H.l. Reed's Family Business and Issues

H.L. Reed’s is a family owned business and operated by the grandson of founder. Its sales performance drop to 940 suits in 1989, 35% decrease compare to 1985. The slow response to H.L.Reed’s declining sales could be contributed to below reasons.

The continuity of family business rely much on the personal abilities, social network, industry knowledge and management skills originated from the owner. These are intangible assets to the company but not likely to transfer to his successor. Selecting successor from family members may not be the best alternative as the option is limited. During the ownership transfer, i.e. when the president retires or pass away, the successor may not possess the same capabilities to run the business with smooth transition. They may act differently to same problem.

Organization Structure

H.L.Reed’s as a family business tend to have a lower efficiency and motivation compared to its competitors. The third generation president may not have the interest to run the business. The company exists for reasons other than profit making. The family could merely let the business run without going deep into operation performance, sales figures and profitability. Even though the industry player intensified the competition, the book still shows profit every year in past few decades. This may also lead to slow response to market competition. At employee level, they may find limited growth opportunities in a family business since the family members occupy all leadership positions. H.L.Reed’s is difficult to retain talented and ambitious employees when there is better job opportunity. This means, the slackening demand are not spot at operational and management level.

H.L.Reed’s enjoy a long history and target at upper-middle class with high markup in the area. Customer loyalty is very high. Several generations of families have purchased their clothes at Reed’s. For so many years Reed’s has been focusing on high-end market, leaving the moderate-to-low market undeveloped. Maulouf strategy is to get into mid-to-low price market in order to build solid customer base and eventually get into high-end market. With the salary increase by age, low income class may eventually go into middle or high income class. However, Reed’s did not aware of market change and respond timely but stick to its current customer base.

2. In response to declining sales, Reed's will adopt several measures trying to regain its market share: adding two low priced lines men's suit below $189, retail reduction adjustment and increase level of advertisement. According to projected figures, overall sales unit will be tripled from 359pcs to 1292pcs. This campaign is expected to make total gross profit $73,938, more than a double compare to profit derived from existing price line ($29,054).

3. Followed by Reed’s price cut, it stimulates consumer to spend which result in increase in sales volume and profit to Reed’s as a first mover in price reduction.

Given that the department store industry and men’s suit market is a free market with no entry barrier, it will lead to competition from both existing and potential players trying to get share of profit. As a result, the number of players in the market is expected to increase. In long run the men’s suit market may become unprofitable if there is over competition. Market leader with cost advantage may see opportunity to takeover some small companies.

The most common practice to respond by competitors is making price reduction same as Reed’s. By the law of demand, quantity demand is increased when its price is lowered. If the market is price sensitive, the percentage of quantity demand increased will outweigh the degree in price reduction, which means the total revenue will be increased by price cut.

Reed’s price cut will drive away demand for low price men suit market. Thus, existing players in this market will try to defend their customer base by increasing customer loyalty. This may include increase in product quality under same price, provide value-added service (i.e. lowest price guarantee, better after-sale service), membership & loyal customer program. This helps the competitors to differentiate its products and market position from Reed’s, and with quality products, consumer will choose the suppliers which best fit their needs and worth for dollar.

Within the organization, they will provide products at lowest possible cost by sourcing globally, archiving supply chain excellence, etc. Consider the brand assortment, department store may re-organize its product mix between menswear and women’s apparel to avoid over competition in men’s suit. Innovative marketing campaign across markets and product lines like shopping day for family in weekend maybe better options than merely focusing on menswear.

4. In response to declining sales, Reed's will adopt several measures trying to regain its market share: adding two low priced lines men's suit below $189, retail reduction adjustment and increase level of advertisement. According to projected figures, overall sales unit will be tripled from 359pcs to 1292pcs. This campaign is expected to at least double the total gross profit to $73,938.

Pros

Given that the advertising expense is increased on both high- & low priced men suit, Reeds can enjoy cost benefit in launching its marketing campaign. It needs more air time, media space for its product exposure, which increase its bargaining power to enjoy a lower marketing cost during negotiation with advertising agents. It helps reeds to identify the best channel to promote its products.

Consumer perceived Reed's as a premium and quality brand before the reform. After the change, it covers a wider price range with all income groups. As low-middle income is a new market segment to Reed's, advertising all its product the same time can deliver message to its target customer directly.

One of the advertising purpose is getting into low-middle income customer. With such advertisement, they understand the product mix Reed's offer and tend to make their first purchase on low price products. With the increase in income over time, these customers may eventually move to more profitable price lines or lead to opportunity for cross selling.

The advertising campaign is expected to bring position sales impact on both low- & high priced price lines. Reed's can improve resource allocation efficiency with the increase in sales volume. It is more likely to make better logistics consolidation, price negotiation, sales planning & coordination, global sourcing and supplier collaboration.

Cons

Reed's has solid customer base and loyalty in high-end men suit market. The existing customer associated Reed's as premium brand and purchasing from Reed's a prestige. If Reed's turn to the mass market, it dilutes Reed's corporate image in high-end market and some loyal customer will be driven away.

Following point 1, Reed's has to consider the right mix of advertisement content so that the decrease in high-priceline sales will be offset by increase in mass market sales. Reeds has to ensure the customer aware of the advertisement and the content could stimulate and change their consumer buying habit.

The advertisement will bring in new customers to low and high pricelines. However, each customer group may desire different needs from Reed's. The services Reed's provided to high priceline may not be applicable to its low price counterpart. Reeds is also inexperience in low price market and it takes time to fine tune the best strategy to maintain its competence in this market.

We simply divide Reed's priceline into two. The low price market generate relative low share of total profit. This accounts for 33% in exhibit 1 and 15% in exhibit 2. The sales in low price market relative to profit share is not proportional. This means the advertisement will attract low profit margin customer. These customer tends to be price sensitive and a lot more resources is needed to keep them as repeat customers.

Pros of Having Bargaining Department in Basement

Reeds discount store will attract price seekers who look for best price. This will increase total traffic to Reed's as a whole. This creates opportunity for Reed's to demonstrate its products to all incoming customers. As a result, this can create positive impact on cross selling, unintentional purchase when the visit time in the store is increased.

Setting up basement discount store allowed Reed's to segregate the customer groups. It helps the company to identify the needs from each market segments. Reeds can further analyses sales data to build up customer database to enhance better customer relationship and formulate better marketing strategies. This provides opportunity to turn irregular shopper to frequent customers.

The basement bargaining store will be selling old fashioned, outdated, obsoleted and leftover items. These items are usually unfavorable to customers. If Reed's is selling these items in normal shop space, it affects the shop layout, sales turnover and stock slows the cashflow. Thus, a basement bargaining store offers the channel to clean up inventory to prevent deadstock.

Cons of Having Bargaining Department in Basement

If a bargaining store is a long term strategy of Reed's, it will affect customer expectations in following ways. Overwhelming traffic will hamper shop experience. Customer may associate bargaining store as poor quality and low end. The effectiveness of having basement bargaining store is lower when customer get use to such strategy.

Bargain items are usually in low value with poor margin. It requires subprime shop space as demonstration and capital investment which could be used for other items promotion and development. Bargain items are fast moving due to low cost. Reeds needs to allocate resources like manpower to manage stock replenishment however product assortment. Even the bargaining store may generate high sales volume, however it may not be a wise decision to adopt this strategy as the corporate focus is driven away.

It is uncertain bargaining store could generate profit. Incoming traffic maybe windows shopper. They are likely to make one time purchase due to price seeking behavior. In low end market, the products tends to be homogeneous and price oriented. If Reed's cannot keep its price competitive from time to time, price sensitive customer will be taken away by its competitors.