Professional Documents
Culture Documents
2
West Lake Home Furnishing Limited
A report submitted to
Prof. MM Monippally
&
Ms. Shibani Shah
Section C
Letter of Transmittal
May 30, 2007
To,
Mr. Charles Bowman
Chief Executive Officer
West Lake Home Furnishings Limited
From,
Students
WIMWI
Executive Summary
USRC has proposed prominent shelf space and a quintuple rise in the
sales of West Lakes signature line, provided West Lake brings down the
retail cost from $69.99 to $29.99. Considering a competitive Canadian
retail market, this proposal could entice other retailers to enforce a
reduction in their retail price, thereby reducing the gross margins. The
lower retail price may hamper West Lakes potential to get into the
luxury segment. But USRC being the biggest retailer for West Lake, a
successful deal would greatly(enhance) total sales turnover, its overall
profits and improve its negative operating cash flows. Hence West Lake is
recommended to accept the offer.
TABLE OF CONTENTS
1. Situation Analysis...........................................................................1
2. Problem Statement.........................................................................2
3. Options............................................................................................2
4. Criteria for evaluation...................................................................2
5. Evaluation of Options....................................................................3
6. The Recommendation..................................................................35
7. Action Plan....................................................................................36
8. Exhibit...........................................................................................37
Situation Analysis
In the month of May, 2007 West Lake was considering a proposal made
by one of its top three wholesale customers (hereafter referred to as
USRC) to reduce the retail price of a signature line of decorative lamps
from $69.99 to $29.99 for a period of one year. In lieu, the retailer had
offered to give the product prominent shelf space and the possible
potential to more than quintuple the wholesalers unit sales from this
retailer. West Lake primarily dealt in the Canadian market in the mid and
premium priced range of lighting and lighting fixture. However the
signature line of West Lake was sold only by USRC.(case facts)
In 2006, the Canadian retail market for lighting and lighting fixture had
recorded sales of $900 million out of more than $200 million total sales.
Impressive growth rates, rising income level of consumers, outsourcing
of manufacturing units to low cost Asian countries (especially China),
penetration of new entrants, had made the market highly competitive. The
retailers increasing stress on quality, timely delivery and responsiveness
of the supplier had not only intensified the competitive nature of the
market but their insistence on on-time delivery had substantially
increased the inventory requirements.
At this juncture, accepting the proposal, would not only increase the Sales
and Administrative expenses, Shipping and Warehouse expenses, it would
also entice its other two big retailers to enforce lower wholesale prices for
its products, thereby pulling down the gross margins as a percentage of
sales. Although West Lake had a retail store and started Interest based
sales, wholesale still accounts for two-third of its total sales. More
importantly, with a growth rate of 0.9% Year-on-Year, a market share of
less than two percent and with new entrants targeting West Lakes
retailers primarily on price, it cannot afford to lose USRC which had
attributed to 23.83% of the formers overall sales turnover in 2006.
Besides, accepting the offer would also boost its total sales, subsequently
increasing its brand recognition and facilitating its goal to become price
competitive and prominent.
Problem Statement
Should West Lake accept USRCs proposal?
Options
1. West Lake should accept the offer made by USRC.
2. West Lake should decline the offer made by USRC.
Evaluation of Options
1. West Lake should decline the offer made by USRC.
a. The deal must improve the financial position of the company
The USRC deal will drive down the gross margins of West Lake
from 38.76% to 21.54% [Exhibit] .The current gross margin of the
wholesale business is at 38.75%. Accepting this deal will mean similar
concessions from the other retailers and eventually drive down the gross
margins in the entire wholesale retail business to 21.54%.
Secondly the deal will mean enhanced inventory requirements.
West Lake already has an inventory exposure of $1.6 million and
accepting this deal will increase the inventory to $1.76 million
[Exhibit].This is adding to a cash outflow of $9600 [Exhibit].If other
retailers request similar concessions the inventory requirements as well as
the cash outflow will further increase.
b. Decision must be consistent with the goals of the company
West Lake will lose on price competitiveness if it refuses USRC.
However if it accepts (irrelevant here)the offer it might become a product
for lower mid priced market , thereby possibly losing the opportunity to
become a major player in the luxury market. The luxury market has
significant potential and West Lake is yet to put in substantial efforts to
capture this market.
The Recommendation
West Lake should accept the offer made by USRC as it would ensure
higher sales turnover, a considerable competitive edge over the new
entrants and a much greater visibility in the overall Canadian retail
market, thereby meeting its goals to be price competitive and a highly
recognisable brand.
Action Plan
Ensure that the supply from China for the increased production
order is delivered on time at the warehouse.
Extend the capacity of warehouse to facilitate the storing of
increased inventory.(that is not possible)
Get to know the delivery schedules of USRC and plan to minimise
the inventory costs.
Focus on internet based sales and custom designs for the luxury
market by capitalising on the enhanced brand visibility.(vague)
Word Count: 1091
10
Exhibit
Analysis of the USRC Deal
(All values in $)
Description
Total Revenues
Revenue from the USRC
Price of Goods Sold to USRC by West Lake
No of Units sold by West Lake to USRC
Cost per unit for West Lake
Cost of Goods Sold
S,G and A Expenses for USRC **
SG&A Expenses as percentage of Sales for USRC
S&W Expenses for USRC***
S&W Expenses for USRC as a percentage of Sales
Credit Line for the year for USRC due to increased
inventory
Interest due to Credit Line @ 6%
Gross margin
Net Profit
Increase in Profit
Percentage Increase in Profit(YoY)
Gross Margin as a Percentage of Sales
Before the
proposal
11200000.00
2666666.66
48.99
54430.00
30.00
1632900.00
650406.50
24.39
197619.05
7.41
After the
proposal
15470845.06
6937511.73
25.49
272150.00
20.00
5443000.00
780487.80
5.04
494047.62
3.19
0.00
0.00
1033766.66
185741.11
160000.00
9600.00
1494511.73
210376.30
24635.19
13.26
21.54
38.77
11