Now let us evaluate the four alternatives for next year’s application of various marketing tools as recommended by JB executives.
Alternative 1: Continue present course.
This will be difficult. As costs increase, we feel we have no room for price increases, and gallonage sales are expected to remain constant.
Alternative 2: Increase advertising by $350,000
Additional sales required at 35% contribution margin: $350,000 / 0.35 = $1,000,000
This represents an 8.33% increase in sales ($1 mil/$12 mil), a difficult hurdle.
Alternative 3: Cut prices by 20%
Where cost of goods sold is now $0.65 per $1 of sales, under this price strategy it will be $0.65 per $0.8 of sales. The new contribution margin will be: $0.15 / $0.80 = 18.75%.
Last year’s margin $ were $12 mil * 0.35 = $4,200,000.
To generate the same margin $ at the lower price would require sales of $4.2 mil / 0.1875 = $22,400,000, or a 187% increase on last year’s base sales.
Alternative 4: Add an additional sales representative at $60,000.
At the current margin, the amount of additional sales to pay for the new person would be
$60,000 / 0.35 = $172,000, or an additional 1.43% of last year’s sales.
Look at distribution outlet penetration figures for the segments:
We have 200 outlets of the 1,000 in our market area, or 20%.
In DFW we have (40% of JB dealers) 80 outlets of the 450, or about 18%.
In the rural areas, we have 120 outlets of the 550, or 22%.
Look at the sales potential for each new account in the market area:
Sales last year to professionals (see table, above) were $17.6 mil.
Over 600 painters, average sales per account were $29,333.
The number of new accounts required to generate $172,000+ in sales = 6
Using a weighted decision model (10-point scale):
Valuing the alternatives on the feasibility of accomplishing the requirements (weighted 40%) and an expectation of the sales increase (60%), we determine that adding a sales representative is the recommended strategy.
Attachment 1: Situation Analysis
I. Customer Environmental Analysis
Architectural coatings consist of general-purpose paints, varnishes and lacquers used on residential, commercial, and institutional structures, sold through wholesalers, retailers, and purchased by do-it-yourself (DIY) consumers, painting contractors, and professional painters.
OEM coatings are formulated to industrial buyer specifications and generally used for durable goods such as transportation equipment and furniture. Special-purpose coatings are formulated for special industrial and commercial applications.
Demand for AC and sundries 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. Newer products reduce the amount of paint needed per application and the necessary frequency of repainting. Demand is expected to increase for sundries due to increasing DIY painting by household consumers.
Buyers of AC and sundries go to specialty paint stores (SP, 36% of sales), lumberyards and hardware stores (LH, combined, 14%), as well as mass merchandisers (MM) and home improvement centers (HIC).
SP and LH outlets compete effectively with MM and HIC, particularly in non-metropolitan areas. Different buying patterns are observed between DIY and professional painters: DIY buy largely from HIC (39% in 1995) and MM (26%); professionals buy mostly from SP (42%) and lumberyards (16%).
Of AC dollar sales, 50% go to DIY, 25% to professional painters, with the remaining 25% going to government, export, and contractor sales. Almost 60% of AC sales are for interior paints, 38% for exterior paint, and the remaining 2% for lacquer and other applications.
Almost 25% of households purchase interior house paint in any one year. The percentage of households buying exterior paint in any year is considerably less. The average paint purchase is $74, average sundry purchase is $12.
Research indicates a four step decision process for DIY purchases:
- Decide on project/product
- Gather information
- Decide on store
- Decide on product
JB President Alex Barrett feels that paint has become a commodity, with DIY focusing on price; added quality is not visible initially. Still, he recognizes that a significant number of people desire service such as information, and color matching. Professional painters are often willing to pay more because their reputation is on the line, and quality coatings require less maintenance. They also look for credit terms, earlier opening hours, and knowledgeable store employees.
JB markets paint and sundries to over 50 counties in Texas, Oklahoma New Mexico and Louisiana from its plant and headquarters in Dallas.
Competition for retail customers has accelerated in recent years. Outlets competing in the JB market area number about 1,000, with 450 of them in the 11-county Dallas-Fort Worth (DFW) metro area. Some consolidation has occurred, however, since this is down from 1990 when there were 1,200 and 600 respectively. There are 400 or so professional painting firms in DFW and 200 in the rest of JB territory.
The typical lumberyard or hardware store gets 10% of its volume from paint ($65,000), and the typical paint store has annual sales of $400,000 with three brands.
MMs control about 50% of the DIY paint market in DFW, largely due to attractive pricing.
Excluding contractor sales, in JB’s market area in 1997, AC and sundry sales were $80 million, 60% in DFW. DIY accounted for 70% in DFW, and 90% elsewhere.
II. Competitive Analysis
The AC segment faces competition from alternative materials, such as siding products, wall coverings, and wooden paneling. Compliance with recent EPA regulations has further eroded historically low profit margins in the paint industry.
Slow sales growth and declining margins have fueled merger and acquisition (M&A) activity in the paint industry since 1990. The number of paint companies is down to about 600, and declining 2 to 3% per year.
Major AC producers include Sherwin-Williams, Benjamin Moore, Glidden, and PPG.
Regional paint manufacturers, such as Jones-Blair, have fared well against national ones by knowing their market better.
The majors still account for almost 60% of AC sales under their own and private labels such as Sears, Wal-Mart, and Home Depot; hardware store groups such as True Value and Ace also market their own brands. Private label sales are about 50% of all AC sales.
The major change in competitive behavior has occurred among paint companies that sell to contractors serving the home construction industry with aggressive pricing. Barrett says they have not been able to get any retail outlets yet, but does not rule this out in the future. He is glad that they are not yet pursuing the professional painter or DIY segments yet.
A key success factor for paint manufacturers, with competition increasing, is to get and keep widespread distribution.
JB distributes its products through 200 independent paint stores, lumber yards, and hardware outlets. DFW contains 40% of these outlets. Sales are distributed evenly between DFW and other accounts.
Retail outlets outside DFW that buy over $50,000 a year from JB carry only the JB product line. Except for the 14 DFW outlets that purchase over that level, the remaining DFW outlets carry two or three lines, with JB being their premium-priced line. Stable gallonage sales figures represent decreases in DFW gallonage offset by increases in the rest of the territory.
JB employs eight sales representatives, paid salary and a 1% commission. It spends 3% of net sales on advertising and promotion; 55% is allocated to cooperative advertising with retailers.
Barrett concedes that JB is the highest priced paint in their service area.
III. Strategic Analysis
Strengths: Well-known name, premium paint image, established distribution network, good relations between customers and sales force.
Weaknesses: In a higher-priced range that is becoming increasingly hard to defend, limited distribution.
Opportunities: Added sales through increased advertising or price cuts, widened distribution through increase in sales force.
Threats: Weakening margins, fierce competition from mass merchandisers and home centers, paint companies that now serve only contractors may develop retail outlets.
Attachment 2: Press Release
PPI Completes Purchase of Jones-Blair Service Centers May 2002
Professional Paint, Inc. (PPI) and Jones-Blair announced the completion of PPI’s acquisition of Jones-Blair’s 27 service centers and related dealer distribution through a newly formed, wholly owned subsidiary, Stellar Kwal Paint. The newly acquired service centers, located in Texas, Alabama, Georgia, and Tennessee will be operated under the Stellar Kwal Paint banner. PPI’s five Stellar Paint service centers, in Dallas/Ft. Worth, will be combined with the Jones-Blair service centers. Stellar Kwal will continue to sell Jones-Blair branded products.
This sale by Jones-Blair, headquartered in Dallas, Texas, is a result of a strategic decision to exit its architectural paint business which sells to paint contractors and consumers, and to focus on its two core businesses – Neogard and Industrial Coatings. The Neogard brand has a long history of excellence in the waterproofing, roofing, wall coatings, and floor coatings markets. Jones-Blair’s Industrial Products have an outstanding reputation dating back to their introduction 74 years ago.
PPI, headquartered in Denver, Colorado, is the parent company of six other regional paint companies including: Frazee Paint (San Diego, CA); General Paint (Vancouver, BC); Hanley Paint (El Paso, TX); Kwal Paint (Denver, CO); Parker Paint (Tacoma, WA); and Sophir-Morris Paint (Omaha, NE). With this transaction, PPI now has over 275 service centers serving professional paint contractors and consumers throughout the western United States and Canada.
The Jones-Blair Service Center transaction is consistent with PPI management’s strategy to acquire paint companies that provide access to new growth markets with established regional brands.
For additional Information contact:
Kent Child, CEO – (720) 873-3061 Professional Paint, Inc.
Jerry Jones – President/CEO - (214) 353-1600
Jones-Blair Company
