Hunley, Inc.: Casting for Growth – Case Solution

Rod, reels, and poles and components were a saturated market where Hunley, Inc. competed against over 25 companies for a 2.5 billion business where Hunley had a 1% of the market share with sales of 26 million in 2018. With 6.5 million fly fishermen and 15 million fishermen (anglers) willing to buy new rods every year Hunley, Inc. had options to grow. The company operates in different segments: avids, occasional, and competitive.

Its major customers are high-income and older individuals. Hunley, Inc. should prioritize the competitive and avid market for two reasons. First, the competitive segment has a big influence on the other segments regarding what equipment to use given that fishermen look up to what professionals choose and they would likely want to buy the same.

The same principle goes for the avid sellers in the specialty stores who are knowledgeable about selecting the right equipment and trusted by consumers. Second, for Hunley, Inc. to jump into mass merchandise retailers and use a low-price strategy against its competitors is not a great idea given that usage of the best materials for manufacturing its product is not price efficient and will be difficult to compete. Plus, it would be challenging to focus on a narrow market segment.

The best approach would be a geographical distribution focus using retirement communities and lakes and streams as filter criteria, where fly fishing is a common activity and high-income consumers can easily access the product.

Grand Bassara introduction analysis

In the ideal case of introducing the Grand Bassara (GB) with no cannibalization and still holding last year’s sales for the Klamath River fly-rod, the company would only need to sell 7000 units of the GB in addition to its 91,000 units sold in the previous year. The GB will be sold at a wholesale price of $400 dollars to meet its 10% increase in sales reaching $27,279,000 million in 2018.

Using a $400 price for wholesale will increase the gross profit percentage for Hunley from 53% to 65% giving an extra room to cover advertising expenses that would be needed after introducing the GB. At first view, this option looks promising, but I consider cannibalization will happen after introducing the new fly-rod GB.

I estimated a 30% decrease in sales on the Klamath in the next year after the introduction of GB. After considering the cannibalization factor in the calculations, Hunley would have to sell 63,700 Klamath units + 25,000 Grand Bassara for a total of 88700 units to achieve its desired goal. This is a considerably smaller number of units compared to the 2018 original forecast.

If marketing plans work as expected and consumers do not react to the higher price this option is the most viable plan of action given that the company does not have to fight other companies for extra market share but instead focus on the perception of the product with its current clients.

The original problem faced by Huntley was product perception by the public, introducing an improved product, which is more profitable than the current product sold, manufactured with high-end materials, and selling at a competitive price, is the action plan that the company needs to follow to gain back its initial reputation. If no new product were to be introduced, then Hunley would have to sell 101,000 Klamath rods 13,000 more than the previous year which would demand more effort from the company.

Exhibit A (cannibalization analysis)

Marketing Plan for Grand Bassara

The plan of action for the introduction of the Grand Bassara considers the following advantages: higher profit margin offers the benefit of selling less volume and still collecting higher earnings, remain on good terms with specialty retailers, the Grand Bassara will be selling in the fishing segments with the highest percentage of sales (Avid), the most influential users to the other segments (Competitive), and still have room for interest from other fishermen segments. My strongest suggestions are:

• The marketing budget needs to allocate more money to sponsoring professional fishermen who are inspirational, highly visible to the other segments, and well known by everyone who is interested in fishing. If Hunley’s rods are such great performers that these products are chosen by professionals, these products will surely perform great for less experienced fishermen too. Also, Sponsoring tournaments, clinics, and lake shops, where more direct customer interaction will happen allows Hunley to measure the effectiveness of its marketing efforts, provide more data for future analysis and strategy developments, and will develop a stronger relationship with its consumers given that it is a more face to face interaction.
• Introduce a demo program for the Fly Rods. It is a system where fishermen can rent different types of rods for a maximum of 5 days in order to test their performance before buying it. Rods will be ordered online and must be shipped back within a reasonable time frame or their credit card would be charged for tardiness, which means the marketing budget needs to allocate more resources towards the online store and digital marketing for better search engine optimization. Specialty stores and retailers will receive a certain number of demos that fishermen can rent on the side to make it more convenient for older clients who are not very familiar with online operations. This program will be a great way to offer the fisherman a chance to test the great performance of Hunley’s rods and change before spending money on them. This strategy would counter the possible price sensitivity reaction on customers for the really elevated price increment compared to previous rods.

Exhibit B (Hunley’s Advertising budget)

Printing in magazines has been inefficient for Hunley and it has become very hard to track the effectiveness of these advertisements. As in any other sport, the best performers are the center of attraction and fishing should not be any different: that being said being able to sign the best-known fishermen professionals to use Hunley’s rods would expose the brand to the masses, and other segments would want to have the best equipment to brag and the best way to do it is by using the same equipment as the best fishermen in the world.

The demo program would start with a small budget as the program is in the initial stages. Increasing the budget for search advertising is necessary to support the demo program and reach further into younger crowds. The main idea is to create stronger bonds with Hunley’s customers and educate them about the top technology used for manufacturing rods and how it translates into a superior product. In addition to the budget plan, C.W. III assigned Alfaro with an extra $1,000,000 for advertising which would strongly compete against Orvis in case they decide to launch their new high-end product.

Walmart Entry-Level Klamath introduction

Besides losing control over the manufacturing process due to outsourcing, the cost of transportation and importing goods will add up to the price on the calculations. Moving towards an entry-level version of the Klamath might seem tempting due to the high numbers of units sold but extra advertising and after-sales support costs should be expected in higher amounts than the company is used to dealing with.

It is true that Walmart represents a large distribution channel, but the reality is that in the fly-fishing market Walmart only distributes barely 20% of the segment sales in comparison to Specialty Fly Shops which distribute 80% of sales for the whole Fly-Fishing Market. Consumers who purchase at Walmart are not brand loyal and would go for the best offer regarding price. Hunley’s strength is based on quality and high-end products so it would be difficult to compete in a market with something which Hunley is not an expert on, low price.

The reason C.W III was concerning, to begin with, was the fact that Hunley, Inc. is losing its perception as a high-end company and becoming to be seen as a mid-tier company. Expanding into low-price markets would expose the company to more of this situation and would completely disrupt its original good reputation. If Hunley ultimately must enter this low-price market for whatever reason, I firmly believe that there must be an attempt to maintain the top-quality producer status that Hunley once was and continue to defend its principles.

Exhibit C (Entry-Level Klamath Analysis)

If a 30% decrease in sales of the iconic Klamath were to happen after the introduction of the entry-level Klamath due to any given reason. For instance, unhappy retailers, cannibalization, the downtrend in sales from previous years, etc. the entry-level Klamath would have to sell 152,000 units to meet a 10% increase from 2017. Walmart possesses the ability to sell a high volume of products but sells total units of 215,700 which means more than doubling units sold from the year 2017 for only a 10% increase.

This sounds like a huge effort to do for a small reward in comparison. Walmart sells to beginners which represent 4% of the market share with no influence on other consumers and represents 2% of sales in the total fly-fishing market. Occasional fishermen consider Walmart when buying rods but despite their larger market share of 53% this segment only accounts for 18% of the sale. In conclusion, the segment of Avid and Competitive fishermen has a lot more potential for growth. That is why I would suggest not considering the Walmart option.

Alternative Growth Options

• Unit Kits: add small fishing accessories (terminal tackles, reels, etc.) to rods as a way to attract consumers and offer extra value to the product to increase sales and compete for a bigger market share.
• Merge and Acquisitions or Joint Venture: Instead of considering entering the saltwater rods market on its own, Hunley can partner up or buy a company that has been operating in the saltwater market for a while to avoid the long years of introduction process and expand its exposure to other types of fishers.
• Join an environmental program with a well-known agency to preserve maritime life and maintain freshwater clean. Encourage fishermen to practice fishing in a responsible way and keep rivers and lakes clean, to protect in-danger species.
• Partner with fishing boat companies and offer a plan where a whole top-tier Hunley complete fishing equipment would be provided to those who purchase brand new fishing boats.

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Second solution

1. For market segmentation, Hunley should employ demographic and psychographic segmentation due to the nature of fly-fishing practitioners. The demographics of fly fishers are not diverse; most of the population had a college education and an above-average annual income of $75,000. The target market is relatively wealthy so they can afford the Titaluk rods.

For psychographics, we look at lifestyles and social status. We can assume fly fishing is our customers’ recreational activity that they spend with family and close friends. Hunley recognized many consumers differentiate fishing gear across brands by price as they perceive higher-priced rods to have better quality and prestige. Consequently, they purchase premium products as an investment in their favorite sport and brag about the expensive gear among their fishing buddies.

For this reason, consumers not only buy high-end products for the perceived better quality but also to display their wealth or their seriousness in this sport. The marketing strategy of the Titaluk line should focus on portraying the image of class, prestige, and professionalism. The target segment will be more likely to purchase this expensive fishing gear if they think Hunley’s Titaluk line can bring them the psychographic values that they desire to have.

I believe Hunley should focus on selling the Titaluk rods to avid anglers because they are most likely to fall into the demographic and psychographic category identified. They have the 2nd highest market share and account for 70% of total sales in the fly-fishing market.

Hunley can influence consumer behavior once it has identified its target segment – the avid anglers. Hunley should be aware that the consumer involvement level for the Titaluk rod is high, so they would go through all steps in the decision-making process to assess the rod thoroughly. In the process, consumers might develop perceived risks that come with the Titaluk rod.

Therefore, Hunley needs to assist the buyers at every stage and ensure they’re making the right decision to purchase Hunley’s product. The marketing mix will discuss how to satisfy valued customers in detail.

I recommend Hunley reposition by moving Hunley’s brand perception closer to the target point (yellow). The ideal location consists mostly of avid anglers who want high-quality rods but are not ready to buy the most expensive ones like Sage. Currently, consumers view Hunley as a mid-tier brand with average quality and price, thus losing appeal to avid anglers.

In exhibit 1, Hunley’s position is marked with a red cross. Orvis and Berkley (marked blue) are other brands comparable to Hunley. Hunley’s product is better than the private label goods from sports stores such as LL Beans, Cabela’s, and Dick’s (Grey) but is inferior to specialized, high-end brands like Thomas Thomas and Sage (orange).  We need to make consumers think Hunley’s products have excellent quality and are relatively high-end.

The new Titaluk River line will appeal to the target market and change their perception of Hunley’s brand overall. The best scenario is to reposition to the ideal point with quality as good as Sage’s but at a better value point.

2. Introducing the new Titaluk River rod to Hunley’s product portfolio comes with opportunities and risks.  Hunley should deliver the relative advantage, communicability, observability, and minimal behavior change benefits to customers. Relevant partnership, promotion, and pricing strategy will help Hunley to communicate the benefits of the Titaluk River rod to customers.

For partnership, Hunley should sell the Titaluk rods through specialty fly shops because most avid anglers choose to shop here instead of major sports stores. By selling through these fly shops, Hunley can establish the product’s exclusivity, which might attract wealthy fishers. Because Hunley sells the Titaluk rods to these stores for $400, a 50% discount, the stores will be incentivized to stock and sell Hunley’s product through push-through marketing.

Hunley should also continue bolstering the relationship with the reps because they have high expertise in Hunley’s products. It can incentivize the reps to sell and promote the Titaluk River rods by changing the commission structure in the first year. It should increase the commission for Titaluk to 6% from the current rate of 5%. By doing so, the sales reps will heed more attention to checking the situation at the specialty stores.

They will put more effort into making sure sales of the Titaluk line are going well. They can make visits to help in-store people to inform the customers of the Titaluk relative advantage such as the product is exclusively made of ultra-light material GB graphite or advise them on how to deliver post-purchase customer satisfaction.

Hunley should modify its current promotional structure by placing more budget on sponsorship. These influencers should be well-known, competitive fly-fishers whose opinions are valuable and credible. Hunley should sponsor these fly-fishing athletes for an extended amount of time, so the Titaluk rods appear multiple times on the screen. The consumers will remember Titaluk rods better through repetition, and it also shows that the professionals are using Hunley’s product and not just advertising for it.

The accomplished fly-fishers have already praised the Titaluk rod; therefore, it’s likely they will accept the advertising offer. Hunley’s target customers, the avid anglers, will be more prone to listen to the professional’s recommendation and desire to own the products their idol use. This aspiration will match the psychographic segmentation strategy mentioned before.

To increase the communicability and observability of the product, Hunley can launch a demo program. The most earnest method to inform customers of Titaluk’s advantages is to let the customers test the products themselves. Hunley can ship some of its Titaluk rods to specialty stores and make the staffs there handle the lending process for Hunley. If many of them participate in this program, the Titaluk rods will frequently appear in the fly-fishers circle; thus, it can also create a buzz effect in which people discuss the launch of the Titaluk.

Furthermore, Hunley should increase the budget for search-based advertising. The VP of marketing suggests quintupling as consumers are migrating to mobile devices instead of magazines. Through programmatic advertising, Hunley can target the Titaluk ads to avid anglers who are most likely to purchase it. Therefore, it allows Hunley to measure the effectiveness of its marketing efforts and provides consumers’ data for future product launches and analyses.

The pricing strategy should reflect the prestigious image that Hunley wants to convey with its Titaluk River line. The managing team has planned to install the traditional cost-plus pricing, which I think is suitable for this product. This method allows Hunley to ensure profitability on each rod sold.

I don’t recommend cream-skimming because the gradual decrease in price will make the first purchasers believe our product is not valuable. The penetration skimming is also not good because if we begin with a low price, the product will not stand out as a luxury good. However, Hunley offers discounts for a limited time after it launches the Titaluk River Rods.

Some strategies might include offering a 10-20% discount for the first 100 customers or for the first week of launching the product. This temporary promotion would create a sense of urgency and motivates prospective customers to buy early.

3. Overall, Hunley’s financial situation will improve with the introduction of the Titaluk River rod, as shown in Exhibit B. The gross profit will increase by $2,000,000, and the EBITDA will increase by roughly $1,300,000. The introduction of the Titaluk offsets the decline in sales of the Klamath since it has a much higher retail price and a higher profit margin.

The marketing budget is shown in exhibit C. I keep the costs of advertising to equal 8% of sales revenue, which is $2,154,152 because Hunley’s managing team wants to maintain this ratio. I defer to the manager’s preference to set $1,000,000 for the new product launch.

The advertising costs will increase because the promotion strategy for Titaluk targets multiple communication vehicles. Sponsorships increase the most, from $50,000 to $450,000, because the Titaluk line needs a stronger professional endorsement compared to the generic Klamath line.

To accommodate marketing costs for Titaluk, the budget for print will have to decrease I recommend decreasing print costs from $900,000 to $600,000. By doing so, the marketing costs increase, but not significantly, and will not affect the profitability of the firm.

4. Introducing the Titaluk rods is better than producing generic rods because the former option allows Hunley to retain its reputable image as a brand that uses the most advanced materials and employs careful craftsmanship. The Titaluk line will reinforce the prestige that the owners built for decades.

In contrast, Hunley won’t be able to control the quality when it outsources production to an overseas supplier with the second option. Choosing Walmart as Hunley’s distributor also decreases brand reputation and hampers Hunley’s repositioning strategy to a higher quality, higher-priced brand.

Second, the Titaluk rods will attract avid anglers, the segment that accounts for 70% of fly-fishing gear. In contrast, the Walmart generic rods will only attract beginners and occasional fishers who together account for 20% of the sales. Thus, the option of going with Titaluk rods is superior because it helps Hunley to capture the most lucrative segment.

Moreover, the introduction of the Titaluk River line can bolster the growth of the general rods later but not the other way around. The segments of first-time fishers and less wealthy people will be excited to be able to purchase products from Hunley – the brand that also produces the Titaluk line.

Instead, if Hunley sells the generic rods through Walmart, it’d be harder to enter the high-end market later since more consumers have already associated the brand with the cheaper products. The wealthy consumers will not want to buy gear from the brand that also sells cheap rods through Walmart.

Nevertheless, the introduction of the Titaluk line comes with risks. The first is a financial risk because this option requires more investment. Hunley must meet the minimum order of $1,000,000 from its manufacturer, Mitsubishi. Marketing costs also increase due to sponsorships, PR, and search-based advertising. The Walmart option is much cheaper because the Chinese manufacturer can produce the rods at a low price, and the generic rod doesn’t require a separate marketing campaign.

The second risk stems from market research’s failure. Hunley is unable to understand how consumers evaluate the value of fishing gear, apart from price. The company needs to carry out further market research to fully comprehend consumers’ motivation and preferences to decrease the risks of launching an undesirable product.

Still, I believe that Hunley should continue with its plan to introduce the Titaluk line. The Titaluk line not only has a promising financial return, but it also transforms and reestablishes the Hunley brand from mid-tier to closer to high-end. Fly-fishing is a growing sport among the retired populations, who are likely to have more disposable income and free time. They can become avid anglers and devote a considerable amount of time and money to this sport. Hunley needs to grasp this opportunity and accommodate this growing demand.

Appendix

Exhibit A: Perceptual map of the fly-fishing market.

Exhibit B: Hunley Inc, Projected income statement in 2018

Notes:

1.      There will be some degree of cannibalization with the introduction of the Titaluk line; however, I project the decrease in Klamath sales will not be drastic as the two products aim at two different target markets. The Titaluk rods sell at $800 and aim at avid anglers while Klamath rods sell at $269 and aim at first-entry anglers. I expect a 5-15% drop in total sales but will take a 15% decrease in sales to calculation due to the conservatism principle.

2.      Sales of a fly rod in 2018 are estimated at $26,926,900 because the management team wants to increase 10% in sales from 2017, which was $24,479,000.

3.      Unit sales of Klamath are reduced from 91,000 to 77350. In order to reach the 10% sales increase goal, Titatuk has to make up for the revenue loss from these reduced unit sales. Titak sales is calculated at 26,926,900 – 20,807,150 = $6,119,750. Titatuk’s unit sales is 6,119,750/800 = 7650. This satisfies the 7,000-rod minimum order from the manufacturer Mitsubishi.

4.      The 2018 COGS of Klamath was 46%, taken from the 2017 Income Statement. The COGS of Titaluk was calculated by the information given in the case study. Buying 7,000 Titatuk rods from Mitsubishi costs roughly $1,000,000 so the cost of 1 rod is 1,000,000/7,000 = $142.86. Hunley sells to retailers at discounted price of $400 so COGS is 142.86/(800-400) =142.86/400 = 35.71%.

5.      Sales commissions for Klamath are decreased to 4%, while Titatuk is 6% because we want to incentivize the reps and specialty stores to sell more Titatuk lines during the first year of its launch. The overall cost of sales commissions decreased.

Exhibit C: Hunley’s Advertising Budget in 2018