Michel et Augustin Cookies - INSEAD · PDF fileMost cookies were sold through supermarkets and...

Michel et Augustin Cookies: Culinary Adventurers Competing Against Food Industry Giants

03/2014-5757

This case was written by Hernán A. Bruno, Assistant Professor of Marketing, and Hilke Plassmann, Assistant Professor of Marketing, both at INSEAD, based on an independent study project by Felix-Antoine Joli-Coeur. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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Winner of The Case Centre case writing competition 2014 in the category “New Case Writer”

Copyright © 2014 INSEAD 1 03/2014-5757

For most business school students, the last section of their CV – “Personal Interests” – aims to show that behind the highly-skilled professional is a sensitive and passionate human being. Michel de Rovira and Augustin Paluel-Marmont wrote “Baking” in that last section. But for them it turned out to be a different story: their personal interest became a full-time job when they created Michel et Augustin, a cookie-making venture based in Paris.

By January 2006, Michel and Augustin were running a small production company that made and distributed cookies mostly through sandwich shops. They were now seeking further investment in the business to increase the size of their operation and distribution. First, however, they required a viable business model in order to persuade potential investors. Specifically, they needed a consistent product, higher brand awareness, and a bigger network of channel partners. More importantly, to compete against the giants of the industry, including Kraft and United Biscuits, they had to have a brand that would attract attention in the marketplace.

But how could they do that with their limited resources? Like David facing the industry Goliaths, they knew they had to do something special. Working on a PowerPoint presentation for potential investors, they strove to map out a path to create the brand they had been dreaming about for years, as well as to survive in one of the most competitive consumer goods markets.

Michel et Augustin’s First Steps

Michel et Augustin was the fruit of a childhood friendship, a shared passion for food, and the irresistible appeal of entrepreneurship. The project started in late 2003, when Michel de Rovira and Augustin Paluel-Marmont spent six months tasting baguettes and croissants in Paris as part of the research for their book Le Guide des Boulangeries de Paris, the first comprehensive guide to Parisian bakeries (Exhibit 1). It was while working on this project that they began to conceptualize a new business idea: to create their own food brand.

From then on, Augustin dedicated most of his time to defining and refining the idea and the vision for the new brand. He had a degree from EAP, a Paris-based business school, and had previously worked for Air France. Fascinated by marketing and branding, right from the start he placed a strong emphasis on developing an original graphic identity for Michel et Augustin. Michel, a former L.E.K. consultant, had just been accepted for an MBA at INSEAD, a business school with campuses in Fontainebleau, France and Singapore. He had majored in finance from ESCP, which made him the perfect complement to Augustin. The year at INSEAD would be a unique opportunity to gain the skills and resources to take their project forward.

By 2005, the two friends became founding partners in their own company. Michel de Rovira described his initial feelings,

“I was definitely nervous, but also excited about committing to Michel et Augustin. Most of my business school friends were going to great jobs in consulting or industry, and here I was, considering baking. Part of me wanted to choose a ‘safer’ path, but part of me wanted to see whether we would succeed. That part won the argument.”


After a few months evaluating different foods, Michel and Augustin decided that their first product should be the sablé, a round, dry shortbread biscuit, either sweet or lightly salted, that was deeply rooted in French culinary tradition. They would offer sablés in three varieties: two classics (butter and chocolate chip) and, after hundreds of experiments baking cookies in their student apartments, they decided to go with “poppy vanilla” as their third flavour (Exhibit 2).

At first, Michel and Augustin produced their sablés themselves in their home kitchen but soon moved to making their cookies in bakeries. They had gained a deep knowledge of Parisian bakeries while researching their book and realized that some had spare capacity. They were, after all, knowledgeable bakers who had created their own recipes through months of experimentation. The plan was to produce their cookies in rented bakery space one day per week, and sell them during the rest of the week.

The next ten months were challenging and frustrating. Despite their passion and talent, baking sablés in large batches brought lots of problems. They realized that they needed a different manufacturing approach if they wanted to achieve a minimum sustainable and standardized production level. Michel and Augustin invested €5,000 in a specially-designed baking mould that would increase their rate of production, only to find that most cookies came out broken or damaged after baking. As Michel recalled:

“It was heartbreaking to make batch after batch of broken cookies. Almost one year after starting, we still didn´t have stable production! I felt discouraged, and questioned our judgement: of our €15,000 in start-up capital, we had spent one third on a mould that didn´t work!

They had to go back to batch making. The mould now sits on his desk as a reminder of all those early days they spent baking.

The beginning was hard, both physically and emotionally. They worked long hours and the future of the venture was still highly uncertain. During the year 2005, Michel and Augustin sold about 70,000 packets of cookies, with continuous growth over the year. In November and December 2005 they sold an average of 500 packs a day. They also launched a website that gained a small but loyal following, and 3,500 people subscribed to their online newsletter. The results were promising but they were still far from achieving adequate scale.

The French Sweet Biscuit Industry

Overview

The sweet cookie market included biscuits based on butter, chocolate or eggs, cream-filled biscuits, plain biscuits and wafer biscuits (Exhibit 3). These were often mass produced in factories but also baked in-store or produced by small operators and artisans.1

The French cookie market had not followed the general trends observed globally. While the global biscuit market grew on average around 3.2% annually during 1995-2004, the more mature French cookie market grew at only 1.7% in 2004. Worldwide, growth was driven

1 Datamonitor Global Biscuits report p 7


mostly by volume of cookies purchased, whereas growth in the French market was driven by a rising interest in quality and a shift to higher price points (volume growth in France for 2004 was just 1.1%).

There are high returns to scale in cookie production given the large investments required in equipment and supplies such as flour and sugar. This incentivizes players to increase volume and compete on price. The considerable investment in capacity needed to achieve a competitive cost structure makes it difficult for undifferentiated small players to gain scale and grow. The result is a market where a few big players have relatively large market shares and market power, while thousands of small producers compete in local markets. This excessive product proliferation and a large number of brands leads to a cluttered marketplace where brands fight to gain and maintain consumer interest. The task is made even harder by the fact that biscuits compete for consumer attention with other snacks and artisanal confectionery such as pastries, or traditional treats such as the macaron, made with egg white, sugar and ground almonds.

Most cookies were sold through supermarkets and hypermarkets, particularly in France, where major retailers accounted for 75.1% of all cookies sold (compared with a global average of 58%, see Exhibit 3). As a result, power in the distribution channel remained on the side of the retailers. This asymmetry allowed big retailers to dominate the negotiating process, particularly when dealing with smaller manufacturers. Moreover, since brands were fairly similar, retailers could replace them without incurring heavy costs. Beyond a few popular products (e.g., Petit Écolier, Oreos), brands had little power in the retail channel, with the big chains driving the stocking and pricing decisions.2 A typical retail margin for selling products from a small producer was 40%. Smaller shops sometimes charged higher prices, with gross margins of between 60% and 80%.

In France, sales were dominated by a few international players that competed for retail shelf space and consumer attention (Exhibit 4). Kraft Foods was present via LU, famous for its Petit Écolier (Exhibit 5), Mikado and PiM’s brands. Other competitors included United Biscuits and the German Bahlsen GmbH & Co., which produced a wide variety of German-style cookies under different names. Of these competitors, LU was the clear leader: in 2008 it owned seven of the top ten cookie brands and accounted for 41% of cookies sales in France3 (Exhibit 3)

In addition to national or international brands, supermarkets and hypermarket chains increasingly sold private label cookies (Exhibit 6). Sales of private label cookies grew more rapidly than overall cookie sales (by 3.8% annually), accounting for more than a quarter of all cookies sold in France in 2008. Although private label products tended to be significantly cheaper than branded products, they could be positioned as premium or standard as well as discount products.

Consumption Patterns

Traditionally, the French ate regular meals with little snacking in between, but this was changing. Snacks now accounted for almost 10% of calorie intake – far higher than in the

2 Datamonitor Global Biscuits report p 15 3 Euromonitor Biscuits in France p2


past, though still lower than in the US (where the figure was over 20%). Less time was being spent on cooking and preparing food. The traditional long Sunday lunch was becoming a thing of the past, with average Sunday food preparation time estimated at only 20 minutes.

The French tended to eat cookies either as a snack or for breakfast. Surveys conducted by the French research company CREDOC found that one in five French people ate cookies every day,4 with 9 out of 10 cookies eaten either at breakfast or as part of a meal or snack that also included dairy products or fruit.

Consumers in France were lovers of chocolate and plain cookies, and these comprised over half of all cookie sales, well above the global average (Exhibit 3). Children and teenagers in France were by far the greatest “cookie lovers”. Average consumption among children under 15 and those aged 15 to 24 was 17g-18g per day (equivalent to two butter cookies). Those in the 24 to 49 age range ate 9g per day, while the over-50s ate only 8g per day. Adults ate more biscuits for breakfast than as snacks (41% of biscuit consumption at breakfast and 32% as snacks), while children ate more for snacks than breakfast (61% and 21% respectively).5

Unfortunately for the industry, cookies were generally not perceived as healthy. They had high levels of sugar and fat, could contain additives, and tended to have low fibre and nutrient levels. As a result, eating cookies was not always perceived as pure enjoyment. Approximately 40% of adults were reported to feel guilty when they ate sweet foods such as cookies.

In essence, eating cookies is an act of indulgence. So despite the popularity of some brands, cookies are not considered a basic necessity and demand is easily influenced by shifting needs and tastes. Busier lifestyles, increasingly health-conscious consumers, a proliferation of products of indulgence, and the growing popularity of organic products all affected the demand for cookies. (Exhibit 7 shows the most popular tags on new bakery product packages from 2004 through 2008).

Industry Trends

One effect of the strong competition was that cookie producers constantly launched new products as a way of keeping consumers interested. The majority of these product launches were not truly innovative. Occasionally, the boundaries were pushed (such as in 2006, when Bahlsen marketed a limited edition of tequila flavoured cookies to adults), but more often new products were variations on existing products, changing the proportions of ingredients such as butter or eggs, adding complementary flavours to a product line, or re-shaping a cookie or its packaging6 (Exhibit 8).

Bahlsen was quick to pick up on this trend, releasing PickUp!, a chocolate wafer cookie in France in 1999, which soon became a hit, selling €9.1 million ($11.9m) by 2000.7 Michael Liardet, Bahlsen’s Director of Operations at the time, stated that it “filled a void in the

4 Baromètre santé nutrition 2008 p137 5 Les biscuitiers se défendent de contribuer à l'obésité en France, Rapport du groupe de travail PNNS sur les

glucides, Etapes 1 et 2 du mandat, Mars 2007, p118 to 120 6 Growth_Strategies_in_Bakery_and_Cereals pp64 and 65 7 Converting 60M francs to Euros and dollars at the “obsolete” Exchange rate


market” by focusing on young people aged 15-34, an age group that was often neglected by marketers despite its high cookie consumption.8

The trend for indulgence led cookie producers to release products that were richer in ingredients such as butter, eggs and chocolate, often exotically flavoured, and in smaller packs. In one example, LU joined forces with Côte d´Or, a chocolate brand also owned by Kraft Foods, to produce Biscuit Intense, a butter biscuit covered in rich chocolate containing pure cocoa butter. A grown-up version of the Petit Écolier, its website featured enthusiastic comments from French people in their late 30s. Bonne Maman, a French brand that produced jams and fruit desserts as well as cookies, with a presentation designed to evoke authentic home-made treats, launched the Petit Cerisier, intensely cherry-flavoured tartlets sold in boxes containing eight individual packs.

The range of health-related cookies was broad, encompassing both health-focused brands and reformulations of existing cookies. In an example of the former, United Brands produced Verkade Fruit&Form, a range of fruity, high-fibre or gourmet cookies, with packaging that emphasized the fruit and wholegrain ingredients, as well as nutritional and calorie content. In a similar fashion, Leibniz, a Bahlsen brand, reformulated its traditional butter cookies into a variety that contained 30% less sugar, two varieties (plain and chocolate-coated) suitable for diabetics, and a wholegrain variety. Some products focused on the health attributes without obviously having changed the recipe. For example, LU emphasized the calcium content of its Lulu L´Ourson (Lulu the Bear) cookies for children and the fact that they contained no colour additives or preservatives, but made no mention of a change in ingredients.

In parallel to the growth of health and indulgence cookies there was increasing demand for organic or ethical products. In the cookie aisles of French supermarkets, AB (organic) certified products were popular and could be found both in the branded and private label ranges. For example, the supermarket chain Monoprix had its own Bio range of cookies alongside La Clé des Champs and Verkade Bio, the organic ranges from LU and United Biscuits respectively. To be certified as organic, products were formally assessed by Agence Bio (AB), the central agency for the development and promotion of organic agriculture.

Michel et Augustin’s Next Steps: The Marketing Plan

Brand Positioning

Since mid-2005, Michel and Augustin had been using their own names as part of the brand. But the name was only the beginning and they had to develop a strong brand position – in the crowded cookie market it was difficult to achieve meaningful differentiation through physical attributes alone. They had pitched the idea to potential investors in the past and it had been received with moderate enthusiasm, but it was difficult to convince people that a new company could break into this market with a traditional product. Michel and Augustin were well aware that a unique brand positioning was the key that could mean the difference between being a success and just another failed business venture. Not only did they have to understand the key trends in the market, they also had to link the brand to a unique set of associations, as Augustin noted:

8 Oscars LSA : Pick Up!, de Bahlsen


“What do we want people to think of when they think of Michel et Augustin? What associations should we bring to mind, especially given our brand is our very own names? What should be their points of differentiation with the competition? What should be their points of parity?”

Product

Michel and Augustin wondered how the product should look. They felt they had already found a winning formula with their sablés. These were wrapped in small sachets so that they kept fresh for longer. Each sachet contained three sables and weighed 20g. They estimated that each sachet cost about €0.22 to produce, which was significantly higher than the average cost of the big cookie producers. Individual sachets were packaged in cardboard boxes of about 120g, equivalent to six sachets per box. They were also contemplating a “snack” version of the product with two sachets per box. Larger packets that held six sachets cost around €0.25, and smaller ones that help held two sachets were only slightly cheaper, at €0.21.

Distribution

Michel and Augustin were faced with a plethora of possible distribution points: supermarkets, hypermarkets, corner stores, internet sales, direct sales, cafes, restaurants, cinemas, museums, delicatessens, sandwich shops, hotels, and gas stations. So far they had focused on small and “unusual” sales points such as hairdressers and independent sandwich shops. Although this was labour intensive, the number of outlets had steadily grown, reaching over 100 different locations.

In order to increase financial viability, Michel and Augustin needed to increase their distribution coverage. One option was to keep expanding their network of sandwich shops, cafes and delis. Although they saw major advantages to using a network of small stores, they had to consider distributing through bigger partners such as a large supermarket chain (e.g., Carrefour), a convenience store chain (e.g., Monoprix), a specialist retailer (e.g., La Grande Epicerie de Paris, Bon Marche), or a combination of all these.

Pricing

The original idea was to price their sablés higher than standard cookies but lower than the most expensive brands such as Fauchon or Hédiard (Exhibit 9). But the ideal price was not clear, given their cost structure and distribution model.

Advertising

Looking at how other food businesses promoted their products, Michel and Augustin noted that many used all available media (TV, radio and magazine spots, social media etc.), as well as coupons, discounts and other tools. They also saw the large amount of money being spent on launching new food products. French food company Danone spent around €10 million launching Essensis, a new yoghurt brand; Yoplait, a French yoghurt company, spent a similar amount on the launch of Dizzy, a fizzy drinking yoghurt.


As a start-up, Michel and Augustin didn’t have the means to run large-scale advertising campaigns. The challenge, therefore, was to attract attention and build sales in a cost-effective manner. Augustin insisted that their advertising choices should not only be decided by their budget but also by their brand positioning: “We need to know who we want to sell to, and what value our sablés bring to them before we can decide how we can attract them.”

Decisions

Michel and Augustin were faced with a difficult challenge. They needed to convince a group of investors that they had a sound marketing plan that would enable them to compete and succeed in the tough cookie market. The heart of the marketing plan was to find answers to the following questions:

1. How should they position the brand? What were the key brand associations that could serve as points of difference?

2. What should the product look like? Should they focus on a small pack of 6 cookies or should they shift to the family pack with 15 cookies? At what price?

3. How would their sablés reach the consumer? Should they try to keep pushing the distribution through small shops, or try to gain access to big chains of convenience stores and supermarkets?

4. How could consumers learn about the product when they didn’t have a big advertising budget? The website was growing, but would it be enough?

The only thing they knew for sure was that in order to compete against the giants in the industry consumers had to fall in love with their sablés – but would they?


Exhibit 1 “Guide to the Bakeries of Paris: The 180 Best Addresses for Learning to Enjoy Bread”

by Michel de Rovira and Augustin Paluel-Marmont

Published in 2004, the book was described by one reviewer as “a comprehensive guide and very useful for lovers of the baguette and croissant… Contains a wealth of practical information, and mouthwatering photos! …In short, a great success.”

Source: Amazon.fr. Author´s own translation of title and review comment.


Exhibit 2 The Three Original Sablé Flavours in an Early Packaging Prototype

Poppy Seed and Vanilla Chocolate Chip Butter

Source: Michel and Augustin company documents.

Exhibit 3 Key Statistics on Sweet Biscuit Sales (in value terms) in 2008

Percentage of sales by cookie type

Globally In France Percentage of sales by distribution channel

Globally In France

Butter-based

17 25.8 Supermarkets / Hypermarkets

55.8 75.1

Chocolate 16.4 28.3 Independent retailers 21.6 11.1

Plain 16.2 11.2 Specialist retailers 12 9.5

Cream-filled

12.7 16.3 Other 10.6 4.3

Wafer 10.7 5.6

Other 27.1 12.8

Sources: Datamonitor Industry Profile on Global Biscuits, 2009; Datamonitor Industry Profile on Biscuits in France, 2009.


Exhibit 4 Market Share Development in the French Sweet Biscuit Market

Source: Euromonitor Country Sector Briefing on Biscuits in France, 2009.

Exhibit 5 LU’s Petit Écolier, a Well-Loved Brand in France

The distinctive shape and the famous “Petit Écolier” (little schoolboy) image help customers distinguish the real thing from other chocolate-coated biscuits, and link customers to the history of the brand. A famous poster from 1897, showing the original “Petit Écolier”, is shown below.

Source: LU Petit Écolier website, 2010

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Exhibit 8 Example of Brand Extensions under the LU Prince Brand

2a: The original LU Prince cookies 2b: “Health” extension: multigrain

2c: Package extension, large pack (2 x standard packs, sold together)

2d: Package extension, pocket-pack (10 x packets of two cookies) and family pocket pack (15 x packets of two cookies)

Source: LU website, 2010.


Exhibit 9 Description of Fauchon and Hédiard

Fauchon and Hédiard both sell fine French foods.

Founded in 1886 by Auguste Fauchon, Fauchon sells a range of luxury food products including chocolates, cookies and delicatessen products through its chain of franchise stores, though it remains most famous for coffees and teas. In the tea market, in particular, Fauchon has been particularly innovative, and has been credited with introducing fruit-flavoured and flower-petal teas to the French market in the 1960s and 1970s.

Fauchon struggled financially in late 1990s and again in the early 2000s, almost going bankrupt in 2004. By 2009-10 it achieved operational break-even on sales of around €135 million, after drastic reductions in staff, selling off unprofitable stores and focusing on markets outside of France.

Fauchon sells a range of cookies, which it describes as “made following age-old production methods...and according to traditional recipes...” A 125g pack of plain butter Palets de Bretagne cookies cost €5 on its website in 2010.

Hédiard was founded in 1832 by Ferdinand Hédiard as a seller of gourmet spices and tea and coffee products. Its range in 2010 still includes teas, coffees and spices, as well as fruit products, gift packs and biscuits.

Like Fauchon, Hédiard´s recent strategy has focused on growing sales outside of France. As of 2007, it had over 200 stores, of which only one in ten was in France. Around the same time it was acquired by the Russian luxury group LuxAdvor and had sales of around € 30 million.

A100g pack of its plain butter Galettes cost €5 on its website in 2010.

Source: Fauchon and Hédiard websites; newspaper articles about Fauchon and Hédiard.

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