Assignment No. 2

West Lake Home Furnishing Limited

A report submitted to

Prof. MM Monippally&

Ms. Shibani Shah

In partial fulfillment of the requirements of the course

Written Analysis and Communication-I

On

08/02/08

By

Section C

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

Letter of Transmittal

May 30, 2007

To,

Mr. Charles Bowman

Chief Executive Officer

West Lake Home Furnishings Limited

From,

Students

WIMWI

Subject: Report on whether West Lake Home Furnishings Ltd. should

accept the proposal by US based Retail Chain

This report analyses the viability of accepting the proposal by US based

Retail Chain (USRC) against the backdrop of a highly competitive

lighting and lighting fixture retail market in Canada. After insightful

considerations, it is recommended that West Lake Home Furnishings Ltd

(West Lake) should accept the proposal.

Executive Summary

USRC has proposed prominent shelf space and a quintuple rise in the

sales of West Lake’s 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 Lake’s 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.

Word Count: 108

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 wholesaler’s 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

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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 Lake’s retailers primarily on price, it cannot afford to lose USRC

which had attributed to 23.83% of the former’s 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 StatementShould West Lake accept USRC’s proposal?

Options1. West Lake should accept the offer made by USRC.

2. West Lake should decline the offer made by USRC.

Criteria for evaluationa. The decision must improve the financial position(??) of the

company.

b. The decision must be consistent with the goals set by the company.

c. The decision should put other competing firms at a disadvantage.

(why should it bother?)

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Evaluation of Options1. 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.

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c. The decision should put competing firms at a disadvantage.

Newer entrants, entering the market are looking to compete with

West Lake primarily on price and are targeting its retail accounts. USRC

being the biggest retailer, West Lake’s refusal might lead to severing

business relationships with USRC. There is a possibility USRC will get

the price it is asking from other suppliers or from the Chinese

manufacturers. Consequently other retailers will ask for similar

concessions from West Lake.(not clear)

2. West Lake should accept the offer made by the USRC

a. The deal must improve the financial position of the company

The deal will increase the profits as well as the cash in hand of

West Lake [Exhibit]. Extra cash will help West Lake recover from

negative cash flows .The cash getting stuck up in the inventory will be

reduced and West Lake will avoid the interest on the line of credit. This

will lead to greater profits in the future.(how?)

b. Decision must be consistent with the goals of the company

Accepting the deal will give West Lake prominent shelf space in

the stores of USRC. Retail customers prefer one stop shops and a

prominent display will increase the brand recall of the West Lake brand.

The brand recall will promote the internet business thereby improving the

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performance of paid search advertising. Accepting the offer might enable

West Lake to cut its costs across the wholesale, retail and internet

businesses.

c. The decision should put other competitive firms at a disadvantage

The offer made by USRC will allow West Lake to source cheap

from it’s suppliers in China thereby permitting West Lake to set lower

price points for it’s retail and internet business. The demand in the home

furnishing market is projected to increase in the near future leading to an

increase in profits.

New players entering the market are competing on price and

targeting the retail accounts of West Lake. This agreement will enable

West Lake to deal with both these challenges.

In due course of time other retailers might negotiate with West

Lake for similar concessions .This will further increase sales volumes and

eventually decrease costs.

The RecommendationWest 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.

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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

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Exhibit

Analysis of the USRC Deal(All values in $)

DescriptionBefore the proposal

After the proposal

Total Revenues 11200000.00 15470845.06Revenue from the USRC 2666666.66 6937511.73Price of Goods Sold to USRC by West Lake 48.99 25.49No of Units sold by West Lake to USRC 54430.00 272150.00Cost per unit for West Lake 30.00 20.00Cost of Goods Sold 1632900.00 5443000.00S,G and A Expenses for USRC ** 650406.50 780487.80SG&A Expenses as percentage of Sales for USRC 24.39 5.04S&W Expenses for USRC*** 197619.05 494047.62S&W Expenses for USRC as a percentage of Sales 7.41 3.19Credit Line for the year for USRC due to increased inventory 0.00 160000.00Interest due to Credit Line @ 6% 0.00 9600.00Gross margin 1033766.66 1494511.73Net Profit 185741.11 210376.30Increase in Profit   24635.19Percentage Increase in Profit(YoY)   13.26Gross Margin as a Percentage of Sales 38.77 21.54

The details of the calculations are not mentioned*All values are in $ unless mentioned explicitly** Given that the SG&A expenses will rise by 30% specific to the retail account due to the proposal***Given that S&W expenses will rise by 150% specific to the retail account due to the proposal

Assumptions:

Any Increase in Credit Line will have to be financed using interest paying loans.

S,G&A and S&W expenses have been calculated assuming proportionality with the sales in the year 2006.

Effects of the offer have been projected assuming the costs and revenues associated with other retailers, retail business and internet are constant.

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