Kathmandu Sample Assignment

Founded in 1987 as a small specialist outdoor retailer in Melbourne, Katmandu now operates in Australia, New Zealand and also the UK with a network of about 130 stores and an online shop. The company strives to provide quality, functional, and stylish products with technical attributes. Its products inspire customers to travel, explore the outdoors, engage in adventures and “Live the Dream” (Katmandu, 2013).

Katmandu competes in a market crowded with a large number of specialist retailers of outdoor and adventure clothing and gear; mainstream/lifestyle merchants that offer products with some technical features of specialist goods; and general stores that provide basic outdoor apparel and gear. In addition, here are outdoor and adventure clothing and equipment brands that sell through sports shops, department stores and outdoor specialist retailers. Adding to the competitive landscape is e-commerce pure play that specializes in outdoor and travel equipment and clothing.

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The retail sector has been affected by the economic downturn but the outdoor and travel clothing and equipment sector in New Zealand and Australia remains attractive. An international study on physical activity in 2004 ranked New Zealand and Australia the first and fifth most active of the 20 countries studied (Banyan, Bull, Chew, Craig et al, 2009). Sports and recreational activities continue to be a major part of the lifestyle of Kiwis and Australians. The demand for outdoor and adventure clothing and gear will provide opportunities for Katmandu.

Business model describes “the position of the firm within the value network linking suppliers and customers” (Cheeseburger, 2010). This report contains an analysis of Katmandu business model of vertical integration of the value chain. It also describes the strategy adopted by Katmandu to gain competitive advantage in the marketplace. Following the business model and strategy analysis, the report continues with n explanation of the company’s revenue generation and cost structure and also its approaches to value creation and appropriation from the perspectives of the company and the customer.

Lastly, the report concludes with recommendations on possible changes to improve the company’s value creation. Page 14 BUSINESS BACKGROUND About Katmandu Katmandu is a leading brand in travel and outdoor clothing, footwear and equipment in New Zealand and Australia. It offers a wide selection of men’s, women’s and kids’ clothing and footwear; and a range of outdoor and camping gear such as tents and sleeping bags, bags and packs, tables and chairs, cookware and tableware, lighting and torches, toiletries and accessories.

Its brand essence “Living the Dream” (Katmandu, 2013) resonates with customers’ aspiration for adventures and outdoor pursuits. Key to its brand essence is the ability to provide quality travel and outdoor clothing and equipment that are of technical credibility and are value for money. Katmandu opened its first store in Melbourne Australia in 1987. Its first store in New Zealand was opened in Christopher in 1991. The company has since grown to become a retail chain with 129 stores – 81 in Australia, 42 in New Zealand and in the UK (Katmandu, 2013).

It is the largest retailer of outdoor clothing and equipment by number of retail locations (Katmandu, 2009). The company is headquartered in Christopher where its New Zealand distribution centre and support office are also located. It maintains a separate distribution centre and support office in Melbourne for the Australian market (Katmandu, 2013). The root of Katmandu can be traced back to the early sass when its founder Jan Cameron opened Alp Sports, the first boutique store in New Zealand specializing in mountaineering and climbing apparel and equipment.

Alp Sports designed and made many of its products. Ownership of Alp Sports had changed a couple of times and the company went into receivership in 1991. Cameron bought back Alp Sports from the receivers and refrained it Katmandu. At that time Katmandu was already well established in Australia (MacAfee, 2006). The company continued to grow and its SUccess had attracted the interest of a private equity consortium that acquired the company in 2006. A new management team was brought in that further expanded the operation from 46 stores in 2006 to 82 stores in 2009, the year that the company listed on the

Stock Exchanges in New Zealand and Australia. To stay relevant to its customers, Katmandu refreshed its brand with a new logo in 2011 (Katmandu, 2013). Katmandu is fully engaged in designing, sourcing, marketing and retailing of its products which are sold only through its own stores and online shop. Of the 5,000 stock keeping units, only 5 percent are non-Katmandu brands (Katmandu, 2013). In line with the changing retail landscape, Katmandu page 15 launched a mail order service and an e-commerce site in 2008 available only in countries where it operates.

Its online business accounted for less than 5 recent of the total sales despite its more than 50 percent year-on-year growth (Katmandu, 2013). In addition to a website and an online store, Katmandu also maintains a presence on Faceable, Youth, Pinsetters, Google* and Twitter. Another unique characteristic of Katmandu is its mega sales promotions, held three times a year – around Christmas, Easter and the end of winter. The seasonal promotions offer customers 50 percent discount on its products.

Such massive discount was unheard of in New Zealand retail at the time it was introduced. The company launched the Summit Club loyalty programmer in 1994. The Summit Club now has over 800,000 members (Katmandu, 2013). Katmandu continues to grow and deliver solid performance. In the first half year of PAYOFF, sales were up 13. 1 percent to NZ$165. Mm, earnings before interest and tax increased by 24. 4 percent to NZ$15. Mm while net profit after tax increased by 72 percent to NZ$10. Mm (Katmandu, 2013).

The company’s expansion plan includes opening 15 stores annually and launching a new online platform that offers international shipping capability. It is also considering selling its products on third party e-commerce sites such as Amazon, eBay and Trade Me. Another key target is to grow its Summit Club membership to one million by the end of 2015 (Katmandu, 2013). Industry Overview Katmandu competes in the travel and adventure clothing and equipment sector which can be divided into three categories: 1 .

Specialist clothing and equipment with highly technical features designed for mountaineers and serious adventurers. Some of these specialist brands are Bivouac Outdoors, CEO, Living Simply, Maniac, Mountain Designs and Snowing in New Zealand. Maniac and Mountain Designs also operate in Australia. Anaconda, Susie Disposals, BCC, Columbia, Payday Palling and Ray’s Outdoors are mom of the specialist brands in Australia. 2. Mainstream/lifestyle products with some technical features of specialist goods but not top of the line specifications.

Rebel Sport, Colorado, Athletes’ Foot and Surf Dive ‘N’ Ski are competing in this category. 3. General merchandise covering basic outdoor clothing and equipment designed for the price sensitive customer. Some of the competitors are Page 16 Smart, Target, Big W, David Jones and Meyer in Australia and The Warehouse and Farmers in New Zealand. Also, there are a number of clothing and equipment brands such as The North Face, Marmot and Columbia that sell through sports shops, department stores and specialist outdoor and adventure stores.

In the digital marketplace, in addition to the online stores operated by many of these retailers, Katmandu is also competing with many e-commerce pure play such as Toppled, Superstitious and Adventuresses that specialist in outdoor and adventure wear and gear. Market Overview With an improving economic environment in New Zealand as indicated by the increase in business and residential investment as well as private consumption, (The Treasury, 2013), a positive outlook of the retail market is expected.

The retail market that Katmandu operates in can be divided into two categories: clothing, footwear and accessories retailing; and recreational goods retailing. For the year ended 31 December 2012, the total market size of the New Zealand clothing and recreational goods retail in terms of sales volume was NZ$5. 4 billion – NZ$I . 9 billion from recreational goods retailing and NZ$3. 5 billion in clothing, footwear and accessories retailing. It is a sizeable market that accounted for 7. 7 percent of total retail sales of NZ$70. 3 billion for the same period (Statistics New Zealand, 2013).

Outdoor clothing and equipment retail continues to be an attractive sector as shown by the big increase in store numbers in sport and camping equipment retailing (41 percent) and clothing retailing (52 percent) between 2000 and 2012. Also, the clothing retail sector is growing at a rate faster than that of the entire retail sector which recorded only a 10 percent increase in store numbers between 2000 and 2012 (New Zealand Retailers Association, 2013). People in New Zealand and Australia are highly active, and this is favorable to Katmandu.

An international study on physical activity in 2004 ranked New Zealand and Australia the first and fifth most active of the 20 countries studied (Banyan, Bull, Chew, Craig et al, 2009). The study showed that over 63% of Kiwis and 58% of Australians were classified as highly active. Also, a national physical activity survey in 2007/08 showed that sport and recreation continues to be a major part of Kiwis’ lifestyle. “During any week, 79 percent of adults participated in at least one sport or recreation activity” (SPARS, 2008).

Among page 17 the top 10 most popular sport and recreation activities in New Zealand, Katmandu products cater to four of them and these are walking, cycling, inning/jogging and tramping (SPARS, 2008). Sport and Recreation Activity Walking Gardening Swimming Equipment based exercises Cycling Fishing Jogging/Running Danced Golf Tramping 64. 1 43. 2 34. 8 26. 5 22. 7 19. 3 17. 5 16. 8 12. 7 9. 4 Number of New Zealand adults participating 1,139,812 868,271 745,1 83 633,769 574, 1 09 549,112 416,223 306,343 Table 1. The 10 most popular sport and recreation activities participated in over 12 months (SPARS, 2008).

Stakeholders and Target Customers Katmandu stakeholders are its customers, Summit Club members, employees, investors, suppliers and the local communities neighboring its stores, striation centers and support offices. Although some of Katmandu products are of high technical specifications that are suitable for top-end users, it is perceived as a mass-market brand that appeals to recreational users and customers buying for lifestyle. Its target customers can be divided into three different categories, namely, “Adventurous Families, Young Go Getters and Older Outdoor Enthusiasts” (Katmandu, 2009, p. 7). Page 18 BUSINESS MODEL AND STRATEGY ANALYSIS Katmandu Business Model Business model explains how a firm’s value proposition, revenue model, cost structure and resources work together to create and appropriate value (Magenta, 2002). Katmandu value proposition is to fulfill the customer’s needs for quality, functional, stylish outdoor and travel products with technical attributes. Katmandu products assist the customer to “Live the dream” (Katmandu, 2013) and fulfill his/her aspiration for an adventurous and outdoorsy lifestyle.

Its value proposition is supported by its business model of vertical integration of the value chain from fabric and product design to sourcing, distribution, marketing and retailing. Katmandu vertical integration enables the company o remove costly link from the value network and capture value at each stage such as margins at both wholesale and retail levels. Although the company ceased manufacturing in-house in 2002, it keeps a tight control of production by stipulating third-party manufacturers to use “materials and components sourced or specified by Katmandu with pricing and volume fixed for each order” (Katmandu, 2009, p. 4). Its business model also means that customers can only buy Katmandu products from the company’s stores and website. The exclusivity of Katmandu products created a point of differentiation for the brand. The business model can be a source of competitive advantage” (Coot, Amid and Mass, 2010, p. 23). Katmandu absolute control of its brand provided a fundamental competitive advantage to the company. Katmandu Business Strategy A business model is about how to organism the logic of a business. It doesn’t take into consideration the critical factor of competition (Magenta, 2002).

Business models can be imitated by competitors so it is through strategy that companies differentiate themselves to gain competitive advantage (Magenta, 2002). Some of Katmandu competitors like Bivouac Outdoors and Mountain Designs also adopt the same business model as Katmandu – vertical integration of value chain. They design, manufacture, market and retail their own products. However, Katmandu traveled its competitors because of its unique strategy of clothing the mass with quality, functional and stylish products with technical attributes at varying price points.

Key to the success of this strategy is aggressive store rollover Page 19 to increase market penetration; attractive loyalty programmer to lock-in customers; massive sales promotions to entice customers and generate revenue; diverse product offering to provide variety and choices for customers; improved commerce capability to capture online growth; and sustainability focus to align with the value of present day consumers. Store rollover and refurbishment Opening new stores provides immediate and significant growth opportunity for Katmandu.

Since 2007, Katmandu has opened more than 10 new stores annually. Its target is to open 15 new stores per year to increase its market penetration especially in Australia. Also, improving existing stores through refurbishment, rebinding and relocation is key to increasing its profitability and market penetration. About 112 stores have been refurbished since rebinding ND the process is ongoing. Loyalty programmer Summit Club is an important revenue generator for Katmandu.

It accounts for more than 50 percent of total sales. In the past four years, membership has more than double and average spend per member has also increased. Incentives and relationship marketing will play an important role in building customer loyalty and growing membership to one million by end 2015 (Katmandu, 2013). Mega sales promotions The three major sales campaigns especially the winter and Christmas promotions are significant contributors to the financial performance of Katmandu.

The 50 recent discount makes Katmandu products more accessible to customers and it helps to attract new customers and grow its database. Profitable product range expansion Katmandu has increased its Stock Keeping Unit by 30 percent since 2010. The company continues to focus on growing the depth of its product offerings by providing the appropriate product range instead of diverse new design in comparable ranges (Katmandu, 2013). Another emphasis is on improving technical fabrics to enhance both style and fit demanded by customers.

Online capability Katmandu online business recorded more than 50 percent year-on-year Page 10 growth but it only accounted for 5 percent of total sales. To enhance the company’s capability to capture the growth opportunity in online shopping, Katmandu is already taking steps to upgrade its online platform and launch a mobile app and international shipping. Sustainability focus Sustainability is a central theme in the way Katmandu conducts its business. It is implemented throughout the company’s value chain from product design to after-sale customer experience.

For example, efforts have been made to reduce the company’s environmental footprint by working jointly with suppliers to educe packaging; implement supplier environmental standards; recycle faulty products and donate items to charities. REVENUE ANALYSIS Katmandu revenue comes mainly from the sales of goods, although it also received a small income from interest. Despite the difficult economic times, Katmandu sales increased 13. 1 percent to NZ$165. 9 million in the first half year of PAYOFF ending 31 January. Gross profit, earnings before interest and tax, and net profit after tax have all increased (Katmandu, 2013).

For the full year ended 31 July 2012, Katmandu recorded a 13. 4 percent growth in sales to NZ$347. 1 lion whilst BIT decreased by 10. 9 percent to NZ$57 million (Katmandu, 2012). Figure 1. Growth since PIP, November 2009 (Katmandu, 2013) Page Ill Sales are generated from three major channels – physical stores, online stores and Summit Club. According to Katmandu (2012, p. 9), “In the three years since Katmandu Holdings Ltd was listed, we have achieved an overall average per annum same store sales increase of more than 7% per annum in both Australia and New Zealand”.

On the other hand, online sales grew by more than 50 percent year-on-year but it only contributed to less than 5 percent of total sales. Sales to Summit Club members continue to generate significant revenue, accounting for 50 percent of total sales (Katmandu, 2013). Risk and Opportunity One of the major risks of Katmandu revenue model is the over reliance on its bricks-and-mortar business to generate revenue. The surge in online shopping is changing the retail landscape and providing opportunities for retailers who equip themselves with the capability to capture the online growth.

The 50 percent yearn-year growth of Katmandu online business indicated the growing importance of the digital marketplace. Opportunities exist for Katmandu o innovate and develop its online platform to gain competitive advantages. Providing quality products with technical attributes is key to Katmandu approach to creating value for customers. Also customers are more willing to pay a price premium for products with high technical attributes. It is therefore vital for Katmandu to focus on building its technical credibility and investing in the development of products with technical content.

At the same time, the company needs to regularly introduce in its product mix a few signature pieces with top of the line technical specifications. This will help to establish its leadership position s an innovative outdoor and travel apparel and equipment provider. COST ANALYSIS Katmandu key cost items include costs of goods, administration and operating expenses including rents of shops and warehouses, employee salaries and wages, marketing spend, investment in infrastructure and management systems, store upgrade and refurnish among many others.

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