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COMPANY INTRODUCTION: Merton Industries is a privately held manufacturer of medium to high priced carpets, mainly focusing on the residential

business in U.S. The company markets its products under the brand names of Masterton and Chesterton. The residential segment comprises of almost 72% of company sales. The company also distributes its contract sales to institutions and business. However, these sales only account for 28% of company sales and occur primarily in the southeastern U.S. The company currently uses 7 wholesalers to distribute to their 4,000 retailers which include department stores, furniture stores and floor covering speciality stores. About 1200 of the companys current retailers are the members of buying groups which represent about a third of the companys residential segment sales. Merton Industries has positive long-standing relationships with all seven of their wholesaler operations, ranging from ten to thirty years. However, over the last several years the carpet industry has been undergoing several changes, such as direct distribution, wholesale and retail consolidation, and forward integration into retailing. In response to these industry changes, Merton Industries is now evaluating the possibility of cutting out the wholesalers (who get a cut of about 6% of its residential segment sales) and setting up their own distribution channels in the form of 5-7 warehouses with sales teams working out of each site

Case Recap
Merton Industry is a manufacturer of a full line of medium to high priced carpet serving primarily residential customers. As Special Assistant to the President, Suzanne Goldman has been asked to prepare a comprehensive analysis on the possibility of establishing a Merton distribution center or wholesale operation. (Kerin and Peterson, 2007). This case study will provide a summary and analysis of Merton Industries options and an examination into the companys strengths, weaknesses, threats and opportunities.

Problem Identification
The problem now being addressed by Merton Industries is whether they should expand their operations by opening their own distribution center or wholesale operation. In the past, the idea of a distribution center was dismissed because the concept was not strategically in Mertons best interest at the time. Now that Merton has enjoyed profitable sales growth over the last several years, Robert Meadows president of Merton Industries would like to explore the idea again. Meadows asked Suzanne Goldman to review and report the benefits of having their own distribution center.

Case Analysis
Privately held, Merton Industries is a manufacturer of medium to high priced carpet. Mertons sales are primarily made through residential customers, while about 28% of sales are generated

through contract sales to institutions and businesses. Merton saw a net profit of $3 million before taxes for the fiscal year 2000 (Kerin and Peterson, 2007). Merton spent the majority of its adverting budget in shelter magazines and newspapers. These advertisements told customers about fiber type, colors, durability and soil resistance. Merton also expanded a cooperative advertising program with retailers. Mertons current distribution method includes seven floor covering wholesalers throughout the United States. The wholesalers then sell the products to retail accounts including department stores, furniture stores, and specialty stores. Merton estimated that these seven wholesalers generated an expense to the company which amounted to 6% of residential sales. The seven wholesalers used by Merton are extremely important to Merton Industries marketing strategy. Many of the wholesalers had long-term relationships with several years of business and maintained extensive sales organizations. Within this organization, each wholesaler employed an average of 10 salespeople. Each sales representatives has a wide variety of tasks, previous reports indicated that a sales rep spent about 40% of each one-hour sales call devoted to selling Merton Industries carpeting and 60% was spent on selling noncompeting products. Merton officials believed that a full hour was necessary to properly represent Merton products. Wholesalers received 20% margin on sales, typically applied as a mark up on cost to the retailers. One of Mertons strengths is the long term relationship that it has with the wholesalers. Specifically, two of the wholesalers have worked with Merton for over 30 years, 4 for 20 to 25 years and one had worked with the company for 10 years. Establishing a long term relationship with wholesalers is beneficial to Merton because it promotes loyalty and increased sales. One of Mertons key weaknesses is that the wholesalers were not devoting the necessary time to sales of Merton products. The wholesaler sales staff was also responsible for many other tasks and sold non-competing products. This reduced the amount of time that was actually devoted to the sales of Merton products. Externally, Merton and other floor covering manufacturing companies have experienced a decline in the demand for carpet and rugs. Hardwood, laminate and ceramic tile are becoming increasingly more popular among residential consumers. This decline in demand has left many manufactures with excess inventory and decreasing profits. Another threat to Merton is the fact that U.S. carpet and rug manufacturers have experienced a decline in sales outside of the United States. Merton does not have any export sales (Kerin and Peterson, 2007). In contrast, Merton has some external opportunities now that much of the competition has undergone consolidation. In the 1980s, the number of carpet and rug manufacturers was reduced from 300 to about 100 companies. Few number of carpet manufacturers could result in a great market share and less competition for Merton. Identifying the Root Problem Components In June 2000, several wholesalers expressed concern regarding their profit margins. About one third of Mertons retail accounts had joined buying groups and was looking for better prices based on bulk purchases. This put an increased amount of pressure on the wholesalers to reduce

their mark up percentage. Merton agreed to consider a price reduction for wholesalers if the wholesalers agreed to a reduction in profit margin. This method was intended to reduce the overall cost to the retailer in order for them to become more competitively priced. Faced with the possibility of receiving less profit from wholesalers, Merton executives now wonder if it would be more beneficial to begin using a direct distribution method.

Evaluation of Alternatives
Merton has two main choices to evaluate. They may continue working with the 7 wholesalers that currently distribute their carpet or they can terminate the relationship with the wholesalers and operate their own distribution center. With direct distribution, Merton would be responsible for contacting their retailers directing using their own sales staff and distribution outlets. Direct distribution would eliminate the 7 wholesalers that were currently being used by Merton. The advantage to direct distribution would be that Merton would have complete control over the sales force. Merton executives have expressed some displeasure in the amount of time that wholesalers reps have been spending on sales calls with retailers. Eliminating the wholesalers will allow Merton to allocate sales calls, as they deem appropriate. Another advantage to direct distribution is that Merton would not have the additional cost of maintaining the wholesalers and can offer better prices to retailers. This would likely position Merton prices below the competition. Direct distribution will also allow Merton to become more involved with the retailer which, could lead to improved quality and increased sales. in a few word can say that Strategically, at first glance the option of Merton forward integrating to distributing its own products seems like a great idea. It would give the company more control over inventory, prices, and communication with retailers while giving Merton a higher profit margin on sales from cutting out the middleman wholesalers. However, in the same strategic, there some disadvantages beside advantages. First of all, Merton has little to no experience in dealing directly with retailers; it has used some of its current wholesalers for over 30 years. Besides being experienced, Mertons current wholesalers also handle extension of credit to retail accounts and manage experienced sales. Furthermore other disadvantage to the direct distribution approach is that Merton will have to take on all of the responsibilities that are currently be performed by the wholesalers. This would include contacting retailers, maintaining inventory, storage, delivery, providing technical and post sale assistance, and offering credit terms to retailers, among many other things. If Merton were to eliminate their current wholesalers, they would have to incur additional costs to operate their distribution centers and hire sales staff and management. Another disadvantage to direct distribution that Merton would have to consider is the negative reaction that could result from the wholesalers. In a phone call with a long time successful wholesaler, Goldman was warned of an

impending exodus from Merton Industries once the first company warehouse was opened. This could cause Merton significant hardship.

Recommendation
For 2000, Merton had annual net sales of $75 million sales, of which $54 million was from the residential retailers that are serviced by the wholesalers. Merton estimates that the cost of servicing the seven floor covering wholesalers is 6% of residential sales to maintain wholesalers, or $3.24 million for 2000. This equates to an average of approximately $462,000 annually in expense per wholesaler. Goldman has determined that the cost to operate a direct distribution center includes: $700,000 per year for rent, personnel, operations $560,000 per year (70,000 for each of the recommended 8 sales rep) $80,000 for each sales manager Additional administration costs, transportation costs, inventory and accounts receivable carrying cost would also need to be included in a complete analysis (Kerin and Peterson, 2007). At this point, it can be determined that the very basic cost to run a direct distribution center is significantly higher than the cost to maintain the wholesalers. With the direct distribution, Merton can offer a lower price to customers, but it is unlikely that this lower price would generate enough sales to warrant the increase in cost for a direct distribution center. It is recommended that Merton continue doing business with wholesalers and work in conjunction each wholesaler to find the best price that will create the desired amount of demand.

Conclusion
While there are some real benefits to selecting the direct distribution method, Merton will not be able to gain enough money to cover the additional expenses by owning and operating a distribution center. Another carpet manufacturer unsuccessfully attempted direct distribution in the past. Additionally, Mertons wholesalers are hinting at a mass exodus, which could negatively affect sales, making the transition to direct distribution even more difficult. The decision to adapt a direct distribution approach could be detrimental to the company and should only be executed when the potential benefits will outweigh the risks.

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