Volume 1, Number 3 December 31,
2003
Recent Events:
Like a good horserace, Industry B has no clear winner, and has everyone watching with great interest. What seemed like a sure thing in 2002 (Audacia) is now up for grabs. Comma was the only company to introduce the high-price, high-quality Product Z this year, and their stock price soared. There continues to be a diversity of strategies and testing of consumer preferences. Four of the six companies have an “A” or better credit rating. Although some companies appear to be circling the drain, if last year taught us anything, it’s that things change quickly.
BMF Inc entered the Western market last year, selling both Products X and Y. Low prices on their Product X could not compensate for their being outspent in advertising and sales force, though, and they captured only 3% of the X market. In the more established Eastern market, BMF Inc’s Product Y is well known and respected, but customers are barely aware that BMF Inc even makes a Product X. All of these signs suggest that BMF Inc is trying to phase out product X and concentrate on Y. This year they reduced production from 3 shifts last year to 2 shifts. Even so, BMF Inc’s inventories, which were huge at the beginning of the year, increased somewhat this year. Their bank overdraft followed a similar trend. Their end-of-year inventories were equal to 80% of this year’s sales. They need to a drastic reduction in production and a substantial increase in sales in order to avoid a future bankruptcy.
Audacia continues to sell
both X and Y in the East and Western markets, outspending in advertising in all
but one of those categories. This in
combination with good credit terms and solid pricing, improved market share in
the West—almost tripling 2002’s share for both X and Y. Audacia lost some of it’s market
share for Product X in the East, in spite of its heavy advertising campaign
last year, though they are still number one in that market. Investors were somewhat disappointed that
this industry juggernaut did not become a rocket ship, (and somehow missed Comma’s
big move) and sold off shares late in the year. However, with far and away the largest capacity heading into
2004, expectations are high for Audacia.
Sammy still sells solidly, centrally, and safely in both the East and West. In the West, Sammy lost market share across the board to both BMF Inc and Audacia last year, while making slight gains in their established Eastern market. Higher revenues, a solid bottom line, and a good supply of cash on hand, helped drive Sammy’s stock up after 2002’s decline. One of only three companies to sell all their inventory last year, we see Sammy seems to have balanced their strategy. Now can they compete with the big dogs?
We would call Comma this year’s dark horse, except that if you recall, we predicted good things from them in 2002. Comma was the only company to introduce the top-of-the-line Product Z last year, and the buzz was huge. Though one occasionally sees old Product Y on the shelves out there, clearly Comma has a split strategy, selling to both the very bottom and very top of the market. It’s working! Though they lost market share, total sales of Product X were up, and Z turned out to be a coup. Stock price jumped $50 a share, and with the industry’s second highest capacity for 2004, and excellent credit, who knows where this horse will finish?
The HOSERS continue to own Product Y in the U.S. market, but…it just isn’t enough. The year’s end saw them sitting on a lot of inventory and getting smacked by a large overdraft. Demand for Product Y grew by slightly more than 8% last year, but that wasn’t enough to clear the shelves at HOSERS. BMF Inc and Audacia both stole market share from HOSERS last year and investors drove the stock down to $1.61. Analysts are mixed on making predictions for HOSERS in 2004: “we know they have enough information” said one, “but can they put it all together?” We shall see.
Like Sammy, BST also made modest gains in 2003. BST is the only company trying to make it in one market (East), and though they held on to their share of the X market, they lost on Product Y, mostly to Audacia and HOSERS. There continues to be a relatively large unmet demand (mostly for X) in the East, so perhaps BST can continue to serve only those customers, but BST will have to hang on to old customers while trying to sell new customers on the idea that BST can do the job. Next year, BST will have the third highest capacity in the industry and we wonder if they can recruit new Eastern customers fast enough to make it work. BST has always been able to sell everything it produced, which is good. They have never had a positive operating profit. This suggests a fundamental flaw in their business model.