Picture this: a company invents a new product, creates an entire industry, becomes a household name — and then watches, helpless, as a smaller upstart beats them at their own game by charging a higher price for the same thing.
That was what happened to Formica Corporation over the course of the 70s.
Old Formica ad (source).
Formica made the world’s first decorative laminate in 1927. A laminate is a material that manufacturers stick onto their kitchen countertops, cabinets, and doors to mimic the appearance of marble, timber, and other, more expensive materials — you might not know it, but it’s likely that your home contains a large number of these surfaces. Laminates are essentially thin sheets of paper and resin pressed together under intense pressure and heat, and serve as durable, cheap alternatives to make furniture look attractive. As the original inventor of laminates, Formica — unsurprisingly — dominated the market.
In its early years, the dominance of the company was so complete that the term “Formica” came to mean ‘decorative laminate’, in the same way that Xerox was to photocopies, and Polaroid came to mean instant photography. The company’s products were used in residential and commercial settings, not just in the United States but in countries across the globe. By 1989, the 77-year-old company brought in revenues of $410 million and held the title of being the world's largest producer of consumer laminates. But just when Formica’s position in the market seemed invincible, it was edged out of the top spot by a smaller, relatively unknown company called Ralph Wilson Plastics.
Ralph Wilson Plastics, later renamed as Wilsonart, was founded in 1956 by Mr. Ralph Wilson, Sr. in Temple, Texas. Wilsonart was established on the bold commitment to deliver “laminate anywhere in the United States in ten days or less.” It’s not clear today if their strategy was designed with consideration for the massive incumbent, or if the commitment to speed was just the consequence of Mr Wilson’s obsession with service. RWP’s target was time-sensitive customers who did not mind paying a higher price if the product could be delivered in a relatively short time. This ambitious goal laid the groundwork for a delivery process of unparalleled efficiency. The company also offered a wide variety of laminate designs, which, in tandem with the promise of short delivery times, turned out to be a winning strategy.
Before we get into how RWP unseated a giant, we must understand the types of customers that operated in the niche decorative laminate market. There are three customer profiles interested in buying decorative laminates: residential cabinet makers, commercial specification customers, and OEM direct purchase factories.
A residential cabinet maker creates custom cabinets to serve their local community, and usually operates from a single workshop. Since they focus on relatively smaller scale projects and have limited capital, they rely on distributors to maintain stocks of different types of laminates which they can purchase on demand at reasonable prices. Residential cabinet makers do not require the cheapest possible price because the cost of the decorative laminates usually amounts to less than a third of the total cost of their project, which includes bigger expenses like wood, hardware and labour. This type of customer can afford to pay higher prices for laminates in exchange for faster delivery times, and in order to effectively meet their requirements, distributors must prioritise product availability.
The second type of customers are the commercial specification customers. These individuals use decorative laminates to beautify or increase the decorative appeal of their projects. For example, they might be an architect or an interior designer with the objective of enhancing the look of a kitchen countertop by using a laminate with a marble finish, without actually using marble (which — in addition to being considerably more expensive — would also demand more labour). For such customers, the availability of a wide range of laminates and quick delivery times are both more crucial considerations than the price. This is because the cost of decorative laminates represents only a minor fraction of the overall project expenses.
Old Formica ad (source)
The last type of customers are the OEM direct purchase factory. This segment includes huge factories who use laminates to mass produce a variety of different products, like cabinets, mobile homes, tables, and display cases. This type of customer is like a local cabinet maker operating at a much larger scale, manufacturing hundreds of products using laminates every single day. Since they produce so many products at once, their aim is to lower production costs as much as possible. OEMs purchase directly from distributors and prioritise limited options of decorative laminate designs in order to maximise purchase volume from suppliers at attractive prices. In order to satisfy these customers, even competitive pricing isn’t enough — it is necessary to offer the cheapest price.
All three types of customers had different expectations and priorities. Formica, being the large incumbent, captured the price-sensitive, OEM direct purchase factory customers. On the other hand, RWP capitalised on the first two customer profiles: those who were willing to pay a premium for access to a comprehensive inventory of laminate designs, and those who valued short delivery times.
When it came to the residential cabinet makers, RWP’s main competitive advantage was short delivery times. RWP maintained a robust inventory of popular SKUs at their regional distribution centres. This enabled them to fulfil many customer orders within just 24 hours. If and when an order for less popular items are placed by a customer, RWP’s mills are designed to process and deliver the order within 10 days. If there was any problem in meeting this timeline, RWP has procedures in place to inform customers of potential delays. This transparency helped RWP build a reputation of reliability with their customers. RWP's responsiveness also enabled distributors who serve residential cabinet makers to meet customer demands quickly, typically within 10 days. By contrast, distributors for RWP's competitors often required around 25-30 days to fulfil the same kind of orders.
For commercial specification customers, though, the variety of product was just as important as short delivery times. It is easy to make a small range of products and deliver them quickly. It is not so easy to make a large range of products — some of which might not be in ready stock — and deliver all of them with the same speed.
The problem is that of production: different resins take different amounts of time to cure, which makes it difficult to schedule manufacturing presses. This inevitably results in delays. RWP solved this by working with their resin supplier to formulate resins that took the same amount of time to cure. These new resins were more expensive than the original ones, but due to their standardised cure times, would ensure that production was level across much of the product range. Further, since commercial specification customers were not very price sensitive, RWP could pass on the cost increases to the customer with no loss of business.
RWP’s choice to focus on residential cabinetmakers and commercial specification buyers was important because they represented a more profitable customer base than the OEMs. Both customer types valued speed over price. In contrast, Formica’s sales were heavily skewed towards the price sensitive OEM direct purchase factory customers, resulting in significantly lower profits for the company.
While the customer mix explains the demand side of RWP’s business, the other key to their success was their distributors. RWP’s signature 10 day delivery promise was highly appealing to laminate distributors. (Often, this delivery was one day, as RWP maintained a network of 15 regional warehouses to service distributors). Because RWP was so reliable, their delivery promise enabled distributors to maintain lower inventory levels, which in turn reduced the amount of cash they tied up in stock.
Distributors could thus allocate their financial resources more efficiently: they could avoid overstocking inventory, reducing the risk of holding unsold goods. More importantly, they skipped the need for extensive warehousing. These efficiencies directly translated into better cash flow for the distributors, making RWP a highly attractive supplier despite the higher prices for its products. One highly ironic feature of RWP’s strategy was that its distributors would often pass such cost savings on to its end customers, despite the higher price for RWP’s products.
For much of the 70s and through to the 80s, Formica did not respond to RWP’s threat. In order to draw customers away from RWP, a prospective competitor would have to sell the same laminates for a much lower price. However, due to the difference in inventory turns, substantial price cuts would be required to make this possible. Such price cuts were not affordable to any of their competitors. The only other option to beat RWP was to increase their response times, which was an option if and only if RWP allowed it to be.
They did no such thing, of course.
Sources
Competing Against Time: How Time-Based Competition is Reshaping Global Markets, by George Stalk, Jr and Thomas M. Hout
https://www.nytimes.com/1990/08/12/business/formica-when-a-household-name-becomes-an-also-ran.html
https://www.wilsonartengineeredsurfaces.com/wilsonart-international-history