Manchester Products: A Brand Transition Challenge Solution

Posted on December 22, 2012 by harvardcasestudies No Comments

It was January 7th, 2005, and Manchester Products Inc. (Manchester), a long-time leader in office furniture, had made a bold move into the household furniture market with its recent acquisition of Paul Logans Furniture Division (PLFD). The acquisition of PLFD dramatically expanded Manchesters Household Furniture Division (MH) overnight and provided them with a strong brand and an instant market-leader position in the household furniture segment. However, Manchester was given rights to use the Paul Logan brand name for only three years. Jason Adams, Vice President of Marketing for Manchester, had just spent eight hours going over the details of the acquisition and brainstorming an integration plan with the senior leadership team. At the end of the meeting, Colleen Jones, Manchesters CEO, asked Adams to develop a comprehensive brand transition strategy to present to the board on January 21, 2005. Over the next two weeks, Adams would have to determine the optimal timing and sequencing of the brand name transition and establish the appropriate mix of advertising and promotion expenditures to support the transition. While branding was the primary focus of Manchesters marketing and communications plan, it was important that Adams also consider the other reasons that customers bought home furniture, which included style, comfort, and price. Background Paul Logan, Inc. Paul Logan, Inc. was the premiere name in high-end, fashionable consumer goods, and was considered a true lifestyle brand. In 2004, Paul Logan operated four divisions: Apparel1 (40% of revenue), Home Dcor2 (26% of revenue), Fashion Accessories3 (23% of revenue), and the furniture division, PLFD (11% of revenue). Total Paul Logan revenues were $9 billion in 2004. The PLFD acquisition included the following furniture products categories: Accent Pieces, Bedroom, Chairs/Sofas, Dining/Kitchen, Entertainment/Media, Home Office, and Tables. After the PLFD sale to Manchester, Paul Logan would continue to use the Paul Logan brand name for its Apparel, Home Dcor, and Fashion Accessories divisions. PLFD offered an extensive line (over 150 SKUs) of high quality furniture and occupied the number one or number two market share position in several of the categories in which it competed. PLFDs association with the Paul Logan fashion empire provided an instantly recognized and respected brand in furniture. Its well established sales force, with strong ties to leading distribution channels, and its talented design team were two driving forces behind the divisions success.

The design team had recently introduced a wildly successful line of furnishings called Signature Style, with powerful colors that popped. The bold hues and unique styles immediately caught the publics attention. Signature Style products had even appeared in the top-rated prime-time cable program House of My Dreams on Designer TV. In 2004, Paul Logan, Inc., decided to refocus on its distinctive competencies in fashion and textile design. The company wanted to free up its balance sheet in order to pursue a big push for further international expansion of its Apparel and Home Dcor businesses. When Manchester approached Paul Logan about its interest in acquiring PLFD, the timing seemed perfect for a divestiture. Manchester Products Manchester was one of the leading manufacturers of premium office furniture in the United States. Paul Logan Furniture The company was well known to business buyers with its distinctive red-script Manchester logo. Revenues for 2004 were $2.33 billion. Manchester executives believed there were significant synergies that could be captured by leveraging their manufacturing expertise and production capacity into household furniture. In addition, the companys skills in engineering, ergonomics, and durable designs could be applied to household furniture products. For these reasons, the company targeted a strategic expansion into the household furniture marketa market it entered in 1999 when it established MH. This decision was at least partially supported by a research study conducted in 1998 which indicated that 5% of Manchesters office furniture products were already being purchased for homes. When launched in 1999, MH consisted of three product lines. The Manchester Relaxer lines consisted of ergonomic recliners that quickly became popular due to their style and comfort. The introduction of the Relaxer products officially took Manchester out of the office and into the living room. Both home office and media/entertainment product lines had also been introduced into the market with positive reviews. However, securing distribution for these products had been more difficult than senior management had anticipated. Although Manchester had achieved critical mass of distribution in upscale furniture stores, there were still substantial holes in their distribution network. On a bright note, Manchesters home products had been featured in leading style magazines, and a successful national advertising campaign had coincided with the launch. Sales for MH climbed to $200 million by 2003, $260 million in 2004, and were expected to grow 30% in 2005. Management felt MHs long-term growth prospects and profit potential were excellent. Manchester Products Manchesters ultimate goal was to provide a complete family of household furniture products in the mid- to upper-price points.4 One of the main hurdles in achieving this objective was Manchesters deficient access to household-furniture distribution channels. Manchesters network of office furniture distributors did not overlap with household distribution outlets. Prior to the acquisition, 75% of Manchesters products were sold through independent office furniture

dealers, 15% were direct-sale business accounts, and 10% were sold via furniture retailers. PLFD Joins Manchester Through the acquisition of PLFD, MH was able to gain better access to household distribution channels. In addition, CEO Colleen Jones felt PLFDs design skills with respect to colors, shapes, and textures coupled with Manchesters engineering strength, manufacturing expertise, and ergonomic innovations would be a winning combination. Adams, however, had been struck by the bold styles and fashionable colors of the PLFD line and wondered how it would fit with MHs conservative, functional designs. The acquisition included the PLFD sales, management, and design teams, 10 distribution centers, 4 manufacturing facilities, inventory for all 150 products, and the right to use the Paul Logan brand name with these products for three more years. But, any new products introduced by Manchester could not use the Paul Logan name. The Paul Logan Corporation was restricted from re-entering the furniture business for 10 years. Summary income statements for PLFD and MH are provided in Exhibit 1. Furniture Market in the United States Market Overview In 2004, US household furniture was a $36.64 billion industry and office furniture was $10.69 billion.5 Industry figures are located in Table A. Table A Household & Office Furniture Manufacturing Industry Sales ($ in billions). Office furniture growth was closely tied to employment growth and new business formation. The bursting of the dot.com bubble in 2000 and the recession of 2001 caused demand for office furniture. to drop sharply. Additional factors restricting office furniture growth included the rise in teleworking and the purchase of used, refurbished furniture. Manufacturers of household furniture in the United States coexisted in a mature and fragmented industry during this time period. However, a number of consolidations were taking place and key players were beginning to emerge. Several large companies had permeated the US market and competition from lowcost imports from Asia and Mexico had increased considerably. Imports from China alone rose 154% from 2001 to 2005. The household furniture industry mirrored the cycle of the general economy and revenues were tied very closely to home sales and new-home construction. Furniture manufacturers relied on innovative and stylish product introductions to fuel growth once the housing boom of the early 2000s cooled. Products and Pricing Household furniture products could be classified as wood (48%), upholstered (34%), or metal/other (18%) pieces. Products could be further segmented by price and quality. Both PLFD and MH produced products in the mid, upper-mid, and upper-price points. PLFD offered both wood and upholstered pieces that commanded an average price premium of 16% over its competitors. The majority of the price premiums were due to the Signature Style line, where the company had several design awards and substantial media buzz. PLFD had a strong presence in the

Bedroom, Dining/Kitchen, Tables, and Chair/Sofa product categories. The Home Office and Entertainment/Media categories were a secondary focus for the company, and Accent pieces were its weakest category. Distribution Many furniture manufacturers had integrated forward in the value chain into company-owned retail stores. For example, Curtis Furnishings, Dynasty, and SVEDE had vertically integrated into retailing by establishing stores that exclusively sold their own brands. For companies that did not operate retail stores, the critical distribution outlets were independent and chain furniture stores (e.g. Havertys), specialty stores (e.g., home goods stores like Bed, Bath and Beyond), department stores (e.g., Macys), home improvement stores (e.g., Home Depot), mass merchandisers (e.g., Wal-Mart) and warehouse clubs (e.g., Costco). Exhibit 2 provides a breakdown of household furniture retailers by channel. PLFDs sales force had strong relationships with buyers from major furniture chains, department stores, and wholesalers that sold to the smaller, independent furniture and specialty stores. However, a major furniture chain buyer (with over 50 stores nationwide) contacted the PLFD sales offices to express her displeasure when rumors of the acquisition surfaced. Were concerned about the future of PLFD. Its a traffic builder for our stores. Consumers instantly recognize the Paul Logan name and they feel comfortable knowing they are purchasing a high-style, quality piece. Without the Paul Logan name, well have to reevaluate our decision to carry these products. PLFDs products were currently sold in upscale furniture stores/chains (45%), specialty stores (30%), and department stores (25%). Competitive Situation Rivalry was fierce among the large, established household furniture manufacturers. Imports from low-cost labor areas such as Asia and Mexico had placed downward price pressure on the market. Once exclusively in the lower-priced segment, these imports had started to gradually move upmarket. In addition to competition from imports, domestic players were eager to challenge MHs new position of dominance. Manchesters immediate concern was with National Furniture Company. This was PLFDs closest competitor in terms of target customer and price point. When rumors of the proposed MH/PLFD merger surfaced, National stepped up advertising and announced price reductions. After the acquisition deal terms were made public, one senior executive from National was overheard at an industry convention saying The MH/PLFD merger is the best thing that could happen to us. This means the end of the Paul Logan brand name in household furniture. Well pursue an aggressive strategy to exploit the uncertainly associated with the integration. Brand Transition Considerations Consumer Research MH target customers were homeowners, age 34 55, with income over $50,000. MH customers were characterized by conservative elegance. PLFD targeted a similar demographic, but the PLFD core customers were more fashion-conscious and considered themselves trend setters. A 2003 Manchester survey7 of household furniture consumers showed

buying behavior consistent with high information needs, moderate price sensitivity, and moderate brand importance. Key findings included:

35% bought their last piece of furniture during a sale. 25% researched advertisements from furniture retailers and planned purchase visits based on those ads. Almost 60% would switch from the current furniture brands in their house when looking for a replacement. 60% talked to a third party (e.g., friend, sales person) prior to a furniture purchase. 70% visited more than one store prior to a furniture purchase. 30% favored shopping in upscale department stores for household furniture; 25% preferred specialty shops, 20% would rather shop at large retail furniture chains, and 15% preferred smaller, independent furniture stores. The majority of the remaining 15% was split between catalogs and online retailers. Participants ranked, in order of importance, the following factors when making furniture purchase decisions: (1) style; (2) design; (3) quality; (4) comfort; (5) price; (6) brand; (7) material/fabric; and (8) durability. Anticipating the PLFD acquisition, Adams commissioned a consumer study in late 2004 to assess the brand awareness and ownership of the major players in the household furniture market. Exhibit 3 presents findings on each competitors brand strength as well as brand ownership percentages. Study results confirmed that Paul Logan had unmatched consumer brand awareness. Although the Manchester name was fairly new to the household furniture market, the study showed that Manchester already possessed unaided brand awareness of 45%. The 2004 consumer study also asked respondents to rate (using a 100-point scale) home furnishing companies on a variety of its closest competitors, as well as directly to PLFD. Variances in consumer ratings between Manchester and its home furniture competitors are shown in Exhibit 4. Brand Transition Options The goal of the brand transition strategy was to take advantage of PLFDs leading position in household furniture in order to raise the market value of all Manchester products and ensure key channels of distribution. A lively debate had taken place at the meeting on January 7th regarding the ideal strategy for a brand-name transition. CEO Jones had challenged the senior executives to offer what they saw as the best option for the brand transition. Adams and the other senior executives ended up listening to three executives perspectives on the optimal plan: This is a no brainer. The brand name should be changed to Manchester in all product categories as soon as possible. This will show competitors quick and decisive action and minimize any confusion that is associated with operating two brand names. We must show our

immediate commitment to the Manchester name. Gary Burnett, COO Garys suggestion ignores a critical issue: Manchester does not have the brand strength to pull off an immediate brand name transition. Part of the reason we bought PLFD was for the Paul Logan association. Lets take advantage of their superior brand awareness and delay the name change for as long as possible. Lisa Marks, CFO It does not have to be all or nothing for three years. Why dont we pick one or two products at a time and transition to the Manchester name gradually? I suggest we take a look at products or categories that lend themselves to a low-risk brand transition and start there. Jeremy Campbell, VP, Strategic Planning Push vs. Pull Promotion Strategy Considerations Adams felt advertising would be critical to the success of any brand-transition strategy and had initially estimated advertising expenses of $184 million for 2005 (national and cooperative advertising for both PLFD and MH products). Campbells strategic planning department had suggested a dualbrand advertising strategy, where both the Manchester and Paul Logan brand names would be highlighted. They developed the tag line, Manchester, the new home for Paul Logan furnishings to be used in a national advertising campaign. Manchesters advertising agency, however, felt this would confuse customers and that there was no need to waste budget on a brand name that had a shelf life of less than three years. The advertising agency proposed a national ad campaign that concentrated on ergonomic innovations and kept the Paul Logan name out of the campaign completely. Promotional programs were another area where Adams needed to focus his attention. PLFD management considered purchase allowances to be an important part of the brands success. The VP of Sales at PLFD told Adams, Trade promotions are critical to our successful distribution strategy. We would not have our vast network of retailers and wholesalers without attractive promotional programs. If you reduce these programs, you are putting our whole distribution network at risk. At the time of the acquisition, 90% of PLFD shipments included off-invoice purchase allowances.8 Paul Logan had also been committed to a volume rebate program that provided trade accounts with rebates of up to 4% of their net purchases for the year. Both companies understood the importance of their net purchases in a cooperative advertising fund. This fund could be utilized to subsidize the cost of advertising that feature Paul Logan products. Neither PLFD nor Manchester had used consumer promotions or rebates extensively in the past. However, Adams thought some consumer rebates in 2005 might help preserve market share. Adams sketched out preliminary recommendations for advertising and promotion expenses for 2005. He also collected historical marketing expenditures in order to analyze differences in the marketing budgets. This expense information is summarized in Exhibits 5 and 6. Upon examination of the two spreadsheets, Adams noticed one significant disconnect. PLFD allocated significantly more of its budget to push programs in the form of volume rebates and purchase allowances for the trade than MH. MH, on the other hand, had gravitated toward pull programs such as national advertising. There was some debate between marketers over whether co-op advertising should

be categorized as push or pull expenditures. Those who felt it represented push marketing cited the fact that it was aimed at the trade. On the other hand, it was advertising that targeted the end customer, and this indicated pull marketing to many. Manchester had always considered co-op ad spending a pull program because the nature of the trade advertisements focused on promoting the brand directly to the customer as well as stimulating immediate sales. Conclusions As Adams reviewed his notes from the meeting, he identified three key decisions he would have to make to provide a comprehensive recommendation to Jones and the Board. First, he had to decide which of the three options offered by these execs he should support (or, come up with a fourth).

Adams wonders if the PLFD products might be best served if they rebranded not with the Manchester name, but with a new celebrity designers name. Second, he would need to further analyze the differences in push/pull strategies between PLFD and MH. Adams realized this analysis would be critical in developing the best push/pull strategies to implement over the next three years. Third, he needed to firm up his 2005 budget recommendations and start to think through appropriate promotions and advertising programs to support the transition.