EVA CONSULTING

University of New South Wales Sydney, Australia

Nelson Boyd, Jared Goh, Paulette Lo, Matthew Zaidan
Mentor: Brian Burfitt

CeeCee Business Challenges and

Strategic Solutions 15 May 2010

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TABLE OF CONTENTS
INTRODUCTION

DISTRIBUTION STRIKE

CHALLENGE

RECOMMENDATIONS

IT FAILURE

CHALLENGE

RECOMMENDATIONS

CELEBRITY MARKETING

EXPANSION INTO JEWELLERY RANGE

CHILD LABOUR ACCUSATION

10

CHALLENGE

10

RECOMMENDATIONS

11

CONCLUSION

11

APPENDICES

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APPENDIX A-1: DISTRIBUTOR STRIKE

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APPENDIX A-2: DISTRIBUTOR STRIKE

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APPENDIX A-3: DISTRIBUTOR STRIKE

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APPENDIX A-4: DISTRIBUTOR STRIKE

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APPENDIX B: IT SYSTEM FAILURE

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APPENDIX C: CELEBRITY MARKETING

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APPENDIX D: JEWELLERY RANGE EXPANSION

defined.

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APPENDIX E: COMPETITIVE ENVIRONMENT

defined.

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INTRODUCTION
CeeCee is a retail fashion company that was established in 1989, operating
630 shops across 18 European countries. The success of the company is
grounded upon employing the fast fashion business model that utilizes the
manufacturing Just In Time (JIT) principle combined with efficient design and
delivery systems. This business model relies on sophisticated IT systems,
close contact with manufacturers, fast creation and supply to shops, and the
swift sale of new inventory items. CeeCee has employed this business model
to great effect, capturing significant market share in their target market of
young professional women looking for fashionable but affordable clothing. It
has since expanded into menswear, childrens wear and home furnishings.
The following SWOT analysis highlights key attributes and opportunities
CeeCee should leverage, threats to be mitigated and weaknesses to
overcome. Despite intense rivalry between numerous competitors such as
Zara and H&M, CeeCee offers a unique value proposition that differentiates it
and positions it competitively in the market (see Appendix E).
SWOT Analysis
Leverage

Mitigate

Internal

Strengths
Fast creation and supply to
shops
Integrated inventory and
logistics system
Competitive prices
Excellent customer care
Global manufacturing
sources

Weaknesses
Very reliant on one
distributor (EIT)
IT system failure

External

Opportunities
Expansion of jewellery range
Celebrity endorsement
Trend towards ethical
products

Threats
Distribution strike
Child labor accusations
Seasonal nature of
clothing industry
Economic recession
Intense competition

However, CeeCee has recently encountered significant business challenges.

Distribution strikes, IT failure, child labor accusation threaten to disrupt the

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successful functioning of the business. They pose significant long term

ramifications to CeeCees image and in the short term affect financials. In
addition, there are opportunities to select payment methods for a new
celebrity marketing campaign and expand by offering a jewellery range.
In this report, EVA Consulting will analyze the challenges and opportunities
faced by CeeCee, and provide strategic recommendations to ensure
sustainable and profitable growth as a leader in the fashion industry.
EVA Consulting has prioritized the above challenges based on a criterion that
includes:
Direct effect on immediate business operations
Indirect effect on the long-term growth of the company and brand
image
Impact on long-term customer relationships, particularly repeat
customers
The most critical challenge is the distribution strike which strikes at the heart
of the company as it disrupts the delivery of the product sold and damages
relationships with repeat customers expecting on-trend items. It has more
severe financial consequences than the IT failure, which is the second most
critical challenge as managing receivables is crucial for cash flow. Celebrity
marketing payment options should be decided to ensure the most efficient
methods are agreed upon. Timely expansion into the jewelry range is
important, but not as pressing as the previous challenges. Finally the child
labour accusations are crucial to CeeCees long term image and reputation,
however, in comparison to the distribution strike and IT failure it is unlikely to
have a large immediate impact on revenues.

DISTRIBUTION STRIKE

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CHALLENGE
EIT, which is the only distribution company utilised by CeeCee, is unable to
deliver goods for five weeks and in the following five weeks is able to
distribute half the deliveries due to servicing and repair work. The success of
CeeCees fast fashion model, that delivers clothes which are on trend,
depends on fast creation and supply to shops. This severe delivery disruption
has significant financial consequences in the short term and in the long term
damage of CeeCees reputation. The disruption will cost each of CeeCees
stores approximately 493,314 in revenues (See Appendix A-1). Based on the
average number of stores in 2010, 640, this disruption will cost CeeCee
316m in revenues, 221m in profits and 100% of sales in week 10 compared
with initial projections (See Appendix A-2). Revenues will decline 11% and
profit for the period will fall 48% (See Appendix A-2). Operating profit margin
is projected to decline from a prediction of 23% to 14% (See Appendix A-3).
The graph below illustrates that the disruption will cause predicted revenue to
fall from 2,985m to 2,669m. See Appendix A-4 for a year to year
comparison.

Impact of delivery crisis on revenue

(m)
Initial sales revenue prediction

Delivery crisis revenue prediction

2,985

2,669

2010 Prediction

The delivery crisis will have long term consequences, negatively impacting
CeeCees reputation and image. CeeCees runway to rack approach, gets
runway looks on its shelves within 15 days. Clothing which arrives 6 weeks
late could result in a spring item arriving during autumn. Late fashions

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combined with stock-outs as inventory is not replenished could damage

CeeCees reputation with customers who return frequently expecting a fresh
supply of fashionable designs. Thus, going forward management should to
develop a course of action to ensure the reliability and effectiveness of its
delivery systems.
RECOMMENDATIONS
As EIT expects vehicles to be fully operational after ten weeks, CeeCee could
absorb the sales lost and continue its relationship with EIT as occurred before
the union crisis. EITs reliable and on-time delivery was provided at the
expense of maintenance of its vehicles. Future deliveries may be late as
maintenance is now a priority for EIT. Thus, relying solely on EITs distribution
services is highly risky.
To minimise the immediate loss in sales revenue, CeeCee has three options:
1. It may enter a short term delivery contract with an alternative distributor
for the 10 week period. A short term contract with little notice may
attract a premium. However, with the companys reputation and sales
at stake, a premium is a worthwhile investment.
2. Alternatively, another clothing company with established distribution
networks in similar areas could be approached with a fee to utilise their
networks for the 10 week period. A combined effort would also
increase leverage when bargaining with delivery companies.
3. CeeCee could sue EIT for damages for breach of contract. The
success of legal action depends on the length of the contract. A failure
to deliver 10 weeks of a six month contract may constitute a substantial
failure to deliver the service promised. With a 5 year contract, a 10
week failure to deliver may be determined as an insignificant time
frame. Failed legal action would be costly, cause negative media
attention, and severely damage CeeCees future relationship with EIT.

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In the long term, to diversify its distribution options, Cee has three options:
1. CeeCee could vertically integrate and acquire an existing delivery
company, establish its own distribution network or contract more firms
to distribute clothing. Owning a delivery network would result in cost
savings, reducing the fees required for outsourcing and ensure control
over delivery reliability. However, due diligence of prospective targets,
the maintenance of delivery trucks and the expansion of human
resources could be a challenge.
2. A second option is to establish a new delivery business unit. This will
require extensive capital investment, which will leverage CeeCees
strong ability to raise finances, but will require expertise in an area that
CeeCee lacks experience. Acquiring an existing delivery company is
less time consuming and complex compared with starting a delivery
business.
3. Switching some orders to EITs distribution rivals will make CeeCee
less vulnerable to distribution shocks. There is a risk that smaller
companies will be unable to meet deadlines, and costs may increase
as CeeCee loses leverage in negotiations, as it becomes a smaller
customer to both distributors. Whilst new distributors would require
updating information systems and adapting communication channels to
accommodate different systems, the reduction in risk is significant.
Multiple distributors may reduce costs and improve delivery reliabilities
as delivery companies compete to retain CeeCees business.
Through increasing the distributors CeeCee utilises, the company can
transform its weakness of reliance on one distributor and significantly reduce
the risk of a similar crisis in the future.
IT FAILURE
CHALLENGE
The online sales system delivered by ProveIT accepted sales order without
payment, which has led to a discrepancy between website sales figures and
cash received. Approximately 50,000 orders have been processed without

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payment at an average transaction value of 120 per order. This has led to
financial loss of approximately 6,000,000 damaged reputation and potential
loss of future business. In addition, this failure has cast doubt on the reliability
of the online sales system delivered by ProveIT.
RECOMMENDATIONS
Recovery of unpaid goods by the Finance department would impose
additional workload leading to staff morale and productivity issues, as the
finance team is currently overstretched. The expected monetary recovery is
also comparatively less than the recovery by an external debt collection
agency (see Appendix B). Hiring an external agency would be more cost
effective and maximises recovery (see Appendix B) and does not distract the
finance team from carrying out their regular day-to-day work. An external
debt agency should be engaged by the Finance Director to recover the
outstanding payments immediately.
ProveIT, as the outsourced IT service provider responsible for the design and
development of the online sales system, has failed to deliver a working
product. ProveIT is responsible for supervising and managing the quality of
the work done by CeeCees seconded staff during the development of the
system. The fact that CeeCee failed to detect the programming error in the
system does not waive ProveITs liability. Both the Finance and IT Directors
should be responsible for reviewing the design of the online sales system and
identifying the need for additional internal controls to prevent any further
errors. Sales reconciliation should be done using reports generated from CCF
and CCIPL in particular weekly sales revenue and weekly inventory sold.
Due to a lack of legal expertise in CeeCee, the Finance and IT Directors
should enlist the assistance of an external legal firm to sue ProveIT for
liquidated damages for financial loss, damaged reputation and potential loss
of future business. It is recommended that CeeCee undertake a reassessment of the robustness and reliability of the online sales system.

CELEBRITY MARKETING

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It is important for CeeCee to consider the two proposed payment methods for
the endorsement of CeeCee by Kool (a popular European rock singer) to
ensure the most cost efficient method that maximises value for shareholders
is selected. The two payment methods include:

Payment Option 1: Kool would accept a fixed payment of 50,000 with a

bonus of 150,000 should incremental sales reach 2 Million
(probability of 0.1)

Payment Option 2: Royalty basis, earning 5% of incremental sales

revenue

Both methods of payment have different projected costs for different

associated levels of revenue as evident in figure 1 (see Appendix C). This
costs result in a projected level of profit as shown in figure 2 and 3 (see
Appendix C). The incremental revenue level of $1 Million is the estimated
break even sale value, that is, where the cost method of payment option 1
and option 2 are both equal and thus the estimated profit level at that
incremental revenue level is equal as shown in table 1 (see Appendix C).
CeeCees payment option 1 for Kool is the cheaper option within the sales
revenue range of 1.2m to 2m. However, its important for CeeCee to
consider, that although there is a probability of 0.1 for sales to exceed 2
million, outside of this range (above and below), payment option 2 is the
cheaper option.
EXPANSION INTO JEWELLERY RANGE
CeeCee should take advantage of complacent competitors in the Jewellery
market that are not upgrading the shopping experience for consumers. The
Chief Executive Officer recommended the launch of a new jewellery range.
This strategy should be supported. The project involves the allocation of
150

of space for the new jewellery range. This provision of space cannot

be supported by smaller shops, so will only be introduced by 320 medium or

larger stores.

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In order to assess the viability of undergoing such a project, a net present

value analysis must be conducted. In reference to the Net Present Value of
the jewellery range expansion project conducted in table 1 and 2 (see
Appendix D), it was projected that the jewellery expansion project per shop is
a viable option. With an internal rate of return of 53% being greater than the
required discount rate of 12%, the Profit Index of 2.77 and Net Present Value
of 37,216.09 the project is viable and it is highly recommended that CeeCee
pursues it. Whilst the CeeCee already allocated significant expense to shop
refurbishment and expansion, the company is in a strong financial position
with strong sales and profit margins, indicating a cost efficient system and a
current ratio in 2008 of 3.26 indicating the company has the liquidity to meet
short term obligations. In terms of financing the jewellery range expansion, it
is noted that CeeCee should have little difficulty in raising finances as it is a
listed company. Jewellery expansion can be timed to occur during regular
shop refurbishments to minimise sales disruptions.
CHILD LABOUR ACCUSATION
CHALLENGE
The management of CeeCee has encountered an ethical dilemma with the
knowledge that a substantial number of the Asian suppliers have been using
child labour to manufacture garments for CeeCee. Although this information is
not yet public, and although the agent believes that the child labour issue is so
commonly reported that many newspapers have grown bored of the story- this
is still illegal. If reported, this could significantly damage CeeCee image and
cause it to lose loyal customers who are affronted by the violations. Child
labour is a sensitive issue amongst CeeCees target market, young educated
women.
This creates a conflict of interests for management between a cheap labour
option which ensures manufacturing cost are low and being ethical, by not
engaging in contracts with suppliers who do not abide by child labour laws.
Management must choose whether to turn a blind eye to the illegal production
of their product, or act ethically not for their own positive publicity or to avoid

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legal action but because acting ethically and fairly is a long-term goal of any
company, as companies such as CeeCee have a social responsibility to not
promote or encourage child labour.
RECOMMENDATIONS
For these reasons we recommend that CeeCee conduct a review of its
suppliers, not just in the Asian region but in Europe as well, reviewing working
conditions and the age of workers. CeeCee can identify which suppliers are
acting ethically and refused to engage with suppliers who breach these ethical
borders. By leveraging its position, CeeCee may be able to persuade
suppliers from hiring child workers. This is important not just for the company
in promoting an ethical image and operating legally, but in acting as a
responsible social entity that promotes fairness and honourable operations.
Whilst CeeCee may suffer slightly higher manufacturing costs as adult
workers are paid higher wages, this could save long term sales losses if the
child labour issue were to get into media attention. In addition, CeeCee can
capitalise on its ethical choices by publicly declaring its careful selection of
suppliers. Customers are increasingly willing to pay a premium for products
created ethically, an image CeeCee can aggressively portray.
CONCLUSION
The current challenges faced by CeeCee pose a unique opportunity to
establish a firm foundation in all areas of performance and establish the
company for sustained and profitable growth in the future. It is critical that
CeeCee prioritizes a solution to the threat posed by the distribution crisis,
which strikes at the very heart of the business model employed. The company
can transform its weakness of reliance on one distributor by diversifying and
contracting multiple distribution companies. Despite the urgency of recovering
lost monies, what is ultimately necessary is that CeeCee reviews the IT
system and ascertain its reliability.

By paying endorser Kool with a fixed

payment method (payment option 1), CeeCee maximises return from the
marketing strategy, as incremental sales are less likely to exceed 2 million.
CeeCee should expand its jewellery range to capitalize on competitor

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complacency and consumer demand. Not only will CeeCee benefit from sale
of this range, but through cross selling and attracting customers into the store,
the firm can ensure that it increases market share and achieve long term
sustainable growth in sales. Finally it is recommended that CeeCee reviews
suppliers, regardless of region and importance, to ensure they are operating
ethically, to ensure long term cost savings. Whilst manufacturing costs may
increase slightly, these are eclipsed by potential costs if consumers were to
discover the child labour accusations.

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