Spriware Canada Inc. was a Canadian-based company involved in the production of refrigerators for middle- class Canadian families. It produced...

Spriware Canada Inc. was a Canadian-based company involved in the production of refrigerators for middle- class Canadian families. It produced a line of high quality, functional and extremely energy-efficient refrigerators with no fancy gadgets or features. The company’s factory, located in Surrey, British Columbia, started production at the beginning of 2011, after completing construction of its new $60-million plant. The plant had a capacity to produce 100 000 refrigerators per year. The plant could be expanded to produce an extra 50 000 units, at a capital cost of $10 million. No extra labour or overhead would be required for the additional production. All refrigerators were sold within the Canadian market, where Spriware had a 10 percent market share after its first year of operation.   The company organizational structure was a simple organizational model.  The President and CEO oversaw three divisions headed each by one director – production, sales and marketing, and finance and administration.

Spriware’s success in obtaining a good market share in such a short time, and also within a highly competitive market, was due to several aspects of its marketing strategy. First, it exclusively distributed its product through two select large retail groups. Second, Spriware engaged in co-marketing with the retail groups through which it sold and distributed its products. Spriware and its retail partners developed television and newspaper advertising for their primary target market: young middle-class families with household income of around $70 000 per year. Spriware also priced its products competitively. The average retail price for its refrigerators was $1500, compared with approximately $1700 for similar competitor models and private brands. Spriware also offered a competitive warranty, which included covering the cost of repairs for the first five years of ownership, provided that repair service companies sub-contracted by Spriware were used.

In 2011, the company had revenue of $90 million, operating costs of $42 million (including variable material and energy costs of $500 per appliance, and fixed labour costs $12 million) and fixed overhead costs of $42 million, including marketing costs of $10 million per year. Net income, after 30 percent corporate income tax, was only $4 million. The profit performance was well below the company’s targeted after-tax return on investment (ROI) of 10 percent. Kenneth Weller was especially concerned about this. Current profitability would not allow him to achieve a payback period of around 5 years. The market for refrigerators in Canada was not expected to grow at all over the next two years. Longer-term growth was only expected to be about 3 percent per year.

One option Weller was considering was to export to an overseas market in an attempt to produce and sell more refrigerators. His highly skilled marketing director, through intelligence gathering, had identified market potential in the island nation of Mabuhailand, located in the Pacific region around Indonesia and the Philippines. Mabuhailand in the last 20 years had emerged into a fairly stable democracy, governed by the pro-business centrist Liberal Democratic Party. This follows nearly 30 years of corrupt dictatorship and infighting among various extreme political factions, several of whom still exist and are reported to be dissatisfied with the distribution of political power formed under the country’s new constitution. Extreme groups were considered to be either ultra-nationalistic and anti-foreigner, or left wing with a desire for complete control of the nation’s emerging commercial and industrial system. Some of the groups were reported to have links to the Chinese government, whose past political and economic involvement in the country is still resented by many of its people. Despite its success, the country has been plagued at times with some violent protests, resulting in blockades of roads and disruption of some commercial activities.

The people are an interesting mixture of Chinese, Malay, and Portuguese, the result of past colonization when Portugal had occupied areas such as Formosa, which today is Taiwan. The dialect, known as Latgalog, is unique to the country. Little is known about it, especially the symbolic aspects of the language. It is described as Brazilian Portuguese with an Asian sound to it. Literacy rates, while improved, are still quite low. Only about 70 percent of the population is literate. However, virtually all young people under the age of 18 (25 percent of the population) are receiving education; they show a great interest and are highly motivated to learn. English is compulsory in school as of age five. Mabuhailand has one government-owned television station, though only about 30 percent of households own a television. One privately held national newspaper, Mabu Express, is in circulation in the country.

The culture is one characterized by strong family ties, with two or more generations living within the same household. A strong sense of obligation to the community exists, and community social activities are focused around the local churches, which are either Catholic or non-traditional Protestant. Informal communication within communities is an important source of information for many people. Traditional authority is shown great respect. However, many younger families are now looking to live on their own following the country’s growing economic prosperity.

Because many of the nation’s 2.5 million households now have power, and given the country’s growing per capita income levels, Weller believes there is great opportunity for refrigerator sales in this country. A benchmarking exercise with other developing nations suggests that based on Mabuhailand’s per capita income levels, annual purchases should be one refrigerator for approximately every forty households. At the moment, the purchase of refrigerators in 2011 was only 20 000 units, according to government import statistics. There is no local production of refrigerators. The retail value of these imports was estimated at $24 million. Weller suspected there may be several reasons for this low level of demand. First, import statistics showed that virtually all the units were re-exports from Hong Kong, which Weller suspected were secondary, low quality units likely made in China. Second, the sale of refrigerators was handled by numerous small-scale retailers, many of whom were not appliance specialists. These retailers were remnants of the old traditional economy, but new larger and modern retailers have begun to emerge. These refrigerators tended to be purchased from numerous traders, who purchased these appliances from various manufacturers in China, and re-sold them to any outfit that would take them. There was no advertising or marketing of any significance.

Weller was confident that there was a tremendous opportunity in Mabuhailand both now and in the future, and believed that he could successfully create a first mover advantage and quickly become the market leader. Weller believed that at the projected rate of economic growth, the resulting gains in income would result in one in thirty households purchasing refrigerators within the next five years, and one in twenty households would purchase refrigerators within 10 years. Spriware’s market studies further suggested that, based on the performance of neighbouring markets, Spriware could sell refrigerators into Mabuhailand at $1400 per unit, net of distribution costs. The price would not include import duties paid to the government, which would represent 5% of the selling price. This duty was applied to all of the nation’s $40 billion of annual imports.

Kenneth Weller knew that to be positioned in this market longer term, he would eventually have to build a plant in the country, even if it was smaller scale than the Canadian operation. Weller had discussions with senior Ministry of Industry and Trade representatives, who visited him in Surrey to discuss this trade opportunity. The sense he got from the discussions was that the government would likely accept imported products for a period of time, but eventually its policy would be to encourage domestic industries. No doubt, Weller thought, the government would soon use duties as a policy to encourage and protect domestic development of the industry.