3 Page Marketing Strategy Case Analysis

In January 2006, the Director of Sales and the Director of Planning and Adminis-

tration at Franklin Industries met to prepare a joint recommendation to the president

on the firm's line of asphalt shingles. Franklin Industries had been a regional price

leader over the years; that is, when the company announced its price on asphalt

shingles, competitive shingle manufacturers followed.

In January 2005, Franklin raised the average price per square of its asphalt

shingles from $40.50 to $44.50.1 Although the company was strong financially,

the price increase was prompted in part by a decision by Franklin's board of

directors to embark on an extensive plant modernization and expansion program.

The price increase was one of several changes directed by the board to improve the

company's working capital position. Contrary to previous price increases, Franklin's

major competitors did not follow suit. The company experienced apoint decline in

market share during 2005.

Asphalt shingles are the dominant residential roofing product in the United States,

accounting for about 93 percent of roofing applications. About 80 percent of asphalt

shingles are used to reroof and remodel existing homes, and 20 percent are used

for new construction. Other roofing materials include wood, metal, clay tile, and

slate, all of which are more expensive than asphalt shingles to produce and install

(see Exhibit 1, next page).

Anatomy of an Asphalt Shingle

Asphalt shingles are named for the sticky, tarry, water-repellent substance that holds

them together. They are basically large, rectangular sheets about 1 x 3 feet, made

of cellulose or fiberglass, and impregnated with asphalt, a petroleum byproduct.

Asphalt shingles are categorized as either organic based or fiberglass based.

Organic-based asphalt shingles are manufactured with a base (also termed mat or

substrate) made of various cellulose fibers, such as recycled waste paper and wood

fibers. This organic base is then saturated with specially formulated asphalt coating,

surfaced with weather resistant mineral granules, and colored with a hard ceramic

glaze. Fiberglass-based asphalt shingles are manufactured with mat composed en-

tirely of glass fibers of varying lengths and orientations. This fiberglass base is then

surfaced with a specially formulated asphalt coating, followed by weather-resistant

mineral granules. In addition to adding color, mineral granules protect the asphalt

from the sun's ultraviolet rays, and their weight increases the shingles' resistance

CASE Franklin Industries

1 A square is a unit of measurement used in the roofing industry. One square contains approximately

80 shingles and covers 100 square feet. A rule of thumb in the industry holds that 25 squares are

needed to roof a typical single-family dwelling.

THE RESIDENTIAL ASPHALT SHINGLE INDUSTRY

to wind. In general, organic-based asphalt shingles generally fare better in cold

weather regions, while fiberglass-based shingles fare better in hot weather regions.

Asphalt shingled roofs are typically replaced about every 17 years.

Industry Size and Structure

About 135 million asphalt shingle squares were manufactured in the United States

in 2005-nearly enough to cover 5.4 million homes. The industry has recorded con-

sistent growth since 2001 with dollar sales reaching approximately $6.5 billion in

2005, at manufacturers' prices. The seven-year expansion in the asphalt shingle

industry has been the longest in more than a generation. Historically, the industry

has been cyclical in nature, marked by three to four years of sales growth followed

by a sales slowdown and decline.

There are about 35 asphalt roofing manufacturers in the United States.

These manufacturers operate 110 production facilities. While about half of shingle

manufacturers operate a single plant and compete regionally, larger manufacturers

such as GAF Materials Corporation, Georgia-Pacific, and Owens Corning each

operate more than 10 plants located throughout the continental United States. Some

manufacturers specialize in fiberglass-based or organic-based asphalt shingles. For

example, GAF and Owens Corning do not have organic-based shingle plants. No

large, national shingle manufacturer had a plant in Franklin's region.

Sales and marketing efforts for asphalt shingles focus on roofing material

distributors. Distributors provide a warehousing function for shingle manufacturers

and sell shingles to roofing contractors or applicators who install the shingles.

Research conducted by the National Roofing Contractors Association indicates that

the type of asphalt shingle to install and specific manufacturer to use depends on

whether a project involves new construction or reroofing work. For new homes,

architects or builders typically decide which type of shingle should be used. Roofing

contractors usually decide which manufacturer to use. For reroofing, roofing

contractors play an influential role in both shingle and manufacturer choice. In

deciding between roofing materials, contractors report that shingle performance

and level of manufacturer service were the dominant choice considerations,

followed by shingle warranty and price. In general, homeowners have little knowl-

edge about shingles and manufacturers and leave the brand choice, particularly for

reroofing, to the roofing contractor, provided the price and manufacturer's warranty

are acceptable.

EXHIBIT 1

Comparison of Roofing Material per 100 Square Feet of Coverage

Roofing Material Asphalt Wood Clay Tile Slate

Retail price of material $20-$140 $95-170 $140-$850 $320-$1200

Installation cost $31-$76 $67-135 $120-$200 $110-$150

Weight in pounds 195-430 300-400 900+/- 900+/-

Typical life span in years 15-30 15-30 50 50-100+

Franklin Industries produces only organic-based asphalt shingles for the residential

market in the upper-Midwestern United States at a single manufacturing facility.

The company also distributes a line of roofing accessory products under the

Franklin brand name. The company was formed in the early 1960s and is a privately

held corporation. Company sales in 2005 were $32 million.

The company's line of asphalt shingles and service are highly regarded by

roofing material distributors and among established, reputable roofing contractors in

the region. All major distributors carry its products. Franklin markets three separate

lines of asphalt shingles. The premium line, priced at $55 per square, is a very heavy,

laminated shingle with a prorated 40-year warranty. Laminated shingles create a three

dimensional visual effect that mimics wood or slate. This line also comes in a variety

of colors. The moderately priced line, priced at $40 per square, is a less heavy shingle

with a prorated 30-year warranty and fewer color options. The value line, with a $32-

per-square price, is the lightest-weight shingle, has a prorated 20-year warranty, and

comes in two colors-gray and brown. In 2004 and 2005, the premium line accounted

for about 35 percent of Franklin's shingle square volume. The moderately priced and

value line represented 55 percent and 10 percent of volume, respectively.

Like other asphalt roofing manufacturers, Franklin benefited from the

seven-year economic expansion in the roofing industry. Asphalt shingle square vol-

ume had more than doubled in Franklin's region since 2001. The company had in-

creased its dollar sales and shingle market share during the period (see Exhibit 2).

710

EXHIBIT 2

Regional Asphalt Shingle Volume and Frankling Industries Volume: 1998-2005

1998

1999

2000

2001

2002

2003

2004

2005

0 1750250 500 750 1000 1250 1500

750

800

950

1000

1100

1300

1450

1610715

637

528

470

427

330

360

Unit Volume (thousands of squares)

Source: Company Records

FRANKLIN INDUSTRIES

Franklin's shingle sales growth had strained production capacity and prompted an extensive plant modernization and expansion begun in 2004 and completed in 2005. Franklin's senior management acknowledged that the plant's modernization and expansion should have been completed in 2004, when two of its major competitors expanded their shingle production capacity. These competitors, with added capacity, were probably seeking to increase their market share, Franklins' senior management thought. Franklin's senior management speculated that this objective contributed to their unwillingness to raise shingle prices in 2005.

Franklin increased its average price per square twice during the past seven years and major competitors in the region followed within a month or so of the an-

nouncement date. Each price increase averaged 10 percent. However, the recent price increase was not met. Even though Franklin's unit volume continued to climb during the spring and summer construction months, Franklin's director of sales observed a sales slowdown in September 2005. By calendar year-end 2005, Franklin recorded a unit sales volume of 715,000 squares. Franklin's 2005 volume, although higher than 2004, represented an estimated market share of 44 percent -- 5 percentage points below the unit market share registered in 2004. Franklin's President instructed the Director of Sales and the Director of Planning and Administration to prepare a recommendation on the company's pricing and competitive position soon after the end-of-year volume total was confirmed.

Regional Economic Projections for the Roofing Industry

During the course of their initial meeting, Wayne Michaels, the Director of Sales, presented historical data on housing starts and the age of the existing housing stock (to estimate reroofing potential) in the region. Frank Chu, the Director of Planning and Administration, supplied published 2006 economic projections for the U.S. roofing industry as a whole and for Franklin's region. The projections generally pointed toward a slowdown. According to one report:

The construction industry is reaching the peak of the current economic cycle. Sin-

gle-family dwelling unit construction is predicted to retreat seven percent as a result

of slower income growth and sagging consumer confidence. Low mortgage rates,

possibly reaching as low as five percent, will help limit the extent of the decline.

In another report, based on a survey of roofing contractors nationwide and

in Franklin's region, was more optimistic in its economic outlook:

Roofing contractors throughout the United States seem to agree that business

conditions during 2006 are anyone's guess. Most tend to project a modest increase

in reroofing and new construction over 2005 sales or no increase at all.

Roofing contractors in Franklin's region were optimistic that shingle

volume would increase 2 percent overall, growing in the first six months of the

calendar year, then declining in the second six months. Representative comments

from large, established roofing contractors in the survey were as follows:

[We] believe the roofing market will soften a bit during 2006. We don't have a back-

log as big as last year's (2005). In addition, homeowners won't commit to major

capital expenditures, such as reroofing. They're adopting wait-and-see attitudes.

Another large contractor noted:

I don't know what has happened. We had a flat fall (2005) season, and I know a

number of well-known contractors, including myself, who are suffering. Contractor

pricing concerns me. Prices seem to be lower than five years ago. Businesses have

grown in terms of revenues, not bottom lines.

Michaels and Chu believed both the formal economic projections and

roofing contractors' estimates had merit. Looking forward to 2006, they agreed that

a favorable forecast meant about a 2 percent increase in square volume over 2005

volume in Franklin's region. An unfavorable forecast meant a 5 percent decline in

square volume compared to 2005 volume in Franklin's region. Both executives were

inclined to give greater weight to professional economists' estimates. Chu said, "I

tend to think there is a 50 to 60 percent chance of two percent growth in 2006 and

a 40 to 50 percent chance of a five percent decline." Michaels felt that Chu's views

were reasonable and, like Chu, believed that the pricing recommendation should

consider both the favorable and unfavorable forecast.

Planning Considerations

A week later, the executives met and discussed their options, knowing their

recommendation was due the next day. After a lengthy discussion, they concluded

two options existed. They could recommend maintaining Franklin's average price

per square at $44.50, or returning the average price to $40.50. The option of

recommending a further price increase was dismissed on the grounds that the price

differential between Franklin Industries and its competitors would be too great. An

average price below $40.50 was out of the question, as was reducing Franklin's

$44.50 average price by a few dollars. In Michaels’ opinion, it was unlikely that

competitors would increase or decrease their prices in 2006, regardless of whether

Franklin lowered its average price to $40.50 or maintained the $44.50 average price.

"There is too much uncer-tainty in the marketplace right now," Michaels said.

During the discussion, Michaels commented that if Franklin kept its

average price at $44.50 per square and asphalt shingle sales grew by two percent,

it was highly likely that Franklin could realize a market share gain of one percentage

point to 45 percent. He believed that the "fly-by-night" roofing contractors that

populated the region during the boom times and fed on demand not satisfied by

established roofing contractors would see less opportunity and do something else.

He added, "Without licensing requirements to be a roofer in many areas of our

region, all you have to do is hang out a shingle saying you're a roofing contractor."

Michaels believed market demand would be even more important with a 5 percent

decline in shingle volume in driving out fly-by-night roofing contractors who often

priced low to get business. He noted, "We could very well achieve a 46 percent

market share if market demand actually drops. We experienced an increase in

market share during the previous downturn in the late 1990s."

Michaels believed that reducing Franklin's average shingle price to $40.50

per square would return the region to the traditional price tiers and differentials

among competitors. Also, it would remove the economic incentive for some roofing

contractors to recommend a competitor's shingles to homeowners and builders.

According to Franklin’s sales representatives, many roofing contractors that

purchased lower-priced shingles from competitors were marking up the product in

such a manner that the installed price to homeowners and builders was equal to

Franklin's shingle price at its typical markup levels. The installed price parity was

annoying to competitors because they had no price advantage at the point of sale

or in the bidding for new construction. However, this pricing practice did improve

roofing contractor profit margins slightly and did give competitors an edge over

Franklin for reroofing jobs when the roofer selected the shingle manufacturer.

Michaels said that this practice was more prominent among "marginal roofers," as

he called them, and would decrease with the departure of many fly-by-night roofing

contractors following slowing or declining shingle demand. Michaels believed that

reducing Franklin's average shingle price to $40.50 could increase Franklin's market

share to 47 percent in a slowing market (2 percent growth). He added, "1 think we

can recapture our 49 percent market share if shingle demand actually declines by

5 percent." Chu thought Michaels’ market share estimates were optimistic, but

generally agreed with his assessment.

"We also have to consider our costs," injected Frank Chu. During the pre-

vious week, he had requested and obtained a production cost breakdown on the

company's line of shingles at various levels of output from the company controller

(Exhibit 3). The costs represented standard costs -- predetermined costs under

projected conditions -- which were established to coincide with the recent plant

modernization and expansion. "Pat (the company controller) assures me that these

costs are reasonable and attainable given our engineering study;' said Chu. He

added, "I think our product costs are roughly the same as our competitors."

Fritz Erlanger, the President of Franklin, knocked on the door just as Chu

completed his sentence. "Any progress on the pricing recommendation?" Erlanger

asked. "You bet," replied Michaels. "We'll have it ready for our meeting tomorrow."

Chu looked at Michaels and said, "Let's order in some food for dinner."

EXHIBIT 3

Franklin’s Estimated Total Cost per Square at Various Production Volumes

Production Volume in Squares

Cost Item 700,000 725,000 750,000 775,000

Direct labor $17.50 $15.75 $13.50 $11.20

Direct material 7.00 7.00 7.00 7.00

Scrappage 2.10 2.05 2.00 1.95

Product line expense

Direct expensea 3.47 3.45 3.40 3.38

Indirect expenseb 2.30 2.22 2.15 2.08

Selling, general, and

administrative expensec 3.75 3.58 3.43 3.29

Total cost per square $36.12 $34.05 $31.48 $28.90

a Includes supplies, repairs, power, etc (all variable costs)

b Includes depreciation, supervision, etc. (all fixed costs)

c All fixed cost but allocated on a per square basis for expository purposes.

Source: Company records.