In May, Suzanne Leister, marketing vice president of Baldwin Bicycle Company, was mulling over the discussion she had had the previous day with Karl Knott, a buyer from Hi-Valu Stores, Inc. Hi-Valu operated a chain of discount department stores in the Northwest. Hi-Valu’s sales volume had grown to the extent that it was beginning to add “house-brand” (also called “private-label”) merchandise to the product lines of several of its departments. Mr. Knott, Hi-Valu’s buyer for sporting goods, had approached Ms. Leister about the possibility of Baldwin’s producing bicycles for Hi-Valu. The bicycles would bear the name “Challenger,” which Hi-Valu planned to use for all of its house-brand sporting goods.
Baldwin had been making bicycles for almost 40 years. The company’s current line included 10 models, ranging from a small beginner’s bike with training wheels to a deluxe 12-speed adult’s model. Sales were currently at an annual rate of about $10 million. (The company’s financial statements for last year appear in Exhibit 1.) Most of Baldwin’s sales were through independently owned toy stores and bicycle shops. Baldwin had never before distributed its products through department store chains of any type. Ms. Leister felt that Baldwin bicycles had the image of being above average in quality and price, but not a “top of the line” product.
Hi-Valu’s proposal to Baldwin had features that made it quite different from Baldwin’s normal way of doing business. First, it was very important to Hi-VaIu to have ready access to a large inventory of bicycles, because Hi-Valu had had great difficulty in predicting bicycle sales, both by store and by month. Hi-Valu wanted to carry these inventories in its regional warehouses, but did not want title on a bicycle to pass from Baldwin to Hi-VaIu until the bicycle was shipped from one of its regional warehouses to a specific Hi-Valu store. At that point, Hi-Valu would regard the bicycle as having been purchased from Baldwin, and would pay for it within 30 days. However, Hi-Valu would agree to take title to any bicycle that had been in one of its warehouses for four months, again paving for it within 30 days. Mr. Knott estimated that on average a bike would remain in a Hi-Valu regional warehouse for two months.
Second, Hi-Valu wanted to sell its Challenger bicycles at lower prices than the name-brand bicycles it carried, and yet still earn approximately the same dollar gross margin on each bicycle sold—the rationale being that Challenger bike sales would take away from the sales of the name-brand bikes. Thus, Hi-Valu wanted to purchase bikes from Baldwin at lower prices than the wholesale prices of comparable bikes sold through Baldwin’s usual channels.
Finally, Hi-Valu wanted the Challenger bike to be somewhat different in appearance from Baldwin’s other bikes. While the frame and mechanical components could be the same as used on current Baldwin models, the fenders, seats, and handlebars would need to he somewhat different, and the tires would have to have the name “Challenger” molded into their sidewalls.
Also, the bicycles would have to be packed in boxes printed with the Hi-VaIu and Challenger names. Ms. Leister thought that possibly these requirements would increase Baldwin’s . . .
Assignment
- What is the expected added profit from the Challenger line?
- What is the expected impact of cannibalization of existing sales?
- What costs will be incurred on a one-time basis only?
- What are the additional assets and related carrying costs?
- What is the overall impact on the company in terms of (a) profits, (b) return on sales, (c) return on assets, and (d) return on equity?
- What are the strategic risks and rewards?
- What should the company do? Why?