Case Study 11 Lampelichter Ag Essen

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All manufacturers of lamps are frantically trying to maintain and protect their share in a shrinking market. Each manufacturer has a large number of production facilities across Europe and the profitability of the companies is determined by production loading. In this industry, economies of scale play a major role and the overcapacity of the manufacturers ensuing from the shrinking market has brought about aggressive price competition. This has been reflected in lower unit selling prices and reduced margins and has put further emphasis on achieving economies of scale. Currently, lamp manufacturing is not a profitable industry. Companies are fighting for market share and high exit barriers prevent withdrawal. However, whenever the upturn occurs, those firms that survive the recession will be in a good position to take advantage of future growth and new markets.

Recently, Philips has entered the Polish market both to access the emerging ex-Comecon markets and to obtain a lower cost base to aid its price competitiveness in established European markets. Similarly, GE has invested heavily in Hungary and Osram has expanded its distribution into the former East Germany and purchased the North American operations of GTE, which has retrenched its business activities to the core of telecommunications. The acquisition of GTE's share of the North American market was critical to Osram to prevent it being marginalised as a European producer. The North America move countered GE's expansion into Europe. GE has also acquired controlling interests in manufacturing sites in Italy, Japan and China. Philips and Osram are also investing in joint ventures in China and the Far East.

As manufacturers have moved into areas of lower cost production, the unit selling price of the manufacturers since 1993 has fallen in real terms - a trend that is expected to continue. However, while the unit production cost of the product has fallen, the distribution and sales cost associated with it have risen.

Lampelichter employs around 100 personnel and was established in 1970. As one of the leading independent suppliers of replacement lamps to independent electrical retailers in Germany, the firm undertakes marketing and distribution but has no manufacturing capacity. It has a single warehousing and office facility in Essen and uses carriers to deliver its consignments to customers. In 1993, 65% of its annual sales were under its own label brand. In 1995 the firm was looking towards a sales revenue target of DM30m. In 1994 the firm's sales revenues were made up as follows:

• plugs, sockets and other accessories 10%

In Europe generally, the independent electrical retailers have chosen to reduce stockholding, thereby holding stock back at their suppliers. This has produced an increase in the number of orders placed but a reduction in the average order value. Unless suppliers can break the trend of falling selling prices coupled with rising sales and distribution costs, the long-term net margin position of the suppliers in the independent market will continue to worsen. The lamp supply industry is especially seasonal - November's turnover is approximately twice that of June. The period September to March is critical to the success of the organisation, but the resources available to allow it to take advantage of the season are carried throughout the year. This makes it a high fixed cost organisation that actually budgets to lose money in the spring and summer periods.

Lampelichter differs from the majority of its competitors. It markets its products on a national basis rather than the more usual local or regional basis adopted by the competition. Competition comprises manufacturers (competing directly for major accounts), national electrical wholesalers, local electrical wholesalers, special lamp distributors, appliance and accessory distributors. Within the company's organisational structure there are board representatives for sales, marketing, finance and operations. Approximately 60% of company manpower is directly related to the sales/sales support roles. The remaining 40% is taken up in staffing the following departments: data processing, accounts and finance, quality assurance, warehousing and transport.

The sales budget in 1995 split the total revenue targets as shown in Table 1.1.

Lampelichter considers that it has committed and talented management and employees, a good reputation in the trade, excellent goodwill and significant customer loyalty. It also has a substantial field salesforce, its own branded product range, consistent attractive barcoded own-brand packaging and excellent supplier relationships with all major lamp suppliers. The firm is a financially strong private company with limited borrowings. It has high stock inventory coupled with an extensive product range. Furthermore, it has expertise in fragile products. The firm has a market-led culture (with the object of being customer led).

Lampelichter sales budget, 1995

Distribution channel

1995 1994 target target

Independent electrical retailer Commercial user Onward distributor

60% 65% 32% 25% 8% 10%

Lampelichter's historic customer base is in decline and the firm is reluctant to accept added-value products. Within the company, there is a lack of internal performance standards. Profitability is declining and there is under-utilisation of assets. Compared with competition the firm is a relatively high-fixed-cost operation. Moreover, delivery performance is poorer than that of competitors. Under-manning of the salesforce is causing ineffective sales management. The salesforce is also an ageing one in terms of selling skills and professionalism and exhibits an absence of any customer segmentation and associated objectives and strategies. The company has a weak planning structure and skills base and a poor training culture.

There is a range of possible opportunities in the marketplace. These include: range extension into complementary non-lamp products; supply chain integration; and new markets. However, the firm faces: increased competition from lower cost distributors; increased competition from manufacturers on direct contracts with large users; increased seasonality of the core business; falling real costs of lamps; centralisation of supplier power with fewer own-brands suppliers; and fewer independent retailers.

Following discussion between the top management of the company and a European management consultancy organisation, the consultancy firm recommended that Lampelichter should commission marketing research to explore the various avenues open to it.


What kind of marketing research information do you think Lampelichter should try to obtain?

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