INTRODUCTION

It is early $2014.$ A leading global skincare manufacturer,

Health & Beauty Co$.($HBC$),$ has been losing market share in the hand and body lotion market. While the firm still leads its competitors in market share in this segment of personal care, it seeks to stem further share erosion and, to that end, has recently developed a strategy to recover market share through rebranding, advertising, and repackaging. The situation is especially critical since a large competitor is believed to be launching a new skincare product in the near future. Your task as senior financial analyst is to draft the capital expenditure proposal related to the new packaging proposal.

Information to support you in this task follows. You should

complete the firm's capital expenditure template included in Appendix $1.$

BACKGROUND: The U$.$S$.$ skincare market has been growing at an average rate of $4\%$ over the past three years and is estimated to reach $$11$ billion in $2018.$ This market includes facial, body, and hair care, as well as other makeup segments. HBC holds a leadership position in the hand and body lotion market

but needs to evolve to meet consumers' growing needs and compete with an ever$-$increasing number of competitors. Recent market research by HBC revealed that consumers perceive the current packaging as outdated: old, generic, dull, and cheap looking. It also lacks a contemporary and

premium look compared with some of the main competitor's

products. HBC is in the process of rebranding these product

lines, and newly developed packaging will play a pivotal role

in the plan to rebrand and reposition the product. The new

packaging aims to convey the brand image of modern, up$-$to$-$date, high$-$quality, everyday use, and good value.

Preliminary investigation comparing the existing and

proposed packaging revealed the following:

The proposed packaging will keep the brand fresh and

relevant while maintaining the brand heritage and appeal

to existing and future consumers.

The project:

a$.$ Provides the opportunity to simplify an over$-$

complicated and confusing pack line$-$up by reducing

the current portfolio of sizes.

b$.$ May lead to improved margins since there is the

potential to raise prices on the newly packaged items.

The current gross margin of the product is $69\%.$

Overall, the new pack design is a cost$-$effective pack with

package unit prices lower than that of the current brand

pack. The brand team believes that incremental sales growth is achievable through the combination of new brand positioning, advertising, and packaging. Feedback from several large retailers consulted on the new packaging was consistently positive.PROJECT INFORMATION: The new packaging would require the purchase of molds and

assembly equipment $($useful life of six years on all$)$ as follows: In addition, the firm will incur start$-$up expenses related to partial case returns and other items. It is assumed that major customers will be able to manage down their inventory levels with the assistance of the transitions team. Minimal returns will come from large retailers including WalMart and Kmart due to their quick inventory turnover. It is anticipated that most returns will come from drug retailers as they shift products to the new packaging and remove unsold product from the shelves.

Partial case returns net of salvage value $$1,800,000$

Label conversion costs $700,000$

Freight charge$/$launch year expenses $,400,000$

Other miscellaneous $,300,000$ The redesign calls for cutting SKU's from $79$ to $49.$ No

volume loss is anticipated from this since the transition team will actively manage shelf space on a customer$-$by$-$customer basis to minimize loss of shelf presence. The SKU reduction is estimated at $$119,000$ per year since the new package design is less expensive per unit.

The brand's current long$-$term strategic role is to

maintain share and grow at category levels. Sales in the

most recent year were $$139\mathrm{.}5$ million. Without the redesign, sales are forecast to remain flat at historic levels. With the redesign, management believes that sales can grow at the rate of the skincare category$-$forecast at $4\%$ per year for the next five years$\_$and there will also be incremental growth related to recovery of market share of $2\%$ in Year $1,1\%$ in Year $2,0\mathrm{.}5\%$ in Year $3,$ and $0\%$ thereafter. The gross margin will remain at $69\%$ of net sales. The incremental marketing and development cost is a one$-$time $$700,000$ for market research and development. Management thought the project should be evaluated using a discount rate of Appendix $1.$ Capital