Reference no: EM13340596

Case Study - Ozi Native Clothing

Background

OziNative Clothing is a clothing manufacturer based in Melbourne which manufactures clothing and accessory items made from the hides of Australian native animals, including emus, kangaroos and wallabies.

The company was established in the late 1980s at the time Australia had started to become a highly popular tourist destination and there was a growing general interest in Australia in many overseas markets.

Product History

The company manufactures a range of products including women's and men's winter coats, women's skirts, waistcoats, handbags and purses. These products have proved to be very popular with overseas visitors.

To date, Andy Scelly, the managing director of OziNative Clothing, has distributed these products through a limited range of tourist and souvenir shops in the Melbourne CBD, in close proximity to a number of four- and five-star hotels in the area.

Feedback from these distribution outlets indicates that the great majority of the buyers are upper-income tourists from Japan, the USA and South Korea, with a more limited number from other Asian markets.  The clothing and accessories do not appear to appeal to British and other European tourists or to New Zealand tourists.  Nor does it appear that Australians themselves want to wear Australian native animals.

The raw materials are sourced from a variety of suppliers in Victoria, with emu farms supplying the emu skins, and with commercial shooters supplying the kangaroo and wallaby skins via an intermediary.  Emu skins are relatively expensive to source, while a plentiful supply of kangaroo and wallaby skins means that supplier prices have historically been fairly low.  Accordingly, Andy Scelly has priced the emu products above the other products.

The overall mark-up is around 50% over and above the company's variable and fixed costs (including all overheads), and Ozi Native Clothing supplies the retailers with a recommended retail price, allowing them a substantial margin as well.  The great bulk of the company's fixed costs, including the overheads, are covered by sales to the tourist and souvenir shops in the Melbourne CBD.  Volume over a certain amount covers the variable costs.

The Market

The company grew until the downturn in many Asian markets, which resulted in the number of tourists from countries like South Korea, Thailand and Taiwan decreasing sharply.  The decrease in the number of tourists from these markets has since been in part made up for by increases in the number of American visitors.  In both volume and value terms, however, the market for Australian native animal clothing and accessories is now stable, rather than growing.

Furthermore, the recent downturn in the American economy also appears to be having an effect on sales of Ozi Native Clothing products.  The tourist and souvenir shops have noted a decrease in the number of buyers from this market.  (Note that a certain volume is required to meet the variable costs.)

As a result, these retail outlets have had a build-up in their inventory and in the last few months have been placing fewer orders for items right across the Ozi Native Clothing range, from the big ticket emu winter coats to small ticket items like kangaroo purses.

Pricing

Andy has considered lowering the percentage mark-up the company has historically used in supplying the retail outlets, and at the same time has considered encouraging the latter to lower their retail prices, even for the more expensive emu skin products.

His intuitive belief, however, is that lowering both the price to the suppliers and the retail prices will not necessarily attract more buyers, since pricing may not ultimately be a very significant factor for the typical well-heeled overseas buyers.

In addition, lowering the percentage mark-up would have a major impact on Ozi Native Clothing's ability to cover its fixed costs, while not necessarily attracting a greater volume of business to meet most of the variable costs.

Rather, Andy feels that the key problem facing the business is that it is vulnerable to the cyclical nature of economic growth and development in the source countries his customers come from.

He had seen in the media that negative or slow economic growth leads to a downturn in inbound tourism, even among upper-income consumers who may instead visit less long-haul destinations, or (in the case of his business) at least be less attracted to buying relatively highly priced Australian native animal clothing and accessories.

Andy is also wondering what occupancy rates have been like in recent months in the four- and five-star hotels in the Melbourne CBD, where the bulk of the visitors appear to stay.  It may be that his market is drying up, albeit only in the short or medium term.

Promotion

A friend of his, Danny Winter, who works for the Electronic Media division of a large Management Consultancy, has suggested that Ozi Native Clothing is too dependant on its current distribution system, and that marketing to overseas tourists visiting Australia may simply be too limiting.

Danny has pointed out to Andy on several occasions that since Ozi Native Clothing's final customers are overseas consumers he should consider more direct ways of assessing them without having to use local retailers who impose their own margins and make decisions about the retail prices charged.

Since the retailer's margins are themselves around 50%, Danny has been trying to convince Andy that marketing directly could potentially allow Ozi Native Clothing to make a full 100% margin over and above the fixed and variable costs.

This assumes that the current retail prices to customers (which they appear willing to accept) could be maintained, and that the current variable costs could be controlled, without additional distributional expenses being incurred.

Andy was not entirely convinced by this argument, and had real reservations about his ability as the owner of a relatively small business to market directly to overseas customers, and at the same time make healthy margins, even after meeting the fixed and variable costs.

The advice given to him by Danny was to establish a Website for the retailing of the products, linked to a number of search engines using key words, so that potential customers could find the site with relative ease and purchase online.

The site would need to be supported by promotional materials in traditional media, such as brochures, magazines and books about Australia, distributed in key markets like Japan, the USA and South Korea as well as other Asian markets.

In addition, Danny suggested that Andy should attempt to get the potential Website listed as a link on the more significant sites about Australia.  He even offered to assemble a list of these sites, including the main government tourism marketing sites.

This suggested strategy seemed to Andy to be a radical departure from the company's current marketing strategy, though the ability to have control of the prices charged for items in the clothing and accessory range had considerable appeal.

In selling the idea to Andy, Danny also pointed out that an OziNative Clothing Website would have the potential to reach potential customers all over the world, not just in the key markets, and that clothes and accessories purchasing via the Internet is an accepted consumer behaviour.

He further suggested that the pricing of the various items on the proposed Website be in US dollars with the site also featuring a currency converter calculator, and that the Website should offer full ordering and credit card payment online.  This would have a number of advantages, including insulation against any possible falls in the value of the Australian dollar against the US dollar, and the ability to receive payment more rapidly than is often the case with the traditional outlets.  Those visiting the Website from markets other then the US would have an immediate idea of the cost of the various items, since many consumers have a reasonable idea at any one time of the value of their national currency against the US dollar.  Those who were less sure, or who wanted to know precisely the cost of the items, could always use the currency converter on the Website.

Andy also liked the fact that the Website would accept major credit and charge cards only, since such payments were backed by the substantial resources of global credit and charge card companies, guaranteeing certainty in payment, with fewer potential debtors to chase.

He noted that some of the tourist and souvenir shops were rather slow in their payment cycles and that, as small businesses, on occasion had cash flow problems, meaning that he had to supply items in the product line on credit.  For some of the bigger ticket items, like three-quarter-length winter emu coats, this presented somewhat of a financial management problem.  It was less of a problem though for smaller ticket items like the kangaroo and wallaby purses.

What concerned Andy more was the fact that if he took Danny's advice in establishing such a Website, he would in effect be abandoning the strategy which Ozi Native Clothing had been pursuing since its establishment in the late 1980s.  He wondered whether the Website would simply replace his current distribution arrangements with the tourist and souvenir shops in the Melbourne CBD, or whether he should run it in parallel with these existing distribution arrangements.

Beyond this, there was also the concern that he would have to develop some understanding of the international marketplace over and above his current understanding of the overseas visitors to Australia who have been buying the clothing and accessories.  As he saw it, this would involve becoming familiar with logistical issues such as transportation, insurance and customs regulations, because Ozi Native Clothing would have responsibility for the delivery of the items ordered online by the customers overseas.

While Danny had suggested that the margins could be a lot better than the current 50% made on sales to the retailers, and that they could even double this, Andy was worried that the logistical cost could negate such potential gains.

Becoming an international marketer by using the Internet certainly offered the potential to have greater control of the pricing strategy (in addition to the other advantages noted earlier), but what if the variable costs blew out and had a negative effect on margins?

Andy wondered if he would need to price the items on the Website higher than the recommended retail prices in the current outlets to cover such eventualities.  Alternatively, Ozi Native Clothing could simply absorb the costs (particularly for the bigger ticket items such as emu winter clothes which had better margins on them anyway).

More broadly, Andy wondered if upper-income customers in Japan, the USA, South Korea and some of the other Asian markets were really price sensitive anyway, particularly when it came to unique items like emu coats or kangaroo skirts, which they would otherwise have to travel all the way to Australia to purchase.

After all, emus are unique to Australia and surely a premium could be charged for owning clothing and accessories not available anywhere else in the world!