Palm Inc. Piloting the Palm Café by pengxiuhui

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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 kkalyanam@scu.edu.  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

								
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