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CAPE BRETON WALLCOVERINGS
In December, 1989, John Hooker, President of Cape Breton Wallcoverings, a division of St.
Clair Paint and Wallpaper Corporation, faced a tough decision. Even though the new plant had
been in operation for only a year, an immediate expansion was necessary to meet market
demand. However, as only 5% of the staff was experienced in manufacturing wallpaper, major
production problems developed. John needed to make a recommendation to the chairman of
St. Clair as to whether or not Cape Breton Wallcoverings should expand at this time.
The Company
At the official opening of the plant located in the Northside Industrial Park (situated between
North Sydney and Sydney Mines, in Nova Scotia) in March, 1989, federal and provincial
government officials hailed Cape Breton Wallcoverings as a "real success story". The Premier
of Nova Scotia stated, "building the 95,000 square foot facility demonstrates the great
confidence St. Clair has in this part of Nova Scotia, and is also an expression of the
confidence St. Clair has in the economy of Cape Breton and in Cape Bretoners." The plant
opening was considered a major boost for the local economy, which was suffering from
industry closures and layoffs, creating a large number of unemployed Cape Bretoners. The
unemployment rate in Cape Breton was chronically high, compared to the rate in Nova Scotia
and the rest of Canada. In March, 1989, the unemployment rate was 20.7%, compared to
9.2% for Nova Scotia and 7.5% for Canada.1
Cape Breton Wallcoverings began production in November 1988 and was fully operational by
March, 1989. By December, 1989, the plant employed 103 people including the senior
management team: John Hooker, President; Michael O'Shea, Controller/Accountant; Donald
Planche, Sales & Marketing Manager; Chris Wood, Production Manager; Carole Degre,
Design Director and Howard Venner, Plant Manager (Exhibit 1). All of the senior management
team had previous wallpaper experience except Michael O'Shea who had formerly operated
his own accounting business.
Cape Breton Wallcoverings was the first wallcovering plant to be established in the Atlantic
Provinces. The plant included all the latest equipment and technology as well as a design
center. The state of the art equipment enabled the plant to produce a
1Statistics
Canada, Labour Force Survey Report, March, 1989.
This case was prepared by Professor Pam Seville of the University College of Cape Breton for the Atlantic Entrepreneurial
Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.
Copyright © 1990, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for
educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include
publication.
variety of wallcovering: blown vinyl, gravure printing, and rotary screen printing, (see
definitions, Appendix 1). John Hooker stated, "These new machines, with their quick
changeover capabilities, reflect the industry's need for more selection and less volume. At
Cape Breton, we will be able to produce 500 single-roll runs as opposed to the industry
standard of 2,000 single-roll runs. That's why we'll be successful and we'll always be here."
The Industry
Somewhat cyclical in nature, sales in the wallcovering industry reflected the state of the
general economy. Between 1982 and 1986, the overall North American consumer
consumption of wallcovering increased by approximately 40%, and Canadian consumption of
wallcovering increased by 54% (Exhibit 2). Between 1986 and 1989, the growth in North
American consumption continued to increase each year by between 1% and 3%. Although
there was no growth in consumption in 1989, growth was expected to continue or even
improve somewhat in 1990 and 1991 as the downturn in the wallcovering industry
experienced in 1989 was expected to level out.
The seven main categories of wallcoverings, their market share and growth figures from 1982
to 1986 are provided in Exhibit 3. Although some categories of wallcoverings had reached a
mature stage, for example Natural Textures, some aspects, in particular the blown vinyls,
were in a rapid growth phase. By 1989, North American sales at the manufacturing level had
reached one billion dollars per annum.
Company Background
St. Clair Paint and Wallpaper Corporation, the parent company of Cape Breton Wall
Coverings, was founded in 1939 by the late Harry Litwin, who began with one retail store. By
1989, St. Clair had grown to be a retailer, distributor and a manufacturer. As a retailer, paint,
wallpaper, decorative supplies and related products were sold through 51 company-owned
and 142 franchised locations in Canada and the United States. The distribution division
consisted of Metro Wallcoverings and St. Clair Distribution. Finally, the manufacturing division
included Phoenix Wallcoverings, Window Magic and Cape Breton Wallcoverings (Exhibit 4).
St. Clair was a public company that traded 30% of its shares on the Toronto Stock Exchange.
The remaining 70% was owned by the Litwin family of Toronto.
Cape Breton Wallcoverings was established in 1987 after St. Clair's United Kingdom plant,
Phoenix Wallcoverings, had reached full capacity. St. Clair wanted to expand into solid sheet
vinyl wall covering, and also wanted to increase its share of the world market, so a second
plant was deemed necessary. Mr. Jeffery Litwin, President of St. Clair, stated that a major
incentive to locate a plant in Cape Breton was the available financial assistance. The Atlantic
Canada Opportunities Agency contributed investment tax credit, offered reduced interest on
$12.25 million of the total loan of $15 million, provided loan insurance on 85% of the loan for
up to 15 years and provided a $3 million mortgage. As well, the Nova Scotia Department of
Industry, Trade, and Technology provided an incentive of $15,000 for every job created up to
a maximum of seventy jobs. Another incentive was the plentiful labour force, low labour costs
and low land costs. A final incentive was the easy accessibility to North American and
European markets.
The President of Cape Breton Wall Coverings, John Hooker, reported directly to Louis Litwin,
Chairman of the Board of Directors of St. Clair. Cape Breton Wallcoverings was centralized in
terms of financial controls and major decision-making. However in the day-to-day operations,
the Cape Breton plant was autonomous and had its own accounting, shipping, sales,
marketing and design departments. As John Hooker stated, "We are a free standing business,
not just a production facility".
Marketing
Cape Breton Wallcoverings offered high quality vinyl products and vinyl base (the basic
ingredient used in manufacturing solid vinyl, blown vinyl and flat screen wallcovering), at a
competitive price. Wallcoverings were produced for the middle price range. It was essential
that the colors and designs offered be consistent with current customer demands. Cape
Breton Wallcoverings produced wallcoverings under two brand names - Glenbeigh and
Phoenix. They also produced wallcovering known as converted brands for other customers
under contract. Channels of distribution included distributors, convertors and retail operators.
The most effective promotional tools for Cape Breton Wallcoverings were their wallcovering
books (collections.) Each collection consisted of 25 designs in three color varieties (a total of
75 choices). The Design Director worked closely with customers (distributors) to determine
what they wanted, and the design department produced collections that included the
customers' suggestions. The production of each collection took a year, but as John Hooker
said, "It is a good selling device because the customers' ideas have been assimilated into the
production of each collection." An investment of $200,000 to $250,000 was needed to design
each collection and a further $1 million to stock the complete line for each collection. The wall
covering books (collections) were provided to distributors and retail outlets so that the
customer could see the product and place orders.
Seventy percent of their product was exported -- 60% to the United States and 10% to Europe.
The remainder was sold in Canada. Approximately 20% of their sales volume was sold to St.
Clair Paint and Wallpaper Stores. The wallcoverings were delivered to customers by transport
or shipped by container from Halifax, Nova Scotia.
Human Resource Management
One of the incentives for building a manufacturing facility in Cape Breton was the large pool of
available labour. In November, 1987, John estimated that he would require 60 people to begin
work in the plant by June, 1989. At that time he said, "the plant will require fairly technical
people for the factory as well as office staff and warehousing personnel. Employees should be
familiar with the printing trades or have good color balance." (See Definitions, Appendix 1)
More than 550 applications were received for the 60 positions.
By the end of 1989, 103 employees had been hired. The breakdown of the number of
employees in each department was: Design Department, 5; Purchasing Department, 4;
Marketing and Sales Department, 8; Administration Department, 11; and Production
Department, 75. Because the staff was relatively inexperienced, it was a challenge for John
Hooker and Chris Wood to provide opportunity for training and development throughout the
plant. As John said, "From myself, right down to the guy who's sweeping the floor, everyone
who is here is in a different position than where he was before." Every employee at Cape
Breton Wallcoverings had started on a new career path. Even the key personnel with previous
wallcovering experience, who had been assembled to run this new plant, were carrying out
new job duties. For example, John Hooker had extensive experience in the wallcovering
industry as an import consultant and vice-president of sales and marketing. However, this was
John's first experience as General Manager and President of a wallcovering plant. Similarly,
Chris Woods had held positions in customer service, warehousing and direct sales of
wallcoverings in Quebec. This was the first Production Manager position that Chris had filled
in the wallcovering field. Further, each position at the plant that was filled by a Cape Bretoner
was considered to be a training position.
This training component was especially evident in the Production Department. Since there
was not an apprenticeship program for printing trades in Nova Scotia, the local people hired
for the production area were not familiar with the printing craft. In general, the local men and
women hired for this department were between 20 and 30 years of age, had obtained, on
average, a grade 11 general level education, had very little technical experience, but, they
were willing to learn. As John Hooker said, "I have the key elements because the Cape Breton
workers have the right attitude and can be taught to make wallpaper."
John had hired five employees experienced in manufacturing wallpaper from outside the area,
who would supervise 70 Cape Bretoners who were unskilled novices in the printing area.
These five employees would report to Chris Wood. The experienced employees acted as
models and coaches to the untrained employees who were learning the printing trade through
on-the-job training. An informal apprenticeship program was set up whereby the five skilled
supervisors trained, monitored and evaluated the novice printers as they learned the new
trade through "hands on" experience on the production line. Much of the printing was a
computerized procedure. However, the production personnel needed to monitor the
equipment and the temperature level of the ovens in addition to operating various types of
equipment used in the production of wallcoverings.
John had also approached the Canada Employment and Immigration Commission to provide
for industry-based training through their National Training Program. This program provided the
training dollars ($15,000 per job created) for producing basic job-specific skills of a technical
nature, for example running the gravure printers. John also planned to invite experts in the
wallcovering field to provide training for both short and extended periods. An expert in gravure
would arrive soon from England to act as a consultant to management and production
personnel. The expert would stay for two years during which time he would recommend and
implement systems to be put in place, monitor production and initiate specific training for the
gravure printing process. Through the technology inflow program of the Department of
External Affairs, Michael O'Shea had arranged that a German chemist would assist the new
plant with vinyl base formulas and production technologies for 150 days in 1990 and 100 days
the following year.
These technical experts would assist Cape Breton Wallcoverings in becoming more efficient.
The German chemist was an expert in producing vinyl base formulas, knowledgeable as to the
intricacies and sensitivities of temperature, mixing processes, and the delicate balance of
ingredients so necessary in this production process. Similarly, the gravure expert from
England had ten years experience in photo-engraving of copper-coated printing cylinders and
was highly experienced in spreading inks onto the cylinders in the process of gravure printing.
Both experts were familiar with the state-of-the-art equipment and the processes necessary to
produce excellent blown vinyl and gravure printed wallcoverings.
Only three North American wallcovering manufacturers produced blown vinyl and Cape
Breton Wallcoverings was one of them. The gravure printing and blown vinyl processes were
relatively new technologically and it was necessary that Chris Woods and the five supervisors
also become familiar with these processes and the state-of-the-art equipment. Consequently,
the technical experts were the key to the training and development programs to be
implemented in order to produce saleable wallcoverings.
Although John was impressed with the Cape Breton workers, he noted, "They do what you tell
them to do but you have to tell them what to do. They do not have the experience to make
wallpaper better." As novices in the printing trade, the Cape Bretoners were acquiring the
technical skills through on-the-job training and through supervision provided by Chris Woods,
the five experienced supervisors and the technical experts. A gravure printer in England spent
six years as an apprentice. At Cape Breton Wallcoverings, an employee filled this position
after only six months. This pressure to perform as an experienced worker after a relatively
short training period was affecting productivity levels. It was unrealistic that the Cape Breton
gravure printers could compete with the English gravure printer craftsmen after only a short
training period.
Very little employee turnover or absenteeism occurred at the plant. John attributed this to a
team approach in running the business. Production workers were encouraged to discuss any
difficulties that developed on the shop floor and to offer suggestions for change to their
immediate supervisors, Chris Wood or John Hooker. John maintained an "open door" policy
and was often seen chatting with employees on the shop floor. John valued the employees'
input and in turn he let them know how the company was faring financially. Everyone knew
how much money Cape Breton Wallcoverings was losing on a month-to-month basis and as a
team effort, they took pride in reducing the loss.
The wage scale for the printers was based on three categories: $7/hour, $9/hour, and
$11/hour. The printers' helpers ($7/hour) ensured that all paper, ink and supplies were
available in sufficient quantities to meet production needs. The printers' assistants ($9/hour)
assisted in the operation of the printing equipment until such time as they were familiar
enough with the process to perform the print work independently. Finally, the printers
($11/hour) were fully responsible for independently operating the gravure and rotary screen
printers. To reach a higher wage scale, an employee needed to acquire the necessary skills
through on-the-job training as determined by Chris Wood and the five supervisors. As a
printer's helper advanced through the stages, s/he acquired new skills which were utilized and
practiced under the supervision of Chris Wood and the five supervisors. The hourly wage
scale for the printers compared to average or slightly above wages in Cape Breton. Yearly
increases were based on a cost of living formula.
Two unsuccessful attempts to unionize the plant had been made. These attempts were
initiated externally and in each case, the Cape Breton Wall Covering employees voted not to
unionize. John said, "I don't disagree with unions. Unions are good for a lot of reasons. The
bigger you get, the more you see unionism because it standardizes what you do. My problem
with unions is that there are too many outside influences. We plan to put in an association that
the workers run. An association doesn't keep a union out, but it gives the employees a sense
of security, consistency and everyone knows the rules." A draft of the association was in the
process of being drawn up by the company's lawyer and this draft would be circulated to the
employees for their input. The final version of the employee association document would be
voted on by all the employees.
Regarding the Cape Breton workers, John said, "You just won't find the kind of loyalty and
dedication anywhere that we have in our staff here. In bigger cities and companies, the
workforce is more mobile and, therefore, transient. Our people have their roots here. They're
proud of what they're doing and it shows in the plant and in the production. Cape Bretoners
value employment. They believe in the Work Ethic: to give a fair day's work in exchange for a
day's pay."
Operations
The new manufacturing plant included 95,000 square feet: 40,500 square feet for
manufacturing, 47,000 square feet for pre-and post-production storage and 7,500 square feet
for administration, sales and design functions. Cape Breton Wallcoverings produced vinyl
base and blown vinyl, solid vinyl and flat vinyl wallcoverings in the manufacturing area.
Operating at full capacity, the gravure machine could produce 2.9 million single rolls in a year
and the rotary machine could produce 3.8 million single rolls a year. However, by 1989 the
market demand for the Cape Breton product had already exceeded their full production
capacity and orders had been turned down.
The employees in the production department had started at the bottom of the learning curve.
They did not have the technical skills or previous wallcover manufacturing experience. "During
the start-up phase, it was not uncommon for the rotary screen printing equipment to run a
month without any good product due to an unskilled labour force" said Chris Wood, the
company's production manager. Yet, this production time provided hours of on-the-job training
for the novice printers. As well, due to many equipment failures, "down time" was often
experienced. There was a definite lack of local expertise to keep the equipment, imported from
Holland and Germany, operational. No maintenance people had been trained before the startup. Michael O'Shea related one example where an expert from Holland had to be flown in to
repair the vinyl base machine. The repair and down time costs relating to this incident
amounted to $10,000. Each interruption in production caused an additional expense.
However, after a year of operation, employees had become more knowledgeable about the
equipment and could do repairs themselves. This greatly reduced repair and downtime costs.
"By 1989, if a piece of equipment stopped working, someone would walk over, turn a switch
and we went on with production" Chris stated. In addition, the production rate had improved to
where it was 75% of the industry average from the non productive start up phase. Labour
costs (computed on a per-roll basis) were still high. Many of the production personnel,
inexperienced in manufacturing wallpaper, and learning new, complex skills, made errors. As
John Hooker said, "We lost more money than anticipated due to our naivete in thinking that we
could get up and running at 100% efficiency right away. It may take five years before we learn
how to solve all the different problems of manufacturing."
In the first year of manufacturing, John Hooker wanted to prove that Cape Breton
Wallcoverings could "make a roll of wall paper, ship a roll of wallpaper, account for the costs
associated with a roll of wallpaper and sell a roll of wallpaper. It was more important to make it
better, ship it better, account for it better and sell it better than to be concerned with how much
it cost." After a year's operation, the amount of waste ran at 25% as compared to the industry
average of 15%. John felt that with "housekeeping and training, waste could be reduced to
20% very quickly, but to reduce it to 15% would take another year."
The first objective of the production department was to produce enough wallcoverings to
provide an inventory for their collections. When the inventory fell to a pre-determined level, a
production order was generated and scheduled into the factory. The lead time to start
production, follow through on all the systems, finish off the run and get it into inventory was
four weeks. Because the "life" of a collection was two years, John felt that the inventory
turnover of 2.5 times per year would improve during their second year of operation.
The manufacturing process was carried out in two shifts of 8 hours per day, five days per
week. However, it was anticipated that beginning in January, 1990, two shifts of 12 hours per
day each week would be necessary. Each employee would work four shifts a week, increasing
the hours worked each week from 40 to 48. John said, "This isn't a good way to run a plant mistakes happen and there is no chance to catch up." However, the extra production shift was
necessary to satisfy the objectives of stocking an adequate inventory for the collections and
filling a backlog of orders.
Finance
After reflecting on the past year, John said, "The reason you go into a business is because
you have confidence in the business and you tend to be more of an optimist. No matter how
much of a pessimist you are, your mind doesn't allow you to say, 'I'm going to go in there and
fail for two years.' When you do a business plan, you're almost better off looking at your worst
case scenario and adding another 50% to it. We haven't done what we said we were going to
do in terms of production, and that relates to sales and cash flow."
There were months during the start-up phase when there were cash flow shortages of
$300,000 to $400,000. As Michael explained, "This $20 million facility has a lot of overhead to
cover: a large computer system, a large area for the design studio and administration and a
$1.25 million incinerator to burn off the waste fumes and protect the environment. For
overhead cost recovery, we need an expansion." As well, in the first year of production it was
difficult to schedule manufacturing of inventory for the stock collections as well as repeat
orders. Changing cylinders meant lost time and money. Although the year-end statements had
not been completed, John estimated that Cape Breton Wallcoverings had achieved sales of
approximately $9.5 million in 1989, a little over 80% of their forecast of $11.5 million.
If Cape Breton Wallcovering expanded its plant by 50,000 square feet and added three new
gravure printers, their production potential could double. The present production capacity had
forced Cape Breton Wallcovering to turn down some orders from companies such as Ralph
Lauren and Sherwin Williams. The expansion could allow Cape Breton Wallcovering to
capture a large export market in the United States and to be strategically placed when the
Free Trade Agreement took effect. John estimated that with an emphasis on increased
training and efficiencies the expanded plant would reach sales of $25 million by 1992.
The costs of the equipment and the building were estimated at $9 million. As an additional
thirty to forty employees would be hired (and increase to seventy within two years), John had
prepared a proposal for government financial assistance in June, 1989, to help with the
expansion. Cape Breton Wallcovering hoped to begin construction before June 30, 1990,
have the machinery installed, and start production by January, 1991. "The company will have
to expand if it is going to be successful," said John. However, by December 1989 John had
not received any word from the provincial government.
To expand or not to expand? To expand meant changing the current focus on increased
training of people and improved efficiencies to a focus on expansion. Was the planned
expansion premature?
Exhibit 1
Cape Breton Wallcoverings
Organizational Structure
Source: Company files.
Exhibit 2
The Canadian Wallpaper Market: 1982-1991
(MM Metric Single Rolls)
Source: CPMA Report, Construction Products Marketing Associates Inc, The Canadian
Market for Flexible Wallcoverings: Market Trends and Characteristics 1985-1990.
Exhibit 3
Performance Measures of Wallcoverings Product
Segments Residential Market
Canada and the United States
Source: CPMA Report.
Exhibit 4
St. Clair Paint & Wallpaper
Corporation Structure
1 The partners of the partnership are St. Clair Paint Limited and St. Clair Wallpaper (1980) Limited, both of which are
Ontario corporations, wholly owned by the company.
2 The shares of Phoenix Wallcoverings, a corporation incorporated under the laws of England, are held through Tradcorp
Canada Limited which is an Ontario corporation wholly owned by the company. Phoenix Wallcoverings is owned as to
66.67% by Tradcorp and as to 33.33% by the local general manager of Phoenix Wallcoverings.
Source: Company records.
Appendix 1
Description of Terms
Blown Vinyl
Poly vinyl chloride (PVC) foam is introduced into the vinyl substrate during the printing process.
As the wallcovering dries, the PVC expands, giving the wallcovering a three-dimensional
appearance.
Color Balance
An ability to determine if wallcovering colors in the production stage match the original design
pattern colors.
Flat Vinyl Wallcoverings
A moving sheet of paper is coated with a specific quantity or thickness of liquid poly vinyl
chloride (PVC) such that the PVC coat is applied in consistent thickness over the length and
width of the moving paper.
Gravure Printing
A design image is etched by photo-engraving onto the surface of copper-coated printing
cylinders faced with a thin layer of chromium plating for protection. Inks of low viscosity and solid
content are used to facilitate ink flow onto image areas. The vinyl base is then fed between the
engraved roller and a rubber covered roller under high pressure.
Rotary Screen Printing
Rotary screen printing is a system similar to flat bed silkscreen printing, but uses a cylindrical
drum as a screen rather than a flat bed Screen the cylindrical screen then prints in a very similar
fashion to a gravure press.
Two types (1) Rotary screen flat printing - uses vinyl base stock and regular inks, superior to
gravure printing as it allows additional quantities of ink to be used, giving it a more handpainted
look, (2) Rotary screen blow vinyls - poly vinyl chloride (PVC) foam is introduced onto the vinyl
substrate during the printing process. As the printing wallcovering is drying, the PVC expands
giving the wallcovering a three-dimensional appearance.
Vinyl Base
Vinyl base production requires the availability of a substantial amount of liquid poly vinyl chloride
(PVC). PVC is manufactured according to a specific formula in a mixing tank. Vinyl base is the
basic ingredient used in the manufacture of solid vinyl, blown vinyl and flat screen wallcovering.
Source: Company records