Marketing Analysis – Chipman Union

By: Gavin P. Smith

Executive Summary

Chipman-Union faces shrinking gross margins in a highly competitive private label hosiery industry.  While we have enjoyed success early on, we have faced difficulties in re-tooling and reducing our product lines.  As a result, we are in a position where there is little room to navigate.  We will need to innovate out of our comfort zone to extend the life of this company, or remain trapped in our category and decline.

After extensive analysis, I propose that we proceed with our efforts to co-brand with Odor Eaters and release two types of socks to the market place: 1) a low cost 24-inch tube sock and 2) variable cost casual crew socks.   Our market tests bear out this focus.  In addition, thanks to the market penetration already established by the Odor-Eaters brand, our advertising cost to enter the segment is cut by over 50%.  In addition, we will focus our advertising efforts on females that are responsible for two-thirds of male sock purchases in the U.S.

To avoid cannibalizing our existing private-label sales and relationships in the department chains, we specifically should focus distribution to discounters or to food and drugstore chains.  Of those two choices, and given the nature of the proposed product line, surveyed pricing responses, and breakeven rates, distribution to discounters is the only optimal choice.  Details are discussed in the Selected Strategy section.

Analysis

Environment (Situation)

The company originally offered 350 styles of hosiery but, due to operational inefficiencies, narrowed this down to just 67 styles and closed a plant.  This helped to optimize our production capacity and shift from shorter runs to longer runs.  In 1979, 37 million dozen pairs were shipped within our industry.  Our current market share is 3.7 million dozen pairs (10% of units) and $27,500,000 (11% of sales).

Consumer trends, however, were changing as we made our adjustments.   Athletic and active lifestyles have increased in popularity.  As a result, the tube sock design is becoming more popular as a one-size-fits-all athletic sock.  In addition, pro athletes are taking the forefront as role models for men.  Athletic wear is now a source of emulation for men.  In addition, thanks to the new tube design, many people perceive the benefit of a better fit and give preference to tube socks.  Within the sector, tube socks are the new rising trend, shifting from less than 1% of shipments in 1970 to over 50% in 1979.

Industry (Five Forces Analysis)

Our industry has high barriers to entry, high competitiveness, low supplier power, high buyer power and threats of substitution.

Barriers To Entry

Within the industry, there are 319 hosiery manufacturers in the United States operating 438 knitting mills, mainly located in the southern United States.  This amount suggests low barriers of entry to our industry, and is reflected by the relatively low initial capital investment required.

Supplier Power

Manufacturers that offer a broad range of styles usually have supplier power over smaller buyer accounts.  Along with other hosiery manufacturers, Chipman-Union has little supplier power given the high population of manufacturers in the industry.  We all compete on price, assortment and quick delivery.

Buyer Power

Retail chains usually spread their orders across a number of supplier accounts to ensure continuity of available inventory.  If one supplier fails to perform, the buyer can easily switch.  This indicates high buyer power.

Competitiveness

In 1979 alone, 289 million dozen pairs of socks shipped to retailers in the United States.  Of that amount, 25% (or 72 million dozen pairs) are men’s socks.  In addition, 55% (or approximately 159 million dozen pairs) were cushioned socks.  On average, up to ten pairs of hosiery are purchased annually per capita in the United States.

No one company holds more than 20% share of this market, including Chipman-Union.   In 1979, 75% of all dollar sales for men’s and boy’s casual/athletic hosiery come from private label sales.  Everyone wants a piece of this pie.  As a result, our slice is getting smaller.

Threat of Substitution

As a private label provider, threat of substitution is also high.  If another competitor negotiates a better deal with one of the three main retail destinations for supply orders, Chipman-Union stands to lose.  If a company creates a type of sock that gets good response in the marketplace, others can quickly replicate the design.

Organization (SWOT)

Strengths

We have an established and streamlined private label presence.  We have been around for a long time and have the ability to leverage strong sales relationships with larger chains.

Weaknesses

By narrowing of our product line, Chipman-Union is contracting while companies like Burlington and Interwoven are innovating.  As a result, we find ourselves pigeonholed in a private label industry that is highly competitive.  This also creates private label price sensitivity for us.   We cannot change our prices to increase our margins, nor can we reduce costs.  The only choice is to move laterally into another product segment.

Opportunities

We have watched other companies innovate with interest, particularly Burlington and the BioGaurd line.  In fact, at one time, we produced a batch of these BioGaurd products on behalf of Burlington.  After seeing the response in the marketplace, and recognizing the 40-50% gross margins held by Burlington in this segment, there is an opportunity here for Chipman-Union.

Household purchasing is also shifting towards the female consumer.  According to studies, females in households with at least one male age 13+ handle hosiery purchases.  Upon analysis, that constitutions a target market of 32,660,000 potential female consumers responsible for two-thirds of all men’s and boys’ socks.  (See Exhibit 4). Acquiring the right initial share of this market is critical.

Price is also becoming less of a factor.  Quality and fit are becoming more important.  With product differentiation emerging in the market, the opportunity exists to try a branded product at higher price points and higher margins.

Threats

Combined with rising retail prices and high retailer margins, our gross margins are contracting.  Without expanding to a growing consumer market, we face further decline in our sustainability as a company.

 

Problems Facing Chipman-Union

  1. Our capacity to grow in private label is at an end.  We are only averaging a 15% gross margin. We need to find a “blue ocean”, another segment of the market where we can navigate into and offer a differentiated product to improve our margins.  In doing so, our goal is to add 5% growth to the company gross margin.  Can we enter the branded socks market with a differentiated product?
  2. Previous attempts to launch a branded line were unsuccessful, due to lack of desired sales volume or yield from upfront investments (i.e. the Rabbit’s Foot line introduced in 1975).  The returns did not warrant the investment to independently build and support a full brand.  Learning from this mistake, however, may yield the right approach that reasonably achieves a better margin.
    1. We currently maintain low overhead with low fixed cost machinery for our private label production.  To enter the branded sock category will require an entire new (and costly) layer for our business model.  We have little experience with the extensive marketing efforts that are required, including media advertising strategies, point-of-purchase displays and other creative development.  How do we approach this effort?  How do we support this new layer of cost?  Who do we market to, through what channels, and how much to spend?  Do we go it alone, or could this be partially or fully outsourced through a partnership?
    2. Do nothing and remain in the private label line. As already discussed, this is not an option for us.
    3. Launch a Chipman-Union brand of odor-repelling socks. GFM Consulting indicates that this is too costly (upwards of $8-10 million).  We also risk taking on all additional costs of in-house chemical treatment, advertising and product placement.  Executives already dislike this option.
    4. Co-Brand with Odor-Eaters to release new line of odor-repelling socks. Taking advantage of their chemical process, brand recognition, and established store presence and distribution relationships will allow us to achieve our mission at a reduced cost.   This move would save on all of the costs mentioned, plus cut overall marketing costs in half to $3.5 million to achieve 50% market awareness.  If we reduce this investment to just $1,000,000 in ad spend over the next two years, it is thought that 25% market awareness will be achieved.  This means that 8,165,000 females would be reached at an average cost per acquisition of $0.12. (Exhibit 4)

Selected Strategy

It does not make sense to introduce 18-inch tube socks or any athletic crews given the response of the market test.  Perhaps competitive offerings from Burlington or Interwoven are impacting response.  Regardless, it makes more sense to go where the price response is most favorable.  We also need to differentiate from Burlington’s BioGaurd line.  Here is the new proposed strategic marketing mix:

Proposed New Marketing Mix

Product

License the Odor-Eater brand name from Combe, Inc. for $60,000 licensing fee in the first year and 5% net sales for each subsequent year.  Target products for release, based on market survey respondents, are:

  1. Tube Socks (due to enormous growth already occurring in this segment, we cannot ignore it)
    1. Single pair, low price 24-inch tube socks
    2. Casual Crew Socks (a way to differentiate from Burlington/Interwoven)
      1. Single pair, high price casual crew socks
      2. Three-pair, high or low price, casual crew socks

The optimum mix of men’s and boys’ socks in tube and crew only will yield the highest gross margins (Exhibit 9).

Price

Mall intercept test data reveals that a majority of respondents favor 24-inch tube socks (a combined 90% definitely/probably would buy) or crew socks (a combined 80% definitely/probably would buy) if branded with the Odor-Eaters label (Exhibit 3, case).  Strongest responses (Exhibit 6) are as follows:

  1. Single pair, low price 24-inch tube socks:      $1.99/pair
  2. Single pair, high price casual crew socks:      $1.99/pair
  3. Three-pair, low price casual crew socks :      $5.49/pair
  4. Three-pair, high price casual crew socks:      $5.99/pair

In addition, retail price points are shifting up toward the middle to high price categories. (Exhibit 10)

Promotion

We will use all proposed methods to promote the new launch except the trade promotion for food and drugstores.  The idea is to use television media advertising spend to appeal to women to get them through the doors to shop for socks for their husbands, boyfriends and/or children.  We then fully invest in circular coupon and display coupon promotions to hook customers into our selling proposition within stores.  Calculations suggest that opting for trade promotions to gain penetration into food and drugstores will too heavily impact our contribution margin.  Breakeven and target market share will be harder to attain. (Exhibit 8)

Place/Distribution

While originally considering a mix of displays in food, drug and discount stores (Exhibit 3), it is more effective to deploy all 15,000 display units into discount stores (Exhibit 8).  Granted, Odor-Eaters has higher penetration in the other store segments, but common sense about shopping habits combined with inhibitive trade discount costs makes me apprehensive.  Display deployment, over two years, will cost $1.5 million, with an average unit inventory turn of 144 days. (Exhibit 3) Refining our placement strategy also negates the cost of 50 additional brokers/sales agents taking 5% sales commission, which eats into our margin.

In addition, men’s hosiery units and sales numbers are down among general merchandise chains, department stores, specialty stores and variety stores.  Supermarket and drugstores have increased slightly, but not enough to warrant placement of 7,500 displays.  The most significant growth is found in discount stores. Growth from 1974-1979 increased from 26.5% to 36.5% pairs (+10% change) and, in dollars, increased from 21.1 to 29.3% (+8.2% change). (Table B, case page 3)

We project an inventory turn of 2.54 times per year.  We need to maintain this level of turn in order to be successful, and Exhibit 8 bears out the consequences of slower turns.  If inventory turns slow in the food and drugstore option, we would not breakeven.  If inventory turns slow in the discount store option, we still have a full 1 unit of cushion to breakeven.  If our projected turns are accurate, we can actually afford to spend $1.5million in the first year on advertising instead of just $1million.  This would yield an extra 5% target market share in first year and still allow us to breakeven. (Exhibit 8, #2)

Summary

With shrinking gross margins in a highly competitive private label industry, we must shift to this new partnership with Odor-Eaters.  We will tap the market trend and go where there is opportunity.  We will target the female household decision makers with a $1.5million media ad spend, full coupon and display promotions, placing low-price tube socks and low/high price casual crew socks in discount stores only.  We will piggyback onto the established brand of Odor-Eaters through a licensing partnership that will not only offset the costs of building a new brand but also quickly yield successful market penetration and higher product margins.

Appendix

Exhibit 1: Industry Calculations

  • Cushioned Socks: 55% of pair units sold (289,000,000 dozen pairs x .55 = 158,950,000 dozen pairs
  • Men’s Socks represent 25% of pair units sold: 289,000,000 x 25% = 72,000,000
  • 85% of Manufacturer Selling Price consists of:
    • Materials:  49%
    • Labor: 10%
    • Variable Overhead: 12%
    • Fixed Overhead (includes Depreciation): 8%
    • Losses on Imperfect Items: 3%
    • Trade Discounts: 3%
    • Total: 49+10+12+8+3+3 = 85%
    • Machinery:  $4,500 per unit generated 8 dozen pairs of tube socks per hour.

 

Exhibit 2: Proposed Position/Target Consumer:

  • FEMALES who were responsible for the shopping for households that included all males 13+ in age.
  • U.S. Households: 71,000,000
    • 46% of households with men: 71,000,000 x .46 = 32,660,000 households (females)
    • Number of men per 32,660,000 households total 65,000,000
    • 65,000,000/32,660,000 = 1.9902 per household (rounded to 2 per household average)

 

Exhibit 3: Proposed Placement/Rollout:

  • Initial proposed rollout to food and drugstore chains, discount chains
  • Time (2 years) = 15,000 display units out

50% in food stores:  7,500 display units

25% in drug stores:  3,750 display units

25% in discount stores:   3,750 display units

 

Proposed Rollout Plan (Store Display Units @ $100/per unit cost):

Location % Placement # of Units X$100 per unit cost
Food Stores 50% 7,500 units $750,000
Drug Stores 25% 3,750 units $375,000
Discount Stores 25% 3,750 units $375,000
Totals: 100% 15,000 units $1,500,000

 

  • Each unit would turn inventory at an estimated 2.54 times annually
    • Display Unit Inventory Turns: 12/2.54 = Every 4.7244 months (or every 143.7 days)

 

Exhibit 4: Proposed Promotion/Advertising

  • Potential Ad Spend/Yield:
    • Expected Expenditure: $1 million over 2 years ($500,000/yr.)
    • Expected Yield: 25% market awareness
    • 25% of 65,000,000 male market:  16,250,000
    • 25% of 32,660,000 female (households): 8,165,000
    • CPA MALES (2 per household) = $1,000,000/16,250,000
      • Acquisition cost of $0.0615 per male
      • CPA FEMALES (1 per household) = $1,000,000/8,165,000
        • Acquisition cost of $0.1225 per female
      • Triers to Repeat Buyers Conversion Rate?  Repeaters would buy 3 packages annually (=9 pairs)

 

  • Promo Option 1
    • $1 cash refund at Point of Purchase / 50 refund forms per “take one” pad attached to display units @ a 7% redemption rate

Total Cost:  $75,000

  • Promo Option 2

$0.25 coupon distributed through free-standing inserts in Sunday papers

10 million circulation audience @ 2.5% redemption rate

Total Cost: $136,500

  • Promo Option 3

Trade Promo deal on opening orders to encourage retailers to set up display units = 20% off manufacturer price invoice allowance + 5% ad allowance (for 55% of retailers/45% of retailers do not get this)

Exhibit 5: Proposed Costs Associated

  • Sunk Costs (Consulting & Research): $100,000
  • Hard Costs:
    • Licensing Fee for Odor-Eaters Brand:
      • 1980: $60,000
      • Subsequent Years: 5% of CU Net Sales (exclusive of returns and prepaid freight)

Exhibit 6: Consumer Price Interest

 

(From Exhibit 2 in Case)

Highest combined “Definitely or Probably Would Buy” responses are in:

  1. Single Pair, Low Price category for 24-inch Tube Socks
  2. Single Pair, High Price category and Three-Pair (Low or High) categories for Casual Crew Socks

Exhibit 7: Inventory Turn Projections

  • 15000 units = initial order of 36 dozen pairs each
  • 15000 x 36 = 540,000
  • 5 inventory turns (approx. 2.54 x 2) over 2 year period for displays = 4 more additional orders of equal proportion over period
  • 5 x540,000 = 2,700,000 dozen pairs over 2 years…or about 1,350,000/year

Exhibit 8: Preliminary Breakeven Options, Breakeven Share

  1. Preliminary Breakeven -including Food & Drug stores with trade promo

$3.30MSP x .45 (45% receive no 25% trade promo) = $1.485

$3.30MSP x .25 (25% Trade Promo discount) = $0.825

$3.30-$0.825 = $2.475*.55 (55% receive the discount) = $1.3612

$1.485 + $1.3612 = $2.8462

$2.85 Weighted MSP (rounded)

2.8462 Weighted MSP -2.00 COGS

2.85 – 2.00 = $0.85 (.8462 rounded)

Contribution margin now = $0.85

YEAR 1 BREAKEVEN PROJECTION______________________________

  • $1,231,500 Campaign Costs / .8462 Contribution Margin = 1,455,300 preliminary breakeven 3-pair packages to sell.
  • 1,455,300/4 = 363,825 dozen pairs for preliminary breakeven

 

  • (1,455,300/24 packages per case = 60637.5 cases to sell @6 dozen per case)
  • Deploying 36 dozen pairs x 15,000 units = 540,000 dozen pairs to market sold at MSP.

OR 1.5 cases x 15000 = 22,500 cases to market at MSP

  • If turn is at approximately 2.54 per year, that’s 2.5 times the cases you sell , or:

2.5 x 22,500 cases = 56,250 cases

  • We will fall short of breakeven by approximately 4300-4400 cases

Breakeven Share of Market:

1,455,300 / 8,165,000 = 0.1782 or 17.82% of target market

YEAR 2 BREAKEVEN PROJECTION______________________________

  • $961,500 Campaign Costs / .7962 Contribution Margin (already -.05 for licensing fee net sales 5%) = 1,207,600 preliminary breakeven 3-pair packages to sell.
  • 1,207,600/4 = 301,900 dozen pairs for preliminary breakeven

 

  • (1,207,600/24 packages per case = 50,317 cases to sell @6 dozen per case)
  • Deploying 36 dozen pairs x 15,000 units = 540,000 dozen pairs to market sold at MSP.

OR 1.5 cases x 15000 = 22,500 cases to market at MSP

  • If turn is at approximately 2.54 per year, that’s 2.5 times the cases you sell , or:

2.5 x 22,500 cases = 56,250 cases

  • If turn drops to 2.24 or less times per year, we do NOT meet breakeven

Breakeven Share of Market:

1,207,600 / 8,165,000 = 0.1479 or 14.79% of target market

  1. Preliminary Breakeven by avoiding Food & Drug stores (eliminatES trade promo)

$3.30-$2.00 = $1.30 Cont. Margin

YEAR 1 BREAKEVEN PROJECTION (At $1.0million/year Media Ad Spend)__________________________

  • $1,231,500 Campaign Costs / 1.30 Contribution Margin per package = 947308 preliminary breakeven per 3-pair packages to sell.
  • 947308/4 = 236,827 dozen pairs for preliminary breakeven OR 947308/24 packages per case = 39,471 cases to sell

 

  • Deploying 36 dozen pairs x 15,000 units = 540,000 dozen pairs to market sold at MSP.

OR 1.5 cases x 15000 = 22,500 cases to market at MSP

  • If turn is at approximately 2.54 per year, that’s 2.5 times the cases you sell , or:

2.5 x 22,500 cases = 56,250 cases

  • If annual turn drops to 1.75, CU still breaks even.

Breakeven Share of Market:

947,308 / 8,165,000 = 0.116 or 11.6% of target market

YEAR 1 BREAKEVEN PROJECTION (At $1.5million/year Media Ad Spend)___________________________

  • $1,731,500 Campaign Costs / 1.30 Contribution Margin per package = 1,331,923 preliminary breakeven per 3-pair packages to sell.
  • 1331923/4 = 332,981 dozen pairs for preliminary breakeven OR 1331923/24 packages per case = 55,497 cases to sell

 

  • Deploying 36 dozen pairs x 15,000 units = 540,000 dozen pairs to market sold at MSP.

OR 1.5 cases x 15000 = 22,500 cases to market at MSP

  • If turn is at approximately 2.54 per year, that’s 2.5 times the cases you sell , or:

2.5    x 22,500 cases = 56,250 cases

  • Annual turn could not drop at all to break even with this increased spend.

Breakeven Share of Market:

1,331,923/8,165,000 = 0.163 or 16.3% of target market

YEAR 2 BREAKEVEN PROJECTION_________________________________________________________

  • $961,500/ 1.25 (.05 out for 5% of net sales licensing in 2nd year) contribution margin per package = 769,200 preliminary breakeven per 3-pair packages to sell.
  • 769,200/4 = 192,300 dozen pairs for preliminary breakeven OR 769,200/24 packages per case = 32,050 cases to sell

 

  • If annual turn in 2nd year drops to 1.5, CU still breaks even.

Breakeven Share of Market:

769,200 / 8,165,000 = 0.0942 or 9.42% of target market

Exhibit 9: Cost Structure Per Pair

  Over the Calf tube socks Boys over the calf tubes Athletic crews Casual crews Weighted Averages (Across Full Line) Weighted –

(Tubes / Athletic Crews / Casual Crews only)

Weighted – (Tubes and Casual Crews) Weighted  -(Boys tubes and Casual Crews only) Weighted – (Boys Tubes and Athletic Crews only)
Retail Price 6.49/3 = 2.1633 per pair 5.99/3 = 1.9967 per pair 5.49/3 = 1.83 per pair 5.99/3 = 1.9967 per pair 2.1633+1.9967+1.83 + 1.9967 = 7.9867 / 4 = 1.9967 per pair 2.1633+1.83+1.9967 = 5.99 / 3 = 1.9967 2.1633+1.9967 = 4.16 /2 = 2.08 1.9967+1.9967 = 3.9934 /2 = 1.9967 1.9967+1.83 = 3.8267 /2 = 1.9134
MSP 3.57/3 = 1.19 per pair 3.29/3 = 1.0967 per pair 3.02/3 = 1.0067 per pair 3.29/3 = 1.0967 per pair 1.19+1.0967+1.0067+1.0967 = 4.3901 /4 = 1.0975 per pair 1.19+1.0067+1.0967 = 3.2934 /3 = 1.0978 1.19+1.0967 = 2.2867 /2 = 1.1434 1.0967+1.0967 = 2.1934 /2 = 1.0967 1.0967+1.0067 = 2.1034 /2 = 1.0517
Trade margin 2.92/3 = 0.9733 per pair 2.70/3 = 0.9 per pair 2.47/3 = 0.8233 per pair 2.70/3 = 0.90 per pair 0.9733+0.90+0.8233+0.90 = 3.5966 / 4 = 0.8991 per pair .9733+.8233+.90 = 2.6966 / 3 = 0.8989 .9733 + .90 = 1.8733 / 2 = 0.9367 .90+.90 = 1.8 /2 = 0.9 .90+.8233 = 1.7233 /2 = 0.8617
Trade Margin % 45%/3 = 15% per pair 45%/3 = 15% per pair 45%/3 = 15% per pair 45%/3 = 15% per pair 15+15+15+15 = 60/4 = 15 % per pair 15% 15% 15% 15%
Cost of Goods $ 2.23/3 = 0.7433 per pair 1.89/3 = 0.63 per pair 1.78/3 = 0.5933 per pair 1.94/3 = 0.6467 per pair .7433+.63+.5933+.6467 = 2.6133 /4 = 0.6533 per pair .7433+.5933+.6467 = 1.9833 / 3 = 0.6611 .7433+.6467 = 1.39 / 2 = 0.695 .63+.6467 = 1.2767 /2 = 0.6384 0.63 + .5933 = 1.2233 /2 = 0.6116
Gross Margin $ 1.34/3 = 0.4467 per pair 1.40/3 = 0.4667 per pair 1.24/3 = 0.4133 per pair 1.35/3 = 0.45 per pair .4467+.4667+.4133+.45 = 1.7767 /4 = 0.4442 per pair 0.4467+.4133+.45 = 1.31 / 3=0.4367 .4467+.45 = 0.8967 /2 = 0.4484 .4667+.45 = 0.9167 / 2 = 0.4584 ß 0.4667+.4133 = 0.88 /2 = 0.44
Gross Margin % 37.5/3 = 12.5 % per pair 42.6/3 = 14.2% per pair 41/3 = 13.6667% per pair 41/3 = 13.6667% per pair 12.5+14.2+13.6667+13.6667 = 54.0334 /4 = 13.5084 % per pair 12.5+13.667+13.667 = 39.834 /3 = 13.278 12.5+13.6667 = 26.1667 /2 = 13.0834 % 14.2+13.6667 = 27.8667 /2 = 13.9334 14.2+13.6667 = 27.8667 / 2=13.9334

 

 

 

 

Exhibit 10: Retail Price Points (from case)

 

Retail Price Point

1969

1974

1979

Change 1969 to 1979

$0.00-$0.69

56%

38%

25%

31%

$0.70-$1.00

30%

33%

40%

+10%

$1.01 +

14%

29%

35%

+21%