In June 2019, Izzy Originals (IO), based in Atlantic Canada, Faces an Important Decision: Cost Accounting Case Study, Canada,

Synopsis

In June 2019, Izzy Originals (IO), based in Atlantic Canada, faces an important decision regarding its distribution strategy into the U.S. market. IO currently manufactures and sells an exclusive line of handmade necklaces and earrings through numerous retailers in Atlantic Canada. One of IO’s retailers complained that the market was becoming saturated, so Jones and Hunter, IO’s founding partners, are looking to the United States for further expansion. They need to decide on a distribution method – attending trade shows or hiring sales representatives.

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Assignment

You have been hired as a consultant to help Darla Jones and Isabelle Hunter decide on the best distribution strategy to use if IO enters the U.S. market. Their options include attending trade shows or hiring a sales force. Each option brings its own opportunities and risks, so Jones and Hunter must
balance the qualitative factors with the quantitative factors when making their decision.

The report should be presented as a business case. It requires a cover page (the cover page does not count toward the total page limit), introductory paragraph, body, conclusion, and appendices.

The report should be no longer than four (4) pages, plus an additional three (3) pages of appendices to present your analysis.

The following questions should be addressed/answered in the report and/or appendices:

  • Pros and cons of each distribution strategy from a qualitative point of view.
  • Prepare a quantitative analysis of each distribution strategy, using a contribution margin approach.
  • For each distribution strategy, calculate the total contribution margin for each of the two product lines (necklaces and pairs of earrings).
  • Calculate IO’s break-even point for each distribution strategy.
  • Determine which distribution channel will be more profitable in 2020.
  • Recommend a distribution strategy (trade shows or sales representatives) based on your qualitative and quantitative assessment.

Izzy Originals

Overview

In June 2019, Darla Jones and Isabelle Hunter received a call from Sonya Moyer, one of their retail customers in Halifax, Nova Scotia. The customer had called to complain about how many of her competitors now carried Izzy Originals (IO) jewellery. Moyer’s Boutique had been the exclusive carrier of
Izzy Originals jewellery in the greater Halifax area for several years. With the growing popularity of its unique designs, many stores in the area were now carrying the jewellery line.

Jones and Hunter, owners and partners of IO, were worried. If they continued to saturate the Atlantic market, they would be faced with similar concerns from other retail customers. The partners realized it was time to grow their business outside of the region, and they were excited about the possibility of selling their jewellery in the eastern United States. Their goal was to enter the U.S. market by January 2020, but they would first have to decide on the best method of distribution: attending trade shows or hiring sales representatives.

Company Background

Darla Jones and Isabelle Hunter shared love of unique, affordable jewellery. They met while attending UNB and developed the idea to design and make high style fashion jewellery accessible to young women. Both partners had experience in the jewellery industry. Jones’s parents owned a small business that manufactured medals, trophies, and customized jewellery pieces for companies and community groups, and Darla had been part of the family business from a young age. Hunter had been designing and selling her own line of necklaces since she was a Grade 11 student.

The U.S. Market

IO had established a strong presence in the Atlantic Canadian market, and Jones and Hunter were ready to expand into the United States. Financially, IO was healthy, so any distribution costs related to the U.S. expansion could be financed from internal operations, without needing external financing. Key fashion hubs in the United States were New York, Los Angeles, Chicago, and Dallas. However, Jones and Hunter wanted to stay true to their Eastern roots and decided they would focus on the New England market first.

Sales Representatives

An alternative method of distributions would be to develop a sales force in the key geographical areas of the eastern U.S. Sales representatives would carry 10 to 15 different brands, usually within the same category of products (i.e. accessories), and would sell to retailers in designated geographical zones. Jones and Hunter want people who would be loyal and who could represent the appropriate IO brand attributes. They believed that the most important characteristics in sales representatives are that they believe in the product and that they are willing to travel to show it well.

Trade Shows and Sales Representatives

Ideally, IO preferred to enter the U.S. market by attending trade shows and hiring a sales force. The problem with this strategy is territory ownership. For example, if Jones and Hunter attended a trade show in Boston, and had hired a Boston-based sales representative, it is an industry norm that the sales representative receive a 15 per cent commission from sales made at the Boston trade show.

Conclusion

Jones and Hunter are excited about the U.S. opportunities and they wanted to ensure that they were entering the market with a solid strategy. The partners had built the business on the principles of having fun, gaining exposure for new product lines and staying ahead of fashion trends. They have been highly successful operationally and financially to date.

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