Plastic Cups Industry

{draw:frame} December 8, 2009 Table of Contents INTRODUCTION 2 Industry/Product Category Overview 2 Market Size 2 Growth of Product Category 3 Recent Product Innovations 3 Market Sub-Segments 4 MARKET SECTOR RESEARCH 4 Differentiation 5 Value to Consumers 5 Fit in the Market 5 Pricing Strategies within Market 6 NEW PRODUCT INFORMATION 7 PRICING STRATEGY, TACTICS, AND THEORY 8 CONCLUSIONS 9 BIBLIOGRAPHY 11 Introduction Industry/Product Category Overview The Foodservice Packaging industry deals with plastic products such as plastic bowls, cups, plates and cutlery. The industry encompasses packaging for the home, commercial use and government institutions, such as schools and correctional facilities. Specifically, the product being developed belongs to the reusable cup category, in which the primary national competitor is Solo Cup Company. Although the Foodservice Packaging Industry was impacted by the economic situation, the challenges proved beneficial for the industry as they led to increase in product innovation. More notable, the â€Å"greening† of products, making them less harmful to the environment, has become a signal of the changing times. Additionally, the reason for the resiliency in some product categories in the industry, is the result of consumers downgrading their, spending on dining out and increasing their spending on home cooked meals. As consumers continue to downscale they will be looking for more disposable items to use in their homes. The foodservices packaging industry contains already established firms, such as Solo Cup Company, however, our product will service a niche in the market not effectively reached by other vendors. Market Size Recycled, reusable plastic wear finds its place in the disposable sector of the industry under the segment, â€Å"Cups and Lids. This market accounts for several segments of plastic ware: Cups and Lids, Containers, Dinnerware and others. In addition, the market includes several â€Å"end-use† markets such as restaurants, retail stores, and various institutions. With respect to the â€Å"cup and lid† market the U. S. is predicting increases over the course o f a four-year layout. It has been speculated that between now and 2012, demand for this respective segment will continue to grow by approximately 4. 3 percent to a figure of $7. 8 billion. Looking further ahead, we see predictions that this industry is expected to eventually reach $16. 52 billion by year 2015. This growth has been associated with increasing away-from-home expenditure, and dual-income families with reduced time for making elaborate home cooked meals, finds immense applications in restaurants, institutions, and retail stores among others. Increase in the number of working women and changing trends in ethnicity have also led to greater indulgence in foodservice disposables. While these aren’t figures directed at the cup market in its entirety, research has noticed a close correlation between purchasing plastic dinnerware (i. e. plastic plates and eating utensils) and the significant increase in plastic drink ware. It’s been noted, however, that of the foodservice market, cups and lids are anticipated to produce the quickest growth in profit from now until 2015. This is expected to be fueled by the increasing demand in environmentally friendly cups, such as compostable cups or recycled content cups, will add value gains as these cups tend to be higher in price than conventional cups, thus generating a respectable profit. Growth of Product Category The Solo cup company was founded in 1936. Solo was and still is one of the biggest companies in the plastic disposable cup industry. In 2006, the company posted sales of over 2. billion dollars. Since the founding of the consumer packaging industry, growth has been exponential. The industry is multi-billion dollar commerce and one that most consumers contribute to at one point or another. Plastic cups are now an everyday item in many people’s lives and have literally countless uses. With the modern, fast-paced lifestyle, convenient, disp osable plastic cups are practical. There are also niche products that are still plastic disposable cups but they have a bit of flare to them. Some of these products include insulated plastic cups and cups that have hand grips added to them. The first Solo red, basic cup that most people know was introduced in late 1972. Since then, the popularity has grown exponentially. What used to be just a family consumer product has now morphed into a product that is used by some of the biggest corporations in the world. 80% of Solo’s sales come from these large corporations such as Starbucks and fast food restaurants who use other, smaller containers as condiment holders. What started out as just simple cups has evolved into something much more broad and diverse. The aforementioned condiment containers are an example. Another example would be the lines of complete tableware that some companies now offer. They are entirely plastic and disposable, just like the cups. The industry has grown from just a simple singular product into completely separate lines and product trees. The expansion from the beginning is enormous. Recent Product Innovations In the plastic tableware industry, lines have blurred between â€Å"disposable† and â€Å"reusable. † With many disposable cups now being marketed as dishwasher safe, low-grade dinnerware has become single-use for some market segments, but multiple-use for others. The â€Å"Green† movement has also influenced this industry. Increasingly, consumers are willing to spend more on products made from recycled or biodegradable materials. Several companies have taken advantage of this new market segment by promoting â€Å"green† product lines. MicroGreen Polymers, for example, is a Seattle-based company that manufactures disposable coffee cups produced from recycled pop bottles. The company uses a thermoformed plastic technique that infuses tiny bubbles into the plastic, resulting in a â€Å"more bang for your buck† product. In addition to resisting temperatures up to 400 degrees, the product also costs fifteen to twenty percent less than competing products. Another eco-friendly tableware producer is EcoProducts, which makes plastic-looking cups that are made from compostable corn. The cups require less energy than a traditional plastic cup to produce, resist heat up to 145 degrees, and compost in only 45 days. Solo Cup Company, the market share leader in plastic cup manufacturing, has also come out with a line of â€Å"green† products called â€Å"Bare. † It is the first nationally available full line of food service and consumer products made of recyclable or renewable materials, and because Solo has the brand recognition that emerging companies don’t, it has a unique advantage over the competition. Another recent product innovation is the beveled cup design that allows for a slip-free grip of the beverage. Solo has released products with this feature called â€Å"Grip Cups†, while Hefty released a similar product called the â€Å"Easy Grip Cup. † Advancement in the industry is the development of color-changing plastics which are being used in the production of low-grade cups. The company MoodCups uses this technology to produce customizable cups for large-scale customers that change color in response to contact with cold temperatures. MoodCups is one of a variety of companies which currently utilize this technology, but thus far the products are only available in mass orders of 250 or more rather than in family-size quantities. Market Sub-Segments There are two main market sub-segments for this product: college students and home users. College students (24 and under) are often price sensitive, with less sensitivity to quality. Additionally, this segment already uses this type of cup for playing drinking games, keg parties, and everyday cup use. Kooler cups will be a draw to this segment because of their unique color-changing technology, low price, and versatility. Home users, generally classified as those consumers 25 and older, are interested in value rather than price alone. The ability to use the product we have created, Kooler Cups, at dinner parties or in everyday settings will add value to the product for this segment. As with college students, these cups will draw in home users looking for that little extra bit of flare to throw in at a home party or with the kids. Market Sector Research The presence of myriad â€Å"off-brands† offering substitute products to the classic Solo cup creates a unique challenge in this product category. While Solo remains the number one competitor in this product category, almost identical products are available to consumers at a lower cost that are packaged under generic and store brands. Throughout our in-the-field pricing research, we found that the store brand alternatives to Solo cups were consistently priced much lower than comparable name-brand products. Differentiation Our product will compete with existing products in the market sector through characteristic differentiation rather than low cost. Kooler Cups will be considered somewhat of a novelty item by offering consumers the ability to own a disposable cup that is more fun and different that other items they see by major competitors. Kooler Cups are temperature activated cups that change colors which add excitement and allows for the consumers to see that the beverage is the perfect temperature. This feature is currently not part of the market our product is entering and this is a main reason it will be successful. Additionally, Kooler Cups are made of a harder plastic that is both inexpensive and manufactured of a higher quality material than competing products. By producing Kooler Cups with a higher quality material, we can ensure that the product is dishwasher safe. Value to consumers These unique features bring a whole new set of desirable and valuable traits of disposable cups to the consumer. The higher quality material establishes a large part of the value of the product as consumer will pay less for a reusable cup that is able to be disposed at the consumer’s discretion. This feature allows for a range of uses at an affordable price which leads to a decrease in consumer disappointment with the accidental destruction or loss of the product. Additionally, the products material provides value by being dishwasher safe which will decrease the spread of germs or residue that may occur with hand wash only cups offered by major competitors. The new material will also add to the ease of cleaning the product, saving the consumer time as well as money because they will need to purchase the cups as frequently. The color change features adds value by bringing an element of surprise and excitement to whatever event the product is used at. For the inexpensive nature of the product, this feature will be a major selling point and will lead to a higher perceived value by consumers. Fit in the market Kooler Cups will participate in the disposable food service products market with products manufactured by major companies like Solo Cup Inc. Kooler Cups will be available at a comparable price to other products in the market because they can be considered disposable even though they are not necessarily one-time use cups. We will package and sell Kooler Cups in comparable quantities to its competitors in the market to encourage the selection of this product for gatherings where many cups are required. Pricing Strategies within Market With several outside factors affecting the profitability and bottom line of a firm, pricing plays a crucial role in reaching that yield. Understanding the costs associated with the product (cost of goods sold and operating expense) is the first step before determining an appropriate pricing strategy. The cost of goods sold accounts for the various costs that go into production of the good as well as shipping and handling expenses. In addition, operating expense takes into consideration the costs associated with overhead, marketing, payroll, and office supplies. The pricing strategy used should more than cover these expenses to result in a respectable profit. With respect to the Palouse region, it appears that our main competitor, Solo Cups is employing a promotional pricing strategy. This strategy is best used as new products are introduced into the market, or in our case, to stimulate demand for an already-established product. The demand for this well established product comes with respect to seasonal changes, given the â€Å"special events† occurring during those seasons. During the fall and winter months, Solo cups are found on sale because of the influence of the two most common sports in our area, football and basketball. With the multitude of residents who tailgate as well as attend or host pre-game parties, breakeven on sales of cups are surely met and exceeded with the use of effective promotional efforts. Also, it was noticed that during off seasons such as late spring throughout summer, the plastic cup industry aims to target the outdoor enthusiast crowd. This group includes those involved with barbequing, casual camping, outdoor sporting events, as well as general picnicking. With this, Solo can maximize reach of its target audience under various shifts, both seasonally as well as activity-based by providing a recognizable price during these respective months as well as using other products to help promote their cups. Upon visiting local stores such as WinCo, Wal-Mart, Rosauers, and Safeway, we observed that Solo Cup places a significant emphasis on product positioning as they are determined to set an inviting, yet profitable price. In WinCo, Rosauers and Safeway, they take advantage of end-cap displays generally strategically positioned with complementary products such as America’s â€Å"beverage of choice,† Busch Light and Keystone beer. This type of strategy grabs the consumer’s attention through use of effective signage, as they are stocking up on supplies for any given event. Given the availability of wide aisles, such as the bordering aisles at Wal-Mart, Solo can position its cups at conveniently located product islands. These islands are also generally shared with other complimentary items, namely Busch Light and Keystone beer as well as twelve pack cases of soda. This is especially effective because people will pass these islands on their way to satisfy their regular shopping lists, being reminded of their need for cups and beverages, if not already realized. New Product Information Our product is a sixteen ounce plastic cup. The features that distinguish Kooler Cups are that they are reusable, dishwasher safe, and color-changing. We believe that by adding these, our product will have value associated with it that the products we are competing with do not have. These features add extra cost to the production of the cups; however, these will be strong selling points to the consumers and will bring in the volume of sales needed to counter the extra costs. By having Kooler Cups made as reusable and dishwasher safe cups, they are more appealing to a broader market, ranging from the household parent who is purchasing to entertain guests, to the college student who is looking for an affordable option as a party cup, and everyone else in between. If a consumer were to go to the grocery store and purchase a pack of Solo brand cups, they would use them for the evening, and throw them away at the end of the night just like any other trash. However, with Kooler Cups, the consumer is able to use the time after time, making our product a much better value over the life of the cup. Kooler Cups will be the life of the party with the color changing technology. This feature will appeal especially to college students looking something extra to have at their party, as well as being a strong selling feature to mothers who go hopping with their children. It is a feature that is sure to be determining factor in the minds of potential consumers, and will result in Kooler Cups gaining a sizable amount of market share from the product launch. Kooler Cups will be positioned on the shelf where all of the other plastic party supplies are located. They will be at a higher price point than most of the competing products because of the reusability a nd color changing features of the cups. Kooler Cups will be offered in packs of twelve, even though many of the competing plastic cups come in packages of twenty. Our product cost would be too high if we offered packs of twenty, so at packs of twelve, the price will seem closer to the competing cups, even though the price per cup will be much higher. The Kooler Cups will sell in packs of twelve cups, and made so that they are stackable. The design of the cup will have a more modern of a look, with a slight outward curve on the upper half of the cup. It will be constructed out of Polypropylene plastic (No. 5), which is a food safe plastic that is dishwasher safe and more durable than Polystyrene (No. 6) that Solo brand cups are made out of. Polypropylene plastic is also able to be engineered to have thermodynamic qualities. Forecasting the demand of our product has proven to be somewhat of a difficult task. After looking at many different factors, the estimated monthly demand in the first year of Kooler Cups is 155,000 packages of Kooler Cups. This was found by looking at the total amount of college student in the United States which is about 14 million. We estimate that probably about 3/5’s of college students participate in drinking, which would bring the number of college age drinkers to 8,400,000. Assuming that each drinking college student consumes about 3 plastic cups a month that would bring the number of cups used monthly to 25,200,000. We are estimating an initial market share of 5%, which would equal 1,260,000 cups purchased monthly. That is 105,000 packages of cups sold per month, and we added an additional 50,000 cups to be consumed by other markets such as households. This gives us a monthly demand of 155,000 packages of Kooler Cups. Pricing Strategy, Tactics, and Theory Our plan is to implement a price-skimming strategy to establish Kooler Cups as a competitor in the market. By pricing the cups slightly higher than our primary competitor, Solo Cup, we will communicate high product value and capture the price insensitive market first. While the price for a package of thirty sixteen oz. Solo cups ranges from $2. 67 to $5. 49 (depending on the distribution channel), we will package our product in twelve cup packages for approximately $3. 99. Because our production cost per cup is much higher due to the higher-grade plastic used for raw materials and the thermodynamic technology, offering the same package size as Solo would make the price per cup difference obvious. However, packaging the cups in sets of twelve accomplishes two goals: 1) increasing the customers’ propensity to purchase the product because the package price is within an acceptable range of competitors’ prices, and 2) reinforcing the reusable feature of the cups (i. e. , if they’re reusable, why buy thirty of them? ). Once the price insensitive market is saturated, we will lower the price slightly to capture more price sensitive markets. Logistically, this strategy makes sense for a company starting with limited production capacity. As a result of high startup costs and little brand awareness (and, consequently, low initial revenues), we will only have the capital to produce limited quantities of the product in the beginning. Then, as brand awareness increases and we begin to re-coop our startup costs, we will generate enough cash flow to increase production capacity and decrease our cost per cup. With a lower cost per cup, we can lower the price without eroding our margins. Because our product has a differentiating feature (the color changing technology), we won’t be forced to compete on price. Additionally, since there are no comparable substitutes for this product’s differentiating feature, we can be the ones to determine its value. Rather than choosing between a name brand Solo cup and a store brand cup that looks virtually identical, customers are choosing between a commodity (the classic disposable cup) and a whole new product entirely. Firms often times find too much comfort in their pricing strategy, and are too optimistic, that they fail to realize what could go wrong with regards to sales or driven demand. As a business, it’s crucial to analyze these â€Å"what-ifs,† if you will, to determine the next plan of action. It becomes entirely necessary during the initial stages of product development and marketing, to come up with something known as a worst case scenario. So, with this scenario in mind, what if the demand for Kooler Cups plummeted during the first three to six months, creating a significant decrease in our sales figures? Would we just â€Å"call it quits,† and bail before too much of our time, money, and efforts are wasted? Well, the primary strategy behind price-skimming doesn’t say to bail, but instead reduce price if that initial market isn’t purchasing our product. The idea behind this strategy resides in the fact that there are different pricing phases over time to generate profits with respect to various price-sensitive markets. If, in our case, consumers aren’t buying during the initial phase of pricing [first 3-6 months], we will reduce the price to try and capture the next segment, using an effective promotional strategy. For example, we would attach a $. 50 off coupon on the outside of the package, as to not degrade the price or brand of the cups, but increase the value leading to higher sales volume. This will keep broadening the consumer base until, eventually, we have maximum market potential given our product. Looking on the other end, if sales skyrocket given a drastic increase in demand, there are a couple different options to consider: increase capacity while maintaining (or even lowering) price, or implement a slight price-increase to counteract demand. Seeing as the product is rather new into the market and un- established, most would agree that the appropriate strategy to take would be to slightly increase price without coming across to customers as charging an unreasonably high price. A brand new business, such as ours, would not hold the necessary resources needed to expand and increase capacity (i. e. purchasing new equipment or hiring additional people). The next best alternative at hand would be a slight price increase until demand starts to level off again. *Conclusion * The disposable sector of the Foodservice Packaging industry is comprised of single-use products such as plastic bowls, cups, lids and cutlery for the commercial, government and home use sectors. The specific product category that Kooler Cups will be competing in is titled â€Å"Cups & Lids†, and includes disposable beverage products made from various grades of plastic, Styrofoam and molded paper. This category is projected to have the highest revenue growth between now and 2015, due largely to innovations in environmentally friendly products such as compostable cups and cups made from recycled materials. Solo Cup Company, the primary competitor in this product category, has overwhelming market share and posted sales of $2. 4 billion in 2006. Created in 1936, Solo enjoys well-established brand equity and has the advantage of low production costs due to its high volume manufacturing. These factors allow Solo to retail its products at a premium price, resulting in high profit margins. By differentiating our product based on its unique characteristics, we will enter the market as a high-quality alternative to the classic Solo cup. With its color changing technology and durability, Kooler Cups will compete in the market by providing the customer with a uniquely valuable product. Bibliography â€Å"Ammended Annual Report. Solo Cup Co.. N. p. , 1 Jan. 2006. Web. 14 Oct. 2009. . â€Å"Cold Cups & Lids. † EcoProducts. N. p. , n. d. Web. 2 Nov. 2009. . â€Å"Cups & Lids to 2012 – Market Research, Market Share, Market Size, Sales, Demand Forecast, Market Leaders, Company Profiles, Industry Trends and Companies including Solo Cup, Dart Container and Georgia-Pacific. † _ The Freedonia Group – Market Resea rch _. N. p. , n. d. 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