Classic Knitwear Essay - Part 2
Classic Knitwear and Guardian: A Perfect Fit Problems Classic Knitwear’s most prominent dilemma is its low gross margin - Classic Knitwear Essay introduction. In comparison to the 30%-40% gross margins of the leading branded product manufacturers, Classic Knitwear’s gross margin of 18% is alarmingly low. The company attributes their low gross margin to its private label and unbranded knitwear having no branded recognition among retail customers. Although Classic Knitwear had recent success in shrinking that gap between themselves and the leaders, the growth-hungry board still demanded better results.
As a publicly traded company reporting $550 million in revenue, Classic Knitwear needed to make decisions that satisfy its board and investors, as well as better the company in all ways possible. One of the successes that the company experienced is low production costs through their state-of-the-art offshore production hub that they established in the Dominican Republic. Because of Classic Knitwear’s moderate cost advantage over other US producers, rival companies such as JamesBrands and FlowerKnit had noticed Classic Knitwear’s model.
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It would only be a matter of time until these rivals reached similar or better manufacturing efficiencies. Although Classic Knitwear is the #2 player in the Wholesalers screen-print sector with 16. 5% market share, it only possessed 1% market share of the private-label sector. The importance to increase gross margins to stay successful and relevant, especially in the private-label sector where its market share is so weak, could not be more important. Objectives Classic Knitwear’s major short-term objective is reaching and sustaining a gross margin of 20% in 2006.
Because the low gross margin is tied to Classic Knitwear’s poor brand recognition, the company needs to focus on innovating their products and raising recognition. To reach this objective and maintain consistency in stock price, Classic Knitwear knows that it needs to communicate compelling plans for margin growth. Through market research, the company found that a licensing agreement with the chemical firm Guardian, a manufacturer of insect repellents that offered odorless protection against mosquitoes and bugs of that nature must be reached.
Because this new category of insect-repellent clothing had barely begun appearing in mass-market products, the agreement with Guardian seems very promising. In order to reach this enticing goal, there needs to be calculations made and a discussion involving the financial aspects and how they can ultimately benefit Classic Knitwear. Alternatives In order to approach the problem of having little to no brand recognition, Classic Knitwear should assess a co-branded approach to marketing this new product.
Classic Knitwear’s product line is mostly the basics, which consumers do not exactly tie together with a specific brand. Their private label is for the standard products that consumers do not get excited about. Through co-branding with Guardian on the insect-repellant apparel, this would be their way to become noticed more amongst their target market and Guardian’s. In the case Classic Knitwear discussed the option of having the insect-repellant shirts sold by using cardboard in-store displays. These displays would only have the Guardian brand name on it as opposed to having both.
If Classic Knitwear wants to become a more well known they need to make sure that their name is on every single display next to Guardian’s. This will increase the awareness of Classic Knitwear as a provider of various lines of apparel as well as insect-repellant shirts. A co-branded approach that increases their brand awareness can increase product purchases among their whole chain of products and not just for these specific shirts. Guardian’s brand name in itself is very well known which can aid Classic Knitwear’s brand issues as well.
Research indicated that, “95% of consumers who were aware of the Guardian name indicated that they held positive perceptions of the brand, with 58% expressing a recognition of Guardian’s pioneering status in insect-repellent clothing technology. ” This status of brand recognition will result in less expenditures needed to market the new product. Also, a co-branded partnership will open Classic Knitwear up to a new market of consumers who may now shop for other apparel that isn’t necessarily insect-repellant, thus increasing unit sales across their other product sectors.
Additionally, the risk associated with this co-branding outcome would now become equally split between themselves and Guardian. This co-branded approach to promoting and distributing the insect-repellant shirts will lead to an increase in leverage from the retailers. This is currently an issue because of their little brand recognition. The retailers have all the power in this relationship. Classic Knitwear has to become better known and increase the consumer demand of their products on the retailer’s shelves in order for their leverage to increase.
Through having both Guardian and Classic Knitwear’s name on the products and displays this will inevitably increase their brand recognition which will in return increase their leverage. As a result of co-branding both consumer awareness and leverage will increase. Another alternative is to focus more on general merchandising stores and discount stores to first release the product. These are the sectors in which Classic Knitwear is familiar and can excel. Classic Knitwear is looking to hire three new sales representatives to focus on the sports sector that will amount to an extra $255,000 in fixed costs per year.
Through a more intensive approach to general merchandising and discount stores, Classic Knitwear can then save costs and possibly hire only one or two sales representatives to work on the Sports sector. This way, they can focus on what they know best as well as tap into new markets. Also, Guardian is very familiar with the Sports market and is a relevant company in that sector. As a result, there may not even be a need for three new sales representatives if Guardian has sales representatives that are also familiar with that sector. It is apparent that with the projected spending, Classic Knitwear is not going to be able to breakeven.
The survey results helped lead Classic Knitwear to the conclusion that they would be able to garner 527,250 units of shirts sold in the first year or $9,421,957. 50 in sales. The costs associated to this project expect a breakeven goal of 617,731 shirts or $11,038,852. 97 in sales. It is obvious that they will not be able to sell enough shirts in order to cover their costs. Their projected sales are 90,481 units below what is needed and will leave them with $1,616,895. 47 of uncovered costs. This is a big issue for the company especially with an objective of having a gross margin that is consistently over 20%.
A final alternative that can both address the margin objective and allow for them to break even would be to cut down on fixed costs. Through a profit margin breakeven analysis we were able to conclude that in order to breakeven with 617,731 units sold and have a 20% gross margin on the first year sales of $9,421,957. 50, Classic Knitwear’s fixed costs must equal $2,470,612. 05. Twenty percent of the first year sales totals $1,884,391. 50 (Exhibit A). Therefore, in order to realistically reach this goal, alterations in the amount of fixed costs need to be made.
For Classic Knitwear, it was projected that $1. 2 million was all that was needed to collect a 25% unaided awareness of its Guardian product. Classic Knitwear originally wanted to attribute $3 million as an advertising investment, but they simply do not have the funds to do so. If this number were brought down to at least $1. 2 million they would be able to more realistically cover their costs with the amount of shirts sold. Another way to keep costs down would be to only hire two new sales representatives. This saves $85,000 dollars in the first year.
Also, as stated above, if they remain focused on general merchandising stores and discount stores, while Guardian focuses on the sports sector, they would not need as many new sales representatives who are well versed in the sporting goods industry. An additional way to lower fixed costs would be to lower the amount of displays needed. Currently, they wanted 10,000 displays at a cost of $100 each. This adds up to $1,000,000, which represents a significant portion of their original $4,355,000 in fixed costs (Exhibit A). Hopefully, as demand grows for this product, they will be able to charge the stores to have the displays as well.
Recommendation Overall, we feel as though it would be within their best interest to cut costs, so that fixed costs do not exceed $2,470,612. 05. Their current gross margins are at 18% and there is a lot of pressure to have this number exceed 20% as soon as possible. This method of cutting costs will allow for this 20% gross margin and cover the costs for this project. We saw the gross margin issue as the biggest priority for Classic Knitwear. Our main recommendation would be to cut reduce fixed costs and to co-brand. This approach to the insect-repellant product will cover all three objectives.
The problem lies in that they wanted to spend money that they were not going to make back. This approach to the problem will increase gross margins, brand recognition and leverage. Exhibit A Price = $17. 87 Variable Cost = $10. 82 Displays ($10,000 x 100displays) = $1,000,000 Advertising investment = $3,000,000 Sales reps (3 at $85,000 yearly salary) = $255,000 Licensing fee = $100,000 Definitely would buy: 38% Respondents that satisfactorily answered screening questions: 185/1000 Definitely try within two-year intro period: 60% Awareness per year: 12. 5% Number of consumers in market: 100,000,000
Possible shirts sold: (. 38) (185/1000) (. 6) (. 125) (100,000,000) = 527,250 shirts sold in first year or $9,421,957. 50 in sales y + . 5y = shirts sold in two years = 527,250 + . 5 (527,250) = 790,875 shirts or $14,132,936. 25 in sales Breakeven Analysis: Breakeven = Fixed Costs / Contribution Margin per unit (P – V) = 1,000,000 + 3,000,000 + 255,000 + 100,000 / 17. 87 – 10. 82 = 4,355,000 / 7. 05 = 617,731 shirts or $11,038,852. 97 in sales Breaking even with 20% profit margin = FC + PM / CM per unit 617,731 = FC + (9,421,957. 50 X . 20) / 7. 05 617,731 = FC + 1,884,391. 50 / 7. 05 FC = $2,470,612. 05