Fun Wheels Case Study

Synopsis:
Nicole Rhodes has established Fun Wheels Inc. in 1980 after working for over 25 years as a mechanical engineer. Fun Wheels was originally formed as a Canadian distributor of German wheeled toys. At those times, Canadian toy industry was highly concentrated with several large companies dominating the market. Toys manufacturing is relatively inexpensive and over the past years many companies moved their production facilities to China and Taiwan in order to minimize their labor costs. Most of the Canadian toy industry is owned or controlled by the U.S. firms, which have reached market leadership through economies of scale, wide-ranging distribution channels and successful marketing campaigns.

Manufacturers of the toys are highly vulnerable to the failures – 80% of the new toys fail. Those who are successful have a very short life span. The main sales season is obviously around Christmas and for this season many companies prepare well in advance and spend significant budgets of advertisement of promotional toys. The market demand of classic toys is comparatively stable.

In Canada wheeled toys include go-carts, scooters, tricycles and bicycles for kids under 13. By the time Nicole Rhodes established her company, most of the competitors competed in low-quality segment and until the 1985 only Fun Wheels were offering high-quality toys. However, by the mid-80s market demand shifted toward high-quality toys, with parents placing significant attention on toys’ development component.

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In 1985, Fun Wheels have acquired a plant to manufacture its toys in Canada. Some parts were still imported from Germany. Fun Wheels manufactured its own toys as well as bicycles for the Anderson Toy Company, which soon became a constraint for the production of the Fun Wheels toys.

Until 1984, the company has relied mainly on the direct sales. During this year company’s strategy changed and it began to target various institutions, such as kindergartens, elementary schools and hospitals for children since these customers were more concerned with quality than price. The new strategy turned out to be very successful. Fun Wheels has changed also its distribution strategy and started selling its toys through up-scale sporting goods stores, which allowed more space to display each item. In 1985, Mark Rhodes, son of Nicole, became Marketing Manager and changed sales approach, which has been quite successful so far.

After nine years of its existence, Fun Wheels became one of the largest players in its market segment.

Symptoms:

  • Many companies moved production to China and Taiwan to minimize labor costs.
  • Seasonal sales patters and demand in toy industry are based on fads.
  • 80% of new toys fail.
  • High advertisement costs of promotional toys.
  • Low brand loyalty.
  • Stronger Deutsch Mark has increased the cost of goods imported from Germany.
  • High transportation expenses for big toys.
  • It was more expensive to assemble toys in Canada, however Fun Wheels could not receive their toys assembled.
  • Fun Wheels are required to produce bicycles for Anderson Toy Company till 1992 or pay a fine in case of contract termination. Continuing manufacturing bicycles for the Anderson meant constraints for the production of their own toys.
  • Under Canada-U.S. Free Trade Agreement, protective import tariffs have to be eliminated.
  • Canadian market characteristics are different from European markets; Canadian parents are used to less expensive and more “gimmicky” toys that come from the American companies. European customers were ready to pay more money for high-quality educational toys and were more familiar with Welle brand name.
  • Mark Rhodes has laid off many sales people, who have already established strong customer network among institutional buyers.
  • Nicole often agreed with Carlo Sanchez opinions because she considered him to be a good businessman and a friend, however, because of Sanchez the company missed a toy fair in Toronto in 1984.
  • Fun Wheels employed many older workers and paid them less than labor unions demanded. Older workers have higher absenteeism rate.
  • Sales Director Jean Claude Bustros threatened to resign after Mark has laid off part of the sales people, but Nicole wanted Mark to learn more about the company and take it over eventually.

Problems:

  • External:
    – Increased competition since 1985 in a market with low brand loyalty is a problem. Particularly, Fun Wheels faces intense competition from Breining – owned by a large U.S. toy manufacturer striving to be a market leader in each segment where it is present. New markets entrants have been very successful in gaining market share.
    – So far Canadian import tariffs have been higher than in U.S., however, under Canada-U.S. Free Trade Agreement, protective import tariffs have to be eliminated. This means that prize competition will increase.
  • Internal:
    – Decline in profitability. Many toy manufacturers have moved their production facilities to the Asian countries in order to cut the labor costs. Fun Wheels, on the contrary has opened a plant in Canada.
    – Nicole Rhodes relies on her son and former colleague more than on opinions of professionals. She lets Mark and Carlo make mistakes, which can be deteriorating for the company.
    – Mark has unreasonably changed marketing strategy, which has started to increase company’s sales and still had significant potential. He decided to pursue the same marketing approach as many big American manufacturers that spend large amounts of money on TV advertisements. Such approach is good for large producers, not for middle-size companies.

Alternative Scenarios:

  1. Concentrate on production of toys for Anderson – less risk connected with demand fluctuations and no need to spend on promotion and distribution.
  2. Manufacture only Fun Wheel toys – try to reach economy of scales, increase operations, move production to Asia, increase market share through targeting retail market.
  3. Stick to the previous marketing strategy and target institutions and parents, emphasizing educational properties of the toys as well as their high quality.

Best solution:
First of all, it is important for Nicole to rely on the professionals in her business. She cannot afford to make mistakes in the market environment where so many companies compete over the market share. Secondly, Fun Wheels does not have capacity to compete with the large U.S. brands, that is why it is important for the company to find its niche on the market. Targeting institutions and positioning itself as a high-quality brand seemed to be a right direction and started to pay off. The company should pay for large TV promotional campaigns before Christmas season. It seems that the company does not benefit much from hiring older employees and paying them less – in return it offers them longer vacations and employees are absent more often. Instead, the company can hire younger employees, who can learn faster and will stay with the company longer. In the current business environment, it is important to be innovative. The company should not engage into price wars, on the contrary, it should concentrate on providing more value to the consumers.

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