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August 22, 2003 Palm Inc.: Piloting the Palm Café Kirthi Kalyanam* In Spring 2003, Ken Wirt, Senior Vice-President, Marketing and Product Development, Palm Inc., was reflecting on the early results obtained from a Palm owned mall based retail kiosk. The retail kiosk, internally code named Palm Café opened in the Westfield Valley Fair Shopping Center in San Jose, CA on October 7th 2002. Sales and customer survey data reflecting 21 weeks of operations are available. Mr. Wirt commented: “The penetration rate of Personal Digital Assistants (PDA’s) among U.S. Households is about 8% compared to 70-80% for PC’s. Palm is executing a strategy to reach the mass market consumer. A new model, the Palm Zire, was launched in October at a $99 price point and features that appeal to the mass market consumer. In addition to existing channels, Palm models are also being sold through new channels such as Target and Radio Shack that reach the mass market. During the 2002 holiday season, the Zire was one of the top selling PDA models in the U.S. and in Europe. Around this time we pilot tested a company owned mall based retail kiosk code named the Palm Café. Since technology oriented companies have rarely embarked on this approach, there are a number of unknowns. First, there is the question of being able to reach the mass market and sell technology to them. Will the current design of the Palm Café’be successful in this regard? Second is the law of unintended consequences. Will the Palm Café cannibalize sales from existing channels? Then, there is the question of channel economics. Can the Palm Café be successful from a cost of sales perspective? Other significant questions include sustainability of the Café test performance and scalability to other locations. We now have 21 weeks of results from operating the Palm Café. The question is what are the implications for our strategy to reach the mass market? Should our next steps be to do another test, pursue a store within a store format, moderately expand the number of locations or expand on a larger scale?” * Kirthi Kalyanam is the J.C. Penney Research Professor, Director of Internet Retailing, and Director of E-Business at the Leavey School of Business, Santa Clara University. This case was prepared for the purposes of classroom discussion only. It is not meant to imply effective or ineffective handling of a business situation or serve as an endorsement. This case should not be reproduced in any form without written permission from the author. Copyright permission can be obtained by emailing email@example.com. Kirthi Kalyanam. 2003, Kirthi Kalyanam 1 Company Background Synopsis Headquartered in Milpitas CA, Palm Inc. with annual revenues of $1.03B Palm is the leading vendor of handheld digital organizers (PDA’s). The company’s offerings include the value priced Palm Zire to high-end models that include color displays, wireless access and mobile communicators that are a combination of organizers and cell phones. Palm Inc. consists of two units. Its hardware business is PalmOne. Its operating system licensing business operates as PalmSource. Palm plans to take PalmSource public. 1 Early Products, Marketing and Distribution Jeff Hawkins had founded Palm Computing on January 2nd 1992. Ed Colligan and Donna Dubinsky joined him shortly thereafter. Palm’s initial product was the Palm Pilot, an electronic organizer that contained an address book, a calendar and the ability to synchronize with a PC. The Palm Pilot also contained software called Graphiti that featured improved handwriting recognition capabilities. The initial profile of the Palm target customer was a PC user, who also used a paper organizer and was not afraid of technology. The marketing plan was to follow a classic three- step adoption model. First, win over the industry influencers in high profile tradeshows. Next, use this momentum to get a PR strategy in the trade press and get ‘sell-in’ into the channel. In the next phase, PR campaigns would provide coverage in the consumer press, which would in turn be leveraged into channel sell-thru. Retail distribution was set to follow a two-phase strategy. In Phase 1, only a handful of retail outlets would sell the Palm Pilot. This would allow Palm to focus its limited marketing budget on these few chains. Phase 2 would expand distribution to other chains. Sales VP Pat McVeigh remarked: “This is like the movie The African Queen. The river flowed swiftly but when it came to the swamp, the water flow was hardly detectable. If you put too many retailers on, that is the swamp. We said, let us make this a narrow gorge and the retailer said, man is this product hot.” By March 1996, the PR efforts were beginning to pay off. Glowing reviews appeared in Business Week and The Wall Street Journal. In Phase 2 of the distribution plan, Office Max, Office Depot and Staples signed up, bringing the number of locations carrying Palm Pilots to 1 The material in this section has been adapted from Andrea Butter and David Pogue (2002), Piloting Palm, New York: John Wiley. 2003, Kirthi Kalyanam 2 5000. By Christmas of 1996, the Palm Pilot was clearly in the tornado. The initial limited distribution strategy had paid off. Retailers reported brisk sales of the Palm Pilot. As trade publications reported this information, other retailers who were not carrying the product started ordering it. Palm had quickly reached 70% market share and had sold five times as many Pilots as it had forecasted. The PDA market enjoyed hyper-growth through FY2000 followed by a significant sales decline in FY2001. A slowing economy triggered a demand slowdown that took Palm by surprise. On the supply side, a fall off in the shortage of components resulted in a spurt in production and excess inventory in the pipeline. The demand slowdown exacerbated the excess inventory problems leading to a vicious cycle of price-cutting. The market has since stabilized with the overall revenue on an improving trend (See Figure 1). New Products and New Markets Product Evolution and Competition By 2002, Palm Inc. had added a number of new models to its product lineup. While the initial Palm Pilots had black and white screens new models such as the M515 and the M30 featured color screens. These models had an estimated street price in the range of $200-$300. The Tungsten T provided wireless connectivity using Bluetooth technology. Other models such as the Tungsten C and the Tungsten W featured a ‘qwerty’ keyboard. The Tungsten C provided wireless connectivity to WiFi networks (also referred to as the 802.11 standard). The Tungsten models had an estimated street price in the range of $399-$549. Most of the Palm models featured expansion slots that increased functionality. The newer models also featured Graphiti 2, an improved version of the handwriting recognition software. Another feature of the newer models was the ability to write anywhere on the screen using a stylus instead of being confined to a limited writing area. Figure 2 provides an overview of Palm’s product line. Following the initial success of the Palm Pilot a number of companies had entered the PDA market. Some of these competitors included Palm Operating System licensees such as Sony with its Clie model. Microsoft’s Windows CE Platform was the main competitor to the Palm operating system. Microsoft’s software licensees included Dell and HP-Compaq. Figure 3 provides an overview of market share trends. While the competitors had made some gains Palm’s market share was holding steady in the 50-60% range. The market share for the Palm Operating system was higher since it included the share of Palm Licensees such as Sony. 2 By 2002, the PDA category was also facing competition from an unexpected direction: smart phones or converged devices that provided address books, calendars and web access from the likes of Samsung and Kyocera. Introduced in the late 1990’s, converged devices were initially large, clunky and sported $1000 price tags. By 2002, these devices had matured, weighing less than 5 ounces with sharp color screens and powered by Palm or Microsoft 2 The material in this section draws from Pui-Wing Tam, “All in One”, WSJ, May 19th, 2003, http://online.wsj.com/article/0,,SB105293235099635600,00.html 2003, Kirthi Kalyanam 3 operating systems. According to research firm Gartner, the sales forecast for smart phones for 2004 was 19 million units surpassing an expected 15.7 million units for hand-held computers. Handheld makers felt that many consumers would desire the richer data experience offered by PDA’s. According to Kevin Burden, an analyst at market research firm IDC Corp, a majority of respondents in surveys still preferred having two separate gadgets for voice and data functions. Industry observers felt that while cell phone makers were making inroads into the handheld market some of the early attempts by handheld makers to target the All in One segment had fallen flat. For example, while Handspring’s Treo, a converged handheld and phone, had gotten strong reviews, sales had been slow to take off. By late 2002, Palm had started selling the Tungsten W, an organizer that also contained a cell phone. On June 5th 2003, Palm announced the acquisition of Handspring Inc. New Business Markets3 In addition to new products that focused on upgrading the installed base, Palm and makers of other handheld computers also targeted focused applications among business users. One of the business markets was public safety. Police officers and other security personnel were beginning to utilize wireless handheld devices. For example a police officer could flag down a car, and as he walked up to the driver tap the automobile’s license number into a wireless PDA. The PDA would wirelessly connect to the police computer system and confirm the validity of the license. Hospitals and emergency rooms were another target market. For example at the Detroit Medical Center, doctors and nurses could access patient histories, calculate doses of medicine, look up the latest treatments and surf the Web for medical information, at the patient’s bedside using the hospital's Wi-Fi wireless network. These capabilities improved the productivity of doctors and nurses and increased patient safety by ensuring access to the right information in a timely manner. Patient safety was also improved by reducing errors that occurred due to manual coding and recoding of information. A number of viable applications were also emerging in the retail market. At the Tesco PLC supermarket chain in England, workers were using hand-held computers to monitor stock and price goods. In Germany, at Metro AG’s store of the future, PDA’s carried by employees were used to transmit wireless messages that alerted them to restock specific shelves where products were out of stock. Some apparel retailers were considering the use of wireless handhelds to transmit instructions to store personnel regarding display of merchandise. Due to these promising new applications sales of PDA’s to corporations and organizations, which currently represented about 25% of total sales, were holding steady. Some analysts predicted that sales would take off as more of these devices become equipped with wireless connections. 3 The material in this section draws from Pui-Wing Tam and David Pringle, “Hand-Helds’ New Frontier”, WSJ, August 8th, 2003, http://online.wsj.com/article/0,,SB106029184859360900,00.html 2003, Kirthi Kalyanam 4 Consumer Channels Consumer Shopping Behavior By 2002, Palm products had achieved significant penetration of consumer channels. The consumer channels included the Computer Product Super Stores (CPSS) such as CompUSA, Fry’s, the Consumer Electronic Super Stores (CESS) such as Best Buy and Circuit City, Office Product Super Stores (OPSS) such as Staples and Office Max and other Mall based retailers such as Franklin Covey. About 15,000 retail outlets sold Palm PDA’s. Palm reached the medium and small retailers thru distributors such as Ingram, Tech Data and Bridge Point. The distributors provided logistics management and assumed some of the credit risk from these retail accounts. Palm products were also available for purchase at a company owned and operated internet storefront (http://store.palm.com). Palm also sold through internet companies such as Amazon.com. Management believed that shopping trips to the consumer electronics and computer channels were planned. For example, a household might decide to purchase a big screen or a high definition T.V., and this might entail a shopping trip to one of these channels. Similarly, a household might decide to purchase a new home PC, and make a trip to a retail store. Many of these purchases involved input from family members and were pre-planned. A typical CompUSA shopper was a male who expected an informed staff to guide them through the various choices, and was also interested in a broad selection of accessories. The typical Best Buy shopper was also a male, 15-40 years of age, who was very tech savvy and interested in electronic media. These shoppers were also Internet Savvy and shopped the web site before they came into the store. The environment was typically self-service, although high touch sales occurred in some areas like cellular service plans. An OPSS retailer such as Staples attracted the small office and home office customer as well as professionals such as lawyers and insurance agents. The OPSS retailer was a destination for office supplies and customers shopped regularly. The OPSS retailer also extended their assortment to other products and solutions that targeted these customers. Sell-in and Sell-thru Palm’s retail account teams worked directly with the large retailers. When the PDA category was new, working with a retailer meant selling to one retail buyer. Over time, the PDA category had become more complex involving multiple buyers. For example, there could be different buyers for the viewers (PDA’s), software, accessories and someone else involved in planning and merchandising. Often each of these buyers was like an entrepreneur, running their own business. Account management activities included working on both long term and near term seasonal sales plans. Tara Griffin, VP, Channel Sales, Americas, remarked: 2003, Kirthi Kalyanam 5 “When you are a small company or are new to the market or have a new product category, it seems that sell-in is the big hurdle. When you are an established company in an established category, you still have to sell-in, now against powerful competitors. In addition to sell-in, and you also have to sell- thru.” A considerable amount of the channel management efforts focused on getting sell-thru. In most cases, this involved working with the retail account on managing an ad schedule and a promotion plan, managing advertising copy and forecasting sales for 13-week seasons. For some retail accounts, Palm would commit to an ad plan as early as January for the back to school sales season. However, the actual ad copy, product and price point were not finalized until about 8 weeks before the ad was due to run. This postponement strategy allowed Palm to react to competitive events and minimized the lead-time that competition would have to react to Palm’s marketing tactics. Getting sell-in and sell-thru varied by retail account. For example, an office products superstore like Staples or Office Depot would not carry a broad assortment of PDA’s but would go deep into one or two models. In this case the sell-in would have to focus on how the choice of these models would help the retailer connect with their target customers. For example, a real estate agent might be a customer that an OPSS was targeting. The sell-in would involve developing a merchandise plan for this target customer. The plan might even include some joint outbound marketing and direct mail to this target. The sell-in would also include creating solution packages with software that targeted this specific customer. Other sell-in messages included drawing the right customer into the store, and building an extended solution set and after sales accessories for this target audience. The typical OPSS chain had around 1000-1500 stores, and had a much lower inventory turn rate compared to the CESS stores. In contrast to the OPSS segment, the CESS segment typically carried a broader range of brands. For instance, it was not uncommon for a retailer like Best Buy to offer every brand in a category. The sell-in strategy would emphasize that the product was a must-have in the assortment. This channel was focused on promotions. Sell-thru was obtained through effective promotional lift and conversion. The CESS channel was extremely focused on top line sales, Gross Margins and Inventory Turns. A retailer like Best Buy with only 500 stores was able to manage turns very effectively. Stores were replenished four to five times a week and the retailer managed technology and model obsolescence very well. Channel Trends Due to the fall off in PDA sales the CESS and the OPSS retailers were not as bullish on the category. The category was also hit by the slowdown in the economy, and retailers were increasingly focusing on costs and category profitability. Market trends were to move away from messaging speeds and feeds to benefits focused on individual customer segments. For example, instead of a promotional message emphasizing the memory of a PDA, the message 2003, Kirthi Kalyanam 6 might now emphasize the capacity of the PDA in terms of number of addresses it could hold. Sell-thru was also becoming highly focused with very specific event driven promotions. As retailers were cutting back on staff in the store, manufacturers were conducting more demo days for shoppers. Sometimes these demo days provided training for the sales staff at the retailer. Overall manufacturers were generally concerned that retailers were very selective about what aspects of the product line they carried. There were also concerns about loss of voice among competitors. The lack of trained staff that could understand customer needs and define an ideal solution also created a varied consumer experience. Often stores did provide fully functional demo units and accessories. Overall, some retailers did a good job in presenting the products, while some did not, leading to a high degree of variability in terms of the consumer experience. Targeting the Mass Market: The Zire Demographics, Market Potential and Product Needs By 2002, the majority of Palm users were mostly male, highly educated, with average annual income of over $80,000, and mostly employed outside the home. However, only 8% of U.S. households had a PDA, whereas PC penetration had reached around 60-70%. Market research indicated that there was a vast untapped segment. Figure 4 shows the results of a study of the handheld market segment by desired feature set. The total universe for the U.S. PDA market, defined to be households that own a Personal Computer and a Cellular Phone, was 104 million households. Of this universe, 26 million households were potential targets for Personal Information Management (PIM). This was the second largest segment and constituted 25% of the total market. Management was increasingly concerned about the single digit market penetration and the strategies required for the mass market. Given the low penetration in the mass market, interest once again focused on the relative advantages of PDA’s versus paper based organizers. Consumer surveys indicated that except for ease of writing and visibility/eyestrain, PDA’s had substantial advantages over paper-based organizers. In order to obtain insights into why the mass market was not adopting PDA’s, management commissioned focus group studies. Selected insights from the focus group studies are summarized in the table below: Features and Packaging The Zire, was designed to meet the needs of the mass-market consumer. Figure 5 presents a picture of the Zire and highlights its key features. A critical feature was the sub $100 price point. The data in Figure 3 show that at an estimated street price of $99, the Zire was one of the lowest priced models and was positioned as a “get started” model. Weighing in at 3.8 OZ it was one of the lightest Palm PDA’s. The rechargeable battery had a life of several weeks. The new design featured an optimized two-button array. Palm PDA’s traditionally shipped with a 2003, Kirthi Kalyanam 7 cradle that was used to recharge the battery and sync with the PC. The Zire did not have a cradle. A power adapter charged the battery and the hot sync cable connected into a Universal Serial Bus (USB) port. The Zire targeted personal information management as the primary customer need. Consistent with this, the address book and date books were the key functional aspects of the Zire. 95% of customers were expected to use these two features. The Zire was packaged like a consumer electronics product. A clear plastic blister pack enabled the shopper to see the actual product and the contents of the package. Summary of Focus Group Results What do you like • Easy to enter information about paper? • I like putting pen to paper! • Hard to change information • Hard to find information • Hard to do repetitive tasks –Katie’s softball What are some of the practice every Thursday night at 6PM. drawbacks of paper? • No backups • No reminders • Hard to carry around • “This is not for me” (Current positioning speaks Why have you not to executives) purchased a PDA? • It exceeds my $100 budget Channel Strategy & Results The Zire was introduced on October 7th 2002. In addition to Palm’s existing channels, the Zire was also introduced into mass-market channels like Target and Radio Shack. In these channels, the buyer was typically a woman, whose interest in a PDA was triggered by an article in a magazine like Good Housekeeping. The price point and advertising in the retail circular was a key purchase driver. Purchase decisions typically involved a single person. Studies4 showed that women purchased technology in a consultative manner over multiple shopping trips. However, these mass market channel environments were not suited to a consultative sell. Magazine articles educated the consumer and in-store merchandising and packaging completed the sale. Upon its introduction, the Zire was the number one handheld in the U.S. and in six of seven European countries in Q4 of 2002. Surveys indicated that the majority of Zire owners were female, with a high percentage of “do not work” consumers, non-college consumers and female homemakers. 72% of Zire buyers were first-time purchasers of hand-held computers 4 For example, see Paco Underhill, The Science of Shopping. New York: Harper 2003, Kirthi Kalyanam 8 Many survey respondents also received the Zire as a gift. Through late February, Palm had sold 850,000 units of the Zire. The Palm Café Pilot As early as July 2001, Ken Wirt had been considering the idea of mall-based kiosks. By July 2002, many of these issues related to the excess inventory had been resolved and a focus was initiated on conducting a test of mall based Kiosks. Kanwal Sharma5, Marketing Director, New Retail Initiatives lead the effort of making the concept a reality. The target date for the launch was October 7th 2002. Design Analysis of other mall-based retailers indicated that mall-based Kiosks needed to be distinctive with a high visual impact. The typical booths that were used in trade shows and conventions would not be appropriate. An open retail environment with fluid boundaries was essential to encourage consumers. These requirements drove the design of The Palm Café (See Figure 6). A Palm café consisted of several stand-alone units called pods. Each pod had a table with stands topped with brightly lit Palm logos. Each pod also had a display of a Palm model outfitted with accessories. Staffing, Training & Compensation One of the drawbacks of the retail channel was the paucity of adequately trained sales personnel. Frequent staff turnover contributed a great deal to this. In light of this, appropriately staffing the kiosks was considered critical. A focused manager along with several staff members was essential for each kiosk. One option was to staff the Café’s with employees of Palm Inc. Another option was to use a franchising model. A third option was to use operators who would receive merchandise on consignment from Palm, and staff and operate the store. It was felt that the independent owner operator would be motivated to maintain the sales team and keep the spirit. The operator would be compensated using the margin allocated to the channel. Palm would contract for the locations and pay the rent. J.D. Estella was the independent operator chosen for the first location. The location had a staff of six employees. Employees were paid on an hourly basis, and earned commissions on sales. The Westfield Valley Fair Location, San Jose, CA. The Westfield shopping town at Valley Fair in San Jose, CA is one of the premier shopping locations in the south bay region of Silicon Valley. The mall is located at the intersection of two major freeways Interstate 880 and Interstate 280. The mall houses over 270 5 Kanwal Sharma reported to William Lynch, V.P. of E-Commerce, who reported to Ken Wirt. 2003, Kirthi Kalyanam 9 specialty shops, restaurants and services and houses over 50 Women’s apparel stores including Banana Republic, Bebe, Eddie Bauer, Gap, and Victoria’s secret. The anchor stores include Macy’s and Nordstrom. Apple computer had a flagship store located next to Nordstrom. Other electronics retailers include Bang and Olufsen, Bose, and the Sharper Image. Kiosks lined the middle section of the main corridors. Some of these kiosks were occupied by cellular phone vendors such as AT&T wireless and Sprint. Figure 7 provides a layout of the mall identifying the anchor stores, the electronic retailers and the location of the Palm Cafe6. One of the locations considered inside the mall was near the Apple store on Level 1. The Apple store with a very large four-window footprint could potentially dominate the experience in the vicinity. Many of the kiosks around the Apple store carried low-end merchandise. Another location considered was on Level 2, in the middle of the aisle that led to the food courts. Pottery Barn was located to the right side of the aisle and Fred Mayer Jewelers to the left. This location was quite close to the Macy’s Women’s section that anchored one side of the mall. While this location was further away from the center of the mall it seemed that it might get considerable foot traffic because of its proximity to the food court. However, it was not clear whether the food court would be a distraction. Next to the Macy’s women’s store was a Franklin Covey store, that carried a whole range of paper based personal organizers and PDA’s including Palm products. The proximity of this location to the Franklin Covey store was also a concern. A third potential location was Level 2 near the main entrance, in between Helzberg Diamonds on one side and Godiva Chocalatier on the other. This location was at the center of the mall. However, being on level 2 it did not provide strong and direct visibility from level 1. Even though this location was on level 2 it was selected because it was central. Since it did not have any other kiosks next to it, it was felt that this location would have enough space to project the Palm brand. The Palm Café was launched on October 7, 2002. Since the Café was in a test mode, PR and promotional programs did not accompany the launch. Results from the Pilot Shopper Demographics and Buying Behavior Shoppers at the Palm Café were surveyed regarding their shopping experience and purchases at the Palm Café. Table 1 summarizes the results. Commenting on the survey results, Ken Wirt remarked: “Before we started the pilot, we had some preconceived notions of who would be shopping at the Café and what types of products we were expecting to sell. Some of the findings in the survey have surprised us.” Before the test, it was expected that sales from the Palm Café would predominantly consist of the Zire. However, the actual product mix was skewed towards the high-end models 6 A complete listing of the stores at this center is available at the following URL: http://www.westfield.com/us/centres/california/valleyfair/directory/ 2003, Kirthi Kalyanam 10 like the Tungsten T and M515. In addition, every hand held sale was accompanied by a sale of accessories. Reflecting on the product mix sold, Kanwal Sharma remarked: “We believe that this is a result of our well trained staff engaging in a very consultative and soft selling process. Many consumers come into the Café attracted by the $99 Zire. Our sales associates do not immediately jump on them. We give them some time and space to get comfortable with the environment. We watch for body language to detect when the shopper wants help. This soft sell approach is critical. Our staff spends time to learn who the customer is and what their needs are before we match them up with the product. The time spent by our associate with a shopper can last anywhere from fifteen minutes to one hour. Once we understand their needs, it is often the case that some other model is better suited for them. Because of this process, a large percent of customers wind up trading up to another model. The usual danger in this type of sales process is that the customer is sold something over and above what they need. Our return rates are very low and customer satisfaction is very high.” Revenue and Contribution Margins Table 2 presents a revenue and contribution margin pro-forma that was used by the company to provide a comparative analysis of the Palm Café and the US Retail Channel for 21 weeks of operation beginning October 7, 2003. Although the data is disguised, this does not materially affect the conclusions. The seasonal sales profile of the product category is presented in Figure 8. The revenue information presented is revenue to Palm Inc., which is revenue net of channel margins. The table provides a revenue index-a disguised indicator of revenue. The revenue index can be used to compare revenue across channels. The gross margin figures reflect the gross margin to Palm Inc. net of cost of goods sold. Operating expenses reflect variable expenses, and some fixed expenses amortized on a time basis. For the Palm Café, amortized overhead expenses included one-time design costs and the cost of fixtures. The Palm Café did not have any regional sales costs. Personnel costs are the costs of Palm Personnel who worked on launching the concept and supporting it. There was some disagreement regarding the overhead allocations and the dangers of literally interpreting the contribution margins. It was estimated that one time design costs and personnel costs incurred would stay fixed for at least 10 more locations. Rental costs could reduce at subsequent locations. Franklin Covey 2003, Kirthi Kalyanam 11 Franklin Covey with their emphasis on personal organization and time management was an early OEM partner for Palm. Franklin Covey stores were located in most of the upscale malls across the United States. Since the Palm Café was located quite close to the Franklin Covey store, the retailer was briefed prior to the launch. Among the issues discussed was the potential of collaborating with Franklin Covey to run the kiosks. Around the same period, Franklin Covey conducted a test with a Kiosk in the Mall of America in Minneapolis. Figure 9 shows a photograph of the Franklin Covey Kiosk. This test was discontinued after two months. Subsequently, as the Palm Café was launched the sales volume at the Franklin Covey Valley Fair store was monitored along with three other control stores. The results indicated that the sales trends at the Valley Fair store were below the trends at the control stores. Tara Griffin, VP of Channel Sales, Americas remarked: “Right now there is a big rush to open and operate manufacturer owned stores. No one can tell our story better than we can, and the company owned stores are a testament to this. However, there is a fine line between a marketing environment and a selling environment. Franklin Covey sales at the Valley Fair store are down and they have been very critical about the Café test. Resellers expect to compete with each other, but they do not like to compete with their vendor. The Café is a great story in December but then you have to work your way through January and the rest of the slow months. Each Palm Café is very small in terms of upside but could be destructive to our channel relationships. Unless there is a way to make everybody successful, there will be some tough lessons here.” Strategic Options Ken Wirt wondered what to make of these test results. Since sales were available for only a 21 week period, he wondered what the annualized performance of the store would be and whether the results currently obtained were sustainable over time. Ken wondered whether the Valley Fair results were somehow Silicon Valley specific and other locations might perform differently. There were at least 800 Malls in the United States that could potentially house a Cafe. In order to assess this issue, Kanwal Sharma had prepared a list of some other potential locations available for kiosk rollouts. Table 3 presents data on household income, traffic and a penetration index for Palm products for some of the potential locations. The team was pondering the implications of this data. Another issue was how to factor in any impact on the existing channel? Ken wondered whether the lessons from the test could be applied to the existing channels. Given the success of the Zire in the traditional channels, and the results from the Café test, Ken wondered whether the strategy to reach the mass-market consumer needed to be re- examined. Some of the options being considered were as follows: 2003, Kirthi Kalyanam 12 1. Store within a Store: One line of thinking was that this test revealed several lessons in terms of how to sell PDA’s. The next step could then be to apply these lessons to the traditional channels to provide a better customer experience. A store within a store (SIS) at a current retail partner like CompUSA that incorporated the design elements from the Cafe with dedicated sales personnel would leverage the cost effectiveness of the traditional channel with the fresh thinking of the Palm Café. The SIS concept was prevalent among cosmetic manufacturers. Fashionable brands like Polo and Tommy Hilfiger set up their own store within the floor of a department store like Macy’s. In 1998, Apple Computer opened a SIS at CompUSA. The brand’s color schemes and fixtures provided a unified brand image within the framework of a fluid boundary. The dedication of space to the brand also meant that merchandise from competing brands was not intermingled. Microsoft had recently initiated a SIS in CompUSA for pocket PC’s that were based on the Windows CE operating system. Pocket PC’s from different manufacturers were displayed side by side in the Microsoft SIS. Even with the SIS concept a number of operational issues remained. A primary one was the lack of trained staff to understand the product line, match it to customer needs, develop, and articulate an ideal solution. Recognizing this, most cosmetics manufacturers (e.g. Estee Lauder, Lancome, Clinique) had dedicated personnel that staffed these counters. Cosmetics manufacturers hired, trained and paid for these personnel. 2. Partner with Franklin Covey: Under this option, Franklin Covey would operate the Palm Café locations. The details of the staffing and compensation would have to be negotiated with Covey. 3. Use the Café as a Marketing Tool: Some in the company advocated selling products at Manufacturer’s Suggested Retail Price (MSRP) at the Palm Café in order to minimize cannibalization of existing channels. Under this option, the Café would become a marketing tool for the company rather than a sales tool. 4. Another Test: Since the test provided a single data point, it was not clear that the results from this test were either sustainable and the generalizability to other locations. Another test could potentially provide information that is more convincing. A second test would take about three months to set up and would have to be continued through the holiday season of 2003. 5. Moderate Expansion: Under this option, 10-12 new locations would be launched in Q2-Q4 of 2003. If this option were pursued, locations had to be selected and sales forecasts developed. A staffing plan also had to be developed. There was also the issue of how to communicate and position this action with the existing channels. 6. Large Scale Expansion: There was some evidence that other manufacturers had noticed the Palm Café pilot and were contemplating their own kiosks. This could potentially lead to competition among manufacturers for mall locations. Under large-scale expansion, many feasible locations would be targeted for opening in 2003. This option would allow the company to lock up most of the important locations immediately. If this option were pursued, additional staffing might be required at Palm to manage and co-ordinate the roll out. 2003, Kirthi Kalyanam 13 As Ken Wirt mulled these options, he wondered what were the best interpretation of the test results and the course of action to follow. He felt that that this was a pivotal decision at a critical juncture in the life of the company. He commented: “Apart from the financial considerations, we really need to look at this strategically. We need to fully internalize what will happen to Palm if we do not pursue this, and if we do pursue it.” 2003, Kirthi Kalyanam 14 Table 1: Palm Café Demographics and Buyer Survey 1. Had you planned on purchasing a handheld 6. Which of the following statements describe why computer today? you have not purchased a Handheld Computer previously? (Please check as many as a. 61% of sales were impulse they had no appropriate). intention of buying a handheld device b. 39% were planning on purchasing a a. 30% I do not know enough about them handheld device. b. 15% The price is too high c. 17% I do not know which one to buy 2. Had you considered purchasing from any of the d. 13% I do not think it will be better than my following outlets? current organizational system (greater than 100% as some had multiple choices e. 9% I think it will be too difficult to use where they would shop) f. 1% I could not find any store that could help answer my questions a. 86% another retail location b. 14% None of the above (would not shop at 7. About the handheld computer user: our existing locations) a. 62% of buyers were women 3. Had you considered purchasing a handheld b. 38% of buyers were male computer on-line? c. 63% were new user to a PDA d. 37% existing users a. 41% Yes i. 13% switched from other PDA's b. 33% No e. Age categories c. 26% did not respond i. 33% in the 35-49 ii. 29% in the 25-34 4. What attracted you to purchase at the Palm iii. 14% in the 50+ Café? (greater than 100% as some had multiple iv. 14% in the 19-24 choices why they purchased at Palm Cafe) v. 6% in the 16-18 a. 62% Location, Accessibility and 8. Would you recommend Palm Café? convenience at Valley Fair b. 42% were attracted by the Palm Brand a. 83% of buyers would recommend the c. 20% knowledgeable staff Palm Café and would come back to buy d. 15 % design of Palm Café again. b. 17% did not complete the question 5. Are you buying this Palm Handheld for yourself or as a gift for someone else? 9. In the future would you consider buying your next handheld or additional accessories from any of a. 65% for someone else the following retailers: (greater than 100% as b. 30% for them selves some had multiple choices where they would c. 5% did not answer shop) a. 83% From another retailer b. 17% None of the above (would not shop at our existing locations) Notes: Survey results are disguised. 2003, Kirthi Kalyanam 15 Table 2: Revenue & Contribution Margins: U.S. Retail Channel vs. Palm Cafe October 7th 2002 to February 28th 2003 U.S. Retail Channel Palm Café Revenue Index 1,500,000 Revenue Index 1,852 # of Current Locations 15000 # of Current Locations 1 Revenue Index Per Location 100 Revenue Index Per Location 1852 # of Potential Locations 800 Gross Margin Gross Margin Gross Margin % 32.31% Gross Margin % 45% Operating Expenses Operating Expenses Sales Rent Marketing Training Beaming Stations Shirts Merchandise Total Operating Expenses % 25.71% Total Operating Expenses % 33% Amortized Overhead Expenses One Time Design Costs 5.00% Fixtures 4.45% Personnel 7.30% Total Overheads and Amortization % 16.75% Contribution Margin Contribution Margin Contribution Margin % 6.60% Contribution Margin % -5% Notes: 1) The data is disguised but this does not materially affect the conclusions. (2) For the Palm Café, one time design costs, and fixture costs are amortized over 104 weeks. The allocation in the table reflects 21 weeks of amortization. (3) Personnel costs reflect 21 weeks of allocation. 2003, Kirthi Kalyanam 16 Table 3: Prospective Locations for Palm Café’s Household Income Traffic Locations Palm Penetration Index Index Index L1 102.45 52.08 42.52 L2 65.32 54.17 43.05 L3 84.57 83.33 116.11 L4 125.01 69.44 70.79 Valley Fair 100.00 100.00 100.00 L6 94.36 65.97 60.06 L7 117.12 56.94 25.27 L8 102.71 62.50 50.11 L9 88.60 120.14 44.19 L10 103.24 64.58 35.79 Notes: 1. Household income is the average household income for the trade area around the location. The standard definition of a trade area is the geographic area from which a location draws 80% of its visitors. 2. Traffic is a measurement of the foot traffic at a location. 3. Palm Penetration Index is an index of the extent of penetration of Palm PDA’s in the geographic area. 4. All table entries are disguised. 2003, Kirthi Kalyanam 17 Figure 1: Revenue Growth Trends for Palm Source: Palm Inc. 2003, Kirthi Kalyanam 18 Figure 2: Palm’s Product Line (April 16th 2003) 2003, Kirthi Kalyanam 19 Figure 3: Market Share Trends 70.0% 60.0% 50.0% Palm Sony Handspring 40.0% Compaq HP Toshiba 30.0% 20.0% 10.0% 0.0% Jan-01 Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Notes: 1. Palm, Sony and Handspring PDA’s use the Palm operating system. 2. Compaq, HP and Toshiba PDA’s use the Windows CE operating system. 2003, Kirthi Kalyanam 20 Figure 4: Handheld Market Segments by Desired Feature Set 2003, Kirthi Kalyanam 21 Figure 5: Palm Zire Handheld Features 2003, Kirthi Kalyanam 22 Figure 6a: Palm Café Design 2003, Kirthi Kalyanam 23 Figure 6b: Palm Café Design 2003, Kirthi Kalyanam 24 Figure 7: Layout of Westfield Valley Fair, San Jose Ca. Location of Apple Store Location of Palm Cafe 2003, Kirthi Kalyanam 25 Figure 8: Category Seasonal Profile. 12% 10% 10% 9% 8% 9% 9% 7% 7% 6% 6% 5% APR M AY JU N JU L AUG SEP OCT NOV DEC JA N FE B M AR 2003, Kirthi Kalyanam 26 Figure 9: The Franklin Covey Kiosk in the Mall of America 2003, Kirthi Kalyanam 27
"Palm Inc. Piloting the Palm Café"