Gallo Rice Hbs

Gallo Rice - Good case for illustrating the differences between mature, new-growth, and emerging-market environments. Case addresses 4P issues in Italy, Argentina, and Poland.

In late spring 1991, as Sig. Cesare Preve was wrestling with the issue of how what strategic moves should form the basis for Gallo's future in Argentina, he decided that an analysis of whether to cut prices to meet local competition would be useful.

Market Situation.

Preve knew that annual retail sales of rice in Argentina were about 140,000 tons, of which 85,000 were branded product. Gallo's planning department had estimated that retail market was well-represented by the following demand formula:

Q = 95,000 +65 I - 100,000 P

where

I = (average income in $ per household) = $3,000

and

P = (average market price per kg for parboiled rice) = $1.50

They did not estimate the standard error of this estimate, but believed it would be rather small. This formula also described the behavior of the specialty and parboiled segment of the market, adjusted for their segment volume levels.

Specialty rice products accounted for about 20 % -- and rising -- of the 140,000 ton total market and the majority of Gallo's sales were in this segment, particularly in the supermarket portion of this segment and in the area close to Buenos Ares. Gallo's overall share of the 140,000 tons was 17.5% by volume and 23.7% by value.

Competitive Situation.

Gallo's leading competitor, Molinas, held 10.1% of this market -- up from 8.8% a year earlier. To gain share, it priced its parboiled Maximo brand product (with 7.5% volume share and 10.3% dollar share) 12% below Gallo's parboiled Oro product which was the market leader (with 9.8% volume share and 12.5% dollar share).

Oro Cost Structure.

Gallo's existing cost structure (based on Oro) was as follows (average unit costs per kg):

Raw Materials 40 cents*

Packaging 20 cents*

Fixed Overheads 20 cents

Marketing Expenses 20 cents

Total 100 cents

* Constant over the range of volumes being considered.

Proposed Action.

Sig. Preve had heard proposals from the Gallo sales department that in addition to maintaining it's "fighting brand" Noblesa Gaucho", Gallo should cut the price of Oro and its other specialty products by about 12% or 20 cents per kg to meet Molinas.