Harold E.

Klein
Page 1

A CASE OF SHMUTZ -- FOR STRATEGIC ANALYSIS
[1. You have owned and operated a convenience store for the last five years, located in a
residential neighborhood in the Philadelphia suburbs. Your store looks about like a free standing
Wawa or 7-11 with 2,600 sq. ft. (which is slightly above average for stores of this type) and has
one half dozen parking spaces surrounding the building. It has refrigerated and freezer sections.]
[2. Most all of your business consists of selling staple food and specialty products, personal care
and selected household products to customers in your trading area. This geographic area
consists mostly of households within a one half mile radius of the store; but more than two-thirds
of your sales volume comes from customers living within one quarter mile (or four or five
blocks).] [3. Your store is not equipped to sell freshly made, take-out food] [4. and there is no
ready market for such services.]
[5. The nearest supermarket is about three miles from your store. The nearest comparable
convenience store is just over a mile distant from yours. That store has a generally similar
product line and pricing policies.] [6. Your main competitive advantage, quite simply, is
convenience That and one other thing: a specialty product that you and you alone carry in your
trading area and beyond (more about that below).]
[7. Your geographic market already was a well-developed residential area, mostly single and
attached homes, by the time you opened your store. The aggregate number of households has
held steady, population within the area growing no more than 0.5-1.0 percent annually, if at all.
The median household income (adjusted for inflation) is above the national average and has not
changed much during the last several years. The one change from a demographic standpoint
has been in the areas ethnic distribution.
As one finds in sections of Philadelphia, its suburbs and other big cities, ethnic enclaves develop
over time. When you opened your store, your trading area was in the process of absorbing the
largest regional concentration of descendants of Zantagonians who originally immigrated to the
Philadelphia area over 100 years ago.] [8. Soon after your store opening, you found that many
of your customers asked if you could carry shmutz, the most famous and expensive delicacy of
Zantagonia.] Of course, you had never heard of shmutz, but you told them that you would
look into the possibility of carrying this product.
You found out the following about shmutz: [9. Shmutz is very complicated and time consuming
to prepare; even in Zantagonia, virtually all shmutz consumption derives from commercial
production; no shmutz is produced outside of Zantagonia; there is only one shmutz producer that
exports to the U.S. and only to one importer/distributor (all other shmutz producers have most of
their output committed domestically or elsewhere); shmutz has a very limited shelf life, no more
than 35 days; and, finally, there has not been any shmutz retailed in the Philadelphia region (you
could have it air shipped on rare occasions directly from Zantagonia, but at an exorbitant
price).] [10. A-Zs (as they like to be called, American Zantagonians) will eat as much shmutz as
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they can get and /or afford. Theyll use any occasion to dish out the shmutz (birthdays,
anniversaries, weddings, christenings, bar mitzvahs, any holiday, etc.). It was unknown for any
shmutz to go bad because it remained too long on the shelf in someones kitchen.]
Within the first year of your stores operation, you had started selling shmutz. [11. By the end of
year two, shmutz accounted for about 20 percent of your sales and 40 percent of your operating
profit.] You never expected anything like this!
How it all happened
[12. When you first contacted the U.S. shmutz importer, you had never imported anything or
even dealt with an importer.] You found New York-based Shamata Imports to be very easy with
which to work. Mr. Shamata (pronounced sh-ma-ta) had been delighted to learn of your interest
in carrying shmutz. He was well aware of the high concentration of A-Zs in the Philadelphia
area, having married into a Zantagonian family. In fact, Mr. Shamata already had heard of your
store. It seems that his wifes second cousins best friend lived only a couple of miles away
and word had gotten back to him (Zantagonians are a gossipy lot).
Mr. Shamata actually had been thinking of contacting you and/or your nearby competitor
convenience store about the possibility of carrying shmutz. At the outset, he rejected the
supermarket option. He felt that it would present too many complications. As part of a chain,
he assumed that there would be all sorts of corporate bureaucratic hurdles that he would need to
overcome in order to bring his one product into one specific store. Since you got to him first and
you both seemed to get on well, Mr. Shamata never did contact the other convenience store
operator.
You started out very simply in trial and error fashion, ordering an ever increasing number of
packages of shmutz month-after-month. [13. As long as your monthly stock sold out, you
increased your order for the next month. The more shmutz you sold, the more shmutz appeared
to be in demand. But recently, retail demand began increasing at a rapidly decreasing rate. It
was becoming apparent that local demand was topping out.] [14. One of your best shmutz
customers said to you, Look, even though I love the stuff and really cant get enough of it,
theres only so much that I can afford to spend on shmutz. After all, the kids need milk and their
Playstations. If shmutz didnt cost so much, Id certainly buy more. An informal survey that
you took among your shmutz customers led to the same finding: There definitely was an
increased built-in demand for shmutz among its existing customers but at lower prices. In other
words, there was price elasticity in shmutz demand.] There was no telling how much more
shmutz you could sell to your existing customers. [15. Then there were other A-Z potential
customers outside of your immediate trading area if one could get to them.] And, of course,
possibly even more than that if you could get the price down.]
When you shared your thinking with Mr. Shamata, he came up with a solution to your problem.
[16. If you would be willing to commit to ordering a years supply in advance, he was sure that
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he could negotiate a better wholesale price from his supplier in Zantagonia. Mr. Shamata then
could sell shmutz to you at a lower unit price. You could then pass on a part of your cost savings
to customers in the form of lower shmutz prices. In this manner, both Mr. Shamata and you
would end up with higher shmutz profit margins.]
You would take delivery on a monthly basis per your needs as before. Since demand was
increasing every month, at no time did you ever have shmutz stock left over at months end.
Hence, realistically, there was practically no chance that youd get stuck with excess shmutz
inventory if your next years order was the net volume of the previous year. Mr. Shamata even
agreed to give you close to the discount unit price on any additional units you likely would need
if demand exceeded your previously determined annual volume commitment.
This arrangement allowed you to expand beyond your retail store sales. The word had spread
rapidly by word-of-mouth among A-Zs throughout the entire country that you carried shmutz at
discounted prices prices that were substantially lower than those of other retailers that could
only be supplied by the sole U.S. shmutz distributor, Shamata Imports. [17. The occasional A-Z
consumer that contacted Shamata Imports directly tended to be rebuffed and steered to one or
more of Shamatas customers, the few local outlets across the country that carried shmutz. Mr.
Shamata was perfectly happy to have you handle sales to retail customers. His was a wholesale
operation that didnt have the personnel or systems in place to handle individual small orders.
So when you turned a rather large, underutilized storage area into a shmutz mini-warehouse and
shipping facility, Mr. Shamata was confident that you could handle broader retail distribution
beyond the confines of your store.]
In fact, it was Mr. Shamata that encouraged you to go on line, establishing your very own
website dedicated to shmutz sales. His own website design consultant did most of the work in
setting up your web operation. You now had an established internet presence.
Consequently, your relationship with Mr. Shamata has deepened over the years to the point
where you now are Shamata Imports largest single shmutz customer in the United States. [18.
Your in-store shmutz sales currently accounts for 60% of your total shmutz volume but is
declining as a percentage of total shmutz sales. Internet sales account for the remainder, but
growing rapidly as a share of your total shmutz volume. You estimate that, at the current growth
rate, your total shmutz sales should at least double in the next three years; shmutz sales then
would account for 65 percent of your business total sales volume and might account for as much
as 75 percent of operating profits.] All things considered Life is good!
Was it too good to last???
Just when you thought things couldnt get better You received a call from Rufus Firefly, the
owner of the other convenience store in the area. Normally, you didnt hear from Ruf but once
every three or four months. Typically, he would call about some mundane matter like running
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short of some product that you both carried. He might need a few units until his next delivery;
sometimes, you needed the same favor from him. (Of course, shmutz was off the table).
This call from Rufus was different. You could hear the fear in his voice. I think you oughta
know about the Frumke property [19. Its been sold to XYZ [XYZ was a national upscale
supermarket chain with a wholesome, consumer-oriented image very much like Whole Foods
and Trader Joes with price points somewhere between the two]. What are we going to do? I
hear that theyll be open within one year. Paul Alper over at the Weekly Bungler [the
community newspaper] told me in confidence that XYZ already has given him the layouts for
display ads announcing the new store and welcoming job applications. For starters, theyve
given him a ten-insertion order to run the ad twice a month starting two months from now.]
The Frumke parcel was located almost exactly between your store and Rufs, about one half mile
from each one. It was an undeveloped piece of land about the size of a square block, large
enough to comfortably house a conventional size supermarket (about 30,000-40,000 sq.ft.) with
the requisite parking spaces. Until its sale, the Frumke family had allowed it to be used as a play
area for children and for an enclosed dog run where the community could bring their pets to
cavort safely unleashed.
Having read about XYZs entry into new markets, [20. you knew that the chain consciously tried
to embed itself into the community. It was known to modify its product line where economically
feasible to meet local needs. If XYZ behaved true to form, you thought, it likely would try to
reserve some of its property for the same community uses as existed before it took over. In this
way, XYZ would look socially responsible and, at the same time, lure potential customers to the
stores environs. You could practically see the joyful in- and outdoor childrens play facilities,
(chaperoned, of course) and a better equipped and maintained dog run. And A-Zs loved their
dogs almost as much as they savored their shmutz! Worse, you could imagine many of your
customers availing themselves of these services and then doing all their grocery shopping
while there. You would need to think about this development. But it would be a year at least
before your business would even begin to feel the impact of the new XYZ store, if it would have
any impact at all.]
When it rains, it pours
You had almost forgotten about Rufus Fireflys near hysterical call when it came time for your
monthly shmutz delivery order to be sent in. Ordinarily, you emailed the order directly to
Shamatas shipping department. You then would follow this up with a phone call to Mr.
Shamata himself, taking the opportunity to talk shmutz, so to speak, and chat about other
matters of mutual interest.
Before you had a chance to make the usual call to Shamata, he called you. He didnt waste any
time with small talk, getting right to the point. I thought you ought to know XYZ is moving
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into your neighborhood. When you told him that you had been made aware of this about one
month earlier, he added, But theres more
The XYZ corporate buying office had contacted Shamata Imports several weeks before and
made routine inquiries about the wholesale pricing and availability of shmutz. In anticipation of
every new store opening, standard protocol for implementing its tailored to the community
strategy called for a detailed socioeconomic and demographic analysis of the prospective target
market area. This was not an academic exercise. XYZ specifically wanted to know what
products and services were in demand in the designated area that were not within its usual
product line makeup.
Since XYZ opened new stores regularly, it had developed a standardized system both for
assessing potential store locations and evaluating target market needs once a store opening
decision was made. [21. It was inevitable that shmutz would be identified as the most unique
product demand in the new store service area. Shamata Imports was contacted as soon as XYZ
analysts verified the products market potential and that it met the various other XYZ internal
criteria for allocating shelf space to a new product.] XYZ representatives asked all the usual
questions about the product (pricing, availability, delivery particulars, etc.) from any prospective
vendor (now that you thought about it, you recalled a month earlier, the man and woman dressed
in business attire, clearly not locals, that had come in and wandered over to the shmutz display
and then asking you lots of questions about shmutz; they had thanked you, bought a small bottle
of Evian water, and left without any shmutz).
Mr. Shamata relayed the substance of his conversations with XYZ to you. From the questions
that they asked, [22. he was sure that XYZ would want to carry shmutz. It had all the
characteristics of a real profit and traffic generator in more ways than one. Almost all specialty
products had much higher markups than the store averages, even higher than meats and fresh
vegetables. But shmutz, they could see, was in a class by itself: an unswerving, fanatical
customer base for a unique product. There was no question but that shmutz would far exceed
XYZs internal hurdle rate for stocking a new product.]
Besides, there were lots of ways XYZ could market shmutz, Mr. Shamata suggested to you. Not
only did shmutz have high unit profit potential. It also could be used as a loss leader, to draw
customers to the store, much the way XYZ priced its turkeys at cost just before Thanksgiving.
[23. You could see that Mr. Shamata already had given a great deal of thought to the matter of
another wholesale customer that might have even greater volume potential than you could
provide.]
You had developed an excellent personal relationship with Mr. Shamata over the years. [24.But
you also knew that Mr. Shamata considered himself a sound businessman.] He had counseled
you on a number of occasions not to let personal feelings influence business decisions. You
were certain that, when the time came, Mr. Shamata would follow his own advice.
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You had some thinking to do And in the not-too-distant future, you were sure that some
strategic decisions would have to be made.