Going to market with a new product: St. Lawrence Island, Alaska.

Roberts, Wayne A., Jr.

CASE DESCRIPTION

The primary subject matter of this case concerns the evaluation of alternative channels of distribution for a proposed new business. Secondary issues that can be examined include pricing through channels, the marketing concept and real world considerations, and information collection and analysis. The case has a difficulty level of 3 to 4. The case is designed to be taught in 1/2 to 1 class hour and is expected to require anywhere from no outside preparation to 1 hour of outside preparation by students, depending on how the case is presented. If desired, the case can easily be expanded to cover logistics issues.

CASE SYNOPSIS

St. Lawrence Island, Alaska, located in the Bering Sea, is actually closer to Russia than Alaska. There is very little economic activity on the island, and the native villages of Savoonga and Gambell are very interested in finding opportunities to generate much-needed cash and employment opportunities for their children.

One resource the island has is seaweed. A market study done on behalf of St. Lawrence Island indicates the health food market has been growing over 15%/year and that 30% of health food consumers purchased seaweed vegetables within the past year. One popular seaweed product, kombu, comes from a seaweed available in abundance around St. Lawrence Island.

This case describes the channels of distribution associated with this market, along with representative pricing, and asks students to evaluate three channel alternatives open to the St. Lawrence Islanders. The proposed alternatives can be evaluated by a number of criteria, such as economic (cash flow levels and risk), adaptability, and control. Important aspects of channel and buyer behavior uncovered during the market study are available, and may be given during the discussion regarding the alternatives.

The case may be introduced verbally and evaluated through the lecture format, or if desired, students may be required to read the case and respond to questions prior to class.

This interesting, simple case clearly demonstrates channel members perform functions that someone has to perform, and if a level is cut the functions need to be shifted to someone else. Further, the best channel choice for an organization hinges on the relative strengths and weaknesses of the organization.

INTRODUCTION

St. Lawrence Island (SLI) is located more than 100 miles off the mainland of Alaska in the Bering Sea, less than 40 miles from Siberia. Temperature extremes vary from less than 30 degrees below zero to a record 67 degrees Fahrenheit. From mid-November to May the island is locked in Bering Sea ice, and the winds average over 15 mph. Mammals on the island include fox and a large unmanaged reindeer herd. The reindeer were introduced to the island in 1900. There are no docks on the island, and any materials brought in have to be either off-loaded the occasional barge via small boats or flown into one of the two small airstrips.

There are two villages, Gambell and Savoonga, on this isolated island. Interestingly, the distance between the two settlements is greater than the distance between Gambell and Siberia. Fewer than 700 Yup'ik Eskimos live in each village. The people predominantly follow a subsistence lifestyle, hunting and living off of walrus, seal, whales and fish. A very few people hold commercial fishing permits, and there is a small fish processing facility in Savoonga. Cash is derived from selling ivory carvings, archaeological artifacts, and from a few seasonal bird watchers. While most homes in Gambell now are tied into a water and sewer system, at the time of the case a sizable proportion of homes in Savoonga still relied on hauling water and on honey buckets, which are nothing more than sewage pails which must be hauled out and emptied.

The residents of St. Lawrence Island need cash for electricity, snowmobiles, rifles, and many other goods. Further, villagers are concerned about the lack of opportunities for the younger people. Young adults often migrate to larger cities on the mainland in the search for employment, and without viable opportunities on the island the communities might wither. Therefore there is a high degree of interest in finding suitable economic opportunities.

NEW BUSINESS OPPORTUNITY

An entrepreneurial-minded individual from Fairbanks, Alaska, noted the quantities of seaweed that grew around the island, and suggested that the St. Lawrence Islanders explore the opportunity to harvest and market them. Following up on this suggestion, the Islanders, through the Alaska Department of Community and Regional Affairs, issued a request for proposals. A team was hired to do two things: first, to inventory the types and quantities of seaweed that grow around the island, and second, to explore market opportunities for the seaweed species that occurred in large enough quantities.

As it turns out, a very common type of seaweed in the area, genus Laminaria, is used commercially in several ways: for extractives (which is used in beer, frostings, dental material, toothpaste), as fertilizer, as fodder, and for food (kombu). The highest value use is as a food. The Japanese use it to flavor soups and casseroles, have kombu candy, and eat it plain. Koreans, Chinese, and other Asian nations also eat kombu. It should be noted that for Asian kombu consumers a little amount went a long ways; most packaged kombu was in approximately 8 ounce packages.

With regard to the food market, a number of options were examined. The possibility of exporting the seaweed to Japan was rejected, given that Japan already has a mature kombu industry and is tightly controlled; one bureaucrat could decide to disallow the importing of St. Lawrence Island kombu at any time. Further, discussions with Japanese industry participants led the research team to believe that the fact that the seaweed came from pristine Alaskan waters harvested by natives would not bestow any differential advantages to St. Lawrence Island kombu: Industry representatives believe that taste was the most important product attribute, and their assessment of the taste of St. Lawrence Island seaweed was that it was not exceptional, or even above average.

Selling to Asians in America, and to Japanese restaurants in the U. S., was also considered. However, this did not appear to be promising. Japanese restaurants bought supplies from wholesalers that already had adequate supplies and were not interested. Visits to ethnic grocery stores were likewise not encouraging; Korean stores stocked Korean kombu, and Japanese stores stocked Japanese kombu. Uwajimaya, a rather large Asian foods grocery store in Seattle, stocked Japanese kombu in a Japanese products aisle, Korean kombu in a Korean products aisle, and Chinese kombu in a Chinese products aisle. Store personnel said that customers bought products from their home country.

One market that appeared to be promising was the U.S. health food market. Health food sales were increasing over 15% per year, health food stores were increasing in number and sophistication, and seaweed products were beginning to be retailed through health food stores. Prices were higher than for Asian-produced kombu, the products came from U. S. companies targeting health conscious consumers, and the field did not appear to be saturated with competitors. Significantly, it was estimated that 30% of health food consumers had purchased seaweed products within the previous year. It appeared that health food kombu was in the introductory, or perhaps the beginnings of the growth stage, of its product life cycle.

Based on personal interviews and observations, the typical channel of distribution for health food products is as follows: Raw materials, such as seaweed, go from harvesters/growers to manufacturers, who package, label and sell a final product to wholesalers/distributors, which in turn is sold and distributed to retailers, who sell to final consumers. For an item that retails for $10.00, health food stores typically pay wholesalers/distributors between $6.00 and $7.00. The wholesalers/distributors would typically pay manufacturers between $4.50 and $5.25 for the item. The raw materials costs manufacturers pay to suppliers would run between $2.25 and $3.95.

ALTERNATIVES

With this information, a group got together to discuss what the tentative scope of the new business should be. Three alternative models were raised for consideration:

Alternative 1

The first model called for St. Lawrence Islanders to simply harvest, dry, and bundle the kombu for sale to one or more health food manufacturers.

Alternative 2

The second alternative entailed turning the bulk kombu into a final packaged product, which would then be sold directly to retailers. The thought was that St. Lawrence Islanders could cut out the manufacturers and wholesalers, and keep more of the revenue and profit for themselves.

Alternative 3

The third alternative called for selling the final packaged product directly to consumers. In this model, the St. Lawrence Islanders could keep all the revenue for themselves.

CASE QUESTIONS

1. For the first alternative, consisting of focusing on harvesting and selling bulk seaweed to manufacturers, what exactly would the St. Lawrence Island business have to do with regard to the product, pricing, and promotion? Assuming pursuing this would be successful, how many channel relationships would have to be maintained? Success, under this alternative, would depend on what?

2. For the second alternative, which consists of selling a finished product to retailers, what additional tasks and activities have to be done with regard to the product, pricing, and promotion? Assuming pursuing this would be successful, how many channel relationships would have to be maintained? Success, if this alternative is pursued, would depend on what?

3. For the third alternative, which consists of cutting out the retailer and selling the final packaged product directly to consumers, what tasks and activities would have to be done beyond what would be required under the second alternative with regard to the product, pricing, and promotion? Success, if this alternative is pursued, would depend on what?

4. Roughly, what could the new firm expect with regard to sales and costs in the short term, and the long term, under each alternative? Why? What sort of investments in people, equipment, and systems are associated with each alternative? What are the risks under each alternative?

5. What sort of investments in people, equipment, and systems are associated with each alternative? What are the risks under each alternative?

6. Recognizing that additional research is required, which alternative do you think represents the best bet for the islanders? Why?

Wayne A. Roberts, Jr., Southern Utah University