Truearth pizza

________________________________________________________________________________________________________________ HBS Professor V. Kasturi Rangan and Sunru Yong prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration. Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

V . K A S T U R I R A N G A N

S U N R U Y O N G

TruEarth Healthy Foods: Market Research for a New Product Introduction

Isabel Eckstein strode toward her office, inhaling the aroma from the test kitchen where the product development team was trying new recipes for TruEarth, maker of gourmet pastas, sauces, and meals. Her team had been working hard for the past year on a fresh whole grain pizza. The final market research results had arrived, and it was time to make a decision on launching the product.

In 2006, Eckstein, a brand manager, had led the introduction of Cucina Fresca, a fresh whole grain pasta meal kit sold through supermarkets. By the end of 2007, sales had reached $23 million, making it the most successful product launch in company history. However, growth had slowed in 2008 as competitors began offering similar products. Sustaining a competitive edge in the fresh Italian food category required continual innovation and, as a result, TruEarth had invested heavily in its pizza offering. Eckstein observed:

We were aggressive in launching Cucina Fresca. We made a significant investment in new manufacturing equipment and the distribution infrastructure required to get fresh food to shelves quickly. Being a small company competing against Nestle and Kraft is not easy, but we do not make rash decisions. The success of Cucina Fresca was a calculated risk based on significant research. We think we can achieve similar success with pizza, but we will need to take a hard look at the numbers.

Company Background

TruEarth was founded in 1993 in St. Louis, Missouri, by Gareth DeRosa, a young entrepreneur. DeRosa saw an opportunity to market healthier gourmet pastas and sauces made from superior ingredients:

In the 1980s, demand for healthy, gourmet products grew sharply. We saw a segment of the market shift away from mass-produced, highly processed foods toward greater quality and authenticity. It was a special opportunity for us because we knew we could deliver what more and more customers wanted.

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DeRosa sourced a particularly high-quality durum wheat from North Dakota and was notoriously selective about ingredients for sauces. The product line featured standard pastas, such as spaghetti, rigatoni, and shells, and specialty pastas with blended ingredients, such as artichoke, spinach, or saffron. In addition, TruEarth was one of the first companies to focus on whole grain products, offering both 60% and 100% whole grain pastas in its line. The tomato-based sauces were made from the highest-quality ingredients—real tomatoes instead of paste or puree, extra virgin olive oil instead of canola or soybean, and no sweeteners or dried spices.

The concept was successful, and TruEarth became a supplier to a number of gourmet groceries throughout the midwestern United States. By 1998, the company had built a loyal regional following. Responding to customer demand, several mainstream supermarket chains began to carry TruEarth products. The company further raised consumer awareness through several promotional programs, using coupons, magazine advertisements, and in-store demonstrations.

Product Development Process

In its early years, TruEarth’s product development was informal and largely driven by intuition. The team enjoyed experimenting with new products and “limited edition” variations on the core recipes, and the batch process used to manufacture most products made it easy to experiment without affecting overall production. The company fostered a freewheeling, entrepreneurial spirit, and despite occasional failures, management believed that regularly trying new products was a low- risk way to identify the next hits. Volume estimates were done “back of the envelope,” using a mix of high-level analysis and intuition. Not infrequently, TruEarth’s projections were significantly different from actual market performance. The company would underestimate the appeal of a hit product and find itself struggling to keep up with demand, or its estimates would be too optimistic and frustrated retailers would seek markdowns and high guaranteed sell-through performance to avoid excess inventory.1

As TruEarth grew, achieved scale, and began serving larger regional accounts, the cost of such missteps increased. In response, the company developed a more formal four-step process for research and development:

Idea generation. As the company grew, the idea generation process became a more systematic evaluation of consumer trends, with formal management brainstorming sessions.

Concept screening. TruEarth administered formal surveys that included an evaluation of interest, probable purchasing behaviors, and willingness to pay.

Product development and testing. The test kitchen and marketing department developed prototype products, which would then be tested through focus groups.

Quantification of volume. TruEarth worked with Nielsen BASES®, a market research firm, to estimate potential sales. A BASES I test gauged consumer awareness and interest. A more extensive BASES II test included a taste test and could also be used as a “line extension” study for any pre-existing product lines.

1 Retailers consider excess inventory “unsaleable” if it has been on the shelf too long and/or expired. To avoid costs of disposal, many force manufacturers to guarantee a certain percentage “sell-through” (i.e., product that sells to the final consumer). Excess inventory below this sell-through is subject to markdowns (e.g. 50% discount) where much of the cost may be borne by the manufacturer.

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Consumer Trends: Home Meal Replacements, Refrigerated Pasta, and “Bad” Carbohydrates

Starting in the 1990s, three important developments reshaped how consumers purchased groceries. The first important trend was a new, loosely defined food category in the United States— “home meal replacement” (HMR). An increase in dual-income households had led to higher disposable incomes coupled with “time poverty,” as both workers found themselves lacking the time to cook a meal and clean up afterward. Further, consumers had tired of unhealthy carryout and fast food and started seeking greater variety and freshness. Supermarkets began meeting HMR needs by enhancing their fresh, prepared food offerings.

However, not all consumers wanted fully prepared, “ready to eat” products. Some consumers sought “semi-prepared” options that required more effort than a processed microwave dinner, but remained considerably easier than a true home-cooked meal. In response, food manufacturers developed single-serving meal kits, which included all or most of the components required for a dish. Psychologically, such kits enabled consumers to feel they were still involved in preparing dinner, but without a difficult, lengthy process. The act of combining ingredients allowed consumers to flavor according to taste and provided a more “home-cooked meal” experience.

The second key development was the growth of refrigerated fresh pasta. Consumers perceived fresh pasta to be tastier and more authentic than the dry, shelf-stable pasta offered by most companies, including TruEarth. Technical innovations in packaging had allowed food manufacturers to produce fresh pasta for broad distribution to supermarkets. Behind the efforts of Nestle and Kraft, annual sales for the category had grown to $4.1B by 2004.

The third trend was a growing awareness of the importance of whole grains in the diet. Spurred by various diet fads, particularly in the early 2000s, consumers sought to avoid “bad carbohydrates” made from refined, white flour. However, many whole grain breads, pastas, and snacks were considered less tasty than their less healthy counterparts. TruEarth’s whole grain pasta line was widely considered one of the best-tasting options, and the jump in demand boosted sales.

Cucina Fresca: Fresh Pasta and Sauce

In late 2004, the management team at TruEarth began discussing ways to take advantage of growing demand for quick home meal replacements, refrigerated pasta, and whole grain food options that did not sacrifice taste. Eckstein explained:

With standard cut pasta like linguine, there’s actually little difference between high-end dry and fresh pasta in flavor, texture, and nutrition. But fresh pasta has its benefits: shorter cooking time, the option to introduce filled pastas like tortellini, which we had long discussed, and the consumer perception of better quality. Refrigerated fresh pasta was growing faster than dry pasta, which made it attractive. And there was no strong player in fresh pasta offering a compelling whole grain option; a couple of companies had tried this, but their products were not very tasty, and we knew we could do better.

The TruEarth test kitchen developed a fresh whole grain pasta line dubbed Cucina Fresca, Italian for “fresh kitchen,” with a full range of choices: cut pasta, tortellini, ravioli, as well as accompanying sauces (see Exhibit 1 for product line). Whereas the dry pastas and shelf-stable sauces came in larger sizes and could be used for several meals, the Fresca products were designed to be consumed in a single meal for two.

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Once the concept was tested with focus groups to positive feedback, Eckstein’s team decided to conduct a market study to estimate Fresca’s potential sales volume. TruEarth retained Nielsen BASES® to conduct a BASES I study to assess consumer awareness of fresh whole grain pasta and interest in purchasing. BASES completed approximately 300 concept tests across several cities (see Exhibit 2 for an overview of the BASES methodology and Exhibits 3 and 4 for a summary of the findings). There was no fresh whole grain pasta with broad distribution, with 85% of those in favor of the concept having never purchased it before.

The research findings were inputs into the proprietary BASES model to estimate first-year trial volume and repeat-purchase volume. The results indicated a 76% positive purchase intent, comprising those who said they “definitely” or “probably” would buy the product. The industry rule of thumb is that 80% of those who claim they “definitely would buy” and 30% of those who stated they “probably would buy” actually completed a purchase, resulting in a 36% trial rate. The model was further refined based on TruEarth’s marketing plan, which called for $8 million in advertising and $2 million in promotional coupons. Eckstein’s marketing team estimated that the expenditure would result in 800 GRPs,2 which BASES estimated would generate 17% awareness among the target population. Based on salesforce feedback, the company anticipated 50% ACV distribution.3 This resulted in an adjusted trial rate of 3.0% (see Exhibit 5 for methodology and calculation details).

TruEarth was equally focused on repeat purchase estimates. The study did not incorporate actual taste testing, so BASES forecast follow-up sales by gauging consumer reaction to the fresh whole grain pasta concept and its prior experience with fresh pasta and other gourmet and healthy foods. Without knowing actual product quality, BASES created three scenarios—one each for mediocre, average, and excellent product—and estimated repeat rate based on its experience with other food products (Table A).4

Table A Total Forecasted Units of Fresh Pasta and Sauce (MM)

Mediocre Product

Average Product

Excellent Product

Pasta Trial Volume 1.4 1.4 1.4 Repeat Purchase Volume 1.0 1.7 2.3

Total Estimated Volume (MM units) 2.3 3.1 3.6

Sauce Trial Volume 0.9 0.9 0.9 Repeat Purchase Volume 0.8 1.8 2.6

Total Estimated Volume (MM units) 1.7 2.7 3.5

Minimum Business Requirement $21M retail market ($14 M wholesale)

2 Gross Rating Points (GRPs) are a measure of advertising impact. 3 All commodity volume (ACV) is a measure of distribution reach. A 70% ACV, for example, means that a product is distributed in stores that represent 70% of sales volume of food products in that area. Niche products from smaller manufacturers will have more limited distribution and lower ACV, whereas Coca-Cola, for example, would have 100% ACV. 4 BASES drew on prior experience with products of similar price, nutrition, and target consumer characteristics. Past launches showed that repurchase rates of similar goods ranged from an estimated 21% repurchase for “mediocre” product to 49% for “excellent” product (see Exhibit 5).

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Each 9-ounce package of pasta was expected to sell for $5.75 retail, while the 12-ounce sauce package would sell for $4.50, resulting in a total combined retail market of $21 million to $37 million. At 35% gross margins for retailers, this was a $14 million to $24 million opportunity for TruEarth at wholesale prices. BASES recommended that the company proceed with the introduction of refrigerated fresh pasta on the assumption that the company could preempt the competition in major metropolitan areas.

The decision to launch refrigerated whole grain pastas required TruEarth to upgrade its manufacturing facility. The cut pastas and sauces could be produced on existing lines. However, stuffed pastas such as tortellini and ravioli required new production lines, and the packaging requirements for refrigerated products required investment in new equipment. Eckstein explained how the company incorporated the BASES findings into its decision:

Given the required capital expenditure, marketing spend, and our own return criteria, the required Year 1 sales volume was $14 million at wholesale. The BASES study gave us a lot of confidence. There was clearly significant interest in this, and our focus groups showed that the product would be perceived to be at least of average quality. We believed that we would achieve the required volumes with Cucina Fresca and have a comfortable margin for error.

The Cucina Fresca line was rolled out nationally in the third quarter of 2006. It grew quickly, with $18 million in retail sales in 2006 and $35 million in 2007. Eckstein remarked that the broad appeal and flexibility of the line was critical:

The Cucina Fresca products are quick and easy. There’s no guesswork for the consumer. The packaging on each product recommends the best sauce options. The portions are exactly right, so you get the perfect amount of sauce and pasta. We provide simple instructions for cooks to add their own touches, such as grilled chicken or shrimp. Plus, there’s so much concern now about unhealthy carbohydrates; we offered an option that was whole grain but still tasted great. Cucina Fresca tapped into an unmet demand, giving customers the convenience they require while allowing them to feel good about their food choices. The team was proud that we had done so well in this new category—it was an unqualified success.