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Product Design Case Study
Homecolour
Homecolour was a paint manufacturer, based in the UK Midlands, which 20 years
previously began supplying own label paints to 2 small DIY retail chains. The company
grew with the expansion of the DIY market by concentrating primarily on supplying
regional - and some national - chains with a proportion of their private label requirements.
During the last 10 years, though Homecolour was still supplying own label products, the
company had also developed a range of branded paint. Sales growth continued through
the last 5 years, but increases in profitability were much more difficult to achieve, as Table
4A indicates.
Return on capital employed had dropped over the same period. The large capital
investment programme instituted by Homecolour, to meet rapidly rising sales volumes,
failed to provide the anticipated return and had declined from 38 per cent to 17 per cent
over the 5 year period. The board of Homecolour were meeting to review the future of the
company and were considering a document which provided the information on which they
would take their decisions. Decisions on company direction would have considerable
impact on the production plant, and the type of packaging that the company manufactured.
Table 4A . Homecolour 5 year sales - all figures in £million with most recent year 5.
Year
1
2
3
4
5
Sales
15
17
19
22
25
Promotion
.6
.8
.9
1.3
1.5
Profit
.8
1.2
1.4
1.5
1.6
Capital
2.1
3.0
3.5
5.5
8.9
The market
The market, valued at around £300 million at retail value - at an average of £2.25 per litre,
a consumption of 120 million litres per annum - had become progressively more
competitive. Paint production was concentrated by a series of industry takeovers into a
smaller number of manufacturers. The result was that Homecolour faced a steady decline
in profit margins as it could not effectively compete with the economies of scale, both in
production and promotion, against the two market leaders. The company had spent
approximately £1.5 million in promotion in the last year, this was significantly behind the
market leader expenditure of approximately £12 million. The market had become
increasingly price competitive as well; Nielsen audits revealed that price elasticities had
changed from 6 to 4 over the past 5 years. There was little evidence that consumers
bothered with price points or other psychological pricing effects; they tended to be buying
paint along with other DIY products and saw paint as one of a range of products needed
for decorating.
With sales totalling 15 million litres, Homecolour had a 12 per cent market share of the
consumer sector, and was clearly the third largest manufacturer in the market. However
the market shares of the two other companies accounted for well over 60 per cent of total
sales. Homecolour had initially concentrated on supplying own label products and this still
provided a substantial proportion of both turnover and profit as Table 4B indicates.
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