Mktg 464 - Classic Knitwear Case Analysis

Dave Oliva, Jeff Porter, Trang (Nancy) Hoang, Ka Thao

MKTG 464 - Group Case Analysis

Classic Knitwear Case Analysis

        In their current situation, Classic Knitwear profit margins currently sit at 18% which is 12%-22% lower than margins of leading branded manufacturers. The company wants to increase its profit margin to 20%. The problem regarding Classic’s margins stem from its lack of brand equity in comparison to its branded contemporaries, as well as the fear that Classic would soon lose its competitive advantage of high operational efficiency, which it achieved due to a new factory in the Dominican Republic. In addition, Classic Knitwears struggles to compete with the “Big Three” who dominate the branded-side of non-fashion knitwear market. The company has been making different attempts such as using price promotion during seasonal period like Christmas or back-to-school to push the margins. However, controlled labels and tie-in promotions do not seem to be achieving their desired 20% margins from a long term point-of-view. That is the reason why Classic is considering expanding its product line through a joint venture with chemical firm Guardian to create a branded line of insect repellent shirts. Classic would use the Guardian name, which has garnered a positive brand perception as 95% of consumers aware of the brand hold a positive feeling towards them.  While the CFO, Sandra Chong, believe that these margins should be increased through further changes to operational efficiency, Marketing Manager Brandon Miller feels that the risk of this partnership will prove mutually beneficial and that they can increase margins without needing to invest in brand awareness for their own product.  

        The first option would be to proceed with operations as they are now.  Classic currently owns 16.5% market share in unbranded, non-fashion apparel and is able to maintain a healthy competitive advantage through the new factory.  Classic uses t-shirts as the focus of its production and sells primarily to wholesale for the purpose of screen printing. This allows them to utilize their high tech new factory and low-SKU operational mentality to produce high amounts of a low number of items very cheaply. The advantage for this option would be low risk in the short term and allow for Classic to utilize its current advantage of being specialized in the production of non-fashion, unbranded t-shirts. The disadvantage for this option is that it leaves the company stagnant, as the market for unbranded t-shirts is not currently growing.  Their technology-based competitive advantage will only last until other players in their industry have also acquired that technology, at which point they will lose pricing leverage and revenue will diminish.  We believe that proceeding with the status quo will have negative consequences in the long term.

The second option would be to go ahead with the plan as presented by Miller. The expected fixed costs for the plan are $4 million, which covers retail displays and marketing costs. Variable costs are $255,000 per year for salespeople, the COGS, and 5% of sales as licensing costs to Guardian. Additionally, there are variable retail incentives of 5% as a discount on product, and an advertising credit expected to amount to about 35 cents per item. Based on our analysis of expected demand, we expect about 513,000 shirts to sell in year one, and 770,000 in year two. After the initial outlay is accounted for, the net margin per unit would be about 24%, which would improve overall company margins. After charting out outflows and income, the Guardian project would break even some time around September of the second year. Going ahead with this project should allow them to increase their margins and profit, calm their investors, and open a new revenue stream that could prove to be very lucrative in the long term.