Merton Industries' distribution strategy: direct sales versus intermediary channels

Merton Industries

Situation Review

Merton Industries is currently operating with results below the industry average, but is revealing a sustainable trend of growth. The question that was raised throughout the previous board meeting refers to the possibility of establishing a personal distribution line, in a context in which the today's company distributes its products through intermediaries. The question was raised ten years back, but at that time, the most adequate solution was that of continuing indirect distribution. Today however, the situation might be different and it deserves a new look.

The alternatives: At this stage, Merton Industries is confronted with four available courses of action. First they could choose to entirely eliminate distributors (both wholesale as well as retailers) and open their own distribution centers and retail facilities in which they would directly sell their products to the final customers. Secondly, they could eliminate the wholesalers and become the ones that distribute the rugs and carpets to an estimated 4,000 retailers, who would sell the products to the end consumers. Third, they could reassess the efficiency of their wholesale distributors and work together to improve utility and marginal profitability -- this alternative was brought about by the fact that 80% of overall sales are generated by 50% of retail accounts. Finally, the fourth alternative is that of implementing no change and continuing operations as they are.

The environment: With annual sales of an estimated $50 billion, the U.S. rug and carpet industry is continually growing in terms of sales revenues, but mostly due to increasing prices as the marginal profitability remains low. Products are designed for both organizations (26%) as well as individual consumers, 74%. Competition is however intensifying and the American products register reduced percentages at an international level. Manufacturers spent reduced amounts of money of marketing operations and strive to reduce costs through the creation of scale economies. There are three companies in the U.S. which account for 85% of industry sales -- Shaw Industries, Mohawk Industries and Beaulieu of America.

The key points relevant information: Merton Industries is a small organization with a limited ability to compete against established giants. This is important in an industry in which large retailers have created scale economies and small manufacturers compete in local regions and with a specific product offering. Creating our own distribution line involves risks and additional costs. Failure could mean the end of Merton and the path to bankruptcy. Wholesale distribution costs Merton 6% of their residential sales, but the sales staff at the wholesale retailers also handles vast logistics operations.

The SWOT Analysis:

Internal strengths: Merton Industries is a strong company that follows a sustainable ascendant trend within the United States rug and carpet industry; we also reveal strong financial highlights;

Internal weaknesses: we only operate within the U.S. And our abilities to register international sales and territorially expand our operations are reduced; low levels of marginal profitability

External opportunities: challenges of the past decade have reduced the number of manufacturers from 300 to 100, generating as such lower levels of competition;

External threats: there is an obvious trend towards hardwood floors in the detriment of rugs and carpets; the remaining manufacturers have overcome major challenges and are as such strong and fiercer competitors

2. Evaluation of Appropriate Alternatives

Qualitative Analysis

Alternative 1 -- Eliminate wholesalers and retailers

Pros: eliminated dependency on tertiary parties

Cons: significantly increased costs and risks; lack of experience with direct distribution as well as retailing; possibility of losing the customer base

Alternative 2 -- Elimination of the wholesalers

Pros: maintenance of individual retailers, reduction of costs with wholesalers

Cons: increased costs through direct distribution process, loss of logistics operations handled by wholesalers' sales staff; lack of experience with direct distribution

Alternative 3 -- Assess and modify wholesalers

Pros: increased marginal profitability; increased operational efficiency; sustained benefits from the logistics operations conducted by the sales staff at the wholesale facilities; benefit from the experience and formed customer base of wholesalers and individual retailers

Cons: the need to use additional financial resources and time

Alternative 4 -- Do nothing

Pros: no loses and additional risks

Cons: no gains

3. Recommendation

Strategy: Based n the previous assessment, it becomes obvious that the most suitable solution at this stage does not revolve around the implementation of a direct distribution system. The company does not have sufficient strength to embark in such an endeavor and the costs and risks are too high. However, a change strategy for the overall organizational benefit could be implemented and it is based on the third possible alternative, that of readdressing the operations of the wholesale retailers and striving to increase their efficiency and profitability. This alternative has an additional benefit over the other three for the simple reason that it will generate low levels of employee dissatisfactions. Furthermore, it will allow the Merton Industries to prospect the industry for potential mergers and acquisitions that will further increase its strength.

Action Plan: Since this possibility is only raised during this July meeting, it is recommendable that the first issues associated with this possibility be presented at the future meeting. An actual plan would be available at the second meeting and it would revolve around the following steps:

(1) Assessments of wholesale operations and results

(2) Discussions with wholesale representatives to improve efficiency and reduce operational costs

(3) Allocation of sufficient resources

(4) Implementation of selected measures

(5) Monitorization and control -- the process should be completed within the following six months

Resource allocation: there is a need for an estimated $90,000 to cover for the adherent expenditure; also, the time of six months must also be allocated to ensure real improvements and the adaptation to the new working system; it could also be possible to contract the services of a management consultancy organization to offer their specialized assistance

Pro-forma income statement showing impact of decision: with an investment of $90,000, the distribution process is likely to improve in terms of reduced costs, increased operational efficiency and improved profitability margins and lead to a final net outcome of $410,000

Controls: the control would be ensured by the managers at Merton Industries as well as by the managers at the wholesale centers as the two parties reveal similar objectives in the endeavor. Whenever inconsistencies are observed at any level, the monitoring forces will discuss them and implement the most adequate solutions.

Reference:

Kerin, R.A., Merton Industries -- The Wholesale Distribution Decision, Edwin L. Cox School of Business, Southern Methodist University