Hallstead (Harvard Business Review Case)

Remember toselect one of the following questions for the Position Statement in your memo. (See "How to write your case memos" in the Rubrics section.)

1. What is the strategic position Hallstead has taken?
2. What are the cost drivers in the business?
   1. Structural
   2. Organizational
   3. Activity
3. What are the primary processes and support processes in the value chain? And, what value does each activity add?
4. How has the breakeven point in number of sales tickets (number of customer orders written) and breakeven in sales dollars changed from 2003, to 2004, and to 2006? How has the margin of safety changed? What caused the changes?
5. One idea that the consultant had was to reduce prices to bring in more customers. If average prices were reduced ten percent (10%), and the number of sales tickets (unit sales) increased to 7,500, would the company's income be increased? With prices reduced, what would be the new breakeven point in sales tickets and sales dollars?
6. Another idea Gretchen had was to eliminate sales commissions. Hallstead's was the only jewelry store in the city that paid sales commissions, and although both Grandfather and Father had insisted that commissions were one of the reasons for their success, Gretchen had her doubts. How would the elimination of sales commissions affect the breakeven volume?
7. Michaela felt that a bigger store could benefit from greater advertising and suggested that they increase advertising by $200,000. How would this affect the breakeven point? Would you recommend that the sisters try this?
8. How much would the average sales ticket have to increase to breakeven if the fixed cost remained the same in 2007 as it was in 2006?
9. What do you recommend that the managers at Hallstead do?
10. If you are missing data, what kind of data would you like and from where could you get it? Or, in other words, what should the firm try to measure that it is not already measuring?

Article Reference:

What have we done? Daddy would know what to do, but I don't. I really thought growing this business would be an easy thing for us,but now I am notso sure. All of the work that we did in 2005was supposed toset usupfornewsuccess, proofs,andabright future.Butnow,weareshowinglosses on both thehistorical investment and on our modernization andexpansion.

Gretchen Reeves was talking in early February 2007 with her sister and partner Michaela Hurdafter receivingpreliminaryincome statementsforHalsteadJewelersforfiscal year2006which hadendedJanuary31,2007(SeeExhibitl).Inanewbuilding,justrenovatedin2005,with50%more spaceandsellingstaff thaneverbefore, thebusinesshadexperiencedalossalmost doubletheincome ofthelast"normal" year,2004.ToGretchen,thisdidnotbodewellforthefuture.

Thesisters'grandfather establishedHallsteadJewelers83yearsearlier inthelargestcityin the tristateregion.Formorethan50years, untilhisdeath, hehadnurturedandgrowntheoriginal store from a start up to one of the largest jewelry and gift stores in the United States. Four departmentssoldalmosteverythingthatcustomersexpected inajewelryandgifts tore:finejewelry and gems, watches, tabletop gifts (china and flatware), and artistic gifts. Customers came from throughout the region to buy from extensive collections in each department. Any gift from Hallstead'shadanextracacheattachedtoit.Itwaspresumed tobethebest.

WhenGrandfatherdied,thestorewaslefttohisonlyson,whohadliterally grownupinthe store to become his father's partner in the business. That son was the father of both Gretchen and Michaela. Another child, their brother James, had shunned the business to study medicine and surgery. Thegirls,however, followedintheir father'sfootstepsandgrewupinthestore,learning the business. At the death of their father in 2002, the three children inherited the business as equal partners,andbyagreementwithJames,Gretchen andMichaelatookoverthemanagementofthe business andstore.

Atthetimeofthesisters' assumptionoftheownershipandmanagementofthestore, itwas stilloperating intheoriginalstorelocation onLakeAvenue andSecondAvenue. Inthelate1930's, Lake Avenue became the most important retail location in the city. The store was improved and providedelegantspace forthedisplay andsaleoftheirproducts.Itwasadestination-shoppingplace. Thestorewasremodeled andredecoratedagainafterthefounderdied,butthelocationandspace remained the same until2004.

Inthemeantime,theprincipalretail shoppingareasshifted twoblockswesttoWashington Street. Stores were larger there and could accommodate department stores and larger specialty retailers.Butreputation andselectionstillbroughtcustomerstoLakeAvenue fortheselectionsat Hallstead's.Shoppingcenters weredevelopedinsuburbanlocations,butHallsteadJewelers stayed put.Thesisters' fathersawthe changesinthe retaillandscape,buthetook noactionbecause ofthem. Hallstead'swasaone-store selleratitsoriginallocation, inmanywaysananachronism.

By the time the sisters assumed management, there were signs that it might be time for changes.Saleshadbeenstagnantsince1999orso,andprofitswereslipping.Oneofthesisters'first ideaswastolook foranotherorseverallocations.Aconsultantsaid thattheyneeded morespaceand a fresh store look. Expansion was impossible without moving, and although a move might entail somerisk, herecommendedthat theylooktoward alargerlocationonWashingtonStreet. Theymade somechanges inproductofferingsthatofferedmore salespotentialatthecost ofminorreductionsin margins.

In2004alarge toysellerwithmorespaceabandoned thecornerofWashingtonStreetand SecondAvenue.Thesisterswastednotimeinsigning anewfive-yearleaseandstartingextensive and expensive renovations. Since the new store was only two blocks from the original location, Gretchen and Michaela were confident that their loyal customers would find and follow them. Renovationsandmoving tookmostof2005,andtheystarted2006inthenewstore.Theylaughed about 2005 being a "lost" and "loss" year, but they were sure 2006 would bring a new day to Hallstead's.

The retail jewelry business was changing. Tiffany & Company, a business with an origin muchlikeHallsteadJewelers, hadgrownintoaninternationalpowerhouse.Withtheir "blueboxes" theyhad becomethelargest diamondsellerintheUnited States.Atthesametime, astart-upinternet seller named Blue Nile, founded in the infancy of the World Wide Web a decade earlier was the secondlargestdiamond sellerintheUnitedStates. Thesistershadnothadtimetothinkaboutwhat those trends meant forHallstead's.

Butasfiscal2006endedandthepreliminaryincomestatement wasin,bothGretchen and Michaela knew something more had to be done. They wanted to figure out what had happened between 2004 and 2006, and they wanted to explore ideas about changes in strategy that would return thebusinesstoprofitabilityandabrighterfuture.Theiraccountantsuggestedthatthemoveto anewlocation hadchangedtheeconomicsoftheirbusiness somewhat,andthatfurtherchanges in promotion might be in order. Increasing advertising might bring in more customers, or changing pricingformulastofendoffnewinternet jewelrycompetitorsmight beconsidered.Thesistersput togethersomequestionsthattheyaskedtheaccountanttoanalyzeforthemusingsomeadditional operating statistics that they had at hand (Exhibit2).

Halstead Income Statement 2003 2004 2006 Sales 8,583 8,102 10,711 COGS 4,326 4,132 5,570 Grass Margin 4,257 3,970 5,141 Expenses Selling Expense Salaries 2,021 2,081 3,215 Commissions 429 405 536 Advertising 254 250 257 Administrative Expense 418 425 435 Rent 420 420 840 :Depreciation 84 84 142 Miscellaneous 53 93 122 Total Expense 3,679 3,758 5,547 Net Income 578 212 (406] Halstead Operating Statistics 2003 2004 2006 (Sales space (sqft] 10,230 10,230 15,280 iSales per sqft 839 792 701 Sales tickets 5,341 5,316 6,897 Question 1 Avg sales ticket 1,607 1,524 1,553 Fixed cost Variable cost 2,003 2004 2006 2003 2004 2006 Unit sale price $1.61 $1.52 $1.55 Salaries 2,021 2,081 3215 Commissic 429 405 536 Variable cast/unit 50.89 50.85 $0.89 Advertising 254 250 257 COGS 4326 4,132 5570 Rent 420 420 BAD Break-even Y= 4535 5000 7505 Depreciati 84 84 142 Actual sales = 5.341 5316 6897 Miscellane 93 122 Difference 806 316 -608 Administra 418 425 435 TOTAL $3,250 00 $3,353.00 $5,011.00 $4,755.00 $4,537.00 $6,106.00 For zero profit/loss, these many tickets needed to be sold. Variable o 50.89 $0.85 $0.89 Break-even in terms of tickets- break-even $ when Rev=Costs Sales for BEP $7,287.03 $7,620.20 $11,655.34 Actual sales revenue = 8,583 8102 10711 WITH THESE CALCULATIONS, I AM NOT ABLE TO BRING THE CONTRIBUTIN MARGIN TO BE EQUAL TO FIXED COST, IT IS OFF BY ~$15 for year 2003, $3 for 2004, and $57 for 2006! I have used calculations as presneted in class, slide # 26, 27 Margin of safety seerd to have changed from 2003-2006 due to increase fixed cast for space rent in 2006