Pioneer Electronics Essay Example for Free

Pioneer Electronics Essay In 1975 Pioneer maintained relationships with approximately 3,500 franchise retail outlets, the retail outlets benefited from a 5% Pioneer investment in local advertising, and attractive gross margins and credit terms. However, that same year, Pioneer and three competitors were forced to sign consent decrees with the U.S. Federal Trade Commission promising not to engage in alleged anti-fair competition practices – namely requiring distributors to use suggested list prices and punishing those distributors who didn’t comply either through delayed shipments or revoked franchises. A market price war followed the signing of the consent decrees, lowering franchise’s profits while increasing revenue for Pioneer. Pioneer followed with a new marketing strategy aimed at pushing its new lower-priced hi-fi components over compacts or consoles, this further boosted Pioneer’s profit, continuing to erode the franchise distributors’ profit margins. The final outcome was a select few distributors’ shifting from supporting Pioneer component sales to pushing competitors’ products in order to make a larger profit. Central Problem Pioneer Electronics must determine how to move forward from franchise distributors’ complaints that they cannot make an adequate profit selling Pioneer components over the lesser quality, more affordable competitors’ components. The result is â€Å"dissident behavior† by the distributors– including disparaging comments about the Pioneer brand to potential consumers, poor product placement in franchise stores and â€Å"bait and switch† sales tactics. These actions reflect a possible erosion of franchise distributor support, which might force Pioneer to alter its business model. Relevant Facts With the repeal of the fair-trade laws, the market changed drastically for Pioneer, sales and market share increased significantly during this period, prices and margins dropped. As the target market for their products expanded, Pioneer changed their marketing strategy to focus on selling mid-priced hi-fi products. Pioneer’s sales continued to climb, but this strategy squeezed the dealers’ margins even more and made it difficult for them to make a profit selling Pioneer products. Pioneer decision to reposition itself from a premium-priced brand into a â€Å"mid-priced, mainstream† brand affected the profit margins of its distributors negatively. At the same time, the company’s profit margin increased dramatically. Based on 1976 data from Exhibit 13, an average retailer profit margin was about 3.4%. Pioneer had a comparable profit margin of 3.9% in 1975, based on Exhibit 14 data. This margin increased by almost 3 times in 1976 to 9.4%. This clearly shows how Pioneer benefited from its market repositioning strategy while its distributors profits declined. Although surveys showed customers were very satisfied with Pioneer products, the sales force was unhappy and felt the lower margins were unacceptable. This drove a few dealers to speak disparagingly about Pioneer products and use bait and switch tactics to create profits for themselves. Mitchell knew the dealers’ support was critical to the current distribution chain, but he couldn’t go back to the old incentives. To continue to be profitable and adapt to the new electronics market, Pioneer reconsider its current distribution network. Alternative Courses of Action †¢Alternative #1 Shift distribution to department stores: Shift retail distribution from specialty stores to department stores and catalog showrooms. 75% of U.S. Pioneer’s sales were from hi-fi specialty stores, 5% by department stores, and 7% by catalog showrooms. Advantages: Extensive credit facilities, strong consumer â€Å"pull† advertising, and lower prices. Industry sources predicts a substantial increase in the market shares of department stores and catalog showrooms. Disadvantages: Department stores and catalog showrooms do not offer the extensive customer services provided by specialty stores, including professional sales assistance, demonstration, extended store warranty, on-the-premises repair, home delivery and installation, and loaner component programs. †¢Alternative #2 Multiple Branding U.S. Pioneer would offer several product lines of varying quality and price points under separate brand names. Different product lines would be carried by different types of retail outlets. The department-store line would be of lower quality and price than the signature line. Advantages: Multiple branding had been used successfully in other industries. It would enable U.S. Pioneer to adapt most effectively to future changes in retail distribution. Pioneer already sells compacts and car stereos to discount stores under the Centrex brand name. Disadvantages: This strategy could tarnish Pioneer’s reputation for selling only top-of-the-line products. Pioneer may have trouble keeping their distribution channels distinct, and therefore be incurring too much cost on the low end products or being destroying the brand value of the high end products. †¢Alternative #3 Company-owned Stores Another alternative is to operate its own retail stores. Some retailers in the low-fi market had been selling their own house brands for some time. House brands are starting to make in-roads in the hi-fi market and the specialty stores are carrying house brands in increasing numbers. Advantages: One way to protect Pioneer from the risk of large specialty store chains promoting house brands which would impact its sales. Disadvantages: A large initial fixed investment for starting up is required. The risk of expanding into a non-familiar territory which Pioneer does not have good expertise in. †¢Alternative #4 Dealer Communication improvement Dealer support is crucial for Pioneer growth. From Table A â€Å"Factors Influencing Purchase of Hi-fi Products† in the case, it clearly shows that dealer recommendations, advertising and store displays accounts for 42% of the factors influencing consumers decisions. The company needs to hire more salespeople to increase the frequency of dealer visits, provide higher cash rebates or other incentive programs and organizing yearly dealers’ conferences at different resorts. Pioneer needs to stop forcing its dealers to prominently display low-end components and push lower-priced components. Selling lower priced components affects the retailer’s profit margin. This results in placing higher sales emphasis on house brands or competitor products. Advantages: Retailer’s salespeople are the company’s point of contact with its customers. Happy and content dealers will push Pioneer product which will increase company’s sales. Disadvantage: The brand is what sells the product. The company should not waste funds on dealer rebates and conferences. This will result in a rebate war between different manufacturers. Plan of Action: Pioneer should pursue a multiple label branding strategy to capture sales in both the high end and lost cost market segments, which will increase total revenue and profits. The company is already implementing this through its Centrex brand name in Japan. This strategy will enable Pioneer, through the Centrex brand, to target the growing department stores market with its lower price product segment. The signature Pioneer brand can still be marketed through Hi-Fi specialty stores. Under this arrangement Pioneer will need to develop a customized sales and marketing plan for each brand and have separate sales and distribution channels. Pioneer will continue to contribute a percentage of sales to local marketing campaigns to assist local specialty retailers in maintaining local recognition within the community. The Centrex brand will be distributed through the larger department stores and because of the national recognition of these stores there would not be a need to contribute a percentage of sales to assist in local marketing. These funds should be used for other promotional items in the large department stores, such as contests for the largest sales in a month or quarter or number of a specific product sold. The company should also simultaneously invest in improving its working relationship with their dealers. The first thing that Pioneer will need to do is to cease printing ads in newspapers and/or journals to communicate to dealers about unapproved behavior. These types of conversations should be conducted behind closed doors, as neither side wins when they communicate in a public forum. Pioneer will need to begin to request their feedback and input on new market trends, consumer needs and product improvement suggestions and adjust the Pioneer products accordingly. Pioneer should implement the sales program from Exhibit 12 and shift some of the funds from the marketing campaigns to have local contests to spur sales among local sales force.