Haverwood Furniture (a) Case

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The Problem.   Haverwood Furniture is unsure how to properly allocate its cash while examining its marketing budget for 2008. There are competing suggestions for a limited dollar amount. Haverwood must answer the following question:

• What approach should Haverwood use for its marketing communications program and what budget should the company set in doing so?

Recommendation.  Haverwood must thoroughly examine how its funds will be distributed for the coming year and support the proper promotional expenses. Therefore, the company should reject the advertisement expenditure proposed by Mike Hervey and instead reconstruct the budget for its upcoming promotions. The recommended changes for the company’s communications objective can be found on Table 1. The discussion factors below will support the necessary amendments to the 2008 budget and warrant 1) staying below the 5% of net sales by $31,550 and 2) increasing the amounts allotted for sales expense and administration as well as trade promotion while keeping the same amounts from 2007 for cooperative advertising and consumer advertising.  

Reconstruct Communication Program.   Haverwood already allocated 5% of net sales into advertising for 2007, which is well above the industry standard of 3.5%. This percentage amount is already set to grow with a projected 4% increase in sales for 2008. However, because of pressure from competitors, it is recommended that Haverwood adjust its promotion dollars with the changes that follow. Trade advertising and the sales expense and administration are two vitally important categories that need to be heavily increased. Trade promotions promptly leverage retailer sales to the end user. This category also consists of important pamphlets for potential consumers and point-of-purchase materials for retailers. In regards to the sales expense and administration category, Haverwood needs to continue to hire additional sales associates to ensure that current associates are not overloaded with foot traffic in the store. Customer service is an incredibly important factor that cannot be overlooked. Consequently, it is recommended that sales expense and administration and trade promotion be increased to $1,095,050 and $560,400, respectively. It is important to note that multiple factors have increased expenses for Haverwood: higher cost of labor and materials as well as pressure from foreign competitors to lower pricing. Because of said increases, Haverwood is predicting a shrinkage in gross profit margin for 2008 even with a projected increase in sales. It’s because of the potential shrinkage that a slightly more conservative approach (a budget actually short of 5% of net sales) is suggested. The leftover amount of $31,550 as well as any leftover amount from the 2007 budget should not be reallocated to the 2008 promotional budget as a cushion in case the drop in gross profit margin is worse than anticipated or if the projected increase in sales does not meet estimates.