Company Background

Bob Utley is the founder of US home. He had the aim to sell proprietary goods and take advantage of the growth in chain discount stores by allowing its products to be showed on the shelves of these stores. With the capital raised from his friends and associates, he began purchasing consumer products such as bed and bath items. Furthermore, due to the business growth, he also pursued growth by acquiring companies from Hardware to Ball Pens.

In 1980, he acquired Clique pens, which was founded in 1922 by two cousins in Kansas City, Missouri. It began with fountain pens and then started ball point in 1960. It had a unique secret about the ink formula which made it readily available when required. Moreover, the pens also had unique utilitarian designs. Since the acquisition by U.S Home, its sales have grown steadily. It sales have increased by 16% from 2010 to 2012.

Industry Background

There are many players in the market competing for the market share of writing implements business. They range from large organizations to numerous small distributors who purchases generic items from global suppliers. This industry is not affected by electronic communication systems such as emails as predicted by analysts.

There are many distribution points for pens and pencils which include drug stores,super markets, mass retailers, ware house clubs, department stores and specialty stores. Manufacturers transfer products to these places through distributors as well as directly. These products are kept on shelves with the way the manufacturers require. The requirement of these products is expected to rise due to the increase in demand for school and office supplies.

Competition in the industry is fierce with many brands competing such as BIC, Scripto, Pentel, Pitol and others. They have been operating the market for 50 years. The preference for consumers is towards brands of these companies instead of unbranded products and other private –labeled brands. Retailers prefer those suppliers who fulfill their demand for the designs that they require.

Consumer purchasing behavior

The main markets of pens and pencils are households and businesses. Amongst consumers, 65% had purchased three or more pens and pencils three times per year. As far as the businesses are concerned, all the businesses purchased 10 or more pens and pencils three time per year. Other customers purchased these items for their promotional activities. These distributors use them as ad-specialty products.

Point of sale displays had a great influence on customers of these items especially during the back to school period from July 15 to September 1. The businesses always want to cash this period as much as they can. This scope of innovation through technology is rare in this industry. However, this industry experiences lower innovation products such as Clique Stylus smooth-roll instantly drying ink.

This industry is viable throughout the year. However, each customer has lower frequency in buying these items. They usually get attracted to price-off deals at point of sale but are unable to compare the prices of different manufacturers.

Specialty retailers and outlets such as food and drug chains usually have four to six brands. On the contrary,the retailers of office suppliers had many brands and covered the full range of products available. The prices of these brands were similar in each category.

Porter five forces

The Porter five forces allow the business to assess the competitive potential of the industry and analyses the resultant impact on the business. The five elements include the bargaining power of buyers, the bargaining power of suppliers, threats of substitutes, competition and the threats of new entrants.

Bargaining power of buyers the

The bargaining power of buyer is high in this industry. The industry has many manufacturers to supply these items of pens and pencils. The brands include Scripto, Pentel, and Pilot, Paper mate, Sharpie and many others who have been operating in the market for more than fifty years. The power of these buyers is such that once they have decided on the area allocated to the manufacturer, they do not change it.

Bargaining power of suppliers

The bargaining power of suppliers is very low;this is due to the high level of competition. The bargaining power is ascertained by the fact that the manufacturer has to offer considerable trade discounts to retailer if they want to increase their market share. Moreover, retailers also not accept these items if they are not made according to the required custom designs and packages.

Threats of substitutes

The threat of substitute is very low. The only potential threat was electronic communication as predicted by it has not been able to replace pens and pencils and the demand is expected to further increase by compound rate of 2%.

Threat of new entrants

There are no barriers to entry in the market,therefore, many firms have already entered this industry make it competitive enough to lower margins across the board.

SWOT Analysis

SWOT analysis considers the strengths, weaknesses, threats and opportunities of an organization. It allows an organization to understand its environment and develop ways to solve the problems it has been facing.

Strengths

U.S Home is a conglomerate with investments in diversified products ranging from hard-ware to these writing implement products.  The business has been operating in the industry for many years with established brands. It must also have developed good relationships with retailers as they provide them with greater trade discounts. The sales and earnings of the business have been increasing steadily with the time. The EBITDA of the business has risen by 27% from 2010 to 2012.

The pens of Clique’s brand have utilitarian designs that differentiate them from their competitors. Moreover, it has “always ready ink supply” that did not require the writer tom make several strokes before the pen begins to write. This ink formula is also well known amongst its final consumers. Furthermore, the division believes in innovation such as Clique smooth-roll instantly drying ink that encourages businesses and other consumers to use their products.

Weaknesses

The Gross Profit margin of Clique’s division has been falling. In 2010, it stood at 42% while it fell to 36% in 2012. The division was not able to meet its target of the gross profit margin which they wanted to rise by 4%. They are heavily dependent on retailers for their sales and they themselves have lower control thus, they are forced to offer high trade discounts to retailers which reduce their gross profit margin. The advertisement on consumer promotion has fallen due to which they are not able to attract as many competitors as their competitors do. The consumer promo and advertising expenditure percentage fell to 7.50 to 8% from 2010 to 2012.

Retailers also takes additional allowances and discounts from U.S home such as just-in-time delivery, shelf “detailing,” stocking, and removal of slow-selling merchandise. Special promotions, such as back-to-school-assortments, end-aisle displays, and pallet programs were often sold on consignment. These incentives such as pens and pencils were highly profitable, high-turnover items for retailers,but they were becoming less profitable in the U.S home Clique division.

There is a difference of opinion between the VPs of marketing and sales which may delay the decision that can solve the issue. The pens and pencils they sell has little brand loyalty due to which they are unable to attract customers.Coupon redemption rates for writing implements were about 1.3%, lower than for most other consumer products for U.S home.

The managers of Clique have not worked together to promote something like special pen and pencil pack as compared to their rivals. As compared to competitors, they do not seem to make their pens and pencils as a brand.

Clique’s salespeople tended to be very accommodating for specific buyer and account “needs,” which resulted in serious inconsistencies in promotional and pricing programs from account to account. This caused problems with Clique’s customer service and accounts receivable personnel.

Opportunities

The population of the United States of America is expected to grow by 2%.Most of the growth would take place in businesses and schools. This statistics shows a positive outlook of the business as its market would rise. Clique showed the capacity to innovate in this industry which seem to have no capacity for these innovations.

Threats

Large retail buyers want to raise their prices by 5% in their superstores. This act would make U.S Home products more expensive as compared to competitors. This would also make products less appealing to consumers. Clique might be forced to do advertising like their competitors as they often joint promotions with vendors such as notebooks and stationary. This strategy may also increase the cost of U.S home by 10% or more. The rising power of retailers has threatened the profit margins of U.S homes.

What are the objectives of Trade Promotions? How are the objectives of MDF different from trade discounts?

Objectives of Trade Promotions

Trade promotions include efforts of the manufacturer to coordinate with retailer to boost the sales of its products;for example, a manufacturer paying a retailer to feature their product in the retailer’s weekly newspaper advertising or paying a retailer to build a special promotional display in their store are both considered trade promotions.

Trade discounts are a part of these trade promotions. In this case, trade promotions are provided in the form of high discounts to retailers so that they provide priority to the goods from U.S Home and display them at locations which are mostly visited by customers. Moreover, the objective of trade discounts is also to get as much shelf space as it a product could gain.

On the other hand, the objective of marketing development fund is to have more control over the sales of the products. As Clique division is largely dependent on retailers who are eroding their gross profit margins, the tactic of marketing development fund will increase sales as well as the gross profit margin of Clique division. There are two types of tactics that pertain to marketing development fund. One of them includes the retail oriented fund whose foundation lies behind the fact that the sales are dependent largely on the shelf space acquired. Therefore, it is necessary to reduce the expenditure on consumer marketing and divert them to satisfy retailers…………

 

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