Hansson Private Label is a corporation that manufactures an array of personal care products, including soap, shampoo, and the like, under the brand label of its retail partners. Recently HPL¶s largest retail partner proposed to t hem ³significantly´ increasing the share of their private label manufacturing. manu facturing. This, however, would require an initial investment of $45,000 to expand its manufacturing capabilities, plus a $12,817 increase in working capital. In order o rder for HPL to accept or reject this expansion proposal, a return on the potential pot ential investment, plus the associated expansion risks, needs to be considered. These would, in turn, be contrasted with other opportunities that HPL can also consider, such as finding other partners part ners for a more diversified growth. The project would attempt to evaluate the investment that has been proposed by HPL¶s manufacturing team. The primary question is on whether the investment required to increase HPL¶s manufacturing capabilities is warranted or not? This project will also attempt to identify the challenges and r isks involved in such an investment. The first and foremost risk comes from the fact that the company has not initiated a project of such a magnitude in quite a while and therefore t herefore the company is quite apprehensive in undertaking this investment. The other risk factors that this project attempts to address is the fact that undertaking undertak ing this investment would double the organization¶s annual debt which its own set of issues has related to it. In addition to all these risks, the returns on such an investment have ha ve to be carefully analyzed. Further, the project will also try to evaluate the investment by taking stock of all a ll the forecast involved in the private labeling market along with a look into the past 10 years worth of growth data. It would wou ld also review some of the risk free returns that are available in the existing market conditions. The project pro ject will also review the process that has been traditionally used by HPL to evaluate the various risks by estimating the company¶s WACC as a discount rate for capital budgeting projects. Also an NPV estimate will be used to calculate the risk involved. The present research will also propose certain measures to reduce the risk involved in making an investment such as diversificati d iversification on of the company¶s investment portfolio. portfolio. This T his would help in reducing the volatili vo latility ty of the t he company¶s investments. Another measure that the project will delve into in detail deta il is asset classes. classes. By combining co mbining various assets classes with various levels of risk together in the same po rtfolio, rtfolio, an investor is able to control the exposure to risk for a particular investment portfolio. Another measure to address risks while making investments is to properly estimate the amount o f return on the investment using the forecast model. In addition, the project will also define certa in limitations associated associated with evaluating the risks involved in making a big investment. One of the limitations comes from the fact t hat the retail partner has agreed to increase HPL¶s share for only three years. Hence this t his forms a limitation because at the end of o f the stipulated term HPL might not get the returns for their investment unless they find more partners. Another limitation that would be present while evaluating the risks is the fact that t he company¶s financial position would be at the limit of their comfort zone. This is a particularly precarious situation that most businesses try to avoid. Hence this limitation would pro bably be influencing the decision making process in a negative negat ive manner. Furthermore the demand for their products pro ducts could disappear at any time since human behavior and preferences are inherently unpredictable.
This project will review all the factors that would be involved in evaluating the question as to whether such a big investment for a firm such as HPL is beneficial in the long run.
Background: About Hansson Private Label (HPL) Started in 1992 (Purchase of manufacturing assets from Simon Health and Beauty Products) Purchased by Hansson for $42 million ($25 million equity & $17 million debt) ± Hansson¶s largest single investment Hansson believed he was paying significantly less than replacement costs for the assets Hansson was confident private-label growth will continue HPL¶s development and success: Hansson¶s focus on manufacturing efficiency, expense management and customer service turned HPL into a success Secured most major national and regional retailers as customers Conservative expansion of HPL ± opening of any new facility only if (>60% capacity utilization) Currently, all operating at (>90%) capacity HPL¶s Business Operations & Performance: Manufacturer of personal care products (soap, shampoo, mouthwash, shaving cream, sun screen and others) under brand label of HPL¶s retail partners (supermarkets, drug stores, mass merchants) Generated $681 million (revenue) in 2007 [28% of total wholesale sales of $2.4 billion] Situation: $170 million investment proposal (expand manufacturing capacity of Hansson Private Label [HPL]) to accomodate request by HPL¶s largest retail customer to increase their share of private label manufacturing Land acquisition ($16 million) Plant construction ($56 million) Manufacturing equipment ($52 million) Packaging equipment ($24 million) Working capital for yr 1 ($22 million) Customer will only commit to a 3-yr contract Expect from Hansson a go/no-go commitment within 30 days Dilemma: Needs to determine return on the investment to justify effort and risk May risk future opportunities of rapid growth and significant value creat ion by locking in strong relationship with huge, powerful retailer Need to maintain debt at modest level to contain risk of financial distress in the event t he company loses a big customer Perspectives: (Pro-Investment) Additional capacity will allow HPL to expand relationship with its largest customer (growing sales in US) Generate attractive payback Expansion will enable HPL¶s growth from addition of new custo mers
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HPL competitors from expanding production capacity in HPL¶s personal care subsegments Perspectives: (Con-Investment) Making investment and incurring associated debt -> significantly increasing HPL¶s annual fixed costs and increase risk of financial distress should sales fall or cost rises (or both) Sales (from HPL¶s largest customer) may initially increase. However, demand may disappear at end of 3-yr contract Industry Trends: (Personal Care Product Market) Personal care market (hand&body care, personal hygiene, oral hygiene, and skin care products) US sales ~ $21.6 billion in 2007 Volumes increased (<1%) in each of past 4 years Dollar sales growth (driven by price increases) averaged growth of 1.7% annually the past 4 years Featured numerous national names (high-end to low-end) with considerable brand loyalty Private label penetration range (3% in hair care to 20% in hand sanitizers) Personal care products are sold mainly through (1) mass merchants, (2) club stores, (3) supermarkets, (4) drug stores and (5) dollar stores Over past 15 years, manufactures heavily depended on small number of retailers who had large national presence Intense competition for shelf space (~80,000 new products launched each year) Industry Trends: (Private Label Industry) With private label brands, retailers rather than manufacturers co ntrolled production, packaging and production of goods Retailers carry private label goods to provide consumers with lower-priced alternatives to national branded goods Quality improvements in private label goods led to increased acceptance by customers Private label sales exceeded $70 billion in 2007 Private label products accounted for $4 billion of sales at retail (19% of $21.6 billion), translating to $2.4 billion in wholesale sales from manufacturers Benefits of Private Label: Potential to increase profits by capturing a greater share of value chain Manufacturer profits per unit could double those of retailer (esp. if brand was famous) Retailers¶ cost of goods was 50% lower than branded goods -> can double profit-per-unit sold despite lower selling prices Opportunity for growth (sales of private label goods <5% in many product categories)
