Case 2: Kwik Lube
YEAR 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981
AVERAGE TOTAL SALES (‘000) 19 22 25 24 26 33 35 39 44 47 52
QUESTION 1 Using the data in Table 1, compute the loss for Kwik Lube stations during the last two years using regression. Relationship between Kwik Lube sales (Y), average industry sales (X), and year (T) (T = corresponding to 1972) is shown in the table below. The X and Y are in thousands of dollars. One could try a multiple regression analysis but the correlation of Y with just X is 0.998, leading to use the simple linear regression equation Y= 2.99X + 1.42.
T 1 2 3 4 5 6 7 8
X 22,000 25,000 24,000 26,000 33,000 35,000 39,000 44,000
Y 68,000 75,000 75,000 78,000 99,000 104,000 120,000 133,000
The year 1971 was excluded since the Kwik Lube revenues were not for an entire year. 1979 with T = 8 was the year of Kwik Lube operation without any competition from Speedy Lube. The forecasted sales for 1980 would be estimated using the average industry sales of $ 47,000 for X: Y = 2.99 (47) + 1.42 = 141.95 and, The forecasted sales for 1981 would use the industry sales of $ 52,000: Y = 2.99 (52) + 1.42 = 156.90
The estimated lost sales in the difference between the forecasted and actual sales: ($141,950 + 156,900) – ($111,000 + $111,000) = $76,850 A 95% prediction interval for 1980 is 141.95 ± 5.20 and for 1981 is 156.90 ± 5.80. Thus, despite the danger of extrapolation, the results of regression, the results of a regression outside the range of the data, one can be reasonably certain that the lost sales were at least $65,850. QUESTION 2 Was it worth $2,000 to perform the market research?
QUESTION 3 Estimate the total loss in gross sales for Dick's Kwik Lube stations over the two-year period. How accurate can the results claim to be? Without the questionnaire study, the best estimate of lost sales would be from the regression of Y on T: Y= 9.38T + 51.8 with a fairly lower correlation. The estimated lost sales would be $59,820, about $20,000 less than the estimate based on average industry sakes. Even recovering as little as 10 percent of this difference would pay for the study. QUESTION 4 What other factors might be introduced into the lawsuit? The lawsuit filed by Dick Johnson should discuss two basic areas which will build a sound case for damages being awarded in his favor. The first factor involves the concept behind setting up a franchise. Franchises are designed so that independent owners can start a business with a wellknown name. this, coupled with proven strategies and expertise given to a franchise purchaser by the franchise seller, reduces the usually high probability of a new business going under in its infancy stage. The franchise fee is the cost paid for the reduced risk of a new enterprise. Naturally, the franchising firm will protect itself against competition in a franchise contract. A franchise holder who violates such clauses has, in essence, gained free proven strategies and has capitalized on them. Thus, the franchising firm has been damaged by the fact that a competitor has gained information without paying for it. This is the case with Kwik Lube. A franchise owner, T. A. Williams has benefited from Johnson’s expertise more than is justified by the monetary gains earned from franchise fees. This is not simply an economic issue for such a situation was thought of before by Johnson. He had required protecting himself with a noncompetition clause in his franchised contract. Thus, Williams is legally in the wrong for his breach of contract. What this first area of discussion in the lawsuit does is to determine that day in fact has been damaged done to the plantiff, Johnson. The second area to be discussed in the lawsuit should deal with how those damages can be mitigated by the defendant, William.
Usually, in lawsuits, there is a problem with measuring the damage done. Johnson, however, can measure his lose by forecasting sales and then comparing actual sales to predicted sales. In summary, the lawsuit should discuss how damage was incurred to plantiff, Johnson, and how said damage should or could be mitigated. Well-presented lawsuit or petition to the court should result in a favorable judgment for the owner of Kwik Lube.