Craft Marine Executive Summary

This analysis is based on the HBS Craft Marine business case in Strategic Marketing Problems: Cases and Comments by Kerin and Peterson.

Date: April 25, 2007

Subject: Craft Marine’s 2002 Advertising Budget and Allocation

This summary outlines Team D&B’s recommendations and supporting rationale regarding Craft Marine’s 2002 total advertising budget and budget allocation.

RECOMMENDATION

Team D&B recommends a 25% increase in advertising to $750,000 allocated as follows:

Craft Marine Advertising Budget for 2002

Budget Item	Allocation	% of Total	% Change
National, vertical boating magazines	363,580	48%	16.53%
Dealer catalogs/consumer brochures	135,000	18%	104.55%
Cooperative newspaper advertising with dealers	138,600	18%	5.00%
Production costs	112,820	15%	25.36%
Total	$750,000	100%	25.00%

CONCLUSIONS

There are two key factors in this recommendation, summarized and developed below.

Increase Top-of-Mind Awareness

Craft Marine should continue to raise its advertising for the year 2002. From 1999 to 2001, Craft Marine has increased the total advertising budget and continued to realize sales growth each year. With the introduction of Craft Marine’s new offshore and fishing boats, as well as innovations in existing products, Craft Marine must continue to increase its investment in advertising to build consumer awareness.
Craft Marine currently spends approximately 0.49% of sales dollars on advertising, while the industry average is close to 0.70%. While this implies that Craft Marine’s advertising is more effective on a per dollar basis, it draws our attention to the law of diminishing return on advertising dollars for larger manufacturers. With a proposed increase in advertising to $750,000 and sales forecasted to increase to approximately $140,021,000, Craft Marine’s ratio of advertising to sales dollars will increase from 0.49% to 0.54%. Craft Marine’s advertising dollars will remain more effective than its larger competitors.
Craft Marine should increase their dealer catalogues and consumer brochures roughly 105%, from $66,000 to $135,000. With dealer catalogues and consumer brochures ranking third on the ‘source of information on brand of boat purchased’ list, Craft Marine should make it a primary focus. The value of this form of advertising is high because it will primarily reach customers interested in purchasing a boat. The same cannot be said for magazines, and particularly general interest magazines, which are viewed by many uninterested parties. Craft Marine should produce 2,000 catalogs for 2002, at a total cost of $40,000. Craft Marine should increase the number of new hull, off-shore, and fishing brochures to 5,000, 10,000, and 5,000, respectively at a total cost of $95,000 (See Appendix A – Catalogue and Brochure Break-down). The larger number of off-shore brochures are necessary with Craft Marine entering this market segment for the first time. These additional brochures will help increase consumers’ top-of-mind awareness, especially in the new market.
Craft Marine should increase advertising in vertical boating magazines by 16.53%. This is a result of increasing the number of months of running a ads from six to seven. In 2001, Craft Marine advertised during the six peak months (March through August) in vertical boating magazines, with a one page color ad. We propose continuing this investment and adding an additional one page color ad in the February editions of these same magazines to increase the consumers’ awareness prior to the peak season. Based on a comparison of circulation per dollar and the percentage of readers who make up Craft Marine’s target market, the additional investment in magazine advertising will be most effective in the vertical boating magazines (See Appendix B – Magazine Cost Comparison).

Maintain Sales Growth

While the pleasure boat industry tends to be sensitive to the economy, and the United States recently experienced a national tragedy and slumping economy, Team D&B believes the ongoing impact of this tragedy will be limited. We expect the economy to be significantly effected for no more than six months. This means that the economy should be back on track by peak buying season for pleasure boats.
The increased investment in advertising will translate into increased sales for Craft Marine. While the effects of the September 11 attack might have a slight affect on consumers willingness to purchase luxury goods, we believe that the addition of several new boats and increased advertising will generate an increase in sales of 16.2%. Craft Marine’s entry into the off-shore market, particularly considering new boat registrations in coastal U.S. states, will be a primary factor off-setting economic factors and driving further Craft Marine sales growth.

SITUATION & EVALUATION

External Environment

Industry Sales. Pleasure boat industry sales are elastic to variations in the economy and heavily dependent on general economic conditions. With the sluggish economy and terrorist attack, 2001 industry sales of $25.6 billion were virtually the same as 2000. Industry sales were maintained because the average unit price increased 13 percent but unit sales decreased 6 percent, offsetting each other. This stagnation was in sharp contrast to the industry sales growth of 15 percent from 1999 to 2000.
Market Segments. The pleasure boat industry is segmented geographically on the basis of state and region. The majority of sales are contributed by ten states, including California and Florida, where offshore boat sales are among the highest. The East North Central Region, South Atlantic Region, and the West North Central Region account for 20 percent, 20 percent, and 12.5 percent of industry sales respectively, totaling over 50 percent of annual U.S. boat registrations.
Distribution. National manufacturers of pleasure boats distribute their offerings through local dealers. Large dealers can account for the majority of sales for one manufacturer and sales efforts of dealers can significantly influence the sales of a particular manufacturer.
Seasonality. The industry represents high seasonality because of the concentrated sales occurring in the primary selling months. 75% of industry sales occur between March and August with April, May, and June being the peak buying months. To promote off-season sales, the manufacturer may provide trade promotions and price discounts to encourage dealers to purchase inventory prior to the peak selling months.
Buyer & Buying Behavior. A typical boat purchaser is a married male in his 40’s with two teenage children. The annual median household income for a boat purchaser is $40,450. Quality and performance are the top two product attributes affecting boat purchases while price has relatively low importance among boat purchasers. Catalogues and brochures show relatively high importance in terms of a source of information on brand of boat purchased making them a significant tool to build brand awareness and drive increased sales.
Advertising. Advertising in the pleasure boat industry is typically focused on print media, such as national vertical boating magazines, dealer catalogues, consumer brochures, and newspapers. The industry average for advertising spending was 0.7 percent of sales while large national manufactures spent 0.9 percent, and Craft Marine spent 0.49 percent of sales. The level of advertising spending can further be related to the general awareness level of a company. With a higher level of advertising spending, a manufacturer will have an improved chance of raising the general level of the brand awareness.

Internal Environment

Craft Marine Company. Craft Marine is one of the first companies to produce fiberglass pleasure boats. With 32 different models in five product groups, the company has family pleasure, offshore, cruiser, and fishing/ water skiing boats. However, the Craft Marine brand currently ranks low in top-of-mind awareness among boat brands. Moreover, the company competes on quality and performance rather than price.
Sales. In 2001, Craft Marine had sales of $120.5 million, representing 15 percent in sales growth, year-over-year. The company experienced similar sales growth between 1999 and 2000. In order to maintain the current growth rate, Craft Marine faced the challenge to consider further the right allocation of its advertising budget.
Current Distribution. Approximately 95 percent of the company’s sales are generated in the United States and the remaining 5% in Canada. Among Craft Marine’s 241 dealers, the three largest U.S. dealers have maintained trade relationships with the firm for more than 20 years. However, Craft Marine has weak distributions in the area where offshore boats are the most popular models.
Advertising & Promotion. In 2001, Craft Marine spent $600,000 for advertising, compared with $500,000 in 2000 and $415,000 in 1999. The advertising expense in 2001 accounted 0.49 percent of its sales. The company spent 0.26 percent of sales especially on national, vertical boating magazines in 2001. In addition to the advertisements on magazines, catalogues, brochures and newspaper advertising also contributed to advertising expenses. During peak sales periods, a color Craft Marine appeared six times in three vertical boat magazines. This advertising plays a main role in marketing the company’s brand. In order to increase customers’ awareness of Craft Marine, the company needs to consider the possibility to increase its advertising expenses. In aspect of promotion, the company is increasing its activities in boat trade and consumer shows recently. Further for 2002, Craft Marine plans to display the innovations at consumer boat shows and expend the promotion plan included a promotion kit for dealers.
Competencies. Craft Marine’s competencies, based on the information presented, are product development and innovation which include design and engineering of new products and existing product improvements. Manufacturing high quality boats is also a competency of the Craft Marine company as the firm “competes on quality and performance.”
Competitive Advantage. Manufacturing superior and innovative products in the pleasure boat industry is Craft Marine’s competitive advantage. The firm’s competitive is derived from their competencies in product development, design, and engineering.

SUMMARY & CONCLUSIONS

For the reasons previously stated, Team D&B recommends that Craft Marine increases advertising 25% to $750,000.

While the economy will be affected by the tragedy of September 11, the effect will taper off by mid-year and Craft Marine will continue to see sales growth next year. With the increased advertising, product innovations, and new products, Craft Marine will see growth in sales larger than the previous three years. Team D&B forecasts a growth in sales of approximately 16.2% from 2001.
To continue building top-of-mind awareness of the Craft Marine brand and product lines, Team D&B’s strategic advertising plan includes further increases to the advertising budget over the next five years. While the overall effectiveness of additional advertising investment will be reduced due to the law of diminishing returns, the firm must accept this impact to continue building strong general awareness of its brand and products. These increases in advertising investment will be funded by Craft Marine’s continued sales growth.

Appendix A – Catalogue and Brochure Break-down

2002 Detailed Advertising Budget - Craft Marine

Budget Item	Type	Units	Cost
Catalogs	N/A	2,000	40,000
Brochures	New Hull	5,000	25,000
Brochures	Offshore	10,000	45,000
Brochures	Fishing	5,000	25,000
Total		20,000	$95,000

Catalog Breakdown

Units	Cost	Cost/Unit	Incremental Price Break
500	10,000	20	0
1,000	18,000	18	2
1,500	24,000	16	2
2,000	28,000	14	2
2,500	30,000	12	2

Brochure Breakdown

Units	Cost	Cost/Unit	Incremental Price Break
5,000	25,000	5.00	0.00
10,000	45,000	4.50	0.50
15,000	63,700	4.25	0.25
20,000	80,000	4.00	0.25
25,000	93,750	3.75	0.25
30,000	105,000	3.50	0.25

Appendix B – Magazine Cost Comparison

Publication	Circulation	B/W Page	Color Page	B/W Copies/$	Color Copies/$
Boating Magazine	202,265	$19,005	$22,630	10.64	8.94
Yachting	133,899	$14,235	$15,910	9.41	8.42
Motor Boating	153,282	$11,700	$13,400	13.10	11.44
Business Week	923,786	$57,400	$85,000	16.09	10.87
Time	4,122,699	$128,100	$183,000	32.18	22.53
National Geographic	10,000,000	$135,130	$156,755	74.00	63.79
Sports Illustrated	3,251,117	$133,000	$190,000	24.44	17.11

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