Written Analysis and Communication I

Assignment 3
West Lake Home Furnishings Ltd: Projections of the sales
offer made by a Client

Submitted to
Dr. Rohini Patel

By
Rathod Manjeet R.
Roll No. 144086
Section: A
PGP 2014-16

On
30.08.2014

Memorandum
To: Charles Bowman, CEO, West Lake Home Furnishings Ltd.
From: Manjeet Rathod, Executive Assistant to Charles Bowman
Date: 15th Jun, 2007
Subject: Analyzing the projections of the promotional offer made by a U.S. based
retail chain client
Please find the attached report, analyzing the future implications of the sales
promotional offer on the signature line of West Lake Home Furnishings Ltd., provided
by a U.S. based retail chain client, including the financial and market share
projections.

Report Summary
The report summarizes the content of the document in a nutshell to provide the reader
a comprehensive perspective of the contents.
Situation Analysis: The home furnishing market has witnessed compounded annual
growth of 6.1% in recent years. West Lake Home Furnishing Ltd (WLHF) does
business in the same vertical. One of the retail chain who contributes 33% of the
wholesale business of WLHF about reducing the price and in turn it is ensuring the
increased market share and five times larger consumer size. WLHF is unsure about
accepting this offer as it can affect all its other customers and its credibility, while
maintaining the current future expectations of sales.
Problem Statement: Considering the impact on future sales and the market share,
should WLHF accept the deal of U.S. based retail chain?
Options:
1. WLHF rejects the offer and continues with the same business operations
2. WLHF rejects the offer and hires a sales consultant to attract the business from
interior decorators
3. WLHF accepts the offer
Evaluation Criteria:
1. Increased market share for WLHF.
2. Increased profitability and net earnings by at least 15% annually.
3. Increased goodwill and credibility.
Evaluation of Options:
Rejecting the offer and continuing with the same business would not increase the
market share, increase the net earnings by only 9%, no significant increase in the
credibility according to the projections.
Hiring the sales consultant for retail store and rejecting the offer would increase the
market share by 0.03%, reduces the net earnings by 13%.
Accepting the offer would increases the market share by 34%, increases profitability
to 40.7%, increases net earnings by 239%. The credibility is expected to rise because
of the increased client base, maintained high quality while the reduced price.
Recommendations: WLHF should accept the offer as it meets all the criteria more
significantly than any other option. The option also ensures the USP of WLHF while
achieving the future goals.

Situation Analysis
The home furnishing markets sales have seen a rise from $7.6 billion (2002) to $9.7
billion (2006), which includes annual growth of 9.38% in the year 2006 (Exhibit 1).
The rise can be attributed to the baby boomers, now in age of 45-64, earning higher
incomes and spending on home ownerships and improvements. In the same time, the
average prices of the home furnishing products have fallen, but because of the ~15%
increase in the number of unit sales, the market has witnessed growth. Analyzing the
trend, it can be inferred that by lowering the unit prices even more, the growth in the
sales volume can be achieved.
West Lake Home Furnishing Ltd. (WLHF) deals in the Lighting Industry and has
~1% of market share. WLHF sells the products by either supplying the retailers or
selling in their own retail store or though Internet website. The unique selling
proposition of WLHF is their modern designs and reasonable prices. Currently,
WLHF is achieving the annual net earnings at a growth rate of ~15% and they want to
maintain this growth in the future. 90% of the WLHFs production is sourced from
China, which has forced the higher level of inventory levels to ensure the in-time
delivery. WLHF holds $1.6 million of inventory, which accounts for 15% of the sales.
Even though WLHF is reluctant to increase the inventory level, they can increase it
without significant financial implications.
WLHF has no long-term debts, as the home furnishing industry is not capital intensive
and yet highly profitable, which presents threat to WLHFs market share, by new
entrants and increased competency to WLHF. Currently, WLHF has five main
competitors and two new firms are entering the market, which pressurizes WLHF to
improve their USP to improve the profitability and increase the market share.
33% of WLHFs wholesale business is attributed to a U.S. based retail chain, which is
asking for price reduction from $69.99 to $29.99. WLHF produces a signature line for
this retailer. The retailer is ready to reduce the profit margin by 50%. If WLHF
accepts the offer, then the COGS would fall 66%, units sold would increase by five
times and the other expenses would rise slowly. The retailer would provide a

prominent shelf space to the product. Summing up all these facts, would result in the
boosted sales and deeper market penetration for WLHF, but following this move, all
the other wholesale retailers, store customers and internet customers would ask for the
similar less price, which would in turn reduce the profit margin per product for
WLHF. WLHF have provided the information about the Chinese manufacturing
factory, cost, product specifications with the buyer, which can lead the retail chain to
start directly buying products from China. If WLHF doesnt make the deal, then
WLHF stands chance of losing a huge customer. Now WLHF needs to make a
decision in accordance with their ambitions, whether they should accept or reject the
offer.

Problem Statement
Considering the impact on future sales and the market share, should WLHF accept the
deal of U.S. based retail chain?

Options
1. WLHF rejects the offer and continues with the same business operations
2. WLHF rejects the offer and hires a sales consultant to attract the business
from interior decorators
3. WLHF accepts the offer
4.

Criteria for Evaluation

1. Increased market share for WLHF.
2. Increased profitability and net earnings by at least 15% annually.
3. Increased goodwill and credibility.
1.

Evaluation of Options
WLHF rejects the offer and continues with the same business operations. The
projected growth of the Canadian retail industry is 10% in 2007(Exhibit 1). It would
increase the WLHF sales to $12.26 million (Exhibit 2), but the market share would
remain unchanged at 1.24% as in 2006(Exhibit 3. Hence, this option would not ensure
the increased market share for WLHF. Exhibit 4 suggests that the projected growth in
the net earnings would be 9% to $2,22,705 (Exhibit 5), which is less than the 15%
growth that WLHF wants to achieve. The profitability of WLHF remains unchanged
at 37%(Exhibit 5).
WLHF rejects the offer and hires a sales consultant to attract the business from
interior decorators in order to leverage upon the opportunity of increased home
ownerships of baby boomers. Exhibit 3 suggests that the market share would increase
by 0.03% to reach the level of 1.27% in 2007. The expected level of increase in the
sales is $3,00,000, but it would increase the COGS and expenses such that the
projected net earnings falls to $1,76,155 (Exhibit 7), causing 13% decrease in the net
earnings (Exhibit 4). By selecting this option, WLHF would lose the signature lines
sale and the consumer group, who were the buyers of those products. Even if WLHF
focuses also on Internet based business to maintain the consumer level, the negligent
sales share of 1.7%(Exhibit 7) would not let the total sale change by a significant
margin.
Accepting the offer by WLHF would increase the market share to 1.66% (Exhibit 3),
which is an increase of ~34% from the 2006 level. Analyzing the financial aspect, the
projected net earnings in 2007 are $6,89,905 (Exhibit 8), which is an increase of
239% (Exhibit 4). Moreover the profitability also increases to 40.7% (Exhibit 8). This
option would reduce the price of the signature line products to $29.99 from $69.99
that can raise doubts about the quality of WLHF products in the minds of consumers.
But the increase in the number of consumers by five times in the wholesale business
reduces the threat of reduced credibility among the consumers.

Recommendations
WLHF should accept the offer following the projections of increased market share,
increased net earnings and increased profitability. Moreover by choosing this option,
the retailer would provide increased shelf space and five times more client base to its
particular business, the high quality products would be sold at lower price maintaining
WLHFs USP of reasonable prices; all these would sum up to the increased credibility
and goodwill among the consumers. As this option projects more market share,
profitability and credibility, WLHF should develop the action plan revolving it.

Action Plan

Make a detailed plan with the retailer about the increased shelf space and how

it would ensure the five times increase in the client base.

Plan out the increased production with the Chinese manufacturer, along with

the required increased labor strength, shipping schedule and other expenses.
Ensure the increased strength of inventory and the warehouse to accommodate

the increased production.

Lay down a plan to negotiate with the other retailers and small shops owners
for the subsequent reduction in the product prices along all the verticals,
without the reduction in the credibility of WLHF.

Total Word Count: 1096

10

Exhibit.1

Year
2002
2003
2004
2005
2006
2007

Projected Home Furnishings Sales

Sales
($ million)
% Annual increase
7,616
7,905
3.79%
8,389
6.12%
8,832
5.28%
9,660
9.38%
10,578
9.50%

Assumption:
1. Based on the presence of Baby Boomers, it is assumed that the % increase in
the sales would not fall and would remain almost at the same level in 2007 as
was in 2006.

Exhibit.2
Projected Sales of West Lake for 2007
(WLHF rejects the deal and continue with the same business operations)
2007
2006
Total Sales of Home Furnishing Industry ($ million)
10,578
9,660
Total Sales of Lighting and Lighting Fixtures
($
million)
As a % of Total Sales of Home Furnishing Industry
West Lake Sales ($ million)
As a % of Total Sales of Lighting and Lighting
Fixtures

986
9.32%

900
9.32%

12.26

11.2

1.24%

1.24%

Assumption:
1. The 9.50% increase in the Total sales of Home furnishing industry (in the
continuation of Exhibit.1) is assumed to be true and the projected sales of
WLHF for 2007 is calculated on its basis.

11

Exhibit. 3
Market Share of WLHF in 2007 under Different Scenarios
2007
Hiring
Accepting
No change in
Consultant
Offer
operations
Total Sales of Lighting and
Lighting Fixtures ($)
99,03,00,000 97,76,80,000
99,00,00,000

2006

90,00,00,000

WLHF Sales ($)

As a % of Total Sales of
Lighting and Lighting
Fixtures

1,26,20,000

1,62,35,301

1,23,20,000

1,12,00,000

1.27%

1.66%

1.24%

1.24%

Sales of other firms ($)

97,76,80,000

97,76,80,000

97,76,80,000

88,88,00,000

Note:
Data presented in the exhibit is supported by various exhibits (3, 7 and 8), consisting
of detailed projected WLHF sales.

12

Exhibit.4

Year
2006
2007
2007
2007

Projected Change in the Net Earnings under Different Scenarios

Net
Earnings
%
($)
Change
Respective Option
2,03,45
0
2,22,70
WLHF rejects the deal and continues with the same business
5
9% operations
1,76,15
WLHF rejects the deal and hire a sales consultant to attract the
5
-13% business from interior decorators
6,89,90
5
239% WLHF accepts the deal

Note:
Data presented in the exhibit is supported by various exhibits (5, 7 and 8), consisting
of detailed projected net earnings.

13

Exhibit.5
Projected Income Statement for 2007
(WLHF rejects the deal and continue with the same business operations)
Income Statement
2007
2007
2006
Store
Wholesale
Internet
Total
26.8
71.4
2,18,92
1.8
Sales ($)
32,83,929
% 87,57,143
%
9
% 1,22,60,000 1,12,00,000
29.8
69.4
0.8
COGS ($)
22,98,750
% 53,63,750
%
62,395
%
77,24,895
70,57,000
21.7
74.8
1,56,53
3.5
Gross Margin ($)
9,85,179
% 33,93,393
%
4
%
45,35,105
41,43,000
As a % of sales
30.0%
38.8%
71.5%
37.0%
37.0%
Sales, General, Administrative Expenses ($)
Shipping and Warehouse ($)
Operating Income ($)
Income Taxes ($)
Net Earnings ($)

32,83,929
9,08,554
3,42,623
1,19,918
2,22,705

Assumptions:
1. Sale has increased by 9.5% over 2006
2. Income tax; Sales, General and Administrative (SG&A) Expenses and
Shipping and Warehouse (SW) Expenses are in the same proportion of sales as
they were in 2006 and were calculated from the income statement as shown in
Exhibit 6
Exhibit.6
Different Percentages for preparing Income Statement
Income Tax (as a % on Operating Income)
35%
COGS (as a % of Sales)
63%
SG&A Expense (as a % of sales)
27%
Shipping and Warehouse (as a % of sales)
7%
Assumption:
1. Calculated from the Income Statement of 2005 and 2006
2. Assumed that the respective percentages remain same for 2007

14

30,00,000
8,30,000
3,13,000
1,09,550
2,03,450

Exhibit. 7
Projected Income Statement for 2007
(WLHF rejects the deal and hire a sales consultant to attract the business from interior decorators)

Sales ($)
COGS ($)
Gross Margin ($)
As a % of sales

Income Statement
2007
Store
Wholesale
Internet
2,18,92
35,83,929 28.5% 87,57,143 69.7%
9 1.7%
23,55,000 29.8% 53,63,750 67.8%
62,395 0.8%
1,56,53
10,09,286 21.7% 33,93,393 73.0%
4 3.4%
28.2%
38.8%
71.5%

Sales, General, Administrative Expenses ($)

Shipping and Warehouse ($)
Operating Income ($)
Income Taxes ($)
Net Earnings ($)

2007

2006
Total

1,25,60,000
79,13,921

1,12,00,000
70,57,000

46,46,079
37.0%

41,43,000
37.0%

34,44,286
9,30,786
2,71,007
94,853
1,76,155

30,00,000
8,30,000
3,13,000
1,09,550
2,03,450

Notes:
1. The consultant would charge $80,000 which would be included in SG&A
expense
2. The sales for the retail store would increase by $300,000
Assumptions:
1. Total Sales have increased by 9.5% over 2006 in 2007
2. Income tax; Sales, General and Administrative (SG&A) Expenses and
Shipping and Warehouse (SW) Expenses are in the same proportion of sales as
they were in 2006 and were calculated from the income statement as shown in
Exhibit 6

15

Exhibit.8
Projected Income Statement for 2007
(WLHF accepts the deal)

Store
Sales ($)

32,83,929

COGS ($)

22,98,750

Gross Margin ($)

As a % of sales

9,85,179
30.0%

20.3
%
24.0
%
14.9
%

Income Statement
2007
Wholesale
Internet
78.4
1,26,94,080
% 2,18,929
75.4
72,35,626
%
62,395
82.7
54,58,455
% 1,56,534
43.0%
71.5%

2007

2006
Total

1.4
%
0.7
%
2.4
%

Sales, General, Administrative Expenses ($)

Shipping and Warehouse ($)
Operating Income ($)
Income Taxes ($)
Net Earnings ($)

1,61,96,938

1,12,00,000

95,96,771

70,57,000

66,00,167
40.7%

41,43,000
37.0%

43,38,465
12,00,309
10,61,393
3,71,488
6,89,905

30,00,000
8,30,000
3,13,000
1,09,550
2,03,450

Assumptions:
1. Sales of the retail chain, making the offer has increased by 5 times.
2. Sales of other retail chains, internet and store have increased by 9.5%
3. COGS of the retail chain making the offer has reduced by 33% (from 63% to
42%) while the COGS for other retail chains is still 63% of sales. Thus the
COGS for wholesale has approximately reduced to 57%
4. Sales of Wholesale = $1,26,94,080 is derived in the Exhibit.9
5. SG&A expenses and Shipping and Warehouse expenses have increased in the
same proportion as the sales, 27% and 7% of sales respectively.

16

Exhibit.9
Change in the Wholesale Sales,
because of the change in the per unit price to the deal making retailer
(WLHF accepts the deal)
2007
Wholesale sales ($)
12694080
Retail Chains Sales ($)
9012797
Non Offering Retail Chain Sales ($)
3299600
Offering Retail Chain Sales ($)
5713197
Price ($)
29.99
Units
190503

2006
8000000
5680000
3013333
2666667
69.99
38101

Given Fact:
1. Retail Chains Sales = 71% of (Wholesale sales)
2. Price per unit of product for signature line reduces to $29.99 from $69.99
3. Units being sold at offering retail chain would increase by five times
4. The retail chain making the offer constitutes 33% of the wholesale market
share in 2007
6.

17

Exhibit.9
Change in the Wholesale Sales,
because of the change in the per unit price to the deal making retailer
(WLHF accepts the deal)
2007
Wholesale sales ($)
12694080
Retail Chains Sales ($)
9012797
Non Offering Retail Chain Sales ($)
3299600
Offering Retail Chain Sales ($)
5713197
Price ($)
29.99
Units
190503

2006
8000000
5680000
3013333
2666667
69.99
38101

18