Marketing and Sales

Ebags_case_Analysis

6 years ago

Situational Analysis:

Company:

· ebags – an online luggage and travel products store was launched in March of 1999 by Nordmark, Peter, Eliott, Frank and Andy.

· By 2004, eBags was largest online provider of bags and accessories with over 200 brands and 8000 products.

· It had sold over 2.5mn bags and had been consistently profitable company.

· Motivation:To reduce the fragmented luggage market and bring customer closer to manufacturer by making wide range of products on online store.

· Current product lines: Bags, Business cases, Hand bags and back packs

· Business Model: It has adopted “drop and ship model” where the inventory was managed by manufacturer and eBags receives order from customer and sends it to vendor who then ships the product directly to customer. Due to this model, holding costs have been reduced. Moreover, eBags’ offered product breadth, selection and convenience. Also started private label brand to cater to price conscious customers where it has inventory based model.

· Operations Model: eBags maintained a system called “eBags partner network system” which helped in high degree of transparency between it and vendors. Inventory levels were updated on real time basis in it by vendor so that only orders can be made only for available products. Also incorporated “vendor scorecard system” that helped ine valuating vendor’s performance.

Customers:

· Luggage industry: In 1980s, luggage became a status symbol. In 2000s, it was seen for utility purpose as international business travel exploded in new global economy.

· Footwear industry: Consumer market was divided into 3 segments: womens, men’s and children’s. Personal consumption of footwear was 15% of total apparel spending with women spending 80% more than men. In early 2000s, consumer price sensitivity increased.

· European Market: Customers are craving for variety and people interest across the country varies. Like, Germans like functionality, French and Italian like style, color and seasonality, British look for mix of function, value and quality. 190mn internet users exist in Europe.

Context:

· Luggage industry: The US luggage industry is fragmented with wide range of products and producers. High end of market consisted of branded products. Low end of market consisted of private label and unbranded products.

· Footwear Market: In 2003, footwear industry is 3 times larger than luggage and travel industry. It is also fragmented industry like footwear. The market was also seasonal with peak sales during Back-to-school, Christmas and Easter periods.

· European Market: European luggage market is highly fragmented. Most European retailers are small, family run stores with limited selling hours and less diverse products.

Competitors:

· Luggage market: Few competitors exist with significant market shares like Samsonite, American Tourister, JanSport and Eastpak. Retail market is also fragmented with retailers ranging from department stores, discount stores and manufacturer owned stores.

· Footwear Market: Nike, Jones Apparel, Reebok, Timberland and Brown shoe. Among these, no one holds market share more than 8%.

Problem Definition:

In the present scenario, competition has increased to due to other e-commerce companies like Amazon etc and the business is almost in the saturated form. For future sustenance, company needs to adopt a growth strategy. Now, the business is facing problem of whether to go for geographic expansion or for product expansion i.e whether to expand into European market or to enter into footwear product. Each strategy is posing with a separate set of challenges.

Alternatives available for expansion:

1> Expansion into US Domestic footwear industry

2> Expansion into European Luggage Industry

The Evaluation of Alternatives can be done based on the following criteria (The current business is also evaluated along with other options to establish a comparison):

Criteria

US Luggage business

US Footwear business

European Luggage business

Market Size

$1.28 billion in 2000

$40.7 billion in 2003

$17 billion in 2004

Industry Type

Fragmented

Fragmented and Seasonal

Fragmented

Price Competition

Yes

May be yes

Breadth of products requirement

Yes

Customer Loyalty

High

Any New Acquisition requirement

Need a new acquisition

May be No

Problem with Company Name

Yes

Challenge of acquiring Relationship with Vendors

Absent

Present

Divergence in requirements by customers

Low

High (Varies from country to country)

Languauge Barrier

Yes

Online Usage

Exists

Very High

Product return rates(pertaining to the trial requirement)

Low(6-7%)

Very High(25%)

Probably Low

Comparative Data by Product Category (Exhibit 5)

Product Category

Avg. Purchase Frequency

Avg.Return Cost(%)

Sum Model Count

Sum SKU Count

Avg.Selling Price

Avg.Gross Margin

Product Life cycle

Product return rate

Bags(All)

1.11

14.26

4029

9305

$55.60

48.4%

3.45 years

Shoes

1.23

9.87

3123

92218

$68.00

48%

0.25-0.5 years

25%

Calculation:

Considering AverageReturn cost is calculated as a percentage of Cost :

Ø Shoes:

Selling Price = $68.00

Gross margin = 48%

So, Cost Price = $35.36

Product return probability = 25%

Cost incurred in returning back = 9.87% * $35.36 = $3.49

Ø Bags:

Selling Price = $55.60

Gross margin = 48.4%

So, Cost Price = $28.6

Product return probability = 7%

Cost incurred in returning back = 14.26% * $28.6 = $4.07

· Though the cost of return per bag is higher, the frequency of returns is higher for footwear

Way Ahead:

eBags should expand its Business into the European market.

Reasons why it should expand its Business into the European market:

· eBags would have an edge as a first mover as most of the bag retailers were small family run stores that offered less diverse product line

· International travel had increased, and customers were not satisfied – High demand available in the European market

· eBags has the capacity to cater to their wide breadth and depth demand of bags in terms of functionality, design, colour etc.

· Increased levels of internet users in Europe – 190 million Internet users in Europe vs the 165 million Internet users in US

· The internet usage rate in Europe also is increasing at an internet penetration rate of 50% - Internet users would not drop, that increases the potential for eBags

· Untapped European market space – eBags could build significant relationships with European vendors as no online retailer has done so(first mover advantage again)

· This could effectively enhance their distribution channel and reduce fragmentation – an opportunity for them to gain more loyal customers in addition to better opportunities of private labeling

· Challenges like language barriers with packaging and labeling, shipping requirements, brand awareness, maintaining interfaces and web page administration are all costs while a business goes global that should not been seen as a hindrance

· The average gross margin is 0.4% more for expansion into Europe rather than

Reasons why it should NOTgo for a product extension into footwear:

· Brand name would get diluted – eBags as a company that sells footwear can confuse customers; Changing the name in accordance can dilute the brand awareness that is present for eBags currently

· Footwear has high returns - This would increase their shipping and transaction costs

· Higher returns could also mean an inventory pile up which is totally against eBags’s strategy – Supply chain management would get more complicated

· The cost price per unit of shoes are higher compared to that of bags- The high returns that might result in inventory pile up might result in lesser flexibility in cash flows

· Lesser flexibility in cash flows can hinder eBags from providing seasonal discounts and offers ( as part of cost cutting) that can attract more customers

· Footwear industry is already highly competitive and fragmented – If brand is not established in terms of footwear, the brand awareness of eBags might also fall

· The customers of footwear are price conscious people and those who prefer to try their shoes before buying – The result of this is high returns observed in footwear

Plan B:

In order to capitalize on the expected rapid expansion of online retailing in Europe, eBags planned on considering business expansion into Europe. However there are a lot of challenges involved in bringing the eBags business model overseas. Language barriers associated with packaging and labeling and currency exchange issues, shipping requirements, brand awareness, maintaining the EPN interface, and Web page administration seem to pose problems in gaining trust among customers.

Although private label brand might lead to increased gross margins to the retailers it has a problem that it does not get advertised nationally and so the brand recognition might be extremely low. As a contingency plan, e-bags shall joint venture with another company who is already an established player there and therefore gain brand awareness and consumer trust with its private labels. Private labelsare generally perceived as better price/value to the consumer.

The joint venture can further help in problems like taxes and other local rules and regulations, language barriers and other cultural differences that might dictate consumer tastes and preferences. Following up with the trends of the European market for a few years initially as a joint venture will help e-Bags to use the online store economics and sell bags through e-commerce in the coming years.

This model would further reduce reliance of e-Bags on its suppliers of the drop ship model. Through a highly personalized value-added service, critical parts of the customer information can be stored on eBag’s database. Further, this will enable marketing correspondence and better targeting of product and service offerings.