Case 13.1 CUTCO Cutlery: Differentiation via Direct Sales The fastest growing segment of the $240 million cutlery industry is in high-quality, relatively high-priced knives and accessories used primarily in cooking/kitchen applications. Typically, high-quality knives from manufacturers such as Henckels, Wusthof, Sabatier/Cuisine de France, and Chicago Cutlery can be purchased in fine department stores or in cutlery shops specializing in such goods. CUTCO Cutlery has used a different marketing channel to develop a successful marketing strategy. The Alcas Corporation, manufacturer of CUTCO knives, has succeeded in differentiating its products from others in the upscale end of the cutlery industry by employing a unique method of sales and distribution-direct selling-used most notably by encyclopedia marketers, vacuum cleaner manufacturers, and cosmetic firms such as Avon and Mary Kay, as well as by Amway, a marketer of household products. The Alcas Corporation has manufactured and marketed CUTCO Cutlery since 1949. As a result of several corporate restructurings, Alcas now exists essentially as a holding company composed of two wholly owned operating subsidiaries: (1) the CUTCO Cutlery Corporation, manufacturer of CUTCO Cutlery, and (2) the Vector Marketing Corporation, a direct and exclusive sales agent for CUTCO products in North America. Alcas has experienced consistent growth over the last ten years, with annual sales expanding by an average of 22 percent since 1985. Sales in 1995 were projected to top the $80 million mark. The CUTCO product line consists of a wide variety of kitchen (food preparation and table) cutlery, hunting, fishing, and utility pocketknives, as well as related accessories like wood chopping blocks. The CUTCO product line comprises over fifty individual items, most ranging in price from $30 to $80, which are often sold in sets and gift packs priced from $160 to $680. Pricing is consistent with that of other high-quality cutlery products such as those made by Henckels and Wusthof, CUTCO Cutlery products are promoted as " CUTCO--The World's Finest Cutlery" and are sold on the basis of quality and performance tests against competitive products and a lifetime guarantee. . Unlike its competitors, who sell and distribute their cutlery through fine department stores and specialty shops, CUTCO, via its Vector Marketing sales subsidiary, engages in direct selling through one-to-one in-home demonstrations. The CUTCO sales force is made up primarily of college students recruited during summer vacation months. In 1995, Vector Marketing recruited more than 35,000 salespeople, between 85 and 90 percent of them college students. The recruiting, training, and ongoing counseling of salespeople, all of whom work as independent contractors, is done in decentralized fashion, utilizing approximately 165 district sales and distribution managers located strategically in communities across the United States and Canada. During its peak summer months, Vector also opens up an additional 200 temporary "branch offices" staffed by college students with prior selling and management experience. One reason for the effectiveness of CUTCO's direct sales and distribution approach is that the high price of its products necessitates that potential buyers see them in use before committing to purchase. CUTCO's competitors usually address this issue by using in-store sales specialists or interactive video demonstrations. One-to-one in-home or workplace selling is the most popular form of direct selling. Between 1987 and 1992, the number of persons involved in direct selling increased from 3.6 million to 5 million, with the total volume of sales made rising from $8.8 million to over $14 million. However, some experts have criticized direct sales and distribution as being limited in today's increasingly competitive and high-tech business environment. Specifically, they suggest that direct sellers expand the number of channels through which their products are offered. As evidence, they cite the problems faced by the Encyclopedia Britannica Corporation. The 225-year-old company, analysts contend, lost market share and profits to competitors not only because it failed to offer its encyclopedias in a much less costly CD-ROM format, but also because it continued to market its products exclusively through its direct sales network. These analysts suggested that Encyclopedia Britannica would have been well advised to diversify its sales and distribution approach, as had competitors, by marketing its products through retail outlets, direct mail, telemarketing, and online computer marketing. In the face of stagnant growth in the early 19906 CUTCO did indeed experience problems trying to expand its operations exclusively through direct selling. In 1993, Vector Marketing was cited by the Wisconsin State Department of Agriculture, Trade, and Consumer Protection for overly aggressive salesperson recruitment. As a result, Vector was ordered to disclose in more exacting detail to its young recruits the nature of positions offered. The dispute centered around three issues: (1) some recruits were led to believe that they would be working for Vector when in fact they were to work as independent sales contractors, (2) the company failed to tell potential recruits that they "would be strongly urged" to purchase a $200 sales kit, and (3) Vector did not inform recruits that they would not be paid until a minimum number of sales demonstrations had been made. As a result of these problems, Vector might consider exploring other means of product sales and distribution to supplement its current direct approach. One promising alternative is marketing its products directly to potential buyers online. Not only would such an approach allow the all-important demonstration of CUTCO products, but it would also facilitate customer convenience (as opposed to the sometimes intrusive in-home sales call), instant order transmission, and greater marketer efficiency (by reducing sales and commissions costs). In 1990, Alcas established Vector Canada as a distinct international marketing entity utilizing the direct sales and distribution approach used in its domestic operations. Vector Canada has been a highly successful venture. Vector Korea was set up in similar fashion in 1992. The decision to enter Korea was made partly on the basis of the availability of U.S.-trained, Korean born managers. Alcas's direct sales and distribution approach proved not to be as effective in Korea as it was in Canada, with the company experiencing losses in 1992, 1993, 1994, and 1995 totaling $2.5 million. As a result, in February 1995, Vector Korea supplemented direct selling by hiring Korean housewives as the recruiting base for a "party plan" approach most notably used by marketers of Tupperware home products. This tactic has proven very successful; the party plan approach accounted for 65 percent of Korean sales in 1995. Vector Korea plans to move exclusively to the party plan sales and distribution approach in 1996.