I need answers on the following on FOXY ORIGINALS - For your case write up, please consider the following: 1) Discuss the pros & cons of each sales channel 2) compute contribution margin for each channel 3) compute break even point (in terms of number of orders and dollars) for each distribution channel (HINT - Fixed costs are all trade show expenses. Use depreciation for the booth as a fixed cost. The booth cost should be considered an investment not a fixed cost) 4) Calculate the number of orders at a target profit of $100,000 5) Calculate the profitability for both the low and high order estimates

For the exclusive use of J. Jehu-appiah, 2016. 907B04 FOXY ORIGINALS -- EXPANSION INTO THE U.S. MARKET Nina Gupta wrote this case under the supervision of Elizabeth M.A. Grasby solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright 2007, Richard Ivey School of Business Foundation Version: 2014-04-28 In June 2004, Jen Kluger and Suzie Orol received a phone call from Sarah Gibson, one of their retail customers, in Winnipeg, Manitoba. Gibson called with a complaint about how many of her competitors now carried Foxy Originals jewelry. Gibson's store had been the exclusive carrier of Foxy Originals jewelry in the Winnipeg area for a number of years. With the growing popularity of its designs, many stores in the area now carried the Foxy Originals line. Kluger and Orol, owners and partners of Foxy Originals, were worried. If they continued to saturate the Canadian market, they would be faced with similar concerns from customers across Canada. The partners realized that it was time to grow the business outside Canada, and they were excited about the possibility of selling their jewelry in the United States. Their goal was to enter the U.S. market by January 2005, but they would first have to decide on the best method of distribution -- attending trade shows or hiring sales representatives. COMPANY BACKGROUND History 1 Jen Kluger and Suzie Orol believed that life should be fun and full of excitement, and they founded Foxy Originals based on these beliefs. These two young jewelry designers met while attending The University of Western Ontario, and they set out with a vision to make high style fashion jewelry accessible to young women. Both partners had experience in the jewelry industry. Orol's parents owned a metal manufacturing company that focused on making jewelry and medals for companies and community groups. Orol was involved in the family business from a young age. Kluger had been designing and selling her own line of necklaces since she was in Grade 11. Kluger and Orol started their business, Foxy Originals (Foxy), in 1998. They sold a modest line of jewelry to friends and acquaintances on campus while attending university. In the summers before graduation, the partners took Foxy on the road to various outdoor festivals and summer concerts. The results were very positive. Upon graduation, with business degrees in their back pockets, Kluger and Orol left corporate job 1 Foxy Originals Catalogue, 2007. This document is authorized for use only by Jilda Jehu-appiah in Managerial Accounting taught by Brandis Phillips, North Carolina A & T State University from August 2016 to December 2016. For the exclusive use of J. Jehu-appiah, 2016. Page 2 9B07B004 offers behind to work full time at Foxy. The partners spent their time designing new product lines and promoting Foxy in new markets. As the company grew and the jewelry that sold at festivals and summer concerts became more popular, Kluger and Orol began selling their jewelry to retail stores. Each retail account took a significant amount of time to develop, with the partners personally contacting and meeting with each store's product buyer. The partners were very successful at selling to retailers due to their high energy, enthusiasm and knowledge of the product. As a result, in the first three years of operations, the company's sales had doubled every year. Sales were continuing to grow at a rapid pace. Kluger and Orol were always very enthusiastic about their designs, and Canadian retailers began placing orders for Foxy jewelry after meeting these dynamic founders and learning about the products. It wasn't long before Foxy jewelry could be found in 250 boutiques across Canada. Kluger and Orol personally sold (i.e., they had no sales representatives) their product lines to every retailer in Canada and managed all operations. Kluger and Orol described Foxy as a company that managed to stay two steps ahead of the latest trends: In doing so, our collections remain fresh, fun and funky. We realize that in this day and age, being hip and trendy comes at a high cost; not so with Foxy. We are able to provide a selection of necklaces, earrings, bracelets and rings that are truly fashion-forward, at a reasonable price. Target Market Foxy jewelry offered high style and high quality at an affordable price point and targeted women between the ages of 18 to 30 who were style- and price-conscious. The jewelry was designed for three groups of women: The Reversible Enamels Ladies, The Bridge Ladies and The Chain-lovin' Ladies. Kluger and Orol explained each customer group: The Reversible Enamels Ladies: Reversible necklace enthusiasts are usually the very dedicated Foxy customers who have been following our company since Day 1. They are slightly more conservative with their style and use Foxy jewelry to add a little something special to their outfits. They love the idea that they are getting two necklaces for the price of one. (See Exhibit 1 for sample product preferences for this group.) The Bridge Ladies: These customers consist of young, suit-wearing professionals. They want to add a little accent to their suits, but they need to be careful how much they add. These customers go for the leather necklaces with the bigger pendants. (See Exhibit 2 for sample product preferences for this group.) The Chain-lovin' Ladies: These customers are more fashion savvy and trendy. They read the fashion magazines and seek out \"that look.\" These ladies collect our big earrings and long necklaces. They layer the Foxy necklaces and try the newest collections as soon as they are in the stores. (See Exhibit 3 for sample product preferences for this group.) This document is authorized for use only by Jilda Jehu-appiah in Managerial Accounting taught by Brandis Phillips, North Carolina A & T State University from August 2016 to December 2016. For the exclusive use of J. Jehu-appiah, 2016. Page 3 9B07B004 Operations 2 Foxy jewelry was designed and produced in Toronto, Canada. Kluger and Orol designed all the jewelry, releasing two new collections every year. A collection or product line consisted of a number of different styles of necklaces, earrings and rings, where all styles were associated with a central theme such as \"Royal Safari.\" The designs were assembled by a small production team of professional crafts people. All Foxy jewelry was made from pewter and coated in sterling silver, matte gold or bronze with a matte finish. Each item was then stamped with the Foxy signature to authenticate the designs (see Exhibit 4 for the Foxy signature tag). From this common starting point, the pieces were transformed into original works through the integration of enamel, stones, leather and ultrasuede. THE U.S. MARKET 3 Kluger and Orol had established a strong Foxy presence in the Canadian market, and they were now ready to expand into the United States. Financially, Foxy was healthy so any distribution costs related to the U.S. expansion could be financed from internal operations (i.e., no funding was needed). The key fashion hubs in the United States were New York, Los Angeles, Chicago and Dallas. Kluger and Orol did not want Foxy to be available on every street corner in every city. Instead, they preferred selling to reputable stores that suited the brand. Kluger and Orol decided to charge the same price for their products in the United States as they did in Canada (i.e., a necklace sold for Cdn$34 and, in the United States would sell for US$34). The U.S. jewelry market was more than 10 times larger than the Canadian jewelry market, offering a much greater opportunity for product exposure. Based on the success they had achieved in Canada, Kluger and Orol believed in their product, but they worried about how responsive the U.S. market would be to their jewelry designs. The partners believed that Canadians supported Canadian businesses and were brand loyal to companies that manufactured locally; however, they suspected that Americans preferred the latest trends regardless of the product's origin. Classic jewelry (currently 50 per cent of Foxy merchandise in Canada) was also not as popular in the United States. Kluger and Orol would need to stay on top of Foxy's fashion-forward designs to compete effectively. U.S. Trade Shows Trade shows were one-stop marketplaces for retailers to source products from wholesalers and importers. They were positioned for registered personnel only, usually consisting of buyers from fashion boutiques, accessories, jewelry, gift, fashion chain, department and other specialty stores. These exhibitions were not open to the general public. U.S. trade shows were very large, often with over 75,000 buyers in attendance. Kluger and Orol planned to set up a booth at several trade shows in order to showcase Foxy jewelry to prospective buyers. Buyers would select what merchandise they would like to carry in their stores and would then place their orders with the exhibitor. The partners had plans to attend trade shows devoted to women's fashion accessories, surf apparel and giftware. There were 10 potential trade shows for 2005 where Foxy could showcase its products. Registration for all shows needed to be complete by November 2004, at an average cost of $3,000 a show. The average trade 2 3 Foxy Originals website, www.foxyoriginals.com/about, March 13, 2007. All figures are in Canadian dollars. This document is authorized for use only by Jilda Jehu-appiah in Managerial Accounting taught by Brandis Phillips, North Carolina A & T State University from August 2016 to December 2016. For the exclusive use of J. Jehu-appiah, 2016. Page 4 9B07B004 show lasted three days, wherein Kluger and Orol would require five days of preparation and both would work nine hours a day at the trade show. Kluger and Orol were excited about attending the shows to learn about the U.S. jewelry market and to get ideas for new product innovations. Trade shows were a great way for the partners to personally sell their merchandise and to network with key people in the industry. The partners also loved to travel, and they looked forward to visiting the big U.S. fashion hubs. Because of the diverse attendance at these shows, it was difficult for the partners to predict at which retail stores their merchandise would be sold. Ideally, they preferred that all major fashion-forward stores within a geographic area would support Foxy's merchandise; however, sales would likely be scattered across locations that were diverse in geography and brand image. One of the principal selling factors at trade shows was the exhibitors' booth layout -- the more exciting and flashy the booth, the greater the number of visitors. The partners researched a number of booths and settled on one that would cost $4,000 and could be used for approximately 30 trade shows (see Exhibit 5 for booth display). The booth would have to be shipped to each trade show at an average cost of $1,500 a show. Plane tickets and related travel costs would average $2,000 per show, and product samples and promotional materials would cost $2,800 per show. Kluger and Orol had friends in many U.S. cities, so they planned to stay overnight with them when visiting the shows. Expected Sales The partners had estimated that an average retailer order would consist of 25 necklaces and 12 pairs of earrings. Retailers would purchase necklaces for $17 and earrings for $12 from Foxy, which they would then sell to their customers for $34 and $24 respectively. Shipping terms were FOB shipping point and cost an average of $15 an order. All necklaces consisted of a chain, a pendant, a label, a clasp, and labor fees for a total cost of $8.05 for each necklace. A pair of earrings cost approximately $5.50 to manufacture. The partners expected anywhere from 20 to 45 orders at each trade show. Historically, 50 per cent of retail buyers at the trade shows would reorder product approximately two times a year. Sales Representatives An alternative method of distribution would be to develop a sales force in the key fashion hubs in the United States. Sales representatives would carry 10 to 15 different brands, usually within the same category of products (i.e., accessories), and would sell to retailers in designated geographic zones. Kluger and Orol wanted to hire people who would be loyal and who could represent the appropriate Foxy brand attributes. Kluger and Orol noted: \"The most important characteristics in sales representatives are that they believe in your product, and they are willing to get on the road or travel to show it well.\" Kluger and Orol knew having a sales force would be a much faster way for Foxy to enter the market because of the sales representatives' contacts in the industry, their relationships with existing retailers and the minimum amount of training they would require. They also knew it could be difficult to find the right people with the right characteristics to make this alternative work. This document is authorized for use only by Jilda Jehu-appiah in Managerial Accounting taught by Brandis Phillips, North Carolina A & T State University from August 2016 to December 2016. For the exclusive use of J. Jehu-appiah, 2016. Page 5 9B07B004 Sales representatives would be compensated with a 15 per cent commission on all sales. 4 They would also receive $200 a month towards rental space in their jewelry showrooms 5 (see Exhibit 6 for showroom display), two sets of sample boards 6 a year for a total cost of $2,900 and catalogues and promotional materials averaging $600 a year. Foxy would have to hire a part-time bookkeeper to pay the sales representatives because calculating sales commissions would be time-consuming and complicated. The bookkeeper's fee would be $40 an hour, and this person would be required for 48 hours a year. Travel expenses, such as gas and mileage were not covered by Foxy. Production costs and retailer order size were the same for this option as for the trade show option. The average sales representative would sell between 10 to 15 orders each month. The 10 to 15 orders included both new account sales and reorders from existing customers. If this option was chosen, Kluger and Orol planned to hire four sales representatives, one in each of the major cities of New York, Los Angeles, Chicago and Dallas. Trade Shows and Sales Representatives Ideally, Foxy preferred to enter the U.S. market by attending trade shows and hiring a sales force. The problem with this alternative was territory ownership. For example, if Kluger and Orol attended a trade show in New York, and had hired a New York based sales representative, it was an industry norm that the sales representative would expect a 15 per cent commission from sales made at the New York trade show. Kluger and Orol investigated structuring the sales representatives' commission package based on sales they made personally rather than on all sales made within their geographic location. Sales representatives were unhappy with this alternative because not only would competition be created between sales representatives, but also between the sales representatives and Foxy. For example, sales representatives worked hard to establish contracts, and many times, contracts were signed with one store, and as a result, other stores would see the product and would want to carry it themselves. Sales representatives believed they should be compensated for these spillover sales, and they were concerned that the new retail stores could order directly from Foxy. To combat the issue of internal competition, the partners thought about attending trade shows in the major cities and having their sales force work in the smaller cities; however, smaller cities were not as fashionforward, and would not help to establish the Foxy brand presence in the United States, the way sales representatives could in major cities. In the short term, Kluger and Orol decided to focus on just one of the distribution channels in order to limit the complexities of the U.S. expansion. If the partners decided to pursue both trade shows and sales representatives, it would be a longer-term strategy. CONCLUSION Kluger and Orol were excited about the U.S. opportunities, and they wanted to ensure they were entering the market with a solid strategy. The partners had built the business on the principles of having fun, 4 A commission rate of 15 per cent of the wholesale price was the industry standard for sales representatives in the United States. 5 Sales representatives would have showrooms either at home or at a central location where the products would be displayed for prospective buyers. 6 Sample boards were used to display merchandise and were transportable. They cost $1,450 each. This document is authorized for use only by Jilda Jehu-appiah in Managerial Accounting taught by Brandis Phillips, North Carolina A & T State University from August 2016 to December 2016. For the exclusive use of J. Jehu-appiah, 2016. Page 6 9B07B004 gaining exposure for new product lines and staying ahead of fashion trends. To date, they had been highly financially successful in doing just this. Knowing the additional workload that the U.S. expansion would create, they hoped their profit would grow by at least $100,000. Both options appeared promising but not without risks. Kluger and Orol had to make a decision quickly to prepare for a January 2005 launch. This document is authorized for use only by Jilda Jehu-appiah in Managerial Accounting taught by Brandis Phillips, North Carolina A & T State University from August 2016 to December 2016. For the exclusive use of J. Jehu-appiah, 2016. Page 7 9B07B004 Exhibit 1 THE REVERSIBLE ENAMEL LADIES Source: Foxy Originals Catalogue 2007. Exhibit 2 THE BRIDGE LADIES Source: Foxy Originals Catalogue 2007. This document is authorized for use only by Jilda Jehu-appiah in Managerial Accounting taught by Brandis Phillips, North Carolina A & T State University from August 2016 to December 2016. For the exclusive use of J. Jehu-appiah, 2016. Page 8 9B07B004 Exhibit 3 THE CHAIN-LOVIN' LADIES Source: Foxy Originals Catalogue 2007. Exhibit 4 THE FOXY SIGNATURE TAG Source: Company files. This document is authorized for use only by Jilda Jehu-appiah in Managerial Accounting taught by Brandis Phillips, North Carolina A & T State University from August 2016 to December 2016. For the exclusive use of J. Jehu-appiah, 2016. Page 9 9B07B004 Exhibit 5 TRADE SHOW BOOTH Source: Company files. Exhibit 6 SHOWROOM DISPLAY Source: Company files. This document is authorized for use only by Jilda Jehu-appiah in Managerial Accounting taught by Brandis Phillips, North Carolina A & T State University from August 2016 to December 2016