Swisher Mower and Machine Company

Case Analysis July 23, 2008 MBA 544

Situation Audit Swisher Mower is a lawn and garden company that manufacturers lawn mowers in its plant in Warrensburg, Missouri. The company’s flagship product is the Ride King. In 1996, Swisher was approached by a national merchandise retailer offering to distribute Swisher’s standard mower under a private label. The retailer offered to distribute the product line, but included several stipulations that would change the Swisher’s distribution methods of its product. Sales within the industry are predominantly determined by changes within the economy. If the economy weakens, overall sales within the industry decrease. This cyclical effect can hinder or expand sales for a company, causing many companies to adjust their business strategies. Another cyclical effect arises from changing seasons, which determines when products will be sold. During the mid-1990s, households were expanding outside of metropolitan areas into vast suburbs across the country. Home owners have acquired larger amounts of property within the suburbs. As the population drifts outside of metropolitan areas, more land is devoted to residential property. New technologies have become available that have helped evolve the industry. More powerful and durable engines are being developed, allowing larger jobs to be completed. The lawn and garden equipment industry produced sales of $5.5 billion in 1995. Three quarters of the sales were from finished mowers, while 25% of sales came from engines. The industry is comprised of ten manufacturers, including major competitors John Deere, MTD, Murray of Ohio and American Yard Products. Each of the ten companies sells its brand under a nationally recognized label, as well as a private label. The private labels account for 65% to 75% of the market, providing a strong level of competition. Many companies have products being sold in national retailer chains as well as home centers and hardware chains. Though distribution varies between companies, the more successful companies sell their mowers under a nationally branded name and a private label. MTD, Murray, John

Deer and American Yard are assumed to be industry leaders, mainly due to the fact that they sell to mass merchandise stores. Mass merchandise stores, such as Wal-Mart and Home Depot, account for the largest percentage of sales for riding mowers, while outdoor power equipment stores supply 22% of all sales. The market is continuing to grow, as sales increased during 1993 and 1994, with a projection of further increases in the next two years. The industry is very cyclical as well as seasonal. As the economy depresses, unit sales decrease. Almost one third of retail sales for riding mowers occur between March and May. Buyers with larger lawns typically look to purchase riding mowers. The industry offers two types of engine configuration: front-engine and rear-engine tractors. Consumers prefer front-engine mowers, because they believe they are more powerful. Consumers with larger tracts of land will typically look for more powerful engines, as well as equipment which is more durable. Price may sway many consumers, with mowers ranging from $800 to $5000. This creates segmentation with buyers: some buyers who have less land will look for smaller models, while other individuals who have large tracts of land will require larger models. Swisher was founded by Max Swisher in 1945, who first developed a self-propelled push mower. Once the Ride King was developed in 1956, Swisher saw a peek in sales of 10,000 mowers in 1966. Currently, sales are stagnant, with the company selling over 4200 riding mowers accumulating sales of $4.3 million. The company’s main product is the Ride King, and the T-44 Trailmower for larger cutting areas. Swisher has maintained a high quality, simple product to allow ease of use to consumers, a feature also found in its trimmers. The mower undercuts the price of its competitors, retailing for $650. Riding mowers account for the majority of sales, while replacement parts generate another 20% of sales. The company focuses on minimizing debt, while consistently returning a 10% margin on sales.

Swisher primarily distributes its mowers in farm supply stores and hardware stores located outside metropolitan areas. 75% of the company’s sales come from rural areas, while 30% of sales are generated from wholesalers and 20% from dealer sales. Much of the company’s brand awareness comes from co-op advertising through all sources of media. Swisher’s target markets are the Midwest and

Southeast, where the Ride King and their private label Big Mow are primarily distributed. The company focuses sales on consumers with over an acre of land, as well as farmers with several hundred acres. The Ride King has a distinct advantage over its competitors, since it is the only mower that has one front wheel that can turn the mower 360 degrees without shifting. As the economy improves, Swisher can take advantage of increasing sales by selling more of its mowers in large retailers. Its retail price would make it the cheapest product on the market. As other brands have distributed their mowers under private labels to the growing mass merchandisers, Swisher’s sales could be quickly depleted. In order for Swisher to fully compete, it must be able to gain market share on other private label brands. Many of its competitors have an advantage, because they use front engine mowers, while the Ride King does not. With other manufacturers selling their mowers in the same locations as Swisher, Swisher must create more brand awareness within urban areas by distributing its products within mass merchandisers. It is important to assume that sales will be increasing in the following years, with the most recent data available showing a growing sales trend. By assuming that more people are moving to suburbs, an argument can be made that sales are more abundant in nonmetropolitan areas. Problem/Decision Statement As of 1995, Swisher was experiencing stagnant sales. Even as the economy is improving and industry sales are growing, sales for Swisher mowers are not following the trend. Though the company has its private label mower being sold in the Midwest, Swisher has little exposure within the mass retailer market. Its national and private brands’ distribution overlaps almost a three state area, creating a

cannibalization of its sales. Swisher needs to increase its sales and market share in order to remain a major competitor in the market. Identification of Alternatives Swisher has an opportunity to distribute mowers to a national merchandiser under a private label. The company can increase its national exposure, thus providing a gateway to increased sales. The extra mowers manufactured would further utilize its factory, which has a weekly capacity of 10,000 mowers. Another alternative would be to continue its normal distribution and hope that sales increase. Swisher could increase advertising in its distribution areas to gather more brand recognition within the marketplace and increase its plateau in sales. Criteria Swisher needs to evaluate that costs will not significantly increase. The competition within the national retail stores will be high, as many of Swisher’s competitors already sell their products in these stores. Swisher must be able to increase its brand awareness through increased advertising with these stores. The new distribution must be able to increase sales in order for Swisher to reverse its current sales trend. Finally, Swisher needs to analyze what types of products consumers need within the metropolitan areas. Analysis Swisher currently generates a modest 15% gross profit margin on its sales. With an average of 4200 units annually sold during 1994 and 1995, Swisher has generated more than $2.73 million in sales. Should Swisher accept the mass retailer proposal, the company’s gross profit margin on the 700 units would only be 5%, assuming all units are sold (see Appendix A). However, costs for each mower would increase by $32.50 per mower. By adding the additional 700 mowers to its line, the new distributor would cannibalize approximately 300 mowers from Swisher’s other distributors.

The cost of goods would increase by more than $400,000, and generate a gross profit $7000 less than if the distributor’s offer is declined. The gross profit margin would decrease to 14% with the additional costs. Assuming that Swisher could sell all 8200 units that the retailer would eventually purchase, the profit margin would decline even further to 8%. Referring to Appendix B, total fixed costs would increase $23,375 with the additional order. The net profit margin with the additional order would decrease 7%, and accounts receivable and inventory turnovers would decline by 1.2 and 4.3, respectively (Appendix C). Though net income would increase by $30,000, Swisher would see a decrease in its margin. This margin should after the first year, since $12,000 in fixed costs would apply only to the first year. Swisher would be unable to collect sales as quickly from purchasers at this rate. Currently, Swisher collects its receivables every 44 days. By accepting the new order, collection times may increase to as much as 105 days. The company would see its accounts receivable increase by almost $30,000, forcing the company to obtain more financing. A non-financial cost could be from a decrease in orders from Swisher’s current dealers, who would have more competition. By adhering to the retailer’s specific demands, Swisher would be increasing its liability costs for its mowers since the title is not transferred until after the mowers have been shipped to stores. Swisher would be at a disadvantage to generate more brand awareness with its product, since the retailer will not mention its relationship with Swisher. Consumers will be unable to differentiate the product under the new label. Swisher would lose control of any potential promotions with the new offer, making it difficult to introduce to the market. Swisher would need to increase sales in the retailer chain by .25%, assuming that all 700 units are sold (Appendix D). Even with little advertising, sales in retailer chains are increasing, allowing Swisher to easily grasp some market share. Swisher’s cheaper model would undercut the prices of other models, which have a minimum price of $800. Sales would increase even with the added competition, and could potentially grab more than 2% of the retailer

market share. Swisher has a design which has not been replicated, posing as an advantage over its competitors. Swisher’s Ride King design would not be altered, allowing it to meet the needs of consumers with smaller yards. The decals on the mower would show that it is American made, giving it more respect with its consumers. Swisher’s engine would match well with its consumers, since most buyers will not need as powerful of an engine. The standard mower that Swisher would offer could easily maneuver around tight areas, allowing it to resonate well with consumers who own less property. Recommendation Swisher is not receiving a financially enticing offer from the national retailer. The company, however, should accept the offer, because unit sales could increase by a minimum of 400 mowers to as many as 7900 mowers. The sales in national retailer chains are rapidly increasing, providing an opportunity for Swisher to enter the market. Swisher would initially only see a 1% decrease in gross margin. As long as Swisher keeps its initial orders small with the retailer, costs will not significantly harm the company. Swisher also has an opportunity to terminate its contract with the retailer, so if sales remain stagnant, Swisher can pull its line. Since Swisher has little exposure within large retailers, the company should keep its orders small. This would allow the company to evaluate how its other sales are being affected by its new order. Swisher can also easily evaluate if it is generating more sales within its new market. Using a model that could be favorable to homeowners, Swisher has the potential to quickly grab market share and increase its sales within the national merchandise stores. The most important goal for Swisher is to increase sales, and by accepting the new distribution proposal, the company would be able to reverse its trend of stagnant sales.

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