Ivey Case Study: Rayovac Rechargeable Battery Opportunity PDF

For the exclusive use of S. Economy, 2025. S w 906A36...

For the exclusive use of S. Economy, 2025. S w 906A36 RAYOVAC CORPORATION - THE RECHARGEABLE BATTERY OPPORTUNITY Joe Falconi wrote this case under the supervision of Professor Don Barclay solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2007, Ivey Management Services Version: (A) 2007-04-11 It was September 2005. Bob Falconi was contemplating how to grow the Rayovac Battery Division of Spectrum Brands Canada Inc. Falconi was the vice-president of sales and marketing for Spectrum, a global consumer products company owning a variety of brand name products. One of the many business units within the company was the Rayovac Battery division, a leading global supplier of household and industrial batteries. With the use of household batteries growing exponentially due to the increased popularity of high-drain devices such as digital cameras, energy consumption had become an important issue. Companies were looking for ways to meet this increasing energy demand. Falconi knew that with effective marketing, the rechargeable battery market was one that would likely grow within North America as it had in Europe. Major competitors were not focusing their efforts on this product category, fearful that it would cannibalize sales of their existing products. Rayovac could use this opportunity to increase its presence and brand name recognition by entering “the back door” instead of competing head-to-head against the well- established, non-rechargeable products of the market leaders. Falconi sat in his office pondering this opportunity. Given that consumer perceptions of rechargeable batteries in Canada had not been positive, Falconi wondered whether this was a business worth pursuing and, if so, how he would market the Rayovac line within Canada. Falconi knew the task ahead of him would not be easy and that a decision would need to be made quickly. THE HOUSEHOLD BATTERY MARKET The household battery market comprises consumer batteries available in standard sizes AAA, AA, C, D and 9-volt (see Exhibit 1), which are used daily in various consumer electronics and high-use standard household devices such as flashlights and remote controls. Sales of these batteries around the world continued to grow as electronic devices such as PDAs, digital cameras and portable music systems became more pervasive. As these devices became more complex, consumers demanded improved battery This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 2 9B06A036 technology to meet their increasing energy requirements. Technology within the battery industry continued to develop as competitors tried to stay ahead by finding the “next big idea.” As of 2005, alkaline was the dominant household battery chemistry in North America and was offered by all major competitors in all sizes. Growth within this product category had become relatively flat (one per cent to two per cent annually), yet due to the size of the market, it was expected to remain the focus of competitors over the next five to 10 years. In 2005, the overall battery market in Canada was estimated to be approximately $3001 million, with the alkaline segment representing 70 per cent, the rechargeable segment making up 10 per cent and other battery chemistries, including zinc, representing 20 per cent. Manufacturers needed to be involved in the alkaline segment in order to be an important player in this industry. Consumers North American consumers sought convenience and quality with their battery purchases and tended to gravitate towards the brand names they knew and trusted. Consumers could be divided into two categories: light users and heavy users. Light users were those who spent, on average, $25 or less annually on batteries, while heavy users spent, on average, $250. Heavy users could be further broken into families with children, and “techies.” Within Canada, the family segment made up close to $200 million of the market. These were couples with one or more children, typically living in urban centres with a household income of over $60,000. They likely had lower levels of disposable income because of higher levels of home ownership and meeting the needs of dependents. As a result, price and value were important as they shopped. Batteries were purchased for devices such as garage door openers, smoke alarms, toothbrushes, electronic games and children’s toys. At any given time, there was a significant number of batteries being used in a wide variety of devices. For the most part, the majority of these devices were not considered to be high-drain. The techie segment represented approximately $75 million in sales. These were the power hungry individuals, typically between 15 and 30 years of age, early adopters of new technology and heavy users of high-drain electronics. Their average income was significantly lower — between $20,000 and $40,000 — however, they had higher disposable income because of the lack of dependents and, in most cases, lower expenses (e.g. no mortgage). They were more likely to live in urban areas and were either still in school or just starting their careers. They tended to be more impulsive in their purchasing and gravitated towards stores with unique product assortments. For these individuals, batteries were purchased for devices such as MP3 players, Palm Pilots, digital cameras and other electronic gadgets, most of which would be considered high-drain products. In comparison to families, techies would have fewer batteries on-the-go at any given time but would replace them more frequently. These two segments made up the large majority of battery users and were targeted frequently by major battery companies. Channels Household batteries were sold through wholesalers, distributors, professionals and OEMs, with the large majority going through traditional retail channels including grocery (e.g. Loblaw, Dominion), drug stores 1 All funds are in Canadian dollars unless otherwise indicated. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 3 9B06A036 (e.g. Shoppers Drug Mart, Katz Group), hardware retailers (e.g. Home Hardware), home and garden retailers (e.g. RONA, The Home Depot), mass merchandisers (e.g. Wal-Mart), and niche stores (e.g. Blacks, RadioShack/The Source). Mass merchandisers generated the largest volume of sales within the battery market, especially for the alkaline category (see Exhibit 2). Internet and direct-to-consumer sales had not proven to be valuable channel options. Traditional channels would react to the establishment of these channels by de-listing the products currently on their shelves. Because of the difference in offerings in each of the retail channels, different channel members tended to target different consumer segments. Grocery retailers and mass merchandisers tended to target families and, in particular, mothers. Mass merchandisers also focused on the price-sensitive consumer. Drug stores targeted seniors (typically 65 years and over), and tweens (15 to 25) as their consumers. Hardware and home-and-garden retailers typically focused on males aged 30 to 35 who make up the majority of do-it- yourselfers (DIYs). Finally, the niche retailers targeted the techies. The targets for each of these categories are not mutually exclusive, as a consumer may well shop across retailers. RAYOVAC Rayovac was the third largest consumer battery manufacturer and marketer in the world. The company sold batteries and flashlights for various household and industrial uses, in addition to being the largest seller of hearing aid batteries in the world. Rayovac’s battery product line-up included alkaline batteries, in all standard sizes, to compete in the highly saturated but lucrative household market. Rayovac products were available in over one million stores throughout North America, Europe, Asia Pacific, the Middle East, Africa, Latin America and Brazil (see Exhibit 3). The company began operations in 1906, but it did not introduce the Rayovac name until the 1930s. Its initial focus was on specialty batteries for use in devices such as its own patented vacuum tube hearing aids. The company grew through the continued development of state-of-the-art flashlights and non- traditional batteries, including extending the successful hearing aid battery line. It eventually entered the competitive household battery market through key acquisitions and by capitalizing on existing distributor and retailer relationships. This was long after Duracell and Energizer were well established within this market. Rayovac had made great strides over the past few years in an attempt to gain ground. Acquisitions were made to access international markets including Europe (Varta Battery Corporation acquired in 2002), China (Ningbo Baowang acquired in 2004), and Brazil (Microlite acquired in 2004). Globally, Rayovac held a 14 per cent market share, with a 20 per cent share of the Canadian market (see Exhibit 4). Similar to its competitors, Rayovac acquired other consumer brand companies to enhance its own ability to gain retail presence. In 2003, Rayovac bought Remington Products Inc., a company specializing in consumer shaving and grooming products (see Exhibit 5 for 2004 year-end product distribution and sales distribution summary, and see Exhibit 6 for financial statements.). In February of 2005, Rayovac Corporation acquired United Industries Corporation (a leading U.S. manufacturer of consumer lawn and garden care products and insect control products), Nu Gro Corporation (a leading Canadian manufacturer of lawn and garden care products), and Tetra Holdings Inc. (a leading supplier of fish and aquatics supplies), and formed Spectrum Brands Inc. This series of moves provided Rayovac with an extended brand portfolio, as well as access to a number of new retailers such as RONA, Home Depot and others where previously it had not been able to gain shelf space. The synergies gained did not necessarily favor one segment (alkalines, rechargeables, shavers, fertilizers, etc.) over another, but rather provided This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 4 9B06A036 negotiating strength for the bundle of Spectrum brands, resulting in greater ability to compete within its given markets. Within the battery market, Rayovac positioned itself as the “value brand,” compared to Duracell and Energizer, which were “premium brands.” In order to gain share in this market, Rayovac reduced its selling price per battery, even though its quality was on par with that of the market leaders. Since the leading brands had greater control over distribution channels, retailers and prices, Rayovac was forced to take a different approach to the market in order to establish its position. Rayovac targeted the value- conscious price-shoppers looking for high quality products at a lower price. Rayovac operated under a slightly different model than did the market leaders. The company manufactured a large portion of its battery lines, including alkaline, hearing aid and other specialty lines. Yet, Rayovac also outsourced production of its more complex product lines to international manufacturers with stronger capabilities in places such as Japan and China. With these third-party arrangements, Rayovac maintained the ownership of the tooling and moulds used by the producers. This outsourcing included a rechargeable battery line. Duracell and Energizer attempted to manufacture all of their products, and had as an objective to develop core competencies in manufacturing. Typically, they would not enter a market unless they had the manufacturing capabilities to do so. The only products they were outsourcing were their rechargeable lines. To this point, Rayovac had established itself as a player within the household market and continued to look for ways to steal market share from the leaders. The company continued to be involved in the large alkaline segment, but competing head-to-head had been only modestly successful. Rayovac was not a low cost producer. Its quality was equal to the existing products, and yet it lacked a presence within the marketplace. The company was looking for a new way to compete and grow. BOB FALCONI Bob Falconi completed the Ivey Executive Program at the Richard Ivey School of Business, London, Ontario, in 1989. He had been involved in the battery business for 27 years, working his first 16 with Duracell, where he became vice-president of sales. He left Duracell in 1995 for a new start-up battery company, Pure Energy Battery Corporation, which introduced a revolutionary new rechargeable alkaline battery system. Pure Energy became a key reason for the development of the rechargeable battery market in Canada, yet the company was ultimately unsuccessful in maintaining its presence in the market. Falconi left Pure Energy in 1999 to serve as the country manager for Rayovac Canada. THE COMPETITIVE LANDSCAPE The North American battery market was highly competitive, with manufacturers competing for limited retail shelf space and consumer acceptance. The main factors influencing retailers to choose one supplier over another included brand name recognition, perceived quality, price and performance. Secondary elements included product packaging, design innovation, creative marketing, and promotion and distribution strategies. With the growth of large retail chains across North America, the balance of power shifted away from manufacturers. Strong relationships with these retailers have become an essential element in competing for valuable shelf space. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 5 9B06A036 Duracell and Energizer continued to dominate the market due to their brand recognition, their relationships with distributors and retailers, and their established presence in the alkaline battery category. These two firms led this market for decades, partly owing to their ability to adapt to consumer needs and partly because they had merged with other consumer goods companies to develop their brand portfolios, thus gaining valuable negotiating power with retailers. For example, the Duracell battery brand was owned by the largest consumer products company in the world, Procter & Gamble (P&G), while the Energizer battery brand was owned by Energizer Holdings Inc., which also owned the Shick Razors brand. An additional benefit of these mergers was the efficiency that came from balancing out the sales cycle. The market for household batteries was highly seasonal, with the large majority of sales occurring during the months leading up to and following the Christmas holiday season. Merging with brands that had a different sales cycle allowed for more efficient use of the sales force and a steady revenue stream. Duracell The Duracell “Copper Top” brand was introduced in 1964 and marketed towards the mass consumer, yet its roots dated back to the 1920s, when it operated as the Mallory Battery Company building batteries for the Second World War efforts in the United States. The company later renamed itself after its own popular brand, and Duracell became a household name in the battery market, associated with high-performance alkaline batteries. Duracell had grown its operation, both organically and through acquisitions, to include sales and manufacturing facilities throughout North America, Europe, Asia, Australia, the United Kingdom and Russia. In 2003, for example, Duracell acquired the Nanpin Nanfu Battery Company, the market share leader in China, in order to gain entry into this market. In 1996, Duracell was acquired by The Gillette Company, a global leader in grooming products (shavers), and personal and oral care products (Oral-B, Braun, etc.). The Gillette family of products was sold in over 200 countries, holding leadership positions in many of the major markets. In early 2005, Gillette was acquired by P&G. P&G owned several “billion-dollar brands” including Pampers, Tide, IAMs pet food, Crest oral care products, Olay beauty products and Pringles snack foods. The company had brands in baby care, fabric care, feminine care, hair care, personal care, oral care, food and now battery categories. Being part of the P&G portfolio provided Duracell with a tremendous advantage over competitors when it came to maintaining strong relationships with retailers and distributors. The strength and size of P&G provided stability and numerous opportunities for growth for the Duracell brand. Overall, Duracell held a worldwide market share of 39 per cent, while in Canada it held a 35 per cent market share (see Exhibit 4). Energizer Energizer was formed in 1896 as the Eveready Battery Company, marketing the first battery designed for consumer use. The company created the first “electric hand torch” in 1899, the building block for the world’s first flashlight, and later was the first to introduce alkaline battery technology to the world in 1959. Like Duracell, the company was renamed after its own popular brand and since then has become one of the world’s larger manufacturers and marketers of batteries and flashlights. Energizer competed directly with Duracell in every major market around the globe. The “Energizer Bunny” had become as popular in the battery market as the Nike “Swoosh” had become in the sports arena. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 6 9B06A036 In 1986, Energizer was acquired by Ralston Purina, Co., leading the trend towards brand portfolio building within this market. Ralston later merged with Nestlé, adding further to the company’s strength. However, in 2000, Energizer was spun off from the company and became Energizer Holdings Inc. In 2003, Energizer Holdings acquired the Shick-Wilkinson Sword blade and razor business, building a brand portfolio similar to its major competitor. The Shick and Wilkinson Sword brands allowed the company to compete directly with Gillette/Duracell. Overall, Energizer held a worldwide and Canadian market share of 39 and 35 per cent respectively, equal to that of Duracell (see Exhibit 4). Within the North American battery industry, the overall market and financial position of Duracell and Energizer provided both companies with the resources necessary to compete through strong advertising, discounts, and promotional incentives to retailers and distribution channels. They were able to protect their market share positions and brand names. These two companies have been responsible for the overall direction of the battery industry for the past 50 years (see Exhibit 7 for selected financials for Duracell and Energizer). Other Competitors Many other firms had attempted to enter the battery business but had achieved little success. Well-known companies, such as Panasonic, Sony, Sanyo, and Kodak, failed to gain a significant share of the battery market despite their size, strength and brand recognition in other markets. Their ability to build strong retail distribution channels and relationships and brand recognition among consumers had been hindered, even though these companies made significant investments in the areas of technological research and manufacturing capacity. These firms, together with the private retail brands, held only eight per cent of the global market and 10 per cent of the Canadian market (see Exhibit 4). RECHARGEABLE BATTERIES The rechargeable battery market was a small and highly fragmented market. In 2004, it represented only five per cent of the North American battery market and 10 per cent of the Canadian market. There was no dominant market leader. These batteries were identical to one-time-use batteries in size and shape, and they fit into the same devices, yet they could be recharged and reused. North American consumers had been reluctant to purchase rechargeable batteries for several reasons: the upfront investment to purchase the charger; the higher cost per battery relative to alkaline units; the lack of convenience in having to charge batteries prior to initial use; the negative experiences consumers had with older rechargeable technologies; and the overall lack of consumer knowledge of the new technology and its benefits. Only those consumers utilizing high-drain digital cameras had really taken the step towards rechargeable batteries (see Exhibit 8). The lack of growth in this market was also attributable to the reluctance of the market leaders to promote this product line. Duracell and Energizer drove market trends, and they saw the potential of the rechargeables to ultimately cannibalize the one-time-use alkaline business. For every rechargeable battery sold, these companies would make approximately $2 in profit, yet they would lose sales of 200 to 500 one- time-use batteries that generated profits of approximately $0.50 each. The math was not difficult to figure out. In addition, the market leaders did not have core competencies in rechargeable battery manufacturing. All rechargeables sold in North America were supplied by manufacturers in Japan and China, such as This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 7 9B06A036 Panasonic, Sanyo and Sony. Good quality rechargeable batteries were available to any firm that was able to establish a relationship with any of these suppliers. Energizer offered a full line of rechargeables and chargers but backed the line with very little advertising, while Duracell offered rechargeables and chargers in AAA and AA sizes only. There was potential for growth in this segment. With the rising cost of regular one-time-use batteries, increasing consumer demand for greater performance and growing environmental concerns, alkaline battery technology could become outdated and obsolete. The new nickel metal hydride (NiMH) rechargeable technology performed very well in high-drain devices, lasting up to three times longer than standard alkalines. They were non-toxic, more environmentally friendly due to their ability to be recharged up to 500 times, and they provided cost savings for consumers in the long run. It was unlikely that rechargeables would ever completely replace one-time-use batteries, but the gap would narrow. Both one-time-use and rechargeable technologies would be improved upon over time. However, there were too many benefits for the rechargeable concept to become obsolete. Battery chargers had been designed to charge any type of rechargeable battery, and they came in various formats (e.g. chargers for use in cars or in standard home outlets), offering great flexibility to consumers. They were available in various sizes, ranging from the ability to charge two AAA batteries through to charging multiple batteries and battery sizes at the same time. The cost for chargers ranged from $10 to $150, depending on their capabilities and capacity (see Exhibit 9). The majority of rechargeable batteries were sold through niche retailers (e.g. electronic stores and photo/camera stores) where high-drain devices were typically sold. It was projected that these retailers would continue to account for the majority of rechargeable sales until the larger mass merchandisers began to pick up the product lines. In a growing market, mass merchants would never allow the business to go exclusively to the niche players. Rayovac Rechargeable Batteries In an attempt to gain market share, Rayovac introduced its “Renewal” alkaline rechargeable brand in 1993 with Michael Jordon as its spokesperson. Only moderate success was achieved with this release, but it provided Rayovac with an edge in terms of brand recognition in the rechargeable category. In 2005, Rayovac held a 20 per cent market share of the small but growing North American rechargeable battery market. Outside of North America, Rayovac was a leader in the rechargeable sector, with its rechargeable Rayovac and Varta brands dominating the European rechargeable market. The European market and consumers demonstrated different characteristics relative to their U.S. counterparts. Europeans tended to be faster adopters of new technologies. Europe had embraced a non-disposable, environmentally friendly perspective, as illustrated by their intense recycling initiatives. Goods in Europe were typically more expensive, and Europeans were not disposed to throwing things away. Americans, on the other hand, grew up on disposable products such as paper towels and diapers. Environmental concerns were viewed as less important, taking a back seat to convenience and cost. As a result, rechargeable batteries represented a greater portion of battery sales in the European market, where consumers understood the environmental and economic benefits of rechargeables. Americans had yet to see the value in the technology; as a result, this market remained relatively underdeveloped. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 8 9B06A036 Canadians, on the other hand, were more similar to Europeans in their attitudes towards environmental factors and cost concerns. In theory, the opportunity associated with rechargeable technology in Canada could be similar to that in Europe. However, since the Canadian market often mirrors that of the United States, Canadians have been slow to adopt the technology. This could have been an issue of lack of awareness. NiMH technology had improved performance over past generations of rechargeable batteries. There was actually a performance claim that could be made for the new products over existing alkaline brands, along with numerous other product benefits. The potential could be significant within Canada for a company willing to dedicate resources to developing exposure and awareness. THE OPPORTUNITY Given Rayovac’s current position within the battery market in North America, a new strategy was needed to gain ground on the market leaders. Rayovac needed a competitive advantage to continue to build its brand in the overall battery market. How could it compete in the larger alkaline battery segment? Could Rayovac use the recent introduction of NiMH rechargeable technology — and hence the rechargeable battery category — as a way to establish itself as a larger player? Could it then leverage this strength and brand awareness to gain share within the alkaline segment? In order to do this successfully, Falconi had many things to consider. Within Canada, the rechargeable category would represent approximately $40 million in annual sales at retail by year-end 2005. The Canadian market represented 20 per cent of North American sales. The Canadian rechargeable market was expected to grow to $100 million in annual sales at retail by 2010 (see Exhibit 10). If he decided to pursue the opportunity, Falconi needed to decide on how to target and position the rechargeable brand. Should he stick with a “value” position in the rechargeable market? A decision needed to be made regarding the story behind the brand in Canada. There were many attributes to promote, given the various benefits of rechargeables over traditional alkaline products, and certain target segments may value certain attributes over others. The message delivered to consumers would be critical to achieving growth within this market, given North American buying habits and consumers’ past experiences with rechargeable batteries. It would be essential, yet difficult, to develop a strong marketing plan that convinced consumers that this product had value. Ultimately, Falconi had to decide whether Rayovac should become a niche player or a volume player within the rechargeable market, and he had to decide on what would build the Rayovac brand. Given the current placement of batteries and the existing relationships between manufacturers and retailers, Falconi needed to decide on the best channels and retailers for the brand. He would also have to identify any obstacles that could hinder achieving ideal distribution. Niche stores accounted for the majority of sales of rechargeable batteries and would likely be more receptive to Rayovac pushing this category. These retailers typically supported higher priced niche brands and, as a result, Rayovac could obtain contribution margins of around 60 per cent of the retail price, compared to the average margin of 45 per cent. However, since niche retailers represented only a small portion of the battery market, the brand would experience lower nationwide distribution and ultimately lower volumes relative to targeting mass merchandisers. Falconi estimated that market share in the growing rechargeable market would remain at approximately 20 per cent if a niche strategy was chosen. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 9 9B06A036 Mass merchandisers on the other hand, were the more popular stores in the overall battery market. They had greater reach (e.g. one Wal-Mart flyer was sent to seven million customers across Canada) and a greater number of stores nationwide. As a result, the volume achieved through these retailers would be significantly higher. It was estimated that, with a volume strategy targeting mass merchandisers, Rayovac could grow its market share in rechargeable batteries to 45 per cent by 2010. However, the contribution margin would be lower, at approximately 40 per cent, due to the price discounts that these retailers seek in order to maintain their “low cost advantage” over competitors. Falconi wondered whether the mass merchandisers would be willing to potentially cannibalize their sales of alkaline batteries. To develop the rechargeable product line, advertising and promotion spend would need to be increased in order to gain the attention of consumers, educate them on the benefits and entice them to invest in the technology. Support of the retailers would also be required. There would be a significant cost associated with such advertising and promotion, and that cost would vary depending on the strategy selected. With a niche strategy, advertising expense would be lower due to a more knowledgeable and dedicated staff within the retail stores. Advertising would initially be seven per cent of the estimated contribution generated (i.e. 7% × 60%) and decreasing to five per cent by 2010. With a volume strategy, the initial advertising expense would be 10 per cent of the estimated contribution, decreasing to six per cent by 2010. The increased expense was due to the larger number of retail players involved with this strategy and to the necessary promotional materials, as well as to the demand of larger mass merchandisers for the manufacturer to increase advertising support in order for them to promote this newer line. See Exhibit 11 for an advertising expense five-year projection. Risks Falconi was aware of the threat that the market leaders would react to this push into the rechargeable market, although he thought it would be muted. These competitors had been reluctant to cannibalize their own products. They had far too much to risk with their current operations to be concerned about this smaller segment. Rayovac also needed to consider its current sourcing arrangements with international partners and the risks inherent in this arrangement. By building the rechargeable market within North America through sourcing products from Japanese and Chinese manufacturers such as Panasonic, Sanyo and Sony, Rayovac could be laying the groundwork for one of these firms to step in and take over. These companies had attempted to gain access to the North American battery market in the past but had struggled to compete against the market leaders. Since those leaders did not dominate the rechargeable segment, the Asian manufacturers might try to capitalize on this opportunity, especially as it began to grow. Rayovac did not want to be in the business of building a business for someone else. The company needed to find ways to mitigate this risk through its arrangements, as it was unlikely that it would invest in rechargeable manufacturing that would match the quality of these suppliers. Rayovac Goals/Objectives For Rayovac to dedicate resources to rechargeables, the company needed to be sure that it could obtain a significant portion of the segment within the first few years and generate increased overall sales. The Canadian operation of Spectrum was self sufficient and autonomous in many aspects. Pricing and marketing were locally driven. The U.S. office had influence over the Canadian operation when it came to some of the relationships with larger retail chains (namely those with U.S. headquarters, as in the case of This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 10 9B06A036 Wal-Mart). Despite the fact that Canada had control over its product lines and offerings, it tried to maintain a close link to the product offerings of the United States when it made sense to do so. The object was to capitalize on U.S. production volumes, promotions and branding strategies behind the overall Rayovac name. A major budgetary consideration was that Rayovac Canada needed to maintain a positive return on investment at all times. The Canadian operation was highly leveraged and lacked the luxury of investing in projects with negative short-run returns. The cash flow to support this was simply not available. If Rayovac Canada were to proceed with this rechargeable opportunity, the ultimate goal would be to become the market leader in the rechargeable battery segment in Canada by moving quickly and taking a proactive stance towards building this market in North America. DECISION TIME Falconi was left questioning whether or not he should proceed and, if he did, what strategy he should pursue. He wondered whether there actually was a lucrative market for this product line and whether the rechargeable category could build the brand name in the industry to boost sales in all categories. He also questioned whether Rayovac could afford not to pursue the rechargeable segment, given the overall competitive nature of this market. Falconi knew that there might be some board members who would suggest keeping the company resources focused on its one-time-use alkaline product line and simply generate cash while searching for ways to create a competitive advantage in the alkaline segment. He wondered whether he could justify the rechargeable strategy as a way to grow the overall business. If Rayovac was to launch this strategy for 2006, a decision would need to be made quickly on how to proceed. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 11 9B06A036 Exhibit 1 STANDARD BATTERY SIZES AAA AA C D 9-VOLT Exhibit 2 BREAKDOWN OF BATTERY MARKET SALES BY CHANNEL Share by Channel- All Channels - Total Canada Units % of Market Mass Merchandisers 34 Traditional Grocery 23 Membership Clubs 15 Hardware/Automotive 10 Drug 10 All Others 6 Source: Spectrum Brands Canada Inc. Exhibit 3 RAYOVAC GEOGRAPHIC SALES DISTRIBUTION 44% North America Europe/Rest of 10% World Latin America 46% Source: 2004 Rayovac Corporation Annual Report. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 12 9B06A036 Exhibit 4 GLOBAL AND CANADIAN MARKET SHARE DATA 8% 10% 14% 35% Duracell Duracell 20% 39% Energizer Energizer Rayovac Rayovac Other Other 39% 35% Source: 2004 Rayovac Corporation Market Summary. Exhibit 5 PERCENTAGE OF RAYOVAC NET SALES (GLOBAL) 2004 2003 2002 General Batteries 49% 65% 68% Rechargeable batteries, chargers and other 11% 16% 9% Hearing aid batteries 7% 9% 12% Lighting products 6% 10% 11% Electric shaving and grooming 19% - - Personal Care 8% - - 2004 Year End 19% Shaving and Grooming Personal Care 8% Lighting 6% Batteries 67% Source: 2004 Rayovac Corporation Annual Report. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 13 9B06A036 Exhibit 6 RAYOVAC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended September 30, 2004, 2003, 2002 (US$ 000s) 2004 2003 2002 Net Sales $ 1,417,186 $ 922,122 $ 572,736 Cost of goods sold $ 811,894 $ 549,514 $ 334,147 Restructuring and related charges $ (781) $ 21,065 $ 1,210 Gross Profit $ 606,073 $ 351,543 $ 237,379 Operating Expenses: Selling $ 293,118 $ 185,175 $ 104,374 General and Administration $ 121,319 $ 80,875 $ 56,900 Research and Development $ 23,192 $ 14,364 $ 13,084 Restructuring and related charges $ 12,224 $ 11,487 $ - $ 449,853 $ 291,901 $ 174,358 Operating Income $ 156,220 $ 59,642 $ 63,021 Interest expense $ 65,702 $ 37,182 $ 16,048 Non-Operating expense $ - $ 3,072 $ - Other expense (income), net $ 64 $ (3,647) $ 1,290 Minority interest $ (78) $ - $ - Income from continuing operations before taxes $ 90,532 $ 23,035 $ 45,683 Income tax expense $ 34,372 $ 7,553 $ 16,446 Income from continuing operations $ 56,160 $ 15,482 $ 29,237 Loss from discontinued operations, net of tax benefits $ 380 $ - $ - Net Income $ 55,780 $ 15,482 $ 29,237 Source: 2004 Rayovac Corporation Annual Report. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 14 9B06A036 Exhibit 6 (continued) RAYOVAC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Years ended September 30, 2004, 2003 (US$ 000s) Assets 2004 2003 Current Assets: Cash and cash equivalents $ 15,789 $ 107,774 Receivables: Trade A/R, net of allowances $ 269,977 $ 255,205 Other $ 19,655 $ 15,376 Inventories $ 264,726 $ 219,254 Deferred income taxes $ 19,233 $ 18,501 Prepaid expenses and other $ 61,132 $ 50,705 Total Current Assets $ 650,512 $ 666,815 Property, plant and equipment, net $ 182,396 $ 150,609 Deferred charges and other $ 35,079 $ 40,160 Goodwill $ 320,577 $ 398,380 Intangible assets, net $ 422,106 $ 252,870 Deferred income taxes $ - $ 8,342 Debt issuance costs $ 25,299 $ 28,111 Total Assets $ 1,635,969 $1,545,287 Liabilities and Shareholders’ Equity Current Liabilities: Current maturities of LT debt $ 23,895 $ 72,852 Accounts payable $ 228,052 $ 172,632 Accrued liabilities: Wages and benefits $ 40,138 $ 36,580 Income taxes payable $ 21,672 $ 20,569 Restructuring and related charges $ 8,505 $ 5,750 Accrued interest $ 16,302 $ 4,894 Other $ 60,094 $ 83,737 Total Current Liabilities $ 398,658 $ 397,014 Long-term debt, net of current maturities $ 806,002 $ 870,540 Employee benefit obligations, net of current portion $ 69,246 $ 63,044 Deferred income taxes $ 7,272 $ - Other $ 37,368 $ 12,687 Total Liabilities $ 1,318,546 $1,343,285 Minority interest in equity of consolidated subsidiary $ 1,379 $ - Shareholders' equity: Common Stock $ 642 $ 620 Additional paid-in capital $ 224,962 $ 185,561 Retained earnings $ 220,483 $ 164,703 Accumulated other comprehensive income (loss) $ 10,621 $ (12,457) Notes receivable from officers/shareholders $ (3,605) $ (3,605) $ 453,103 $ 334,822 Less treasury stock, at cost $ (130,070) $ (130,070) Less unearned restricted stock compensation $ (6,989) $ (2,750) Total Shareholders' equity $ 316,044 $ 202,002 Total Liabilities and Shareholders' equity $ 1,635,969 $1,545,287 Source: 2004 Rayovac Corporation Annual Report. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 15 9B06A036 Exhibit 7 SELECTED FINANCIALS (US) 2004 Information Duracell GROWTH Energizer GROWTH Battery Sales: Global $2.23 billion 5% $1.94 billion 6% North America $1.3 billion $1.12 billion Profit: Global $490 million 4% $446 million 7% North America $325 million $298 million* Overall Parent Company: 26% Sales $51.4 billion 35% $2.81 billion Profit $6.2 billion $267 million *Segment Profit – before shared expenses between brands. Source: Spectrum Brands Canada Inc. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 16 9B06A036 Exhibit 8 BATTERY MARKET PRICE COMPARISON Canadian Alkaline Battery Category* Rayovac Energizer Energizer E2 Duracell Duracell Ultra AA (4pac) $ 3.28 $ 4.24 $ 5.64 $ 4.24 $ 5.69 AAA (4pac) $ 6.17 $ 7.57 $ 7.86 $ 7.57 $ 9.76 C (2pac) $ 3.28 $ 3.78 $ 5.64 $ 4.24 $ 5.98 D (2pac) $ 3.28 $ 4.24 $ 5.64 $ 4.24 $ 5.98 9Volt (2pac) $ 6.17 $ 7.57 $ 5.64 $ 7.57 $ 8.97 *Prices listed are retail prices at Wal-Mart stores as of April 2004 in Canadian dollars. Source: Retail Store Check. Canadian Rechargeable Battery Category* Rayovac Pure Duracell Renewal Rayovac NiMh Energy Energizer NiMh Dynacharge Radio Radio Radio Home Home Shack Shack Zellers Shack Depot Best Buy Depot Best Buy AA (4pac) $ 8.99 $26.99 $15.99 $ 7.99 $17.98 $29.99 $11.93 $24.99 AAA (2pac) ** $14.99 $11.99 $12.98 $14.99 $ 7.95 $14.99 AAA (4pac) $ 8.99 $ 9.99 C (2pac) $ 9.99 $13.99 $12.98 $14.99 $ 9.94 D (2pac) $ 9.99 $13.99 $12.98 $14.99 $ 9.48 Chargers: Standard PS1 Model $ 19.99 $19.99 $19.99 $ 19.99 $29.99 $29.99 *Prices listed are retail prices at the specified retail outlets, as of April 2004 in Canadian dollars. **No price means that the brand is not sold in that package size at that retailer. Source: Retail Store Check. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 17 9B06A036 Exhibit 9 RECHARGEABLE BATTERY CHARGER EXAMPLES Compact Charger Car/Home Charger Universal (all sizes) Charger 2-Battery 15-minute 4-Battery 15-minute Charger Charger Source: Public Information available in retail stores. This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.  For the exclusive use of S. Economy, 2025. Page 18 9B06A036 Exhibit 10 Canadian Rechargeable Battery Market Sales Projections 2005 2006 2007 2008 2009 2010 Annual Sales (Millions) $ 40 $ 45 $ 55 $ 70 $ 85 $ 100 Source: Rayovac Canada Estimates Rayovac Canada Rechargeable Battery Market Share Projections 2006 2007 2008 2009 2010 "Volume" Strategy 25% 30% 35% 40% 45% "Niche" Strategy 20% 20% 20% 20% 20% Source: Rayovac Canada Estimates Exhibit 11 Advertising & Promotional Projections (% of Contribution from Retail) 2006 2007 2008 2009 2010 "Volume" Strategy 10% 9% 7.5% 6% 6% "Niche" Strategy 7% 7% 6% 6% 5% Source: Rayovac Canada Estimates This document is authorized for use only by Sara Economy in MBA 670 Spr 25 taught by DMITRI MARKOVITCH, University of Maine from Jan 2025 to Jun 2025.