ABC is a major retailer of various types of coats for men and women and has supplied the supplying the South African market with quality coats as they use various materials like wool, cashmere, nylon, cotton, hemp, mohair, flannel, and fur to mention a few. With the increase in demand and popularity of the coats, the retailer extended its offering to include leather jackets, leather pants, leather, fur, and faux leather boots. ABC with headquarters in Spain started trading in South Africa in 1994. ABC has experienced the challenges listed below:

A. The retailer has not increased its market share due to the influx of new entrants and online shopping.

B. Profit margins have reduced drastically due to increased costs as seen by year-on-year reported increases in cost-to-income ratios.

C. A rights issue was done in the prior year as a means to improve liquidity and that led to a dilution of some shareholders who did not follow their rights.

D. The company has not maintained its dividend cover ratio as it has not declared a dividend. A consulting firm was hired in order to carry out a strategic review of ABC. The Board of Directors also requested that the consulting firm should suggest alternative strategies for achieving growth. Following the review ABC management will make their own decision about which strategy to follow. The consulting company was hired because of the following reasons:

A. ABC has failed to increase its market share over the last four years.

B. Profits have been failing gradually, as it has been necessary to keep prices fairly constant to maintain demand. However, both direct and indirect costs have been increasing.

C. The shareholders are becoming restless as dividends have fallen and the share price is gradually declining.

As part of the strategic review the consulting company carried out a SWOT analysis on ABC:

Strengths A. Abc has a majority shareholding in almost 30% of textile manufacturers for the products it manufactures. B. The company retails a variety of product range for different demographics. C. It has a market share of 42%. D. The Executive Team is solid with a strong tenure in the company. E. The company previously concluded strategic mergers and acquisitions. F. The company introduced high tech equipment to achieve efficiencies.

Weaknesses A. Market share is declining year on year over 3 years. B. Ageing workforce and equipment. C. The majority of the workforce is unionized. D. Newly introduced product ranges have not contributed to increasing market share and revenue. E. Poor learning and collaboration culture - teams work in silos. F. Poor succession planning and some Teams nearing retirement. G. There is resistance to use new technologically equipment for fear of being replaced.

Opportunities A. Potential to expand to other regions in Africa. B. Selling online and social media presence. C. Diversify product range to children. D. Flexible manufacturing.

Threats A. Online goods increased competition from overseas brands. B. Pricing- customers are price sensitive. C. Climate changes have made production unstable. D. Copying of styles and trends by competitors.

In addition to producing a SWOT analysis, the consulting company also drew up Ansoff’s growth matrix, showing the potential growth strategies available to ABC

	Existing product	New Product
Existing product	A. Use extensive advertising channels and methods targeting the existing market, with special focus key television adverts targeting children B. Explore footprints and visibility in high-traffic shopping areas and not just limited to segments from upper-middle class.	C. Design new styles in line with the market trends at competitive price points
New Market	D. Sell the existing products to countries in the African region.	E. Manufacture affordable coats using cheaper materials like synthetic leather and corduroy and explore new distribution channel

The consulting company was only asked to present their findings rather than make decisions however, they have given strategic option D as their recommendation to the way forward for ABC.

Subsequent to the Consultants’ report tabled at the Board meeting, the Sales Director informed you of the approach for luxury lingerie and swimwear retailer called Naked Cover which has earned a great reputation for producing high-quality luxury goods that have attracted international buyers. Naked Cover was founded in Germany and has a presence in Cape Town, Johannesburg, Durban, and Gqeberha. The shops attract sales from high-end customers. The shareholders have considered an acquisition as one of the strategies to unlock value for ABC. Naked Cover has enjoyed continued growth, high profits, and high consistent dividend cover. Naked Cover wants R270m.

REQUIRED: (Students must refer to the above scenario in their answers)

1) Briefly explain the issues to be taken into account to evaluate the purchase of Naked Cover.