Interoffice Memo Date: 7/2/2013 To: Ronald Burns From: 001-78-2434 Subject: JanMars Coatings, Inc.

Recommendation Companys Situation The problem that we discussed in our last board meeting dealt with deciding where and how to execute corporate marketing efforts for the year 2005 among the various architectural paint coatings market in the southwestern United States. Industry Background The architectural coatings industry is a mature market that estimates to be a $12 billion dollar industry with 1 to 2 percent annual growth rate which accounts for 43 percent of the total industry dollar sales. About 50 percent of architectural coatings dollar sales are brought in by doit-yourself (DIY) painters purchases. Professional painters purchases are accounted for about 25 percent of the dollar sales. The rest comes from the government, export, and contractor sales. Furthermore, there are three main types of distributors: mass merchandisers and home improvement centers (50%), special paint stores (36%), and hardware stores and lumberyards (14%). Company Background Our company markets to over 50 counties in Texas, Oklahoma, New Mexico, and Louisiana from its headquarters in Dallas, Texas. The major service area is in the 11 county Dallas-Fort Worth (DFW) metropolitan area. Our company is made up of two market segment areas, Dallas Fort Worth and Non-Dallas Fort Worth. The sales volume of architectural paint and products sold in our companys 50 county service areas was $80 million in 2004 and DFW made up about 60 percent, which was $48 million of those sales. The non-DFW areas made up the remainder $32 million of those sales, the other 40 percent. The companys sales are distributed evenly, 70 percent of sales through DFW dealers go to the professional painter and the 70 percent of sales through non-DFW dealers go to DIY. DIY household buyers account for 70 percent of noncontractor related volume in DFW and 90 percent for non-contractor related volume in other areas.

Major Competitors Our companys major competitors in the architectural coatings segment for the DFW outlets are Sears, Kmart, Sherwin-Williams, and Home Depot. Competition for retail selling space in paint stores has increased as well. Company research has shown that 1,000 of these outlets are now operating in the 50 county area and DFW houses 450 of them. Another competitor market is found at the paint manufacturing level and it is increasing tremendously due to the change in their competitive behavior that focuses on selling to contractors serving the home construction industry. Company Competitive Position JanMars SWOT Analysis Strengths Solid distribution network 40% of stores are located in DFW area Knowledgeable Sales Rep Weaknesses Low margins on products Low brand awareness

Opportunities Rising numbers of DIY Growing number of professional contractors that desire high quality products

Threats Decline in the industry of 2-3% each year. Increased Government and Environmental regulations Increasing R&D costs to comply with new regulations

Based on the SWOT analysis, the companys competitive positions in its market area are the solid distribution network and the knowledgeable representatives. More specifically, the

knowledgeable sales representatives are intangible resources that give our company a core competency that are competitors cannot imitate and duplicate. Segmentation of Company Market Area Our company has two distinct market segments: Non- Dallas Fort Worth with 120 stores o 70% of sales come from DIY mostly concentrated in urban geographic areas Dallas Fort Worth with 80 stores o 70% of sales coming from professional painters mostly concentrated in urban and rural concentrated areas Our company should pursue the DIY market segment because even though it accounts for 70 percent of sales coming from DFW, there is 90 percent of non-contractor related volume in other areas. As a result, with the growing numbers of DIY consumers, our company will be able to gain more sales while increasing the demand of rural areas. Strategic Plan and Recommendation To help our company make a decision on a new marketing strategy plan, I looked at all of the proposed ideas by the company executives. Strategic Idea 1 proposed by the VP of Advertising involved increasing advertising to household segment by $350,000 for Corporate Brand Awareness. Pros o Qualitative Increase in brand awareness among mass merchandisers Attract DIY consumers awareness in both DFW and non-DFW areas, which would increase company sales. o Quantitative Increasing Advertising to Household Segment by $350,000 for Corporate Brand Awareness, the break-even dollar volume=$350,000/0.35=$1,000,000

Cons o Qualitative Not sufficient customers that would not increase company sales and extra expense is too high.

The strategy proposal that came from the VP of Operations involved making price reductions of 20 percent. The pros of this decision are that only $4,200,000 (.35*12m) would be needed to maintain the 35% contribution margin. The sales of the company would increase to $22,400,000 ($4,200,000/.1875) in the short term. The qualitative pros of this decision includes that the products can become more attractive to DIY and more competitive in the paint segment. The cons of the decision would be that the required sales are too high to achieve the goal. In addition, lowering the price poses a threat to the companys image. Exhibit 1 in the appendix further explains the cons to the contribution margin. The last strategic proposal by the VP of sales is to hire a new sales representative. Since the direct cost to keep one rep in the field is $60,000 per year, the extra sales to recover a sales representative would be $171,428 ($60,000/.35). The pros are that the additional sales representatives would bring would be more professional painters to the stores and the companys goal of making profits is measurable and achievable. The account penetration in non-DFW areas would increase slowly each year. The cons from this strategic decision would be that our company would have difficulty increasing the sales that are already dominant in the market. The potential segment, which is households in rural areas, is not being addressed in this decision either. Overall, the decisions pros and cons varied across each option. However, the recommendation that I want to make to you Mr. Burns is to go ahead and introduce a new sales representative. The cost of introducing a new sales representative is $60,000 a year compared to the advertising cost of $350,000. Furthermore, to recover the extra sales from a sales representative the cost would be $171,428. All of these options are a lot lower than spending more money on increasing advertising. Compared to the price reduction, the company would maintain its brand image and it would be bringing more professional painters and probably new DIY customers in the long term. Now that you have the information, it is up to the executives and yourself to make the decision.

Appendix Table: Architectural Paint and Sundry Sales Volume, excluding contractor sales Year Total Dollar Sales DFW Area Sales Non-DFW Area Sales 2003 2004 $78.4 $80.0 $50.7/78.4=64.7% $48.0/80.0= 60% $27.7/78.4= 35.3% $32.0/80.0=40%

Exhibit 1 VP of Operations decisions: Price Reduction Current Sales VC Contribution Margin $1.00 $0.65 $0.35 Price Reduction (20%) $0.60 $0.65 $0.15 (.15/.80)=$18.75