Question: Background information EuroFoods is a French-German consumer products group with a turnover of £8bn a year at 1992 retail prices. One of EuroFoods' activities is the manufacture of ice-cream. Medley is an American company. It has worldwide sales of £5bn a year and these come mainly from chocolate products. Three years ago Medley started to diversify. It did this by selling a new product, ice-cream, in one of its existing markets, Europe. Although Medley has no prior experience of ice-cream, it believed that it could exploit its existing expertise in food products, marketing and distribution in this new area. The European ice-cream industry turnover is £6bn at 1992 retail prices. The aggregate industry return on sales is estimated to be 10 per cent profit before tax.
Distribution has always been a very important aspect of the food industry. However, it is particularly so in the ice-cream business. This is because the product must be kept refrigerated from factory to shop, and also while it is stored in the shop. Many of the shops which sell EuroFoods ice-cream are small businesses and the freezer which is required for storage is a costly item for them to buy. EuroFoods has therefore a scheme whereby it will install and maintain such a freezer in these shops. The shop owner does not have to pay for the freezer. The only condition which EuroFoods imposes is that the freezer must be used exclusively for the sales of its products. EuroFoods believes that this arrangement has worked well for everybody in the past. EuroFoods' expenditure on the freezers have ensured that its products have reached the consumer in good condition and also enabled it to simplify stock control. It has also played a part in building its market dominance by enabling shops which otherwise would not be able to do so, to sell its products.