In May 1983, Suzanne Leister, marketing director of Baldwin Bicycle Company, was mulling over the discussion she had had the previous day with Karl Knott, a buyer from Hi-Valu Stores. Hi-Valu operated a chain of discount department stores in the North West. Hi-Valu's sales volume had grown to the extent that it was beginning to add its "own-brand" (also called "private-label") merchandise to the product lines of several of its departments. Mr. Knott, Hi-Valu's buyer for sporting goods, had approached Ms. Leister about the possibility of Baldwin producing bicycles for Hi-Valu under its own-brand name of "Challenger".
Baldwin had been making bicycles for almost 40 years. In 1983, the company's line included 10 models, ranging from a small beginner's model with training wheels to a deluxe 12 speed adult's model. Sales were currently at an annual rate of about $10 million and Baldwin’s 1982 financial statements appear in Exhibit 1.
Most of Baldwin's sales were through speciality bicycle shops. Baldwin had never before distributed its products through department store chains of any type (e.g. Rebel Sports, K-Mart etc). Ms. Leister felt that
Baldwin bicycles had the image of being above average in quality and price, but not a "top of the line" product. Hi-Valu's proposal to Baldwin had features that made it quite different from Baldwin's normal way of doing business. First, Hi-Valu wanted to sell its Challenger bicycles at lower prices than the well-known brandname bicycles it carried (e.g. Trek), and yet still earn approximately the same dollar gross margin on each bicycle sold - the rationale being that Challenger bike sales would take away from the sales of the brandname bikes. Thus, Hi-Valu wanted to purchase bikes from Baldwin at lower prices than the wholesale prices of comparable bikes sold to Baldwin's speciality bicycle shops.
Second, Hi-Valu wanted the Challenger bike to be somewhat different in appearance from