BUSINESS ANALYSIS Bubble Head
Introduction This business analysis is being conducted to outline the considerations based on the market research for the new entrant, a protective faucet cover. The information contained in this report is developed from U.S. sources, as the primary concern in development will focus on the U.S. market. The analysis will examine market size, industry revenue, factors influencing demand, competing products and their prices, sales forecast, product licensing and related manufacturers and retailers. To illustrate these points, information on the faucet manufacturing, plumbing supply and construction industries will be featured. With the new entrant being geared toward children, this report will include figures on the number of children in the U.S. The faucet manufacturing industry makes $1.6 billion yearly and is set to grow 3.4 percent per year between 2010 and 2015 1. The overall prognosis for this industry is an even flow, where sustainable growth will be activated and maintained due to a recovery in overall construction activity. The stated figures are based on sales remaining steady; therefore, the market has not considered the added growth of new entrants. Thus, the final expansion could be much greater and new entrants have the opportunity to capture a significant part of the overall market. Special Highlights of the market: As of 2015, there are an estimated 38 faucet manufacturers in the U.S. In 2013, the top faucet brands were Delta, Kohler and Moen, respectively. Faucet manufacturers are facing medium level of competition, and the trend is rising. The faucet manufacturing industry is primarily driven by residential construction activity. Between 2014 and 2015, there were 23.7 million children ages 0-5, a slight increase from 2013 which had 23.5 million 2. In July 2015, privately-owned housing completions were 2.4 percent above June 2015 s estimate, and 10.1 percent 3 above the rate for July 2014. 1 http://www.ibisworld.com/industry/faucet-manufacturing.html 2 http://www.childstats.gov/americaschildren/tables/pop1.asp 3 http://www.census.gov/construction/nrc/pdf/newresconst.pdf
Plumbing fixtures which include bathtub, shower, toilet, and sink supplies will account for 7.7 4 percent of online plumbing and electrical supply sales in 2015. Average price of competing products is between $9 and $30. Market The faucet manufacturing industry is a segment of the overall plumbing fixtures market. The leading manufacturers in this industry are Fortune Brands Inc., Kohler Company and Masco Corporation. Other major industry players are retailer Home Depot Inc. and distributor W.W. Grainger Inc. The faucet market is largely driven by the demand for construction activity. When the number of new homes being built fell drastically during the Great Recession (2009 2010), so did home remodeling activities. Recovery of the economy in recent years spurred an increase in privately-owned housing starts. Revenue for the faucet manufacturing industry began to grow in 2011, and is forecast to rise 2.2 percent in 2015, with increased spending on home improvements being a significant contributor. Gains for this industry is predicted to rise annually at 3.4 percent to an anticipated $1.6 billion over the five years to 2015 5. The residential construction market is the top user of faucets. Though the size of the faucet market will differ from year to year, an estimate of the scope of the current residential construction market can help measure the potential for demand and annual sales. In July 2015, privately-owned housing units authorized by building permits were at 1,119,000, a 7.5 percent increase above July 2014 s estimate of 1,041,000 6. As a whole, private construction spending which includes residential and nonresidential segments has been steadily increasing during recent years, with total value of $787,776 in July 2015 as opposed to $673,787 7 in July 2014. During the five years to 2020, housing starts are expected to grow annually at 6.8 percent. Spending on home improvement activities is forecast to increase 4.5 percent per year. Key factors motivating consumers to invest more in their homes include increasing per capita income, rising home prices and a commitment by the Federal Reserves to maintain low interest rates. This increasing demand from the construction 4 http://www.ibisworld.com/industry/online-plumbing-electrical-supply-sales.html 5 http://www.ibisworld.com/industry/faucet-manufacturing.html 6 http://www.census.gov/construction/nrc/pdf/newresconst.pdf 7 https://www.census.gov/construction/c30/historical_data.html
segment will fuel annual growth for the faucet manufacturing industry at 2.9 percent to an estimated $1.9 billion in 2020. The online plumbing and electrical supply industry plays a notable role in the demand for faucets. When the recession curtailed growth in the construction and home improvement markets, shoppers on a tight budget looked to the Internet for deals by comparing prices online. When the housing market recovered, online sales for this industry had already positioned itself as a major source of revenue and is estimated to reach $5 billion in 2015, growing at an annual rate of 2.5 percent. As of 2015, plumbing fixtures and other plumbing supplies account for 7.7 percent and 5.6 percent, respectively, of online plumbing and electrical supply sales. Between 2015 and 2020, this industry is forecast to grow at an average rate of 3.4 percent, reaching $6 billion in 2020 8. The size of new homes has decreased since the recession, and the demand for apartments and condominiums has outpaced single-family homes, leading to fewer bathrooms being constructed and lower demand for faucets. Still, the faucet industry s growth will be reinforced by stronger nonresidential construction, because increased corporate profits will elevate spending on business remodeling projects. Furthermore, with per capita income improving over the past five years, spending on home remodeling has been modest at the least. Statistics on the number of children in the U.S. are available based on ranges spanning 0-17 years old. With the new entrant targeting younger children, the population for that demographic will be considered. In 2014 and 2015, the U.S. had 23.7 million children ages 0-5. For ages 6-11, there were 22.7 million in 2014 and 23 million 9 in 2015. 8 http://www.ibisworld.com/industry/online-plumbing-electrical-supply-sales.html 9 http://www.childstats.gov/americaschildren/tables/pop1.asp
Strategic Considerations and Product Discussion U.S. faucet manufacturers face a high level of price-based competition from other industry manufacturers, which compromises profitability. In addition, faucet imports are expected to increase in 2015, encompassing 30.7 percent of domestic demand 10. Profitability has also been compromised due to regulations in some states mandating more stringent lead content controls for faucets and other plumbing products. Despite these challenges, better days are ahead for the faucet manufacturing industry. Strong recovery of the residential and nonresidential markets are likely to help mitigate the effects of increasing import penetration and changing production requirements, boosting revenue over the five years to 2020. Companies in the faucet manufacturing industry compete based on price, product quality, brand reputation, product innovation and features, and the scope of their product line. By maintaining quality and reliability and offering additional services, such as consultation and design, manufacturers can secure a competitive edge. The protective faucet cover is a bathroom accessory that goes over the front of a bathtub/bathroom sink faucet, dispensing bubbles when squeezed while giving the faucet a unique appearance. The cover can also serve as a protector that shields children from faucet injury while in the bath. Competing products on the market are designed to help prevent injury, but only some are capable of dispensing bubbles. The most popular price range for faucet covers is between $9 and $30. Boon Flo Water Detector and Faucet Cover comes with a bubble bath dispenser and helps protect against injury. Selling for $9.59, the unit projects water away from the faucet and enables access to shower diverter. It is also PVC- and phthalate-free. 10 http://www.ibisworld.com/industry/faucet-manufacturing.html
This Ginsey Elmo Faucet Cover fits over most standard faucets and enables water to flow out of the bottom of the opening guard. Retailing for $9.99, it is designed to protect kids from injury while providing a playful new look for the bathroom. The whale-shaped Skip Hop Moby Bath Spout Cover helps prevent injury during bath time. The fin has an adjustable strap that fits and tightens on most spouts and a blowhole that allows easy access to the shower diverter. Retailing for $13.10, the unit is dishwasher safe, and phthalate-, BPA- and PVC free. 4moms Spout Cover, which retails for $29.99, digitally shows water temperature with a color-coded display that indicates safe water temperatures. It also protects children from bruises caused by bumping into the faucet.
Sales Projections The average retail markup for the accessories industry is between 50 and 70 percent. To obtain a 40-percent gross margin on a faucet cover retailing for $9.59, the manufacturer must spend $2.49 to make and deliver each unit. In this report s example, the manufacturer and the retailer would receive a 67-percent markup. See channel margins below: If this product were to gain rapid market share and sell 250,000 units with a gross margin of $1.66, the manufacturer would reap gross profit of $415,000 in the first year of production. The anticipated growth rates over a 5-year period are: Year 1 Year 2 Year 3 Year 4 Year 5 15% 20% 25% 20% 15% $415,000 $477,250 $572,700 $715,875 $859,050
Licensing Your Product When you have a great idea for a product, there is an important decision to make right up front: do you want to build a brand new company from the ground up in order to commercialize the product OR do you sign a product licensing deal with a pre-existing company that already has the resources needed to market the product? If you choose the latter and you are successful in getting your product licensed you will receive royalties on sales of the product, and you will have a lot more time on your hands to tend to other activities in your life. The tradeoff is that you will receive a far smaller percentage of the profit from the sale of your invention. The percentage of royalty paid to an inventor varies. The most common percentage is 5 percent. That is not a hard and fast rule, however. Some royalty rates can be as low as 1-2 percent, or as high as 15-20 percent or more. It all depends on the item and industry. Rates on gimmicky infomercial products may be much higher (as much as 20 percent), but they typically have a substantially shorter product life. The reported royalty rate for consumer goods, which is the category that the Bubble Head would fall under, is 6 percent. Based on the manufacturer sales and profit projections in the previous section, below is a breakdown of the royalty commission that could be expected over the first 5 years. Rate Type Year 1 Year 2 Year 3 Year 4 Year 5 Projected Growth 15.00% 20.00% 25.00% 20.00% 15.00% Revenue $415,000 $477,250 $572,700 $715,875 $859,050 Royalty $24,900 $28,635 $34,362 $42,953 $51,543 Profit (After Tax) $21,165 $24,340 $29,208 $36,510 $43,812
Manufacturers www.us.kohler.com Headquartered in Kohler, WI, Kohler has been in business since 1873. Though widely known for its plumbing supplies, the company also makes cabinetry, furniture, engines, tiles and generators. Kohler provides bathroom faucets and accessories including towel and tissue paper holders and soap dishes. Kohler s bath and kitchen products can be found in U.S. hardware and home improvement stores. As of 2015, Kohler has 32,000 employees and annual revenue of almost $6 billion. www.moen.com Based in North Olmsted, OH, Moen has corporate locations in North and Central America, Canada, Mexico and Asia. The company, which was founded in 1956, manufactures bathroom and kitchen supplies including faucets, sinks, showers, spas, and system components, plus accessories such as vanity shelves and robe hooks. Moen operates as a subsidiary of Fortune Brands Home and Security Inc., whose sales for the second quarter of 2015 was $1.17 billion. www.deltafaucet.com A wholly owned subsidiary of Masco Corporation, Delta Faucet Company was founded in 1954 and is headquartered in Indianapolis, IN. Delta makes bathroom and kitchen supplies such as faucets, sinks, lavatories, tubs and showers, and accessories including towel bars and tumbler holders. Masco owns more than 20 companies, operating in nearly 60 manufacturing facilities domestically and over 20 internationally. In 2014, Masco increased its net sales by 4 percent to $8.5 billion.
www.pfisterfaucets.com Founded in 1910 and based in Lake Forest CA, Pfister is owned by Spectrum Brands. Pfister manufactures kitchen and bathroom fixtures such as faucets, shower components, bath accessories, valves and tubs and showers. With a history of offering innovative products, Pfister has added advanced filtration faucets and touch-free pulldown faucets to its offerings. In 2014, Spectrum Brands generated annual sales of $4.43 billion. Other U.S. manufacturers of faucets and bathroom accessories include: American Standard Sonoma Forge Chicago Faucet Company Elkay Gerber Plumbing Fixtures Danco Retailers www.walmart.com Headquartered in Bentonville, AR, Walmart was founded in 1962. It is the leading discount retailer in the U.S. and the biggest company in the world in terms of revenue. Walmart operates as a retailer and wholesaler of a variety of merchandise and services, which are sold at everyday low prices. Apparel, grocery, home and health and wellness are some of the company s merchandise units. With annual revenue of $485.65 billion, Walmart has 11,508 locations worldwide.
www.bedbathandbeyond.com Incorporated in 1971, Bed Bath & Beyond is a retailer of domestics merchandise and home furnishings, including bath items, kitchen textiles and basic housewares. The company operates under several other names such as Buy Buy Baby, Christmas Tree Shops and World Market. Bed Bath & Beyond has 1,504 locations, and annual revenue of $11.5 billion in 2014. www.toysrus.com Founded in 1948, Toys R Us is a chain retailer of brand name toys, gear, electronics and games for kids. Based in Wayne, New Jersey, the company operates over 1,500 stores in 35 countries under the Toys R Us, Babies R Us and FAO Schwarz banners. Toys R Us is #22 on Forbes America s Largest Private Company list. Annual revenue as of October 2014 is $12.5 billion. www.target.com Based in Minneapolis, MN, Target Corporation is the second largest discount retailer in the U.S., behind Walmart. Founded in 1902, the company sells everyday merchandise, food and essentials via its stores and online channels. Target operates under various brands, including Room Essentials, Market Pantry, Cherokee and Merona. The company has 1,934 locations, and revenue of $71.28 billion in 2014.
Other retailers of faucets and bathroom accessories include: Home Depot Lowe s Diapers.com Wayfair Build.com Walgreens