Angela Baker, CEO of ACME Birdseed Company (ACME), sat at her desk and thought of the board meeting that was about to start. At the meeting, she would have to make recommendations for what her company should do next. Despite a long record of success, the company faced numerous challenges, and shareholders needed confidence in its future.

History

Baker and her twin brother, Gregory, had founded ACME as a family business in Topeka, Kansas, in 1952. They had both been interested in birds as children. At the University of Kansas, Angela studied biology and Gregory studied mathematics. They both took jobs in Kansas City after graduation, but they hoped to return home eventually to family and friends. When they returned to Topeka, the twins opened a birdseed company.

The Bakers were quickly successful. They found suppliers that collaborated with them so they could provide very high-quality birdseed to consumers. They were able to gather feedback from their local customers, and were gratified to hear that customers thought the quality of birdseed made ACME different and attracted many more birds than birdseed from competitors. Of course, ACME birdseed was more expensive than most competitor birdseeds, but many customers thought the difference was worth it. ACME birdseed came in several varieties that included sunflower, safflower, corn, peanuts, millet, and other seeds and nuts. ACME packaged these ingredients into different recipes so that customers could, at least in theory, express a preference for which types of birds they wanted to see in their backyards by buying one package of seed versus another. Suppliers were not abundant. ACME could choose from less than a handful of large, reliable, affordable suppliers. These did offer very important volume discounts should ACME purchase enough seeds and nuts. All the suppliers were very pleased to work with ACME, as the company was growing fast and buying the highest-quality, highest-margin ingredients. ACME represented good business for its suppliers.

ACME began by selling the birdseed exclusively in pet stores, which retained 40% of the sales price. After beginning in Kansas, ACME quickly expanded from the Midwest to the Northwest, and eventually to the Northeast and the rest of the United States. As pet stores learned of the quality of the product, it made sense for them to offer ACME birdseed to their customers. Sales grew rapidly as ACME expanded geographically.

In 1984, with annual sales exceeding $300 million and annual profit of $12 million, ACME went public with an initial public offering (IPO) of stock. The issuance of stock was successful, and the company raised millions of dollars with which to fuel further growth. Growth focused on two key areas. First, the company was able to sell birdseed in smaller suburban and rural communities, expanding its reach to more of the population. Second, ACME began to sell birdseed to retailers beyond pet stores. Walmart, Target, and Costco all stocked ACME birdseed. By 2010, sales exceeded $1.5 billion. This represented approximately 22% of the total birdseed market, making ACME the dominant player in the industry.

Since 2010

Birdseed consumers were aware of environmental trends, including scientific research demonstrating that climate change threatened birds, and many people were interested in helping by providing food.

Approximately three million people bought birdseed every year, and another two million participated in backyard bird watching. However, the Great Recession severely reduced sales of birdseed, as customers looked to save their incomes and spent 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 birdseed industry. The 2015 Food Safety and Modernization Act included foods for animals, and therefore birds. The primary impact was the addition of inspections to ensure the production of birdseed that was safe and of consistent quality. These inspections added significant cost to the production of the ingredients.

The overall birdseed 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 birdseed remained steady or slowly declined. Furthermore, there was less interest from subsequent generations.

Along with the cost to inspect ingredients, other critical costs, such as labor, shipping, and marketing, had all increased substantially. Because of these trends, ACME shifted from the highest-quality to average-quality ingredients, more in line with competitors. As ACME shifted toward average-level ingredients, suppliers realized lower and lower margins in selling to ACME. This caused suppliers to be less dedicated to ACME and therefore to reduce ACME's volume discounts. ACME became just another customer, albeit a large one, for the suppliers.

ACME had become deeply engaged with philanthropic interests and efforts. Executives and many associates in the company were involved with environmental organizations such as the Audubon Society, Sierra Club Foundation, and American Bird Conservancy. They gave financial contributions and participated in abundant volunteer efforts to promote bird safety and longevity.

Competitive Situation

There had always been competitors in the birdseed industry, including both well-established companies and several new companies. Most of the industry was viewed as a commodity market where there was less opportunity to differentiate based on the product itself. Some of the newer, smaller companies marketed unique and different products, while the larger companies sold a variety of products.

A few of the largest competitors had begun to reduce quality, while flirting with regulatory acceptability, to reduce costs. They were thus reducing prices to the consumer and acquiring more and more market share.

Current State

ACME was not showing strong results. Profits had been dropping for eight consecutive quarters, with a net loss of $14 million in the last quarter. The board of directors was expecting Baker to present several strategic alternatives along with a recommendation for how ACME could restore profitability and increase its stock price over the long term.

Baker and her team had been analyzing the industry, environment, and prospects for the company, and Baker was prepared to make her presentation.

QUESTION

1. How do the various strategic factors influence choices about which direction ACME should pursue? What are the most important problems/opportunities to address?