In 1988, there are over 100 companies in the greeting cards industry, including the “big three”, which dominate the market. Of these three, two are publicly owned (American Greetings and Gibson Greetings), and one privately owned (Hallmark). Relatively small firms make up the rest of the industry, however they often struggle to grow due to the large costs associated with setting up substantial distribution channels, and producing diversified product lines. Due to these high start up costs the industry has declined by about 15% each decade in the period from 1954 to 1984.
It was predominantly firms with less than 50 employees that contributed to this declining figure. In order to remain competitive in this industry, firms have to closely monitor high fixed cost and inventory levels. Due to the general competitiveness of the greeting card industry, firms had to keep fixed and distribution costs to a minimum in order to remain profitable in the cut-throat environment. All companies in the industry face seasonal peaks, with occasions that have a short selling season, but generated large sales for the companies.
For example, 32% of cards sales are experienced at Christmas time, 7% on Valentines day, 5% on Mother’s day, 2% on Father’s day. In order to increase sales on a day-to-day basis firms are introducing a large variety of cards, and placed an emphasis on rapid replacement of unpopular designs to encourage impulse buying of everyday cards. This change in direction has had an influential impact on the greeting card industry with sales of “everyday” cards increasing to 40% of cards sold in 1969, and in 1987, this figure was in excess of 50%.
Many of the larger firms in the industry, including Hallmark and American Greetings deviated from simple selling cards, and began producing glassware, jewellery, and candles amongst other products (Kester, Ruback, Tufano, 2005). 3. Friendly Cards Wendy Beaumont founded Beaumont Greeting Cards Co. in 1978, in New York City with $15,000. Following this, she acquired the bankrupt Lithograph Publishing Co. of Reading, Connecticut and then moved all her operations to the new plant.
One year later she renamed the firm, Friendly Cards, Inc. and took the stock public at $3 per share. Friendly then continued to expand in the following years through internal growth, and acquisitions of companies with similar product lines and distribution channels. These companies included Glitter Greetings, Edward & Co, and a Californian firm which was renamed Friendly Artists. 3. 1 Friendly Cards’ Operations Friendly Cards manufacture a wide range of greeting cards, with 1,200 designs, unlike most small firms in this field.
The greeting card industry is a highly seasonal one; approximately 30% of Friendly’s dollar sales are accounted for by Christmas sales, 25% for Valentines sales, and the remainder being made up of spring holiday and everyday cards. Friendly’s card designs are targeted towards the cost conscious, over 40-year-old market. A greater emphasis is placed on the convenience, and value for money factor of card shopping. The firm is operating at full capacity with 250-employees, however, much of the printing work can be done by outside printers if required. 3. 2 Friendly Cards’ Distribution Methods
The distribution costs for Friendly are relatively low, as they did most of their selling to central buyers for stores such as K Mart Corp. , Wal-mart, and Bradlees or to rack jobbers, and wholesalers. However, this system led directly to low margins earned by Friendly, as there were often two intermediaries between them and the final customers. Therefore the retail sales were often three times as much as the figures shown on Friendly’s income statement. 3. 3 Friendly Cards’ Financial Problems Friendly Cards is a capital-intensive firm and has never been without financing problems.
They are very dependent on lines of credit, which total $6. 25 million, and much of their success is attributed to their good relationships with banks and suppliers. They borrow at a rate 2. 5% above the current prime rate of 8. 5% (Kester, Ruback, Tufano, 2005). Due to the seasonal nature of the industry Ms. Beaumont estimates that the peak times for bank and trade credits (which amounted to over $9. 0 million at the end of 1987) are December and January. These peak times are followed by a period of low borrowing in April, when the bank and trade credits are reduced to around 50% of the required peak level (Kester, Ruback, Tufano, 2005).
In 1986 Friendly Cards’ banks approved increased debt levels to fund an expected 20% sales expansion, with a period of decreased sales growth anticipated to follow. This would have increased retained earnings, enabling Friendly Cards’ liabilities/equity ratio to return to its relatively low 1985 level. However, due to the persistent nature of this sales growth, Friendly is taking longer than the banks originally expected to return to its original liabilities/equity ratio. This has led to Friendly’s bankers imposing two covenants on future loans. 1) Bank loans outstanding cannot exceed 85% of accounts receivable
2) Total liabilities cannot exceed three times the book value of Friendly’s net worth (Kester, Ruback, Tufano, 2005) Friendly’s management have also self imposed a restriction on interest bearing debt/equity, setting a maximum ratio of 2 to 1. In order for Friendly to continue to meet these requirements in the future they need to locate more sources of equity. If Friendly continues along their current path they will struggle to meet demand from new and existing customers, and risk turning away future orders. This loss of business would be both demoralising to staff and damaging to Friendly’s reputation.
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