Christopher A. Ross, Professor, John Molson School of Business, wrote this case. It is partly based on a student group report that was submitted in the fall of 2006. The members of the group were Jenviev Azzolin, Monique Chalifour, Colin Kim, Elissa Morrissette and Tanya Saba. This case is to be used for discussion purposes only. It is not designed to illustrate either effective or ineffective handling of an administrative or commercial situation. Some of the information in this case may have been disguised but essential relationships have been retained.
In November 2006 Jeffrey (Jeff) Morahan and David Sciacca were wondering if they were on the right path to grow their fledgling company, First Class Trading Corporation (First Class). They had committed their strategic plan to paper but they were still evaluating whether they had a winning and sustainable formula.
First Class, a Montreal based company, had been incorporated in 2003 and completed its first year of operation in 2004. Jeff, the founder of the company, after evaluating the school supplies industry, had identified an opportunity which involved marketing a fully stocked school bag to schools and parents. The school bag was filled with the various items that a child needed for school as determined by a given teacher’s requirements. The company also offered dictionaries and other reference materials. The company’s slogan was “Your partner in education” and according to David the goal was to “create fluent learning environments that render the education process more effective and efficient.” Essentially, First Class partnered with schools in order to simplify the school supplies purchasing process of parents and schools.
First Class’s strategy was to target elementary and secondary private schools in the greater Montreal area with elementary schools being their initial target. To date, the owners had generated sales through cold calls and sales visits to schools. This strategy had won them two Montreal-based elementary
schools. Sales to these two schools totalled $22,000 and the total number of students purchasing was 240. As the two partners sat in their office they wondered whether they were on the right track with their plan. Had they missed something? Should they seek additional marketing counsel? The School Supplies Market
The Quebec education system was divided into two sectors: (a) public and (b) private schools. The public schools were managed by a number of school boards. Excluding universities, there were four levels of schools within each sector: preschool, primary, secondary and CEGEP2. Quebec’s private education system was popular among parents. In 2005/2006 students in private schools represented approximately 10% of all Quebec students within the pre-CEGEP segment, excluding the preschools.
In Canada, education was a provincial responsibility. In Quebec, a student progressed through the educational system as follows: Preschool, Primary, Secondary, CEGEP and University. CEGEP is an acronym for Collège d’enseignement général et professionnel. The 999,394 students (excluding adult learners) enrolled in primary and secondary schools throughout the province, 117,022 students were registered in private primary and secondary schools (Exhibit 1). This number represented a 14% increase in enrolment during the period 1998 to 2005. In the province there were 2755 elementary, secondary and mixed elementary/secondary schools and of these, 346 were private schools (Exhibit 2). Some private schools were completely independent of government funding but the vast majority, approximately 90%, were partially subsidised by the government to the tune of roughly 60% of the cost of the child attending school. This subsidy was resented by some members of the public and occasionally there were public calls for ending subsidies to private schools. Public schools were funded completely by the government.
Montreal had the highest density of private schools in the province. In 2005/2006, there were 444 public elementary, secondary and mixed elementary/secondary schools. In addition there were 162 private elementary, secondary and mixed elementary/secondary schools. Of the private schools 97 were French, 44 were English and 21 were both French and English (Exhibit 3). Private elementary and secondary schools therefore accounted for 26.7% of all elementary and secondary schools in Montreal. In Quebec, 29% of children attending private schools were from families with incomes below $50,000 per year and another 29% were from families earning between $50,000 and $74,000 per year. Because of the low birth rate, however, the number of school age children was decreasing rapidly. According to Statistics Canada, the number of children between the ages of 5 and 13 years will decrease by 13.51% between 2001 and 2011. The average number of students per classroom was approximately 22 with a slightly lower number in the private school system.
Consumers: A US study by the Gale Group identified a number of factors that influenced consumers’ buying habits during the September back-to-school season3. The study found that price, quality of merchandise, and availability were the three most important factors that influenced consumers’ choice of retail outlet for school supplies. Other factors included selection, customer service, convenience, store layout, and trust. Once inside the store parents looked for quality, price and whether the item was included on the school list. Brand name was the lowest ranked reason for purchasing specific products. Discount stores and office product stores were the most popular outlets and buyers tended to visit more than one store as they searched for better prices, better selection or a specific item that the child required.
In Canada, as in the US, the back-to-school season was the second busiest for retailers after the end-ofyear holidays. Every year, Canadian parents spent an average of $108.00 on back-to-school supplies such as notebooks and binders. Seventy-five percent of shoppers were parents and 4% were grandparents. In contrast to the other provinces, it was estimated that in 2004 Quebec parents spent approximately $138.00 per student (excluding expenditures on accessories such as mirrors) on school supplies. This figure
was expected to grow at a compounded annual growth rate (CAGR) of 3.24%. By 2015, household spending per child was expected to be $195.98. In 2004 total Quebec sales were estimated at $125 million annually.
Back-to-school was always a hectic period for all parties and parents were often confused as to their child’s school supplies requirements. In addition, parents were concerned about the accuracy of their purchases and therefore spent considerable time seeking appropriate supplies for their children. Many schools did not have a systematic approach to crafting their supplies list and much time was often wasted by school administrators, teachers and parents as preparations got under way for the first day of school. Within private schools, decision-making power was shared between the school’s administration and the parent committees. Most schools did not make major decisions without first consulting parents since they were significant stakeholders in the institutions. Teachers normally generated back-to-school supply lists in the spring.
While each school had a preferred supplier for the supplies that teachers used, most schools allowed parents to shop wherever they wish. Schools sometimes suggested outlets especially in the case of school uniforms, but for supplies like binders, pencils, paper, and erasers, parents normally shopped at their preferred stores using the shopping list provided by the school. The Company
Jeff and his friend Marco had established their company, First Class Trading Corporation, in November 2003. Through an acquaintance, they subsequently met with the Director General (DG) of the Lester B. Pearson School Board, the largest English public school board in Quebec. The DG agreed to review their promotional material during the end-of-year holidays and he met with them shortly afterwards. At this meeting, Jeff and Marco made a presentation and demonstrated a sample of their product embossed with the school board’s logo. They also had a letter of reference endorsing the concept. According to Jeff, the DG was enthusiastic about the project. He subsequently requested the various school board commissioners to follow established protocols to have the product approved at the various schools. This school board managed Elementary schools and High Schools with a combined enrolment of 27,814 students4. The board managed schools on the west side of Montreal island as well as in Hudson and St. Lazare, nearby municipalities off the island of Montreal. Jeff and Marco had understood that with the board’s approval, First Class would supply all the schools in the board’s territory. In preparation for the approval, therefore, Jeff and Marco started gearing up to supply the schools. They began setting up their infrastructure, their supply lines and finalizing arrangement with dealers. While doing this they discovered that in the industry all the deals were worked out in March/April for delivery in September. As a result, they had to buy early. At the school board, the product was approved at all levels except at the level of the individual schools. At the meeting where it was discussed the school principals expressed the opinion that they did not want to be held responsible if there were any disasters. Parents approached principals first to complain, they targeted principals if there was a problem, and principals were held responsible for what happened in their schools. Waiting during the period of negotiating with the school principals was very stressful and during that time, Marco withdrew from the company.
The Quebec Entrepreneurship Contest focused on schools and on new entrepreneurs who are often at the business planning stage. It promoted entrepreneurship in Quebec by rewarding concrete initiatives throughout the province more inclined to use his services since parents paid fees to these schools and would therefore be prepared to pay for things that they perceived to be legitimate expenses. Jeff still felt that he needed a partner if the business was to succeed. He and David had attended college together and they had encountered each other at various functions. At one business function he ran into David. At this meeting, he described the business to David and said that he was looking for a partner. David subsequently agreed to come on board.
Jeff and David, who were both bilingual in English and French, had graduated from a well known Montreal business school. Jeff had graduated in Accounting and Finance and had won numerous awards for his academic achievements and contribution to student life. He also had experience in operations and financial management in the transport, apparel, and software industries. David, also a graduate in Accounting and Finance, had participated in numerous student associations. He had experience as an investment advisor, in conflict management, valuation, and risk assessment. He also had experience in sales.
The product, which they named K12, was a customizable fully stocked school bag. The contents consisted of what the teacher asked for at the beginning of the school year. Each bag contained, for example, paper, binders, spiral notebooks, regular notebooks, crayons, erasers, and rulers. This unique school bag catered to the needs of children, parents, teachers, and schools. The product centralized the back-to-school purchasing task and packaged all needed school supplies within a single school bag. K12 offered end-users, students enrolled in elementary and secondary schools, the benefit of having uniform school supplies. According to Jeff and David, no student was to be at a disadvantage for lack of materials. In addition, as with school uniforms, the standardized school bags did not distinguish students on the basis of “coolness.” All students were therefore on an equal footing. K12 offered parents the benefit of convenience since parents no longer had to shop around for their children’s school supplies. Furthermore, K12 offered parents and children high quality products at competitive prices. Parents therefore had peace of mind knowing that their children were equipped with appropriate school supplies.
Teachers also benefited from K12 as it ensured that all students received the required school supplies. This, in turn, allowed teachers to demand specific products without placing the burden of store purchasing on parents. Thus both parent and teacher satisfaction improved. The institutions also benefited from K12 as it helped schools instil a sense of identity among students when school bags are branded with the school’s name and logo, thus promoting school pride and values.
Jeff and David visited the private schools in January. They had a presentation book of about 8 pages. This book gave a description of what it is they wanted to do and how they would go about doing it. The book also presented a comparative study of First Class’s prices vs. their closest competitors. These competitors were Bureau en Gros (Staples), Wal-Mart, Jean Coutu Pharmacies and Pharmaprix (Shoppers Drug Mart). Their comparison showed that if a parent bought all school supplies at one store, First Class was approximately 11% cheaper. Jeff explained, “We maintain a certain level of profit on every item we sell. We do not go into selling loss leaders. Some stores sell loose leaf sheets at $0.50 or $1.00 per packet but the cost is $1.25, so these stores are taking a loss. We sell at $1.25 plus our markup, but we would not sell a calculator at $20.00 if it cost us only $10.00. And overall we are cheaper than Wal-Mart.”
They made their pitch to the principals and those who were interested provided the list of materials that the classes needed. This would normally be the lists from the previous year. First Class then consolidated the lists from the different schools. Consolidation of the lists was complicated because some of the schools were disorganised with regards to the preparation of lists. In addition, two different Grade 6 teachers, in the same school, could have different requirements. First Class tried to standardize the lists as much as possible while trying to keep the teachers happy. Once approval and acceptance of the lists was received from the school, a signed letter of intent was requested. Jeff and David then consolidated the lists and placed the order.
The manufacturers of school supplies such as Hilroy, Crayola and Staedtler all dealt with customers who ordered in large volumes. A small customer such as First Class was therefore directed to the established channel of distribution which in this case meant dealing with Corporate Express, a major international services and distribution company, with locations worldwide. Because of size Corporate Express was able to purchase at a favourable discount from manufacturers and sell to retailers. They delivered at the point designated by First Class. Corporate Express also provided very favourable terms. For orders placed in February/March, Corporate Express allowed payment to be made only in September. Supplies were normally received within 24 to 48 hours. Packaging required approximately two people working for 8 hours to fill 100 bags.
First Class tried to standardize the products offered to the schools. While they were prepared to offer different sizes of school bags, the company strongly preferred standardization of colour and sizes within any one level in the school. This put all students on the same footing, in the company’s opinion. For example, Grades 1 and 2 had a smaller size bag than Grades 3 to 6. In response to the schools which said that parents wanted differences, the company emphasized that standardized school bags played the same role as school uniforms: it minimized differences and therefore jealousy and envy
among the students. In addition, the company felt that the method of standardization was the safest way to deliver the supplies.
Some parents suggested putting the names of the student on the bag but Jeff and David argued that that would allow strangers on the street to know the name of the student and the school attended. Parents however wanted cool bags and cool pencil cases. Some parents also did not want a new school bag each year while other parents were concerned about reusing supplies from previous years. Some schools suggested providing some of the supplies in September and some in January. The business model of First Class, however, could not accommodate these requests. First Class’s approach to the different schools was that all the students had to buy into the programme. It was all or nothing. David explained, “It would only be worthwhile if the entire school was involved. We could not afford to order, say, for 7 students. We did not want to go through the process for even 25 students. Financially, it did not make sense.”
First Class supplied the checklist to teachers. Teachers checked off the supplies that they wanted each student to get. The completed list was returned to First Class. The material was packaged in durable school bags and delivered to schools. Students got the bags on the first day of school. First Class received payment from the school and not from individual parents. The school was responsible for collecting payment from the parents.
Competition
First Class had a number of competitors who while not offering the bundling service, were able to offer identical products. Most parents, when buying school supplies, used one of these competitors, depending on availability and their preferences. Big-Box and Discount Stores including large corporations such as Bureau en Gros and Wal-Mart offered convenience, competitive prices and benefitted from mass promotional campaigns. They also operated nationwide and offered multiple ways to shop. At Bureau En Gros, for example, customers could shop at the retail outlets, (on Montreal island it had 12 retail outlets) online or order from a print catalogue. Wal-Mart had 8 locations in the Montreal area offering sundry items from apparel to toys. In the school supplies department, Wal-Mart offered a wide assortment but had a limited variety within each category. These stores did not, however, offer customized solutions.
Drug store chains such as Jean Coutu with 56 locations and Pharmaprix with 20 locations in Montreal also offered school supply items. These chains offered convenience such as 24 hour operations, especially useful for urgently needed supplies. As a result, they were able to command higher prices. On the other hand, drug store chains did not stock a wide range of merchandise for back-to-school. Other competitors included small and medium sized independent retailers. These offered pre-packaged school supplies as determined by the schools but they often sent the supplies in bulk to the schools and the school was responsible for sorting and packaging. Their overhead costs, however, limited their price competitiveness.
In-school bookstores were exclusive outlets that offered a focused range of products that catered to the needs of the students in the school. They offered convenience to both students and parents since they carried what was required by the school, but products were priced at higher price points. These stores existed in the medium to large size schools and their market was limited to the school population. Both Jeff and David saw these outlets as major threats since they could easily bundle pre-packaged supplies for their students. The majority of schools in Montreal, however, did not have in-school retail outlets. Keys to Success
Both Jeff and David saw the need to clearly position their enterprise in the minds of parents, teachers and administrators. They promised a combination of quality goods, timely service and convenience as part of their value proposition. They wanted to offer an innovative concept and value added services that no other competitor could match. Goods were customized to meet the individual needs of each school. The company had the ability to deliver quality products, bundled in school bags at competitive prices. Jeff and David identified their keys to success as follows:
- Clearly communicate the savings in cost and time, and positioning advantages of K12 to private elementary schools.
- Emphasize the selling tasks within the organization as this was the key driver of revenues.
- Secure long-term contracts through relationship building with schools so as to ensure constant revenue streams.
- Obtain approval of parents.
The two entrepreneurs also felt that they had to keep their eyes on some critical environmental issues and react swiftly in the event of any changes. For one thing, continued government subsidization of private schools was essential if there was to be continued enrolment growth in private schools. In addition to high income earners, more and more middle income Montreal families were also sending their children to private schools. Finally, individuals and institutions were always seeking ways to simplify their lives given today’s fast paced living. Thus, products and services that offered solutions to everyday issues were often successful in the marketplace.
Marketing Strategy
First Class wanted to collaborate with private schools in order to forge long-term partnerships and to improve the buying process for educational supplies. Its marketing strategy was to emphasize the unique benefits of K12 to the schools and the various stakeholders. The company wanted to communicate with key decision makers and influencers such as school
directors and parents’ committees. Private schools were interested in providing the best solutions to students and parents, and were constantly seeking additional ways to add value to their service offerings. They sought to differentiate themselves from their competitors through smaller classes, newer facilities and extracurricular activities. Both Jeff and David wanted the company to be a partner with schools in order to simplify the buying process of parents and provide added services to these elementary and secondary institutions.
The company also had some well established goals. It wanted to capture at least 5% market share of Quebec elementary schools by 2008. It wanted to maintain marketing expenses at roughly 5% of sales and it wanted out-of-Montreal sales to account for 15% of total sales by 2009. Softer goals included the forging of long-term relationships and partnerships with Montreal private elementary schools. Financially, the company wanted to breakeven in 2008 (Exhibit 4 and 5), maintain gross margins at 30% at least until 2009 and increase sales growth by 25% each year until 2009. At that time the principals of the company felt that they should re-evaluate their goals and objectives. Target Market: Jeff and David decided to target two categories of buyers. The first category was the private elementary school directors. This group consisted largely of women, aged 45 years and over. The majority of directors worked in collaboration with parent and teacher committees. Together, both parties took decisions regarding the purchase of new school supplies. Directors, however, were the final decision makers with regards to new purchase decisions. Their main purchase criteria were quality, price and overall benefit to the learning institution.
The second category of buyer was private elementary school teachers and parent teacher committees. For the most part, private elementary schools had parent and teacher committees that were involved in new purchase decisions. Parents committees were made up mostly of women. Their main purchase criteria were product quality and benefit to children. They were significant influencers on school directors and administration. Moreover, teacher committees also had an influence on school directors. The teacher committees were made up of male and female teachers, who were also involved in the overall administration of the institution. They wanted quality products that enhanced learning. Initially, First Class wanted to focus on the Montreal region. In the long run, however, the company wanted to expand its marketing efforts to the Quebec market, focusing on key urban areas such as Quebec City and Trois Rivières.
The Marketing Mix: First Class’s product was a fully stocked backpack as determined by teachers and directors preferences. Pricing was determined by the cost of sales as well as by competitor’s pricing. The average cost of each backpack was $63.00. Taking into consideration competitive pricing, Jeff and David decided that a price of $90.00 per backpack was reasonable and it provided a healthy margin. From published reports they knew that the average price paid by parents was $138.00. They therefore reasoned that at $90.00, their product was quite affordable especially since a new school bag was being offered each year. They saw this price as a penetration price. As they gained an increasing foothold in the marketplace, they envisioned increasing the price but they intended to remain sensitive to school budgets.
In the promotional area they considered brochures, personal selling, product samples, trade shows, sponsorships and a website. They wanted to use brochures (Exhibit 6) to create awareness. The brochure outlined the benefits of the product and how the company could be contacted. Trade shows were to be used to generate buzz about the company and its services. The benefits of trade shows included the opportunity to network, prospect customers, create awareness and generate sales. The company also had a website that provided information about the company, its products and services, the benefits of using K12 and company contact information.
The entrepreneurs also wanted to launch a sponsorship programme designed to provide incentives to schools and build brand equity. Sponsorships of events such as fieldtrips and school activities would ensure positive long-term relationships with schools and students. They estimated that the programmes would cost $1,000 in 2007, $1,500 in 2008 and $3,000 in 2009. First Class also offered to pick up old schoolbags from schools to donate them to a charity which promoted education in poor countries. The company thought that this would create good will for First Class and decrease the waste associated with purchasing a new schoolbag each year. First Class acted as an intermediary between suppliers of school supplies and the private schools. The company sold directly to schools via personal selling administered over the phone and face-to-face. Jeff and David felt that this simple model was unique in the industry.
The marketing budget had been set at 5% of forecasted sales. All promotional and sales activities had to fit within this budget. As a result, the company forecasted a significant increase for the marketing budget in 2009, with $20,000 allocated to this function. The idea was to cover additional costs associated with the hiring of a new salesperson and with increased promotion. During its first year of operation, First Class had incurred a loss of $9,543 on sales of $6,297. In 2005, sales increased to $29,372 ($24,000 of this was a special sale of school bags to the Lester B. Pearson School Board) but the company still had a loss of $5,991. Its gross margin had dropped significantly in 2005 because of inefficiencies in the ordering process for goods. In 2006, revenues were $22,000 representing two school contracts and 240 students. These two schools were part of a franchise that had 13 schools altogether. The average contract size was therefore $11,000 with approximately 120 students per school served. The company’s main capital assets were furniture and computer equipment valued at approximately $4,177.
The company projected sales of $198,000 in 2007 (Exhibit 4 and 5). This projection was partly based on capturing 50% to 75% of schools that operated in the particular franchise. Projections for future years took into consideration that if First Class did a good job, schools would continue ordering in the future years. For 2007-2008, most of the revenues was projected to come from the Montreal area private school market. Selling was to be the responsibility of Jeff and David. They intended to split the task evenly. In 2009, they planned to hire a new sales person in order to generate additional sales from the private schools outside the Greater Montreal area. These sales were projected to be 15% of overall sales in 2009. They expected that the sales person hired in the last half of 2009 would be paid a base salary of $15,000 plus a 2% of sales commission. As they sat in their office, they wondered what more they had to do to be successful. They had quality products, a ready supply of stock, excellent value and lots of enthusiasm. They asked themselves, “Was this plan realistic?”
