CASE STUDY # 6 – Home Appliance Distributor
The luxury appliances distributed by the Company are favorably differentiated from the competition. The main refrigeration brand carried by the Company offers the only double refrigeration equipment in the industry, which preserves food much better than other product offerings. The useful life of the product is seventeen years, compared to the twelve-year average for most other household refrigerators.
The imported dishwasher is the quietest and most energy efficient line of laundry products in the industry and conforms to top European and US standards, which separate all appliances into A-D categories, according to quality, reliability, warranty, and efficiency.
The high-end cooking equipment borrows the dual refrigeration concept from the maker of the refrigerators, manufacturing a dual convection oven, which conforms to the highest professional standards in actual performance.
In quality and reliability, the refrigerators rate a strong 98.5%, with 0% defects at installation. Although no precise statistics are kept on service calls frequency, the consensus among the sales and service personnel is that reliability for the refrigerators is above the 98% target for most manufacturers. Reliability is measured here as a percentage of total shipped products with at least one service call within the first year of purchase.
Objective: Maintain better statistical service data, and provide immediate feedback on all recurring problems to the manufacturers. Obtain commitments and follow through on improvements. Make sure that operating manuals are clear and well illustrated to avoid operating error by consumers. Feature and operating hints training by the District Sales Manager should be reviewed for possible improvement both for dealers and the Company’s sales representatives.
Although the prices for the Company’s products are generally higher than others in the same luxury category, the inherent product differentiation strengths provide justification from a value perspective. Selling value instead of price is an important component of any luxury related product. The Company supports its price structure with a cash rebate and volume discount program.
The Company has been adept at connecting the customer’s allegiance to the Company itself and not solely to the appliance brands it carries. This is best exemplified by the Company’s studio concept, which promotes demonstration of products through various celebrity chefs. In the dealer’s and end-users mind the concept is related directly to the Company and not to one of the manufacturers.
The image, choice, and positioning in the advertising and promotional material have been carefully crafted to associate the appliances and accessories to the lifestyle of the top 10% of the population in earning power.
With the recent expansion of its protected territory, the Company has almost doubled in size. This improves its negotiating position with manufacturers and customers alike. Its past history attests to the fact that the Company has been able to change vendors and continue to operate successfully with a different line of products. This advantage will be augmented even further because of the company’s recent territorial expansion.
The financial resources of the company compare well, and in most cases surpass the industry in terms of such financial ratios as current ratio, debt to equity, gross profits and net profits in the next three years. This allows the space to invest in future capacity needed to accommodate expansions, or change marketing direction.
The company has built its reputation on a personal approach that involves the entire sales staff, including the president/owner. The message to the customers is that everyone cares, and everyone supports the product and vendor/client relationship. This has established the company as the leader in product knowledge, sales training, and after-sales support. The Company has purposely positioned itself as the main beneficiary of this reputation, rather than exclusively associating it with the manufacturer’s products.
The business relationship with the customers has withstood the test of time over the last 30 years. The company is now in the privileged position of selecting who should represent them at the retail level. The banking relationship has been built on a mutual trust over the years facilitating negotiations over lines of credit and funding for capital acquisition requirements.
All the company’s human and financial resources are focused on major appliances. Other competitors disperse focus over many unconnected products. The recent organizational restructuring has provided a foundation for a more accountable and performance-based functional structure from the top down to the lowest responsibility. Financial goals have been set for the next three years.
Threats and Weaknesses
From a product standpoint, the relatively inferior reliability of the dishwasher/laundry line (95%) is cause for some concern. Although the dishwasher manufacturer meets the high-end design criteria sought by the Company, it lacks the performance characteristics. Because these products are imported, lead times for dishwashers are inferior to those of similar USA built products and impact the company’s storage costs and gross margins.
The cooking equipment is still an unknown entity in the marketplace. The company is relying on its experience with the refrigeration equipment from the same supplier to prop up the stove brand. The price for the stoves is markedly above those of the previous brand of cooking equipment distributed by the company.
The smooth transition from one to two divisions operating in different territories, with new personnel, who are accustomed to a different management style and culture is a challenge with serious overall corporate implication on the company’s planned financial goals.
Improvement in sales force effectiveness through better communications, team-based management, and supporting a process of continual coaching will progressively lower the marketing budget from the current 9.5 % of sales to a more sustainable 7.2%
The trend in some areas towards direct distribution by the manufacturers places a 60-day termination threat under distribution agreements, which are subject to annual reviews.
The expansion and acquisition of rights to product exclusivity in adjacent new territory presents an opportunity to double the volume of consolidated sales, and grow the combined volume at a rate of 10-12% per year. Success in the two territories can lead to further arrangements with dominant manufacturers for another exclusive territorial expansion within the next three years. Satisfying the annual growth targets of the manufacturers will be the main catalyst for further growth in subsequent years. Salesforce effectiveness, driven by a motivated, well- trained team, with superior leadership, is the main ingredients for success.
Most distributors of big-ticket products look at the service department as an additional profit center opportunity. The Company’s Service Manager has acquired experience in most of the high-end appliances currently being marketed in the area. The same holds true for the counterpart in the new division. They could form the nucleus of a separate service division with the capability to repair and supply parts for a vast variety of appliances.
Currently, the service department operates as a cost center. However, the potential gross margins for service is superior to that of product sales, normally reaching the 40-45% levels. This substantially exceeds the 20-23% margins now realized on the company’s product lines. The cost/benefit is substantiated by the historical gross margin capabilities.
With all the changes currently underway this is not the right time to invest time, energy and funding on the potential servicing revenue stream. However, the service center idea is well worth investigating more thoroughly at a later date because of its superior profitability. Once the basic idea is accepted by top management, a business plan must be developed, which addresses the funding, human resources, facility and marketing requirements.
The Studio concept developed by the Company is currently focused on a cooking demonstration facility and is seen as a marketing related cost. Removed from its confines as strictly a facility to showcase the Company’s appliances, it opens up entirely new vistas and opportunities for growth. One of these is to see the studio as a unique restaurant concept, along the lines of celebrity chef performance-based dining. Add to that, the lure of the television camera, and participation in televised series with renowned chefs, and you have the foundation for a powerful, franchisable, restaurant chain. This concept requires more rigid preliminary analysis of the cons and pros, financial, market positioning, and partnering requirements.