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The Problem with Snapple, Part I

CEO William D. Smithburg of Quaker Oats purchased Snapple for $1.7 billion in 1994. In 1997 Smithburg sold Snapple to Nelson Peltz for $300 million, reported a $1.11 billion quarterly loss, and resigned from his position as CEO (Hartley, 2005). Smithburg’s decision to purchase Snapple was not based on solid financial reasoning or research, but an egotistical hunch that he could turn Snapple around as he had done with Gatorade. By acquiring the already declining Snapple, Quaker Oats was forced to spend the next few years trying to salvage what was left of a company with too much market competition and an outdated production system. In the end, Smithburg proved to be a socially irresponsible manager whose duty to uphold Quaker Oats’ profits was less important than (dis)proving his own managerial superiority.

Do you think Snapple could have been turned around?

No I do not think Snapple could have been turned around once it was purchased by Quaker Oats for two reasons, neither of which have to do with the very high price of its acquisition. First, Snapple iced tea sales were already lagging at the time of purchase. The main reason for this lag was increased market competition by firms such as Coke, Pepsi, and Lipton, who were able to manufacture and sell similar drinks for lower prices than could Snapple (Hartley, 2005). Because Quaker Oats could not eliminate this competition, and had no concrete plans of how to make Snapple drinks more appealing to consumer after the purchase of Snapple other than to pair it with Gatorade, Quaker Oats’ other popular drink, there was no reason to believe that Snapple sales would or could rise in the future. Second, the production and distribution system of Snapple was not thoroughly investigated before its purchase (Hartley, 2005). This meant that Quaker Oats had very little information regarding the costs associated with producing Snapple, making it nearly impossible to correctly gauge its profit/cost ratios, or what would be needed to streamline the production of Snapple to lower its overall production costs. Taken together, these reasons show that Quaker Oats had no idea how it would make Snapple profitable from either the demand side (by eliminating or stemming market competition) or the supply side (by lowering production costs).

Do you think the premium retail price for Snapple was a serious impediment?

Yes, I think the premium price of Snapple was a very serious problem that ultimately brought about its demise. When Snapple was first introduced into the market it was the only flavored iced tea drink of its kind, making its premium price sustainable. However, as other companies began producing similar drinks that could be substituted for Snapple, the only choice Snapple had to remain competitive would have been a reduction in price. Basic supply and demand dictates that as supply rises and demand is held constant, the equilibrium price of a good will fall, and any company continuing to sell at above market, or premium, prices will eventually be forced out of the market completely (Mankiw, 2007). Because Snapple chose to keep its prices above that of the market equilibrium (perhaps due to its high production costs), its sales decreased, and it became obvious that they could not rely on consumer brand loyalty to keep sales up and the company profitable.

This post first appeared on Business Now - A Gen Y Perspective, please read the originial post: here

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The Problem with Snapple, Part I


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