Cutco Company Channel-Selection Decision

By

Joe Howard

Problem: CUTCO Corporation has six different growth drivers they can use to increase growth of revenues to $500 million dollars for 5 years and reach an ultimatum at $1 billion annually after that. After CUTCO Corporation picks the best growth drivers they must develop a plan for implementation. About CUTCO: CUTCO is direct seller of cutlery. Direct selling refers to any sort of selling that is made outside of a business outlet or store. A lot of direct selling companies are small, privately owned or do not have outlet stores. Also, most of direct sales take place on a one-to-one basis and in a residence. Alcas, a joint venture of ALCOA and W. R. Case & Sons, created the first CUTCO cutlery in 1949. After increased sales and growth Alcas changed its name to ALCAS. In 1990, ALCAS Corporation is the parent holding company for: CUTCO Cutlery Corporation, KA-BAR Knifes, CUTCO International, Vector Marketing Corporation and Shilling Forge. Vector Marketing Corporation markets CUTCO Cutlery Corporations products in North America and is the largest independent distributor that operates in the eastern United States. CUTCO International main duty is to market CUTCOs products outside North America. The vision of ALCAS Corporation is to become the largest, most respected and widely recognized cutlery company in the world. By 2002, ALCAS was the largest manufacturer of highquality kitchen cutlery and accessories in the United States. Soon after, ALCAS changed its name to CUTCO because the there was outstanding reputation of the CUTCO Cutlery and it would make a more consistent corporate umbrella for the company. There was a major increase in CUTCO cutlery sales orders to 700,000 in 2009, which was a 27% increase from 1999. In the last decade, direct selling increased at annual growth rate of 3.2%. Also, the number of direct sellers increased from $8.5 million dollars in 1996, to $12 million dollars in 2007, a 57% increase. In 2009, over 800 people are working at the headquarters in Olean, New York and revenues exceed $200 million dollars. Six Alternatives: The first option is the company making a major acquisition that would require a minimum of $10-15 million dollars to be successful. More demand for their CUTCO cutlery had been increasing in recent years. An acquisition of a company with manufacturing capacity would be the best to add additional plant capacity for major growth. The disadvantage of this would be diverting attention away from CUTCO Corporations direct selling, which management believes is the best way to sell their products because it has a personal demonstration and a handson opportunity. The second option for Cutco is designing a more effective recruiting program. In the past, CUTCO has been very successful implementing a variety of improved recruiting techniques. Web-based technologies are at a higher sophistication now so

focusing on the Internet could be a major strategy to improve recruiting. Around $510 million dollars is required for recruiting management infrastructure and technology. The advantage is improving the recruiting techniques and opportunity for gaining insights on new Internet technologies. The disadvantage is that is will cost to hire and train the additional sales force. The third option CUTCO has is increasing brand recognition. Brand recognition for CUTCO in recent years has been very high and increasing word-ofmouth would increase sales dramatically. Around $1-2 million dollars for public relations expenditures to increase word-of-mouth would increase their revenues to $10-20 million dollars. This option is relatively cheap and would serve a big increase in CUTCOs sales and brand awareness. The fourth option is increasing international expansion. CUTCO has only been successful in the international markets in Canada and it costs around $10-15 million for an attempted entry into the global market. CUTCO vision is to be the leading cutlery manufacturer globally, so it would fit CUTCOs interests, but given the international economy right now it would be hard to expand by themselves. CUTCOs best international strategy would be to add a strategic partner that would meet CUTCO halfway with investment. The fifth option for CUTCO is to expand the catalog and Internet channels by $3 million dollars. This is risky investment for CUTCO because it will have the cannibalization effect on the direct selling method. On the other hand, online shopping is increasing exponentially in recent years and CUTCO received around $23.8 million dollars in revenues for each catalog or Internet order at an average $153 per order in 2008. The sixth option is for CUTCO is to go into the retail market where stores cost around $100,000 and produce around $250,000 in revenues per store. This is seen as taking direct selling sales but serves as a major profit source. Strengths and Weaknesses: CUTCO currently has many strengths and the main one is their diversification of their interrelated companies. All of CUTCOs five different companies have separate management teams devoted to different purposes of selling CUTCO cutlery. Acquiring Vector is a major advantage for CUTCO Corporation because it provides the marketing support needed to control the sales efforts of direct selling. Vector also motivates the employees with incentives like contest, awards, bonuses, vacation trip and others, and this helps motivate direct selling. CUCTOs ability to direct sell is a distinct advantage for them because the quality and performance features can be explained and demonstrated on a personal and usually one-to-one basis. Vector Corporations direct sales account for $195 million dollars in 2009, which is around 83% percent of all CUTCO Corporations revenues and is the largest independent distributor in the United States. Vectors direct selling has increased by 15% from 2008 to 2009. Vector is so large in the United States that they broke up Vector in Vector East and Vector West who report to the CEO of CUTCO Corporation. Also there are three regions in both Vector East and Vector West and a employees report to regional sales managers.

Corporate hierarchy is a major strength because employees and managers know their jobs better, which mean they are more efficient. CUTCOs main targets are households with incomes over $50,000 and there are around $105 million households in the United States. Residences, or households in the United States accounted for $23.1 billion dollars in revenues in 2007 and $85.5 billion dollars in revenues globally (see exhibit 1). Another strength is the increased sales for CUTCO Corporation by 27% since 1999. CUTCO previously improved recruiting procedures with a better direct selling trainers and using Internet-based technologies. CUTCO presently has really high word-of-mouth brand recognition. CUTCO cutlery is recognized for its quality products like the Double-D knife blade grind, and also the wedge-lock is ergonomically made to have a very confortable handle. The corporation has web a web site set up that keeps up with current customers by offering customer support and a product-replacement system that is free of charge for defective or broken products. CUTCO has a few weaknesses also. The first one is that Vector marketing only makes its sales during the summer months and relies heavily on sales representatives to direct sell the products. Vector marketing currently trains employees at many different branches with many different classes. If there was a way Vector could train them all in fewer or one location all at the same time then CUTCO could save major training costs. Also, in 1985 there were $4 million customers in the catalogue customer base and it has increased a lot since then. A major cost and weakness is sending these catalogues out to so many people four times a year. Another weakness is that Vector only uses referrals and home presentations to sell its products, which negatively affects their sales volume. CUTCO cutlery needs to get involved with more aggressive marketing techniques from Vector and their other interrelated organizations and they need to try different methods of marketing their products other than direct selling to maximize their sales volume. Opportunities/Threats: CUTCO Corporation has had the opportunity to join new markets internationally and domestically. They have failed starting their business in a lot of countries internationally except for Canada because cultures are susceptible to different marketing techniques and the investment expenditures are really high to start from scratch in another country. A major opportunity would be to create a strategic alliance with a CUTCO product line in another country like Japan or China. Another opportunity is trying out new markets like retail sales, where J.A. Henckel Zwillingswerk Inc., a German company who has achieved the same level of sales that Vector has achieved in the United States. This shows how different marketing channels to sell CUTCOs cutlery can boost growth if done right. A major threat of CUTCO is the fact that they defined their target market with an income of $50,000 whereas there is a critical group of customers that make incomes less than that are less affluent are left out of the mix. Course of Action:

CUTCO Corporation has many different options to choose from to develop a plan to improve their growth. The first thing that CUTCO Corp. should do is open a hundred new retail outlets. Studies were conducted in a town in New York where a CUCTO retail store was open for 3 years and produced sales around $250,000 dollars. Opening up 100 new retail stores would increase their revenues by $25 million dollars, and total including their 2009 sales would be making around $262 million dollars. This would cost around $10 million to implement. Studies show that CUTCO would have to train their store sellers a different way so that they could maximize their revenues, and also the retail outlets would not affect their direct selling strategies. The next thing CUTCO should do is increase their word-of-mouth by increasing funding of public relations expenditures by $2 million dollars. Studies have shown that CUTCO has a very high reputation of high quality and customer satisfaction, so If CUTCO were to increase their awareness to the public then sales generated would increase up to $20 million dollars. This is the best option for CUTCO Corporation because it is the cheapest option while increasing profits the most for them. This would increase CUTCOs total revenues to $282 million dollars. The third thing CUTCO should do is adding twenty sales representatives that will market their products in the low season, or fall and winter. These sales representatives will set up trade shows all across the United States and Canada where they will personally demonstrate and explain all the benefits of CUTCOs products directly to a groups of consumers who are interested. The sales representatives should receive $50,000 for their salaries, totaling $1 million for ten sales representatives. This would not only increase CUTCOs awareness but it would also increase their sales immensely in the down season. Trade shows produce around $6,200 dollars per trade show (see exhibit 2). These sales representatives will put on 35,000 shows, which will produce around 217 million dollars, and this will total CUTCOs revenues to $499 million dollars. This will help CUTCO reach their goal of making $500 million in revenues for the next five years. CUTCO will need to plan implementing a long-term international strategy in 5 years that could take them the rest of the way to $1 billion dollars annually.

Exhibit 1. % of Industry Residence One-To-One Basis Group Sales/Party Plans Independent Contractors Web Retail Sales Channel Total Direct Selling Exhibit 2. 75% 65% 28% 99.80% 11.40% 6% US Direct Selling (in billions) 23.1000 20.0200 8.6240 30.7384 3.5112 1.8480 30.8 Global Direct Selling (in billions) 85.5000 74.1000 31.9200 113.7720 12.9960 6.8400 114

Cutco International Vector Catalog Sales Vector Internet Activities Fairs & Shows/Realtor Program

Operating Margins 2.50% 10% 10% 5%

Operating Per Activity Revenues (in millions) Income (dollars) 11.843 296,075 16 1,600,000 7.8 780,000 9.3 $465,000.00

153 153 6200

Exhibit 3. % of Industry Residence One-To-One Basis Group Sales/Party Plans Independent Contractors Web Retail Sales Channel Total Direct Selling 75% 65% 28% 99.80% 11.40% 6% US Direct Selling (in billions) 23.1000 20.0200 8.6240 30.7384 3.5112 1.8480 30.8 Global Direct Selling (in billions) 85.5000 74.1000 31.9200 113.7720 12.9960 6.8400 114