Sorzal Corporation

February 4, 2006

Sorzal Distributors Case

Introduction

Management of Sorzal Distributors is faced with the difficult decision of signing a purchase contract with a mass-merchandise department store chain at 10 percent below existing Sorzal's existing prices. Sorzal Distributors has established itself as one of the more reputable dealers in authentic southwestern jewelry and pottery. The company is positioned as a distributor of high-quality and authentic South American and African artifacts and replicas at reasonable prices. Its products are distributed exclusively through specialty dealers (including interior designers and decorators), firm-sponsored showings, and a few department stores. Sorzal's gross sales are about $25 million and have been growing at relatively constant rate of 20% per year but its gross margin has slipped in recent years due to aggressive competitions at both the distribution and retail levels resulting in erosion of its bargaining position in the market. This is due to the problem of limited supply, Sorzal's larger specialty and exclusive department stores customers sending their own buyers to deal directly with some of its suppliers, and the entry into the market by amateurs or fly-by-night competitors. Additionally, the buying public in the artifacts and replicas are not knowledgeable enough to distinguish between real artifacts, replicas, and junk. Due to this, the other competitors, especially the amateurs, are dumping a bunch of unauthentic junk on the public at exorbitant prices; thus, giving the industry a bad name.

Another issue is that Sorzal would have to redefine its business of distributing its products via specialty dealers, firm-sponsored showings, and a few department stores if it accepts the purchase proposal from the mass-merchandiser. This is likely to impact on the firm's hard-won reputation and its future profitability. Furthermore, accepting the mass-merchandiser would affect its relationship with existing distributors. This can force the company to reduce overall margin to all distributors, which is likely to reduce its profitability.

Options/ Alternatives

1. Sign or accept the purchase contract with the mass-merchandise department store chain.

This will affect its relationship with existing distributors, and its reputation as distributor of authentic products could be undermined. This is due to the fact that product quality at these mass-merchandise stores are mixed coupled with the inability of buying public not able to distinguish between authentic, replica and junk products. Existing distributors are likely to also ask for price reduction. They may also undermine Sorzal since relationship could be strained.