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Homework answers / question archive / Industry Overview During the past decade, the growth rate in the greeting card industry has slowed
During the past decade, the growth rate in the greeting card industry has slowed. Although this rate has been close to 9 percent annually, recent trends identify a 3.8 percent compound annual growth rate. Industry analysts expect this sluggishness to continue and predict an annual growth rate of 2.7 percent each year for the next five years. Despite slow growth, industry profitability is $334 million with an average margin of 12 percent.
The lack of growth in the industry may be attributed to the shift from seasonal to everyday card giving. Although there are various theories about the reason for the shift, its mere existence is of greatest importance.
COMPANY INFORMATION
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Hercules Cards |
The largest card manufacturer in the United States, Hercules is famous for its flowery, poetic sentiments and watercolor designs. Founded in 1946 as the first national greeting card company, Hercules has a large following of loyal clients, primarily female, who appreciate the familiarity of the cards. Hercules consumers expect the strong sentimental messages printed inside the cards.
As the market leader in the greeting card industry, Hercules has a strong distribution channel, an extensive distribution of retail outlets, and efficient production and strong brand recognition. Hercules employees personally stock the shelves at supermarket and mass-market retail sites. In addition, Hercules has a chain of freestanding stores that sell Hercules products exclusively.
There are rumors that Hercules is preparing to release a high-end line of cards. A few of our retailers have told company salespeople that they have been approached by Hercules representatives and asked if Shomei has an exclusive license to distribute cards at their stores. In addition, Hercules continues to struggle with Atlas for control of the supermarket and drug store chains.
Hercules is facing major challenges that may be contributing to its decline in profitability. As recently as 10 years ago, Hercules dominated the market with more than 20 percent profitability. Today that profitability has dwindled to 12 percent, which is well below the industry average. Some speculate that recent price competition has narrowed Hercules' margins or reduced the advantages it gets from its economies of scale.
Because of the growth of the Internet, Hercules has been struggling to maintain its talent pool. It has been forced to raise the salaries of those artists who are willing to remain, further compromising the company's profitability.
Evidence of Hercules' declining market power is exemplified in its failure in the high-end (greater than $5) card market. Hercules has had trouble attracting and retaining talented artists to create designs for these cards. The country's top creative designers have flocked to energetic, young companies such as Shomei Cards and avoided conventional card companies like Hercules.
Hercules has traditionally dominated the market of 40- to 60-year-old women—those who manage households and purchase cards for the entire family to give and receive. These women generally purchase cards while doing their grocery shopping. Hercules' expansion to the Internet is an attempt to reach yet another market: the nation's growing population of young professionals.
Hercules produces traditional cards for a variety of occasions, including religious and ethnic holidays, Valentine's Day, Mother's Day/Father's Day, anniversaries, birthdays, and graduation cards, as well as sympathy/get-well, and congratulation/thank you cards.
The company's lines include the following offerings:
Hercules was the first card manufacturer to use "overlays" on its cards—for example, paper lace coverings on its Valentine's greetings and tissue or foil coverings on its Mother's Day cards and Christmas greetings. It was also the first company to offer boxed greetings during the Christmas season.
The company holds an exclusive licensing agreement with Brite-Star Pictures to use its animated characters on Hercules cards, gift wrap, and other supplies. These items are sold in the company's exclusive gift shops, along with stationery, invitations, Christmas ornaments, and other trinkets.
Hercules has secured its strong market position by contracting with large supermarkets and mass-market stores. Hercules' size, coupled with consumer demand for the company's product, has made it difficult for competitors to gain a position in the same mass market. Hercules employs an army of representatives to stock these stores by hand. Hercules was able to secure its position in these mass-market retail outlets by offering to purchase, place, and restock the card racks, which the company owns. Atlas Cards is the only other card company that has been able to break into the mass market. Although some retailers are willing to sign exclusive agreements with one card vendor in exchange for better prices, many prefer to sell to multiple vendors so that they can offer their consumers more variety.
In addition to retail outlets, Hercules operates a highly trafficked website. Consumers can select from the artwork of 12 graphic artists and send free electronic Hercules greetings to friends and family. Hercules has been able to generate significant revenue through banner advertisements and e-commerce opportunities on the site.
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Atlas Cards |
The greatest threat to greeting card giant Hercules Cards is Atlas Cards. Atlas targets the same consumer market as Hercules and has been able to rise to the top through carefully executed acquisitions. Most recently, Atlas bought out No. 2 card manufacturer Moya Cards several years ago, catapulting itself to its current position of second-largest card maker in the nation.
Atlas is able to compete with Hercules thanks to its acquisitions, management team, and exclusive licensing rights. As it has grown in scale, Atlas has successfully engaged Hercules in price wars, which may have contributed to Hercules' decline in profitability. Atlas has used its cash reserves to acquire companies, which its management team has successfully integrated into the company's culture. The management team has secured Atlas' position in the market by focusing on key themes for the company's greeting cards. To ensure competitive advantage, the team has engaged in exclusive contracts for the rights to certain logos.
Atlas' acquisitions and its rapid expansion into new markets has affected the company's profitability. Last year Atlas had an estimated profitability of 10 percent, well below its previous average of 13 percent. The company's strategic move into sports-theme greeting cards and cards with audio messages may turn out to be a wise long-term move, despite disappointing short-run revenues, which are barely covering costs.
To address their web-savvy, young professionals, Atlas launched a website where consumers can purchase hard copies of Atlas cards found in stores as well as send electronic greetings. Although Atlas is likely to benefit from a web presence, its website is not improving its market share or profitability at this time.
Though its traditional card consumers have been women, Atlas has successfully targeted and attracted a new card consumer through its sports specialty sector: men. Today more men are giving their girlfriends and sisters cards, such as those depicting famous female sports stars. Increased public interest in professional female sports, such as volleyball and soccer, has contributed to record-breaking card sales for Atlas.
To differentiate Atlas' offerings from Hercules', the company has designed several lines targeting key consumers. These lines include the "Girlfriend" collection, generational cards that focus on women from their 20s through their 50s; special cards targeted toward teenage girls; and a unique collection for men, which features classic sports scenes and sports stars appealing to men between the ages of 18 to 35. Atlas' ability to focus its product lines on niche markets has enabled it to compete effectively with Hercules.
The full line of Atlas cards includes the following collections:
All of Atlas' cards are printed on standard card stock. The cards range in price from $.99 to $4.50.
The card company has acquired exclusive rights to license Olympics-related cards and cards from other major international sporting events, such as the World Cup and the World Series. In addition, Atlas has arrangements with 75 percent of U.S. universities to design cards using school teams with school sports themes on them. The cards are sold in university bookstores and grocery stores throughout the country. The company also sells its cards at collegiate and professional football games.
Just last year the company decided to add sound to its greeting cards. By pressing a button on the back of the card, the consumer can listen to a school's fight song, its alma mater, or the sound of an audience cheering.
Like Hercules cards, Atlas greeting cards are sold in grocery stores, drug stores, and other major mass-retail outlets throughout the country. After acquiring Moya Cards, Atlas also gained a presence in discount stores, where it is vying with Hercules for volume and space. Most recently, the company developed an exclusive arrangement with major sporting-goods stores to stock its cards at their checkout counters. All shelf stocking and reordering of inventory is handled by college students, most of whom work part-time. Atlas offers free electronic greetings on the web and sells cards online. Since 1995, it has had an exclusive relationship with several Internet service providers to offer e-greetings on their sites.
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Snapadoo Cards |
Snapadoo Cards satisfies a niche that few other greeting card companies can rival: The company uses photographs to convey sentiments. Snapadoo holds exclusive licenses for classic pictures from well-known photographers such as Andy Whitner. The themes of the photos vary from dramatic natural scenery to historical events to emotional images.
Snapadoo secured the fourth-largest market share in the greeting card industry by capturing exclusive licensing rights and targeting a loyal consumer market. Snapadoo's exclusive contracts for the majority of "classic" photographs ensure a monopoly in this segment of the greeting card market. Its management appears to have discovered the magic formula for gaining loyalty among high school and college-aged students and young professional consumers.
The Internet has significantly affected Snapadoo, reducing its profit margin from the traditional 16 percent to 14 percent. In particular, the introduction of digital cameras and the ability of consumers to download pictures from the Internet has weakened Snapadoo's competitive advantages. Furthermore, Shomei Cards' success in the artisan market has damaged Snapadoo's monopoly on artisan appeal. Unlike Shomei, Snapadoo has been unable to retain much of its artistic talent; many of Snapadoo's photographers are leaving the company to seek jobs in the Internet world.
Snapadoo cards are extremely popular among high school and college-aged students, artsy individuals, and photography enthusiasts. Snapadoo has also been extremely successful in marketing to a young professional audience. Snapadoo appears well-positioned to capitalize on the growing popularity of greeting cards among this demographic group.
Snapadoo carries the following lines:
Snapadoo has made a substantial investment in its photographers. Although the company has printing rights to many famous photographs, it contracts with photographers to create original shots. Contracting with photographers allows Snapadoo to achieve its 14 percent margins. Thanks to the nature of its cards and the total automation of its systems, Snapadoo has the potential to be a formidable competitor on the Internet.
In addition to Snapadoo's small booths located in upscale malls and shopping centers, the company's cards are sold in photo-development shops, camera equipment stores, museum shops, and major bookstores. The company even markets its cards in the backs of photography and art magazines. Snapadoo is planning to place its cards in photography studios and college bookstores in the near future.
Snapadoo's sales force is responsible for the sales distribution of the product. Salespeople must order their cards at least seven days in advance and are rewarded for condensing their orders. Generous incentives for the sales force ensures that Snapadoo cards are rarely out of stock.
One of the company's most successful marketing moves was establishing small booths on busy street corners in major cities. Customers like the convenience and the "artistic feel" of buying a card from a street-corner artist. Snapadoo was the first greeting card company to market its cards in this way.
Art students and photography students flock to work for Snapadoo with the hope of seeing their work displayed on the company's popular cards. Snapadoo does not offer its artwork on the web, although it has reportedly been approached by many companies to develop an online presence.
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Felicita Cards |
Felicita Cards established its position in the greeting card market by offering foreign language cards. The company uses standard greeting card formats and prints its cards in Spanish, Japanese, and Chinese. By offering an entirely new product, Felicita has been able to capture the No. 5 spot in the greeting card market.
Felicita, the newcomer to the greeting card market, is growing rapidly. The company has distinguished itself through its multilingual and multicultural offerings, which target a fast-growing sector of the U.S. population. Because ethnically focused retailers are eager to stock Felicita cards, they are willing to take responsibility for ordering the cards. When Felicita takes an order, the retail outlet is billed for the entire order, which is then shipped through the U.S. Postal Service. Most other card companies are paid only when consumers purchase the cards.
Despite Felicita's unique offering, the company has been challenged by retail space. It has successfully placed cards in small businesses, bookstores, and venues that cater to niche markets, but has been struggling to maintain its profitability within this widely fragmented retail market. Because artistry is not Felicita's selling point, it has not been significantly affected by the shift in available talent from traditional greeting card companies to the Internet.
Felicita targets Spanish-, Japanese-, and Chinese-speaking consumers in the United States. These consumers are more interested in finding a traditional card in their native language than in satisfying a need for an artistic sentiment.
Felicita carries the following card lines:
Felicita uses standard greeting card paper. The designs are stored in the company's database and printed in large runs. Part of the reason for the company's profitability decline has been attributed to deep discounts on overstock of holiday-specific cards. To offset this problem, Felicita has had to downgrade the quality of its ink to reduce costs.
Felicita sells cards to small businesses, bookstores, and ethnically focused venues. Felicita does little marketing and is often approached by storeowners who want to carry the company's products. Consumers spread the company's message through word of mouth. There is a general consensus in the foreign-language community that if Felicita's business is adequately supported it will spawn other language-specific products.
The information in this table is as accurate as our sources could locate; therefore, it should be used as a guide, rather than an absolute, for determining cost and margins for competitors.
Excluding the retail selling price, the remaining data in this table have been normalized to reflect known differences in accounting practices.
*Hercules and Snapadoo are privately held. Financial information for these companies is estimated.
**The cost to retailer is equivalent to the revenue to card manufacturer.
***This includes the content creation and royalty payment costs.
The factors which have affected the greeting card industry are as follows:
1. Availability and price of raw material (Example paper) and pay roll costs
2. Government policy like taxes and duties on industry
3. Change in preferences of the customer
4. State of competition, both domestic and global
5. Production capacity and actual production
6. Economic situation and the inflation rate.
7. Growth in the industry
8. Political and governance situation
9. Change in socio cultural factors
10. Global competition
11. Availability of substitutes
12. Change in Technology like using egreeting
Impact of Trends
The greeting card industry is facing slowdown in the growth rate. It is around 3.8 percent compound annual growth rate and in future it is predicted lesser at 2.7 percent each year for the next five years. Average profitability margin of greeting card industry is at 12 percent. But the slow down in the growth rate may affect the profitability of S.
There is gradual increase in distribution of greeting cards through bookstores, specialty shops, and internet . There has been advancement as the high quality raw material is there, also there has been growth in niche segments which can increase the profitability. But overall the material and payroll costs are expected to be high in future which will affect the profitability in adverse manner. There has been increase in the population of the age of 50 to 64 which is positive for the industry. The greeting card buying is seen increasing with the Men and the young population due to the growth in internet.
Thus some trends are weakening the companies of the greeting card industry such as increase in price of price, pay roll costs, and decline in demand.
On the other some trends are positive such as increase in preferences of old age population towards greeting cards and heavy usage of egreetings.
UPDATE FROM OTA:
Question I asked was not answered, but a general overview was provided. I specifically asked about the affects of the 2 following trends affects on the 5 companies:
The 2 Trends affecting profitability to review are: 1. Increases in paper prices and payroll costs 2. The change in demand from seasonal to everyday cards.
Further explanation
Impact on Hercules
Hercules is the largest player in the industry. The increase in paper prices will have negative affect, but it may be able to absorb it due to the economies of scale and volumes.
The change in demand from seasonal to every day cards is positive for the company as it is the dominant player in the mass segment.
Impact on Atlas
Atlas is the second largest player in the industry. The increase in paper prices will have negative affect, as its margins are 10%. Thus the pressure on margins will rise.
The change in demand from seasonal to every day cards is positive for the company as it has also wide variety of the cards.
Impact on Snapadoo
Snapadoo Cards satisfies a niche market and uses photographs to convey sentiments. Thus increase in paper price may not effect in a significant manner as it is catering to the high end market and its ma. The change in demand may affect the demand in a negative manner as it is catering to the specialty market.
Impact on Felicita Cards
It may be greatly impacted by the increase in paper price as it is largely catering to the traditional segment. Thus it can lead to the reduction in the profit. The change in the demand augurs well for the company as it is catering in the tradition segment and may see rise in demand.
Impact on Shomei Cards
It has higher margin thus it may absorb the price increase in paper. Also effect of change in demand suits Shomei as it is catering to that segment.
