Zoecon Corporation Introduction

Changes in top management at Zoecon Corporation brought about a shift in corporate objectives. The new objectives emphasized a focus on high financial-return products and businesses. In January 1986, Zoecon executives called for a meeting to determine the fate of their Strike brand insect growth regular (IGR) called Strike ROACH ENDER. This product had been tested in the consumer market in four cities (Charleston, SC; Beaumont, TX; Charlotte, NC; and New Orleans, LA) from May through October of 1985. Now that the test marketing venture was complete, Zoecon executives were faced with determining the most profitable future marketing strategy for their IGR products.

Definition of the Problem

One Zoecon executive stated that the decision is basically how we can best allocate our technical, financial, and marketing resources for our IGR Compounds. Some suggestions had already been discussed informally among the executives, including, consumer market expansion with the ROACH ENDER product, pest control operator (PCO) market concentration with the ROACH ENDER, or IGR compound sales to existing firms in the consumer insecticide market. Some of these alternatives were mutually exclusive, and others were not. So, it was up to Zoecon executives to use the test market data analysis, along with their knowledge and experience in the insecticide industry to decide which of the proposed alternatives will be most profitable and most appropriate according to the newly developed corporate strategy.

Summary of the Major Alternatives

Zoecon executives are faced with the alternatives of marketing their Strike ROACH ENDER product to the consumer market or concentrating their efforts on the professional pest control market. If Zoecon cannot make a sufficient profit then marketing their IGR compounds through other firms may be the next opportunity.

Zoecon has already introduced the Strike FLEA ENDER to the consumer market in 19 states, where the product gained an 18% market share by 1985, but has not yet reached its profit objectives. These insecticides were also successfully sold to pest control operators through distributors, and by 1985 had captured 80% of all flea product sales made through these outlets. In December 1983, Zoecon reached an agreement with SC Johnson and Son to include PRECOR (the flea control compound in Strike FLEA ENDER) in its Raid Flea Killer Plus. There are significant differences in the consumer and professional pest control markets. The consumer market targets a stronger, more poisonous chemical that quickly kills insects. The professional market uses adulticides that focus more on preventing maturity, which disables reproduction. The consumer market is a quick ending solution and the professional market concentrates on a long term effect. Both markets have a good growth rate each year. The following chart represents characteristics of the premise insecticide market.

The best alternative

(A) Strike ROACH ENDER distribution should be expanded to the 19 cities where Strike FLEA ENDER is sold. 1. Marketing research indicates that 80% of roach insecticide volume is sold in these 19 cities. 2. Marketing expenses would consist of promotion & advertising. (B) Direct resources to pest control operators. 1. GENCOR (hydroprene) was well received in 1984, and many PCOs were promoting its benefits to their customers. 2. Yearly investment of $500,000 per year above the typical 27% of sales in advertising and sales efforts could increase usage. (C) Pursue opportunities for selling hydroprene to other manufacturers for use in their products. All marketing and sales costs would be absorbed by the manufacturer of said product, and

Zoecon could realize a 50% gross margin. This action could also terminate Zoecons presence in the consumer market.

Analysis of the Alternatives

Zoecons Roach Ender product has a market with three distinct channels. The principle market is comprised of the retail consumer market for household insect and pest remedies and the wholesale market for Pest Control Operators (PCOs). An alternative market is the bulk wholesale market to national brand name insect control remedy manufacturers. The decision of which channel to use should be based on recent market data and information pertaining to the various channels. However, there are important considerations regarding the use of IGRs versus adulticides, and how they would be received and promoted in each specific channel. SALES AND PROFIT ANALYSIS

Trial: 1.17 million HH x .06 trial rate x 1.3 units x 3.02/unit = $275,605 Repeat: 70,200 trial HH x .30 repeat rate x 3.5 units x 3.02/unit = $222,604 Total Sales $498,209 Contribution $273,850 Less Case Exhibit 6 Expenditures $1,478,000 Profit/(Loss) $(1,204,150)
Next, we estimate the test market share based on test market data received from an independent study. Then we will expand the estimate to cover the larger 19 city southern tier market. As we expand the test market to the 19 cities of the southern tier, and assume that all test market data would remain the same for expanded distribution, we project the forecasted sales in the 19 city market composed of 22 million households to be: Expenditure levels (Fixed Costs) can be estimated several ways. Depending on which method we use, the expansion may or may not produce additional profits as explained below:

A. Assuming expenditures are based on a per capita approach, and the test market cities contain 5.3% of household population, then advertising and promotion expenditures for the 19 city market would be: 20 x $1,016,000 = $20,320,000. B. Assuming expenditures are based on a per city approach and spending in 5 of 19 cities, (test market cities) or about 1/4 of cities for advertising and promotion was $1,016,000, the total spending would be: 4 x $1,016,000 = $4,064,000. C. Assuming Zoecon adopts the industry "rule of thumb" that $10 million are necessary to launch a new product when consumers were familiar with the brand name (which might be the case since Strike FLEA ENDER was distributed in 19 city market), then spending for advertising and promotion would be $10 million. Expenditure levels greatly exceed expected revenues in both option A and option C. Option B is the only option in which revenues are greater than expenses, and even then, the margin is small. Keeping the expanded consumer-market projections in mind, we now evaluate the option of selling to the pest control operators (PCOs) market. Based on the data provided in the case, we have determined the following: The projections are based on sales and advertising costs of 27% of sales plus an additional $500K to accelerate GENCORs use among PCOs. In this market, because of the reduced costs, Zoecon can remain profitable with as little as 5% market penetration. Given the 80% market penetration of the PRECOR product within 5 years, Zoecon can expect significant profits from GENCOR in the PCO market as well. Finally, we look at the option of wholesaling hydroprene to the makers of d-Con, Black Flag, and Raid. Considering their market-share, we find:

If we assume we could sell hydroprene to all 3 manufacturers, with a 50% gross margin, we would expect roughly $30M in profits, and all marketing and advertising costs would be borne by them. If this course is chosen, we would talk with makers of Raid first, and if no exclusive agreement is required, we would pursue the others in kind. Recommendations and Summary Justification After careful analysis and examination of the alternatives, our recommendation for Zoecon is alternative B. The test market results show more than $1M in losses during the test period, and, based on the 19-city profit estimates, alternative A would most likely continue to result in losses. This is further supported by the fact that after 2 years in the 19-city consumer market, Strike FLEA ENDER still has not reached its profit objective. With alternative B, marketing & advertising costs are sharply reduced, and PCOs are already promoting the IGRs benefits (since GENCORs introduction in 1984). Also, by 1985, PRECOR successfully captured an estimated 80 percent of all flea product sales made through PCOs, veterinary clinics, and pet stores. It is reasonable to expect similar results from GENCOR. Although alternative C would essentially eliminate marketing and sales costs, it could also potentially terminate Zoecons presence in the consumer market, thus limiting future growth and profit potential. For that reason, we do not recommend this course of action. Considerations for Implementation of Recommendation There are a few market considerations in choosing to implement alternative B. One, Zoecon should budget an expected $500,000/year above the 27% of sales amount for marketing to PCOs. The good news is that this is far less than any marketing estimates in the consumer market, and Zoecon has already established strong relationships in the professional pest control market. Also, Zoecon should reasonably be able to maintain the average gross profit of 51% on the GENCOR product. The product has already been received well by professionals in the industry, and continued support is expected.

This option satisfies the goals of the organization by making the most effective use of resources to gain the highest return. Alternative B also preserves Zoecons ability to compete in the consumer market in the future.