West Lake Home Furnishings LTD.

Report submitted to
Professor Gita Chaudhuri

In partial fulfilment of the requirements of the course

Written Analysis and Communication I

SUBMITTED BY:
AKASH DHIMAN – 2011010
SUBHASHREE JEENA- 2011250

On
26-10-2020
From
Subhashree Jeena
Consultant
Bain & Co.
Sector-110, Noida 201301

To
Charles Bowman
CEO
West Lake Home Furnishings LTD.
Toronto, Ontario

Date: 24 August 2007

Subject: Analyzing the pros and cons of the promotional offer made by a major U.S. based
retailer

Dear Mr Bowman

Please find enclosed the report, analysing the promotional offer made to WLHF by a major
retailer. The reports consider the various financial implications of the various options
available and recommend the best possible course of action.

Thanks & regards

Sincerely

Subhashree Jeena
(Consultant)
 Summary
Situational Analysis: West Lake Home Furnishing Ltd (WLHF) operates in the house
furnishing market. This market has seen a compounded annual growth rate of 6.1% from
2002 to 2006. WLHF sells its products either to retailers (wholesale business) or to customers
through its retail stores or to customers through its website. The wholesale business
constitutes 72.07% of the total sales of WLHF. One of the retail chain clients who constitute
33% of this wholesale business offered a deal to WLHF. The offer says that this retail chain
is willing to drop its profit margin by 50% and provide prominent shelf space to WLHF
products, increasing the market share and customer base of WLHF five times. In turn, WLHF
must reduce its prices by 57.15%. WHLF must decide whether to accept this deal or not.
Problem Statement: How does this deal impact their market share and profits, and should
WLHF accept this proposal?
Options: 
1. Accept the offer by the retailer
2. Reject the offer and hire a sales consultant
3 Reject the offer and continue the operations without any change
Criteria: 
1. Revenue Growth
2. Volume and profit
3. Brand Value
Evaluation of Options:
Accepting the offer would increase the revenue by 41%, increase the net income by 240%.
The credibility of WLHF will increase as customers would be getting the same quality
product at lower prices.
Hiring the sales consultant while rejecting the deal would decrease the profits from
operations by 13%.
Rejecting the offer and continuing the operations without any change would not make much
difference as the net earnings will increase by 9.5% only with no increase in the brand's
credibility.
Recommendations: WLHF should accept the offer because out of all the options available,
this option will help WLHF achieve long-term and short-term goals. This option also ensures
that the USP of WLHF is not threatened.
Situational Analysis:

Canadian Home Furnishing Market:

The decrease in the average cost for home furnishing items due to outsourcing manufacturing
to China has helped the Canadian Home furnishing market grow from a market of $7.6
billion in 2002 to a $9.7 billion market in 2006 with a CAGR of 6.12%. There has been an
annual growth of 9.38% from 2005 to 2006. A decrease in the average price of furnishing
items is offset by the increase in the number of units sold, which is approximately 15%. This
trend suggests that future growth will be driven by volume, and by decreasing the price, the
volume of sales can be improved.
Lighting and Light Fixtures:
The lighting and light fixture industry accounts for $900 million in 2006, which is 9.27% of
the Canadian home furnishing market. No significant investment in fixed assets is required to
enter this market due to outsourcing manufacturing to China, which decreases the cost of
entry. Thus this is a highly competitive market. Due to the availability of many options, the
retailers have leverage on the wholesalers. It is not surprising to see retailers change
suppliers, so no loyalty by retailers for suppliers. This is a very fragmented market with no
retailer accounting for more than 20% of the market.
West Lake Home Furnishings LTD.
West Lake Home Furnishings Ltd. (WLHF) deals in the lighting fixtures market, with 1.24%
of the market share. WLHF have three ways to sell their products: Selling to wholesalers,
selling through their retail stores, & selling through their website. USP of WLHF was the
combination of their modern designs at a reasonable price. WLHF has five main competitors,
with two new entrants who have some designs similar to WLHF. This is a major threat to the
company. The company needs to improvise their USP and penetrate more into the market and
thus increase profits.
WLHF’s net earnings grew 15.9%, and the sales numbers grew by 9.09% from 2005 to
2006.WHLF has no long-term external debt, but since WLHF has outsourced 90% of its
manufacturing to China, it has increased inventory costs. Currently, WLHF holds $1.6
million worth of inventory and is not willing to increase this cost.
Three national retail chains account for approximately 71% of the company’s wholesale
business in 2006. One of these retail chains, which account for 33% of WLHF’s wholesale
business, has offered a deal to WLHF, where they have asked WLHF to decrease the price
from $69.99 to $29.99. This U.S. based retail chain has agreed to lower its profit margin by
50 % for the signature line that WLHF offers only to this retailer. The retailer has promised to
provide prominent shelf space. If WLHF accepts this offer, COGS for this signature line will
decrease by 66%, and the units sold can increase by five times, with other expenses rising
slowly. After analyzing these facts, it can be inferred that this deal will help boost the overall
sale and increase the market penetration for WLHF, but the other customers of WLHF would
also ask for the same price, which will reduce the profit per sale. By not accepting the offer,
WLHF takes the risk of losing a major customer. WLHF has to decide whether accepting this
offer will help fulfill their ambition or not.
Problem Statement:
How does this deal impact their market share and profits, and should WLHF accept this
proposal?
Options
1. Accept the offer by the retailer
2. Reject the offer and hire a sales consultant
3 Reject the offer and continue the operations without any change
Criteria
1. Revenue Growth
2. Volume and profit
3. Brand Value
Evaluation of Options
1. Accept the offer by the retailer:
The client is constituting 33% of the total sales of WLHF’s wholesale business in 2006. After
predicting the 2007 revenue growth, it constitutes over 42% (Exhibit) of total wholesale
business, which is a rise of 27% compared to last year. Overall, there is 41% increase in
revenue due to this change. If we consider the increase in the volumes (quantity sold), we will
have a higher market presence with 190505 units predicted to be sold in 2007 compared to
38101 in 2006 (Exhibit ). The increase in net income is around 240% as compared to 2006.
Customers may raise questions about the quality of WLHF's product if we reduce the price,
but the five times increase in the number of customers will offset this threat.  
2. Reject the offer and hire a sales consultant:
The cash flow statement of WLHF (Exhibit) shows that WLHF has $ 3,18,300 cash in hand
to spare for hiring sales consultants. The predicted increase in revenue due to hiring the sales
consultant is around 12.14% (Exhibit). The profits from operations are expected to decrease
by approximately 13% (Exhibit) due to a rise in 14 % expenses. Hiring a sales consultant will
increase the brand value because that will attract businesses from home designers.
3.Reject the offer and continue the operations without any change
The increase in revenue due to the rejection of the proposal is around 9.5% (Exhibit). The
operations' net income is predicted to increase by the standard 9.5% (Exhibit) with no
substantial increase in volumes. The goal of achieving a 15% growth rate would not be
achieved. There will be no significant increase in brand value as compared to 2006.
Recommendation
After evaluating the above options, the first course of action, i.e., accepting the retailer's
offer, seems to be the most profitable in terms of growth and new customer acquisition. The
increase in revenue is predicted to be around 42% for the first option, whereas it is 13% and
9.5%, respectively, for the other two options. Similarly, the profit margin is also predicted to
increase by 240% for the first option compared to -14% and 9.5% for option two and option
three, respectively. There will be an increase in brand value due to the prominent shelf space
provided by the retailer.
Action Plan
The following course of action should be followed to make the whole process smooth and
streamlined:
1. Discuss and plan with the retailer about the prominent shelf space and how it would
boost units' sales by five times.
2. Plan a layout with the manufacturers in China to make sure that they can manufacture
and deliver the goods on time.
3. Plan to accommodate the increased inventory.
4. Plan on negotiating with other retailers and customers to make sure the company's
credibility doesn’t deteriorate.

Total Words: 1078