Kanata Motor Company (KMC) began producing automobiles in the 1950s. Taking advantage of the baby boom, the company designed and sold cars targeted toward families. Later, when urban dwellers migrated to the suburbs, the company recognized the needs of the suburban demographic (such as “soccer moms") who value practicality over style, economy over performance, and reliability over luxury. KMC is a full-service automobile company, manufacturing, distributing, and selling vehicles through its network of corporate-owned dealerships. The company also provides loans to customers who wish to finance their purchases. KMC has remained largely profitable over the decades in the face of stiff competition from domestic and foreign competitors, although there have been ups and downs with the economic cycle.
The global recession that began in mid-2008 hit the auto sector particularly hard. Sales of cars and light trucks plunged by 22% in the first quarter of 2009 relative to the same quarter in 2008, from 363,800 to 284,600 units. KMC was caught in this downdraft along with the rest of the industry. Indeed, the demographic that KMC targets was especially hard hit by job losses and belt tightening by businesses and consumers alike.
It is now mid-April 2009. KMC’s Chief Executive Officer, Tom Delorian, knows that he has to do something in light of these dire economic conditions. Privately, he knows that his company’s sales have declined by 30% in the number of units and 40% in dollar value, as customers shifted toward buying cheaper vehicles. There has been mounting pressure from shareholders who were becoming concerned about the profitability and future viability of the business. The company is due to report its results for the year ending June 30, 2009 sometime in late July.
To help come up with a plan, Delorian called a meeting of his key staff:
• VP of Marketing—Susan Marvel
• VP of Dealership Relations—Willy Nelson
• VP of Credit Services—Bruno Charles
• VP of Finance—Kate Moffat
The following are some key excerpts from their meeting.
SUSAN: We should have a big promotion to get people into our stores. We have great products. All we need to do is bring them in and they will like what we have to offer so much that a sale will be a piece of cake.
WILLY: I wouldn’t go that far—my sales people work pretty hard. But I agree that getting people through the door is essential. As bad as the economy is, people are hesitant to spend. So why don't we give them an offer they can’t refuse? Here’s my credit protection proposal: if the customer loses his/her job and can’t make the car payments, we’ll take the car off their hands.
TOM: What do you think about this, Bruno?
BRUNO: Well, it sounds like a reasonable idea. It does take the risk off the customers so they might be quite tempted to buy our cars. It shouldn't be a problem for our people to do the usual check-up on their credit history to approve the financing.
WILLY: I’m confident that we can kick up our sales by 50% with this plan. As you know, our sales people have been starved of commissions lately. They’ll love this new plan, since they get 5% of the sale price.
KATE: Wait a minute ... what happens if the customer does bring the car back in?
BRUNO: I guess our dealers will take the keys off their hands, and put the car back on the lot for resale.
KATE: What would happen to the car loan?
BRUNO: We would forgive the loan in exchange for the return of the car.
KATE: Any guess as to how often a customer might use this offer and return the car?
BRUNO: Well, this recession has been harder than any in recent memory, so we’re in uncharted territory. Your guess is as good as mine.
TOM: Okay, I think we have an interesting idea here. I need to think through it in more detail over the next couple of days. Kate, can you draft a memo analyzing this proposal? I know you don’t have a lot to work with in terms of numbers. All I’m looking for is a qualitative discussion of the issues and how they would end up impacting our bottom line.
Required:
Play the role of Kate and draft the memo requested by Tom.