INSTITUTE OF MANAGEMENT TECHNOLOGY HYDERABAD
CASE STUDY ON
“Classic Knitwear and Guardian: A Perfect Fit?”
Submitted by: Group 3
Submitted to – Dr. Rambalak Yadav
Date – October 2, 2018
Classic Knitwear, publicly traded company who has their headquarters in Miami, Florida, was established in 1995. It was the manufacturer and distributor of unbranded casual knit apparel. Classic earned a revenue of $550 million in 2005. Their revenue comprised of 75% or $413 million in wholesale and the remaining 25% came from mass retail channels. They tried tie in promotions and controlled labels to push the overall gross margin over 20% but sadly did not succeed. They then found out an interesting prospect in February 2006, knitwear that treated chemically to repel insects, as there were a lot of awareness of insect-borne illnesses. This resulted to negotiation of a partnership with Guardian, manufacturer of insect repellents. They claimed to have received a EPA registration that would provide 70 washings that would be near to 3 times the existing repellent apparel. Later classic along with Consumer.com conducted an online survey to analyze which groups would intend to buy for four shirt types with Guardian repellent with their prices. According to their analysis, out of 1000 e-mail invitations,185 answered a set of questions satisfactorily. Miller and Chong set the prices for these shirts to match for other brands and provided the trade 45%margin. Reason being that the percentages of customers that completed the survey stating that they would or probably buy Guardian apparel were not lower under than high price option than under the low-price option. Miller recommended that minimum of 3 sale reps and each rep would be given a separate geographical region. Along with that, print and television advertisements would target men of age 15 and above.
Classic have invested a lot in evaluating the guardian project. The task of the executives now had to decide whether they should launch the new product line.
Q1. Do you think that introducing a new product line is suitable for Classic Knitwear? Justify your decision by evaluating the product company fit.
Yes. Introducing the new product line with Guardian is beneficial for both the companies.
The new product aligns with Classics current operations and therefore, the resources can be utilized efficiently.
Despite being mostly used by hunters & fishermen, Guardian brand has a high level of awareness and is well known in the insect repellent industry.
The product has a huge market potential due to it innovation in the field and has also patented its insect-repellent clothing technology, this advantage can be leveraged by the production efficiency of Classic Knitwear, where it can achieve a sustainable competitive advantage over the others.
The company has a moderate cost advantage due to its high volume, low SKU (stock keeping unit) production; through its production hub in Dominican Republic. These Guardian shirts would be sold through different branded cardboard display units, these units will be featuring images of outdoor activities, but the addition of new product would also mean addition of 16 SKUs through 12 dozen shirts, which could lead to temporary inefficiency.
Earlier classic knitwear was only getting a gross margin of 18% (December 31, 2005); now due to the introduction of this new product with Guardian the company would be getting a gross margin of 38%~39%
Q2 Evaluate the product-market fit?
Product-market fit is pursuing state when you have a product in a good market that satisfies the market. Product Market Fit of the Classic Knitwear is $24.5 billion category of non-fashion casual knitwear. The branded side of non-fashion knitwear of classic knitwear market was dominated by three large manufacturers:
James Brands ($4.5 billion)
Flower Knit ($1.25 billion)
Greenville Corporation ($0.63 billion).
30-40% of gross margin was operated by these big brands. Classic competed with little known firms like B&B Active wear which held the market share of 23.6% and “Big Three” were also involved in this unbranded market segment.
James Brands $4.5 billion
Flower Knit $1.25 billion
Greenville Corporation $0.63 billion
The product- market fit of classic knitwear was good because there was an existing problem in the market which was worth solving.
Customers required protection against the rising insect-borne illness and many of them were dissatisfied with few prevention products available in the market. The category of this new line was virtually non-existent in the mass market as they were being sold in niche markets. People had requirements which are mentioned above and those they don’t have, they are looking the way to solve it. They also conducted the online survey on consumer.com where 185 respondents satisfactorily answered all the questions. They also possess the necessary marketing channels to sell the product.
Q3. Identify the product depth and consistency in case of new product line launched by Classic Knitwear-Guardian.
Product Depth is the number of variants/ sub-products offered in each within a product line. It can be the size, flavor, color or any other distinguishing characteristics.
According to the consumer research made by the company via consumer.com, following was the product depth offered by them:
Four shirt types: Short sleeve tee, Long sleeve tee, Polo-style sport shirts and heavy-weight fleece.
Four colors in each style (including white).
Two pricing groups for all four styles: Low and High.
Product Consistency shows degree of closeness between the product lines within the product mix. It can be measured in terms of production, usage and distribution of the products.
Initially Classic had sold more t-shirts than any other shirt style and now with all four styles of Guardian shirts they were expecting to be equally popular based on the target audience.
Guardian shirt were made available by the same distribution channel to the existing wholesale clients.Q4. What sales volume to break even on classic’s 2year launch period?
Year 1&2 Year 1
DISPLAYS ($100 x 10,000) $1,000,000 $5,00,000 $5,00,000
aDVERtising $1,200,000 $6,00,000 $6,00,000
(3 x 2years x$85,000) $510,000 $255,000 $255,000
licensing fee $100,000 $100,000 –
TOTAL $2,810,000 $1,455,000 $1,355,000
From exhibit 4:
Mfg. selling price(MSP) $17.87 $17.87
COGS $10.82 $10.82
5% of MSP $0.89 $0.89
(20% x $17.87 X 10%) $0.36 $0.36
5% x $17.87 for next year – $0.89
$ $5.80 $4.91
% 32.46% 27.48%
Year one breakeven
1,455,000/$5.80 = 250,862 units
Year two breakeven
1,355,000/$4.91 = 275,967 units
$5.80 + $4.91 = $10.71/2 = $5.36
$2,810,000/$5.36 = 524,253 units
Combined year one and two breakeven
250,862+275,967 = 526,829 units
Q5. What problem do you see in proposed Guardian marketing program?
There are various problems in the proposed Guardian Marketing program:
Classic, not being a well-known brand in the market might be overshadowed by Guardian’s brand and therefore would not be able to create its own brand image and loyalty in the market.
Agreement between Classic and Guardian would lead to some immediate financial implications like incurring substantial amount of liabilities (royalty), additional sales and advertisement cost.
The survey conducted with Consumer.com was not exhaustive as it was limited to 1000 respondents only.
Initially, Classic decided to distribute the product through major sporting goods and apparel chains, general merchandizing chains and apparel chains which would support in establishing the brand in its initial phase. However, selling via discount stores, retail and sports outlets tighter is inappropriate. The prices might differ extensively across all outlets.
Highly risky point owing to the uncertainty prevailing in the market.
According to the agreement, if Classic fails to meet the series of steadily rising targets, the agreement would be null and void.
Only Guardian logo being used in the product can be a major disadvantage to Classic, in case of any conflict owing to the agreement between the companies in future.
Short-term benefit to Classic as the expected marketing investment has been reduced to $3 million from the initial expected investment of $8-10 million. Promotional expenses incurred by Classic, would increase the brand value of Guardian as well. Hence, Guardian should also bear some of the promotional expenses.
The termination clause would lead to an investment loss to Classic, if it is unable to meet the expectations of Guardian.