Professional Documents
Culture Documents
AHMEDABAD
Assignment 2
Presented to
05 July 2008
by
24 May 2007
From,
XYZ,
ABC
Students of WIMWI
To,
Mr. Charles Bowman
CEO, West Lake Home Furnishings Ltd.
Toronto, Ontario,
Canada
Re: Evaluation of a proposal to reduce the retail price of the signature line
Dear Charles,
We have analyzed the proposal by your wholesale customer to reduce the retail price of the signature
line. Please find attached a report containing our evaluation of the proposal and recommendation.
Thanking You,
Yours Sincerely,
XYZ,
ABC
Executive Summary
West Lake Home Furnishings Ltd. (WL) is a manufacturer of table lamps with modern
designs at reasonable prices. One of its largest retailers has proposed a reduction in the price
of its signature line, which accounts for 59.2% of its income, from $69.99 to $ 29.99;
resulting in an expected fivefold increase in sales volume.
WL now needs to decide whether it should accept the proposal or decline. Both options have
been evaluated in terms of the profitability, brand alignment and the reaction of its dealers.
On the basis of this evaluation, it is recommended that WL should accept the proposal and
reduce the price of its signature line.
(Word Count: 109)
Contents
Situation Analysis.....................................................................................................................1
Market Analysis.....................................................................................................................1
Financial Performance..........................................................................................................1
The Signature Line and URC.................................................................................................2
Problem Statement...................................................................................................................2
Available Options.....................................................................................................................2
Criteria for Evaluation............................................................................................................3
Evaluation of Options..............................................................................................................3
Accept the proposal................................................................................................................3
Reject the proposal................................................................................................................4
Recommendation......................................................................................................................5
Action Plan................................................................................................................................5
Exhibits......................................................................................................................................6
References.................................................................................................................................8
Situation Analysis
West Lake Home Furnishings Ltd. (WL) has positioned itself as a manufacturer of table
lamps with modern designs at reasonable prices. It aims to increase customer recall while
growing rates of 10 to 15% p.a. However, after three decades of operation, it has only a
1.24% market share and an annual growth rate of 1.8%, lower than the industry standards of
6.1%. Even its return on investment has decreased from 10.04% in 2005 to 8.98% in 2006.
(See Exhibit 1)
Market Analysis
The market for table lamps is expected to continue its growth till 2011, when the baby
boomers are expected to reach the age of 65 (Statistics Canada, 2006). The $0.9 billion
market for table lamps is extremely fragmented while the retail market, its customer, is a
$236 billion industry of which large chains accounted for about 33.33%. Thus these retailers
have tremendous negotiation advantages over manufacturers, and could change suppliers
frequently if their products did not sell well.
Manufacturers compete on product designs and prices, and WL faces increasing price
competition from new entrants with similar designs, who are targeting its retail accounts.
Financial Performance
The operating margin for wholesalers is 6.95%, accounting for 71.41% of total sales. (See
Exhibit 2) Internet Sales, though with an attractive margin of 39.7% only accounts for 1.78%
of total sales, thus not affecting the bottomline. The retail store is running at a loss with an
operating margin of 10.74%. Thus wholesale revenues, though comprising of 71.41% of
sales, contributes 178% to operating income underlining its importance to the overall
profitability of the firm.
Problem Statement
A decision needs to be made on whether to accept the proposal by URC to decrease the price
of the signature line from $69.99 to $29.99.
Available Options
The options available are:
Accept the proposal reduce the price of the signature line from $69.99 to $29.99
Alignment with Brand Image effect on brand from changes in the signature line
Evaluation of Options
Accept the proposal
Profitability and Liquidity
If the proposal is accepted, the revenue per unit is reduced from $48.99 to $25.49 per unit and
operating margin decreases from 6.95% to 3.05%. (See Exhibits 3 and 4) However, if sales
volume quintuples as expected, the overall operating income would increase by 8.4% to
$339,310. The return on investment for WLs shareholders, whose maximization is the aim of
any for-profit organization, would increase from 8.94% to 9.74%.
Inventory for retail products would increase by 30% however the overall inventory would
only increase by 7.14%. (See Exhibit 5) This increase can be financed by a line of credit for
$114, 286 whose interest payments would make no material difference to profitability.
Recommendation
WL should accept UCRs proposal and reduce the price of its signature product from $69.99
to $ 29.99.
Action Plan
Negotiate with UCR to gain concessions on prominent shelf spaces and other
promotions
Negotiate with the Chinese manufacturer for discounts on signature line production
Obtain a line of credit for $114,286 to meet cash requirement for inventory
Exhibits
EXHIBIT 1: Calculation of Return on Investment
* The various items have been split between sectors as per instructions in the case. Where no instructions were
provided, they have been segmented proportional to sales.
** Operating Margin (%) = Operating Income / Sales
* For 2006, all Signature items are taken as 1/3 of Wholesale items
* For 2007, Signature Sales = (5*2006 Signature Sales*New Per Unit Revenue)/2006 per Unit Revenue
*For 2007, COGS = (5 * 2006 Signature COGS * $ 20)/$30
* For 2007, SGA = 2006 SGA * 1.2
* For 2007 SW = 2006 SW *2.5
EXHIBIT 6: Analysis of the Scenario Where All Retailers Give Similar Proposals
References
Census of Canada 2006. (2006). Population gain fastest among the oldest. Retrieved on July
31, 2008, from Statistics Canada online via access:
http://www12.statcan.ca/english/census01/Products/Analytic/companion/age/canada.cfm