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jones_blair_case.docxJONES▪BLAIR COMPANY (2010)
In early January 2010, Alexander Barrett, president of Jones▪Blair Company, slumped back in his chair as his team of senior executives filed out of the room. After two lengthy meetings, the executive group still had not decided where or how to deploy corporate marketing efforts among the various architectural paint coatings markets served by the company in the southwestern United States. He asked his secretary to schedule another meeting within a week.
The U.S. Paint Industry
The U.S. paint industry is divided into three broad segments: (1) architectual coatings, (2) original equipment manufacturer (OEM) coatings, and (3) special-purpose coatings. Architectural coatings consist of general-purpose paints, varnishes, and lacquers used on residential, commercial, and industrial structures, sold through wholesalers and retailers, and purchased by do-it-yourself consumers, painting contractors, and painting professionals. Architectural coatings are commonly called shelf goods and account for 43 percent of total industry sales. OEM coatings are formulated to industrial buyer specifications and are applied to original equipment during manufacturing. OEM coatings are used for durable goods such as automobiles, trucks, transportation equipment, appliances, furniture, metal containers, building products, and industrial machinery and equipment. OEM coatings represent 35 percent of total industry sales. Special-purpose coatings are formulated for special applications or environmental conditions, such as extreme temperatures, exposure to chemicals, or corrosive conditions. These coatings are used for automotive and machinery refinishing, industrial construction and maintenance (including factories, utilities, and railroads), bridges, marine applications, highway and traffic markings, and roof paints. Special-purpose coatings account for 22 percent of total industry sales.
The U.S. paint industry is considered a maturing industry. Industry sales in 2009 were slightly over $16 billion. Average annual dollar sales growth was estimated to approximate the average annual rate of inflation through 2010.
Outlook for Architectural Paint Coatings and Sundries
Industry sources estimated U.S. sales of architectural paint coatings and sundries (brushes, rollers, paint removers, thinners, etc.) to be $12 billion-plus in 2009. Architectural coatings were considered to be a mature market with long-term sales growth projected in the range of 1-2 percent per year. Demand for architectural paint coatings reflects the level of house redecorating, maintenance, and repair, as well as sales of existing homes, and to a lesser extent new home, commercial, and industrial construction. Industry sources noted that the demand for architectural coatings and sundries is also affected by two other factors: (1) competition from alternative materials, such as aluminum and vinyl siding, interior wall coverings, and wood paneling; and (2) newer-developed, higher-quality paints that reduce the amount of paint necessary per application and the frequency of repainting. Counteracting these factors, industry observers foresaw increasing demand for paint sundries due to a trend toward do-it-yourself painting by household consumers.
U.S. paint manufacturers have historically been under pressure to reduce emissions of volatile organic compounds (VOCs) from paints and to limit the consumption of solvents. In 1996, the Environmental Protection Agency (EPA) adopted a three-step plan for the reduction of VOCs in architectural and industrial maintenance coatings whereby VOCs were to be reduced by 95 percent by 2005 (from the base year beginning in 1990). Compliance with EPA regulations eroded already low profit margins in the paint industry.
Consolidation and Competition in the Architectural Coatings Segment
Slow sales growth, the necessity for ongoing research and development (R&D), and regulatory compliance have fueled merger and acquisition activity in the U.S. paint industry. Companies seeking growth and a higher sales base to support increasing costs are making acquisitions. Companies that were unwilling or unable to make capital and R&D expenditures necessary to remain competitive sold their paint businesses. Industry sources estimate that the number of paint companies is currently 600, or about 40 percent fewer companies than in 1980. The number of paint companies is presently declining at a rate of about 2-3 percent per year. Merger activity generally involves the purchase of small companies by larger firms to boost the specific market or geographic presence of the larger firms. Still, because of readily available technology and differences in paint formulations associated with regional climatic needs, a small number of regional paint manufacturers such as Jones▪Blair Company have competed successfully against paint manufacturers that distribute their products nationally.
Major producers of paint for the architectural coatings segment include Sherwin-Williams, Benjamin Moore, the Glidden unit of Imperial Chemicals, PPG Industries, Valspar Corpation, and Pratt & Lambert. These producers account for upwards of 60 percent of sales in the architectural coatings segment. They market paint under their own brand names and for retailers under private or store brand names. For example, Sherwin-Williams makes and markets the Sherwin-Williams brand and also produces paint for Sears. About 50 percent of architectural coatings are sold under private or store brand names. Sears, Lowe’s, Walmart, and Home Depot are major marketers of these brands. In addition, hardware stores such as Ace and True Value market their own paint brands.
Specialty paint stores, lumberyards, and independent hardware stores that sell architectural paint and paint sundries have been able to compete in the paint business despite the presence of mass merchandisers and home improvement centers. Industry sources estimate that specialty paint stores account for about 36 percent of paint and sundry sales; hardwares and lumberyards account for 14 percent. Furthermore, specialty paint and hardware stores and lumberyards in nonmetropolitan areas have outdistanced mass merchandisers and home improvement centers as sources for paint and paint sundries in these areas. This is largely attributed to the lack of mass merchandisers and big box retailers in these areas and to the customer relationships and customer service provided by the rural hardware and specialty paint stores and lumberyards. Walmart, however, has been an effective competitor in nonmetropolitan areas.
Home improvement centers and mass merchandisers (including warehouse clubs such as Sam’s) represent the two most frequently patronized categories of retailers shopped by do-it-yourself consumers for paint and sundry items. Specialty paint stores and lumberyards are the most frequently patronized retail stores by professional painters for paint products and paint sundries.
Architectural Coatings Purchase Behavior
Approximately 50 percent of architectural coatings dollar sales are accounted for by do-it-yourself painters. Professional painters account for 25 percent of dollar sales. The remainder of architectural coatings dollar sales results from government and contractor sales.
Almost 60 percent of annual architectural coatings sales are for interior paints. Exterior paint represents 38 percent of sales. Lacquers and all other applications make up the balance of sales. Slightly less than one in four households purchase interior house paints in any given year. The percentage of households purchasing exterior house paint is considerably less than that for interior paint. The popularity of do-it-yourself painting, particularly for interior applications, has increased the paint and sundry item product lines carried by retail outlets. Paint industry consumer research indicates that the average dollar paint purchase per purchase occasion is about $74.00. The average dollar sundry purchase per purchase occasion is about $12.00.
Research by the Home Improvement Research Institute indicates that do-it-yourself painters first choose a retail outlet for paint and paint sundries and then choose a paint brand. This research also identified four steps in the do-it-yourself decision process for home improvement products, including paint. The results of this research are summarized in Exhibit 1.
Exhibit 1: Consumer Buying Decision Process for Home Improvement Products
“Paint has become a commodity” commented Alexander Barrett. “Do-it-yourself purchasers all too often view paint as paint—a covering—and try to get the best price. But there is a significant number of people who desire service as well in the form of information about application, color matching, surface preparation, and durability,” he added. He conceded that once paint is on the wall, most people can’t initially tell the difference between premium-priced and competitively-priced paint. “There is a difference, however, between painting contractors and professional painters,” he continued. “Professional painters seek out quality products, since their reputations are on the line and maintenance firms don’t want to have to paint an office each time a mark appears on a wall. The pros want paint that is durable, washable, and will cover in a single coat. They also look to retailers who will go the extra mile to give them service. Many pro painters request and get credit from stores. They appreciate being able to get to stores early in the morning to pick up paint and supplies. They deal with the stores that can mix large quantities of custom colors and expect to work with knowledgeable store employees who can give them what they want. It is not surprising that specialty paint stores remain the preferred outlet for paint and sundries by professional painters. Contractors simply want a coating in many instances and strive for the lowest price, particularly on big jobs.”
Jones ▪ Blair Company Service Area
Jones▪ Blair Company markets it paint and sundries in 50 counties in Texas, Oklahoma, New Mexico, and Louisiana from its plant and headquarters in Dallas, Texas. The eleven county Dallas - Fort Worth (DFW) metropolitan area is the major business center in the company’s service area.
Competition at the retail level has accelerated in recent years. Sears and Lowe’s have multiple outlets in DFW, as do Home Depot and Sherwin-Williams. Competition for retailing space in specialty paint stores, lumberyards, and hardware stores has also increased. “Our research indicates that 1,000 of these outlets now operate in the 50-county service area, and DFW houses 450 of them,” noted Barrett. “When you consider that the typical lumberyard or hardware store gets 10 percent of its volume ($65,000) from paint and the typical specialty paint store has annual sales of $400,000 with three brands, you can see that getting and keeping widespread distribution is a key success factor in this industry.”
Competition at the paint manufacturing level has increased as well. The major change in competitive behavior has occurred among paint companies that sell to contractors serving the home construction industry. These companies have aggressively priced their products to capture a higher percentage of the home construction market. “Fortunately, these companies have not pursued the 400 or so professional painting firms in DFW and the 200 or so professional painters outside DFW in the service area, or the do-it-yourselfer as yet,” Barrett said. They have not been able to gain access to retail outlets, but they may try to buy their way in through promotional allowances or other means available to them in the future. We believe mass merchandisers control 50 percent of the do-it-yourselfer paint market in the DFW metro area and their prices seem to be the main attraction,” noted Barrett.
The estimated dollar value of architectural paint and sundries sold in Jones ▪ Blair’s 50-county service area in 2009 was $80 million (not including contractor sales). The DFW area was estimated to account for 60 percent of this amount, with the remaining volume being sold in the other areas. Do-it-yourself buyers were believed to account for 70 percent of non-contractor volume in DFW and 90 percent of non-contractor volume in the other areas. A five year summary of architectural paint and allied product sales in the Jones ▪ Blair service area is shown below in Exhibit 2.
Exhibit 2: Architectural Paint and Sundry Sales Volume (Excluding Contractor Sales)
In Millions of Dollars
|
Year |
Total Dollar Sales |
DFW Area Sales |
Non-DFW Area Sales |
|
2009 |
$80.0 |
$48.0 |
$32.0 |
|
2008 |
78.4 |
50.7 |
27.7 |
|
2007 |
77.6 |
50.5 |
27.1 |
|
2006 |
76.4 |
50.8 |
25.6 |
|
2005 |
75.7 |
50.9 |
24.8 |
Jones ▪ Blair Company Information
The Jones ▪ Blair Company is a privately-held corporation that produces and markets architectural paint under the Jones ▪ Blair brand name. In addition to producing a full line of architectural coatings, the company sells paint sundries under the Jones ▪ Blair name, even though these items are not manufactured by the company. The company also operates a very large OEM coatings division, which sells its products throughout the U.S. and internationally.
The company’s architectural paint and sundries sales volume in 2009 was $12 million with net profit before taxes of $1,140,000. Dollar sales had increased at an average annual rate per year of 4 percent over the past five years. “We have been very successful at maintaining our margins even with increased R&D, material, and labor costs, but we’re approaching the threshold on our prices,” Barrett said. “We are now the highest-priced paint in our service area.” In 2009, paint cost-of-goods sold, including freight expenses, was 65 percent of net sales.
Distribution—Jones ▪ Blair distributes its products through 200 independent specialty paint stores, lumberyards, and hardware outlets. Forty (40) percent of these outlets are located in the 11-county DFW area. The remaining retail outlets are situated in the other 39 counties in the service area. Jones ▪ Blair’s sales are evenly spread between DFW and Non-DFW accounts. Exhibit 3 below shows the account distribution and sales volume distribution by the retailer’s dollar size of purchases per year.
Exhibit 3: Account & Sales Volume Percentage Distribution by Size of Retailers’ Annual Purchases
|
|
Retail Accounts |
Dollar Sales Volume |
||||
|
Purchases/Yr. |
DFW |
Non-DFW |
Total |
DFW |
Non-DFW |
Total |
|
$50,000+ |
7% |
10% |
17% |
28% |
28% |
56% |
|
$25,000-50,000 |
14% |
20% |
34% |
13% |
13% |
26% |
|
Less than $25,000 |
19% |
30% |
49% |
9% |
9% |
18% |
|
TOTAL |
40% |
60% |
100% |
50% |
50% |
100% |
Retail outlets outside the DFW area with paint and sundry purchases exceeding $50,000 annually carry only the Jones ▪ Blair product line. However, in the DFW metro area, with the exception of 14 outlets each of which has greater than $50,000 in annual purchases, retailers carry two or three products with Jones ▪ Blair’s line being premium priced. “Our experience shows that in our DFW outlets, the effect of multiple lines has been to cause a decline in gallon volume. By comparison, the non-DFW outlets have grown in gallon volume,” Barrett said.
Promotional Efforts—Jones ▪ Blair employs its own sales force of eight sales representatives. The company does not sell through wholesalers. Jones ▪ Blair sales representatives are responsible for introducing paint lines to retailers, taking orders, monitoring inventory, assisting in store display and merchandising, and coordinating the cooperative advertising program. A recent survey of the paint dealers indicated that the Jones ▪ Blair sales representatives were well-liked, helpful, professional, and knowledgeable. The sales representatives are paid a salary and 1 percent commission on sales. In addition to a top-notch company sales force, Jones ▪ Blair spends approximately 3 percent of net sales on advertising and sales promotion efforts. Approximately 55 percent of advertising/sales promotion dollars are allocated to the company’s cooperative advertising program for retail accounts. Under the cooperative program, Jones ▪ Blair pays a portion of a retailer’s advertising costs, based on the dollar amount of paint purchased from Jones ▪ Blair. The cooperative advertising program mainly applies to newspaper advertising and seasonal inserts distributed in a retailer’s immediate trade area. Exhibit 4 shows an example of a Jones ▪ Blair cooperative print advertisement. The remainder of the budget is spent on sales promotions, including in-store displays, outdoor signs, and premiums (free merchandise), and corporate brand advertising.
The Planning Meeting
Senior management executives of Jones ▪ Blair assembled again to consider the question of where and how to deploy corporate marketing efforts among the various paint markets served by the company. The peak painting season was approaching and decisions had to be made quickly.
The Vice President of Advertising believed the efforts should be directed toward bolstering Jones ▪ Blair’s presence in the DFW do-it-yourself market. This recommendation was based on recent results of a DFW consumer advertising awareness study. The study showed paint purchase behavior was directly related to brand awareness and that purchasers were more likely to choose brands they had recently seen advertised. Although the Home Improvement Research Institute’s findings showed the largest percentage of do-it-yourselfers choose a store before selecting a brand, the advertising study showed consumers think about paint they have seen advertised when choosing a brand. This becomes very important in stores carrying multiple brands. Jones ▪ Blair’s measured level of awareness in the DFW area was 24 percent. The company’s advertising agency indicated that an increase of $350,000 in corporate brand advertising with an emphasis on television advertising would be necessary to achieve the 35-40 percent awareness levels currently held by mass merchandiser and national paint brands. Furthermore, any television advertising in the DFW media market would reach consumers in 15 of the 39 non-DFW counties as well.
The Vice President of Operations did not agree and felt increased advertising to the DFW area was too narrow a focus. In-store research with shoppers had shown that dealers quickly backed off the Jones ▪ Blair brand when the customer appeared price sensitive. The VP of Operations felt that, in order to become more competitive with do-it-yourselfers in general, Jones ▪ Blair prices should be cut by 20 percent to achieve parity with popular national brands.
Exhibit 4: Jones ▪ Blair Company Sample Cooperative Print Advertisement
The Vice President of Sales wanted to downplay the DFW market and corporate brand advertising. He felt the marketing efforts should favor personal selling over advertising and should be geared toward the non-DFW areas where half of sales and a majority of dealers existed. Account penetration in the non-DFW area was only 16 percent and sales representatives had added but five new accounts in the last two years. Consequently, the VP of Sales suggested adding one additional sales representative whose sole responsibility would be to develop new retail account leads or call on professional painters to solicit their business through dealers. The direct cost of a field rep was $60,000, excluding commission.
Finally, the Vice President of Finance favored adhering to the present approach and spending levels. The company currently had a 35 percent contribution margin and a policy of recouping noncapital expenditures within a one-year time horizon. That meant increased advertising, a new hire in sales, or across-the-board price cuts would be expected to generate enough incremental sales to offset these new costs.
Barrett’s comments in the meeting were as follows:
“Increased advertising seems reasonable since national paint firms and mass merchandisers already outspend us tenfold in absolute terms. It is certainly correct that people have to be aware of us before they will buy or even consider Jones ▪ Blair paints, but I am not sure what mass media television advertising will do for us given that about 75 percent of the audience is not buying paint. Would it not be better to take that $350,000 in incremental advertising and apply it toward print ads and sales promotions in non-DFW areas?”… The price cut seems to be a drastic action, but we might have to do it to keep our gallon volume this year. The sales representatives forecast that demand for paint in our service area will not increase. That means any market share we can expect to pick up from a price cut will have to come out of a competitor’s hide. Moreover, since our costs are unlikely to decline, we MUST recoup any lost gross profit dollars due to a price cut from an increase in volume. Is this possible?”… Lastly, the hiring of one or more additional sales representatives may have merit given the low account penetration rate, but how would we deploy them? Should they focus on adding retail accounts or recruiting professional painters? An analysis of retail accounts indicates that 70 percent of our sales through DFW dealers go to professional painters while 70 percent of our sales through non-DFW outlets go to do-it-yourselfers. Regardless of service area, our contractor sales are minimal. Does the contractor market need a dedicated sales rep? We would need at least a 40 percent price cut to attract contractors, not to mention the increased costs, expertise, and headaches of competitive bidding for large jobs…Those are my thoughts. I’ll entertain more discussion from all of you on these proposals. And, there may still be other ideas we haven’t thought of. We’re not leaving until we decide on a course of action.”
Step 1: Decide on Project/Product
Primary Motivation:
Step 2: Gather Information
For Products, From:
Step 3: Decide on Store
Will Shop:
Old/Nonrepairable
Have the Time
Have the Money
House is an Investment
Step 4: Decide on Product
Friends/Relatives
Retailers
Internet
Mfg. Literature
Professionals
Magazines
"Different Stores" 46% of the time
"One Store" 26% of the time
"For Best Price" 22% of the time
"Close to Home" 8% of the time
Key Criteria:
Durable/Reliable
Acceptable price
Performs well
Brand reputation
Ease of use
Appearance
Warranty/Service
