Question

CASE STUDY – Jacobson Carpet Company

In January 2002, Ms. Mary Lewis was preparing to meet with Mr. Carpenter, President of Jacobson Carpet Company.

Ms. Lewis assumed that the meeting was related to the recent Board of directors of the company. As a direct assistant

to the President, she knew from experience that this type of meeting often resulted in a project to be studied. Her

expectation was confirmed as soon as Mr. Carpenter began to inform her of the discussion in the Council.

“The directors are not very happy with the current situation of the company. The cyclicality of the mat and carpet

market is once again clear as household disposable income and new home construction are stagnating in many parts

of the country. Our wholesalers complain about the slowness with which retailers execute their payments. In many

cases, receivables are paid within 60 days, which leads us to extend the payment terms of our own receivables at an

annual cost of 15%. Wholesalers are reducing inventories as management costs approach 15% per year. As a result,

our inventories have increased, as have the transportation costs required to supply wholesalers. Management costs

and services provided to wholesalers represent approximately 4% of our turnover. I could go on like this, but you have

the essential elements of the problem. Some people raised the idea of creating our own network of warehouses and

wholesalers, but I was not prepared to address this issue. Needless to say, I was a bit embarrassed. Could you look

into this problem and prepare an orientation note on the issue for next May’s meeting? Focus on the retail market

only, as we are already dealing directly with commercial contracts, based on a turnover similar to the one reached in

2001. Do not forget in your analysis that our policy is to finance our own development programs. I would like you to

do as complete an analysis as you did on our advertising and sales program last November.”

The mat and carpet industry

In 2000, the mat and carpet industry generated total sales (at manufacturers’ prices) of $ 9.7 billion. According to Mr.

Carpenter, sales for 2001 are expected to be $ 10.5 billion. Turnover in the sector is evenly subdivided into business

sales to organizations and retail sales to households.

The industry is moderately concentrated. In 2000, 15 of the 250 companies in the mat and carpet manufacturing

sector accounted for about two thirds of the total production volume. Burlington Industries is the industry leader.

Three types of outlets make the vast majority of mat and carpet sales in the retail sector. The most recent statistics

reveal that specialty carpet stores make up 58% of the total volume, department stores represent 21% and furniture

stores 19%. While there is no statistical information, industry experts believe that retailers have increased their share

of carpet and mat sales.

Sector analyses suggest that significant pressures on manufacturing costs will emerge over the next five years, due to

changes in commodity prices. This will reduce profit margins since, for an average manufacturer, material costs

account for about 80% of the cost of manufactured products. A second trend is the increased use of nylon in

manufacturing. Nylon is used in 75% of the manufactured frames. The popularity of the nylon will continue due to its

excellent handling, flexibility, good responsiveness to colors and dyes and fire resistance. A third trend is relatively

strong demand for higher quality carpets, despite the low overall demand of the sector as a whole. Better quality

carpets are expected to meet a higher demand than the low price carpets that have been popular in recent years.

Buying a carpet is an important act for households and often time consuming for the buyer. The purchase process is

similar to the furniture purchase process: (1) a comparative purchase involving the visit of multiple outlets; (2) a joint

decision of the husband and his wife; and (3) a purchase with a strong personal commitment. Questionnaires

completed by the Better Homes and Gardens panel members highlighted the following facts.

1. Almost half of the panel members who purchased a carpet in the last two years bought it to replace

another carpet. It should be noted that, according to industry estimates, the carpet replacement cycle is 8

years;

2. About three in five respondents consider branding to be a “very important” or “important” factor in

quality assessment;

3. Surface appearance, color, durability, strength and washability were identified as very important factors

in the choice of mats or carpets by more than half of the panel members questioned.

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The Jacobson Carpet Company

Jacobson Carpet manufactures a full range of mats and carpets in the middle and high price ranges for household

furnishings. Commercial contracts concluded directly with apartment buildings or offices represent only 10% of the

company’s turnover. In 2001, total sales amounted to $ 60 million with a pre-tax profit of $ 2.4 million. Table 1

summarizes the company’s operating statement and balance sheet for the year 2001.

Table 1. Summary of the balance sheet and operating statement of Jacobson Carpet, Inc.

Operating statement

Turnover 60,000,000 $

Cost of goods sold - 45,000,000 $

Total gross margin 15,000,000 $

Distribution costs - 1,800,000 $

Selling and administrative expenses - 9,000,000 $

Other expenses - 1,800,000 $

Net profit before taxes 2,400,000 $

Balance sheet

Current assets 21,550,000 $

Fixed assets 19,200,000 $

Total assets 40,750,000 $

Short-term debts (current liabilities) 8 250,000 $

Long-term debts and own funds 32,500,000 $

Total liabilities 40,750,000 $

Working capital (Current assets – Current liabilities) 13,300,000 $

The company distributes its products through seven wholesalers across the country. These wholesalers, in turn, supply

4,000 retailers. These retailers include department stores, home furnishing stores and specialty floor covering stores.

Sales analysis showed that 80% of sales were generated by half of Jacobson Carpet’s retail customers. The same

distribution of sales existed in all commercial areas served by Jacobson Carpet. Mr. Carpenter believed that these

sales figures by customer account showed that the company had adequate, if not excess, retail coverage.

The advertising used by Jacobson Carpet was mainly based on press advertising in periodicals and newspapers, where

the emphasis was on advertising the type of fiber, the life span, the resistance to wear, the colors ... There was also an

advertising program established in cooperation with retailers. The latter was recently developed following

recommendations made by Ms. Lewis that “... the co-op program was very well received by retailers and helped to

bring us closer to them.” The company employs two regional inspectors in charge of coordination. They act as liaisons

with wholesalers, assist with the management of the cooperative advertising program and regularly visit the largest

retailers. In addition, they are responsible for managing commercial contracts.

Independent wholesalers play a major role in the company’s marketing strategy. They maintain a large commercial

organization, an average wholesaler using ten sales representatives. Mat and carpet manufacturers think that retailers

should be visited at least once a month. The Lewis study had shown that the wholesalers’ representatives performed

tasks, including inventory and carpet sample control, shelves and display organization, management and tracking of

retailer inquiries and this in addition to taking orders. About 25% of the time of an average representative was

devoted to administrative activities (visit reports, relationship with manufacturers, travel, etc.). On a one-hour visit,

40% of the time was devoted to Jacobson Carpet’s products and 60% to non-competing products, such as

complementary furniture, curtains and other similar products. This information had greatly disrupted the executive

board of Jacobson Carpet who considered that an hour at least was necessary to represent them validly with retailers

and that it could be established from the forty hours per week currently performed by sales representatives. In

addition to the sale, the wholesalers also provided the storage function. Jacobson Carpet’s wholesalers had enough

stock to run an average of five rotations a year. Jacobson Carpet’s management considered that a level of inventory to

ensure four rotations per year was sufficient to ensure adequate service to retailers. Finally, wholesalers gave credit to

ELMSM411 Retail Management and e-commerce – JCC case study (2018-2019) 3

retailers. In exchange for these services, wholesalers received a margin of 22% of turnover expressed at the prices

charged to retailers.

Direct marketing experiences and competition

In February and March, Ms. Lewis searched for information on the competitive experiences of direct sales systems for

retailers. Despite contradictory information between industry trade publications and industry-leading expert advice,

Lewis managed to come up with some important conclusions.

First, competitors located their warehouses in seven urban areas: Atlanta, Chicago, Cleveland, Dallas-Fort Worth, Los

Angeles, New York and Philadelphia. With the exception of Dallas-Fort Worth and Atlanta, Jacobson Carpet already

had wholesalers in these large cities. The company served these areas from wholesalers in Houston, Texas, and

Richmond, Virginia.

Then, it turned out that a turnover of about five million was needed to manage a warehouse profitably. An average

warehouse involved an annual operating cost (staff, rent, operations) of $ 700,000 excluding transportation costs. To

directly supply all Jacobson Carpet’s retail customers, experts estimated a total annual transportation cost of

approximately $ 3 million. Ms. Lewis had learned that adequate warehouses were available in the urban areas

considered. Third, the salaries, expenses and additional income of qualified representatives averaged $ 40,000 per

year. A sales manager is required to manage and control eight representatives. Salaries, expenses and additional

income would be approximately $ 50,000 per year per sales manager.

Finally, administrative selling costs generally accounted for 40% of the total cost of the sales team, including sales

managers. Although these figures were approximate, they were nevertheless the best available, in the opinion of Ms.

Lewis and the people she had consulted.

In March, Ms. Lewis receives a disturbing phone call from a wholesaler who has been representing Jacobson Carpet’s

products successfully for many years. The wholesaler told her that he, along with other members of the marketing

system, were fully aware of her quest for information on the pros and cons of a direct selling system to retailers.

Implicitly, the wholesaler cautioned against the risk of a massive departure of wholesalers as soon as the first

Jacobson Carpet warehouse was opened. He even said that discussions were already under way with a major

competitor. This conversation will certainly have a serious impact on Ms. Lewis’ recommendations, if the feasibility of

a direct distribution system is established. In any case, a “market by market” change strategy seemed already out of

the question. If a change were to occur, a quick transition would be required, which would in turn necessitate

substantial expenditures…

Questions

3. What are the economic implications of the direct distribution system compared to the current wholesaler

distribution system? Is a direct distribution system justified economically and financially?

4. Can Jacobson Carpet afford to lose sales if wholesalers abandon the referencing of its products, before the

new distribution system is adopted?

Answer 1

3. Direct distribution is always better than wholesale distribution system.

Under direct distribution producer can directly deal with customer which reduces middleman cost and time delay.

In wholesale distribution the wholesaler may delay in sale and may fix more price this reduces sales.

If producer directly contact customer through distribution then the producer can analyse and identify the needs of customer . And area of improvement can be known.

And it direct distribution system delivery is fast and middleman cost is saved ,thus economicaly and financialy beneficial.

4. Even if wholesalers abandon refrencing of products Jacobson Carpet will not lose sales if it promotes its sales activity through other chanels like advertisement discount etc..