Batesmanor's Ad Agency Case Analysis

company manufactures medium-to-high-priced wood bedroom, living room and dining room furniture. BatesManor sells its furniture to independent furniture stores and high quality department stores nationwide; it's very selective in choosing retail outlets. BatesManor had 10 full-time salespeople and 2 sales managers for fiscal year 20071. And sales personnel receive his salary and commission on the base of the sales. Bates believes that the company has been successful because they have employees who are committed to the company and they are not only taking the order but motivate the retail sales people and suggesting them about displaying the furniture in the store. The total promotional expenditures allocated by BatesManor for the operating year 2007 were $3,675,000, which did not include the salary of the vice president of sales. For the same year the company had net sales of $75 million.

Problem Identification

For year 2008, Mike Hervey, from BatesManor's ad agency, proposed that they would increase the advertising expenditures by $225,000. This would increase new product exposure, brand awareness, and enhance the quality image of the manufacturer. However, the $225,000 increase in advertising is slightly out of line with the manufacturer's policy of budgeting 5 percent of expected sales for total promotion expenditures1. Although Hervey recommended an additional $225,000 only for the advertising budget, John Bott, the vice president of sales, noted sales expenses and administration costs were expected to increase a total of $135,000 in 2008. Therefore, how can Charlton Bates allocate the advertising budget, sales and administration costs?

Case Analysis

In 2007, the total furniture industry sales were estimated to be $31 billion at manufacturers' prices. The household furniture industry is divided into three categories of furniture. The first category is upholstered furniture which makes up 50% of the market sales. The second category is wood furniture which has 40% of the market sales. In 2007 this category grew 2.5% and is forecasted to grow another 4% in 2008. Wood furniture consists of tables, dining room and bedroom furniture (dining room and bedroom furniture accounts for the majority of the wood sales). BatesManor furniture falls into the second category, and its year end net sales were $75 million with a before-tax profit of $3.7 million1. The third category consists of ready-to-assemble furniture and casual furniture, which makes up about 10% of the sales.

In the U.S. there are about 1000 furniture manufacturers. The top ten account for about 28% of the industry sales. The top twenty-five account for more than one-half of the industry sales. Bedroom furniture from Asia (imports), account for as much as thirty percent of industry sales. These foreign imports have had a negative impact on the industry's sales because they are driven down furniture sales by as much as thirty percent in some furniture categories1. U.S. manufactures are slowly downsizing their operation. Over the last eight years one hundred manufacturing plants have been closed.

Manufacturers distribute furniture to specialty furniture and home furnishing stores, department stores, and mass-merchandise stores. About 68 percent of furniture sales come from specialty furniture and home furnishing stores. Manufacturers have avoided the internet for the sales of their furniture. In US, BatesManor sells its furniture through department stores and independent furniture specialty stores. This is mostly because of the up-front cost of building a website, maintaining the website, issue with the cost of deliveries, and concerns with returning of heavy items. Majority of retailers are moving towards "gallery concept"-the practice of dedicating an amount of space in a store and sometimes an entire freestanding retail outlet to one manufacturer1.

According to Bates, most of the company's customers aged 40 to 59 years old with an annual household income over $100,000 get ideas from galleries and upscale furniture and department stores and buy BatesManor furniture. In 2007, the company employed 10 full-time salespeople and two regional sales managers. The sales staff takes furniture orders; are also expected to motivate retail sales people, assist in setting up displays in stores, and give advice.

Approximately 3.5% of annual net sales are spent on trade (ex. Brochures, point-of-purchase materials, and technical booklets), consumer (shelter magazines), and cooperative advertising (newspapers, radio, and TV). The cooperative advertising is usually shared between the retailer and manufacturer. About 5% of net sales of BatesManor are allocated for total promotional expenditures for the 2007 operating year. Promotional expenditures consist of sales expense and administration, cooperative advertising programs, trade promotion, and consumer advertising.

Identifying the Root Problem Components

Charlton Bates, president of BatesManor Furniture, Inc., received a proposal from their advertising agency for fiscal year 2008. The proposal showed that there would be an increase in advertising expenditures by $225,000. According to Dr. Berry, consultant to the company, this increase appeared to be slightly out of line with the company's budgeting 5% of expected sales for total promotional expenditures. If the company doesn't