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INSTITUTE OF MANAGEMENT TECHNOLOGY,

HYDERABAD

Marketing Management-2 Assignment

Classic Knitware

Team Members:

Anshul Tamrakar - (17A1HP297)

Srishti Jindal - (17A1HP243)

Kunal dhanwani - - (17A3HP523)

Anurag Roy - (17A1HP537)

Sarthak Biyala - (17A2HP453)

Jeevan AS - (17A1HP370)

Rohit Kumar Morla - (17A1HP442)


SUMMARY

Key facts

Classic Knitwears gross margins from private label or unbranded knitwear was low because of
lower brand recognition. It was earning $550 million as revenues in 2005 out of which three
fourths came from wholesaler customers.

Gross margin in 2005: 18%

Expected gross margin in 2006: 20%

A new product was needed to achieve the expected gross margin figures. Through market
research with the help of consumer.com, they came up with the idea of insect-repellent apparel.
In doing so, they would have incurred $8-10 million as marketing expenses to tap 50% unaided
awareness. Such a figure was beyond the investment capacity of the company. So, they entered
into a licensing agreement with Guardian Inc., a manufacturer of insect-repellent products which
would have provided them chemical to be used to produce such shirts.

Decision making issues

1. Whether to launch the new product line?


2. What is the expected sales volume of the new product line to achieve break even (keeping
under consideration the cost structure, trade promotions and cost of advertising budget)?
3. Whether or not the new product line would fetch the demand needed to achieve break even?
4. Would the Guardian project provide a viable long-term product differentiation strategy for
Classic?
1. Evaluate the product-company fit.
Answer: - Classic Knitwear was planning to launch a new product to compete with international
brands and thereby its problems as well. The main problem faced by the company was that its
gross margin was very low as compared to its peers because the company had no brand
recognition among retail customers, which restricted the opportunity to distinguish its products.

The company was planning to launch a line of insect repellent shirts through a partnership with
Guardian, Inc. The product had a great potential because of its innovativeness and which would
have ultimately increased the gross margin of the company from 18% to 38-39%. This
would have helped the company to compete with other brands. The Company chose to partner
with Guardian, Inc. because its insect-repellent clothing technology was patented and because
the company had a high level of awareness as well.

The company also had high-volume and low SKU production runs which helped the company to
enjoy a cost-advantage over other US producers. The introduction of the new product meant
introduction of additional 16 SKUs which might bring some inefficiency in its present system.

2. Evaluate the market-company fit.


Answer: - Classic knitwear started as a manufacturer and distributer of unbranded casual knitwear
apparel who operated in the $24.5 billion category of non-fashion casual knitwear (which
constituted mainly of casual wear or underwear), rather than in the prestigious and expensive
category.

The branded side of the non-fashion was dominated by mainly three players: JamesBrands ($4.5
billion in U.S revenue), FlowerKnit ($1.25 billion in U.S revenue), and Greenville Corporations
TopTops Division ($630 million in U.S revenue). The profit margin of these major brands where
between 30 to 40% while Classic knitwear was hardly making around 18%.

Even with these major players in the market, in the unbranded side Classic Knitwear mainly
competed with little-known firms such as B&B Activewear ($590 million in U.S revenue) having
a market share of 23.6%.

Due to the increase in insect-borne illness such as Lyme disease and West Nile virus and with
Americans dissatisfied with the scarcity of products available for insect prevention, Classic
Knitwear found out that there was a need in the market. So, they decided to launch a line of
insect repellent shirts through partnership with a chemical firm Guardian, Inc. which they
believed have a good market potential based on the market research they have done.
3. Will consumers and trade respond to Guardian marketing program?
Answer: - Classic Knitwear, in partnership with Guardian, plans to launch a new line of
clothing to increase its gross margin. Since this new line of clothing is insect repellent, the
company does not want to take away its importance, and hence decides to launch the same in the
name of Guardian and not Classic Knitwear. Hence, it is critical for the company to know how
the traders and the consumers will respond to this new marketing program.

The retail stores might not have a positive response to this until and unless certain trade
discounts and promotions are provided. This is because, in comparison to the margin provided by
other brands (50%), this company decided to provide lesser margin to the retailers. Moreover,
the company also demands for higher display space. This is hence a drawback for the retailers
and may not support it.

Classic knitwear gets 75% of its revenue from the wholesalers and only 25% from retailers.
Therefore, without much experience with the retail sector, Classic knitwear decided to target
only them for the sales of the new product line (sports and apparel stores, discount stores, general
merchandise stores). In such a case, the trade may not respond the way the company anticipates.
In this case, the company also has a high chance of losing out on its existing wholesaler base.

When it comes to customer response, there is good chance that it is positive. This is because,
based on the survey, 65% of the respondents would definitely try the product line and 50% of
them would even go for purchases in the following year. This clearly shows that there are high
chances for the customers to respond positively to this new program.

4. What other problems do you see in the proposed Guardian marketing program?
Answer: - The following are the problems which can be noticed in the proposed Guardian
marketing plan:

1. Guardian anticipated all then four styles (short sleeve tee, long sleeve tee, polo style sport
shirt and heavyweight fleece) to be equally popular. However, there was no such
evidence or market research done in that context. This conclusion was solely based on the
target audience which they were catering to.
2. The new product was marketed by the name Guardian Apparel after Guardian Inc.
However, there was no mention of Classic knitwear in marketing the clothing. This could
have resulted in Classic losing its identity and recognition among customers. The basic
motive for which this project was being undertaken (brand recognition among customers)
was not being fulfilled.
3. There was no such guarantee that Classic would be able to achieve the level of
acceptance to produce a demand of 10,000 units in two years.
4. 40% of the marketing investment ($1.2m out of a total of $3m) was being spent to garner
only 12.5% of unaided awareness of Guardian product among its target market.
5. What are the advantages and disadvantages of the licensing agreement?
Answer: - The Following are the Advantages and Disadvantages of License Agreement.

Advantages:

1) Benefits that are related to short term can be a result of this Agreement. This is so because the
determined marketing investment, which was initially thought to be $8 million - $10 million ,
was reduced to $3 million

2) Brand Value of Guardian increases significantly when it is undergoing promotion. So, they
should bear some part of the Marketing Expense

Disadvantages:

1) Only Guardian Logo is being used on the product which might turn out to be a loop hole in the
process. It may create problem for Classic if there is any conflict which arises due to agreement
between companies in near future

2) The Result of this Agreement has forced Classic to meet series of Annual Net sales target over
the first 4 years which is steadily rising. The target for the 4th year should be met in each of the
succeeding years to come. If the target failed and they could not reach the requirement, then the
license would be deemed Null and Void and would be cancelled.

6. What sales volume is required to break even on Classics 2-year marketing investment?

Answer: - Break-even Analysis:

Total Costs:

1. Fixed Costs:
Marketing expense

a. Cost of display unit $1,000,000 (10,000*100)


b. Advertising expense $1,200,000
c. Salaries of executives $510,000 (85,000*2*3)
d. Trade promotion and
Advertising allowance $290,000 (balance figure)

Total Fixed Costs $3,000,000


2. Variable Costs:
Total Variable cost $10.82x (x is the number of units required to
break even)
Total Revenue: $17.87x (x is the number of units required to
break even)

Break-even= Total Cost=Total Revenue

Therefore,

3,000,000+10.82x=0.95*17.87x (5% royalty to Guardian)

Break-even units of shirts: 4,87,290


Break-even sales: 4,87,290*17.87=$8,707,872

7. If Classic implements all of Millers recommendations, what is the estimated demand


for the new product line over the 2-year launch period?

Answer: - Demand Estimation

Target population 100,000,000 (aged 15+)


Percentage of Unaided-awareness 12.5% (taking half of the percentage of
generated unaided awareness as an average for 2
years as mentioned in case)
Percentage of the respondents
definitely would buy 37% (in the high-price group,
based on the consumer research)
Actual conversion into sales 60% (based on Millers
estimation)
Therefore,
Total demand for the next 2 years,
=100,000,000*0.125*0.37*0.60
=2,775,000
Including the fraction of the consumers who would re-purchase. Thus, the
final demand,
=2,775,000+2,775,000/2
=4,162,500