UVA-M-0747R

STOGUARD: SPRAY-ON HOUSE WRAPS1

Introduction

In February 2003, David Boivin became CEO of Sto Corp. after spending more than 10 years in the insulation industry. Boivin believed that there was a lot of potential for a recent innovation from Sto Corp.—a product called StoGuard. The product was outside of the traditional exterior insulation and finish systems (EIFS) applications Sto Corp. had focused on so far. This was a shot in the arm for the StoGuard team, which comprised Sto Corp. Director Alec Minne and Product Manager Lisa Petsko. Attention from Boivin implied a significant increase in resources for marketing StoGuard in 2007, and was a realization of persistent efforts by the StoGuard team to convince top management that StoGuard had potential as an independent product.

StoGuard was a breathable house wrap that could be sprayed (or hand-rolled with a paint roller) on to a building’s wall structure. The primary function of a house wrap was to provide a moisture and air barrier to the wall structure, while simultaneously allowing vapor to pass outside. “StoGuard could be considered as a GORE-TEX for houses” Minne explained. A plastic-based material, such as DuPont Tyvek, which was wrapped around a building’s wall structure, was the dominant material in the house wrap market at the time.

Despite evidence from company tests proving that StoGuard was superior to other house wraps, building contractors and other customers had not shown the expected level of interest in adopting this product. About 15 million square feet were sold until December 2006, since the product’s launch six years earlier. This was very small compared with the total sales in the house wrap market of approximately 2.3 billion square feet per year.2 The excitement from Boivin’s attention was therefore tempered by the challenge of developing an effective marketing plan for StoGuard. The problem was not a lack of data. A plethora of information was collected over the years from focus groups and customer surveys, and market-research consultants provided

1 This case is currently restricted to use at Darden. Please return your case copy after the class discussion. 2 Estimate obtained by The Kiemle Company by combining estimates from the NAHB builder practices survey, the Pennsylvannia Housing Research Center, and the Freedonia Group.

This case was prepared by Associate Professor Rajkumar Venkatesan with the assistance of Professor Paul W. Farris. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2007 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. -2- UVA-M-0747R multiple estimations of market size. Sifting through this information, Petsko needed to devise creative ways of leveraging the $350,000 allocated for marketing StoGuard. Her earlier conversations with Minne revealed that he favored developing a marketing plan that used the current distribution system and effectively established credibility among builders with the limited funding available. Future budget increases for marketing StoGuard depended on the success of the current plan.

Company History

Sto North America was a subsidiary of the German construction and building materials supplier, Sto AG. Since going public in 1994 on the Frankfurt and Stuttgart stock exchanges, Sto AG had rapidly expanded its products, systems, and services to more than 19 countries. In 2005, Sto AG’s international sales exceeded its sales in Germany for the first time. Select financials for Sto AG are provided in Exhibit 1.

Sto’s products were primarily targeted at professional users, such as craftsmen, architects, and development companies. The Sto Group attached key importance to research and development. StoCoat Lotusan was one such product generated by the research and development at Sto. The Lotusan exterior coating possessed a highly water-repellent surface similar to that of a lotus leaf. Its microstructure was modeled on the lotus plant to minimize contact area for water and dirt. As a result, dirt simply ran off with the water that fell on the façade, leading to walls that looked dry and attractive for several years. Lotusan was included in Architectural Record magazine’s 2005 “Editor’s Picks,” a list of the year’s 13 most outstanding building-product introductions. Such innovations led the Sto Group to be listed among the 100 most innovative companies in Germany in 2006.

Sto North America was based in Atlanta, Georgia, and had plants in three locations: Atlanta, Georgia; Glendale, Arizona; and Rutland, Vermont. Its products were sold through 170 Sto-authorized distributors across North America and Canada. These distributors were supported by 30 sales representatives.

Product Line Description

Sto North America manufactured specialty coatings, exterior insulated wall claddings (EIFS, or synthetic stucco), cement hard-coat stucco, concrete repair, and house wraps.

Coatings

A wall coating formed the outermost layer of a building and was meant to provide protection, decoration, and texture. In addition to providing the desired texture and look, the external coatings were also meant to span small gaps or cracks and provide superior weatherproofing. In a wall structure, the wall coatings were applied on the surface of wall -3- UVA-M-0747R claddings. The latest innovation in this product line was StoCoat Lotusan, a patented external wall coating that had a self-cleaning effect. This resisted the growth of mold, mildew, and algae in the wall façade, because dirt particles were washed away from the wall during rain.

Cement stucco

Some wall structures were covered with moisture barriers and then a stucco mixture. Traditional stucco was a cement mixture used for siding, usually on Spanish-style homes. Traditional hard-coat stucco essentially covered a building (or home) with a layer of cement plastic, and provided weatherproofing. It was attached to a building using galvanized wire mesh and metal flashings (devices that channeled water to the exterior of a wall). The stucco façade provided a primary barrier, but a secondary barrier directed any water that got behind the façade to the exterior. This created a dual barrier to wind, rain, snow, and ice. Sto provided traditional stucco under the brand name of Sto Powerwall. Sto Powerwall systems were positioned as offering a one-stop solution that combined both regional and national products for complete- system quality control and cost effectiveness.3 Sto accomplished that by producing Sto Powerwall cement plaster, in regional production facilities with local raw materials that were then sealed with an exterior finish or coating. The Powerwall system was expected to provide good crack bridging, fewer pin holes, and to be lightweight. It could be applied at half the thickness of conventional stucco. As a lighter-weight cladding than field-mixed stucco, Sto Powerwall stucco necessitated fewer and less-expensive structural requirements—which saved time and was less costly.

Exterior insulated wall claddings

Many homes built after the 1950s used a variety of synthetic materials that resembled stucco. One type of synthetic stucco was EIFS. Developed in Europe in the 1950s, EIFS was introduced in the United States in the 1980s. The system was first used on commercial buildings, and later on homes. According to the EIFS industry members’ association (EIMA), by 2002, EIFS accounted for nearly 30% of the U.S. commercial exterior-wall market. Commercial customers included national retailers, restaurants, and hotels.

A typical EIFS consisted of a layer of insulation and a multi-layer, reinforced coating system. The insulation layer of an EIFS was attached to the wall with adhesives or mechanical anchors. The insulation was in the form of preformed sheets of foam plastic, such as expanded polystyrene, Styrofoam, and similar materials. The reinforced coating system consisted of an adhesive, into which was embedded a glass fiber reinforcing mesh, and an attractive, colored, textured, finish coating. In appearance, EIFS resembled portland cement plaster (stucco) and concrete, but it could also be made to mimic many other common materials and architectural styles such as stone.

3 Stucco composition varied by each region in the United States depending on the weather conditions in that region. Different compositions provided optimal insulation in different climates. -4- UVA-M-0747R

EIFS was usually installed at the construction site by plasterers, but it could also be produced off-site, being made in the factory in the form of panels. EIFS panels had a metal subframe, and were complete, ready-to-install, wall units. Panels, used mostly for commercial building, were trucked to the site, lifted into place, and attached to the building’s frame.

While it had the appearance of stucco, EIFS did not have an open-air gap behind it to act as a water drainage point if water got through the outer layer. EIFS would not allow water to pass back through its coating in liquid form once moisture got behind the system. By contrast, traditional stucco was a porous material that permitted moisture to move both in and out of the wall cladding.

Therefore, EIFS needed to be correctly installed and sheathing of the home had to be properly detailed if it was to perform properly. Otherwise, moisture could get behind the systems and cause damage, just as it could with wood siding, brick, or any other exterior.

Sto was a leading manufacturer of EIFS claddings in the United States. Sto provided EIFS cladding under the Sto brand with three versions: Essence, Classic, and Premier. Sto Premier was priced the highest of the three versions, and came with a 10-year limited warranty, while Sto Essence was the least expensive and came with a 5-year warranty.

House wraps

Plastic house wrap, foam plastic sheathing, and spray-applied plastic foams were the various forms of house wrapping. They were placed just on the exterior surface of the wooden wall structure and underneath the claddings. These products reduced unwanted air and moisture infiltration by as much as 10% to 50%, which in turn reduced the amount of energy required to heat and cool a home. While highly variable because several factors determined the energy efficiency of a house, a fair estimate was that an average homeowner saved from $75 to $390 per year or between $2,300 and $11,700 over a 30-year mortgage period due to the energy savings made possible by these products.4 From an environmental perspective, the energy saved by the use of house wraps exceeded the energy used to make the product—in some cases, in less than two months after installation.

There was no single person responsible for the choice and application of house wraps in buildings. The choice of house wraps was made by one or more decision-makers involved in a building’s construction: the owner, builder or general contractor (in the case of a custom house), architect, distributor, and subcontractors (e.g., EIFS, painters, masons, drywall applicators, waterproofing). In large-scale residential-housing projects and for commercial buildings, the architect specified the type of house wrap. Most builders, however, were inclined to use a cheaper alternative than that specified by the architect.

Moisture control was the most misunderstood aspect of residential construction, for a number of reasons. First, there were so many factors that determined the effectiveness of

4 Multi-Housing News, July 2001, 18 (1). -5- UVA-M-0747R moisture-control products and installation techniques. This included not just climate, but local weather conditions; the interior and exterior wall products that builders used and how they were combined, installed, and altered after installation; and even the way homeowners used the house long after the builder was gone. Furthermore, the number of subcontractors involved made it nearly impossible to execute a coordinated strategy. For example, a drywall applicator could build the perfect wall; but it was only perfect until the plumber or the electrician punched holes in it for pipes and wires.

The science of moisture control was also in flux. Building scientists were not always in accord on the most effective products and techniques, and when new products came into the mix—for example, as house wrap replaced felt paper—they altered the performance of the construction assembly, which forced a shift in strategy. It was not a surprise that builders were unclear about what they should be doing. They could follow the rules in place when constructing the building, and then find out five years later that the rules were dead wrong, but still be liable for damages due to structural defects.

StoGuard

Development

The development of StoGuard was quite unusual to the extent that it was designed to address needs in the marketplace that were both real and perceived, relating to unwanted water intrusion into wall assemblies. During the mid 1990s, a local building inspector in coastal North Carolina responded to homeowners’ complaints of damage to their homes caused by water leaks. In his investigation, he noticed that nearly all of the homes that he was inspecting were clad with EIFS. This was due, in part, because a predominance of homes in the area were using this type of cladding at the time. The building inspector quickly developed the theory that water was leaking through the EIFS and was getting trapped between it and the wood sheathing beneath it. This trapped water, he opined, was causing the wood to rot, leading to damage of the homes. He theorized that, unlike other claddings, EIFS did not have a building paper or secondary form of weather protection behind it to allow water to drain from within the wall. It was later found, however, that all cladding types suffered the same damages for the same reasons.

A local attorney learned of the issue and began to contact some of the homeowners with the idea of suing the manufacturers of the EIFS for the damages. The attorney filed a class action suit on behalf of the homeowners. Numerous individual lawsuits also were filed throughout the state and then throughout the country. These individual lawsuits named the architect, builder, roofer, siding installer, window manufacturer, and others, claiming everything from breach of contract to negligence and fraud. Contractors pointed the finger at the product manufacturers. Product manufacturers pointed to errors in design and construction that allowed water to enter into areas that water was never intended to go. This created a flurry of litigation that lasted nearly 10 years.

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At this point, StoGuard was developed to address the concerns regarding EIFS. EIFS installers applied StoGuard over 100% of the wall surface area and within the window and door openings. But less than 10% of the wall surface area, regardless of cladding type, was affected by water intrusion due to leaks in windows, missing flashings, and improper terminations, and the water leak sources could be corrected without the use of StoGuard. But conventional wisdom and a desire to avoid future claims drove the notion that some form of secondary barrier was prudent in certain types of construction. There were also significant advantages to adhesive attachment (versus attachment with mechanical fasteners such as nails or screws) of EIFS. StoGuard allowed EIFS to be adhesively attached, yet provided for secondary protection and positive drainage of unwanted water at the interface between the substrate and the cladding. StoGuard was intended to provide building contractors with the peace of mind in knowing that they had taken a belt-and-suspenders approach to protecting the wall assembly from water intrusion. While it was developed as a solution for the EIFS concerns, Sto North America began marketing StoGuard as a stand-alone product by 2000.

StoGuard product system

Until 2006, Sto North America provided the StoGuard system as a combination of three products:

 Sto Gold Fill, a spray or trowel-applied joint treatment  StoGuard Mesh, an adhesive reinforcing mesh used in conjunction with Sto Gold Fill  Sto Gold Coat, a waterproof coating applied by spray, roller, or brush to concrete or to wall sheathing surfaces coated with Sto Gold Fill.

StoGuard was also sold as a bundled product with the Sto EIFS and Sto Powerwall external claddings systems. Those bundled products were branded as Sto EIFS NExT (New Exterior Technology) and Sto Powerwall NExT. Sto provided a 15-year warranty for the Premier version of Sto EIFS NExT, and a 10-year warranty for the Essence version, with an extended warranty as an additional option. However, both Sto Powerwall and Sto Powerwall NExT had a 10-year warranty. Exhibit 2 demonstrates how StoGuard and Sto EIFS were used over a wooden wall structure. The features and benefits of StoGuard, as illustrated in StoGuard marketing collateral, are provided in Table 1. Overall, for the consumer, StoGuard provided better waterproofing, no air gap, and no staple holes or seams. For the builder, StoGuard provided better protection, fewer repairs, a five-year warranty, did not require inspection (which is required for Tyvek by DuPont), was probably quicker because it required fewer steps. -7- UVA-M-0747R

Table 1. StoGuard features and benefits.

Feature Function Benefit

Minimizes air flow through the Reduces risk of condensation caused by air leaks wall; exceeds CCMC* through the wall construction; reduces energy costs by Air barrier requirements for an air-barrier reducing heating/cooling loads; increases occupant material comfort Waterproof Helps protect wall from moisture Offers building owners added security and peace of coating for intrusion, which causes damage to mind; minimizes risk of water damage to sheathing sheathing sheathing or behind the sheathing and associated repair or replacement costs Vapor Breathable; allows moisture vapor Moisture does not get trapped in the wall cavity Permeable to pass through No air leakage or moisture intrusion between the When applied to sheathing it sheathing and StoGuard; rigid and stable under air Structural becomes structural; no chance of pressure loads; does not tear or blow off the wall with tearing away from the sheathing wind No air leakage or moisture intrusion between the No laps or gaps between Sto Gold Seamless sheathing and StoGuard; no tears, holes, or mislapped Coat and the sheathing joints that can compromise performance in service Does not tear or lose its effectiveness with exposure to Durable Adhesively attached to sheathing weather during construction or while in service Resists UV Can be left uncovered for up to six Gives peace of mind if construction delays occur degradation months Liquid Can be spray- or roller-applied for Safe, non-toxic, saves time and money when installing formulation— easy installation the product; does not require highly skilled labor. water-based Enough flexibility to keep a Extra protection at seams where needed most; saves Flexible positive seal from water and air money on heating and cooling; security, peace of infiltration mind * Canadian Construction Materials Centre Source: Sto Corp.

But StoGuard was also perceived to be more expensive. And builders and contractors felt that there was a high chance of spraying StoGuard outside the wall assembly, onto nearby objects, including windows, construction equipment, and vehicles parked nearby. This phenomenon commonly referred to as “overspray” in the painting market was prominent in commercial buildings in cities. Internal company tests indicated that the total installation costs of StoGuard (with Sto Gold Fill and Sto Gold Mesh) was 15% higher than Tyvek. In 2007, Sto Gold was also available in spray form. Most contractors still used a brush or roller to roll on StoGuard on building walls for two reasons: First, there was less risk of overspray with rollers; and second, users had to invest in airless sprayers for spraying StoGuard. While painters already owned these sprayers, most building subcontractors, such as the EIFS contractors, did not own airless sprayers. While leasing options were available for airless sprayers, house wrap users generally did not invest in additional equipment required for effectively using house wraps. In fact, DuPont Tyvek was better when installed with “cat-fasteners,” which were used to attach the plastic-based house wraps to the wall structure. Not using these fasteners increased the chances -8- UVA-M-0747R of the house wrap tearing, especially under heavy winds. While DuPont sold these fasteners along with its Tyvek house wrap, most contractors did not purchase the fasteners from DuPont. They instead used either staple guns or house wrap tapes (which were cheaper, but less reliable than fasteners) when using Tyvek.

Sales

StoGuard sales, since its launch, are provided in Table 2. The regional breakdown of StoGuard sales is provided in Table 3. Sto Gold Fill was sold to distributors for $68.25 per unit, and Sto Gold Coat was sold to distributors for $87.50 per unit. A 5-gallon pail of StoGuard typically covered 500 square feet. A unit of StoGuard represented a 5-gallon pail that was sold by distributors to contractors for $100. Distributors were not willing to take less than a 30% margin on house wraps. StoGuard Mesh was sold in 180 sq. ft. A 9 × 150 sq. ft. roll of DuPont’s Tyvek house wrap was sold for about $161. So the per-square-foot difference in price between StoGuard and Tyvek was around $1, depending on the quality of installation. Tyvek was also available in 9 × 100 sq. ft., 10 × 150 sq. ft., and 6-ft rolls.

Table 2. StoGuard sales in North America.

StoGuard Sales ($1000s) Units 2000 535 8,000 2001 708 11,318 2002 1,036 16,209 2003 1,644 35,687 2004 2,521 57,361 2005 3,224 71,887 2006* 1,204 24,776 * Sales until June 2006

Table 3. Regional breakdown of StoGuard sales in U.S. dollars.

Region 2000 2001 2002 2003 2004 2005 2006* Northeast 195,412 320,063 355,952 664,911 1,006,254 1,285,849 905,025 Northwest 128,086 151,055 315,141 508,836 697,190 818,234 672,182 Southeast 83,104 88,638 205,663 255,845 472,833 622,398 517,252 Southwest 45,984 114,139 143,624 195,514 345,174 497,685 332,762 * Sales until June 2006

A 1,000 sq. ft. house would typically require two 5-gallon pails each of Sto Gold Coat and Sto Gold Fill. Most contractors and builders were able to accurately estimate the amount of Tyvek house wrap required for a particular house. They were, however, not able to accurately estimate the amount StoGuard required. Many prospects usually called a StoGuard salesperson for estimates. Once a 5-gallon pail was opened, StoGuard Gold Coat or Gold Fill could be reused -9- UVA-M-0747R within a year. So any StoGuard remaining after use in a project could be saved for use in another project.

Management was ready to change StoGuard prices because the product would sell at a loss if it were priced on par with Tyvek. The profit margin for StoGuard was between 48% and 52% since its launch. The market share of EIFS for Sto was around 20%, and Sto EIFS NExT had a share of around 17% of the EIFS for Sto’s market. The residential sector represented 35% of house wrap installations. Market share in the overall commercial and residential construction market was less than 1%. StoGuard installations were easier when used with Stucco and EIFS. As a result, Stucco and EIFS installers were influential in the adoption of StoGuard. In the residential market, StoGuard installations were higher among houses in the $500,000 to $1.5 million range.

Marketing media

Until 2007, all the marketing efforts for StoGuard were focused on the commercial- buildings market. The media budget allocations for StoGuard over four years are provided in Table 4. The marketing budget of Sto was still small compared with DuPont (for its house wrap under the Tyvek brand). The primary objective of StoGuard’s advertising, public relations (PR), and direct-mail campaigns were to build awareness and interest among architects and contractors for spray-on house wraps. Print advertising was primarily employed for StoGuard and only magazines that focused on architects and contractors were chosen for the advertising campaigns. Table 5 provides the various publication outlets that were used and the frequency of advertising in those outlets for 2006. A typical StoGuard print ad in 2006 is provided in Exhibit 3.

Table 4. Media budget allocation for StoGuard.

Budget 2003 2004 2005 2006 Amounts $50K $250K $250K $200K

Allocations Advertising 16% 64% 75% 58% Public relations (PR) 16% 6% 10% 8% Direct mail 43% 10% 0% 0% Research 16% 10% 9% 13% Miscellaneous 9% 10% 6% 21%

The total cost of the print advertisements listed in Table 5 was around $108,000. PR campaigns for StoGuard involved providing support for articles on spray-on house wraps in industry publications and journals. Exhibit 4 lists the various articles that had either directly featured StoGuard or had featured spray-on house wraps in general. While the PR campaigns were not directly controlled by Sto Corp., they nevertheless were very cost-effective.

Over time, marketing resources were moved from direct mail to advertising due to high costs and low response rates from direct mail. In addition to print advertising, and PR campaigns, -10- UVA-M-0747R

StoGuard was also featured in trade shows and Air Barrier Association of America (ABAA) workshops. A typical StoGuard trade show panel is provided in Exhibit 5. The returns from trade shows varied a lot depending on the cost and the attendance at the show. StoGuard had not employed a push strategy of providing promotions or incentives to the distributors to feature its product.

Table 5. StoGuard print advertising schedule for 2006.

Number of Publication Name Insertions Issues Ad Size Jan/Feb 07, Mar, May, Architectural Products magazine 4 Tab, 4-color Nov/Dec Architectural Record 4 Apr, Jun, Aug, Oct Front page, 4-color Architecture magazine 2 Jul, Nov, Front page, 4-color Building Design and Construction 3 Apr, Jul, Nov Front page, 4-color (BD&C) The Trowel magazine 3 Not available Front page, 4-color

Distribution

One of the main challenges for StoGuard was its limited distribution network. StoGuard was supplied primarily through specialty distributors that focused on the commercial market, such as drywall yards where EIFS was also distributed. The distributors had, in most cases, exclusive arrangements with Sto for distributing EIFS products. While Sto had considered home improvement stores such as Home Depot or Lowe’s for its paint products, the company did not sell StoGuard through this channel for two reasons: (1) the lower manufacturer margins in this channel; and (2) the greater appeal of this channel to do-it-yourselfers and not contractors, who were StoGuard’s preferred market. The specialty distributors did not provide any advice to customers on choosing house wraps, but rather concentrated on stocking a wide array of products within each category. Lumber yards were, in general, risk-averse, and willing to sell StoGuard once there were enough inquiries from potential buyers. They were not, however, willing to proactively carry the product and push it to store visitors. Lumber yards were the typical channel for house wraps to get to the builders and residential house wrap contractors.

StoGuard Fabric

StoGuard Fabric was developed in early 2007 as an add-on for StoGuard. It was manufactured in 4-inch or 6-inch non-woven cloth reinforcement that resembled fabric softener sheets. StoGuard Fabric was intended to be used with StoGuard (either Sto Gold Coat or Sto Emerald Coat) to treat joints, corners, and rough openings for installers who were not plastic- trowel users. With this system, StoGuard would first be applied at joints, corners, and rough openings using a roller or sprayer. StoGuard Fabric would then be placed on the wet StoGuard layer and any wrinkles in the fabric would immediately be made smooth. Then an additional coat of StoGuard would be applied to seal the fabric. Further details on this system are provided in Exhibit 6. StoGuard Fabric eliminated the need for Sto Gold Fill and Mesh, resulting in a -11- UVA-M-0747R simpler two-component system. StoGuard Fabric was sold in 150 sq. ft. rolls. As per internal testing, the new system was expected to reduce installation costs by about 30% for builders because of easier installation around corners and joints. The system, however, could not be used below 40 degrees Fahrenheit and was not recommended when cool or damp conditions existed for extended periods. The price of this new system was similar to the price of earlier StoGuard systems. Company tests indicated that the total installation costs of StoGuard with StoGuard Fabric were about 30% lower than Tyvek. The labor savings when StoGuard was rolled on with StoGuard Fabric were about 2.6% higher than Tyvek; and when StoGuard was sprayed, the labor savings were around 38.6% higher.

Competition in the Residential Market

Around 2002, the growth of new construction in the commercial sector slowed whereas the residential construction sector showed promise. The focus of Sto therefore shifted toward the residential sector. Exhibit 7 provides market trends in the commercial and residential building sectors. By 2003, about 45% of new residential buildings and 25% of new nonresidential buildings in the United States had house wraps. Building additions and renovations accounted for an estimated 4% to 8% of house wrap usage.

The various options available for house wraps were plastic-based house wraps, rubberized membranes, fluid-applied (or spray-on), and felt paper.

Plastic-based house wraps held about 67% of the total dollar volume in this market. DuPont’s Tyvek was the market leader, with very high brand-awareness and its market share estimated to be around 55%. BBA Fiberweb and Pactiv Corporation were the other firms that offered paper-based house wraps with 13% and 9% shares, respectively.5 Among plastic-based house wraps, 92% to 96% of the applications were in the residential market. Demand for these house wraps was estimated to be highest among residential builders and masonry contractors. While Tyvek did not have a strong presence in the commercial market, it had recently launched Tyvek Commercial (which was believed to be heavier, and more tear-resistant than the residential product), and Tyvek Stucco wrap. The Tyvek Stucco wrap had crinkles that allowed for water drainage. Tyvek had by far the highest marketing budget in this industry and it was heavily promoted through both advertising to the contractors and through incentives to the retailers who carried the product. Tyvek was available through both the specialty distributors and home improvement stores such as Home Depot and Lowe’s.

Rubberized membranes held about 27% of the total dollar volume among house wraps. Bituthene was the clear market-leader in this category, and the other brands included Firestone/Carlisle, Grace, Carlisle, Tremco, Henry, and W.R. Grace. More than 95% of the rubberized membrane applications were in the commercial market. Rubberized membranes were traditionally used in basements but the manufacturers of these house wraps had started selling

5 Frost and Sullivan, U.S. Housewrap Market Report (2005). -12- UVA-M-0747R them for upper levels of the house as well. Demand was highest among architects, drywall applicators, and waterproofing contractors.

Fluid-applied wraps: StoGuard was the leading brand in this category. The company held about 5% of the total dollar volume among house wraps. Demand for fluid-applied house wraps was highest among EIFS and waterproofing contractors.

Felt paper was by far the least popular category, with only 1% of the total dollar volume. Major applications for felt paper were submitted in residential markets. Karnak and Fields were the recognizable brands and demand was highest among multi-family builders, residential builders, and masonry contractors.

Market Research

Lisa Petsko was discouraged by the findings from a focus group of builders conducted in a National Association of Home Builders meeting (results summarized in Table 6). In addition to expressing its perceptions of Sto, the focus group also identified that StoGuard was not a highly recognized brand, and the association with a synthetic stucco manufacturer seemed to limit its appeal among prospective customers. The focus group participants also suggested that free samples, free product and installation support, product warranties, and educational programs that contrasted StoGuard from other house wraps might entice them to try the product.

Table 6. Focus group results.

Perceptions about benefits of spray-on house wraps  Won’t wrinkle or tear  Application is easier  Able to use less skilled labor  Effectively seals seams  Product is breathable  Resists UV exposure  No waste  Easy clean-up  Will not flop in wind or tear Perceptions about problems with spray-on house wraps  Unable to install in wind or temperatures below 40 degrees Fahrenheit  Takes too long to dry  Too many steps, uses more labor and time (therefore costs more)  Need to add another subcontractor or identify a current sub to install  Does not give a clean, finished look  Overspray  Unable to use logo  Needs longer warranty  Traps moisture—slows sheathing drying process, potentially causing mold and rot  Additional equipment is necessary  Not practical for remodeling existing homes -13- UVA-M-0747R

The following two statements from a home builder captured the influence of home buyers and suppliers on the builders’ decisions regarding house wraps.

Influence of homebuyers

“When the customer comes in, if you use something different than Tyvek, then you would have to go back into that education and have literature on the other product and stuff like that.”

Influence of suppliers

“My building supply company, they sell Tyvek, I buy Tyvek. It’s that simple. If I go to another part of the town or a different building supply, I see what they’ve got and if it works for me I buy it.”

Market research information was also available from an external consultant’s survey of firms that were likely to use or specify house wraps such as architects and general contractors. The survey identified users and nonusers of liquid-applied (or spray-on) house wraps (Exhibit 8) and reasons for not using liquid-applied house wraps (Exhibit 9), and measured interest among nonusers for considering liquid-applied house wraps (Exhibit 10). The various influencers in the house-wrap decision (Exhibit 11) and the primary issues with each type of house wrap were also available from the survey (Exhibit 12). Other highlights from the survey included:

 More than half the respondents stated that they were either very or somewhat likely to use StoGuard.  Groups most familiar with spray-on house wraps were commercial users (versus residential), those in the Midwest and South, EIFS contractors, waterproofing contractors and multi-family builders. In addition to residential builders, the groups least familiar were masonry contractors and general contractors.  Spray-on house wraps were used or specified on about 50% of residential buildings and 22% of commercial buildings.  Around one-third of the contractors who had used spray-on house wraps in the past expected to increase future usage.  Awareness about the properties and benefits of StoGuard, however, was very low.  Primary reasons for using spray-on house wraps included: o In the commercial market: building specifications/codes required spray-on barriers, masonry/block use, and environmental friendliness. o In the residential market: moisture barrier, building specifications/codes required spray-on barriers—however, similar reasons were also given for other types of house wraps. -14- UVA-M-0747R

 Thirty-seven percent of the respondents who had not previously installed house wraps were open to considering applying house wraps as a means of expanding their business.  The primary perceived deterrents to the use of spray-on house wraps were the “ease of application of other house wraps,” “lower cost of other house wraps,” “strong tradition of using a particular type of house wrap,” and “not being the sole decider on the type of house wrap.”

Decisions to Make

The research and development (R&D) department was confident that quicker drying of StoGuard was a feasible option, and it was also exploring whether StoGuard could be installed at 35 degrees Fahrenheit. Sto North America had established an agreement with another firm to target waterproofers, but waterproofers were not a primary source for house wrap installation in the residential market. The installation of StoGuard had been highest within the EIFS target market.

Petsko reflected that StoGuard was developed as a solution to the perceived problems with EIFS. Now this solution seemed to have applications above and beyond the original intent. She wondered how to profitably manage the new StoGuard system—StoGuard plus StoGuard Fabric. Petsko’s most challenging task was the design of an integrated marketing campaign that would provide the highest returns from the $350,000 allocated as marketing budget for 2007. She considered various alternatives:

 Redesigning the StoGuard section of Sto Corp.’s Web site (http://www.stocorp.com). In the current Sto Corp. Web site, visitors could (1) locate distributors that carried Sto products, (2) search a knowledge base of the technical aspects related to using Sto’s products, and (3) request information packets. In addition, the Web site provided product brochures and installation guides in English and Spanish.  Initiating a viral marketing campaign. While viral marketing could provide a high return on investment (ROI), the success rate of these campaigns was very low. Petsko also wondered whether such a campaign was appropriate for StoGuard’s customer base.  Providing giveaways and free samples of the StoGuard system. If so, who should the giveaways target—architects, contractors, or distributors? The quantity provided as free samples was expected to push both the acquisition rate and profitability of the campaign. The marketing plan had to also specify the duration of this program.  Expanding the print advertising outlets to include residential magazines. StoGuard had favorable feedback from some test advertisements in magazines such as Southern Living. A full-page color advertisement in Southern Living was estimated to cost around $80,000. However, Petsko was not certain whether end-consumers in residential markets were influential in deciding house wraps for their homes. If architects and design professionals also read residential magazines, it might be a good idea for Sto to advertise in them. -15- UVA-M-0747R

Advertising in residential magazines was also costlier than construction magazines and some architectural magazines. Exhibit 13 provides the price of a full-page, four-color advertisement, and the circulation, for magazines that were under consideration for the new marketing plan. Black-and-white advertisements were typically 10% cheaper, and quarter-page advertisements were about 35% the cost of full-page advertisements.  Customizing the presentations given by the sales representatives for each customer segment.

In addition to the marketing plan, several other decisions had to be made regarding StoGuard:

 Should the StoGuard system be sold only as an add-on for EIFS or stucco, or was there sufficient potential to support the StoGuard system as a stand-alone product?  Should StoGuard stay in the commercial segment and not pursue the residential segment? Should StoGuard go “mass” or “class” in residential?  Should Sto invest R&D effort toward improving StoGuard as the focus group recommended?  How should the company position the StoGuard system against Tyvek to successfully overcome price objections?

When designing her plan, Petsko reflected on this comment made by a residential builder: “A few home builders saw potential in spray/roll-on house wrap used in custom luxury homes where the homeowner cares more about the product than the price. They would offer it as an option.”

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Exhibit 1 STOGUARD: SPRAY-ON HOUSE WRAPS Select Financials of Sto AG

Changes (figures in millions of euros) (%) Sto Group 2000 2001 2002 2003 2004* 2005* 05/04 Sales 463.7 460.5 654.7 654.7 679.1 740.6 9.1% Germany 280.3 259.4 364.3 348.7 347.5 355.4 2.3% International (including United States) 183.4 201.1 290.4 306 331.6 385.2 16.2% Capital spending (excluding financial assets) 51.6 27.4 33.9 32.1 22.9 49.2 114.8% Amortization/depreciation 24.2 24.4 32.5 30.5 26.9 25.3 −5.9% (excluding financial assets) Earnings before taxes 14.8 14 13.8 9 25.7 25.7 0.0% Net income for the year 8.8 9.2 8.8 6.6 16 16.5 3.1% per ordinary share 1.26 1.32 1.25 0.94 2.32 2.38 per preference share 1.32 1.38 1.31 1.00 2.38 2.44 Cash flow from operating activities** 34.0 34.6 40.9 39.6 56.8 47.4 −16.5% per share 4.96 5.04 5.96 5.77 8.28 6.91 Total assets 296.6 327.2 404.9 410.1 414.9 465.5 12.2% Shareholders’ equity 133.3 136.7 134.9 134.3 162.0 176.8 9.1% Equity ratio 44.9 41.8 33.3 32.8 39.0 38.0 Employees (year end) 2,808 2,809 3,936 3,840 3,813 3,866 1.4% of which Germany 1,914 1,849 2,503 2,337 2,243 2,231 −0.5% of which non-Germany 894 960 1,433 1,503 1,570 1,635 4.1%

* In accordance with International Financial Reporting Standards (IFRS) **Cash flow, in the narrower sense, is reported until 2003. Source: Sto Corp.

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Exhibit 2 STOGUARD: SPRAY-ON HOUSE WRAPS Application of Sto EIFS Classic NExT

Source: Sto Corp. -18- UVA-M-0747R

Exhibit 3 STOGUARD: SPRAY-ON HOUSE WRAPS StoGuard Print Advertisement

Source: Sto Corp.

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Exhibit 4 STOGUARD: SPRAY-ON HOUSE WRAPS Print Outlets that Featured StoGuard or Spray-on House Wraps Month/Year Outlets February ’07 Commercial Building Products: “Exterior Envelopes. Cladding and Waterproofing Air Barrier,” bylined article. Environmental Design + Construction: Energy-efficiency section. January ’07 Journal of Architectural Coatings: Directory of liquid-applied barriers. Building Envelope Forum: “Adding Waterproofing Air Barriers,” article with photos and Petsko’s byline and bio. Walls & Ceilings: “Adding Waterproofing Air Barriers,” article with photos. Residential Design & Build: Sidebar on importance of air barriers with any cladding (including stucco) plus Powerwall Next product feature (with visual). November ’06 Shelter: In green-buildings product guide. Building Products Digest: “Adding Waterproofing Air Barriers,” article and photos. Remodeling News: Included in article on green remodeling and indoor air quality. Environmental Design + Construction: Product focuses on waterproofing membranes. October ’06 Building Design & Construction: The Breakers case study. Journal of Architectural Coatings: Highlight on the Breakers, along with a larger story including StoGuard. July ’06 Commercial Building Products: July/August, Shelter Cove case study. Professional Builder/Remodeler: Coastal Living Supplement featuring StoGuard and Powerwall. June ’06 Associated Construction Publications: Reed Construction magazines, regional publications. May ’06 Construction Specifier: Feature article by Tom Remmele. Walls & Ceilings: Energy efficiency article. Building Products: Information on code approval. May/June issue in product-information section. http://www.iGreenBuild.com: “Determining the Right Air Barrier for You.” bylined article (by Petsko). April ’06 Building Products Digest: News item on the air-barrier study. February ’06 Journal of Architectural Coatings: John Edgar’s air-barrier paper as presented at PACE. Source: Sto Corp. -20- UVA-M-0747R

Exhibit 5 STOGUARD: SPRAY-ON HOUSE WRAPS A Sample Trade-Show Panel

Source: Sto Corp. -21- UVA-M-0747R

Exhibit 6 STOGUARD: SPRAY-ON HOUSE WRAPS StoGuard Fabric Brochure

Source: Sto Corp.

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Exhibit 7 STOGUARD: SPRAY-ON HOUSE WRAPS Prefabricated Housing Supply and Demand for 1990 to 2010

% Annual (thousand units) Growth Item 1990 2000 2005 2010 00/90 05/00 Total housing starts 1,388 1,866 1,820 1,890 3.0 −5.0 % prefabricated 24.8 27.8 30.2 31.0 – –

Prefabricated housing demand 344 518 550 585 4.7 1.2 + net exports & stock changes 2 −7 20 25 – −

Prefabricated housing shipments 346 511 570 610 4.4 2.2 Manufactured housing 188 251 300 315 3.3 3.6 Other prefabricated housing 158 260 270 295 5.7 0.8

$000/unit 22.0 33.1 36.7 42.1 4.6 2.1

Prefabricated housing shipments (in millions of U.S. dollars) 7,624 16,923 20,930 25,690 9.3 4.3 Manufactured housing 3,678 7,443 9,810 11,780 8.1 5.7 Other prefabricated housing 3,946 9,480 11,120 13,910 10.2 3.2

U.S. Nonresidential Construction Estimates (in millions of 2008 dollars) Category 2000 2001 2002 2003 2004 2005 Education $38,942 $41,592 $42,931 $46,747 $52,799 $62,022 Hotels & Motels 10,984 9,771 9,576 9,767 10,646 11,392 Industrial 13,954 12,239 12,473 12,756 13,227 13,793 Offices 45,674 44,937 40,832 40,558 43,227 46,055 Stores & Other $27,275 $27,400 $27,478 $28,563 $29,845 $31,359

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Exhibit 8 STOGUARD: SPRAY-ON HOUSE WRAPS Distribution of Users and Nonusers of House Wraps

Users Nonusers Nonusers/Total Res. Comm. Res. Comm. Res. Comm. Architectural firms 4 3 0 0 0/4 0/3 Drywall applicators 2 1 8 3 8/10 3/4 EIFS contractors 0 7 0 0 0/0 0/7 General contractors 15 12 1 12 1/16 12/24

Masonry contractors 3 1 4 2 4/7 2/3 Multifamily builders 3 0 1 0 1/4 0/0 Painting contractors 2 4 3 6 3/5 6/10 Residential builders 19 0 5 0 5/24 0/0

Waterproofing contractors 5 8 1 0 1/6 0/8 Distributors 5 4 1 0 1/6 0/4 Framer contractors 0 0 0 0 – – Total 58 40 24 23 24/82 23/63

Source: Sto Corp.

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Exhibit 9 STOGUARD: SPRAY-ON HOUSE WRAPS Non-Users’ Reasons for Not Using House Wraps in New Construction

N = 24 N = 23 Residential Commercial No. % No. % Don’t do/not licensed 10 42 5 21 They are specified for us/already there 4 17 6 27 Don’t know anything about them 4 17 3 13 Determined by building codes 3 12 0 0

Have not been specified 3 12 3 13 Don’t need the extra work/responsibility 2 8 0 0 Only do below-grade waterproofing 1 4 0 0 Cost 1 4 0 0

Not required 0 0 3 14 Don’t need/area is dry 0 0 1 4 Use other method 0 0 1 4 Total 24 100 23 100

Source: Sto Corp.

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Exhibit 10 STOGUARD: SPRAY-ON HOUSE WRAPS Non-User Contractors’ Interest in Considering Liquid-Applied House Wraps

Q3. A growing number of contractors have started applying liquid air and/or moisture barrier materials as a way of expanding their business. Is this something you might consider?

N=12 N=18 N=17 Not Yes No Sure Drywall applicators (11) 18% 54% 27% General contractors (13) 54 23 23

Masonry contractors (6) 17 33 50 Multi-family builders (1) 100 0 0

Painting contractors (8) 50 37 12 Residential builders (5) 20 40 40

Waterproofing contractors (1) 100 0 0

Total (46) 37% 37% 26%

Source: Sto Corp. -26- UVA-M-0747R

Exhibit 11 STOGUARD: SPRAY-ON HOUSE WRAPS Individuals Other Than Respondents Who Are Involved in Specifying or Choosing House Wraps

Others Are No Others Involved Involved No. % No. % Residential 16 30% 37 70% Commercial 19 53% 17 42%

Architectural firms 2 29 5 71 Drywall applicators 2 67 1 33 EIFS contractors 4 57 3 43

General contractors 10 37 17 63 Masonry contractors 2 50 2 50 Multi-family builders 2 67 1 33 Painting contractors 3 50 3 50

Residential builders 7 37 12 63 Waterproofing contractors 3 23 10 77 Distributors 0 0 0 0

Total 35 39% 54 61%

Source: Sto Corp.

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Exhibit 12 STOGUARD: SPRAY-ON HOUSE WRAPS Issues with House Wraps Currently Used

Issues in Issues in House wrap Type Residential Market Commercial Market Plastic-based Hard to apply, too expensive Don’t use, don’t know, too expensive #15 asphalt paper Not durable, hard to apply May puncture, hard to apply Rubber membrane sheet Too expensive, harder to apply and clean up Too expensive, too labor-intensive, weather limitations Water-based liquid-applied Harder to clean up, messy, too expensive Harder to clean up, messy, too expensive

Source: Sto Corp.

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Exhibit 13 STOGUARD: SPRAY-ON HOUSE WRAPS Print Media Advertising Rates (in thousands of dollars)

Circulation Annual Frequency of Inserts Publication Outlet 1 3 6 9 12 18 24 30 36 Architectural Digest 97,602 91 88 86 84 81 79 77 76 75 Architectural Record 90,000 16.4 16.2 15.5 15.2 14.7 14.3 13.7 13.2 12.8 House & Garden 770,325 97 94 92 89 86 84 82 81 80 Southern Living 2,650,000 90.1 86.5 82.9 78.9 75.3 Better Homes and Gardens 7,600,000 404.6 384.4 364 346 Green Builder magazine 95,000 11.4 10.7 10 Painting and Wallcovering Contractor 27,000 4.8 4.6 4.2 3.9

Source: Sto Corp.