Question
Red Squirrel Apple Juice (RS)
Red Squirrel Apple Juice (RS) is a cooperative of apple farmers. RS was named after the red squirrel, whose population is declining because of growing numbers of grey squirrels. Originally from North America, grey squirrels are aggressive and take over red squirrels’ habitats. RS’s founders thought that the red squirrel would be a good symbol to reverse the declining popularity of traditional apple juice due to consumer preference for high-sugar American-style beverages. With the symbol, RS aimed to appeal to environmentally aware and health-conscious consumers.
Originally, RS only sold apple juice in bulk to beverage companies. These companies bottle the juice and sell it under their own labels. RS requires these companies to place RS’s logo of a red squirrel on their labels. Although RS only sells to a small number of beverage companies, its logo is on juice bottles in stores across the country.
Awareness of the RS brand grew. The cooperative’s managers recently opened another channel of distribution: direct sales of bottled juice to consumers at the cooperative’s processing plant. RS charges lower prices than stores. The new channel of distribution required capital expenditure for bottling equipment and additional revenue expenditure. RS experienced increased labour and promotion costs, which some farmers complained about.
In recent decades, RS’s home country has experienced rising anti-immigrant sentiment. Some politically motivated organizations have begun to use images of red squirrels to symbolize this sentiment, so some beverage companies no longer want to use RS’s logo on their labels.
Some of RS’s stakeholders are concerned.
a. State two features of a cooperative. [2]
b. With reference to $R S$, explain the importance of branding.[4]
c. With reference to $R S$, explain the difference between capital expenditure and revenue expenditure.[4]
▶️Answer/Explanation
Ans:
a. The main features of a cooperative include:
- An aim is to serve the members of the cooperative/members with a common interest.
- A cooperative is a type of corporation.
- A cooperative has a board of directors or trustees.
- Members of the cooperative have limited liability.
- Cooperatives have democratic or democratically spirited management.
- Legal existence is separate from the members themselves.
- Membership is usually open.
- Surpluses/profit are distributed except when needed for finance.
- The organization will not end if a member dies or withdraws.
- All owners have equal voting rights.
Accept any other relevant feature.
Award [1] for each relevant feature identified up to [2].
Branding is a way for a company to distinguish itself from other organizations. Ideally, it succinctly delivers a message about your product, as RS hoped with the symbol of the red squirrel would symbolize environmental friendliness by reminding consumers of the dangers of invasive species and would symbolize health consciousness, as RS was promoting traditional juice, which has less sugar (and preservatives) than American-style beverages. In this way, RS hoped to build credibility with consumers – any beverage with the RS symbol would be healthy and would remind consumers of the environment. With these features, RS hoped to build goodwill.
Brands, and their symbols, run the risk of taking on a life of their own. Sometimes a famous brand, like McDonald’s, enjoys decades of positive psychological associations but then, as culture and consumer trends change, the brand starts to generate negative associations. Such was partially the case with RS. Originally, the image of the red squirrel was at worst innocuous and at best heart-warming. As anti-immigrant groups co-opted the red squirrel for its own purposes, however, the cooperative faced risks of being associated with anti-immigrant sentiment. Some consumers may now be turned off by the brand as to them a red squirrel may symbolize a political position that they disagree with.
Award [1] if the candidate demonstrates some understanding of branding. Award up to [2] if the candidate demonstrates a clear understanding of the importance of branding but makes no meaningful reference to the stimulus.
Award up to [3] if the candidate demonstrates a clear understanding of the importance of branding and makes meaningful reference to the stimulus, but the explanation is one-sided. Award up to [4] if the candidate demonstrates a clear understanding of the importance of branding, makes meaningful reference to the stimulus, and points out both a benefit of branding and some risks inherent with it.
Maximum award: [4]
N.B. For application, just mentioning red squirrel is not enough. Candidates must link the response to the stimulus (for example, “appeal to environmentally aware and health-conscious consumers”).
Capital expenditure is the purchase of assets whose life exceeds one year. Revenue expenditure is made up of expenses related to the trading cycle: purchasing raw material, processing, inventory, making payroll, etc. With respect to RS, capital expenditure refers to the bottling equipment needed to produce bottled apple juice to sell directly to consumers. RS experienced an increase in revenue expenditures when it started selling bottled apple juice, as it had increased labour costs (presumably to operate the bottling equipment) and increased costs for promotion.
Award [1] for a theoretical understanding of capital expenditure and an additional [1] for reference to the bottling equipment.
Award [1] for a theoretical understanding of revenue expenditure and an additional [1] for reference to increases in labour expenses or increased costs in promotion.
Mark as [2] + [2]. Maximum award: [4].
Question
Office Supplies (OS)
Office Supplies (OS) is a family-owned private limited company that, for 40 years, has operated three retail office supply stores in a small city. OS offers a wide range of office products (such as computer paper and stationery) and office machinery (such as computers and printers). When each store opened, OS purchased the buildings using long-term loan capital. OS’s objective is to have enough profit to finance the company’s working capital and pay annual dividends.
OS has no clear marketing strategy. Traditionally, OS competed with several other office supply stores operating in the same city. The market was not competitive, however, and most customers went to the nearest office supply store. OS’s prices were comparable to those of other retail office supply stores, and the company did little promotion.
Nationally, the retail office supply store industry is declining. Many retail office supply stores have had to close, and new competitors have entered the market, many of which benefit from some or all of the following:
Specialization in particular office products
Economies of scale leading to more competitive prices
Greater convenience, including e-commerce with door-to-door delivery
Like other physical retail stores, OS has seen its sales decline. Gross and net profit margins have fallen. Last year, to ensure enough funds for capital expenditure and revenue expenditure, OS’s board of directors chose not to pay dividends. OS also anticipates the need for additional finance next year. OS’s board is considering changes to the company’s marketing mix in response to new competitors.
a.State two marketing objectives that a company might have.[2]
b.With reference to OS, explain one advantage and one disadvantage of operating as a private limited company.[4]
c.With reference to OS, explain the difference between capital expenditure and revenue expenditure.[4]
d.Discuss possible changes to any two elements of OS’s marketing mix.[10]
▶️Answer/Explanation
Ans:
Marketing objectives include:
attract new customers
enter new market
improve brand loyalty
increase awareness
increase market share
increase profit
increase revenue
increase sales
retain existing customers.
Accept any other valid marketing objective.
Award [1] for each objective identified up to a maximum award of [2].
a.
Advantages of operating as a private limited company include:
Compared to sole traders and partnerships, private limited companies typically can raise more capital.
Control of the company cannot be lost to outsiders.
Members of the board of directors, many/most of whom are major shareholders in the company, can make decisions with fewer concerns about shareholder and/or market reaction.
Owners have limited liability.
Private limited companies do not have to disclose fully their financial information.
The business continues if one of the owners dies.
For OS, one advantage to operating as a private limited company is that OS could make changes in dividend policy without affecting perceptions of the company in the marketplace. When OS realized that it needed to preserve cash, it suspended dividend payments for one year and said it possibly would for a second year. When a publicly traded company lowers or eliminates dividend payments to preserve cash, the share price typically falls, sometimes significantly, which can make capital sufficiency issues even worse.
Disadvantages of operating as a privately limited company often include:
If a shareholder wants to sell their shares, finding a suitable buyer may take time.
Often (though not always) private limited companies are relatively small organizations which possesses lesser expertise than large, publicly traded companies.
Opening a private limited company takes time and has some legal expenses.
Private limited companies cannot sell shares to the public, thus limiting the amount of capital than be raised.
Profits have to be shared with more people/owners compared to a sole trader or most partnerships.
OS is currently facing a difficult moment, as its industry is changing, a situation that has led to a decline in sales and a contraction of margins. As a private limited company, OS may not have the expertise to face this situation. Currently, the company has no real marketing strategy and may not have the marketing expertise to make appropriate adjustments.
Additionally, many potential adjustments OS may make will require capital, which, as a private limited company, OS has lesser access to than if it were public.
Mark as [2 + 2].
Award [1] for identification of an advantage and an additional [1] for an explanation thereof with application to the stimulus.
Award [1] for identification of a disadvantage and an additional [1] for an explanation thereof with application to the stimulus.
Maximum award: [4].
b.
Capital expenditure refers to any expenditure for assets with a life of more than one year. The stimulus refers to three instances of capital expenditure in the company’s history: each time OS purchased a building location.
Revenue expenditure refers to those expenses that will be accounted for fully in the year in which the expense occurs. In the case of OS, revenue expenditures mention in the case are expenditures for inventory.
Mark as [2 + 2].
Award [1] for an explanation of capital expenditure and an additional [1] for an explanation with application to the stimulus.
Award [1] for an explanation of revenue expenditure and an additional [1] for an explanation with application to the stimulus.
c.
Refer to Paper 2 markbands for 2016 forward, available under the “Your tests” tab > supplemental materials.
Ways that OS could modify its marketing mix to match and compete with the new competitors.
Product: Changing its product range (either contracting or expanding its product range).
Price: Adopting a different pricing strategy.
Place: Modifying its distribution strategy to include e-commerce.
Promotion: Initiating a more aggressive promotion strategy.
For each of the four Ps, OS could make modifications. Modifying each has advantages and disadvantages. For example, contracting its product range could give the organization more focus and require lesser investment in stock. On the other hand, assuming that OS process its products properly, each inventory item makes some contribution to fixed costs. Further, any termination of a product line means that customers for that product, however few, will have to go to a competitor for that product.
OS could modify its prices, particularly try being more aggressive with its pricing. Whereas that may attract more customers (advantage), margins will be thinner.
An ecommerce shift with a door-to-door aspect will change OS’s supply chain considerably. Time and resources will need to be devoted to this task
There is a sense that OS is a traditional business and new aggressive forms of pricing and promotion will be required. Will they know how to do the latter? Do they need to introduce a social media campaign backed up with a membership or loyalty programme?
Candidates are expected to provide a conclusion with a substantiated judgment.
Grade according to the paper 2 markbands for May 2016 forward.
For one relevant modification to the marketing mix that is one-sided, award a maximum of [3].
For two relevant modifications, but the discussion of both is one-sided, award a maximum of [4].
For two relevant modifications, one treated in a balanced way and another in an unbalanced way, award a maximum of [5].
For two relevant modifications, both treated in balanced ways, but no real conclusion, award a maximum of [6]. Conclusions must be more than nominal (for example, when a candidate opens a final paragraph with “In conclusion . . . “ but then has no real conclusion), award a maximum of [6].