AS Business Studies Unit 1: Developing New Business Ideas
The Smooth Start-Up
The start-up of Innocent Drinks is one of the best-known in the business world. In 1998, after leaving Uni, Richard Reed, Adam Balon and Jon Wright decided to try their own business, selling fresh fruit smoothies.
They tried out recipes on friends, then spent £500 on strawberries and bananas, turned the fruit into smoothies, and sold them at a small music festival in London. At their stall they put up a big sign saying ‘Should we give up our jobs to make these smoothies?’ One bin at the front of the stall said ‘Yes’; another bin said ‘No’. By the end of the weekend the ‘Yes’ bin was full of smoothie bottles.
At the start, everything went smoothly. The Innocent 3 found it surprisingly easy to break into major outlets even though their retail prices were as high as £2 for a small, 200 ml bottle. By 2002/2003 sales had risen to £10 million a year and the future looked very bright. Then things became a bit tougher. The smoothie market had been originated in Britain in 1994 by a company called ‘PJ’. Stung by Innocent’s success, in 2003 PJ Smoothies were promoted more heavily, stabilising their market leading position. Then the major supermarkets started offering own-label smoothies. With a Tesco’s own-label bottle at £1.39, it would be much harder to charge £1.99. Also in summer 2003 Innocent launched a new brand, ‘Juicy Water’. It struggled to achieve a good distribution level, and then repeat purchase levels were disappointing.
Yet look at the bar chart below, to see how brilliantly Innocent recovered in 2004. Better still, the market size has expanded steadily, from £20 million in 2001 to £60 million in 2003 and an estimated £80 million in 2004.
Source: AC Nielsen Scantrack, quoted in The Grocer magazine Nov 13th 2004
So how was Innocent Drinks able to restore its growth position? The complete answer is not yet clear, as Innocent would not want PJ to know exactly how it has boosted market share so dramatically. One aspect is perhaps that Innocent’s are the only truly fresh smoothies (PJs and others are made from concentrates, not fresh juice).
A more likely explanation, though, is Innocent’s Spring 2004 launch of the UK’s first take home
Smoothie cartons. Looking back, it is extraordinary that none of the supermarkets tried this approach. Now, instead of just buying a small bottle of a Smoothie while on the way to work, people can buy a one litre take-home carton from their local Tesco. That’s taking Innocent into the world of competing with Tropicana (Pepsi-Cola).
Behind Innocent’s sales success are two key factors. First, the three founders remain wedded to a vision for the business based upon passion to provide a great, not just a good, product. This rubs off onto staff. After the company won the accolade of ‘National Employer of the Year 2004’, Lucy Ede, one of Innocent’s product development team said: “It’s an incredibly motivated team to work in”.
The second strength lies in marketing. This has two elements. The first is obvious: Innocent’s above the line spending is five times greater than the rest of the market combined. This is allied to its terrific public relations (PR), constant new product innovation, brilliantly distinctive packaging and its annual promotion of a free summer music festival called Fruitstock (81,000 people came). The second element of its marketing is more subtle. Every bottle says exactly what it contains (12 raspberries, 26 cranberries etc) in a way that endears the business to consumers who want honesty and social responsibility. In 2004 it set up the Innocent Foundation, which is a charity that receives a % of all the revenue generated by the drinks, and gives money to charities working in the countries where the fruit comes from.
Innocent has seen off the market founder and market leader, PJ, and coped with the power of Tesco and Asda. It looks set to grow far beyond its current sales turnover of £16 million, with its sights set on becoming ‘Europe’s favourite little fruit drinks company’. It has to beware, though, of Pepsi or Coke finding it hard to resist a rapidly growing niche market with very impressive profit margins. It may be harder to be Innocent when under fire from America.
Questions (30 marks; 30 minutes)
Based on the case study complete the following questions…
1. Outline three factors that may have led to Innocent’s growth in market share during 2004. (8 marks)
2. What was the retail value of Innocent’s sales in 2003, given that its market share for 2003 was the same as it achieved in December of that year? (4 marks)
3. As retailers were taking an average of 35% of the sales value of Innocent’s smoothies, what was the company’s real sales revenue in 2003? (3 marks)
4. To what extent do you believe Innocent could continue to succeed if Coca-Cola decided to launch fruit Smoothies in Britain? (15 marks)
Smooth Mark Scheme
1a) Outline three factors that may have led to Innocent’s growth in market share during 2004. (8)
4 / 4CONTENT / APPLICATION
4 – 3 / 4 – 3
Two or three factors identified and outlined, showing understanding / Point/s made are applied to key features of this case (‘Innocent’s growth in market share’)
2 – 1 / 2 – 1
One relevant factor outlined or two+ relevant content points identified / Answer shows some application to the case
Possible answers may include:
· The passion of staff towards innovation and therefore new product ideas
· The launch of the take-home carton
· Innocent might have increased its advertising budget, with no corresponding reaction from PJs
1b) What was the retail value of Innocent’s sales in 2003, given that its market share for 2003 was the same as it achieved in December of that year? (4)
Market size in 2003 was £60m (1)
Innocent’s share was 26.1% (1)
So sales value was £60m x 0.261 = £15.66m (1 for workings; 1 for right answer)
Total for £15.66m = 4 marks (allow £15.6 or £15.7 or £16)
1c) As retailers were taking an average of 35% of the sales value of Innocent’s smoothies, what was the company’s real sales revenue in 2003? (3)
£15.66m * 0.65 = £10.18 million (1 for workings, 1 for numerical answer, 1 for £m)
Allow between £10 and £10.4m to allow for rounding within the calculation.
2. Discuss the key strengths and weaknesses of Innocent Drinks’ marketing mix. (10)
MARKING GRID (Out of 10)2 / 2 / 3 / 3
CONTENT / APPLICATION / ANALYSIS / EVALUATION
2 / 2 / 3 / 3
Good understanding shown of the marketing mix / Relevant issues applied in detail to the case / Analysis of question set, using relevant theory / Judgement shown in weighing up the qualities in Innocent’s marketing mix
1 / 1 / 2-1 / 2-1
Shows some understanding of the marketing mix / Relevant issues applied to the case / One or two points applied in a limited way to analyse the Q. / Some judgement shown in text or conclusions
Possible themes might include:
· It’s coherent, in that it’s all focused on a particular type of customer – well-off, food-conscious young adults – so pricing is high, the product is extra special, the distribution is highly effective (including Tesco) and it’s backed by strong promotion
· It seems based on a long term vision, to build the consumer image in line with the founders’ wish for people to be passionate about Innocent (in effect, to feel good about themselves when they’re parting with their money)
· But the mix is highly elitist, assuming that fresh fruit Smoothies are only for a particular type of person (whereas Tropican orange juice is classy stuff, but aimed at everyone)
3. To what extent do you believe Innocent could continue to succeed if Coca-Cola decided to launch fruit Smoothies in Britain? (15)
MARKING GRID (Out of 15)3 / 3 / 4 / 5
CONTENT / APPLICATION / ANALYSIS / EVALUATION
3 / 3 / 4 - 3 / 5 - 3
Good understanding shown of competition and/or response to it / Relevant issues applied in detail to the case / Analysis of question set, using relevant theory / Judgement shown in weighing up the key elements in this David v Goliath struggle
2 – 1 / 2 – 1 / 2 - 1 / 2 – 1
Shows some understanding of competition / Relevant issues applied to the case / One or two points applied in a limited way to analyse the Q. / Some judgement shown in text or conclusions
Possible themes might include:
· Coca-Cola’s resources would allow for a huge TV-based marketing push, to establish a more mass market Smoothie; this might take sales away from the less-committed current customers of Innocent (only research could give a figure, but every brand will have some customers who are not wholly committed)
· More serious for Innocent might be Coke’s distribution muscle; this comes partly from its virtually 100% distribution in the retail trade, but more importantly from its grip on vending machines; if you could get your lunchtime Smoothie from a vending machine close by, you wouldn’t walk half a mile to the shop for an Innocent Smoothie.
· BUT Innocent has had several years of building a hugely distinctive brand loved by wealthy townies and foodies; would they defect for a Coca-Cola smoothie? Of course, Coke would hide behind a natural-sounding brand name, but the foodies would know the parent
· If Innocent can maintain its squeaky clean image as a provider of healthy, quirky products, it is unlikely to suffer a knock-out blow from the arrival of Coke; Coke will expand the market for Smoothies, but Innocent will still be able to maintain a profitable niche; the future for PJ might be a lot less comfortable; (so perhaps Coke would launch by buying PJ? Might be a clever move)
Faculty of Business & Vocational Studies