Merton Industries Case Analysis

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Merton Industries

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Case Analysis

Overview of Merton Industries

Merton Industries is a privately held manufacturer of a full line of medium- to high-priced carpet primarily for the residential segment, although about 28% of total sales are contract sales to institutions and businesses. The company markets its product under the Chesterton and Masterton brand names. Merton currently distributes its line through seven floorcovering wholesalers, who in turn distribute to 4,000 retail outlets including department, furniture, and floor covering stores. Eighty percent of residential sales were made through 50% of the retail accounts. Total sales in fiscal 2000 were $75 million; Figure 1 shows the breakdown of sales to residential and to institutions and businesses. Advertising by Merton appeared primarily in shelter magazines and newspapers. A cooperative advertising program with retailers has been expanded. This program is being well received and has brought Merton into closer contact with retail accounts.

Figure 1. Merton Sales in FY2000
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Nature of the Industry

The U.S. carpet and rug industry has gone through some vast changes in the past decade. The number of U.S. carpet and rug manufacturers has dropped greatly due to changes in consumer preference and foreign competition. The type of retailers and the retailer purchasing strategies have changed drastically also. Currently, Merton Industries, a small carpet and rug manufacturer has had to face these changes in a re-evaluation of their distribution process. The U.S. carpet and rug industry recorded sales of $11.69 billion at manufacturers’ prices in 1999. This translates to estimated retail sales of $17.9 Billion. The market share for carpets and rugs in the floorcovering industry has been declining over the past five years in favor of hardwood, ceramic and laminate (Fig. 2). This decline is partially attributed to a lack of marketing. The industry as a whole spends 2.1 percent of its sales on consumer advertising; other industries that advertise to households such as furniture and appliances spend proportionally more of their sales on advertising.

Figure 2. Trends in U.S. Carpet and Rug Market Share
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The carpet and rug market is in the decline phase (Fig. 3) due to customer preference shifting to alternatives such as hardwood. Price has become the dominant marketing tool and manufacturers focused attention on cost reduction and achieving economies of scale. As a result, although sales increased, profitability for the industry as a whole is marginal. In addition, the industry is under increasing pressure to decrease profit margins in order to meet retailer pricing demands. They have also experienced a decline in sales in markets outside of the U.S.

In the 1980s, the largest carpet and rug manufacturers began to move to direct distribution to maintain profit margins. Smaller manufacturers retained indirect distribution through wholesalers because they lacked the capital resources to invest in their own distribution centers. The majority of carpet and rug manufacturers continued to rely on indirect distribution. The company is now evaluating the possibility of cutting out the wholesalers (who get a cut of about 6% of sales) and setting up their own distribution channels in the form of 5-7 warehouses with sales teams working out of each site. In the early 1990s, retail buying groups, an organization of similar retailers that combine their purchases to obtain volume discounts from manufacturers, arose. Nearly 40 percent of retail carpet and rug outlets were members of buying groups. This phenomenon ultimately caused a reduction in the number of carpet and rug wholesalers. In 1995, Shaw Industries began to operate its own retail stores and commercial dealer network. This caused significant conflict with buying groups and large retailers that did business with Shaw Industries. Shaw Industries ultimately sold its retail stores and...
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