Quant Section - HillTop Hiking Shoes

To stay fit, more and more people are turning to hiking. Hiking requires special shoes that are resistant, waterproof, offer adequate support, and are comfortable throughout the day. Hiking shoes tend to vary depending on the difficulty of the trail one wants to complete, and range between reinforced walking shoes and professional hiking boots. HillTop is a leading manufacturer of outdoors apparel, and its latest entry level hiking shoes, the "Raw" model, features an innovative sole that allows the foot to breath, while being completely waterproof. The retail price of a pair of "Raw" is $185.

The market:The USA is home to 300 million people. Market research has shown that outdoor enthusiast account for 50% of the population, 40% of which are hikers. However, the management realizes that not all hikers might be interested in the "Raw" model, since it is an entry level model. For this reason, they decide to target beginner and amateur hikers who make up 15% of the hikers' market. Statistics show that beginner and amateur hikers buy, on average, 0.8 pairs of shoes each year.

Production and Cost Information: To create the "Raw",an initial investment for the product facility was $1,675,000 and HillTop estimates the general overhead expenses at $200,000. To promote it, HillTop will set aside $500,000 for advertising, such as TV ads and billboards and $400,000 on additional fixed promotions in the first year. Management expects 15% of the retail price to account for labour costs, 10% for raw material expenses, while 10% will be for factory operating costs and 10% for transportation expenses. HillTop has decided to sell the "Raw" model through distributors rather than directly to retailers. Distributors expect margins of 20% while retailers look for 25% margins before selling to customers.

Market Test:To gaugeconsumer interest, HillTop conducted perform a test on a smaller test-market. The test lasted for a period of 8 months. In the first 6 months, the "Raw" model was sold at its original retail price. During the following 2 months, the management decided to run a promotion, selling the "Raw" modelat 25% off its original retail price. Sales for the first 6 months reached a total of 1,800 units. A total of 1,200 units were sold during the following 2 months.

HillTop's decision to introducethe "Raw" modelin the test market also influenced the sales of two other products:WayUp, an established brand of climbing shoes, andWindOut,a modern hiking jacket. The retail price ofWayUpandWindOutwas $150 and $130 respectively. Before the price discount on "Raw",WayUpsold 4,200 units andWindOut3,600. After the price discount on "Raw", the two brands registered sales of 1,200 and 3,000 units respectively.

1. Complete the following calculations for each step of the distribution channel for HillTop's "Raw" model (beforethe price discount). [6 pt]

Retail Selling price

Retail Variable cost

Retail Margin$

Retail Markup %

Distributor Selling Price

Distributor Variable cost

Distributor Margin $

Distributor Margin %

Manuf. Selling Price

Manuf. Variable cost

Manuf. Margin $

Manuf. Margin %

1. Given the information above, what is the minimum market share that HillTop should capture in the first year after US national launch if they do not want to incur financial losses (assume no price promotions). Please make your calculations clear. [10 pt]

1. Calculate the price elasticity for the"Raw" model. What do your results indicate? Based on the results ofprice elasticity alone, would you recommend a price discount? Clearly explain your reasons. [8 pt]

1. AreHillTop's "Raw"and WayUp (climbing Shoe) complements or substitutes? AndHillTop's "Raw" andWindOut(hiking jacket)?Justify your answers with calculations. [8 pt]

1. Assume you are the manager of a large sporting goods store that sells the"Raw"modelas well astheWayUp(climbing shoes)andWindOut (hiking jackets).Would you agree on the price discount for the"Raw" model? Justify your answer with appropriate calculations. You can assume that the test market characteristics also apply to your sporting goods store. [8 pt]