© 2000 John Petroff

2)- Marketing strategy

An aggressive marketing strategy can be confirmed by several expenses. Advertising comes naturally first to mind, along with selling expenses. One should also look at rebates, allowances and returns, which show how aggressive sales people are in getting sales. Less obvious is provision for bad debt which shows that the firm is reaching out even to marginal customers. Achieving an aggressive sales strategy with zero bad debt is not possible. Yet, the size of bad debt should not be compared to sales only, but also to the size of accounts receivable. Additional distribution facilities and shipping equipment should also translate in new outlays and increases in depreciation. Finally, the size and composition of inventory should match customer expectations. If the firm caters to a highly restricted and specialized clientele, just-in-time inventory management would be optimum. But, if the customer population is varied and changing, a large inventory must be held, and that must be reflected by high warehouse or selling floor costs. Thus, if a sales expansion is planned, this must translate with a proportionately larger expansion of inventory, and the inventory expansion must precede sales growth.

A defensive marketing strategy is more difficult to detect since revenues and expenses are intended to be preserved at the level they are initially. One would have to look for such items as an expanded service after sale, or some kind of rebate or allowance for repeat customers, for instance, with the help of coupons. But such information does not appear normally as a separate item in the income statement.

Let us look at defensive strategies in a low growth and low margin industry of convenience stores with gas stations. Income statements for 7-Eleven and Unit-Marts are presented in Table T-13.6, together with RMA statistics for largest firms group of miscellaneous food stores SIC# 5499 industry (because no convenience store classification is available in RMA). Table T-13.6 Comparison of selling/administrative expense of two convenience store chains in 1998 .(in $ millions) 7-Eleven Unit-Marts RMA Sales 7,350 252 . COGS 5,122 185 . Gross Margin 2,228 67 . Selling/administrative expense 2,054 66 . Other expenses net 91 4 . Profit before tax 83 -3 . . 7-Eleven Unit-Marts RMA Sales 100.0 100.0 100.0 % COGS 69.7 73.4 66.2 % Gross margin 30.3 26.6 33.8 % Selling/administrative expenses 27.9 26.2 27.3 % Other expenses 1.2 1.6 0.9 % Profit before tax 1.1 -1.2 5.6 Table T-13.6 shows that both 7-Eleven and Unit-Marts have modest gross margins because the industry is highly competitive. 7-Eleven incurred larger selling and administrative expenses because a retail information system installation which aims at maintaining fresh inventory in all stores. This strategy seems to be paying off as 7-Eleven keeps growing. By contrast, Unit-Marts does not have a marketing strategy, is unable to compete and has been closing stores and losing revenue at an annual rate of 14%.

See review questions Q-13C2.1 through Q-13C2.3.

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