Please write a summary for the case discussion "Janmar Coating". Your summary should include the following elements: 1. What are the marketing strategic options or alternatives? 2. Evaluation of each option using the RELEVENT information from the case. 3. Break-even analysis if applicable (including market potential if applicable). 4. Recommendation based on your analysis and evaluations. Janmar Coatings, Inc. In early January 2005, Ronald Burns, president of Janmar Coatings, Inc., slumped back in his chair as his senior management executives filed out of the conference room. "Another meeting and still no resolution," he thought. After two lengthy meetings, the executive group still had not decided where and how to deploy corporate marketing efforts among the various architectural paint coatings mar kets served by the company in the southwestern United States. He asked his sec retary to schedule another meeting for next week. J.S. PAINT COATINGS INDUSTRY The U.S. paint coatings industry is divided into three broad segments: (1) ar chitectural coatings, (2) original equipment manufacturing (OEM) coatings, and (3) special-purpose coatings. Architectural coatings consist of general-purpose paints, vamishes, and lacquers used on residential, commercial, and institu- tional structures, sold through wholesalers and retailers, and purchased by do-it- yourself consumers, painting contractors, and professional painters. Architectural coatings are commonly called shelf goods and account for 43 percent of total industry dollar sales OEM coatings are formulated to industrial buyer specifications and are ap- plied to original equipment during manufacturing. These coatings are used for durable goods such as automobiles, trucks, transportation equipment, appliances, furniture and fixtures, metal containers and building products, and industrial machinery and equipment. OEM coatings represent 35 percent of total industry dollar sales. Special-purpose coatings are formulated for special applications or envi- ronmental conditions, such as extreme temperatures, exposure to chemicals, or corrosive conditions. These coatings are used for automotive and machinery refinishing, industrial construction and maintenance (including factories, equip- ment, utilities, and railroads), bridges, marine applications (ship and offshore facilities such as oil rigs), highway and traffic markings, aerosol and metallic This case was prepared by Professor Roger A. Kerin, Edwin L. Cox School of Business, Southern Methodist University, as a basis for class discussion and is not designed to illustrate effective or inef fective handling of an administrative situation. Certain names and selected market and sales data have been disguised and are not useful for research purposes. Copyright 2005 by Roger A. Kerin. No part of this case may be reproduced without written permission of the copyright holder 105 paints, and roof paints. Special-purpose coatings account for 22 percent of total The US. paint couting industry is generally considered to be a maturing indus try. Industry sales in 2004 were estimated to be slightly over $16 billion. Average CHAPTER OPPORTUNITY ANALYSIS MARI Industry dollar sales annual dollar sales growth was forecasted to approximate the general rate of india tion through 2005 Outlook for Architectural Paint Coatings and Sundries Industry sources estimated us. sales of architectural paint coatings and sun. dries (brushes, rollers, paint removers and thinners, etc.) to be $12 billion plus in 2006. Architectural coatings are considered to be a mature market with long term sales growth projected in the range of 1 to 2 percent per year. Demand for architectural coatings and sundries reflects the level of house redecorating maintenance, and repair, as well as sales of existing homes, and to a lesser extent new home, commercial, and industrial construction Industry sources also noted that the demand for architectural coatings and sundries is affected by two other factors. First, the architectural coating segment faced competition from altera. tive materials, such as aluminum and vinyl siding, interior wall coverings, and wood paneling. Second, paint companies had developed higher-quality products that reduced the amount of paint necessary per application and the frequency of repainting. Counteracting these factors, industry observers foresaw increas ing demand for paint sundries due to a trend toward do-it-yourself painting by household consumers. U.S. paint manufacturers are under growing pressure to reduce emissions of volatile organic compounds (VOCs) from paints and to limit the consumption of solvents. The Environmental Protection Agency (EPA) has adopted a three-step plan for the reduction of VOCs in architectural and industrial maintenance coat- ings. The first phase of the plan, which took effect in 1996, required a 25 percent reduction in VOC content from the base year of 1990. VOCs were reduced an- other 35 percent (from the 1990 base year) in 2000 and 45 percent in the third phase in 2003. Compliance with EPA regulations eroded historically low profit margins in the paint industry. Consolidation and Competition in the Architectural Coatings Segment Slow sales growth, the necessity for ongoing research and development, and recent compliance with governmental regulations have fueled merger and ac quisition activity in the U.S. paint industry. Companies seeking growth and a higher sales base to support increasing costs are making acquisitions. Companies that were unwilling or unable to make capital and research and development (R&D) commitments necessary to remain competitive sold their paint businesses. Industry sources estimate that the number of paint companies is currently 600, or about 40 percent fewer companies than in 1980. The number of paint companies is presently declining at a rate of 2 to 3 percent per year. Merger activity generally involved the purchase of small companies by larger firms to boost their specific market or geographic presence. Still, because of readily available technology and difference in paint formulations associated with regional climatic needs, a small number of regional paint manufacturers, such as Janmar Coatings, have competed successfully against paint manufacturers that distribute their products nationally. Major producers of paint for the architectural coatings segment include Sherwin-Williams, Benjamin Moore, the Glidden unit of Imperial Chemicals, PPG Industries, Valspar Corporation, Grow Group, and Pratt & Lambert. These pro- ducers account for upward of 60 percent of sales in the architectural coatings segment. They market paint under their own brand names and for retailers un der private, controlled, or store brand names. For example, Sherwin-Williams markets the Sherwin-Williams brand and produces paint for Sears. About 50 percent of architectural coatings are sold under private, controlled, or store brands. Sears, Lowe's, Walmart, and Home Depot are major marketers of these brands. In addition, hardware store groups such as True Value and Ace Hardware market their own paint brands Specialty paint stores, lumberyards, and independent hardware stores that sell architectural paint and paint sundries have been able to compete in the paint business despite the presence of mass merchandisers (such as Sears) and home improvement centers (such as Lowe's and Home Depot). In dustry sources estimate that specialty paint stores account for about 36 per cent of paint and sundry sales; hardware stores and lumberyards account for 14 percent. Furthermore, specialty paint and hardware stores and lumberyards in nonmetropolitan areas have outdistanced mass merchandisers and home improvement centers as sources for paint and paint sundries. This is largely attributable to a lack of home improvement centers and mass-merchandiser distribution in these areas and paint store, hardware, and lumberyard customer relations and service. However, Walmart has been an effective competitor in many nonmetropolitan areas. Home centers (including wholesale home centers) and mass merchandisers (including membership clubs such as Sam's) represent the two most frequently patronized categories of retailers shopped by do-it-yourself painters for paint and sundry items. Specialty paint stores and lumberyards were the most fre. quently patronized retail stores by professional painters for paint products and sundry items Architectural Coatings Purchase Behavior Approximately 50 percent of architectural coatings dollar sales are accounted for by do-it-yourselfer painters. Professional painter purchases account for 25 percent of dollar sales. The remainder of architectural coatings dollar sales result from government, export, and contractor sales. Almost 60 percent of annual architectural coatings sales are for interior paints. Exterior paint represents 38 percent of sales, Lacquers and all other applications make up the balance of sales. Slightly less than one in four households purchase interior house paint in any given year. The percentage of households purchasing exterior house paint is considerably less than that for interior paint. The popular ity of do-it-yourself painting, particularly for interior applications, has increased the paint and sundry item product line carried by retail outlets. Paint industry consumer research indicates that the average dollar paint purchase per purchase occasion is about $74.00. The average dollar sundry purchase per purchase occa sion is about $12.00 Research by the Home Improvement Research Institute indicates that do-it- yourself painters first choose a retail outlet for paint and paint sundries, then choose a paint brand. This research also identified four steps in the do-it-yourself decision process for home improvement products, including paint. The results of this research are summarized in Exhibit 1 on page 108. "Paint has become a commodity," commented Burns. "Do-it-yourself purchas- ers all too often view paint as paint-covering-and try to get the best price. But there is a significant number of people who desire service as well in the form Step 4 Consumer Buying Decision Process for Home Improvement Products 10 EXHIBITI Step / Drode on Prolece/Product Step 3 Decide on Product Step 2 Die Son Primary Movie - Old/None Have the Time Have the Money House Is Enement Key Criteria . Durable Reliable Acceptable price Performs Brand reputation Base of use Soyle/Appearance Warranty/Service Rene Consumer Report Mere To Best Price Internet Close to Home of the time Home Improvement Market, 1996. Thed with permission Home Home Improvement Research Institute, Reprinted from National News Center News, *10 Forces Restaping the Retal of information about application, color matching, surface preparation, and dura. bility," he added. He conceded that once paint is on the wall, you can't initially tell the difference between premium-priced and competitively priced paint. "There is a difference between painting contractors and professional painters, however," he continued. "Pot and brush guys (professional painters) do seek out quality products, since their reputation is on the line and maintenance firms don't want to have to paint an office each time a mark appears on a wall. They want paint that is durable, washable, and will cover in a single coat. They also look to retailers who will go the extra mile to give them service. Many request and get credit from stores. They appreciate being able to get to stores early in the morning to pick up paint and supplies. They deal with stores that can mix large quantities of custom colors and expect to work with knowledgeable store employees who can give them what they want. It is not surprising to me that paint stores remain the preferred outlet for paint and sundries for professional painters. Contractors simply want a coating in many instances and strive for the lowest price, particularly on big jobs." JANMAR COATINGS, INC. SERVICE AREA Janmar Coatings, Inc. markets its paint and sundry items in over 50 counties in Texas, Oklahoma, New Mexico, and Louisiana from its plant and headquar- ters in Dallas, Texas. The 11 county Dallas-Fort Worth (DFW) metropolitan area is the major business and financial center in the company's southwestern service area. Competition at the retail level has accelerated in recent years. Sears and Kmart have multiple outlets in DPW, as do Sherwin-Williams and Home Depot. Competition for retail selling space in paint stores, lumberyards, and hardware stores has also increased. "Our research indicates that 1,000 of these outlets now operate in the 50-county service area, and DFW houses 450 of them," noted Burns. "When you consider that the typical lumberyard or hardware store gets 10 percent of its volume ($65,000) from paint and the typical paint store has annual sales of $400,000 with three brands, you can see that getting and keeping widespread distribution is a key success factor in this industry. Over WON, INC 109 EXHIBIT 2 Architectural Paint and Sundry Sales Volume Excluding Contractor Sales in Millions of Dollars) Sedar DW 'PURAL UEBAN Total Dadlar Sales DPW Ar Sale New DWAra Sales 2000 5757 2001 764 SON 27.1 2003 507 2004 RO NO 1.200 outlets were in operation in the area a decade ago, about 600 were situated in the DFW area." Competition at the paint manufacturing level has increased as well. The ma jor change in competitive behavior has occurred among paint companies that sell to contractors serving the home construction industry. These companies have aggressively priced their products to capture a higher percentage of the home construction market. "Fortunately, these companies have not pursued the 400 or so professional painting firms in DFW and the 200 professional painters outside the DFW area or the do-it-yourselfer market as yet," said Burns. They have not been able to gain access to retail outlets, but they may buy their way in through free goods, promotional allowances, or whatever means are available to them in the future "We believe that mass merchandisers control 50 percent of the do-it-yourselfer paint market in the DFW metropolitan area. Price seems to be the attraction, but we can't quarrel with their quality, noted Burs. The estimated dollar volume of architectural paint and allied products sold in Janmar's 50-county service area in 2001 was $80 million (excluding contractor sales). DFW was estimated to account for 60 percent of this figure, with the re- maining volume being sold in other areas. Do-it-yourself household buyers were believed to account for 70 percent of non-contractor-related volume in DFW and 90 percent of non-contractor-related volume in other areas. A five year summary of architectural paint and allied product sales in the Janmar service area is shown in Exhibit 2 R COATINGS, INC. Janmar Coatings, Inc. is a privately held corporation that produces and markets architectural paint under the Janmar brand name. In addition to producing a full line of architectural coatings, the company sells paint sundries (brushes, rollers, thinners, etc.) under the Janmar name, even though these items are not manu- factured by the company. The company also operates a very large OEM coatings division, which sells its products throughout the U.S. and worldwide. Company architectural paint and allied products sales volume in 2001 was $12 million, and net profit before taxes was $1,140,000 Dollar sales had in creased at an average annual rate of 4 percent per year over the past decade. Paint gallonage, however, had remained stable over the past five years "We have been very successful in maintaining our margins even with increased research and development, material and labor costs, but I'm afraid we're approaching the threshold on our prices, 'Burns said. "We are now the highest priced paint in our OPORTUNITY ANY 6 percent of net sales Distribution bergand, and hardware outlets Party percent of its outlets are located in the The company distributes is pract the 200 independent paint stores, bu in the senere Janmar sales are distributed evenly between D and non 11- DF The remaining ets are inated in the other countles DPW account Exhibit shows the account and sales volume distribution by si Retail outlets outside the DFW area with paint and sundry purchases en for 14 outlets in DP (those with purchases greater than $50,000 annually) ceeding 350.000 annually carry only the Janmar product line. However, except which carry the Janmar line exclusively, DPW retailers carry two or three lines, with Janmar's line being premium priced. "Our experience to date shows that in our DFW outlets, the effect of multiple lines has been to cause a decline in Ballonge volume. The non-rw outlets, by comparison, have grown in gallon e volume. When you combine the two, you have stable gallonage volume, remarked Burns of Janmar employs eight sales representatives. They are responsible for monitoring Inventories of Janmar paint and sundry items in each retail outlet, as well as for order taking assisting in store display, and coordinating cooperative advertis ing programs. A recent survey of Janmar paint dealers indicated that the sales representatives were well liked, helpful, professional, and knowledgeable abou paint. Commenting on the survey findings, Burns said, "Our reps are on a firse. name basis with their customers. It is common for our reps to discuss business and family over coffee during a sales call, and some of our people even 'mind the store' when the proprietor has to run an errand or two." Sales representatives are paid a salary and a percent commission on sales. The company spends approximately 3 percent of net sales on advertising and sales promotion efforts . Approximately 55 percent of advertising and sales pro- motion dollars are allocated to cooperative advertising programs with retail ac counts. The cooperative program, whereby Janmar pays a portion of an account's media costs based on the dollar amount of paint purchased from Janmar, applies to newspaper advertising and seasonal catalogs distributed in a retailer's immedi- ate trade area. The remainder of the advertising and sales promotion budget is spent on in-store displays, corporate brand advertising, outdoor signs, regional magazines, premiums, and advertising production costs. Promotional Efforts for Architectural Coating Sales EXHIBIT 3 Account and Sales Volume Percentage Distribution by Dollar Purchase per Year Dollar Purchase/Year DFW $50,000+ $25,000-$50,000 14 Less than $25,000 19 Total 10% Retail Accounts Non-DFW Total 10% 17% 20 34 30 28% Dollar Sales Volume DFW Non-DFW Total 28% 56% 13 13 26 9 9 18 50% 100N 60% 100% 50% PLANNING MEETING Senior management Executives of Janmar Coatings, Inc. assembled again to consider the question of where and how to deploy corporate marketing efforts among the various architectural paint coatings markets served by the company Burns opened the meeting with a statement that it was absolutely necessary to resolve this question at the meeting in order for the tactical plan to be developed. The peak painting season was soon approaching and decisions had to be made. Vice President of Advising Hon, I sill believe that we must direct our efforts toward bolstering our presence in the DPW do-it-yourselfer market. I just re- ceived the results of our DPW consumer advertising awareness study. As you can see Exhibit awareness is related to paint purchase behavior Industry research on paint purchase behavior indicates that a large number of doit yourselfers choose a store before selecting a brand. However, a brand name is also important to consumers because they do think about paint they have seen advertised when choosing a brand. This becomes very important in those stores carrying multiple brands. It seems to me that we need an awareness level of at least 30 percent among do-ityourselfers to materially affect our sales. Preliminary talks with our ad agency indicate that an increase of $350,000 in corporate brand advertising beyond what we are now spending, with an emphasis on television, will be necessary to achieve this awareness level Furthermore, this television coverage will reach non-DPW consumers in some 15 counties as well Vice President of Operations. I don't agree. Advertising is not the way to go, and reference to the DPW area alone is too narrow a focus. We have to be com- petitive in the do-it-yourselfer paint market, period. Our shopper research program indicated that dealers will quickly back off from our brand when the customer appears price-sensitive. We must cut our price by 20 percent EXHIBIT 4 Percentage of DFW Population That Was Aware of Paint Brands and Purchased Paint in the Last 12 Months 100 50 45 40 35 30 25 Percentage 15 10 5 Mass merchandiser brand National paint brand Mass merchandiser brand Janmar brand Local paint brand Awareness Last Brand Bought Awareness Question: "What brands come to mind when you think of paint?" Last Brand Bought: "What paint brand did you purchase the last time you bought paint?" Node Sample size was N = 100 Percentages are subject to a 5 percent sampling error on all paint products to achieve purity with national paint brands. Look here In today's newspaper, we admise a price of special on our extent paint price. With hochas on the same pe customer would have to be an die and our price is still noticeably her than a mass merchandiser's every day the head of the Drw market. We ought to be putting our effo now. I have to admit that our sales representatives could be more into non-Waas, where all of our sales and most of our dealers exit sive. We have added only five new accounts in the last five years acco penetration in non-DFW area is only 10 percent. I'm partially at fault, but I'm ready to act. We should add one additional sales representative whose sole on professional painters to solicite their business through our dealers. I've responsibility is to develop new retail account leads and presentations or call ured the direct cost to keep one rep in the field at $60,000 per year, cluding Vice President of Everyone is proposing a change in our orientation O. OFTUNITY ANIM to prove one of our dealers Let me be the devil's advocate and favor pursuing our current approach We now sell to both the homeowner and the professional painter in Dr and non-DPW markets through our dealers. We have been and will continue to be profitable by judiciously guarding our margins and controlling cose Our contribution margin is 35 percent. Everyone suggests that increasing our costs will somehow result in greater sales volume. Let me remind you, Ron we have said that it is our policy to recoup noncapital expenditures within a one year time horizon. If we increase our advertising by an incremental amount of $350,000, then we had better see the incremental sales volume as well. The same goes for additional sales representatives and, I might add, any across the board cut in prices. Mr. Burns We keep going over the same ground. All of you have valid argu ments, but we must prioritize. Let's think about what's best for all of us. Increased advertising seems reasonable, since national paint firms and mass merchandisers outspend us tenfold in absolute terms. You are right in saying people have to be aware of us before they will buy, or even consider, Janmar. But I am not sure what advertising will do for us given that about 75 percent of the audience is not buying paint. Your reference to DFW as being our major mar ket has been questioned by others. Can't we take that $350,000 of incremental advertising and apply it toward newspapers and catalogs in non-DFW areas? The price cut is a more drastic action. We might have to do it just to keep our gallonage volume. It would appear from our sales representatives' forecast that gallonage demand for paint in our service area will not increase next year and we can't increase our prices this year. Any increases will have to come out of a competitor's hide. Moreover, since our costs are unlikely to decline, we must recoup gross profit dollars from an increase in volume. Is this possible? The idea of hiring additional representatives has merit, but what do we do with them? Do they focus on the retail account side or on recruiting the pro fessional painter? Our survey of retail outlets indicated that 70 percent of sales through our DPW dealers went to the professional painter, while 70 percent of our sales through our non-DPW outlets went to do-it-yourselfers. Our contractor sales in DPW and other areas are minimal. We would need a 40 percent price cu to attract contractors, not to mention the increased costs, expertise, and head aches of competitive bidding for large jobs Now that I've had my say, let's think about your proposals again. We're not leaving until we agree on a course of action Please write a summary for the case discussion "Janmar Coating". Your summary should include the following elements: 1. What are the marketing strategic options or alternatives? 2. Evaluation of each option using the RELEVENT information from the case. 3. Break-even analysis if applicable (including market potential if applicable). 4. Recommendation based on your analysis and evaluations. Janmar Coatings, Inc. In early January 2005, Ronald Burns, president of Janmar Coatings, Inc., slumped back in his chair as his senior management executives filed out of the conference room. "Another meeting and still no resolution," he thought. After two lengthy meetings, the executive group still had not decided where and how to deploy corporate marketing efforts among the various architectural paint coatings mar kets served by the company in the southwestern United States. He asked his sec retary to schedule another meeting for next week. J.S. PAINT COATINGS INDUSTRY The U.S. paint coatings industry is divided into three broad segments: (1) ar chitectural coatings, (2) original equipment manufacturing (OEM) coatings, and (3) special-purpose coatings. Architectural coatings consist of general-purpose paints, vamishes, and lacquers used on residential, commercial, and institu- tional structures, sold through wholesalers and retailers, and purchased by do-it- yourself consumers, painting contractors, and professional painters. Architectural coatings are commonly called shelf goods and account for 43 percent of total industry dollar sales OEM coatings are formulated to industrial buyer specifications and are ap- plied to original equipment during manufacturing. These coatings are used for durable goods such as automobiles, trucks, transportation equipment, appliances, furniture and fixtures, metal containers and building products, and industrial machinery and equipment. OEM coatings represent 35 percent of total industry dollar sales. Special-purpose coatings are formulated for special applications or envi- ronmental conditions, such as extreme temperatures, exposure to chemicals, or corrosive conditions. These coatings are used for automotive and machinery refinishing, industrial construction and maintenance (including factories, equip- ment, utilities, and railroads), bridges, marine applications (ship and offshore facilities such as oil rigs), highway and traffic markings, aerosol and metallic This case was prepared by Professor Roger A. Kerin, Edwin L. Cox School of Business, Southern Methodist University, as a basis for class discussion and is not designed to illustrate effective or inef fective handling of an administrative situation. Certain names and selected market and sales data have been disguised and are not useful for research purposes. Copyright 2005 by Roger A. Kerin. No part of this case may be reproduced without written permission of the copyright holder 105 paints, and roof paints. Special-purpose coatings account for 22 percent of total The US. paint couting industry is generally considered to be a maturing indus try. Industry sales in 2004 were estimated to be slightly over $16 billion. Average CHAPTER OPPORTUNITY ANALYSIS MARI Industry dollar sales annual dollar sales growth was forecasted to approximate the general rate of india tion through 2005 Outlook for Architectural Paint Coatings and Sundries Industry sources estimated us. sales of architectural paint coatings and sun. dries (brushes, rollers, paint removers and thinners, etc.) to be $12 billion plus in 2006. Architectural coatings are considered to be a mature market with long term sales growth projected in the range of 1 to 2 percent per year. Demand for architectural coatings and sundries reflects the level of house redecorating maintenance, and repair, as well as sales of existing homes, and to a lesser extent new home, commercial, and industrial construction Industry sources also noted that the demand for architectural coatings and sundries is affected by two other factors. First, the architectural coating segment faced competition from altera. tive materials, such as aluminum and vinyl siding, interior wall coverings, and wood paneling. Second, paint companies had developed higher-quality products that reduced the amount of paint necessary per application and the frequency of repainting. Counteracting these factors, industry observers foresaw increas ing demand for paint sundries due to a trend toward do-it-yourself painting by household consumers. U.S. paint manufacturers are under growing pressure to reduce emissions of volatile organic compounds (VOCs) from paints and to limit the consumption of solvents. The Environmental Protection Agency (EPA) has adopted a three-step plan for the reduction of VOCs in architectural and industrial maintenance coat- ings. The first phase of the plan, which took effect in 1996, required a 25 percent reduction in VOC content from the base year of 1990. VOCs were reduced an- other 35 percent (from the 1990 base year) in 2000 and 45 percent in the third phase in 2003. Compliance with EPA regulations eroded historically low profit margins in the paint industry. Consolidation and Competition in the Architectural Coatings Segment Slow sales growth, the necessity for ongoing research and development, and recent compliance with governmental regulations have fueled merger and ac quisition activity in the U.S. paint industry. Companies seeking growth and a higher sales base to support increasing costs are making acquisitions. Companies that were unwilling or unable to make capital and research and development (R&D) commitments necessary to remain competitive sold their paint businesses. Industry sources estimate that the number of paint companies is currently 600, or about 40 percent fewer companies than in 1980. The number of paint companies is presently declining at a rate of 2 to 3 percent per year. Merger activity generally involved the purchase of small companies by larger firms to boost their specific market or geographic presence. Still, because of readily available technology and difference in paint formulations associated with regional climatic needs, a small number of regional paint manufacturers, such as Janmar Coatings, have competed successfully against paint manufacturers that distribute their products nationally. Major producers of paint for the architectural coatings segment include Sherwin-Williams, Benjamin Moore, the Glidden unit of Imperial Chemicals, PPG Industries, Valspar Corporation, Grow Group, and Pratt & Lambert. These pro- ducers account for upward of 60 percent of sales in the architectural coatings segment. They market paint under their own brand names and for retailers un der private, controlled, or store brand names. For example, Sherwin-Williams markets the Sherwin-Williams brand and produces paint for Sears. About 50 percent of architectural coatings are sold under private, controlled, or store brands. Sears, Lowe's, Walmart, and Home Depot are major marketers of these brands. In addition, hardware store groups such as True Value and Ace Hardware market their own paint brands Specialty paint stores, lumberyards, and independent hardware stores that sell architectural paint and paint sundries have been able to compete in the paint business despite the presence of mass merchandisers (such as Sears) and home improvement centers (such as Lowe's and Home Depot). In dustry sources estimate that specialty paint stores account for about 36 per cent of paint and sundry sales; hardware stores and lumberyards account for 14 percent. Furthermore, specialty paint and hardware stores and lumberyards in nonmetropolitan areas have outdistanced mass merchandisers and home improvement centers as sources for paint and paint sundries. This is largely attributable to a lack of home improvement centers and mass-merchandiser distribution in these areas and paint store, hardware, and lumberyard customer relations and service. However, Walmart has been an effective competitor in many nonmetropolitan areas. Home centers (including wholesale home centers) and mass merchandisers (including membership clubs such as Sam's) represent the two most frequently patronized categories of retailers shopped by do-it-yourself painters for paint and sundry items. Specialty paint stores and lumberyards were the most fre. quently patronized retail stores by professional painters for paint products and sundry items Architectural Coatings Purchase Behavior Approximately 50 percent of architectural coatings dollar sales are accounted for by do-it-yourselfer painters. Professional painter purchases account for 25 percent of dollar sales. The remainder of architectural coatings dollar sales result from government, export, and contractor sales. Almost 60 percent of annual architectural coatings sales are for interior paints. Exterior paint represents 38 percent of sales, Lacquers and all other applications make up the balance of sales. Slightly less than one in four households purchase interior house paint in any given year. The percentage of households purchasing exterior house paint is considerably less than that for interior paint. The popular ity of do-it-yourself painting, particularly for interior applications, has increased the paint and sundry item product line carried by retail outlets. Paint industry consumer research indicates that the average dollar paint purchase per purchase occasion is about $74.00. The average dollar sundry purchase per purchase occa sion is about $12.00 Research by the Home Improvement Research Institute indicates that do-it- yourself painters first choose a retail outlet for paint and paint sundries, then choose a paint brand. This research also identified four steps in the do-it-yourself decision process for home improvement products, including paint. The results of this research are summarized in Exhibit 1 on page 108. "Paint has become a commodity," commented Burns. "Do-it-yourself purchas- ers all too often view paint as paint-covering-and try to get the best price. But there is a significant number of people who desire service as well in the form Step 4 Consumer Buying Decision Process for Home Improvement Products 10 EXHIBITI Step / Drode on Prolece/Product Step 3 Decide on Product Step 2 Die Son Primary Movie - Old/None Have the Time Have the Money House Is Enement Key Criteria . Durable Reliable Acceptable price Performs Brand reputation Base of use Soyle/Appearance Warranty/Service Rene Consumer Report Mere To Best Price Internet Close to Home of the time Home Improvement Market, 1996. Thed with permission Home Home Improvement Research Institute, Reprinted from National News Center News, *10 Forces Restaping the Retal of information about application, color matching, surface preparation, and dura. bility," he added. He conceded that once paint is on the wall, you can't initially tell the difference between premium-priced and competitively priced paint. "There is a difference between painting contractors and professional painters, however," he continued. "Pot and brush guys (professional painters) do seek out quality products, since their reputation is on the line and maintenance firms don't want to have to paint an office each time a mark appears on a wall. They want paint that is durable, washable, and will cover in a single coat. They also look to retailers who will go the extra mile to give them service. Many request and get credit from stores. They appreciate being able to get to stores early in the morning to pick up paint and supplies. They deal with stores that can mix large quantities of custom colors and expect to work with knowledgeable store employees who can give them what they want. It is not surprising to me that paint stores remain the preferred outlet for paint and sundries for professional painters. Contractors simply want a coating in many instances and strive for the lowest price, particularly on big jobs." JANMAR COATINGS, INC. SERVICE AREA Janmar Coatings, Inc. markets its paint and sundry items in over 50 counties in Texas, Oklahoma, New Mexico, and Louisiana from its plant and headquar- ters in Dallas, Texas. The 11 county Dallas-Fort Worth (DFW) metropolitan area is the major business and financial center in the company's southwestern service area. Competition at the retail level has accelerated in recent years. Sears and Kmart have multiple outlets in DPW, as do Sherwin-Williams and Home Depot. Competition for retail selling space in paint stores, lumberyards, and hardware stores has also increased. "Our research indicates that 1,000 of these outlets now operate in the 50-county service area, and DFW houses 450 of them," noted Burns. "When you consider that the typical lumberyard or hardware store gets 10 percent of its volume ($65,000) from paint and the typical paint store has annual sales of $400,000 with three brands, you can see that getting and keeping widespread distribution is a key success factor in this industry. Over WON, INC 109 EXHIBIT 2 Architectural Paint and Sundry Sales Volume Excluding Contractor Sales in Millions of Dollars) Sedar DW 'PURAL UEBAN Total Dadlar Sales DPW Ar Sale New DWAra Sales 2000 5757 2001 764 SON 27.1 2003 507 2004 RO NO 1.200 outlets were in operation in the area a decade ago, about 600 were situated in the DFW area." Competition at the paint manufacturing level has increased as well. The ma jor change in competitive behavior has occurred among paint companies that sell to contractors serving the home construction industry. These companies have aggressively priced their products to capture a higher percentage of the home construction market. "Fortunately, these companies have not pursued the 400 or so professional painting firms in DFW and the 200 professional painters outside the DFW area or the do-it-yourselfer market as yet," said Burns. They have not been able to gain access to retail outlets, but they may buy their way in through free goods, promotional allowances, or whatever means are available to them in the future "We believe that mass merchandisers control 50 percent of the do-it-yourselfer paint market in the DFW metropolitan area. Price seems to be the attraction, but we can't quarrel with their quality, noted Burs. The estimated dollar volume of architectural paint and allied products sold in Janmar's 50-county service area in 2001 was $80 million (excluding contractor sales). DFW was estimated to account for 60 percent of this figure, with the re- maining volume being sold in other areas. Do-it-yourself household buyers were believed to account for 70 percent of non-contractor-related volume in DFW and 90 percent of non-contractor-related volume in other areas. A five year summary of architectural paint and allied product sales in the Janmar service area is shown in Exhibit 2 R COATINGS, INC. Janmar Coatings, Inc. is a privately held corporation that produces and markets architectural paint under the Janmar brand name. In addition to producing a full line of architectural coatings, the company sells paint sundries (brushes, rollers, thinners, etc.) under the Janmar name, even though these items are not manu- factured by the company. The company also operates a very large OEM coatings division, which sells its products throughout the U.S. and worldwide. Company architectural paint and allied products sales volume in 2001 was $12 million, and net profit before taxes was $1,140,000 Dollar sales had in creased at an average annual rate of 4 percent per year over the past decade. Paint gallonage, however, had remained stable over the past five years "We have been very successful in maintaining our margins even with increased research and development, material and labor costs, but I'm afraid we're approaching the threshold on our prices, 'Burns said. "We are now the highest priced paint in our OPORTUNITY ANY 6 percent of net sales Distribution bergand, and hardware outlets Party percent of its outlets are located in the The company distributes is pract the 200 independent paint stores, bu in the senere Janmar sales are distributed evenly between D and non 11- DF The remaining ets are inated in the other countles DPW account Exhibit shows the account and sales volume distribution by si Retail outlets outside the DFW area with paint and sundry purchases en for 14 outlets in DP (those with purchases greater than $50,000 annually) ceeding 350.000 annually carry only the Janmar product line. However, except which carry the Janmar line exclusively, DPW retailers carry two or three lines, with Janmar's line being premium priced. "Our experience to date shows that in our DFW outlets, the effect of multiple lines has been to cause a decline in Ballonge volume. The non-rw outlets, by comparison, have grown in gallon e volume. When you combine the two, you have stable gallonage volume, remarked Burns of Janmar employs eight sales representatives. They are responsible for monitoring Inventories of Janmar paint and sundry items in each retail outlet, as well as for order taking assisting in store display, and coordinating cooperative advertis ing programs. A recent survey of Janmar paint dealers indicated that the sales representatives were well liked, helpful, professional, and knowledgeable abou paint. Commenting on the survey findings, Burns said, "Our reps are on a firse. name basis with their customers. It is common for our reps to discuss business and family over coffee during a sales call, and some of our people even 'mind the store' when the proprietor has to run an errand or two." Sales representatives are paid a salary and a percent commission on sales. The company spends approximately 3 percent of net sales on advertising and sales promotion efforts . Approximately 55 percent of advertising and sales pro- motion dollars are allocated to cooperative advertising programs with retail ac counts. The cooperative program, whereby Janmar pays a portion of an account's media costs based on the dollar amount of paint purchased from Janmar, applies to newspaper advertising and seasonal catalogs distributed in a retailer's immedi- ate trade area. The remainder of the advertising and sales promotion budget is spent on in-store displays, corporate brand advertising, outdoor signs, regional magazines, premiums, and advertising production costs. Promotional Efforts for Architectural Coating Sales EXHIBIT 3 Account and Sales Volume Percentage Distribution by Dollar Purchase per Year Dollar Purchase/Year DFW $50,000+ $25,000-$50,000 14 Less than $25,000 19 Total 10% Retail Accounts Non-DFW Total 10% 17% 20 34 30 28% Dollar Sales Volume DFW Non-DFW Total 28% 56% 13 13 26 9 9 18 50% 100N 60% 100% 50% PLANNING MEETING Senior management Executives of Janmar Coatings, Inc. assembled again to consider the question of where and how to deploy corporate marketing efforts among the various architectural paint coatings markets served by the company Burns opened the meeting with a statement that it was absolutely necessary to resolve this question at the meeting in order for the tactical plan to be developed. The peak painting season was soon approaching and decisions had to be made. Vice President of Advising Hon, I sill believe that we must direct our efforts toward bolstering our presence in the DPW do-it-yourselfer market. I just re- ceived the results of our DPW consumer advertising awareness study. As you can see Exhibit awareness is related to paint purchase behavior Industry research on paint purchase behavior indicates that a large number of doit yourselfers choose a store before selecting a brand. However, a brand name is also important to consumers because they do think about paint they have seen advertised when choosing a brand. This becomes very important in those stores carrying multiple brands. It seems to me that we need an awareness level of at least 30 percent among do-ityourselfers to materially affect our sales. Preliminary talks with our ad agency indicate that an increase of $350,000 in corporate brand advertising beyond what we are now spending, with an emphasis on television, will be necessary to achieve this awareness level Furthermore, this television coverage will reach non-DPW consumers in some 15 counties as well Vice President of Operations. I don't agree. Advertising is not the way to go, and reference to the DPW area alone is too narrow a focus. We have to be com- petitive in the do-it-yourselfer paint market, period. Our shopper research program indicated that dealers will quickly back off from our brand when the customer appears price-sensitive. We must cut our price by 20 percent EXHIBIT 4 Percentage of DFW Population That Was Aware of Paint Brands and Purchased Paint in the Last 12 Months 100 50 45 40 35 30 25 Percentage 15 10 5 Mass merchandiser brand National paint brand Mass merchandiser brand Janmar brand Local paint brand Awareness Last Brand Bought Awareness Question: "What brands come to mind when you think of paint?" Last Brand Bought: "What paint brand did you purchase the last time you bought paint?" Node Sample size was N = 100 Percentages are subject to a 5 percent sampling error on all paint products to achieve purity with national paint brands. Look here In today's newspaper, we admise a price of special on our extent paint price. With hochas on the same pe customer would have to be an die and our price is still noticeably her than a mass merchandiser's every day the head of the Drw market. We ought to be putting our effo now. I have to admit that our sales representatives could be more into non-Waas, where all of our sales and most of our dealers exit sive. We have added only five new accounts in the last five years acco penetration in non-DFW area is only 10 percent. I'm partially at fault, but I'm ready to act. We should add one additional sales representative whose sole on professional painters to solicite their business through our dealers. I've responsibility is to develop new retail account leads and presentations or call ured the direct cost to keep one rep in the field at $60,000 per year, cluding Vice President of Everyone is proposing a change in our orientation O. OFTUNITY ANIM to prove one of our dealers Let me be the devil's advocate and favor pursuing our current approach We now sell to both the homeowner and the professional painter in Dr and non-DPW markets through our dealers. We have been and will continue to be profitable by judiciously guarding our margins and controlling cose Our contribution margin is 35 percent. Everyone suggests that increasing our costs will somehow result in greater sales volume. Let me remind you, Ron we have said that it is our policy to recoup noncapital expenditures within a one year time horizon. If we increase our advertising by an incremental amount of $350,000, then we had better see the incremental sales volume as well. The same goes for additional sales representatives and, I might add, any across the board cut in prices. Mr. Burns We keep going over the same ground. All of you have valid argu ments, but we must prioritize. Let's think about what's best for all of us. Increased advertising seems reasonable, since national paint firms and mass merchandisers outspend us tenfold in absolute terms. You are right in saying people have to be aware of us before they will buy, or even consider, Janmar. But I am not sure what advertising will do for us given that about 75 percent of the audience is not buying paint. Your reference to DFW as being our major mar ket has been questioned by others. Can't we take that $350,000 of incremental advertising and apply it toward newspapers and catalogs in non-DFW areas? The price cut is a more drastic action. We might have to do it just to keep our gallonage volume. It would appear from our sales representatives' forecast that gallonage demand for paint in our service area will not increase next year and we can't increase our prices this year. Any increases will have to come out of a competitor's hide. Moreover, since our costs are unlikely to decline, we must recoup gross profit dollars from an increase in volume. Is this possible? The idea of hiring additional representatives has merit, but what do we do with them? Do they focus on the retail account side or on recruiting the pro fessional painter? Our survey of retail outlets indicated that 70 percent of sales through our DPW dealers went to the professional painter, while 70 percent of our sales through our non-DPW outlets went to do-it-yourselfers. Our contractor sales in DPW and other areas are minimal. We would need a 40 percent price cu to attract contractors, not to mention the increased costs, expertise, and head aches of competitive bidding for large jobs Now that I've had my say, let's think about your proposals again. We're not leaving until we agree on a course of action