S w 9B06A035 SPECTRUM BRANDS, INC. - THE SALES FORCE DILEMMA Joe Falconi wrote this case under the supervision of Professor Don Barclay 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. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. 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 Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 Copyright 2007, Ivey Management Services Version: (A) 2007-02-21 We are in the business of building our strengths by managing brands... as retailers get bigger... we get bigger to fight fire with fire. I'm now in the business of managing BRANDS, not simply PRODUCTS! It was November 2005, and Bob Falconi, vice-president of sales and marketing for the Canadian division of Spectrum Brands Inc., was sitting in his new Brantford, Ontario office, pondering his next steps regarding his sales force. During the course of the last year, the company had gone through a number of changes at the global level. Spectrum Brands (Spectrum), a global consumer products company formerly known as Rayovac Corporation, had made a number of acquisitions to diversify and expand its product and brand portfolio. With these changes, Spectrum had become a leading supplier of consumer batteries, lawn and garden care products, specialty pet supplies, and shaving and grooming products. Falconi, charged with the task of creating a national sales force from the teams of the newly merged companies, sat in his office trying to make sense of the new business. He knew that creating an effective sales team one which would capitalize on the synergies across the various businesses would be very difficult, since these companies each operated differently with regards to the role of their sales forces, customers targeted and products sold. Knowing the importance of the sales function to each of these companies, Falconi wanted to ensure, despite the differences amongst the diverse groups, that he still maintained a team that would effectively and efficiently continue to increase the sales of each business unit. The task ahead of him was big, but Falconi knew that a plan needed to be implemented immediately to avoid disrupting the growth momentum of the company's individual brands, to maintain customer relationships, and to preclude competition from taking advantage of any perceived disruptions during this time of change. ecch the case for learning Distributed by ecch, UK and USA www.ecch.com All rights reserved Printed in UK and USA North America t +1 781 239 5884 f +1 781 239 5885 e ecchusa@ecch.com Rest of the world t +44 (0)1234 750903 f +44 (0)1234 751125 e ecch@ecch.com Page 2 9B06A035 THE CONTEXT Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 With the growth of large retail chains across North America through retail consolidation, the balance of power had shifted away from manufacturers. Small players could no longer compete effectively, as strong relationships with retailers had become essential in order to compete for limited and valuable shelf space within stores. Manufacturers built alliances with other consumer brand companies in order to gain strength and power in the retail market. As a result, companies such as Procter & Gamble (P&G), Unilever, S.C. Johnson, and others with large portfolios of popular consumer brands, dominated the shelves in traditional retail channels including Grocery (e.g. Loblaw, Dominion), Drug stores (e.g. Shoppers Drug Mart, Katz Group), Hardware retailers (e.g. Home Hardware), Home and Garden retailers (e.g. RONA, The Home Depot) and Mass Merchandisers (e.g. Wal-Mart). Internet and direct-to-consumer sales had not proven to be valuable alternate channels for these companies, as retailers would retaliate by de-listing products of those manufacturers who tried to go in this direction. Companies competing against the brands under the umbrellas of these large companies continued to struggle for position and, ultimately, for market share, mainly because of the established relationships that these large firms had with the retailers. The trend was towards companies such as Spectrum Brands who had a presence in batteries, shaving and grooming products, lawn and garden products, and specialty pet supplies. CONSUMER BRANDS MARKETS Battery Market North American consumers of household batteries (AAA, AA, C, D and 9-volt standard batteries) sought convenience and quality when purchasing batteries and tended to gravitate towards the brand names they knew and trusted. Duracell and Energizer continued to dominate the market due to their brand recognition, their relationships with distributors and retailers, and their established presence in the large one-time-use alkaline battery category. These two firms were leaders in this market for decades because of their ability to adapt to consumer needs and to merge with other consumer goods companies to create brand portfolios, thus gaining valuable negotiating power with retailers. For example, the Duracell battery brand was owned by the largest and most recognized consumer products company in the world Procter & Gamble (P&G) while the Energizer battery brand was owned by Energizer Holdings Inc., which also owned the Shick Razors brand. Each company held a 40 per cent market share within the battery industry. Household batteries were sold through wholesalers, distributors, professionals and OEMs, but the large majority were sold through traditional retail channels. Of these retailers, mass merchandisers, home and garden centers and niche electronic stores accounted for more than 60 per cent of sales. As of 2005, the alkaline battery was the predominant type of household battery in North America, and was offered by all major competitors in all sizes. The growth within this segment had become relatively flat, at only one to two per cent annually, yet, due to its size, it was expected to dominate the market for the next Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org The consumer brands industry had become highly competitive on a global basis. Numerous acquisitions and mergers had taken place over the past decade, resulting in a select group of large companies with extensive brand portfolios. These companies had developed numerous product lines that allowed them to compete in a variety of markets and product categories, and also strengthened their relationships with retailers. Page 3 9B06A035 five to 10 years. In 2005, the overall battery market in Canada was estimated to be $3001 million, with the alkaline category representing 70 per cent, the rechargeable category making up 10 per cent, and other battery chemistries, including zinc, representing 20 per cent. The market for household batteries was highly seasonal. The large majority of sales occurred during the months leading up to and following Christmas sales of electronics and other battery-operated devices. Close to 70 per cent of battery sales occurred during this period. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 The shaving and grooming products industry was dominated by a select group of companies selling electric shavers and accessories, electric grooming products and hair care appliances. Electric shavers included both rotary and foil designs for men and women, and accessories included replacement parts, pre-shave products and cleaning agents for shavers. Electric grooming products included beard/moustache trimmers, nose and ear trimmers, haircut kits and related accessories. Hair care appliances included hair dryers, setters, curling irons, crimpers, straighteners and hot air brushes. The shaving and grooming products market was growing at a rate of three to four per cent annually, and this trend was likely to continue. The market for electronic shaving and grooming products was highly seasonal with peaks during the months leading up to and following the Christmas holiday season and around Father's Day and Mother's Day weekends. The majority of these products were purchased as gifts, and thus the sales cycle followed these gift-giving seasons. The primary competitors in the shaving market included: Norelco, Braun and Remington. Norelco was a division of Koninklijke Philips Electronics (Philips), which was one of the world's biggest electronics companies and the largest one in Europe. Braun was a member of the Gillette family of products which was now part of P&G, while Remington was part of Spectrum. Norelco only sold rotary shavers, Braun only offered foil shavers, while Remington was the only company competing in both segments. Quality, price and brand awareness were the main factors influencing sales in this segment. The major competitors in the hair care market were Remington, Norelco, Conair Corporation and Helen of Troy Limited. Each company offered a complete line of hair care products and accessories and competed on quality and price within this category. Competitors within both of these segments sold their products largely through traditional retail channels with a heavy emphasis on mass merchandisers and specialty retailers such as salons and hair and body care shops. Like all consumer product companies, those firms able to maintain or increase the amount of retail shelf space allocated to their respective products could gain share of mind and, potentially, a share of the market. Lawn and Garden Market The lawn and garden market was a US$4 billion industry in North America, with an additional US$1 billion in sales of household insect control products. Companies manufactured and marketed fertilizers, herbicides, outdoor insect control products, rodenticides, plant foods, potting soil, grass seeds and other growing media. The lawn and garden industry had been driven largely by affluent baby boomers who 1 All funds are in Canadian dollars unless otherwise indicated. Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Shaving and Grooming Products Market Page 4 9B06A035 enjoyed gardening and also by increasing home ownership levels. Growth in this market had been between four and five per cent annually and was expected to continue at this pace. In North America, more than 80 per cent of households were participating in at least one lawn and garden activity in 2004. Growth in the insect control market had been generated by population growth in the insect-prone Sunbelt region and the heightened awareness of insect-borne diseases such as West Nile virus. Growth in this market had been slightly higher than historical levels since 2002 with a seven to eight per cent annual growth rate. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 In the insect control market, the major competitors included United, Scotts and S.C. Johnson & Son, Inc. Scotts, once again the market leader, sold products under the Ortho and Roundup brand names, while S.C. Johnson marketed their insecticide and repellent products under the Raid and OFF! brands. Competitors within both of these markets sold mainly through mass merchandisers, home centers, independent nurseries and hardware stores. Home centers and mass merchandisers typically carried one or two premium brands and one value brand on their shelves. Obtaining and maintaining share of shelf within these retailers was critical as 50 to 60 per cent of sales passed through these two channels. The lawn and garden market was also highly seasonal. Products were shipped to distributors and retailers beginning as early as March in preparation for the spring season. Demand for products typically peaked during the first six months of the calendar year. This seasonality created a major risk within this industry, as there was a heavy dependence on weather to drive sales. A poor season greatly hindered the bottom line. Specialty Pet Supply Market The specialty pet supply industry had historically been one of the fastest growing consumer product categories with annual growth between six and eight per cent. This category consisted of aquatic equipment (i.e. aquariums, filters, pumps), aquatic consumables (i.e. fish food, water treatments, conditioners) and specialty pet products for dogs, cats, birds and other small domestic animals. In North America, this was an US$8 billion market in 2004, and was expected to grow to over US$11 billion by 2007. Much of this growth could be attributed to the increasing levels of pet ownership. On average, households with children under the age of 18, and adults over 55 (who were typically \"empty nesters\"), tended to keep pets as companions and had more disposable income and leisure time to spend with them. In North America, both of these categories have expanded rapidly with the aging of the baby boomer population. As of 2004, 62 per cent of households in the United States owned a pet, and 46 per cent owned two or more pets. In addition to these trends, the growing movement towards pet humanization the tendency of pet owners to treat pets like cherished members of the family had also factored greatly into this market expansion. Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org The main competitors within the lawn and garden segment included: United Industries (United)/Nu-Gro, Scotts Miracle-Gro Company (Scotts) and Central Garden & Pet Company (CGPC). Scotts marketed products under the Scotts and Miracle-Gro brand names. They led this market with a 30 per cent market share. CGPC sat behind United with a 17 per cent market share. They sold garden products under the Amdro, Image and Pennington Seed brand names. Page 5 9B06A035 The specialty pet supply industry was highly fragmented. There were over 500 manufacturers in North America, consisting of both small companies with limited product lines and larger firms. No company held a market share of greater than 10 per cent. The largest competitors included: CGPC, United Pet Group/Tetra and the Hartz Mountain Corporation. CGPC led the market with a nine per cent market share. Sales in this segment remained fairly stable throughout the year since pets needed to be maintained continuously. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 COMPETITIVE CONTEXT In all of these industries, some competitors had gained significant market share and had explicitly committed significant resources to protecting share and/or stealing share from others. In some product lines, competitors had lower production costs and higher profit margins, enabling them to compete more aggressively through advertising and by offering retail discounts and other promotional incentives to retailers, distributors and wholesalers. This aggressive strategy obviously provided additional strength in attracting retailers and consumers. The ability to retain or increase the amount of retail shelf space allocated to their respective products provided competitive advantages in each of these market spaces. SPECTRUM BRANDS, INC. Spectrum brands products were available through the world's top 25 retailers, in over one million stores throughout North America, Europe, Asia Pacific, the Middle East, Africa, Latin America and Brazil. Overall, the company was generating US$2.8 billion in annualized revenues from its brand portfolio (see Exhibits 1 and 2 for Spectrum pre-merger and consolidated financial information). Similar to its competitors, Rayovac had acquired other consumer brand companies to enhance its ability to gain retail presence. Beginning in 2003, Rayovac acquired Remington Products Inc., a company specializing in consumer shaving and grooming products. In February 2005, Spectrum Brands was created when the Rayovac Corporation acquired United Industries Corporation (a leading U.S. manufacturer of consumer lawn and garden care, and insect control products), Nu-Gro Corporation (the Canadian subsidiary of United, specializing in lawn and garden care products) and Tetra Holdings Inc. (a leading supplier of fish and aquatics supplies). Continued growth and strategic acquisitions allowed the company to leverage global distribution channels, purchasing power and operational processes. These mergers provided the company with an extended brand portfolio. This allowed all of the brands to access a number of new retailers where they had not previously been able to gain shelf space. In turn, this increased the ability for each brand to compete within its given markets. Spectrum became the global leader in aquatic supplies; the number two player in the lawn and garden industry, the household insect control market, and Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Products within this segment were sold through specialty pet stores, independent pet retailers, mass merchants, grocery stores and through various professional outlets. Mass merchandisers, supermarkets and discounters increasingly supplied pet products, but they focused mainly on a limited selection of items such as pet food. The majority of sales were made through pet supply stores, of which there were over 15,000 in the United States and more than 5,000 in Canada. There were only two national retailers in this industry: PetsMart and PetCo. PetsMart accounted for 10 per cent of North American pet product net sales in fiscal 2004. PetCo reflected similar statistics, but no other retailer accounted for more than eight per cent of industry retail sales. Page 6 9B06A035 the shaving and grooming supplies industry; and the third largest global company in the battery industry (see Exhibit 3 for a list of brand names under the Spectrum label). Rayovac The company began operations in 1906, but did not introduce the Rayovac name until the 1930s. Their initial focus was on manufacturing specialty batteries for use in such devices as their patented vacuum tube hearing aids. The company expanded and grew through their continued development of state-of-the-art flashlights and non-traditional batteries, including their successful hearing aid battery line. They eventually entered the competitive household battery market through key acquisitions and by capitalizing on existing distributor and retailer relationships. This was long after the market leaders, Duracell and Energizer, had become well-established within this market. Rayovac made great strides over its last few years in an attempt to gain ground. Acquisitions had been made to gain access to international markets including Europe (Varta Battery Corporation acquired in 2002), China (Ningbo Baowang acquired in 2004) and Brazil (Microlite acquired in 2004). The leaders in this industry had leading brands and thus greater control over distribution channels, retailers and prices. Rayovac had only been able to secure shelf space in a small number of retailers, including Wal-Mart (making up 40 per cent of sales), Canadian Tire (15 per cent of sales), Home Hardware (10 per cent of sales), and other chains and smaller niche retailers such as Toys R' Us, Radio Shack and others (35 per cent of sales). Remington Products Company Remington was a leading designer and distributor of consumer shaving and personal care products in North America and the United Kingdom. They marketed a broad line of electric shaving and grooming products for both men and women, as well as hair care products and other personal care items. Beginning operations in 1936 as a division of Remington Rand, Remington captured a strong position as a global player in the market by developing new innovative shaving products. Before being bought by Rayovac Corporation in 2003, the Remington Electric Shaver Division had been involved in various mergers: merging with the Sperry Corporation in 1955; being bought by entrepreneur Victor Kiam in 1979; and then acquiring Clairol Inc.'s worldwide personal care appliance business in 1993. Through all of these moves, Remington was able to command a 30 per cent market share in North America and a 21 per cent share in the United Kingdom, with the number one position in men's foil shavers, women's foil shavers, and men's grooming products, and the number two position in men's rotary shavers globally. Remington had become an established name in the industry, achieving global revenues of US$350 million in 2003. Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 Rayovac was the third largest global consumer battery manufacturer in the world third largest in North America and second largest in Europe. The company sold batteries and flashlights for various household and industrial uses and was the largest worldwide seller of hearing aid batteries. Their battery product line included one-time-use alkaline and Nickel Metal Hydride (NiMH) rechargeable batteries available in all standard sizes (AAA, AA, C, D, 9-Volt) to compete in the highly saturated but lucrative household market. Globally, Rayovac held a 14 per cent market share, with a 20 per cent share of the Canadian market. The division generated US$1.5 billion in annual global revenues in 2004. Page 7 9B06A035 Remington, like Rayovac, sold its products largely through traditional retail channels. The breakdown of retailers was similar to that of Rayovac, with the niche retailers being salons and specialty hair and body care shops. United Industries Corporation Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 United competed in the United States under the United name. In Canada, the company operated under the Nu-Gro Corporation (Nu-Gro) name. United, which began operations in the early 1950s, acquired Nu-Gro in April 2004 to serve as the Canadian arm of the company. Nu-Gro was established in 1988 as an exclusively Canadian lawn and garden company. Both were leaders within their marketplaces, maintaining a number of top-selling brands including Vigoro, Shultz and CIL. Within the lawn and garden industry in North America, United/Nu-Gro was the number two company, holding a 23 per cent market share. The company targeted consumers who wanted products comparable to and at lower prices than premium-priced brands, and thus positioned their brands as the value alternatives. In 2004, United/Nu-Gro together generated sales of US$550 million in this market. In the household insect control industry, United/Nu-Gro generated US$150 million in sales in 2004. With their insect control brands, it was again the number two company, with 24 per cent market share in North America. The consumer division for both of these categories sold its products through various retail outlets, including home and garden centers, large home supply retailers, and general mass merchandisers. The sales breakdown was as follows: Canadian Tire (13 per cent), Home Depot (nine per cent), Rona (seven per cent), Lowe's (six per cent), Home Hardware (five per cent), Wal-Mart (three per cent), independent garden retailers (five per cent), other small retailers and garden stores (12 per cent) and their professional division made up 40 per cent. The United/Nu-Gro professional division served two major markets: Professional Turf Care Products for golf courses and lawn care companies, and Professional Pest Control Products and Animal Health Products for pest control operators and farms (making up 25 and 15 per cent respectively of the company's overall sales). This division had its own dedicated sales force and marketing team to manage the diverse needs of the professional customers. United was also a leading supplier of quality products to the pet supply industry in the United States, under the United Pet Group (UPG) name. UPG operated in the fragmented U.S. pet supply market, manufacturing and marketing premium-branded pet supplies for dogs, cats, fish, birds and other small animals. Products included: aquarium kits, stand-alone tanks, filters and related items, and other aquarium supplies and accessories, as well as pet treats and supplies. This division was number two in North America, with an eight per cent market share and annual revenues in 2004 totalling US$250 million (figure includes Tetra sales). This division sold its products through large mass merchandisers, while also Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org United Industries Corporation was a leading manufacturer and marketer of professional and consumer lawn and garden care and insect control products. It produced a wide variety of products, including brand name items and private label products for individual retail chains. United also produced and distributed controlled release nitrogen and other fertilizer technologies to the consumer, professional and golf industries worldwide under various brand names. Page 8 9B06A035 targeting the larger pet supply chains of PetsMart and PetCo, and the considerable number of independent pet supplies stores. Tetra Holdings Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 Tetra was founded in Germany in the early 1950s, pioneering the development of flake fish foods. The company grew into one of the most recognized global brand names in the pet supplies industry. In addition to the products they offered, they also published hundreds of books on aquarium fish keeping, reptile and amphibian keeping, and water gardening. Tetra was acquired by United Industries in early 2004, joining the UPG division. Despite the merger, United maintained separate operations for each brand with the exception of combining administrative functions. UPG only operated in the United States, while Tetra operated globally. These groups together held the number two position in the North American pet supply market, with eight per cent market share. Like UPG, Tetra sold its products through large mass merchandisers, while also targeting the larger pet supply chains (PetsMart and PetCo) and smaller pet supplies stores in the countries in which it operated. BOB FALCONI Bob Falconi completed his Executive MBA program at the Richard Ivey School of Business in 1990. He had been involved in the battery business for 27 years, working his first 16 with Duracell, where he became vice-president of sales. He left Duracell in 1995 for a new start-up battery company, Pure Energy Battery Corporation, which introduced a revolutionary new rechargeable alkaline battery system. He left Pure Energy in 1999 to serve as country manager for Rayovac Canada, and had then taken on the role of vice-president of sales and marketing for Spectrum. Throughout his career, he had developed a keen understanding of brand management, and had been given the responsibility within Spectrum to leverage his experiences. REASONS FOR THE ACQUISITIONS Through the evolution into Spectrum Brands, Rayovac had become a channel marketer, and purveyor of specialty brands. The Rayovac Corporation had been painted into a corner in the competitive battery market due to its lack of retail strength. In order to compete on a larger scale, greater power within retail channels was required. The company had continually looked for potential acquisitions where it felt that it could add value to the company's operations while at the same time creating a larger and more powerful combined company. Rayovac's goal was to grow through acquisitions that diversified and increased its revenue base while leveraging its strengths and capabilities in global merchandising and distribution. With the Remington merger, there were many similarities between the two companies in terms of marketing and channel strategies. However, the systems Remington had in place to manage logistic processes were outdated and inefficient. Rayovac saw this as an opportunity to add value to this company Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Tetra Holdings was a global supplier of fish and aquatic supplies, operating in over 90 countries worldwide and holding leading market positions in Germany, Japan, the United States and the United Kingdom. They manufactured, distributed and marketed a comprehensive premier line of foods, equipment and care products for fish and reptiles, along with accessories for home aquariums and ponds. Page 9 9B06A035 through the sharing of best practices. Rayovac acquired Remington and was able to update the company's logistic processes and systems and improve the overall operations of the firm. Through this merger, Rayovac was able to drive US$35million in annual costs out of the combined enterprise while adding the Remington revenues to Rayovac's top line. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 THE ISSUE As Falconi looked through his notes on his individual Canadian business units and their competitive markets, he questioned how best to organize the new sales force in order to capitalize on the strengths of each brand, given the similarities and differences between them. He knew that with the recent acquisitions, the company was looking to leverage any synergies created and reduce costs where possible. However, as overarching objectives, he wanted to make sure that customers would be serviced in the same fashion, if not better, and that sales would not be affected. Falconi decided to take a look at how each business unit currently operated, and how some of their major competitors were organized (see Exhibit 5 for a postmerger organizational chart). THE CURRENT SALES FORCES Rayovac and Remington In Canada, the Rayovac/Remington sales force was currently organized by distribution channel. The eight sales representatives serving this division were responsible for selling all products under both the Rayovac and Remington brand names to their assigned retailers. This was a small sales team, but it had tremendous support from the U.S. office for large accounts, as well as for marketing and trade promotion campaign design. Sales targeted towards hearing aid professionals and industrial and OEM distributors were handled from the U.S. office. These sales representatives were organized geographically as well. The allocation was as follows: six in Toronto, and one in each of Vancouver and Montreal. Each representative was responsible for the retailers in their regions. Toronto had a greater number of corporate head offices, thus requiring more representatives to service these accounts. The average base salary for these sales reps was approximately $70,000, with an overall employee expenditure budget of around $900,000 annually, including bonuses. With these representatives, this division was able to generate a 2004 sales volume of over $50 million in Canada. Overall, this sales force had worked well for the company. The division had been able to minimize the size of the sales force while still achieving their sales goals in an effective and efficient manner. Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org With the recent United/Nu-Gro/Tetra acquisitions, Rayovac was looking to continue its growth and expand into new product categories. New products would provide increased negotiating strength with the larger retailers while diversifying the company's revenue base. For example, with this merger, worldwide battery sales represented approximately 40 per cent of revenue as compared to the 2004 level of 67 per cent. More importantly, the merger served to balance out the sales cycle for the firm given the different seasonalities of the various categories this meant no down time for the sales force. Finally, Spectrum Brands had at least one brand in all of the major retailers in the world, a situation they hoped to leverage into having other brands in many retailers (see Exhibit 4 for annualized revenues by product category). Page 10 9B06A035 Nu-Gro In a similar fashion, Nu-Gro operated customer-focused teams made up of 30 consumer sales reps. Logistics were a very important element within the lawn and garden industry, as shipping costs for these products were significant. For example, a trailer shipment of fertilizer could have a maximum of 1,500 bags valued at $3 a bag, while the same trailer could ship $1 million worth of batteries. As a result, sales reps for Nu-Gro needed to plan carefully with customers in order to minimize costs by ensuring full truck shipments. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 The average base salary for these sales reps was slightly lower than for Rayovac/Remington representatives at $60,000, with an overall employee expenditure budget of approximately $2 million annually, including bonuses. With these sales reps, this division was able to generate a 2004 sales volume of more than $105 million in Canada. Nu-Gro, however, had been struggling as the company's operations and product offerings were extremely unfocused. Over the past five years, the company had acquired a large number of their smaller competitors and had accumulated their associated brands under the Nu-Gro umbrella. As a result, Nu-Gro experienced a proliferation of products and brands (see Exhibit 6). There were strong arguments to stay in underperforming categories, including contribution toward fixed manufacturing costs, improved transportation economics and account control. On the other hand, the significant working capital required to support these under-performing products could not justify keeping them. Brand and SKU rationalization was needed, and a target of up to a 50 per cent reduction over a one year period was being considered. Ultimately, a more focused product portfolio would facilitate the efforts of the sales force. In addition to the large SKU offerings, the sales team was forced to target a wide variety and large number of customers with these brands, including both the large mass retailers and the small \"mom and pop\" garden stores. These efforts were very time-consuming and uneconomical for the sales team, as the majority of stores were of the smaller garden shop variety that ordered limited quantities. The professional division that served the two major lawn and garden markets had been fairly successful in the past through its strong established relationships. The sales force for this division had and would continue to remain independent from Spectrum's consumer (retail) sales division. Nu-Gro maintained a separate sales force beyond the 30 consumer representatives exclusive to this division. Overall, Nu-Gro's consumer sales operations needed adjustment. A strategy that refocused the sales team's efforts on their large and more important areas, while still finding a way to reach their current customer base, was required to turn this division around. Tetra/United Pet Group The sales force for this division in the United States was regionally based so that each sales rep could ensure an ample supply of product for their distributors and dealers. These sales representatives were responsible for the large accounts such as PetsMart and PetCo, mass merchandisers such as Wal-Mart, and the large number of smaller specialty retailers. Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org As with Rayovac/Remington, sales representative were distributed geographically to service key Canadian locations: 17 in Ontario, six in Vancouver, three in Montreal, and two in each of Calgary and Winnipeg. Page 11 9B06A035 However, in Canada, sales for this division were handled by distributors. These distributors were responsible for the sales to the highly fragmented Canadian specialty pet retailer market. They offered the same services that an internal sales force could provide, including organizing special promotions and setting up in-store displays. Ultimately, they were able to generate sales from a large number of smaller players more economically than a small internal sales team could. The sales managers for Rayovac/Remington and Nu-Gro were responsible for managing these distributors. The larger retail accounts were managed by the U.S. sales team but serviced by these distributors. Of the 38 sales reps between the Rayovac/Remington and Nu-Gro divisions, four of them filled the roles of sales manager, two managers for each division. Each rep/manager was responsible for the various representatives in their specific geographic regions. They spent 65 per cent of their time selling to their own individual accounts. The remaining 35 per cent was spent managing reps, managing distributors, forecasting, strategic planning and analysing their market. For each division, one rep/manager was responsible for the sales reps in the large Ontario market, while the other managed the sales reps in the rest of the country. Regardless of structure of the sales operation going forward, Falconi would likely organize around three regions: the West, Ontario and the East, with one manager responsible for the sales reps within each region. This, of course, raised the issue of the surplus manager and would provide an opportunity to reconsider the incumbents. COMPETITOR ORGANIZATIONS Falconi wanted to look at how some of Spectrum's competitors organized their sales forces within Canada. He decided to select a few of the major players from each industry as comparison points. Koninklijke Philips Electronics and P&G operated their sales divisions by product category. Each category had its own dedicated sales force further divided by specific retail channels and/or customer, depending on the size of the retailer. For example, Norelco's sales force was responsible exclusively for shaving and grooming products and did not cross-sell other Philips brands such as televisions. Similarly, Braun sales reps would sell both the Braun and Gillette shaving brands, Duracell would have its own sales team, but neither group would cross-sell other P&G brands. In certain circumstances, one purchasing manager for a retailer such as Wal-Mart might deal with a sales rep from each product category but these sales reps would deal exclusively with Wal-Mart as a customer. In other circumstances, the sales reps would interface with different purchasing managers in those retailers where the purchasing function was organized by category. Both Scotts and CGPC operated their sales divisions in a different manner. Their sales forces were organized by product category, but covered all retail channels. Thus, they had specific sales reps for categories such as fertilizers, soils and seeds, insect control products, and pet supplies (CGPC only), but each sales rep would service clients across multiple channels. Like Philips and P&G, these companies had developed a sales force with product category expertise, yet they did not concentrate an individual sales rep on a specific retailer. Due to the size and strength of each of these companies, they had been successful at developing a \"pull\" strategy with the consumers. Retailers were almost mandated to support and sell these companies' products because of the consumer demand created. In addition, the sales forces had developed strong relationships with retailers, the \"push\" component. Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 Sales Management Page 12 9B06A035 SALES FORCE OPTIONS Looking forward, Falconi wanted to evaluate his options regarding how to organize his sales force to see what alternatives or combinations made sense to Spectrum's operations and the market characteristics. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 Maintaining a separate sales force for each brand line would offer Spectrum the greatest degree of expertise on each brand. These sales reps were already familiar with, and had extensive knowledge about, their brands and would require little, if any, additional training. Sales reps could continue to operate as they already did, and maintain the momentum they had already generated for their product lines. Ultimately, such an organization would allow for a more focused sales force in that representatives would be in a better position to answer product-related questions and offer product educational services. On the other hand, maintaining separate sales forces would not take advantage of the synergies that the recent merger had created for the company. There would be little to no expense reduction, as the existing sales rep levels would likely be maintained. In addition, this organization would not offer any efficiency improvements in the use of sales reps during slower seasonal periods. Finally, there would be a significant duplication of efforts as Spectrum would have multiple sales reps calling on the same retailer at any given time. Merged Sales force With a merged sales force, Spectrum would essentially move to a \"one bag\" sales rep approach, in that each representative would be responsible for becoming an expert on all product lines and selling every brand to their specified customers. With this option, Falconi would have to define each sales rep's responsibilities relating to whether or not the representative would cover all customers in a geographic area, or be responsible for a specific retail group or nationwide chain. As with the separate sales force option, the \"one bag\" sales rep would offer Spectrum numerous benefits. First, Spectrum would be able to capitalize on the potential synergies of the merger as Rayovac did with the Remington acquisition and integration. With each representative selling the entire Spectrum product line, there would be the opportunity to cross-promote brands, leveraging the strong relationships that certain brands have with particular retailers to sell and promote the other lines. This is especially important as Spectrum tries to gain presence for all their lines within each major retailer across the country. Additionally, Falconi would be able to consolidate the existing teams into a smaller unit. Responsibilities for individual retailers could be handled by one or two sales reps selling the entire portfolio of brands, rather than one representative for each individual brand. For example, there are certain customers to whom each business unit has been selling products, including Wal-Mart, The Home Depot, RONA, Canadian Tire, as well as many others across the country. Overall, by merging the sales force, it is estimated that Spectrum would be able to reduce the salaries and bonus expense to approximately $2 million for the entire Canadian sales division. Finally, a merged sales force would create a more efficient team to cope with the seasonality issues inherent in the industries in which Spectrum operates. Sales reps would always have something going on with one of the portfolio brands, allowing them to be in constant contact with retail purchasers. Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Separate Sales forces Page 13 9B06A035 While there are many benefits to this approach for a diversified company like Spectrum, there could be great difficulty in creating an effective and efficient merged team. First, with the addition of numerous new brands to the company's portfolio, sales reps would need to develop an expertise for a large number of brands and products. In addition, the new products they would be selling are completely different from the current brand category they have experience with (i.e. a battery sales rep selling fertilizer). Additional training would be required for all sales reps to educate them on the unfamiliar brands. This training could ultimately be costly and take a substantial amount of time. Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 Distributors Distributors provide sales and logistic services to firms in exchange for commission fees. Such firms are typically hired by smaller companies with limited sales reach, or by companies who are entering new geographic markets but do not yet have a sales team in place. They usually have an advantage over these types of companies as they are well-established, they have existing relationships with retailers, and they operate large sales groups that can service a large number of customers. They typically serve a variety of manufacturers, and thus are able to operate such a sales process in an efficient manner. As a result, distributors are typically given the task of reaching the large number of smaller retailers that prove to be too costly for a small sales force to target, while the manufacturer's internal sales team targets the smaller number of large customers that contribute greater individual sales. Though there are many benefits to using professional distributors as the company's sales force, there are drawbacks as well. The costs associated with these services can be substantial relative to an internal sales force. The cost of sales through a distributor is approximately 15 per cent against revenues, while it is two to three per cent with an internal sales person. As a result, successful firms that are able to establish large sales teams can ultimately generate sales at a lower cost. Other Alternatives and Considerations While each of these alternatives would provide Spectrum with benefits in particular areas, Falconi knew that creating a sales force based on a combination of one or more of these elements might generate greater returns for the company. For example, one option would be to use a combination of a merged sales force and distributors in order to reach both large and small retailers more effectively. Another option could be to create \"platform teams,\" where one business manager would be responsible for maintaining the relationships with the retailers, while a group of product experts support the manager during sales pitches. Falconi wanted to further explore these opportunities, and others, to see what benefits might be derived. Falconi knew that before any changes could be made to the sales strategy, selecting his sales managers would be the first essential step. He would need to ensure that he had the right people in this role, whether they were the current managers or new ones. These individuals would serve as the leaders for the overall sales force, ensuring continued momentum and performance of the representatives. They would also be the \"change agents\" responsible for implementing the plans developed by Falconi for any reorganization. Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Given the variety of products and brands under the Spectrum name, a merged sales force may prove to be highly unfocused. A representative may be incapable of attaining a sufficient knowledge base about every product line, or have too much going on to give each brand the necessary focus needed to sustain its current sales levels. This could hinder sales and effectively kill the existing momentum of the brands. Page 14 9B06A035 If there was a new strategy implemented, Falconi would have to decide how to judge these managers and how best to use them given the chosen system. Falconi knew that dealing with the sensitivities of his employees would be crucial to achieving a successful implementation of a new sales strategy, if, indeed, the company chose to proceed with that option. Changes would need to be made while the company was still in operation; thus, care needed to be given to these issues in order to avoid potential disturbances and to preserve the current momentum of the business. Falconi realized that change management skills would definitely be required to implement a new structure, or to alleviate concerns if no changes were planned, but he wondered how best to deal with these issues moving forward. Finally, Falconi needed to decide how many sales reps should be kept if a new strategy was to be implemented and by what criteria he should be judging his representatives. He knew that the sufficient number of sales reps would depend on the chosen direction of the sales force strategy, but he wondered what his team would look like once the dust had settled. DECISION Given the nature of the new company, and the industries each business unit competed in, Falconi was unsure what sales force structure would offer the company the greatest benefits, at the same time allowing it to grow its sales and gain a greater retail presence for the entire Spectrum brand portfolio. How should the new company be structured in terms of reporting, responsibilities and the size of the sales force? Should Spectrum try to structure itself similarly to its competitors, or did their operation require a different approach? Additionally, depending on which sales force structure was selected, Falconi would have to consider how to organize the teams relative to Spectrum's retail customers. He could organize them by geography, by retail channel, by individual retailers, by some combination of these or by another method altogether. Falconi would have to explore the benefits of the options and determine what made the most sense. The board of directors was meeting next week and Falconi wanted to present them with a full report outlining his proposed strategy regarding the sales force, and why the other alternatives were dismissed. Overall, Falconi knew that a decision would need to be made quickly in hopes that the new sales force strategy could be implemented prior to the peak period for the lawn and garden industry. Falconi knew that sufficient time would be needed to implement changes and initiate any training that might be required for the sales team. Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 Falconi realized he would have to consider the impact that this major change would have on the current employees. The employees recognized that, with such a merger, the company would look for potential synergies to reduce overall company expenses. Other companies in similar situations have typically looked to consolidate employee positions as one option to reduce costs. If there was to be a merger of the sales teams, Falconi would be responsible for selecting the best candidates for the new organization, meaning that nobody's job was safe. As a result, employees from both the Rayovac/Remington and NuGro divisions would be feeling very apprehensive at this point. People are often averse to change and the sales reps would be concerned about their future employment status and the implications of any forthcoming changes to the company. Page 15 9B06A035 Exhibit 1 (NUMBERS BASED ON FISCAL YEAR ENDING SEPTEMBER) 2004* $ $ $ $ 939 90 272 116 N/A N/A N/A $ 1,417 Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 *United/Nu-Gro was acquired by Rayovac mid 2005 (US$ millions) Net Sales Gross Profit Operating Income Rayovac & Remington Rayovac 2004 2003 $ 1,029 $ 922 42.8% 38.1% $ 109 $ 60 Net Income $ 39 $ 15 Remington 2004 2003* $ 388 N/A 47.0% N/A $ 47 N/A $ 17 *Remington was acquired by Rayovac mid 2003 United Industries and Tetra North America United 2005 (US$ millions) Net Sales from External customers $ 787 Segment Profit $ 79 SP as % of Net Sales 10.0% Tetra 2005 $ 96 $ 10 10.4% N/A Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Rayovac Corporation Net Sales Breakdown Consolidated Net Sales by Product line 2005 (US$ millions) Batteries $ 968 Lights $ 94 Shaving & Grooming $ 271 Personal Care $ 143 Lawn and Garden $ 447 Household Insect Control $ 150 Pet Products $ 286 Totals $ 2,359 Page 16 9B06A035 Exhibit 2 SPECTRUM BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (years ended Septemeber 30, 2005, 2004) (US$ 000s) Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 Gross Profit Operating Expenses: Selling General and Administration Research and Development Restructuring and related charges Operating Income Interest expense Other income, net Income from continuing operations before taxes Income tax expense Income from continuing operations Loss from discontinued operations, net of tax benefits Net Income Source: 2005 Spectrum Brands Inc. Annual Report. 2005 $ 2,359,447 $ 1,465,096 $ 10,496 2004 $ 1,417,186 $ 811,894 $ (781) $ 883,855 $ 606,073 $ $ $ $ $ $ $ $ $ $ $ $ $ 473,834 160,382 29,339 15,820 679,375 204,480 134,053 (856) 71,283 24,451 46,832 46,832 $ $ $ $ $ $ $ $ $ $ $ $ $ 293,118 121,319 23,192 12,224 449,853 156,220 65,702 (14) 90,532 34,372 56,160 380 55,780 Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Net Sales Cost of goods sold Restructuring and related charges Page 17 9B06A035 Exhibit 2 (continued) SPECTRUM BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (years ended Septement 30, 2005, 2004) (US$ 000s) 2005 2004 Current Assets: Cash and cash equivalents Receivables: Trade A/R, net of allowances Other Inventories Deferred income taxes Assets held for sale Prepaid expenses and other Total Current Assets Property, plant and equipment, net Deferred charges and other Goodwill Intangible assets, net Debt issuance costs Total Assets Liabilities and Shareholder's Equity Current Liabilities: Current maturities of LT debt Accounts payable Accrued liabilities: Wages and benefits Income taxes payable Restructuring and related charges Accrued interest Liabilities held for sale Other Total Current Liabilities Long-term debt, net of current maturities Employee benefit obligations, net of current portion Deferred income taxes Other Total Liabilities Minority interest in equity of consolidated subsidiary Shareholders' equity: Common Stock Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Notes receivable from officers/shareholders Less treasury stock, at cost Less unearned restricted stock compensation Total Shareholders' equity Total Liabilities and Shareholders' equity Source: 2005 Spectrum Brands Inc. Annual Report. $ 29,852 $ $ $ $ $ $ $ $ $ $ $ $ $ 362,399 10,996 451,553 39,231 108,174 45,762 1,047,967 304,323 47,375 1,429,017 1,154,397 39,012 4,022,091 $ $ 39,308 281,954 $ 13,971 $ 269,977 $ 19,655 $ 264,726 $ 19,233 $ 9,870 $ 51,262 $ 648,694 $ 182,396 $ 35,079 $ 320,577 $ 422,106 $ 25,299 $ 1,634,151 $ $ 23,895 226,234 $ 47,910 $ 40,468 $ 16,978 $ 31,529 $ 22,294 $ 76,935 $ 557,376 $ 2,268,025 $ 78,510 $ 208,251 $ 67,199 $ 3,179,361 $ - $ 40,138 $ 21,672 $ 8,505 $ 16,302 $ $ 60,094 $ 396,840 $ 806,002 $ 69,246 $ 7,272 $ 37,368 $ 1,316,728 $ 1,379 $ 666 $ 671,378 $ 267,315 $ 10,260 $ $ 949,619 $ (70,820) $ (36,069) $ 842,730 $ 4,022,091 $ 642 $ 224,962 $ 220,483 $ 10,621 $ (3,605) $ 453,103 $ (130,070) $ (6,989) $ 316,044 $ 1,634,151 Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 Assets Educational material supplied by The Case Centre Copyright encoded A76HM-JUJ9K-PJMN9I Order reference F221316 SHAVING, GROOMING & HAIR CARE PRODUCTS LAWN & GARDEN CARE INSECT CONTROL PRODUCTS AQUARIUM PRODUCTS & SUPPLIES PET PRODUCTS & SUPPLIES Purchased for use on the cases in, at European University, Barcelona. Taught by Christine Clarke, from 3-Feb-2014 to 6-Jun-2014. Order ref F221316. Usage permitted only within these parameters otherwise contact info@thecasecentre.org Page 18 9B06A035 Exhibit 3 BATTERY & LIGHTING PRODUCTS