recession severely reduced sales of dog food, as customers looked to save their incomes and spend discretionary money elsewhere. The industry had not yet recovered from this dip in sales.

Regulatory changes that affected food consumed by people across the country also caused ripples in the dog food industry. The 2015 Animal Food Safety and Modernisation Act included foods for animals, and therefore dogs. The main effect was the addition of inspections to ensure the manufacture of dog food that was safe and of reliable quality. These inspections added considerable cost to the production of the dog food and its ingredients.

The overall dog food industry had grown slowly, even before the Great Recession. The dominant customer segment consisted of baby boomers (born 1944 – 64), and this had not changed over the past decades. As these customers aged and retired with fixed incomes, their demand for dog food remained steady or slowly declined. Additionally, there was less interest from successive generations.

Along with the cost to scrutinise ingredients, other crucial costs, such as labour, shipping and marketing, had all increased significantly. Because of these trends, MDF shifted from the highest quality to average quality ingredients, more in line with competitors. As MDF shifted toward average level ingredients, suppliers realised lower and lower margins in selling to MDF. This caused suppliers to be less devoted to the company and therefore to reduce MDF’s volume discounts. The company became just another customer, albeit a large one, for the suppliers.

Montego had become deeply engaged with charitable interests and efforts. Executives and many associates in the company were involved with environmental organisations such as the SPCA and the Four Paws Society. They gave financial donations and participated in volunteer efforts to encourage dog safety and longevity.

The Competitive Situation
There had always been competitors in the dog food industry, including both well established companies and several new companies. Most of the industry was perceived as a commodity market where there was less prospect to differentiate based on the product itself. Several of the newer, smaller companies marketed distinctive and different products, while the larger companies sold a variety of products.

A few of the largest competitors had begun to decrease quality, while flirting with regulatory acceptability, to reduce costs. They were therefore decreasing prices to the consumer and gaining more and more market share.

The Current State
MDF was not showing strong results. Revenues had been dropping for eight consecutive quarters, with a net loss of ZAR 12 million in the last quarter. The board of directors was expecting Smith to present several strategic alternatives along with a proposal as to how MDF could restore profitability and boost its stock price over the long term.

Smith and his team had been analysing the industry, environment and prospects for the company, and he was prepared to make his presentation.

Question 1

Discuss the various strategic and strategic marketing factors that the company has faced in the past and is now facing in the present. For each factor you identify, discuss the current situation, the trend, and the potential impact on the company. (25)

Two (2) marks each will be awarded for any 10 correct strategic and strategic marketing factors that are identified that the company has faced in the past and is facing today. A brief introduction and conclusion is required. Interpretation of the content is required and encouraged on the part of the student.

Answers to Above Questions on Digital Marketing

Answer 1: There are a significant number of strategic marketing factors that are faced by Montego Dog Food, and they have directly affected the performance of the company. One such strategic marketing factor is quality focus with respect to dog food that differentiate it from others. Because of this differentiation, the company has also charged premium prices for its products. But recently the company has started using average quality ingredients in order to compete with other brands in the market. Another such strategic marketing factor is…