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 HPLs largest retail partner proposed to them significantly increasing the share of their private label manufacturing. 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 for HPL to accept or reject this expansion proposal, a return on the potential 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 for a more diversified growth. The project would attempt to evaluate the investment that has been proposed by HPLs manufacturing team. The primary question is on whether the investment required to increase HPLs manufacturing capabilities is warranted or not? This project will also attempt to identify the challenges and risks 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 the company is quite apprehensive in undertaking this investment. The other risk factors that this project attempts to address is the fact that undertaking this investment would double the organizations 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 to be carefully analyzed. Further, the project will also try to evaluate the investment by taking stock of all the forecast involved in the private labeling market along with a look into the past 10 years worth of growth data. It would also review some of the risk free returns that are available in the existing market conditions. The project will also review the process that has been traditionally used by HPL to evaluate the various risks by estimating the companys 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 diversification of the companys investment portfolio. This would help in reducing the volatility of the companys investments. Another measure that the project will delve into in detail is asset classes. By combining various assets classes with various levels of risk together in the same portfolio, 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 of return on the investment using the forecast model. In addition, the project will also define certain limitations associated with evaluating the risks involved in making a big investment. One of the limitations comes from the fact that the retail partner has agreed to increase HPLs share for only three years. Hence this forms a limitation because at the end of 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 the companys 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 probably be influencing the decision making process in a negative manner. Furthermore the demand for their products 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) Hanssons largest single investment Hansson believed he was paying significantly less than replacement costs for the assets Hansson was confident private-label growth will continue HPLs development and success: Hanssons 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 HPLs Business Operations & Performance: Manufacturer of personal care products (soap, shampoo, mouthwash, shaving cream, sun screen and others) under brand label of HPLs 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 HPLs 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 creation 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 the 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 HPLs growth from addition of new customers Deter HPL competitors from expanding production capacity in HPLs personal care subsegments Perspectives: (Con-Investment)

Making investment and incurring associated debt -> significantly increasing HPLs annual fixed costs and increase risk of financial distress should sales fall or cost rises (or both) Sales (from HPLs 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 controlled 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)