CASE 11 MAYU LLC INTRODUCTION After graduating from college with a BS in business administration, Kate Robertson was not seeking a traditional office job. Instead, she was looking for an adventure, one that would fulfill her never-ending wanderlust and allow her to unleash her entrepreneurial spirit. She joined the Peace Corps as a Small Business Development Volunteer and was sent to a rural community high in the Andes Mountains of Peru. During the 2 years that Kate lived in Peru, she became enamored with the country. After months of teary-eyed goodbyes, she returned to Chicago in early 2010 with an idea. Kate would create Mayu LLC, a company that would sell hand-knit fashion accessories made with pure Peruvian alpaca fiber by the artisans with whom Kate worked in the Peace Corps. Kate believed that by establishing this small social enterprise, she could remain connected to her Peace Corps community. The company would not only provide additional income to Peruvian women but also fulfill a market need for knitwear that was both one-of-a-kind and stylish. To test the waters, Kate returned from the Peace Corps with two giant rice sacks full of alpaca shawls, scarves, and blankets. Seeing the positive reactions of friends and family, Kate decided that starting Mayu was indeed an excellent idea. As the demand was there and the weather was cold, she dove in head first without creating a formal business plan. One year later, as Mayu was growing, Kate was faced with a number of challenges and realized she should answer a couple of questions before moving ahead. 1. Assuming demand continued to grow, how would she scale operations in Peru? She had already accepted a full-time job in Chicago and would be working on Mayu on a part-time basis. Page 523 2. How would she take Mayu from an in-person, event-based company to a successful online store if people could not see and feel the alpaca fiber? She needed an online marketing strategy. 3. Admitting that finance was not her strong suit, Kate worried that the pro forma financial data she had calculated were missing something. She was looking for feedback on what she had done. 4. What fraction of equity would need to be given up assuming outside capital would be sought for expansion? 5. Should she partner with several individuals who had asked her to help them also import knitwear from Peru? She wanted to protect her "trade secret"-the artisans who she had worked hard to train. COMPANY AND PRODUCT Mayu, which means river in Quechua, the native language of Mayu's Peruvian artisans, imports and sells alpaca accessories including hand-knit scarves, hats, shawls, wraps, gloves, and blankets. Mayu's pro bono attorney incorporated the company as an LLC and Mayu is now a registered trademark. Kate developed the following mission for the company: Mayu strives to be the industry leader in the sale of high-quality, one-of-a-kind, ultra-classic alpaca accessories. Mayu offers social value by increasing the livelihood and contributing to the personal and professional development of their female producers in Peru. At the same time, Mayu transparently and honestly educates American consumers about the origins of Mayu's ethical fashion accessories. Superb customer service, mutual- respect, and triple bottom line initiatives (people, planet, profit) are the elements guiding Mayu's business activities. After many shopping excursions in Lima's markets and Internet research on alpaca accessories currently offered in the market, Kate defined the unique selling propositions of Mayu's products. The exclusive, stylish designs were handmade with ecofriendly alpaca fiber, were fairly traded (Mayu is a member of the Fair Trade Federation), and were of the highest quality, lasting a lifetime. This product offering was different from the mass-produced, machine-made accessories found in brick-and-mortar and Internet-based shops in Peru and the United States. Kate also noticed that most of these products were not actually knit with pure alpaca yarn. Instead, they were typically a combination of alpaca and other wools of lesser quality. Another uniqueness was that Mayu's products used purely Peruvian materials and labor and had an interesting story behind them. The story reflected Kate's Peace Corps experience and direct relationship with the artisans. INDUSTRY AND CURRENT TRENDS Clothing and Accessories Kate's research indicated that the demand for clothing and accessories was driven by personal income and fashion trends and that women purchased approximately 64 items of clothing per year. According to 2010 IBISWorld Clothing & Accessories stores industry forecasts, the industry was valued at $7.0 billion with profits of $772.8 million and of all the accessory products sold, 18 percent involved neckwear, scarves, and hats. The accessories market had seen annual growth of 5.1 percent over the previous 5 years and was expected to reach 7 percent annual growth from 2010 to 2015. The market size of the women's outerwear and clothing industry had consistent growth between 2003 and 2008. Although the recent economic downturn had impacted the accessories market as the consumer sentiments index fell by 4.1 percent during the preceding years, the index was expected to rise by 13.6 percent in 2010. Per capita disposable income in the United States was also on the rise from its lowest values in 2008. As a result, Kate thought that her target market would not be severely impacted. Studies showed that even in times of economic downturn, consumers shifted buying behavior to more classic, forever pieces, which is precisely what Mayu offered. E-Commerce The e-commerce industry was growing steadily, having annual growth of 6.6 percent from 2005 to 2010 and annual revenues over $93.8 billion. Fortunately, online sales were expected to continue growing at an even faster rate of 10.5 percent from 2010 to 2015. Looking at these statistics, it was clear that online retailing was a growing medium for the purchase of specialty items such as those knit by Mayu's artisans in Peru. Of all online businesses in 2010, 15 percent were clothing and accessories retailers. Due to increased connectivity, positive perceptions of online security, and ease of conducting transactions, online companies such as Mayu could be expected to benefit from this growth. Page 524 Trends Kate knew that growing awareness of fair trade and ethical fashion and the recent signs of a "green revolution" would be beneficial to Mayu. There was no doubt that consumers were becoming more responsible shoppers, and Mayu offered a solution to the market's increasing demand for products that offered social value. With that, the consumer market was developing a need for transparency and traceability throughout supply chains, especially for products from the developing world. The implementation of corporate social responsibility programs and establishment of not-for-profit advocacy organizations was proof that the 21st-century business environment was changing, and companies would be unable to survive without considering the consequences of their behaviors. The Mayu website contained information about the Mayu product life cycle, and Kate intended to further expand the site to allow for even greater transparency. According to surveys administered by the Fair Trade Federation, the trend toward fair trade shopping in the United Sates was growing quickly. By 2010, 71.4 percent of American consumers knew about fair trade and 88 percent considered themselves conscious consumers. In 2009, fair trade organizations averaged annual sales of $517,384, compared to $499,892 in 2006, and 72.4 percent of these organizations were for-profit entities, showing that social, mission-driven businesses were valid substitutes for the traditional "charity-based" not-for-profits. Established fair trade companies were growing with increasing numbers of employees and volunteers and increasing impact in the countries where the production of their goods took place. As for consumer trends, A.T. Kearney indicated that in 2009, the market for sustainable products was estimated at $118 billion, while, according to the Boston Consulting Group, firms with a "true commitment to sustainability" outperformed industry peers, especially in the retail sector. These trends reiterate American society's desire to create positive change through purchasing habits. 2009 Cone Consumer Environmental Survey, which was conducted by Opinion Research Corporation, indicated that 34 percent of American consumers were likely to buy environmentally responsible products and 25 percent more Americans had greater interest in the environment today than they did one year ago. As a result, there was an increased expectation for companies to produce and sell environmentally conscious products. Seventy percent of Americans indicated that they were paying attention to what companies were doing with regard to the environment. This interest indicates that the "green revolution" is more than just a passing trend. A 2008 study by Conscious Innovation claimed that products and services that help customers live a sustainable life and fulfill their "help me to be a conscious consumer" desire would also thrive. Consumer behaviors for purchasing clothing and gifts have changed from previous years and are expected to continue being influenced by conscious choices. Competition A broad range of competition existed in the industry including both online and brick-and-mortar shops selling accessories, and while some items were handmade, most were machine made. All were available in a variety of raw materials, including alpaca, cashmere, wool, and cotton. Kate defined direct competition as online retail stores selling alpaca accessories and clothing. There were a number of e- commerce sites selling alpaca accessories but none of them sold products as unique as Mayu's. The following websites were good examples of the competition: . Peruvian Connection- http://www.peruvianconnection.com/ Alpaca Direct www.alpacadirect.com Purely Alpaca www.purelyalpaca.com Marketing Target Market Based on her research, Kate planned to target educated women between the ages of 32 and 62, who make up 67 percent of the accessories market. This range allowed Mayu to target a majority of women aged 15-65, who represent 90 percent of total consumer spending. Kate expected that this market would be more socially aware and understanding of global issues and would be consumers that were more responsible. It was shown that luxury shoppers, defined as consumers who earn over $100,000 per year, are more educated and demanding so workmanship, longevity, and artistry play a large role in their purchasing behaviors. Because Mayu is striving to become an Internet business, it has access to the entire world. In order to narrow its online marketing, Kate thought she should focus on three Standard Metropolitan Statistical Areas (SMSAs)-Chicago, New York City, and San Francisco. The reasons for choosing these particular cities are that they have appropriate weather and large populations of educated and affluent female consumers. Chicago was a natural starting point, as it is Mayu's home base with existing relationships. San Francisco has a high concentration of socially conscious female consumers and New York City's inhabitants are fashion forward and the country's trendsetters. Price Mayu's pricing structure is cost-based pricing. Kate used the traditional industry markup of between 200 and 250 percent to calculate both wholesale and retail prices. The base price that Mayu pays its artisans in Peru covers labor, raw materials, and transportation in Peru. Once the products arrive in the United States, Kate added on international shipping from Peru and customs duties to generate the total cost of each item (cost of goods sold). In some instances, however, Mayu receives slightly lower or slightly higher margins than the industry standard, depending on the product and what she thought the market could pay for each item. Distribution Distribution will be discussed in terms of in-personal events, online, and wholesale. In-Person Events Until now, Mayu's greatest source of revenue had been from high-end, in-person weekend holiday events. Mayu had been invited to at least 10 such events and sales ranged from $0 to $2,500 per event. Participation fees were usually 10 percent of revenues. Because Kate worked full time, one of her family members or her future part-time employee would staff weekday events in the fall and spring. Mayu would make itself available for private "shopping parties" throughout the Chicago area. During a party like this, the host would invite friends over for an evening of Mayu shopping. To entice hosts to have a party, items would be offered at a 10 percent discount from online prices and hosts would be compensated with a generous Mayu gift card. Online Although the majority of Mayu's sales took place during holiday shopping events, Kate's goal was to increase online sales and decrease her reliance on labor-intensive and sometimes "hit-or-miss" events. She knew it would be a challenge to sell high-end products through a website, especially without a well-established brand. The beauty of the alpaca was United States Kate was responsible for operations in the United States and overseeing production in Peru. From her home, she managed the website, online content, social media, marketing, and customer service aspects of Mayu, and also attended sales events. She created an internship program and began employing students on an unpaid, 10-15 hours per week basis. Although time consuming, Kate felt that the use of interns could be a mutually beneficial experience and that "two heads were better than one." Once products arrived from Peru, Kate's mother was responsible for counting, ironing, and tagging inventory and outbound logistics such as shipping and handling. Kate knew that her mother would continue doing this forever so she planned to hire seasonal help for 3 months (November through January). The part-time help would be paid about $1,200 per month. Team Page 529 Although Kate was receiving advice from a number of individuals, she did not have a formal advisory board. Her father provided her with legal advice, her uncle was a CPA, and her web designer guided her on all aspects of managing a website. Kate wanted to widen her support network and started thinking about contracting a product designer who excelled in knitwear, a professional photographer, and a clothing model as well as a team that could optimize her website. She knew that it was not in her budget to hire anyone on a full-time basis so she decided she could hire the necessary help on a per-project basis. Kate is a good networker and excels in finding high-quality help at minimum prices. Mayu's Short-Term Plan To take Mayu to the next level, Kate plans to hire a fashion designer and is already in contact with a woman who specializes in knitwear. The design fees per collection will be about $5,000 and include arrangements with a professional photographer, model, and hair and makeup team. The designer will take care of the creative vision behind Mayu. Kate will travel to Peru periodically to work with the artisans to create new collections. Each trip to Peru will cost about