Chipman Union

I. Executive Summary

Our company has been focus on manufacturing unbranded socks, which is perceived as private label products in the socks market. Our position in this hosiery industry was to act like a full-line supplier so that we had too many product lines. As a result, our short-run operating cost was considered too high to sustain. To solve the issue, our strategies in 1979 was to narrow down our product line, to lower the production level, and to cut all the out-of-dated products. We were convinced it would increase our sales margin by concentrating on only 67 styles product line. However, the profit margin in our company has remained around 15%, which is not met our 20% target margin. Let alone, it has been very difficult to sustain profitable business in socks market by achieving only 20% gross margins.

A recent increase in retail price in our industry is because the raw materials costs keep rising. To get higher gross margin under this economic force, our management team is planning to launch a new brand of deodorizing socks. At the same time, we plan to conduct advertising campaign to stimulate consumers' brand awareness toward our Odor-Eaters product by over fifty percent.

The proposed plan is to venture into new product line of branded socks with the Combe Inc., the manufacturer of Odor-Eaters deodorizing shoe insoles. This opportunity allows us to use Odor-Eaters name on a line of deodorizing socks. Our management team will present the evaluation outcome of the conducted market research and quantitative analysis on this new Odor-Eaters project.

After running break even analysis, our team believed that the Odor-Easter Project is promising and will be successful. Our target sales for the first year is approximately 1.1 million dozen pairs, and 1.8 million dozen pairs for the second year after launching the Odor-Eaters project. Compared to the overall 3.2 million dozen pairs targeted share of men's and boy's casual / athletic segment, the break even units of 1.1 million dozen pairs sounds pretty reasonable. Therefore, we plan to execute this Odor-Eater project.

II. Situation analysis

The hosiery industry is a perfect competition market because the entrance to this market requires little capital investment, which set a low barrier for new entrants to enter. The competition is existed not only from the production prospective but also from the channel distribution. We are facing threats from other private label manufacturers, other branded manufacturers, and retail chains.

The price set in sock industry is highly elastic. Since the supply of socks is plenty, consumers have variety of choices to select from private labels to brand name socks. This increases the bargaining power of consumers and reduces our flexibility to set price. Furthermore, although retailers aimed 50% margin on branded socks and a 40% margin