Jean Plourdes dream was becoming his nightmare. It was March 24^th, the first anniversary of the opening of his bicycle shop. His first year sales performance did not meet his expectations. He sold a total of 30 bikes, and of those one was returned by an unsatisfied customer (who was reimbursed in full.) If sales did not improve considerably, he would have to decide whether to keep the business or close his store by the end of September. The next few months were critical.

Quebecers love cycling. There are several biking events held during the summer and autumn months that encourage cyclists of all levels, from novice to competitive rider, to become involved. These events have the secondary effect of promoting cycling. The BIXI shared bicycle system, where cyclists can rent a bike at one self-serve station and return it at another, has proved very popular in the last several years for cycling commuters in Montreal. Bike paths are used year round. It is not uncommon to see cyclists on even the coldest winter days.

Jean Plourde was a competitive cyclist in his youth. After his competition days ended, he earned a DEC in Leisure Studies from one of Quebecs finest colleges. After working as a sales associate in the sports department at a Canadian Tire store for 3 years (Canadian Tire is a large retail chain of 400 stores across Canada that specializes in, among other things, hardware, camping equipment, housewares, and sports equipment. The store sells many models of low-priced bicycles, average price $210; the average cost of each bicycle purchased by Canadian Tire was $180), he decided it was time to start his own business. Last year he finally turned his idea into reality: at the age of 30, he opened Plourde Bicycle Store in his hometown, Stratbourg, Quebec, population 300,000 people.

Some facts about Stratbourg:

- It is an upper-scale town, where 60% of the population was between 25 and 55 years of age.

- Twenty percent of the population was under 25 years of age and 15% was over 55 years of age.

- Most of the over-55s were retired.

- Twenty-five percent of the population were professionals and earned a mean income of $120,000.

- Fifty percent of the population were skilled and non-skilled labourers and earned a mean income of $40,000.

In a poll conducted by a Quebec marketing research firm and commissioned by the Stratbourg Board of Trade, the following was revealed:

- Thirty percent of the adult residents valued their health, and considered cycling as an attractive form of exercise. These weekend warriors exercised, but only when they had the time. They had the money to spend on a better bicycle, but they wanted the bicycle to be as fashionable as they were. The weekend warriors market buys sporting goods at a sporting goods specialty store like Sports Experts. They spend on average $500 on a bike, which is also the stores average selling price. (Sports Experts buys its bikes on average for $320 per bike.)

- Ten percent of the population defined itself as hard core exercisers, and used the best equipment regularly, year-round. Bicycles were made to be used, they would say, and they would replace their bikes every two or three years. This market buys its bicycles at specialty bicycle retailers, that is stores like DEFI, which only sell competitive bicycles. (There was no store like DEFI in Stratbourg.) This is the market that the Plourde store sought in its first year. The members of this market segment would spend on average $2000 for a bike.

- Forty percent admitted that they were coach potatoes and did not exercise enough. If they were inclined to buy a bike, they would use it sparingly. One bike is all they would need in a lifetime. This market shopped exclusively at mass merchants. They would spend on average $200.00 for a bicycle.

- Other markets (familys buying their children their first bicycle, casual cyclists, and the active over 55s- consumers over 55 years of age) sought a solid bicycle with no special features. Price was a critical criterion. This market shopped exclusively at mass merchants. These other markets totaled 20% of the population. They would spend on average $200 on a bicycle.

It was the results of this poll, the increasing popularity of cycling in Quebec, and Quebecs robust economy and currently low unemployment rate that convinced Jean that a bicycle store in Stratbourg provided significant opportunity.

With some of the money that he had inherited, Jean rented a medium-sized store in the heart of downtown Stratbourg. The large window at the front of the store allowed Jean to display his prized possession: the racing bike he used to win his first international competition. Beside the bicycle were an old helmet, some well-used bicycle gloves, and the creased racing jersey he wore at competitions, along with a picture of a young, beaming Jean as he crossed the finish line at the event he won.

Realizing that the local Canadian Tire and Wal-Mart stores carried a wide range of low-cost, mass-produced, all-terrain bicycles like the Mongoose, Magna, and Schwinn brands, and that stores like Sports Experts carried mountain and hybrid bicycle brands like Specialized, Fuji, and Trek, Jean knew that he had to be different. He contacted suppliers who distributed only high-end bicycles: the Cervelo, DeRosa, Felt, and Pinarello brands were recognized as some of the finest road and racing bicycles. Jean was certain that a market like Stratbourg could support a store whose average bicycle price was $2000.00. Also, Jean wanted to hang out with customers who were as knowledgeable and passionate about bicycles as he was. It was these high end bicycles that Jean decided to carry when he opened his store.

In the store, his inventory of high-end racing bikes were neatly aligned on the floor. The only accessories that were displayed were also of the high-end variety: gloves, racing apparel, sunglasses, and very little else. Jean felt that accessories, despite their high margins (the average margin was 80%), distracted customers from the stars of the store: the bicycles. Although sales were already poor, once famed racer Lance Armstrong and many of the cycling worlds elite were found guilty of doping, Jeans sales plummeted even further. The only thing that kept the business operating at this point was the activity in the stores small basement: bicycle repair and maintenance. Cyclists recognized that Jean and his two assistants had superior technical abilities. Although Jean was proud of his stores growing service reputation, he hoped this would be only a nice complement to the core business, not the main thrust of business. It was, nevertheless, very profitable.

Over the course of the first year of operations, Jean had tried a number of marketing tactics. He advertised in the local newspaper, which cost $1000 for a half-page ad. He advertised on the radio, which cost $1000 for the one week he was on the air in May (twenty 30-second spots.) He had a website that displayed his merchandise and his store location, but little else. And he was once interviewed on the local nightly news about bicycle safety. That was all of the promotion in his first year. Jean had believed that if his store was truly the exceptional bicycle retailer he knew it was, word-of-mouth would eventually generate sales, so he would not need to promote much. Unfortunately this was not the case.

Jean expended a lot of money in his first year. He renovated the store, which cost $10,000. He purchased fixturing (like counters and display racks) for which he paid $20,000. He purchased $200,000 worth of inventory. He paid his 5 full-time employees a total of $200,000. His rent is $3,000 per month. His utilities expenses (like heat and electricity) was $6,000 for the year.) He purchased a sign for his store, for which he paid $15,000. He purchased 100 bicycles, at an average price of $1500.

Now Jean was faced with a dilemma. He really did not want to have to close the store. Because his lease ran until end of December, he decided that he would see how sales would go until end of September, at which point he would have to tell his landlord if he were renewing the lease for the following year, or not.

It was at this time that he had to contemplate several things. For one thing, was he targeting the right market?

(1) The hard core exercise market seemed attractive when he opened the store. Perhaps this was indeed the right market, and all that was needed was a good marketing strategy to sell his high end bicycles. Although these bicycles offered high margins, at this point in time sales were stagnant.

(2) Of course, thought Jean, it might be better to abandon the current concept and compete head-to-head with mass retailers like Canadian Tire and Wal-Mart. They would all be selling the same kind of lower-margin, lower-priced bicycles, but Jean had the expertise and the bicycle goodwill associated with his name. The coach potatoes and other markets were not the kind of cyclists Jean would typically socialize with, and Plourde Bicycle Shop was not the type of store where these people typically shopped for their bikes, but they did constitute a combined 60% of the market.

(3) A third option did exist: sell-broad-spectrum bicycles, like hybrids and mountain bikes, at a mid-range price, to a consumer with moderate cycling expectations, such as the weekend warriors.

Also: regardless of the kinds of bikes he sells, Jean had to decide whether or not to promote the service-component of the business.

As this was indeed the last chance opportunity, Jean decided to go all in. Right or wrong, he decided to use the remaining $30,000 of his inheritance to promote what he felt was a great business that could sustain him for a lifetime.

Question:

Assume that Jean has decided to pursue the Hard Core Exerciser market.

(i) On average, what is the profit margin (in percentage) that Jean would earn on the bicycles he sold? (Show your calculations.) (5 marks)

(ii) Jean has instructed his salespersons that he wanted to increase his margins. To do so, he encouraged his staff to try to sell at least one accessory product with every bike sold. If a salesperson successfully sold to a customer both a bicycle and a pair of bike gloves (the selling price for the gloves is $30), what would be the profit margin (in percentage)? (8 marks)