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S w 9B07B004 PY FOXY ORIGINALS -- EXPANSION INTO THE U. MARKET Nina Gupta wrote this case under the supervision of Elizabeth M. Grasby solely to...

Questions
1. Indentify all costs, other than variable costs, for the trade-show distribution strategy. Categorize these costs as investments and fixed costs ( per trade show and for fiscal 2005)
2. Identify all costs, other than variable costs, for the sales representatives’ distribution strategy
3. Do the variable costs for both products (necklaces and pairs of earnings) differ between trade shows and sales representatives ?
4. Calculate the variable costs per order received at a trade show and the variable costs per order received through a sales representative
7. For each distribution strategy, calculate the unit contribution and contribution margin rate for each of the two products lines ( necklaces and pairs of earnings). What is the weighted average contribution margin for an order at a trade show and an order with a sales representative ?
8. Calculate Foxy’s breakeven point for each distribution strategy
9. which distribution channel will be more profitable in 2005?
10. Choose a distribution strategy ( trade shows, sales representatives or both) based on your qualitative and quantitative assessment
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9B07B004 PY FOXY ORIGINALS –– EXPANSION INTO THE U.S. MARKET Nina Gupta wrote this case under the supervision of Elizabeth M.A. Grasby 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. O 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 [email protected]
Version: (A) 2008-12-23 C Copyright © 2007, Ivey Management Services N O T In June 2004, Jen Kluger and Suzie Orol received a phone call from Sarah Gibson, one of their retail
customers, in Winnipeg, Manitoba. Gibson called with a complaint about how many of her competitors
now carried Foxy Originals jewelry. Gibson’s store had been the exclusive carrier of Foxy Originals
jewelry in the Winnipeg area for a number of years. With the growing popularity of its designs, many
stores in the area now carried the Foxy Originals line. Kluger and Orol, owners and partners of Foxy
Originals, were worried. If they continued to saturate the Canadian market, they would be faced with
similar concerns from customers across Canada. The partners realized that it was time to grow the
business outside Canada, and they were excited about the possibility of selling their jewelry in the United
States. Their goal was to enter the U.S. market by January 2005, but they would first have to decide on the
best method of distribution –– attending trade shows or hiring sales representatives. COMPANY BACKGROUND
History1 D O Jen Kluger and Suzie Orol believed that life should be fun and full of excitement, and they founded Foxy
Originals based on these beliefs. These two young jewelry designers met while attending The University
of Western Ontario, and they set out with a vision to make high style fashion jewelry accessible to young
women. Both partners had experience in the jewelry industry. Orol’s parents owned a metal
manufacturing company that focused on making jewelry and medals for companies and community
groups. Orol was involved in the family business from a young age. Kluger had been designing and
selling her own line of necklaces since she was in Grade 11. Kluger and Orol started their business, Foxy Originals (Foxy), in 1998. They sold a modest line of jewelry
to friends and acquaintances on campus while attending university. In the summers before graduation, the
partners took Foxy on the road to various outdoor festivals and summer concerts. The results were very
1 Foxy Originals Catalogue, 2007. Page 2 9B07B004 positive. Upon graduation, with business degrees in their back pockets, Kluger and Orol left corporate job
offers behind to work full time at Foxy. The partners spent their time designing new product lines and
promoting Foxy in new markets. PY As the company grew and the jewelry that sold at festivals and summer concerts became more popular,
Kluger and Orol began selling their jewelry to retail stores. Each retail account took a significant amount
of time to develop, with the partners personally contacting and meeting with each store’s product buyer.
The partners were very successful at selling to retailers due to their high energy, enthusiasm and
knowledge of the product. As a result, in the first three years of operations, the company’s sales had
doubled every year. Sales were continuing to grow at a rapid pace. O Kluger and Orol were always very enthusiastic about their designs, and Canadian retailers began placing
orders for Foxy jewelry after meeting these dynamic founders and learning about the products. It wasn’t
long before Foxy jewelry could be found in 250 boutiques across Canada. Kluger and Orol personally sold
(i.e., they had no sales representatives) their product lines to every retailer in Canada and managed all
operations. C Kluger and Orol described Foxy as a company that managed to stay two steps ahead of the latest trends: T In doing so, our collections remain fresh, fun and funky. We realize that in this day and
age, being hip and trendy comes at a high cost; not so with Foxy. We are able to provide a
selection of necklaces, earrings, bracelets and rings that are truly fashion-forward, at a
reasonable price. O Target Market N Foxy jewelry offered high style and high quality at an affordable price point and targeted women between
the ages of 18 to 30 who were style- and price-conscious. The jewelry was designed for three groups of
women: The Reversible Enamels Ladies, The Bridge Ladies and The Chain-lovin’ Ladies.
Kluger and Orol explained each customer group: O The Reversible Enamels Ladies: Reversible necklace enthusiasts are usually the very
dedicated Foxy customers who have been following our company since Day 1. They are
slightly more conservative with their style and use Foxy jewelry to add a little something
special to their outfits. They love the idea that they are getting two necklaces for the price
of one. (See Exhibit 1 for sample product preferences for this group.) D The Bridge Ladies: These customers consist of young, suit-wearing professionals. They
want to add a little accent to their suits, but they need to be careful how much they add.
These customers go for the leather necklaces with the bigger pendants. (See Exhibit 2 for
sample product preferences for this group.)
The Chain-lovin’ Ladies: These customers are more fashion savvy and trendy. They read
the fashion magazines and seek out “that look.” These ladies collect our big earrings and
long necklaces. They layer the Foxy necklaces and try the newest collections as soon as
they are in the stores. (See Exhibit 3 for sample product preferences for this group.) Page 3 9B07B004 Operations2 PY Foxy jewelry was designed and produced in Toronto, Canada. Kluger and Orol designed all the jewelry,
releasing two new collections every year. A collection or product line consisted of a number of different
styles of necklaces, earrings and rings, where all styles were associated with a central theme such as
“Royal Safari.” The designs were assembled by a small production team of professional crafts people.
All Foxy jewelry was made from pewter and coated in sterling silver, matte gold or bronze with a matte
finish. Each item was then stamped with the Foxy signature to authenticate the designs (see Exhibit 4 for
the Foxy signature tag). From this common starting point, the pieces were transformed into original works
through the integration of enamel, stones, leather and ultrasuede. O THE U.S. MARKET3 T C Kluger and Orol had established a strong Foxy presence in the Canadian market, and they were now ready
to expand into the United States. Financially, Foxy was healthy so any distribution costs related to the
U.S. expansion could be financed from internal operations (i.e., no funding was needed). The key fashion
hubs in the United States were New York, Los Angeles, Chicago and Dallas. Kluger and Orol did not
want Foxy to be available on every street corner in every city. Instead, they preferred selling to reputable
stores that suited the brand. Kluger and Orol decided to charge the same price for their products in the
United States as they did in Canada (i.e., a necklace sold for Cdn$34 and, in the United States would sell
for US$34). This was a common pricing strategy in the industry, and the partners knew this would
eliminate all risk associated with exchange rate fluctuations. N O The U.S. jewelry market was more than 10 times larger than the Canadian jewelry market, offering a much
greater opportunity for product exposure. Based on the success they had achieved in Canada, Kluger and
Orol believed in their product, but they worried about how responsive the U.S. market would be to their
jewelry designs. The partners believed that Canadians supported Canadian businesses and were brand
loyal to companies that manufactured locally; however, they suspected that Americans preferred the latest
trends regardless of the product’s origin. Classic jewelry (currently 50 per cent of Foxy merchandise in
Canada) was also not as popular in the United States. Kluger and Orol would need to stay on top of Foxy’s
fashion-forward designs to compete effectively. O U.S. Trade Shows D Trade shows were one-stop marketplaces for retailers to source products from wholesalers and importers.
They were positioned for registered personnel only, usually consisting of buyers from fashion boutiques,
accessories, jewelry, gift, fashion chain, department and other specialty stores. These exhibitions were not
open to the general public. U.S. trade shows were very large, often with over 75,000 buyers in attendance.
Kluger and Orol planned to set up a booth at several trade shows in order to showcase Foxy jewelry to
prospective buyers. Buyers would select what merchandise they would like to carry in their stores and
would then place their orders with the exhibitor. The partners had plans to attend trade shows devoted to
women’s fashion accessories, surf apparel and giftware. 2
3 Foxy Originals website, www.foxyoriginals.com/about, March 13, 2007.
All figures are in Canadian dollars. Page 4 9B07B004 There were 10 potential trade shows for 2005 where Foxy could showcase its products. Registration for all
shows needed to be complete by November 2004, at an average cost of $3,000 a show. The average trade
show lasted three days, wherein Kluger and Orol would require five days of preparation and both would
work nine hours a day at the trade show. O PY Kluger and Orol were excited about attending the shows to learn about the U.S. jewelry market and to get
ideas for new product innovations. Trade shows were a great way for the partners to personally sell their
merchandise and to network with key people in the industry. The partners also loved to travel, and they
looked forward to visiting the big U.S. fashion hubs. Because of the diverse attendance at these shows, it
was difficult for the partners to predict at which retail stores their merchandise would be sold. Ideally, they
preferred that all major fashion-forward stores within a geographic area would support Foxy’s
merchandise; however, sales would likely be scattered across locations that were diverse in geography and
brand image. C One of the principal selling factors at trade shows was the exhibitors’ booth layout –– the more exciting
and flashy the booth, the greater the number of visitors. The partners researched a number of booths and
settled on one that would cost $4,000 and could be used for approximately 30 trade shows (see Exhibit 5
for booth display). The booth would have to be shipped to each trade show at an average cost of $1,500 a
show. Plane tickets and related travel costs would average $2,000 per show, and product samples and
promotional materials would cost $2,800 per show. Kluger and Orol had friends in many U.S. cities, so
they planned to stay overnight with them when visiting the shows. T Expected Sales O The partners had estimated that an average retailer order would consist of 25 necklaces and 12 pairs of
earrings. Retailers would purchase necklaces for $17 and earrings for $12 from Foxy, which they would
then sell to their customers for $34 and $24 respectively. N All necklaces consisted of a chain, a pendant, a label, a clasp, and labor fees for a total cost of $8.05 for
each necklace. Shipping terms were FOB shipping point and cost an average of $15 an order. A pair of
earrings cost approximately $5.50 to manufacture. Shipping terms were the same for a pair of earrings as
they were for necklaces. O The partners expected anywhere from 20 to 45 orders at each trade show. Historically, 50 per cent of retail
buyers at the trade shows would reorder product approximately two times a year. Sales Representatives D An alternative method of distribution would be to develop a sales force in the key fashion hubs in the
United States. Sales representatives would carry 10 to 15 different brands, usually within the same
category of products (i.e., accessories), and would sell to retailers in designated geographic zones. Kluger
and Orol wanted to hire people who would be loyal and who could represent the appropriate Foxy brand
attributes. Kluger and Orol noted: “The most important characteristics in sales representatives are that they
believe in your product, and they are willing to get on the road or travel to show it well.”
Kluger and Orol knew having a sales force would be a much faster way for Foxy to enter the market
because of the sales representatives’ contacts in the industry, their relationships with existing retailers and Page 5 9B07B004 the minimum amount of training they would require. They also knew it could be difficult to find the right
people with the right characteristics to make this alternative work. PY Sales representatives would be compensated with a 15 per cent commission on all sales.4 They would also
receive $200 a month towards rental space in their jewelry showrooms5 (see Exhibit 6 for showroom
display), two sets of sample boards6 a year for a total cost of $2,900 and catalogues and promotional
materials averaging $600 a year. Foxy would have to hire a part-time bookkeeper to pay the sales
representatives because calculating sales commissions would be time-consuming and complicated. The
bookkeeper’s fee would be $40 an hour, and this person would be required for 48 hours a year. Travel
expenses, such as gas and mileage were not covered by Foxy. Trade Shows and Sales Representatives C O Production costs and retailer order size were the same for this option as for the trade show option. The
average sales representative would sell between 10 to 15 orders each month. The 10 to 15 orders included
both new account sales and reorders from existing customers. If this option was chosen, Kluger and Orol
planned to hire four sales representatives, one in each of the major cities of New York, Los Angeles,
Chicago and Dallas. T Ideally, Foxy preferred to enter the U.S. market by attending trade shows and hiring a sales force. The
problem with this alternative was territory ownership. For example, if Kluger and Orol attended a trade
show in New York, and had hired a New York based sales representative, it was an industry norm that the
sales representative would expect a 15 per cent commission from sales made at the New York trade show. N O Kluger and Orol investigated structuring the sales representatives’ commission package based on sales they
made personally rather than on all sales made within their geographic location. Sales representatives were
unhappy with this alternative because not only would competition be created between sales representatives,
but also between the sales representatives and Foxy. For example, sales representatives worked hard to
establish contracts, and many times, contracts were signed with one store, and as a result, other stores
would see the product and would want to carry it themselves. Sales representatives believed they should
be compensated for these spillover sales, and they were concerned that the new retail stores could order
directly from Foxy. O To combat the issue of internal competition, the partners thought about attending trade shows in the major
cities and having their sales force work in the smaller cities; however, smaller cities were not as fashionforward, and would not help to establish the Foxy brand presence in the United States, the way sales
representatives could in major cities. D In the short term, Kluger and Orol decided to focus on just one of the distribution channels in order to limit
the complexities of the U.S. expansion. If the partners decided to pursue both trade shows and sales
representatives, it would be a longer-term strategy. 4 A commission rate of 15 per cent of the wholesale price was the industry standard for sales representatives in the United
States.
5
Sales representatives would have showrooms either at home or at a central location where the products would be
displayed for prospective buyers.
6
Sample boards were used to display merchandise and were transportable. They cost $1,450 each. Page 6 9B07B004 CONCLUSION D O N O T C O PY Kluger and Orol were excited about the U.S. opportunities, and they wanted to ensure they were entering
the market with a solid strategy. The partners had built the business on the principles of having fun,
gaining exposure for new product lines and staying ahead of fashion trends. To date, they had been highly
financially successful in doing just this. Knowing the additional workload that the U.S. expansion would
create, they hoped their profit would grow by at least $100,000. Both options appeared promising but not
without risks. Kluger and Orol had to make a decision quickly to prepare for a January 2005 launch. Page 7 9B07B004 Exhibit 1 T Source: Foxy Originals Catalogue 2007. C O PY THE REVERSIBLE ENAMEL LADIES O Exhibit 2 D O N THE BRIDGE LADIES Source: Foxy Originals Catalogue 2007. Page 8 9B07B004 Exhibit 3 C O PY THE CHAIN-LOVIN’ LADIES T Source: Foxy Originals Catalogue 2007. O Exhibit 4 D O N THE FOXY SIGNATURE TAG Source: Company files. Page 9 9B07B004 Exhibit 5 Source: Company files. T C O PY TRADE SHOW BOOTH O Exhibit 6 D O N SHOWROOM DISPLAY Source: Company files.

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