Cost-Benefit Analysis for Foxy Originals - Essay Example

Cost-Benefit Analysis for Foxy Originals Executive Summary It is evident from the case analysis that Foxy Originals which is a Canadian jewellery company, is planning to enter US jewellery market in order to penetrate in a market which is 10 times bigger than Canadian jewellery market. The company is currently lacking a well defined marketing plan and it is in dilemma to select an appropriate distribution channel to enter USA jewellery market. Now the question is that, would Foxy Originals attend trade shows or hire sales representatives in order to distribute products in USA market? The essay will try to find the answer of this pertinent question. The study will use cost-benefit analysis for each of the viable distribution strategy in order to ratiocinate the recommendation. 1. Situation Analysis Foxy Originals is renowned jewellery company which is headquartered at Toronto, Canada. The company was established by Jen Kluger and Suzie Orol in the year 1998 (Foxy Originals, 2013). The company has established its presence in 250 boutiques in Canada. Product portfolio of the company is comprised of high end and stylish necklaces, earrings, bracelets, rings, belts and other jewellery items. A business must have a competitive advantage in order to sustain in the market place (Porter, 1980, 1985 and 1991). Hence sustainability of Foxy Original is dependent its competitive advantage of selling stylish but low cost jewellery to price sensitive women in the age group of eighteen years to thirty years. Although the company is growing at an acceptable pace but there is a risk for the Canadian jewellery market to get saturated due to entry of new players in the future course of time. Over saturation and presence of many sellers in comparatively small Canadian jewellery market might decrease the profit margin for Foxy Originals in the near future. Hence, the company is thinking about entering USA jewellery market which is 10 times bigger than Canadian jewellery market by the month of January, 2005. To enter USA jewellery market, Foxy Original must formulate a profitable distribution strategy which can give them sustainable competitive advantage. 2. Target Customers for Foxy Original A brief discussion about the about target customers of Foxy Original will help the essay to develop a thematic background for the case. According to the owners of the company, target market for the company consists of three types of customer segments such as The Reversible Enamel Ladies, The Bridge Ladies and The Chain Lovin Ladies. Although such customer groups are profitable from Canadian jewellery market perspective but sustainability or profitability of such customer groups in USA market is yet to be tested. Country The Reversible Enamel Ladies The Bridge Ladies The Chain Lovin Ladies Canada These customers are loyal to Foxy Original brand and they are conservative in terms of selecting the jewellery. Young and Sweet wearing ladies who purchase Foxy Jewellers in order to add little accent to their suits. Brand switching tendency is moderate. These customers are trendy and fashion savvy and they emphasize on purchase latest collection of the company. Switching tendency is highest among the ‘The Chain Lovin Ladies’ group. USA It is difficult for Foxy Original which is a foreign company to create such loyal group. Another thing is that, demand for classic and conservative jewellery is low in USA in comparison to Canada. In USA, Foxy Original needs to work hard in order to generate brand awareness among ‘The Bridge Ladies’ due to presence of many players with equal resource capabilities. In USA, it will be very difficult for Foxy Original to retain The Chain Lovin Ladies’ due to reasons like, 1- hyper competitive nature of market and 2- huge resource deployment is required in marketing communication activities. (Source: Gupta, 2007) Hence it is Evident from the customer group analysis, Foxy Original needs select distribution channel carefully in order to save itself from wasting money on unnecessary activities. 3. Situational SWOT Analysis Management scholars such as Dierickx & Cool (1989), Rumelt (1986), Barney (1986) and Grant (1991) have stated that companies need to understand its resource capabilities before deciding business strategies. The concept of resource capability analysis can be used in order to understand strength, weakness, opportunity and threat for Foxy Original in USA market. Strength Weakness Foxy Originals emphasizes on incorporating latest style, fashion statement, funky design in the jewellery. The company offers latest collection of jewellery at competitive price to customers who do not have the economic capability to afford high end jewelleries; hence Foxy Original has a loyal customer base. The company has established its strong presence in 250 boutiques of Canada which has helped the Foxy Originals to achieve significant brand recognition among customers. Strong market presence has helped the company to generate significant sales revenue which can be used by the company to finance its future diversification strategy. The company has very little experience about jewellery market dynamics of USA and there is doubt over the sustainability of Foxy Original’s strategy of maintaining low production cost in USA. High cost of acquiring retailers and channelizing the retail sales in USA will increase the value chain cost for Foxy Originals. It will be difficult for the company to follow competitive pricing strategy due to rising value chain cost. Classic jewellery contributes 50% of stock for Foxy Originals but demand for classic jewellery is pretty low among USA citizens, hence the company needs to change its product portfolio in order to attract customers in USA. Opportunity Threat According to Central Intelligence Agency (2013), population of women in the age group of 18- 34 is more than 40 million in USA. There is opportunity to Foxy Original to cater demand of such large population and generate huge amount of revenue which is not possible for them to earn from Canadian market. Increasing penetration USA market will not only help the company to generate hullabaloo about brand among customers but also will them to use the experience of USA market in entering jewellery market of other countries. Although customers in Canada have shown penchant for local jewellery brand Foxy Originals for the sake of showing support to a Canadian products but customers of USA are driven by latest fashion trend and according to the survey, 50% of collections of Foxy Originals were failed generate interest among USA citizens. High cost maintaining distribution channel in USA will reduce the profit margin for the company. 4. Identification of the Problem Canadian jewellery market for Foxy Originals is slowly but surely getting saturated due to stagnant growth opportunity and high degree of fragmentation, hence the company has decided to enter USA jewellery market in order to explore new business opportunities. The study has identified following three problems associated with “USA entry” strategy for Foxy Originals. The company doesn’t have any justifiable marketing strategy in terms of distribution and promotion which can help them in gaining momentum in USA market. Demand for classic range of jewellery products of the company is low among customers of USA whereas cost of acquiring USA retailers based in New York, Los Angeles, Chicago, Dallas and other cities will be much higher in comparison to Canada. The company is not familiar with the hypercompetitive nature of USA jewellery market. 5. Set of Alternatives for Foxy Originals On the basis of the case study, both short term and long term perspective of alternative distribution channels should be considered while recommending any strategy. 5.1 Short Term Perspective 5.1.1 Alternative 1 Orol and Kluger can sell their products by attending trade shows. They can attract 75,000 retailers by setting up booths which will show latest jewellery designs, collections of the company to incoming retailers. Trade shows will provide the opportunity to owners of the company to meet influential people of jewellery industry of USA and develop network which will help the business to grow. 5.1.2 Alternative 2 Foxy Originals can go with the traditional distribution channel formulae by hiring sales representatives who will sell jewellery products of the company. Sales representatives will get commissions on the basis of sales target achievement and they will also be entitles to monthly fees. Hiring sales representatives who are experienced with retail sales channel activities of USA jewellery market will decrease risk factor associated with Foxy Original’s lack of knowledge about business operation of USA jewellery market. Now the question is that weather Foxy Originals can fetch higher profit by choosing tradeshows as primary distribution in comparison to banking on sales representatives to boost the sales. Mathematical calculation for both the alternatives is given in the appendix section in order to understand profitability of each alternative. 5.2 Long Term Perspective The company can use both trade shows and sales representatives in order to distribute and sales products. If the company fail to establish proper juxtaposition between both the distribution channel alternatives, then there is possible each of the alternatives will cannibalize potentiality of other distribution channel. For example, using tradeshows to generate lead for the sales force and then using sales representatives to distribute the jewellery items to shops across USA. From the viewpoint of long term perspective, the company should go for developing local sales force who can distribute jewellery items by using their own credentials and reputations in the marketplace. As the focus of the case study is to select immediate distribution channel alternative for the company hence the study will use short term perspectives in order to suggest suitable alternatives to Foxy Originals for distributing jewellery products in USA. 6. Decision Matrix Now the study will do individual analysis of each distribution channel alternative on the basis of calculations given in the appendix section. 6.1 Trade Shows Attending a single tradeshow will cost on an average $9,433.33 to owners of Foxy Originals., while there is possibility for the company to achieve contribution margin of $82,304.20 during the year 2005 by attending 10 potential tradeshows by the owners (check Exhibit1 for the mathematical calculation for cost and sales revenue for attending tradeshows). There is a problem with the alternative of attending tradeshows to distribute jewellery products. For example, there are only 10 potential tradeshows are available to Kluger and Orol to meet the retailers but these tradeshows are organized in geographically dispersed location without a coherent schedule, which means that if one of these owners fail to attend one tradeshow due to unavoidable circumstances then they will have to bear the fixed cost of all the promotional activities of the company in the tradeshow. Overall, attending tradeshow to distribute is a complex concept due to involvement of activities which need personal attention. 6.2 Sales Representative There is no doubt that relying on traditional distribution channel by hiring four qualified sales representative who have contacts, credentials and detailed knowledge of US jewellery market will speed up the market penetration of Foxy Originals. The company need to spend $19,182.50 for hiring single sales representative in order to distribute jewellery items in the market while using the four sales representatives will help the company to fetch annual profit margin of $86,320 which is higher than the contribution margin for attending tradeshows (Check the Exhibit 2 for the calculation). Another important thing is that, the company need to spend minimal amount to train experienced sales representatives which will decrease human resource cost of the company. Calculation costs for each of the distribution channel alternative will be used in order to select most appropriate distribution channel options for Foxy Originals. The study will use four contingent variables such as profit margin, complexity of the process, success probability and time duration in order to develop a decision matrix for both the distribution channel alternatives. Mathematical justification and calculation for selection of each variable is given in the appendix section. Matrix Criteria Profit Margin Time Duration Complexity Success Probability Hiring Sales Force $86,320 Short Moderately Low High Attending Trade Shows $82,304.20 Long High Medium According to the decision matrix variables, hiring sales representatives is more viable option for Foxy Originals in comparison to attending tradeshows to distribute jewellery items. 7. Recommendation It is evident from the above analysis that contribution margin for hiring sales representative is much higher in comparison to attending tradeshows for the owners of Foxy Originals. On the other hand, trade shows are organized throughout the year, hence relying on trade shows only will delay the market entry process for Foxy Originals. Relying on trade shows as potential distribution channel is associated with following disadvantages. Fixed cost associated with booking tickets, setting up booths, collecting promotional material for single show is quiet high, while there is no guaranty about return on such high investment. Expected revenue by using four sales representatives is much higher in comparison to sales revenue earned from each trade shows. Hence, the study will recommend Foxy Originals to hire sales representatives to distribute its jewelleries and collection in USA market instead of relying on attending trade shows to attract retailers. Experienced sales representatives will foster the market penetration Foxy Originals by using their network and contracts. According to the average value calculation of both best and worst condition, hiring sales representative can give extra benefit of $4015.8 in comparison to attending tradeshows by owners of the company. Reference Barney, J. B., 1991. Firm resources and sustained competitive advantage. Journal of Management, 17 (1), pp. 99-120. Central Intelligence Agency., 2013. North America: United States. [online] Available at: [Accessed 7 March 2013]. Dierickx, I. and Cool, K., 1989. Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), pp. 1504-1511. Foxy Originals., 2013. Designer Profile. [online] Available at: [Accessed 7 March 2013]. Grant, R. M., 1991. A resource based perspective of competitive advantage. California Management Review, 33, pp. 114-135. Gupta, N., 2007. Foxy Originals- Expansion into the U.S Market. Ontario: The University of Western Ontario. Porter, M. E., 1980. Competitive Strategy. New York: Free Press. Porter, M. E., 1985. Competitive Advantage. New York: Free Press. Porter, M. E., 1991. Towards a dynamic theory of strategy. Strategic Management Journal, 12, pp. 95-118. Rumelt, R. P., 1986. Strategy, Structure, and Economic Performance. Harvard: Harvard Business School Press. Appendices Exhibit 1 Forecasted Cost for Trade Show Activities Cost/Trade Show Registration fee $3000 Booth Display $4000/30 Trade Shows =$133.33 Promotional Material $2800 Travel Costs $2000 Booth Set Up $1500 Total $9433.33 Forecasted Sales for Trade Show (At best condition) Total Number of Orders in a Trade Show 45 Item contribution at each order 25 Necklaces + 12 Pairs of Earrings Revenue contribution at each order Necklaces= (25*$17)= $425 & Earrings= (12*$12)= $144, Total= ($425 + $144)= $569 Total Revenue (45*$569)= $25,605 Forecasted Sales for Trade Show (At worst condition) Total Number of Orders in a Trade Show 20 Item contribution at each order 25 Necklaces + 12 Pairs of Earrings Revenue contribution at each order Necklaces= (25*$17)= $425 & Earrings= (12*$12)= $144, Total= ($425 + $144)= $569 Total Revenue (20*$569)= $11,380 Cost for Each Order Necklace (1 piece) $8.05 Earrings $5.50 Shipping Charge $15 Total Cost [($8.05*25) + ($5.50*12) + ($15*2)]= $297.25 Expected Contribution Margin in Trade Shows (At best condition) Sales revenue $25,605 Cost per orders $297.25 No. of orders 45 Margin [$25,605 – ($297.25*45)]= $12,228.75 Actual contribution Margin at each trade Show $12,228.75 - $9433.33= $2795.42 According to the case study that 50% of retailers like to order twice a year, hence annual contribution margin can be calculated on the basis of initial and second re-order in the following manner. Annual Margin= $2795.42 + (2*0.50*$12,228.75) = $15024.17 Expected Contribution Margin in Trade Shows (At worst condition) Sales revenue $11,380 Cost per orders $297.25 No. of orders 20 Margin [$11,380– ($297.25*20)]= $5435 Actual contribution Margin at each trade Show $5435 - $9433.33= -$3998.33 Annual Margin= (-) $3998.33+ (2*0.50*$$5,435) = $1,436.67 Average annual contribution margin per trade show = ($15024.17 + $1,436.67)/2= $8230.42 According to the case study, there are 10 potential in 2005, hence total annual contribution margin from trade shows for Foxy Originals= $82,304.20 Exhibit 2 Forecasted Sales Revenue (At best condition) No. of orders/Month 15 Annual Orders 15*12=180 Item contribution at each order 25 Necklaces + 12 Pairs of Earrings Revenue contribution at each order Necklaces= (25*$17)= $425 & Earrings= (12*$12)= $144, Total= ($425 + $144)= $569 Total Revenue ($569*180)= $102,420 Forecasted Sales Revenue (At worst condition) No. of orders/Month 10 Annual Orders 10*12=120 Item contribution at each order 25 Necklaces + 12 Pairs of Earrings Revenue contribution at each order Necklaces= (25*$17)= $425 & Earrings= (12*$12)= $144, Total= ($425 + $144)= $569 Total Revenue ($569*120)= $68,280 Average commission for sales representative= [($102,420 + $68,280)/2]*0.15= $12,802.5 Monthly showroom rental= $200, hence annual renal cost= 12*$200= $2400 Bookkeeping cost for each sales representative= (48*$40)/4= $480 Forecasted Cost for Appointing Sales Representative Particulars Cost Commission $12802.5 Sample boards $2900 Showroom rent $2400 Bookkeeping $480 Promotional Materials $600 Total $19,182.50 Total cost for 4 sales representatives $19,182.50*4=$76,730 Now, Average annual orders while using sales representatives as distribution agent= (180+120)/2=150 Average annual cost for all the orders = (150*$297.25) = $44,587.5 Average annual sales revenue= ($102,420 + $68,280)/2= $85,350 Annual contribution margin for all 4 sales representatives= 4*[$85,350 - $44,587.5 - $19,182.50] = $86,320 Benefit of hiring sales representative= $86,320 - $82,304.20= $4015.8 Read More