HARTMANN LUGGAGE Co.

(Price Promotion Policy) By: x

Introduction:
Upon review of the available information, we recommend that Hartmann should discontinue the gift-withpurchase promotions, but still consider price promotions based on actual contribution margins. To achieve corporate goals of 25-30% annual earnings growth, maintain its premium brand image, and increase its share of the high quality luggage segment, Hartmann should implement the following recommendations: Pricing and Promotions: In order to appropriately segment its customer base, Hartmann should conduct a detailed conjoint analysis to obtain the various customer preferences. Using information gathered from this analysis, Hartmann should refine its prices. Hartmann should then offer the right price promotions at the right time. The gift-with-purchase and purchase-with-purchase promotions should be discontinued unless the gifts or purchases are items currently available within the product lines (of a similar quality). Market Segmentation: Hartmann should conduct detailed market-research surveys to identify emerging growth segments (i.e. enhance carry-on and portable lines; add backpacks and bookcases; enter personal leather goods markets with folios, wallets, purses) and thereby broaden its customer base for maximum brand leverage. Cost Analysis: To enhance margins, Hartmann should conduct a detailed analysis of its variable costs. Advertising: The overall advertising budget should be carefully expanded (with additional monitoring and controls). Hartmann should focus its marketing expenditures on those programs that return the biggest bang-forthe-buck in its focus customer segments (especially the cooperative advertising programs with its retailers). Placement: Hartmann should open its own boutique stores in high-visibility locations such as large airports and world-class hotels around the world so as to increase brand awareness with the Business Traveler customersegment around the world. Product Line changes: Hartmann should replace the Ultrasuede line with a fashionably styled (but traditionally colored) casual luggage line below that of the 4200 line. Warranties: Hartmann should offer lifetime warranties for defective materials and free maintenance service every 5 years for its expensive 4700 series. Benefits for the less expensive series should be on a graduated scale. Pricing: Price promotions dilute the value of the brand and encourage retailers to load up on inventory during promotional periods. To prevent artificial spikes in current demand, followed by drops in demand the following period, price promotions affecting only the current period should be offered (through earning future sales credits by selling promoted merchandise). Appendix A shows a Promotion analysis comparison of the 4200 line using the same variable cost ($24.76), and unit quantity sold (48,960) at two different prices to retailers ($41.60 and an optimal $45). At the optimal $45 price, the retailer shares the risks and rewards equally; and results in a $100K gain instead of a $156K loss for Hartmann. Market Segmentation: New product ideas, such as product offerings designed for the needs of women business travelers (smaller, lighter and more fashionable) must be researched and developed to maximize brand reach. Cost Analysis: Knowing the true costs will allow Hartmann to decide the correct price promotion. An increase in units produced (due to price promotion) should decrease the variable cost. Appendix B shows a comparison of two promotions analysis using Schusters variable costs ($25.76) but two different sets of quantities sold (consultants and Schusters assumptions of units sold). Advertising: Both Hartmanns telephone survey and a trade magazines survey indicate that nearly 50% of consumers favor a brand of luggage that they see advertised. The same study found that only 17% of consumers in the target segments recognized the Hartmann brand name and 5% recalled having seen any Hartmann advertising. Promoting co-op advertising encourages retailers to push Hartmann products. Placement: Opening boutique company stores along with other amenities such as service and repair is a great strategy for Hartmann to improve its brand image and get feedback about latest market trends directly from its most important customer segments. Additional retailer penetration (see Appendix C) should be explored in order to capture a higher penetration of the current potential target markets. Product Line changes: The new line should be targeted at the new growth segments. The traditional brand strengths (quality, durability, and styling) should be emphasized with any new product offerings or new product lines. (Note: brightly colored luggage may clash with the customers current perception of Hartmann luggage.) Warranties: Offering warranties signals exclusivity, indicates high quality, and improves brand image.

Recommendations:

Basis for Recommendations:

Assumptions & Uncertainty:

The main uncertainty plaguing this market is demand seasonality and the corresponding fluctuations in demand. Furthermore, in the current period of high inflation and high oil prices, we assume that the travel industry and therefore the luggage industry will keep growing at a relatively stagnant 9%.

Action Steps: Conduct a detailed market study, investigate variable costs, and enhance advertising efforts.

APPENDIX A:

Hartmann Luggage Company Promotion Analysis - Effect of Changing the Sell Price to Retailers
1978 Actual Pricing
1978 Promotion Review 4200 Line Nonpromoted Promoted Quantity sold 48,960 75,323 Quantity sold

1978 Proposed Modified Pricing

1978 Promotion Review 4200 Line Nonpromoted Promoted 48,960 75,323

HARTMANN ANALYSIS Average retail selling price $ 100.00 Average manufacturer's selling price $ 48.00

$ $

80.00 41.60

HARTMANN ANALYSIS Average retail selling price $ 100.00 Average manufacturer's selling price $ 48.00

$ $

80.00 45.00

Variable cost - direct labor and raw material - 7% selling expenses - 5% advertising/promotion expenses - allocated g&a exp and manuf o/h Fixed cost Average contribution, $ Average contribution, $ Total revenue Total revenue (diff.) Total contribution Total contribution (diff.) Potential cannibalization of 4400 line - quantity Average retail selling price Average manufacturer's selling price Average contribution Total contribution Total contribution (diff.) Inventory savings contribution

$ $ $

34.70 7.00 5.00

$ $ $

34.70 5.60 4.00

13.30 $ 13%

6.90 9%

Variable cost - direct labor and raw material - 7% selling expenses - 5% advertising/promotion expenses - allocated g&a exp and manuf o/h Fixed cost Average contribution, $ Average contribution, $ Total revenue Total revenue (diff.) Total contribution Total contribution (diff.) Potential cannibalization of 4400 line - quantity Average retail selling price Average manufacturer's selling price Average contribution Total contribution Total contribution (diff.) Inventory savings contribution

$ $ $

34.70 7.00 5.00

$ $ $

34.70 5.60 4.00

13.30 $ 13%

10.30 13%

$ 2,350,080.00 $ 651,168.00 $ 131,438.77

$ 3,133,440.00 $ 783,360.00 $ 519,729.23

$ 2,350,080.00 $ 651,168.00 $ (124,659.69)

$ 3,389,538.46 $ 1,039,458.46 $ 775,827.69

$ $ $ $ $ $

17,070 183.46 88.06 20.81 355,179.19 40,366.00 -

$ $ $ $

15,130 183.46 88.06 20.81 314,813.19

17,070 $ 183.46 $ 88.06 $ 20.81 $ 355,179.19 $ 40,366.00 $ -

15,130 $ 183.46 $ 88.06 $ 20.81 $ 314,813.19

16,068.00

16,068.00

Overall affect of promotion Total contribution $ 1,006,347.19 Total contribution (difference) $ 155,736.77 promotion loss

$ 850,610.42

Overall affect of promotion Total contribution $ 1,006,347.19 Total contribution (difference)

$ 1,106,708.88 $ 100,361.69 promotion gain

RETAILER ANALYSIS Average retail selling price $ 100.00 $ Average manufacturer's selling price $ 48.00 $ Retailer's margin, $ $ 52.00 $ Retailer's margin, % 52% Total revenue Total revenue (diff.) $ 4,896,000.00

80.00 41.60 38.40 48%

RETAILER ANALYSIS Average retail selling price $ 100.00 $ Average manufacturer's selling price $ 48.00 $ Retailer's margin, $ $ 52.00 $ Retailer's margin, % 52% Total revenue Total revenue (diff.) $ 4,896,000.00

80.00 45.00 35.00 44%

$ 6,025,846.15 $ 1,129,846.15

$ 6,025,846.15 $ 1,129,846.15

Overall affect of promotion Total contribution $ 2,545,920.00 Total contribution (difference)

$ 2,892,406.15 $ 346,486.15 promotion gain

Overall affect of promotion Total contribution $ 2,545,920.00 Total contribution (difference)

$ 2,636,307.69 $ 90,387.69 promotion gain

Hartmann should increase this manufacturer's selling price to the retailer to more fairly share in the cost of the promotion. Currently, Hartmann is absorbing 16% and the retailer is absorbing only 4% of the margin decrease.

OPTIMAL PRICE RESULTS (from optimization): 1) If Mfg contribution = Retailer contribution, optimal price = $44.93 Retailer margin is 44% 2) If Retailer contribution = 50,000 and Mfg. contribution = Max., price = $45.54 3) If Retailer contribution = 0 and Mfg. contribution = Max., price = $46.20

APPENDIX B:

Hartmann Luggage Company Promotion Analysis - Effect of Schuster's Variable Costs and Quantities
1978 Actual Pricing-Schuster's Variable Costs(VCs) Only
1978 Promotion Review 4200 Line Nonpromoted Promoted Quantity sold 48,960 75,323 Quantity sold

1978 Actual Pricing-Schuster's VCs and Modified Quantities

1978 Promotion Review 4200 Line Nonpromoted Promoted 25,563 75,323

HARTMANN ANALYSIS Average retail selling price $ 100.00 Average manufacturer's selling price $ 48.00

$ $

80.00 41.60

HARTMANN ANALYSIS Average retail selling price $ 100.00 Average manufacturer's selling price $ 48.00

$ $

80.00 41.60

Variable cost - direct labor and raw material - 7% selling expenses - 5% advertising/promotion expenses - allocated g&a exp and manuf o/h Fixed cost Average contribution, $ Average contribution, $ Total revenue Total revenue (diff.) Total contribution Total contribution (diff.) Potential cannibalization of 4400 line - quantity Average retail selling price Average manufacturer's selling price Average contribution Total contribution Total contribution (diff.) Inventory savings contribution

$ $ $

34.70 7.00 5.00

$ $ $

25.76 5.60 4.00

13.30 $ 13%

15.84 20%

Variable cost - direct labor and raw material - 7% selling expenses - 5% advertising/promotion expenses - allocated g&a exp and manuf o/h Fixed cost Average contribution, $ Average contribution, $ Total revenue Total revenue (diff.) Total contribution Total contribution (diff.) Potential cannibalization of 4400 line - quantity Average retail selling price Average manufacturer's selling price Average contribution Total contribution Total contribution (diff.) Inventory savings contribution

$ $ $

34.70 7.00 5.00

$ $ $

25.76 5.60 4.00

13.30 $ 13%

15.84 20%

$ 2,350,080.00 $ 651,168.00 $ (541,949.54)

$ 3,133,440.00 $ 783,360.00 $ 1,193,117.54

$ 1,227,024.00 $ 339,987.90 $ (853,128.42)

$ 3,133,436.80 $ 1,906,412.80 $ 1,193,116.32

$ $ $ $ $ $

17,070 183.46 88.06 20.81 355,179.19 40,366.00 -

$ $ $ $

15,130 183.46 88.06 20.81 314,813.19

$ $ $ $ $ $

17,070 183.46 88.06 20.81 355,179.19 40,366.00 -

$ $ $ $

15,130 183.46 88.06 20.81 314,813.19

16,068.00

16,068.00

Overall affect of promotion Total contribution $ 1,006,347.19 Total contribution (difference)

$ 1,523,998.72 $ 517,651.54 promotion gain

Overall affect of promotion Total contribution $ 695,167.09 Total contribution (difference)

$ 1,523,997.51 $ 828,830.42 promotion gain

RETAILER ANALYSIS Average retail selling price $ 100.00 $ Average manufacturer's selling price $ 48.00 $ Retailer's margin, $ $ 52.00 $ Retailer's margin, % 52% Total revenue Total revenue (diff.) $ 4,896,000.00

80.00 41.60 38.40 48%

RETAILER ANALYSIS Average retail selling price $ 100.00 $ Average manufacturer's selling price $ 48.00 $ Retailer's margin, $ $ 52.00 $ Retailer's margin, % 52% Total revenue Total revenue (diff.) $ 2,556,300.00

80.00 41.60 38.40 48%

$ 6,025,846.15 $ 1,129,846.15

$ 6,025,840.00 $ 3,469,540.00

Overall affect of promotion Total contribution $ 2,545,920.00 Total contribution (difference)

$ 2,892,406.15 $ 346,486.15 promotion gain

Overall affect of promotion Total contribution $ 1,329,276.00 Total contribution (difference)

$ 2,892,403.20 $ 1,563,127.20 promotion gain

Schuster's estimate of average unit variable costs

Schuster's estimate of the nonpromotional quantity of units that would have been ordered. Consultant's estimate of the nonpromotional quantity of units that would have been ordered.

Appendix C Example Current Hartmann Customer Market (Available Upscale Department Stores and Store with Exclusive Rights)
Geographic or Customer Preference Segmentation (All are in the upscale department store segment) More Exclusive

Neiman Marcus

Bloomingdales

Harrods

Specialty Store #1

Specialty Store #2

Specialty Store #3

Less Exclusive

Saks 5th Ave

Nordstrom

Macys

All Available Retail Outlets: (Existing Markets, Targeted Expansion, and Potential Additional Market Segments) High-Margin Customer High-Margin Retailers
Lord & Taylors Kaufmanns

Low-Margin Customer

Lazarus

JC Penneys

Sears

Low-Margin Retailers (Mass Merch.)

Kohls

Target

Wal-Mart