ELGIN NATIONAL WATCH COMPANY

The 93rd annual report of the Elgin National Watch Company for the financial year
ending March 1, 1958 showed an operating loss for the year of $2,442,000. Sales
had dropped from $42 million in the previous year to $31million. Net operating
profit for the previous year had been $671,000. These results were naturally
disturbing to the management. It was not difficult, however, to identify the major
causes of the difficulty. Discount houses had been cutting long established retail
prices and had disrupted conventional distribution channels. At the same time low-
priced imported watches had been cutting into sales of the more expensive
watches, further upsetting the market. Therefore, the Elgin management began an
evaluation of its product and distribution policies.

Elgin had been one of the best known American watch manufacturers ever since it
was founded in 1864. For years, it had enjoyed the prestige of making the finest
watches in America. A long established tradition of fine watch craftsmanship was a
matter of pride for all personnel in the company. The Elgin reputation was still
strong in 1957. In that year the company surveyed the market. Among questions
asked was, “What is your brand preference for the watch you purchase?”. The five
leading brands thrown-up by the study, along with their market shares were as
follows: Elgin 30.9%, Bulova 29.4%, Hamilton 21.9%, Longines 14.9%, and Timex
2.9%.

Elgin had diversified in recent years into electronics, micronics (production of

highly precise and miniature devices for guided missiles and aircraft), and a quality
line of abrasive products for the metal working field. The watch division, however,
still accounted for considerably more than half the company's sales volume. In
1958, the newer divisions were not yet operating profitably, but, for the most part,
the operating loss in the preceding financial year was attributable to the watch
division.

In addition to the operating loss sustained in 1958, special write-offs of $4.5 million
were made against earned surplus. Most of these special charges applied to the
watch division. They included a write-down of fixed assets which resulted from
plant relocations and consolidations and a more realistic valuation of the finished
product inventory which included many models of watches which were not selling
well.

Elgin's unfavourable results were accounted for partially by the recession of 1957-
58, but the general unrest and confusion which had existed in the watch market for
a number of years was a major factor. Following World War II, imports of Swiss
watch movements had increased at the expense of the domestic movements.
Bulova watch Company produced its own cases but Swiss movements were used in
about 50% of its finished watches. Gruen & Longines used Swiss movements
exclusively in their cases. Many “off-brand” Swiss watches were sold in the lower
price field. On February 28, 1958 the Office of Defence Mobilisation ruled that the
American watch industry was not essential to national defence. This decision
precluded the possibility that higher tariffs might be imposed to restrict imports in
the foreseeable future.

Price cutting was another disruptive influence that was closely related to the influx
of low cost watches. After World War II, discount houses became important factors
in retailing. The wide established margins on watches, typically 50% of selling
price, and the well-known brand names made them popular promotion items for
the discounters. The emphasis which these discounters put on price in their
promotion of watches encouraged aggressive selling by manufacturers of low-
priced watches. Some manufacturers began advertising fictitiously high prices so
that retailers could offer consumers what appeared to be larger discounts.
Indicated retail prices as high as three times the retailers cost were common.

These practices were at their peak in 1957. In addition to its financial loss that
year, Elgin suffered a major loss in its share of the market. Elgin estimated the
total number of wrist watches sold by the industry in 1957 to be 12.2 million, well
about the 9.2 million sold in 1956. Elgin's share of the market, however, dropped as
did the share held by most of the major jewelled watch manufacturers. The major
pin-lever watch manufacturers gained in market share1. The disruptive market
factors described above were major causes of Elgin's loss in market share, but the
management did not think they were the sole causes. Elgin had not kept abreast
completely of such changing trends as the increased demand for round watches;
sweep second hands; and shockproof, waterproof and self-winding watches. As a
result, Elgin followed its competitors in introducing these changes.

The market for watches had also been changing by price lines (Table 1).

Table 1
Share of Wrist Watch Movement Unit Sales by price: Selected Years (Thousands)

1950 1952 1954 1956 1958

a
Jewelled Watches # % # % # % # % # %
Under $30 2000 20.0 2686 24.6 2597 29.8 3293 37.0 3000 40.0
$30 & over 7992 80.0 8233 75.4 6118 70.2 5607 63.0 4500 60.0
Total jewelled 9992 100.0 10919 100.0 8715 100.0 8900 100.0 7500 100.0
b c
Pin-lever Watches 4800 6300 5900 7700 8000

Total all Watches 14792 17219 14615 16600 15500

a
Total jewelled watch market data from U.S. Tariff Commission; price breaks
estimated from Elgin studies, and indicate retail value of complete watch, not just
the moment.
b
U.S. Tariff Commission
c
Estimated.
1
A pin-lever watch is constructed without the use of jewels as bearings. This is the
typical construction in watches retailing for less than $15.00.

-2-
In 1950, jewelled watches selling for less than $30 accounted for only 20% of
jewelled watch sales, but by 1958 this was 40%. Watches selling below $30 were
generally considered low priced, but this market consisted of two separate
segments -- jewelled watches retailing between $15 and $30 and pin lever watches
which usually sold for less than $15. Pin lever watches did not use jewels for
bearings. The total volume in low-priced watches was large in dollars as well as
units. At manufacturers’ selling prices, the “$15 to $30” market totalled $23.5
million in 1957 and the “under $15” market totalled $12 million.

Elgin had always emphasised high-priced watches and the top price bracket, $75
and up, had lost significantly in market share in 1957 as shown in Table 2.

Table 2
a
Distribution of Wristwatch Sales by Retail Price: 1956 and 1957

1956 1957
Price Units Percent Units Percent

$75 and up 1,514,000 16.5% 1,380,000 11.3%

$50 to $74.99 1,889,000 20.6% 3,000,000 24.6%
$30 to $49.99 2,015,000 22.0% 2,666,000 21.8%
$15 to $29.99 1,805,000 19.6% 1,728,000 14.1%
Under $15 1,965,000 21.3% 3,460,000 28.2%

9,188,000 100.0% 12,234,000 100.0%

a
Data compiled by Elgin National Watch Company. Data are for watches, not just
movements, as shown in Table 1. The large difference in the totals in Tables 1 and
2 was primarily due to differences in estimating pin lever watch sales. During this
period, Timex was just getting started and a major portion of its production went
into pipeline filling of new channels of distribution. The practice in repairing pin
lever watches still under guaranty was to replace the movement. Elgin estimated
that this would account for approximately 25% of the pin lever movements in Table
1. Also, many pin lever movements went into timing devices other than
wristwatches. The Elgin Sample probably understated purchases of pin lever
watches because it did not include individuals under 15 years old, who buy an
estimated one half to one million pin lever watches.

Prior to 1958, Elgin had not produced a watch which could be retailed below
$33.75 with the customary trade margin of 50%. Company policy had been positive
and explicit in refusing to produce a watch under the Elgin name to retail in the
lower price brackets. The management had felt that selling a low-priced watch
with Elgin's name degrade the tradition of quality and craftsmanship built up by the
company over many years. Some executives cited the Packard automobile as an
example of what would happen if a low-priced watch were marketed.

They said that the Packard name at one time stood for the top in automobile
quality. When that firm put out a medium priced car, its reputation suffered; it
lost its top-quality market and failed to gain in the medium priced market. These
officials believed that, should Elgin try to compete in the lower price market, the
results might be similar to Packard's.

As the low-priced watch market expanded, however, Elgin officials were under
greater and greater pressure to enter that field. Rather than compromise the Elgin

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reputation, they brought out in 1952 a lower-priced watch under the name
Wadsworth, which sold primarily at $19.95 and $29.95. Executives believed that
with adequate promotion this watch would capture its fair share of the lower price
market. Sales were disappointing despite the fact that low-priced watch sales
generally continued to grow. Executives believed the Wadsworth was adequately
promoted, but it never obtained more than 3% of the “under $30” market in any
year. In 1956, Elgin estimated the Wadsworth accounted for about 2.3% of the
“under $30” market, but this dropped to 1.9% in 1957.

In a general appraisal of the watch market, Elgin executives concluded that there
was an increasing acceptance of inexpensive “fashion” watches such as the Swiss
timepiece in the $20 to $30 bracket and of the cheaper pin lever watches,
primarily American brands such as Timex. Appreciation for fine watches as
jewellery was declining, particularly among the younger generation. No longer was
a watch bought or presented as a gift with the idea that it would be used for a
lifetime. The market for expensive watches was faced with increasing competition
from other goods and services such as hi-fi sets, outboard motors, sporting
equipment, cameras, vacation trips, and other items which the expanding
American middle-class was enjoying in its leisure time.

Elgin officials interpreted the development to mean that the expensive watch was
no longer the symbol of social standing it had been a generation before. Consumer's
surveys indicated that the largest proportion of watches retailing for less than $30
were purchased for teenagers as gifts.

The tendency was to give less expensive watches which would be functional for
some years but which neither the giver nor the recipient expected to last a
lifetime. Style changes emphasising the latest in design and fashion were also
encouraging the tendency to pay less for a watch and to buy more often.

Watch ownership was high in all age groups so that a large share of the market
would be in the form of replacement sales. An Elgin survey showed, however, that
there were a significant number of men in the teen age and the 30 - 35 age bracket
who did not own a wristwatch or even any watch (Table 3).

Table 3
Percentage Ownership of Watches by Age and Sex: 1957

M: Men; W: Women
14 ‐ 19  20 – 24  25 ‐ 29  30 ‐ 39  40 ‐ 49  Over 50 
M  W  M  W  M  W  M  W  M  W  M  W 
                       
Use wristwatch 56  68  87  70  81  80  65  75  69  86  54  69 
Own, but, don’t use 4  1  2  4  1  2  1  2  1  1  5  2 
wristwatch
Don’t own wristwatch 40  31  11  26  18  18  24  23  14  13  16  26 
                       
Use Pocket or lapel watch 0  0  0  0  0  0  0  0  15  0  26  3 
                       
Percentage of men/women 11.7  11.0  8.6  8.6  9.5  9.3  20.1  20.1  18.3  18.1  31.8  32.9 
in the age-group

Elgin had distributed its watches directly to jewellers and high-class department
stores for many years. Surveys indicated that 90% of all Elgin watches had been
purchased at jewellery stores. Elgin's management had always felt a great loyalty
for the established legitimate local jeweller who had distributed the product so
successfully. Such loyalty had almost become a tradition, and the management

4
hesitated to break away from such a distribution policy in spite of the dynamic
changes which were taking place in the watch market. The low-priced watches,
however, were being sold through different channels than had been customary for
expensive watches. (See Tables 4 and 5).

Table 4
Distribution of Sales of Wristwatches by Place of Purchase: Selected Years

Place of purchase 1954 a 1956 b 1957 b

Jewellery store 67% 61% 56%

Department store 5% 7% 5%
Discount house 4% 6% 11%
Mail order 3% 5% 7%
Drug store 3% 7% 9%
All others 18% 14% 12%

100% 100% 100%

a
A.C. Nielson Consumer Survey
b
Crossley – S.D. Consumer survey

Table 5
Distribution of Sales of Different Priced Wristwatches by Place of Purchase: 1956 And 1957

Watch price Jewellery Department Discount Drug Mail All Total

stores stores stores stores order others

$75 and up 84% 6% 3% 1% 0% 6% 100%

$50 to $74.99 76% 2% 6% 2% 6% 8% 100%
$30 to $49.99 75% 3% 10% 1% 4% 7% 100%
$15 to $29.99 50% 12% 15% 4% 6% 13% 100%
Under $15 16% 10% 7% 30% 10% 27% 100%

The jewellery stores still dominated the retail sales of watches above the $30 price
bracket. This was Elgin's strong field, but even here its share of this market had
dropped.

In 1958, Elgin's management again considered the question of whether or not to

enter the low-priced market. To aid in arriving at a decision, a mail and personal
interview survey was conducted among Elgin's dealers. 917 dealers answered the
question, “Would an Elgin watch retailing at about $25 help your sale?”. The
results were as follows:

Personal Interviews Mail Survey

Yes 76.5% 66.1%

No 23.5% 33.9%

Number answering 47 870

5
Additional comments were solicited and the principal reasons for and against the
introduction of a watch in the $25 range which were given are shown in Table 6.

Table 6
Reasons given by Dealers for and against Low-Priced Elgin Watch

Reasons for # of mentions

Would get business from Swiss (Private brands) 169
People want this price watch -- this is where market is 127
Need a good name watch at lower price 81
We need an inexpensive watch for teenagers 55
It would outsell Wadsworth 15
Elgin name alone would sell it 8

Reasons against # of mentions

It would hurt Elgin name 71
It would interfere with Wadsworth sales 40
You could not give the mark-up 22
There is no demand for this type of watch 20
It would hurt our higher-priced watch sales 12
Other reasons 55

In June 1958, the marketing department presented a plan for increasing Elgin's
total watch sales with special emphasis on the under $30 market. The first step in
the suggested plan was to eliminate the production and marketing of the
Wadsworth watch in spite of the fact that considerable investment had been put
into advertising this watch over the preceding five years.

The next recommendation was that Elgin's prestige line, the 21 jewel "Lord" and
"Lady" Elgins which retailed from $71, be continued as the top Elgin line, but the
starting retail price to be reduced to $59.50. This price reduction would, it was
believed, enable Elgin to compete in the $50 to $65 market where it might
presently be losing many sales. It was recommended that this quality line continue
to be distributed directly to retail jewellery dealers. Dealers were to be
franchised, however, and tightly policed by the company. Franchises would be
granted to a limited number of perhaps 7000 dealers out of the 17,000 on Elgin's
dealer list.

Franchises could be withdrawn at Elgin's option from dealers whose activities did
not enhance the prestige name of the “Lord” and “Lady” Elgin line.

The third recommendation was that a medium priced line of Elgin watches of the
19 jewel variety be introduced to sell from $34.95 to $69.50, or perhaps higher in
models with solid gold cases or diamond ornamentation. This line of watches would
be distributed to all jewellery stores as well as many other types of retail outlets.
The Elgin sales force would sell the line direct to the large mass distributors such
as department stores, catalogue houses, low margin retailers, certain house to
house operations, and trading stamp redemption stores.

The fourth recommendation was that a 17 jewel lower-medium-priced Elgin watch

retailing from $19.95 to $29.95 be produced or, if necessary, assembled with
imported movements in company designed cases. This lower-priced line would be
offered to all outlets to which Elgin sold direct, including jewellery stores,
department stores, and the large mass distributors to be used for the medium price

6
line. In addition, distribution would be sought through wholesale distributors who
sold to good "merchandising" drugstores, gift stores, speciality stores, and through
premium channels. Distinctive names were planned for this low-priced line; the
men's wristwatch would be called the "Sportsman" and the lady's the "Starlite". The
word "Elgin" would appear in the title along with the model name. This would
distinguish this lower-priced line from the medium priced line, which would only
use the word "Elgin", and the top line, which would always be identified as the
"Lord" or "Lady" Elgin. Packaging on all three lines was to be distinctively different
so that there would be little confusion on the part of the consumer as to which
quality of Elgin watch he was buying.

It was believed that this programme could hold the loyalty of the jewellery retailer
who, although he might be competing with the discount house on the medium
priced line or the drugstore on the low-priced line, could point out to his customer
that only he, the jeweller, could supply the finest in the Elgin line -- the "Lord" and
"Lady" Elgin's.

The marketing department made no recommendation that Elgin attempt enter the
"under $15" market where the great volume of non-jewelled or pin lever watches
was sold. It was believed that the lowest priced Elgin line would automatically take
some sales from this low-priced market, in that some customers might be induced
to upgrade their purchases on the strength of the fact that for a few dollars more
they could purchase a jewelled lever quality Elgin watch.

The "Lord" and "Lady" Elgin lines would continue to be marketed with a suggested
retail price that would provide the retailer with the conventional 50% margin. The
medium priced line would carry a suggested retail price that would give the
retailers a margin of 50 to 60%, depending on the specific model. In the low-priced
line, suggested retail prices would provide margins of 40 to 45%, somewhat less
than the common industry margin of 50%.

Elgin's sales force numbered about 50 men who sold direct to about 17,000 active
accounts. Each salesman had between 300 and 400 accounts. Salesmen called on
the typical accounts four times a year; they called more frequently on the larger
accounts, some as often as once a month. In instances where a small account was
inconveniently located, a salesman might not call on it more than once a year.

If the new marketing plan was adopted, salesmen would continue to sell direct to
retail jewellers and the mass distributors. The same salesmen would handle any
drug or other wholesalers in his territory. The new plan would expand the number
of Elgin accounts an estimated 15 to 20% or about 3,000 accounts. It was
estimated, however that this would expand the number of retail outlets from
17,000 to about 40,000. Initially some special sales personnel would probably have
to be added to open up new accounts, especially the drug and tobacco jobbers.
After these were started, regular salesmen would take over. The number of
salesmen would be increased as necessary and as experience showed the desirable
number of calls and time per call which the new accounts would require.

Long-term promotion plans called for most advertising to support the entire Elgin
line with such broad terms as "Elgin watch from $19.95". It was planned, however,
to spend part of each year's budget on each line separately, featuring new models
and new model features. If the low-priced “Sportsman” and “Starlite” models were
added to the line, a major share, perhaps 75%, of that year's budget would be
spent in introducing them. In general, however, the “Lord” and “Lady” Elgin lines

7
would receive the largest percentage of specific model advertising. As a general
policy, new models and other innovations would be introduced in the “Lord” and
“Lady” Elgin lines first. The franchised dealers who handled these lines would also
get special display materials.

***
Should Elgin adopt the new product line and distribution plan? Critically analyse
the plan.

Also, give your own recommendations (which may even run counter to Elgin’s
plan), considering your understanding of customer behaviour and other marketing
concepts.