Sweet leaf bath co case analysis

9B13A044 SWEET LEAF BATH CO. Melissa Jean wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2014, Richard Ivey School of Business Foundation Version: 2014-01-27

It was January 2012 when Rose Creamer and Stacey Guymer, partners of Sweet Leaf Bath Co. (Sweet Leaf), had just finished mixing another batch of their handmade rosemary mint soap in the company’s production facility located in Creamer’s basement. The partners took a well-deserved break and began their review of Sweet Leaf’s 2011 financial statements. The statements confirmed that the company had experienced minimal sales growth over the past year and the partners decided that they needed to develop and implement a new marketing strategy that would enable them to grow their business. They wanted to formalize their strategy, specifically their distribution plans and promotion efforts, with the hope of growing sales to a level that would allow Guymer to return to the company on a full-time basis. COMPANY HISTORY The mother-daughter team had operated their bath and body products company out of Creamer’s St. Mary’s, Ontario home since 2007. The idea for Sweet Leaf originated from the pair’s weeknight hobby of making homemade soaps in Creamer’s kitchen. They loved to spend quality time together experimenting with different ingredients and recipes to create products for their personal use. Soon the pair began selling their high-quality, unique products at craft shows and exhibitions. Eventually those efforts led to sales through local retailers who were anxious to carry their line. Through these initial sales channels, the partners learned more about the bath and body industry and the international issues surrounding the sourcing of many raw ingredients used in their products. Both women were committed to creating products with ingredients that were ethically sourced and environmentally sustainable. It was at this point that the company decided to purchase as many raw ingredients as possible through fairtrade1-certified producers and to seek certification of as many of their products as possible through an organization known as Fairtrade Canada. According to the company, Sweet Leaf was one of

1 “Fair trade (also known as “fairly traded”) refers to the broader concept of fairness and decency in the marketplace, whereas “fairtrade” refers to the specific fair trade certification system run by Fairtrade International (FLO) and its members, including Fairtrade Canada. When speaking generally about the concept, it is best to use “fair trade.” When speaking specifically about the FLO system, use “fairtrade” (“fairtrade certified products,” “fairtrade certification standards,” etc.).” From “What is Fair Trade?” Fairtrade Canada, www.fairtrade.ca/en/about-fairtrade/what-fair-trade, accessed May 22, 2012.

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Page 2 9B13A044 only two bath and body product manufacturers in Ontario and one of eight bath and body product manufacturers in Canada whose products were certified through Fairtrade Canada. Initially, neither partner worked outside of the business. Creamer was a retired business manager of a large firm and Guymer was raising her two young children after taking some time off from her studies in aromatherapy, reflexology and herbology. In the summer of 2010, Guymer reluctantly reduced her workload at Sweet Leaf to part-time and took a full-time position outside of the company in order to contribute to her young family’s financial needs. It was estimated that sales would need to be in the CDN$150,000 to $200,0002 range in order to allow Guymer to withdraw the compensation she needed to leave her full-time job (see Exhibit 1). INDUSTRY OVERVIEW The notion of “green” products was firmly ingrained in consumer packaged goods offerings and in the minds of consumers (see Exhibit 2). “Green” claims referred to products labeled as “environmentally friendly packaging,” “environmentally friendly product” or “carbon neutral.” “Natural” and “organic” were other terms used on a wide variety of product labels. According to the Natural Products Association, “natural” products contained ingredients originating from or made from a renewable resource found in nature, avoided any ingredients with a suspected human health risk, did not use animal testing in its development and used biodegradable ingredients and the most environmentally sensitive packaging3. “Organic” referred to the way agricultural products were grown and processed.4 Although the U.S. Food and Drug Administration had not yet regulated “organic” claims for personal care products, the term “organic” referred to products that had been processed without artificial ingredients, preservatives or irradiation. Consumer awareness and concern over the nature of chemical ingredients in personal care products was high. In addition, consumers had high expectations for companies to consider both environmental and social issues in all aspects of product design, sourcing, manufacturing and sale (see Exhibit 3). Because of the considerable growth of countless products across multiple categories seeking to capitalize on this increasing preference for green, natural or organic products, consumers were often suspect of “greenwashing” practices. Greenwashing was defined as the practice of making an unsubstantiated or misleading claim about the environmental benefits of a product, service, technology or company practice.5 Various standards and certifications existed through organizations such as the Natural Products Association, the Organic and Sustainable Industry Standards, Compact for Safe Cosmetics and Fairtrade International in order to provide credibility and to substantiate claims. A 2011 Globescan Study conducted for Fairtrade Canada found that there was a strong consensus among consumers (71 per cent of respondents) that third-party certification was the best way to verify a product’s claims6. The overall market for soap, bath and shower products was impacted by the slow economic recovery after the 2008 global financial crisis. Some users were opting for less expensive products or making their

2 All figures in CDN$ unless otherwise noted. 3 www.npainfo.org/NPA/NaturalSealCertification/PersonalCare/NPA/NaturalSealCertification/NPANaturalStandardfor PersonalCareProducts.aspx?hkey=443d55de-e315-42ee-918b-2960452d9fe4, accessed December 13, 2013. 4 www.ota.com/organic/faq.html, accessed December 13, 2013. 5 “Greenwashing,” TechTarget, www.searchcrm.techtarget.com/definition/greenwashing, accessed May 24, 2012. 6 “Fairtrade International Consumer Perceptions Survey 2011,” GlobeScan, www.fairtrade.ca/sites/default/files/Fairtrade_2011_Consumer%20Perceptions%20Survey_Canada_Consumer_EN.pdf, accessed May 24, 2012.

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Page 3 9B13A044 existing products last longer in order to save money. More than 40 per cent7 of consumers indicated they would like to purchase more green products but did not because of financial reasons. The natural and organic personal care products market grew 10 per cent during 2007 and 2009,8 but sales had suffered slightly due to the economic recession. Improving economic conditions indicated that demand for green and sustainable products would grow in 2012 and beyond. Major Players Sales through the top three companies in the natural and organic personal care product market — Burt’s Bees, Tom’s of Maine and Hain Celestial Group — comprised over 65 per cent of the U.S. total market.9 The remaining portion of the market was highly fragmented with an abundance of companies manufacturing and selling natural and organic products. Burt’s Bees, owned by Clorox Company, was extending its large product offering into new lines such as natural acne treatments. Tom’s of Maine, owned by Colgate-Palmolive, had followed a similar path with new product introductions in the deodorant and toothpaste categories. Hain Celestial Group had recently seen sales drop from the natural supermarket channel as it focused on other areas of distribution. Natural and organic personal care products were available for purchase in supermarkets, mass merchants, natural and organic health food stores, online and at various vendor shows. Regional Competitors Consumers had an infinite number of options to choose from when it came to natural, green and organic bath and body products. Sweet Leaf had identified five direct competitors with similar product lines that were successful in entering the retail markets of eastern Canada (see Exhibit 4). Tashodi Tashodi branded itself as “Canada’s leading fair trade bath and body care company” even though none of its products sold through large retailers were fairtrade-certified. The company was located in Toronto, Ontario and stated that it purchased pure plant products from exotic parts of the world at a fair price and from production facilities that ensured fair working conditions. Tashodi products were available in over 50 stores in Canada and the United States, including large chains such as Winners, Planet Organic and Chapters. Product lines included bath bars, shower creams, body scrubs, soaks, hand washes, hand creams, body lotions, body butters and a line of hair products. In 2011, the original owner of Tashodi sold 49 per cent of the company to two partners. Tashodi’s website was professionally designed and allowed for online shopping. In addition, the company was featured in multiple articles from various national magazines including Lou Lou, Canadian Living, Wish and GlobeLife.

7 Fiona O’Donnell, “Marketing to the Green Consumer,” Mintel, April 2012, www.academic.mintel.com/display/619478/?highlight=true#hit1, accessed June 19, 2013. 8 Shannon Romanowski, “Natural and Organic Personal Care Products – US,” Mintel, March 2010, www.academic.mintel.com/display/521113/, accessed June 19, 2013. 9 Ibid.

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Page 4 9B13A044 Delapointe The company’s first mission was to improve the quality of life for 3,000 women and their communities, who were shea butter producers from the Léo cooperative in Burkina Faso, Africa by providing regular and increasing revenues. Delapointe was located in Quebec and its products were available in approximately 85 retailers in Quebec, seven retailers in New Brunswick and also online. The company was the sole Canadian importer of fairtrade shea butter, having been licensed through Fairtrade Canada since 2007, and therefore served as the shea butter supplier to Sweet Leaf. Its product line included soaps, lip balms, face and body balms, a therapeutic balm and gift baskets. Delapointe was also certified by Quebec Vrai, a province-wide organic food and product certification authority. The company’s website communicated information about fair trade practices and shared stories. L’Herbier L’Herbier was located in Quebec and manufactured body care products with natural, organic and fairtrade ingredients. It was not certified through Fairtrade Canada but used fairtrade ingredients when available. The company’s products were available in over 100 spa and retail outlets in Quebec and Ontario. The product line consisted of massage gels, balms and oils; bath salts; creams; masks; scrubs; lip balms; and soaps. L’Herbier offered bulk product options for purchases made by spas and healthcare centres. Kynk Naturals and Earth to Body Kynk Naturals (located in Cambridge, Ontario) and Earth to Body (located in Montreal, Quebec) were bath and body product manufacturers that focused on creating natural products. Neither company was fairtrade-certified nor mentioned using fairtrade ingredients on their websites. However, both companies had a strong online presence and also sold products through various vendor shows and retailers across the country. Earth to Body had developed a referral rewards point system to encourage customers to share company and product information. THE FAIR TRADE ADVANTAGE Fair trade was a global movement that sought to change the terms of trade for many farmers and artisans. Most often this was understood to mean better prices for producers, but it often meant longer-term and more meaningful trading relationships as well. Ultimately, fair trade appealed to consumers’ sense of fairness and common decency, and applied those values to the marketplace. It allowed consumers to make a positive difference in the world just by making informed purchases. Fairtrade certification involved producers, buyers and consumers. The process began with the producers, who had to meet a variety of criteria that focused on areas such as labour standards, sustainable farming, governance and democratic participation. Producers were regularly audited by an independent certification body owned by Fairtrade International, FLO-Cert, and companies who purchased products from fairtrade-certified producer organizations would also have to file regular reports, submit to on-site audits and adhere to strict standards. These standards often set the minimum prices that could be paid to producers, the expectation for longer-term contracts and the requirement to provide up to 60 per cent of the value of a contract in advance should the producers request it.

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Page 5 9B13A044 In Canada, companies were required to register with Fairtrade Canada in order to deal in fairtrade- certified products; this involved signing an agreement obliging them to report their purchases, processing and sales of anything that had been certified as fairtrade. The agreement also spelled out how they could and could not use the fairtrade certification mark on packages and promotional materials (see Exhibit 5).10 A 2011 fairtrade perceptions survey conducted by Globescan revealed that the major barriers to consumer purchases of fairtrade products were cost and availability. Although coffee was the most recognized fairtrade category, followed by chocolate and tea, the strongest opportunities for new fairtrade products in Canada were identified in the textiles, cosmetics and seafood markets (see Exhibit 6). Sweet Leaf was a registered Fairtrade Canada business and purchased as many raw ingredients as possible through fairtrade-certified producers, including shea butter, cocoa butter, raw cane sugar and coffee. PRODUCT LINE Sweet Leaf produced 22 different products in five categories including soaps, soaks, scrubs, lip balms and butters. Occasionally the company grouped items together to create gift packages. All Sweet Leaf soaps, scrubs and lip balms and two of its body butters were fairtrade certified products. The other products were not certified because the ingredients were not available from fairtrade producers (see Exhibit 7). The wholesale selling price of these ingredients to retailers such as Sweet Leaf was generally 50 per cent of the retail selling price. Sweet Leaf eventually changed its product packaging for lip balms from a standard plastic tube to an “eco tube,” which was Canada’s first 100-per-cent post-consumer-waste compostable tube. Although the tube cost double that of a plastic tube, the container could hold 40 per cent more than a standard tube. SALES CHANNELS Online and Direct Sales Sweet Leaf maintained a website that provided information about the company’s products, ingredients, fairtrade certification and other company information (see Exhibit 8). Consumers were able to purchase products online through PayPal. One of Sweet Leaf’s online initiatives involved providing product giveaways to various “mom bloggers”11 in exchange for being a featured story on their blogs. The goal was to drive more traffic and sales to the company website. Annual website traffic was estimated at 4,500 visits in 2010 and 4,300 visits in 2011. Approximately 73 per cent of website traffic was from Canada and the other 27 per cent from the United States. Internet sales contributed approximately 25 per cent of total sales with a gross margin of 62 per cent. The average online order was $65. Sweet Leaf also allowed close friends and co-workers to buy directly from them; however, the partners preferred that all purchases be made through local retailers to demonstrate product demand and were not interested in expanding sales in this manner. This channel constituted 10 per cent of total sales and had a 71 per cent gross margin.

10 www.fairtrade.ca/en, accessed May 22, 2012. 11 “Mom bloggers” could be defined as mothers who write blogs to chronicle their personal parenting lives.

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Page 6 9B13A044 Wholesale Sweet Leaf products were available in 20 retail locations across Canada. The majority of these locations were in Ontario and consisted of gift shops, natural food stores and earth-friendly outlets. Individual retailers decided which products to stock and when to reorder. No merchandising materials or displays were available through Sweet Leaf so individual stores had full responsibility to ensure that shelf displays were visually appealing and well stocked. Sweet Leaf did not have a formal reordering policy with any of its retailers. The average retail customer order was approximately $185 and retailers reordered three times a year on average. Sales from the wholesale channel were 37 per cent of total sales with a 51 per cent gross margin. Vendor Shows The partners attended several vendor shows each year to promote Sweet Leaf products. Vendor shows were held in various indoor and outdoor venues in virtually every town and city across Canada year- round. Organizers would recruit vendors to participate in exchange for advertising and organizing the event. Most shows required vendors to pay a fee to participate. Sweet Leaf attended 14 shows in 2010 and 13 shows in 2011. All but one of the 2011 shows were one- day events held on a Saturday or Sunday at a location across Ontario. An example of one such show Sweet Leaf attended was the Organic Advocates Feast of Fields event. The event brought together organic producers, environmentally concerned chefs, various other food professionals and enlightened customers. Sweet Leaf had been successful in securing four retailers to carry its line from these types of events in 2011. Although the partners enjoyed interacting directly with customers at these events, they often required a considerable time commitment to account for production, packing, set-up, staffing the booth, tear down and travel. Sweet Leaf’s direct costs associated with vendor show attendance amounted to approximately $2,500 in 2011. Sales from vendor shows were 28 per cent of total sales with a 69 per cent gross margin. CONSUMER BEHAVIOUR In 2011, 17 per cent of all consumers had purchased a fairtrade product, which was up from 14 per cent in 2008. Fairtrade buyers were from the “young consumer” and “mature consumer” segments as reported in a 2011 Fairtrade International Consumer Perceptions Survey conducted by Globescan12 (see Exhibit 9). Most fairtrade purchases occurred at grocery stores (60 per cent), cafe/coffee chains (30 per cent) and organic/health food stores (28 per cent).13 According to the partners, consumers who were interested in fair trade were usually also interested in eco friendly packaging and organic ingredients. The majority of Sweet Leaf’s buyers were women in the 25- 50 age group. Church-going women were often quite aware of fairtrade issues and tended to support the movement by purchasing fairtrade products. In addition, Creamer observed that consumers in larger cities such as Vancouver tended to be more eco-forward than those in smaller centres.

12 “Fairtrade International Consumer Perceptions Survey 2011,” GlobeScan, www.fairtrade.ca/sites/default/files/Fairtrade_2011_Consumer%20Perceptions%20Survey_Canada_Consumer_EN.pdf, accessed May 24, 2012. 13 Ibid. All percentages approximated.

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Page 7 9B13A044 THE FUTURE Creamer and Guymer knew they needed to make some changes to their business in order to grow sales to a level that would allow Guymer to return to the company on a full-time basis. There were no capacity issues as yet. It was determined that each full-time partner would be able to produce enough product to meet approximately $75,000 in sales annually. The partners were considering various distribution and promotion options and wondered which would constitute the best plan for growth. As Guymer was available on a part-time basis and therefore only able to manufacture and sell on evenings and weekends, the partners wondered where they should focus their sales efforts in 2012. They felt that an assessment of their existing sales channels would help them make an informed decision about how to move forward. DISTRIBUTION OPTIONS Online Marketplaces The partners were considering listing their products on the Etsy and/or Pristine Planet websites. Both websites allowed sellers to reach potential consumers by posting product photos and descriptions; however, each operated in a slightly different manner. Etsy Etsy was an e-commerce website focused on connecting sellers of handmade or vintage items with interested buyers. Multiple product categories — including bath and beauty, clothing, jewelry, edibles, wedding and toys — existed for sellers to post their goods. Website traffic varied by month but averaged approximately 6.8 million to 8.4 million unique visitors each year.14 In order to sell their products on Etsy, sellers registered for a free Etsy account and then posted items they wished to sell in their “Etsy Store,” which would have a unique URL address. Each item cost $0.20 to post for a four-month period and if the item did not sell within four months, the post would expire. If sellers had more than one of the same item to sell they could reflect the quantity available in their listings. When a transaction occurred, the listing was automatically renewed at a cost of $0.20. Sellers were charged a fee of 3.5 per cent on all sales, which was billed on a monthly basis. Customers paid sellers directly for the products and any applicable shipping and taxes. Pristine Planet Pristine Planet was similar to Etsy in that it was a website that connected sellers and buyers; however, Pristine Planet marketed itself as a green comparison shopping engine for eco savvy consumers that allowed customers to shop for the best green merchants and products with one convenient website. Website traffic varied between approximately 4,400 and 14,300 unique visitors per month in 2011.15 All products listed on Pristine Planet were required to adhere to at least one of the company’s proprietary “tags” before being accepted into their online catalogue. The partners did not foresee any issues with this

14 www.complete.com, accessed June 19, 2012. 15 Ibid.

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Page 8 9B13A044 requirement as many of their product ingredients were qualified tags, and “fairtrade certified” and “fairly traded” were also acceptable tags. Pristine Planet merchant memberships included a number of benefits such as individual product pages, a dedicated merchant page and additional free exposure on social media sites. All memberships were renewable on a monthly basis. To list up to 100 products, a two-month trial cost $50 and then $50 per month afterwards. There were no per transaction fees required as all purchases would be directed to Sweet Leaf’s current online payment platform. Distributor Contract A distributor was an independent agent who could enter into an agreement to offer and sell the product of another company. The partners were considering entering such an agreement with Purity Life Health Products (Purity Life) of Acton, Ontario and Vancouver, British Columbia. Purity Life distributed various health products including dietary supplements, vitamins, natural body products and natural health foods to health food stores, pharmacies, grocery stores and mass retailers across the country. The partners hoped that a distributor relationship with Purity Life would enable them to access larger retail chains including Whole Foods, Goodness Me and others who were not responsive to their initial contact attempts. Larger chains often had an exclusive relationship with one distribution company. In order to carry Sweet Leaf’s product line, Purity Life would demand a margin of approximately 32 per cent of Sweet Leaf’s wholesale price. In addition, Sweet Leaf would be required to spend $1,000 on a one-page advertisement to be printed in the monthly distributor catalogue for the first month the line was available. Sweet Leaf would also be expected to offer an additional 10 per cent off the wholesale price during the launch month. Additional incentives, including periodic retailer discounts on selected products and end-consumer coupons, might also be expected of Sweet Leaf and would depend on the individual retailer. Sales kits containing items such as product samples and literature would be required for each of Purity Life’s 30 distributor representatives and would cost Sweet Leaf approximately $10 per representative. If Purity Life was successful at securing Sweet Leaf a placement at a major retailer, an additional $1,000 in advertising support would be required during the launch period and product demonstration days would be requested. Approximately four demonstration days would be required per year for each major retailer secured. These demonstration days would cost Sweet Leaf approximately $200 per day, which included the participation fee, product supplies and samples. However, Creamer and Guymer knew that these demonstration days would be great opportunities to interact directly with store management, sales staff and customers and set a solid foundation for the success of Sweet Leaf in those outlets. Vendor Shows Sweet Leaf had attended many end-consumer-focused shows but was considering a change by adding a Canadian Health Food Association (CHFA) show to their 2012 line up. The CHFA was Canada’s largest trade association dedicated to natural, health and organic products. Its members included manufacturers, retailers, wholesalers, distributors and importers of natural and organic products. The CHFA advertised its three annual trade shows as “dynamic events where education, innovation and networking opportunities come together.” Instead of end-consumers, retailers, suppliers and industry experts gathered to network and learn more about product innovations.

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Page 9 9B13A044 The next show would be held in Toronto over four days at the end of September 2012, with more than 650 exhibits covering 80,000 square feet. Two days of the event would be dedicated to conference activities and the other two days would consist of the trade show. It would cost approximately $2,500 for Sweet Leaf to secure a vendor space, $400 in product samples, $200 in printed materials and $100 in travel costs. No accommodation costs would be incurred as the partners had family in Toronto who were able to offer them free lodging. PROMOTION OPTIONS Public Relations Consultant The partners were considering hiring an external public relations consultant to help them develop a print and online media presence with the goal of driving more traffic and sales to the Sweet Leaf website. They had spoken to a consultant from Toronto who was willing to charge Sweet Leaf on a per job basis for the work the company requested. The writing and distribution of a targeted press release would cost approximately $800 and an additional $30 in sample mailing costs. The partners were considering requesting at least two of these jobs if they decided to work with this consultant. Website Redesign Neither partner was particularly computer-savvy so they had outsourced the development of Sweet Leaf’s website. All updates, including new product information, retail locations and promotions, were made by Guymer’s husband free of charge. Creamer and Guymer wondered whether it would be worthwhile to have the website redesigned to increase the professionalism, add more information (specifically about fair trade), incorporate promotion codes to improve online checkout procedures and implement search engine optimization practices to provide better visibility for the page in search engines. They had received a quote of approximately $3,500 to do this work. Facebook Ad Campaign Sweet Leaf maintained a Facebook page and a twitter account. Another option the partners were considering to increase website traffic was to invest in a Facebook advertising campaign. Ads could be targeted using many criteria including location, education, age, gender, likes and interests. If the partners went ahead with a Facebook ad campaign they would need to decide if they wanted to go with a cost-per- click (CPC) or cost-per-thousand-impressions (CPM) model — or a combination of both. CPC advertising allowed users to specify a certain amount that they would be willing to pay each time a user clicked on their ad. Many CPC advertisers were most interested in having people click through to their websites in order to drive conversions. CPM advertising allowed users to specify how much they were willing to pay for 1,000 impressions (views) of their ad. Generally, CPM advertisers were most concerned with ad visibility and exposure as opposed to accruing conversions.16 If Sweet Leaf used Facebook ads, the partners would need to set a maximum daily budget and bid price for their ads. Once the maximum daily budget was met, the ad would no longer show. In addition, the partners would need to decide what to promote (event, website, coupon, etc.) and who to target.

16 www.facebook.com/business/ads/, accessed June 13, 2012.