Wholesteen Dairy, Inc., produces and sells Wholesteen brand condensed milk to grocery retailers. The overall market for condensed milk is fairly flat, and there’s sharp competition among dairies for retailers’ business. Wholesteen’s regular price to retailers is $8.88 a case (24 cans). FoodWorld—a fastgrowing supermarket chain and Wholesteen’s largest customer—buys 20,000 cases of Wholesteen’s condensed milk a year. That’s 20 percent of Wholesteen’s total sales volume of 100,000 cases per year.
FoodWorld is proposing that Wholesteen produce privatelabel condensed milk to be sold with the FoodWorld brand name. FoodWorld proposes to buy the same total quantity as it does now, but it wants half (10,000 cases) with the Wholesteen brand and half with the FoodWorld brand. FoodWorld wants Wholesteen to reduce costs by using a lower-quality can for the Food- World brand. That change will cost Wholesteen $.01 less per can than it costs for the cans that Wholesteen uses for its own brand. FoodWorld will also provide preprinted labels with its brand name—which will save Wholesteen an additional $.02 a can.
Wholesteen spends $70,000 a year on promotion to increase familiarity with the Wholesteen brand. In addition, Wholesteen gives retailers an allowance of $.25 per case for their local advertising, which features the Wholesteen brand. FoodWorld has agreed to give up the advertising allowance for its own brand, but it is only willing to pay $7.40 a case for the milk that will be sold with the FoodWorld brand name. It will continue under the old terms for the rest of its purchases.
Sue Glick, Wholesteen’s marketing manager, is considering the FoodWorld proposal. She has entered cost and revenue data on a spreadsheet—so she can see more clearly how the proposal might affect revenue and profits.
a. Based on the data in the initial spreadsheet, how will Wholesteen profits be affected if Glick accepts the Food- World proposal?
b. Glick is worried that FoodWorld will find another pro ducer for the FoodWorld private label milk if Wholesteen rejects the proposal. This would immediately reduce Wholesteen’s annual sales by 10,000 cases. FoodWorld might even stop buying from Wholesteen altogether. What would happen to profits in these two situations?
c. FoodWorld is rapidly opening new stores and sells milk in every store. The FoodWorld buyer says that next year’s purchases could be up to 25,000 cases of Wholesteen’s condensed milk. But Sue Glick knows that FoodWorld may stop buying the Wholesteen brand and want all 25,000 cases to carry the FoodWorld private label brand. How will this affect profit?
d. What should Wholesteen do? Why?