Marketing Metrics Case 8

Promotion Effectiveness in the Clothing Stores Industry

The clothing store industry, North American Industry Classification System (NAICS) 4481, is part of the retail trade sector (NAICS 44-45), and includes clothing stores for men, women, children, family, accessories, among others. Sales of the industry reached $18.9 billion in Canada as of December 2008[1]. The compounded annual growth rate (CAGR) of the industry sales from 1999 to 2008 was 3.9 percent. Total expenses of the industry, in 2008, arrived at $17.4 billion. Expenses CAGR 1999-2008 reached 3.3 percent. Expenses of the industry include cost of goods sold, labour remuneration, and other expenses (rental and leasing, advertising, depreciation, management fees, etc). Cost of goods sold represented 53.4 percent of total expenses and labour remuneration represented 19.2 percent.

As of December 2009, there were 13,767 clothing stores employing one or more person in Canada. Provinces with the most number of stores are Ontario (4,917), Quebec (3,631), British Columbia (2,057), and Alberta (1,494). Typical clothing retail store companies in Canada are The Hudsons Bay Company, Sears Canada Inc., Hennes & Mauritz AB (H&M), Inditex Group (Zara), Punto Fa S.L. (Mango), Gap Inc. (Banana Republic, Gap, Old Navy), among others.

The company It fits me nicely (IfM), with headquarters in Toronto, Canada, is also one of the players of the clothing store industry. IfM started operations in 2005 opening 4 stores in Toronto, Quebec City, Vancouver, and Calgary. The company manufactures and retails clothing for men and women. In cities such as Edmonton, Regina, and Montreal IfM retails its clothing using one of the biggest department stores in Canada. 2005 and 2006 were two years of complete success for the new company. IfM expected annual sales of $20 million in 2005 and $23 million in 2006; however sales actually reached $22 and $26 million in 2005 and 2006 respectively. The rate of pre-tax earnings over sales was 9 and 12 percent in 2005 and 2006 correspondingly.

During 2007 and 2008 IfM sales were hurt by the economic crisis and the reduction of household expenditures. Sales reached $24 and $25 million in 2007 and 2008 respectively. As you can imagine profitability rates have also been affected by the sales decline. IfM management decided to spend aggressively in marketing activities during 2009 and 2010. By and large, IfM decided to implement deals and coupons in owned stores and allowances and discounts for the department stores reselling its clothing.

The company needs to evaluate the effectiveness of the marketing activities implemented in 2009 and 2010 in order to continue or stop spending on those activities during 2011. Sales reached $27 and $30 million in 2009 and 2010 correspondingly. The rate of pre-tax earnings over sales was 8 and 10 percent in 2009 and 2010 respectively. Management believes that sales would have reached $23 and $24 million and pre-tax rate earnings would have been $1.61 and $2.04 million in 2009 and 2010 without the implementation of the aggressive marketing program.

As mentioned earlier the marketing program consisted of deals and coupons in owned stores and allowances and discounts for the department stores reselling IfM clothing. The cost of deals reached $0.5 and $0.49 million in 2009 and 2010 respectively. There were 0.7 and 0.8 million coupons distributed in 2009 and 2010. The cost of printing coupons and distributing in stores and in local magazines and newspapers was $0.15 and $0.19 million in 2009 and 2010. The number of coupons redeemed reached 150,000 in 2009 and 200,000 in 2010. The approximate cost of redemption of each coupon was $5 and $6 in 2009 and 2010. Sales that resulted from the redemption of coupons were $4.5 and $7 million in 2009 and 2010 respectively. The cost of discounts and allowances combined reached $0.75 and $1.15 million in 2009 and 2010.

Questions:

1. Compute the total coupon cost, coupon redemption rate, and percentage sales with coupon of IfM in 2009 and 2010. What would you advise to the management team of IfM in regards the effectiveness of coupons?

Consider this[2]:

Total Coupon Cost ($) = [Cost per redemption ($) + Number of Coupons Redeemed] + Coupon printing and distribution cost ($)

1. Compute the incremental sales, promotional lift and cost of incremental sales of IfM during 2009 and 2010. Was there an improvement of promotion sales effectiveness? Explain.

Consider this[3]:

1. Compute the incremental profits, promotional profit lift and cost of incremental profits of IfM during 2009 and 2010. Was there an improvement of promotion profitability? Explain.

1. Should IfM continue to implement promotion activities in 2011? What happen with the promotion effectiveness if management decides to increase baseline sales and baseline pre-tax earnings?

Fernando Angulo Ruiz wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality.

[1] Information retrieved from Statistics Canada http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic4481rdpe.html on May 31, 2011.

[2] Farris, Paul W., Neil T. Bendle, Phillip E. Pfeifer, and David J. Reibstein (2010), Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, NJ: Pearson Education, Inc.

[3] Farris, Paul W., Neil T. Bendle, Phillip E. Pfeifer, and David J. Reibstein (2010), Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, NJ: Pearson Education, Inc.

Coupon redemption rate (%)=NumberofcouponsdistributedNumberofcouponsredeemed Percentage sales with coupons (%)=Sales($)Saleswithcoupons($) or s)= Total Promotional Lift (%)=Baselinesales(inunits,or$)Incrementalsales(inunits,or$) Cost of incremental sales ($)=Incrementalsales(inunits,or$)Marketingspending($)