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 $175.

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 $1,875,000 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 5% for transportation expenses. HillTop has decided to sell the Raw model through distributors rather than directly to retailers. Distributors expect margins of 25% while retailers look for 20% margins before selling to customers.

Market Test: To gauge consumer interest, HillTop conducted perform a test on a smaller test-market. The test lasted for a period of 7 months. In the first four months, the Raw model was sold at its original retail price. During the following three months, the management decided to run a promotion, selling the Raw model at 20% off its original retail price. Sales for the first four months reached a total of 1,600 units. A total of 1,500 units were sold during the following three months.

HillTops decision to introduce the Raw model in the test market also influenced the sales of two other products: WayUp, an established brand of climbing shoes, and WindOut, a modern hiking jacket. The retail price of WayUp and WindOut was $150 and $130 respectively. Before the price discount on Raw WayUp sold 2,400 units and WindOut 3,600. After the price discount on Raw, the two brands registered sales of 1,200 and 3,000 units respectively.

Questions:

1. Complete the following calculations for each step of the distribution channel for HillTops Raw model (before the 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 %

2. 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.

3. Calculate the price elasticity for the Raw model. What do your results indicate? Based on the results of price elasticity alone, would you recommend a price discount? Clearly explain your reasons.

4. Are HillTops Raw and WayUp (climbing Shoe) complements or substitutes? And HillTops Raw and WindOut (hiking jacket)? Justify your answers with calculations.

5. Assume you are the manager of a large sporting goods store that sells the Raw model as well as the WayUp (climbing shoes) and WindOut (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.