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INTRODUCTION It is early 2 0 1 4 . A leading global skincare manufacturer, Health & Beauty Co . ( HBC ) , has been
INTRODUCTION
It is early A leading global skincare manufacturer,
Health & Beauty CoHBC 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
BACKGROUND: The US skincare market has been growing at an average rate of over the past three years and is estimated to reach $ billion in 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 everincreasing 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 Recent market research by HBC revealed that consumers perceive the current packaging as outdated: old, generic, dull, and cheap looking.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, uptodate, highquality, 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 lineup 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
Overall, the new pack design is a costeffective 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 startup 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 $
Label conversion costs
Freight chargelaunch year expenses
Other miscellaneous The redesign calls for cutting SKU's from to No
volume loss is anticipated from this since the transition team will actively manage shelf space on a customerbycustomer basis to minimize loss of shelf presence. The SKU reduction is estimated at $ per year since the new package design is less expensive per unit.
The brand's current longterm strategic role is to
maintain share and grow at category levels. Sales in the
most recent year were $ 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 categoryforecast at per year for the next five yearsand there will also be incremental growth related to recovery of market share of in Year in Year in Year and thereafter. The gross margin will remain at of net sales. The incremental marketing and development cost is a onetime $ for market research and development. Management thought the project should be evaluated using a discount rate of Appendix Capital
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