Cutco Company Channel-Selection Decision
By
Joe Howard
Problem:
CUTCO Corporation has six different growth drivers they can use to increase
growth of revenues to $500 million dollars for 5 years and reach an ultimatum at $1
billion annually after that. After CUTCO Corporation picks the best growth drivers
they must develop a plan for implementation.
About CUTCO:
CUTCO is direct seller of cutlery. Direct selling refers to any sort of selling
that is made outside of a business outlet or store. A lot of direct selling companies
are small, privately owned or do not have outlet stores. Also, most of direct sales
take place on a one-to-one basis and in a residence.
Alcas, a joint venture of ALCOA and W. R. Case & Sons, created the first
CUTCO cutlery in 1949. After increased sales and growth Alcas changed its name to
ALCAS. In 1990, ALCAS Corporation is the parent holding company for: CUTCO
Cutlery Corporation, KA-BAR Knifes, CUTCO International, Vector Marketing
Corporation and Shilling Forge. Vector Marketing Corporation markets CUTCO
Cutlery Corporation’s products in North America and is the largest independent
distributor that operates in the eastern United States. CUTCO International main
duty is to market CUTCO’s products outside North America. The vision of ALCAS
Corporation is to “become the largest, most respected and widely recognized cutlery
company in the world.” By 2002, ALCAS was the largest manufacturer of highquality kitchen cutlery and accessories in the United States. Soon after, ALCAS
changed its name to CUTCO because the there was outstanding reputation of the
CUTCO Cutlery and it would make a more consistent corporate umbrella for the
company. There was a major increase in CUTCO cutlery sales orders to 700,000 in
2009, which was a 27% increase from 1999. In the last decade, direct selling
increased at annual growth rate of 3.2%. Also, the number of direct sellers increased
from $8.5 million dollars in 1996, to $12 million dollars in 2007, a 57% increase. In
2009, over 800 people are working at the headquarters in Olean, New York and
revenues exceed $200 million dollars.
Six Alternatives:
The first option is the company making a major acquisition that would
require a minimum of $10-15 million dollars to be successful. More demand for
their CUTCO cutlery had been increasing in recent years. An acquisition of a
company with manufacturing capacity would be the best to add additional plant
capacity for major growth. The disadvantage of this would be diverting attention
away from CUTCO Corporation’s direct selling, which management believes is the
best way to sell their products because it has a personal demonstration and a handson opportunity.
The second option for Cutco is designing a more effective recruiting program.
In the past, CUTCO has been very successful implementing a variety of improved
recruiting techniques. Web-based technologies are at a higher sophistication now so
focusing on the Internet could be a major strategy to improve recruiting. Around $510 million dollars is required for recruiting management infrastructure and
technology. The advantage is improving the recruiting techniques and opportunity
for gaining insights on new Internet technologies. The disadvantage is that is will
cost to hire and train the additional sales force.
The third option CUTCO has is increasing brand recognition. Brand
recognition for CUTCO in recent years has been very high and increasing word-ofmouth would increase sales dramatically. Around $1-2 million dollars for public
relations expenditures to increase word-of-mouth would increase their revenues to
$10-20 million dollars. This option is relatively cheap and would serve a big
increase in CUTCO’s sales and brand awareness.
The fourth option is increasing international expansion. CUTCO has only
been successful in the international markets in Canada and it costs around $10-15
million for an attempted entry into the global market. CUTCO vision is to be the
leading cutlery manufacturer globally, so it would fit CUTCO’s interests, but given
the international economy right now it would be hard to expand by themselves.
CUTCO’s best international strategy would be to add a strategic partner that would
meet CUTCO halfway with investment.
The fifth option for CUTCO is to expand the catalog and Internet channels by
$3 million dollars. This is risky investment for CUTCO because it will have the
cannibalization effect on the direct selling method. On the other hand, online
shopping is increasing exponentially in recent years and CUTCO received around
$23.8 million dollars in revenues for each catalog or Internet order at an average
$153 per order in 2008.
The sixth option is for CUTCO is to go into the retail market where stores cost
around $100,000 and produce around $250,000 in revenues per store. This is seen
as taking direct selling sales but serves as a major profit source.
Strengths and Weaknesses:
CUTCO currently has many strengths and the main one is their diversification
of their interrelated companies. All of CUTCO’s five different companies have
separate management teams devoted to different purposes of selling CUTCO cutlery.
Acquiring Vector is a major advantage for CUTCO Corporation because it provides
the marketing support needed to control the sales efforts of direct selling. Vector
also motivates the employees with incentives like contest, awards, bonuses,
vacation trip and others, and this helps motivate direct selling. CUCTO’s ability to
direct sell is a distinct advantage for them because the quality and performance
features can be explained and demonstrated on a personal and usually one-to-one
basis. Vector Corporation’s direct sales account for $195 million dollars in 2009,
which is around 83% percent of all CUTCO Corporation’s revenues and is the largest
independent distributor in the United States. Vector’s direct selling has increased by
15% from 2008 to 2009. Vector is so large in the United States that they broke up
Vector in Vector East and Vector West who report to the CEO of CUTCO Corporation.
Also there are three regions in both Vector East and Vector West and a employees
report to regional sales managers.
Corporate hierarchy is a major strength because employees and managers
know their jobs better, which mean they are more efficient. CUTCO’s main targets
are households with incomes over $50,000 and there are around $105 million
households in the United States. Residences, or households in the United States
accounted for $23.1 billion dollars in revenues in 2007 and $85.5 billion dollars in
revenues globally (see exhibit 1). Another strength is the increased sales for CUTCO
Corporation by 27% since 1999. CUTCO previously improved recruiting procedures
with a better direct selling trainers and using Internet-based technologies. CUTCO
presently has really high word-of-mouth brand recognition.
CUTCO cutlery is recognized for its quality products like the Double-D knife
blade grind, and also the wedge-lock is ergonomically made to have a very
confortable handle. The corporation has web a web site set up that keeps up with
current customers by offering customer support and a product-replacement system
that is free of charge for defective or broken products.
CUTCO has a few weaknesses also. The first one is that Vector marketing only
makes its sales during the summer months and relies heavily on sales
representatives to direct sell the products. Vector marketing currently trains
employees at many different branches with many different classes. If there was a
way Vector could train them all in fewer or one location all at the same time then
CUTCO could save major training costs. Also, in 1985 there were $4 million
customers in the catalogue customer base and it has increased a lot since then. A
major cost and weakness is sending these catalogues out to so many people four
times a year. Another weakness is that Vector only uses referrals and home
presentations to sell its products, which negatively affects their sales volume.
CUTCO cutlery needs to get involved with more aggressive marketing techniques
from Vector and their other interrelated organizations and they need to try different
methods of marketing their products other than direct selling to maximize their
sales volume.
Opportunities/Threats:
CUTCO Corporation has had the opportunity to join new markets internationally
and domestically. They have failed starting their business in a lot of countries
internationally except for Canada because cultures are susceptible to different
marketing techniques and the investment expenditures are really high to start from
scratch in another country. A major opportunity would be to create a strategic
alliance with a CUTCO product line in another country like Japan or China. Another
opportunity is trying out new markets like retail sales, where J.A. Henckel
Zwillingswerk Inc., a German company who has achieved the same level of sales that
Vector has achieved in the United States. This shows how different marketing
channels to sell CUTCO’s cutlery can boost growth if done right.
A major threat of CUTCO is the fact that they defined their target market with
an income of $50,000 whereas there is a critical group of customers that make
incomes less than that are less affluent are left out of the mix.
Course of Action:
CUTCO Corporation has many different options to choose from to develop a plan to
improve their growth. The first thing that CUTCO Corp. should do is open a hundred
new retail outlets. Studies were conducted in a town in New York where a CUCTO
retail store was open for 3 years and produced sales around $250,000 dollars.
Opening up 100 new retail stores would increase their revenues by $25 million
dollars, and total including their 2009 sales would be making around $262 million
dollars. This would cost around $10 million to implement. Studies show that CUTCO
would have to train their store sellers a different way so that they could maximize
their revenues, and also the retail outlets would not affect their direct selling
strategies.
The next thing CUTCO should do is increase their word-of-mouth by
increasing funding of public relations expenditures by $2 million dollars. Studies
have shown that CUTCO has a very high reputation of high quality and customer
satisfaction, so If CUTCO were to increase their awareness to the public then sales
generated would increase up to $20 million dollars. This is the best option for
CUTCO Corporation because it is the cheapest option while increasing profits the
most for them. This would increase CUTCO’s total revenues to $282 million dollars.
The third thing CUTCO should do is adding twenty sales representatives that
will market their products in the low season, or fall and winter. These sales
representatives will set up trade shows all across the United States and Canada
where they will personally demonstrate and explain all the benefits of CUTCO’s
products directly to a groups of consumers who are interested. The sales
representatives should receive $50,000 for their salaries, totaling $1 million for ten
sales representatives. This would not only increase CUTCO’s awareness but it would
also increase their sales immensely in the down season. Trade shows produce
around $6,200 dollars per trade show (see exhibit 2). These sales representatives
will put on 35,000 shows, which will produce around 217 million dollars, and this
will total CUTCO’s revenues to $499 million dollars. This will help CUTCO reach
their goal of making $500 million in revenues for the next five years. CUTCO will
need to plan implementing a long-term international strategy in 5 years that could
take them the rest of the way to $1 billion dollars annually.
Exhibit 1.
% of Industry
Residence
One-To-One
Basis
Group
Sales/Party
Plans
Independent
Contractors
Web
Retail Sales
Channel
Total Direct
Selling
75%
65%
US Direct Selling
(in billions)
23.1000
20.0200
Global Direct Selling
(in billions)
85.5000
74.1000
28%
8.6240
31.9200
99.80%
30.7384
113.7720
11.40%
6%
3.5112
1.8480
12.9960
6.8400
30.8
114
Exhibit 2.
Cutco International
Vector Catalog Sales
Vector Internet Activities
Fairs & Shows/Realtor
Program
Operating
Margins
2.50%
10%
10%
5%
Operating
Per Activity
Revenues (in millions) Income
(dollars)
11.843
296,075
16
1,600,000
7.8
780,000
9.3
$465,000.00
153
153
6200
Exhibit 3.
% of Industry
Residence
One-To-One Basis
Group Sales/Party Plans
Independent
Contractors
Web
Retail Sales Channel
Total Direct Selling
75%
65%
28%
99.80%
11.40%
6%
US Direct Selling
(in billions)
23.1000
20.0200
8.6240
30.7384
3.5112
1.8480
30.8
Global Direct Selling
(in billions)
85.5000
74.1000
31.9200
113.7720
12.9960
6.8400
114