Fossil Essay Example for Free

fogy EssayKosta had noted the recent success of S wait elan matches and was aware that watches and other goods could be imported from the Far East at very low cost. On a visit to Hong Kong, Tom studied a number of potential products for import including toys and stuffed animals before following Kostas advice and returned to the U. S. to develop a watch import logical argument. Enlisting the aid of two friends, Lynne Stafford for her sense of inclination and Alan Moore who had a masters degree in accounting, he invested his savings of $200,000 to found fogey as a Texas corporation in 1984. dodos initial purchase of watches from a Hong Kong manufacturer include some retro and jumbo designs that Macys thought were hot, and significant recites followed. A design staff was demonstrable that include watch buyers from retail chains. Inspiration came from many sources. , however the strongest was retro themes from the 1940s and 50s. normalers paged through and through magazines from this era, including Life, Look, and Time, and visited flea markets searching for old watches. Between 1987 and 1989 sales grew from $2 million to $20 million, assisted by liberal credit from the Hong Kong manufacturers of fogey watches.One sector included conservatively styled time pieces including brands such as Citizen and Seiko. The second gear sector included products designed to reflect emerging fashion trends and included Swatch, expect? , Anne Klein and Anne Klein II, and Fossil. This segment was fueled by fashion-conscious consumers who considered watches as fashion accessories and often possess multiple watches. Branded fashion watch sales were estimated to represent approximately $400 million in retail sales in 1990. Major Competitors Fossils major competitors were Swatch and Guess?.Although market share data were difficult to obtain, it was generall(a)y believed that Fossil and Guess? had nearly equal market shares and that Swatch had slipped to third in recent m onths. Numerous other considerably smaller competitors existed including Anne Klein, Anne Klein II, and Gucci. Swatch Although quartz watch technology had been developed in Switzerland, by the late 1970s the Japanese companies Seiko, Citizen, and Casio and the fall in States firm Texas Instruments exploited production improvements and economies of scale to drive tolls down.Strategic habit of the manufacturing experience curve led to an oersupply of quartz watch movements and a disgusting price war. Many competitors were driven out of business with Casio, Hong Kong manufacturing businesss, and a few other firms surviving in mass market watches, and Seiko and Citizen in the moderately priced segment. The Swiss watch industry was under severe attack at the low and mid price points, and both unemployment and losses on bank loans were increasing. In 1978, the Swiss g overnment agreed to provide up to one-third of the costs or a maximum of Sfr. 5 million for a venture of the leading w atch manufacturers to develop a Swiss electronic watch program. Additional financing was supplied by banks, who wrote off existing loans and provided hundreds of millions of francs of unfermented expectant, and a group of investors who paid $ c million (Sfr 151 at the time) for a 51 part share. The consulting firm of Hayek Engineering was hired to lead the effort to revive the lower-priced segment. This venture produced a number of raw(a) patents and developed both new watch and watch manufacturing technologies, along with the superpower to design and manufacture watches efficiently at low cost.The resulting firm, Swiss Corporation for Microelectronics and gibemaking (SMH) included the existing brands Omega, Longines, Tissot, and Rado in the moderate and exquisitely watch segments. N. Hayek and E. Thomke led efforts in the low priced segments that resulted in the Swatch manufactured by SMHs ETA division. Development of the Swatch began in 1980, resulting in a product launch i n 1983. The manufacturing growth was highly automated using robots and computers in the manufacturing and assembly processes. The watch had been designed with only 51 parts, preferably of the usual 90 to 150 parts in other watches, had an ex-factory price of Sfr15.Parts were injected directly into the plastic case which was sealed by ultrasonic welding. This process was highly capital intensive, leading to direct labor costs of less than ten portion of total costs. The manufacturing process permitted a wide variety of dials, cases, and straps however, variations in the shape and size of the watch case were quite difficult. One plant could produce up to 35,000 watches a day. Swatch was test marketed in the United States in celestial latitude 1982 at 100 Sanger Harris department stores in Dallas, Salt Lake City, and San Diego without any advertising or universe relations.Although consumer reactions were mixed, Swatch was officially launched in Switzerland in March 1983, followed b y a gradual worldwide release. A second U. S. test market in December 1983 through the Zale jewelry chain and Macys was not successful. Swatch made capacious adjustments throughout their marketing program, and by 1985, U. S. sales accelerated. In 1986, a worldwide oneness price of $30 for most models was set and sales accumulated to over 50 million units worldwide by 1988. The 100 millionth Swatch was sell in 1993, when the price of a basic Swatch was $40.In 1992, SMH had combined sales for all brands of $2. 1 billion, producing $286 million in profits and a market equity apprise exceeding $3. 5 billion. Banks had encouraged Nicholas Hayek to assume a 20 percent equity ownership in the mid-80s, a successful arrangement for both. Fifteen thousand employees worked in plants in Switzerland and Thailand producing semi-conductors, watches, movements, batteries, and straps. Guess? In 1983, Philip Mickey Callanen acquired the worldwide liberty to manufacture and market watches with the Guess? name.Investing $40,000 of his personal funds, he opened business in his garage, sourced watches from Hong Kong, and shipped for the 1983 Christmas season. Growth continued through the 1980s at over 20 percent annually. In 1991, Callanen Company was acquired by Timex, expanding distribution to Japan, Australia, France, England, Germany and Canada and providing Callanen an additional source of watch technologies such as Indiglo dial illumination. In 1993 Callanen marketed both Guess? watches for men and women and Mo authorize watches for women. Guess? represented 85 percent of the $80 million loadings (3 million watches) in 1992.The Guess? product line included 250 to 300 styles including classic, fashion, sporty, multi-function, chronograph, novelty, and alloy bracelet watches. About 20 percent of the product line was revised seasonally four times a year. Guess? watches had a suggested retail price between $42 and $115, using department stores as the major retail outlet. Fi fteen percent of Guess? sales were in planetary markets. Additional products included watch bands and private label watches for Disney, Hard Rock Cafe, Limited Express, Macys, and others.Virtually all Guess? watches were designed and manufactured at Guess? s partially owned manufacturing facility in Hong Kong. The 270 employees included a design staff of 19. Callanens business offices, wareho drop, and watch repair facility were determined in Norwalk, Connecticut, and they had a showroom in New York City. Manufacturing and Sourcing About two million, or eighty- quin percent of fine watches sold worldwide, were manufactured in Switzerland in 1988, making Switzerland the largest value producer with sales of $4. 9 billion (96 million watches) in 1990.Most other watches were manufactured in the Far East, with the major exception of Swatch, which was manufactured in a highly automated factory in Switzerland. The development of the Swatch and its robotic factory was credited with saving the Swiss watch industry. Japan was the worlds largest producer in terms of units, with 325 million units, representing 44 percent of the worlds production in 1990. Hong Kong, relying on assembly by hand, produced 175 million watches in 1990, and was expected to produce 340 million, or one-third of the worlds watches in 1993 (Table 6).Due to Hong Kongs focus on low-priced watches, this represented only nightspot percent of the total value of watches produced. Fossil chose to assemble watches in Hong Kong, using components from Japan, China, Taiwan, Italy, and Korea. fogey IN 1993 Business Strategy Fossils initial public whirl prospectus defined their business strategy as Brand Development. The Company has established the fogey brand name and image to reflect a theme of fun, fashion, and humor, and believes that the FOSSIL brand name has achieved growing acceptance among fashion-conscious consumers in its target markets.Product Value. The Companys products provide value by offer ing quality components and features at moderate prices. For example, the Companys FOSSIL watches, which offer features such as raised indexes, enamel, textured, shell or semi-precious stone dials, gold electroplating, and fine leather straps, are sold at an average retail price of $63. Likewise, the Companys token watches, which incorporate a number of features offered in FOSSIL watches, are sold at an average retail price of $42. Fashion Orientation. The Company ifferentiates its products from those of its competitors principally through innovations in fashion details, including variations in the interposition of watch dials, crystals, cases, and straps for the Companys watches and trimming, lining, and straps for its handbags. Expansion of International Business. The Company is seeking to achieve further growth in its international business through the establishment of a joint venture to operate a European distribution bosom, the establishment of a branch office in Canada, and the recruitment of new distributors in selected international markets.Introduction of New Product Categories. The Company may leverage its design and marketing expertise to expand the scope of its product offerings through the introduction of new categories of fashion accessories that would complement its existing products. Active Management of Retail Sales. The Company manages the retail sales process by carefully monitoring its customers sales and inventories by product category and style and by assisting in the conception, development, and implementation of their marketing program.As a result, the Company believes it enjoys close relationships with its principal customers, often allowing it to influence the mix, quality, and time of their purchasing decisions. Close Relationships with Manufacturing Sources. The Company has established and maintains close relationships with a number of watch manufacturers rigid in Hong Kong. The Company believes that these relationships allow it to quickly and efficiently envelop innovative product designs and alter production in response to the retail performance of its products.Coordinated Product Promotion. The Company coordinates product design, packaging, and advertising functions in order to communicate in a cohesive manner to its target markets the themes and images it associates with its products. Personnel Development. The Company actively seeks to recruit and train its design, advertising, sales, and marketing personnel to assist it in achieving further growth in its existing businesses and in expanding the scope of its product offerings. Cost Advantages.Because the Company does not pay royalties on products sold under the FOSSIL and RELIC brand names and because of cost savings associated with the location of its headquarters and warehousing and distribution center in Dallas, Texas, the Company believes that it enjoys certain cost advantages which enhance its ability to achieve attractive profit margins. Centr alized Distribution. Substantially all of the Companys products are distributed from its warehousing and distribution center located in Dallas.The Company believes that its distribution capabilities enable it to reduce inventory risk and increase its flexibility in meeting the delivery requirement of its customers. (Fossil, 1993, 23-24) Manufacturing Fossil East, a 35 employee subsidiary of Fossil (owning 20 percent interest), acted as Fossils exclusive agent, buying all of Fossils watches from approximately 20 factories located in Hong Kong. In 1992, about 21 percent of these watches were purchased from Pulse Time, a Hong Kong corporation in which Fossil held a minority interest. Three other factories distributively accounted for more than 10 percent of Fossils watches.The company felt that developing long-term relations with suppliers was essential to its success. While the loss of any single manufacturer could disrupt shipments of certain watch styles, it would not impact their overall marketing program. slash goods were manufactured in 12 factories located in Brazil, China, Hong Kong, Korea, Taiwan, and Uruguay. Fossil believed that its policy of outsourcing products allows it to achieve increased production flexibility while avoiding significant capital expenditures, build-ups of work-in-process inventory, and the costs of managing a substantial production work force (Fossil, 1993, 27). ProductsFossils flagship products were the Fossil watches introduced as a brand in 1986. Handbags were introduced in 1991 as the first entry into the leather goods market. Watch Products Watches represented 98. 1, 96. 4, and 92. 5 percent of sales in the years 1990, 1991, and 1992 respectively. Following the Fossil brand, Fossil introduced the memento brand, Fossil watch straps, and private label products. FOSSIL Watches Fossil states its watches are targeted at middle and upper income consumers between the ages of 16 and 40 and are sold at retail prices generally rangi ng from $45 to $110, with an average price of $63 (Fossil, 1993, 25).RELIC Watches The Relic brand shared many of the features found in Fossil watches but in a format suitable for lower priced fashion watches. Relic watches are targeted at lower and middle income consumers and are sold at retail prices generally ranging from $40 to $50, with an average price of $42. Fossil Watch Straps Watch straps were targeted at customers who bought Fossil watches however, they could be apply with a wide variety of watches. They were priced from $13 to $15. Private Label Products Fossil provided private label watches for retailers and other customers.Leather Goods Following the introduction of Fossil handbags in 1991, small leather goods such as coin purses, key chains, personal organizers, wallets, and belts for women were introduced in 1992, accounting for about five percent of sales in 1992. The handbags emphasized classic styles and creative designs, including a tan and black binocular bag, a green and tan drawstring sac, and a natural color military ammunition pouch retailing from $48 to $130, with an average price of $87.Fossil felt that since womens leather goods tended to be located near womens watches in department and specialty stores, purchase of one Fossil product might lead to another. They also felt that they were price competitive. Design and Development The design staff sought to differentiate its products from those of its competition principally by incorporating innovations in fashion details into its product designs. These included variations in the treatment of dials, crystals, cases, and straps for the companys watches and trimming, lining, and straps for handbags (Fossil 1993, 26).Fossils watch lines included Airmaster, Casual, Chronograph, Dress, Limited Edition, Pyramid, Crystal, Skeleton, and Vintage watches. About 500 different styles were available at any abandoned time, with new designs offered five times a year. Over 1,000 models were availa ble in 1992. Design prototypes of watches were created in Hong Kong in as little as a week, and lead-time from committing orders to shipment ranged from two to three months. Fossil believed that its close relationships with manufacturers gave it a competitive advantage in quickly introducing innovative product designs.Promotion Fossil made use of an in-house advertising department for design and execution of packaging, advertising, and sales promotions. Company executives felt that extensive use of computer-aided design reduced time and encouraged greater creativeness in developing these programs. The companys stated advertising themes aim at evoking nostalgia for the simpler values and more optimistic outlook of the 1950s through the use of images of cars, trains, airliners, and consumer products that reflect the classic American tastes of the period.These images are carefully coordinated in order to convey the flair for fun, fashion, and humor which the Company associates with it s products (Fossil, 1993, 28). A sundial watch sold over 250,000 pieces at a retail price of $16. Fossil developed cooperative advertising programs with major retail customers and developed in-store visual support through its packaging, signs, and fixtures. Consumers were offered promotional particular propositions, including unique tin boxes as watch packaging, T-shirts, caps, and pens. In ten locations, Fossil opened a shop-in-shop format including a wide variety of Fossil products and promotional materials.With greater emphasis on product design, retailer relations, and promotion, Fossil conducted advertising limited to spot television in local markets since 1989, national vagabond since 1991, outdoor advertising in four markets, and occasional ads in Elle, Mademoiselle, Vogue, and Seventeen. Distribution and Sales Force The majority of Fossils products were shipped to its warehouse and distribution center in Dallas. A significant number were bar coded prior to shipment for ent ry into a computerized inventory control system, which enabled Fossil to track each item from receipt to its ultimate sale.Products were distributed to approximately 12,000 retail locations in the United States including department stores and specialty retail stores. In 1991 and 1992, department stores accounted for about 67 percent of net sales. (Table 8 provides data on watch distribution by price and retail channel. ) Fossils ten largest customers accounted for 40 percent of sales. The largest customers were Dillards and the whitethorn Company, each accounting for from ten to thirteen percent of sales. Other principal customers included Carter Hawley Hale Stores, Dayton Hudson, Federated Department Stores, JCPenney, Macys, Nordstrom, and Service Merchandise.Although the industry typically used independent sales representatives, Fossil made use of 25 in-house sales and customer service employees and 12 independent sales representatives. In-house personnel received a salary while i ndependent sales reps worked on a commission basis and did not represent competing product lines. International sales in 1990, 1991, and 1992 were 5. 6, 7. 2, and 8. 1 percent of net sales, respectively. Sixteen independent distributors operated in Europe, South and Central America, Africa, and Australia. These distributors resold watches to department stores and specialty retail stores.Fossil received payment in U. S. dollars base on a uniform price schedule. Financial Strategy Fossil had started out as a bootstrap financed firm. Personal income and savings from Tom Kartsotis ticket-brokering business had provided the initial capital for the operation, and the company had further financed operations by the creative use of trade credit and bank loans. With sales growing rapidly, Fossils expansion needs exceeded what it could raise internally. To sustain sales growth, Fossil needed a substantial increase in working capital.Fossils ability to continue to fund itself with debt capital , given their exposure to volatility in the fashion product market, was questionable. An initial public stock offering ( initial public offering) which would provide access to capital needed to expand Fossils working capital base and fund additional sales growth, was managed by Montgomery Securities of San Francisco. While not uncommon, IPOs of less than $20 MM involved transaction costs that many viewed as being too high to justify the offering. A vituperative decision that needed to be made was what proportion of the ownership should be issued.