sales management case 2

It was November 2005, and Bob Falconi, vice-president of sales and marketing for the Canadian division of Spectrum Brands Inc., was sitting in his new Brantford, Ontario office, pondering his next steps regarding his sales force. During the course of the last year, the company had gone through a number of changes at the global level. Spectrum Brands (Spectrum), a global consumer products company formerly known as Rayovac Corporation, had made a number of acquisitions to diversify and expand its product and brand portfolio. With these changes, Spectrum had become a leading supplier of consumer batteries, lawn and garden care products, specialty pet supplies, and shaving and grooming products. Falconi, charged with the task of creating a national sales force from the teams of the newly merged companies, sat in his office trying to make sense of the new business. He knew that creating an effective sales team — one which would capitalize on the synergies across the various businesses — would be very difficult, since these companies each operated differently with regards to the role of their sales forces, customers targeted and products sold. Knowing the importance of the sales function to each of these companies, Falconi wanted to ensure, despite the differences amongst the diverse groups, that he still maintained a team that would effectively and efficiently continue to increase the sales of each business unit. The task ahead of him was big, but Falconi knew that a plan needed to be implemented immediately to avoid disrupting the growth momentum of the company’s individual brands, to maintain customer relationships, and to preclude competition from taking advantage of any perceived disruptions during this time of change.

THE CONTEXT

The consumer brands industry had become highly competitive on a global basis. Numerous acquisitions and mergers had taken place over the past decade, resulting in a select group of large companies with extensive brand portfolios. These companies had developed numerous product lines that allowed them to compete in a variety of markets and product categories, and also strengthened their relationships with retailers. With the growth of large retail chains across North America through retail consolidation, the balance of power had shifted away from manufacturers. Small players could no longer compete effectively, as strong relationships with retailers had become essential in order to compete for limited and valuable shelf space within stores. Manufacturers built alliances with other consumer brand companies in order to gain strength and power in the retail market. As a result, companies such as Procter & Gamble (P&G), Unilever, S.C. Johnson, and others with large portfolios of popular consumer brands, dominated the shelves in traditional retail channels including Grocery (e.g. Loblaw, Dominion), Drug stores (e.g. Shoppers Drug Mart, Katz Group), Hardware retailers (e.g. Home Hardware), Home and Garden retailers (e.g. RONA, The Home Depot) and Mass Merchandisers (e.g. Wal-Mart). Internet and direct-to-consumer sales had not proven to be valuable alternate channels for these companies, as retailers would retaliate by de-listing products of those manufacturers who tried to go in this direction. Companies competing against the brands under the umbrellas of these large companies continued to struggle for position and, ultimately, for market share, mainly because of the established relationships that these large firms had with the retailers. The trend was towards companies such as Spectrum Brands who had a presence in batteries, shaving and grooming products, lawn and garden products, and specialty pet supplies. CONSUMER BRANDS MARKETS Battery Market

North American consumers of household batteries (AAA, AA, C, D and 9-volt standard batteries) sought convenience and quality when purchasing batteries and tended to gravitate towards the brand names they knew and trusted. Duracell and Energizer continued to dominate the market due to their brand recognition, their relationships with distributors and retailers, and their established presence in the large one-time-use alkaline battery category. These two firms were leaders in this market for decades because of their ability to adapt to consumer needs and to merge with other consumer goods companies to create brand portfolios, thus gaining valuable negotiating power with retailers. For example, the Duracell battery brand was owned by the largest and most recognized consumer products company in the world — Procter &Gamble (P&G)— while the Energizer battery brand was owned by Energizer Holdings Inc., which also owned the Shick Razors brand. Each company held a 40 per cent market share within the battery industry. Household batteries were sold through wholesalers, distributors, professionals and OEMs, but the large majority were sold through traditional retail channels. Of these retailers, mass merchandisers, home and garden centers and niche electronic stores accounted for more than 60 per cent of sales. As of 2005, the alkaline battery was the predominant type of household battery in North America, and was offered by all major competitors in all sizes. The growth within this segment had become relatively flat, at only one to two per cent annually, yet, due to its size, it was expected to dominate the market for the next Page 3 9B06A035 five to 10 years. In 2005, the overall battery market in Canada was estimated to be $300 million, with the alkaline category representing 70 per cent, the rechargeable category making up 10 per cent, and other battery chemistries, including zinc, representing 20 per cent. The market for household batteries was highly seasonal. The large majority of sales occurred during the months leading up to and following Christmas sales of electronics and other battery-operated devices. Close to 70 per cent of battery sales occurred during this period.

Shaving and Grooming Products Market

The shaving and grooming products industry was dominated by a select group of companies selling electric shavers and accessories, electric grooming products and hair care appliances. Electric shavers included both rotary and foil designs for men and women, and accessories included replacement parts, pre-shave products and cleaning agents for shavers. Electric grooming products included beard/moustache trimmers, nose and ear trimmers, haircut kits and related accessories. Hair care appliances included hair dryers, setters, curling irons, crimpers, straighteners and hot air brushes. The shaving and grooming products market was growing at a rate of three to four per cent annually, and this trend was likely to continue. The market for electronic shaving and grooming products was highly seasonal with peaks during the months leading up to and following the Christmas holiday season and around Father’s Day and Mother’s Day weekends. The majority of these products were purchased as gifts, and thus the sales cycle followed these gift-giving seasons. The primary competitors in the shaving market included: Norelco, Braun and Remington. Norelco was a division of Koninklijke Philips Electronics (Philips), which was one of the world’s biggest electronics companies and the largest one in Europe. Braun was a member of the Gillette family of products which was now part of P&G, while Remington was part of Spectrum. Norelco only sold rotary shavers, Braun only offered foil shavers, while Remington was the only company competing in both segments. Quality, price and brand awareness were the main factors influencing sales in this segment. The major competitors in the hair care market were Remington, Norelco, Conair Corporation and Helen of Troy Limited. Each company offered a complete line of hair care products and accessories and competed on quality and price within this category. Competitors within both of these segments sold their products largely through traditional retail channels with a heavy emphasis on mass merchandisers and specialty retailers such as salons and hair and body care shops. Like all consumer product companies, those firms able to maintain or increase the amount of retail shelf space allocated to their respective products could gain share of mind and, potentially, a share of the market.

Lawn and Garden Market

The lawn and garden market was a US$4 billion industry in North America, with an additional US$1 billion in sales of household insect control products. Companies manufactured and marketed fertilizers, herbicides, outdoor insect control products, rodenticides, plant foods, potting soil, grass seeds and other growing media. The lawn and garden industry had been driven largely by affluent baby boomers who enjoyed gardening and also by increasing home ownership levels. Growth in this market had been between four and five per cent annually and was expected to continue at this pace. In North America, more than 80 per cent of households were participating in at least one lawn and garden activity in 2004. The main competitors within the lawn and garden segment included: United Industries (United)/Nu-Gro, Scotts Miracle-Gro Company (Scotts) and Central Garden & Pet Company (CGPC). Scotts marketed products under the Scotts and Miracle-Gro brand names. They led this market with a 30 per cent market share. CGPC sat behind United with a 17 per cent market share. They sold garden products under the Amdro, Image and Pennington Seed brand names. Growth in the insect control market had been generated by population growth in the insect-prone Sunbelt region and the heightened awareness of insect-borne diseases such as West Nile virus. Growth in this market had been slightly higher than historical levels since 2002 with a seven to eight per cent annual growth rate. In the insect control market, the major competitors included United, Scotts and S.C. Johnson & Son, Inc. Scotts, once again the market leader, sold products under the Ortho and Roundup brand names, while S.C. Johnson marketed their insecticide and repellent products under the Raid and OFF! brands. Competitors within both of these markets sold mainly through mass merchandisers, home centers, independent nurseries and hardware stores. Home centers and mass merchandisers typically carried one or two premium brands and one value brand on their shelves. Obtaining and maintaining share of shelf within these retailers was critical as 50 to 60 per cent of sales passed through these two channels. The lawn and garden market was also highly seasonal. Products were shipped to distributors and retailers beginning as early as March in preparation for the spring season. Demand for products typically peaked during the first six months of the calendar year. This seasonality created a major risk within this industry, as there was a heavy dependence on weather to drive sales. A poor season greatly hindered the bottom line.

Specialty Pet Supply Market

The specialty pet supply industry had historically been one of the fastest growing consumer product categories with annual growth between six and eight per cent. This category consisted of aquatic equipment (i.e. aquariums, filters, pumps), aquatic consumables (i.e. fish food, water treatments, conditioners) and specialty pet products for dogs, cats, birds and other small domestic animals. In North America, this was an US$8 billion market in 2004, and was expected to grow to over US$11 billion by 2007. Much of this growth could be attributed to the increasing levels of pet ownership. On average, households with children under the age of 18, and adults over 55 (who were typically “empty nesters”), tended to keep pets as companions and had more disposable income and leisure time to spend with them. In North America, both of these categories have expanded rapidly with the aging of the baby boomer population. As of 2004, 62 per cent of households in the United States owned a pet, and 46 per cent owned two or more pets. In addition to these trends, the growing movement towards pet humanization — the tendency of pet owners to treat pets like cherished members of the family — had also factored greatly into this market expansion.

The specialty pet supply industry was highly fragmented. There were over 500 manufacturers in North America, consisting of both small companies with limited product lines and larger firms. No company held a market share of greater than 10 per cent. The largest competitors included: CGPC, United Pet Group/Tetra and the Hartz Mountain Corporation. CGPC led the market with a nine per cent market share. Products within this segment were sold through specialty pet stores, independent pet retailers, mass merchants, grocery stores and through various professional outlets. Mass merchandisers, supermarkets and discounters increasingly supplied pet products, but they focused mainly on a limited selection of items such as pet food. The majority of sales were made through pet supply stores, of which there were over 15,000 in the United States and more than 5,000 in Canada. There were only two national retailers in this industry: PetsMart and PetCo. PetsMart accounted for 10 per cent of North American pet product net sales in fiscal 2004. PetCo reflected similar statistics, but no other retailer accounted for more than eight per cent of industry retail sales. Sales in this segment remained fairly stable throughout the year since pets needed to be maintained continuously.

COMPETITIVE CONTEXT

In all of these industries, some competitors had gained significant market share and had explicitly committed significant resources to protecting share and/or stealing share from others. In some product lines, competitors had lower production costs and higher profit margins, enabling them to compete more aggressively through advertising and by offering retail discounts and other promotional incentives to retailers, distributors and wholesalers. This aggressive strategy obviously provided additional strength in attracting retailers and consumers. The ability to retain or increase the amount of retail shelf space allocated to their respective products provided competitive advantages in each of these market spaces. SPECTRUM BRANDS, INC.

Spectrum brands products were available through the world’s top 25 retailers, in over one million stores throughout North America, Europe, Asia Pacific, the Middle East, Africa, Latin America and Brazil. Overall, the company was generating US$2.8 billion in annualized revenues from its brand portfolio (see Exhibits 1 and 2 for Spectrum pre-merger and consolidated financial information). Similar to its competitors, Rayovac had acquired other consumer brand companies to enhance its ability to gain retail presence. Beginning in 2003, Rayovac acquired Remington Products Inc., a company specializing in consumer shaving and grooming products. In February 2005, Spectrum Brands was created when the Rayovac Corporation acquired United Industries Corporation (a leading U.S. manufacturer of consumer lawn and garden care, and insect control products), Nu-Gro Corporation (the Canadian subsidiary of United, specializing in lawn and garden care products) and Tetra Holdings Inc. (a leading supplier of fish and aquatics supplies). Continued growth and strategic acquisitions allowed the company to leverage global distribution channels, purchasing power and operational processes. These mergers provided the company with an extended brand portfolio. This allowed all of the brands to access a number of new retailers where they had not previously been able to gain shelf space. In turn, this increased the ability for each brand to compete within its given markets. Spectrum became the global leader in aquatic supplies; the number two player in the lawn and garden industry, the household insect control market, and Page 6 9B06A035 the shaving and grooming supplies industry; and the third largest global company in the battery industry (see Exhibit 3 for a list of brand names under the Spectrum label).

Rayovac

Rayovac was the third largest global consumer battery manufacturer in the world — third largest in North America and second largest in Europe. The company sold batteries and flashlights for various household and industrial uses and was the largest worldwide seller of hearing aid batteries. Their battery product line included one-time-use alkaline and Nickel Metal Hydride (NiMH) rechargeable batteries available in all standard sizes (AAA, AA, C, D, 9-Volt) to compete in the highly saturated but lucrative household market. Globally, Rayovac held a 14 per cent market share, with a 20 per cent share of the Canadian market. The division generated US$1.5 billion in annual global revenues in 2004. The company began operations in 1906, but did not introduce the Rayovac name until the 1930s. Their initial focus was on manufacturing specialty batteries for use in such devices as their patented vacuum tube hearing aids. The company expanded and grew through their continued development of state-of-the-art flashlights and non-traditional batteries, including their successful hearing aid battery line. They eventually entered the competitive household battery market through key acquisitions and by capitalizing on existing distributor and retailer relationships. This was long after the market leaders, Duracell and Energizer, had become well-established within this market. Rayovac made great strides over its last few years in an attempt to gain ground. Acquisitions had been made to gain access to international markets including Europe (Varta Battery Corporation acquired in 2002), China (Ningbo Baowang acquired in 2004) and Brazil (Microlite acquired in 2004). The leaders in this industry had leading brands and thus greater control over distribution channels, retailers and prices. Rayovac had only been able to secure shelf space in a small number of retailers, including Wal-Mart (making up 40 per cent of sales), Canadian Tire (15 per cent of sales), Home Hardware (10 per cent of sales), and other chains and smaller niche retailers such as Toys R’ Us, Radio Shack and others (35 per cent of sales). Remington Products Company

Remington was a leading designer and distributor of consumer shaving and personal care products in North America and the United Kingdom. They marketed a broad line of electric shaving and grooming products for both men and women, as well as hair care products and other personal care items. Beginning operations in 1936 as a division of Remington Rand, Remington captured a strong position as a global player in the market by developing new innovative shaving products. Before being bought by Rayovac Corporation in 2003, the Remington Electric Shaver Division had been involved in various mergers: merging with the Sperry Corporation in 1955; being bought by entrepreneur Victor Kiam in 1979; and then acquiring Clairol Inc.’s worldwide personal care appliance business in 1993. Through all of these moves, Remington was able to command a 30 per cent market share in North America and a 21 per cent share in the United Kingdom, with the number one position in men’s foil shavers, women’s foil shavers, and men’s grooming products, and the number two position in men’s rotary shavers globally. Remington had become an established name in the industry, achieving global revenues of US$350 million in 2003.

Remington, like Rayovac, sold its products largely through traditional retail channels. The breakdown of retailers was similar to that of Rayovac, with the niche retailers being salons and specialty hair and body care shops.

United Industries Corporation

United Industries Corporation was a leading manufacturer and marketer of professional and consumer lawn and garden care and insect control products. It produced a wide variety of products, including brand name items and private label products for individual retail chains. United also produced and distributed controlled release nitrogen and other fertilizer technologies to the consumer, professional and golf industries worldwide under various brand names. United competed in the United States under the United name. In Canada, the company operated under the Nu-Gro Corporation (Nu-Gro) name. United, which began operations in the early 1950s, acquired Nu-Gro in April 2004 to serve as the Canadian arm of the company. Nu-Gro was established in 1988 as an exclusively Canadian lawn and garden company. Both were leaders within their marketplaces, maintaining a number of top-selling brands including Vigoro, Shultz and CIL. Within the lawn and garden industry in North America, United/Nu-Gro was the number two company, holding a 23 per cent market share. The company targeted consumers who wanted products comparable to and at lower prices than premium-priced brands, and thus positioned their brands as the value alternatives. In 2004, United/Nu-Gro together generated sales of US$550 million in this market. In the household insect control industry, United/Nu-Gro generated US$150 million in sales in 2004. With their insect control brands, it was again the number two company, with 24 per cent market share in North America. The consumer division for both of these categories sold its products through various retail outlets, including home and garden centers, large home supply retailers, and general mass merchandisers. The sales breakdown was as follows: Canadian Tire (13 per cent), Home Depot (nine per cent), Rona (seven per cent), Lowe’s (six per cent), Home Hardware (five per cent), Wal-Mart (three per cent), independent garden retailers (five per cent), other small retailers and garden stores (12 per cent) and their professional division made up 40 per cent. The United/Nu-Gro professional division served two major markets: Professional Turf Care Products for golf courses and lawn care companies, and Professional Pest Control Products and Animal Health Products for pest control operators and farms (making up 25 and 15 per cent respectively of the company’s overall sales). This division had its own dedicated sales force and marketing team to manage the diverse needs of the professional customers. United was also a leading supplier of quality products to the pet supply industry in the United States, under the United Pet Group (UPG) name. UPG operated in the fragmented U.S. pet supply market, manufacturing and marketing premium-branded pet supplies for dogs, cats, fish, birds and other small animals. Products included: aquarium kits, stand-alone tanks, filters and related items, and other aquarium supplies and accessories, as well as pet treats and supplies. This division was number two in North America, with an eight per cent market share and annual revenues in 2004 totaling US$250 million (figure includes Tetra sales). This division sold its products through large mass merchandisers, while also targeting the larger pet supply chains of PetsMart and PetCo, and the considerable number of independent pet supplies stores.

Tetra Holdings

Tetra Holdings was a global supplier of fish and aquatic supplies, operating in over 90 countries worldwide and holding leading market positions in Germany, Japan, the United States and the United Kingdom. They manufactured, distributed and marketed a comprehensive premier line of foods, equipment and care products for fish and reptiles, along with accessories for home aquariums and ponds.