Hair Care

Sam and Annabelle Burns own and manage the firm Hair Care Ltd, based in the United Kingdom. The firm was formed
in 1998 when Sam and his wife re-mortgaged their house and borrowed heavily from the bank to buy out the
company from a conglomerate organisation who were disposing of non-core businesses. Sam had been a senior
salesman with the hair-care subsidiary of the conglomerate. This subsidiary bought hair care products, mainly small
value items and consumables - scissors, brushes, combs, hair nets, curlers and hair driers, from manufacturers and
resold them to wholesalers and large retail chemist chains within the United Kingdom, mainly for use in hairdressing
salons. The new business has continued in this direction. The manufacturers are almost entirely non-UK suppliers,
many based in Hong Kong but with manufacturing facilities in mainland China, Taiwan and Malaysia. However about
30% of the products are sourced in Europe - Italy and Germany predominantly.

The company has met with success very quickly and the initial loans have already been repaid ahead of schedule.
The company now owns the freehold of a large warehouse/distribution centre which is five times the size of the
original depot, leased when the company first started trading five years ago. Sales turnover, now in excess of £5
million, has increased by more than 50% each year and shows little sign of slowing down. Despite this apparent rapid
growth Hair Care Ltd only accounts for about half of the current market, leaving some potential for growth. The
company is run cost effectively, with minimum staffing. Sam, as Managing Director is solely concerned with the
marketing side of the business. He spends most of his time in the selling role and in customer care which he rates as
a major contributor to the company's success. The only other key manager is his wife who is responsible for
managing the warehouse staff, arranging distribution, general administration and financial management. The
company started with six employees, in addition to Sam and Annabelle, and now has 15. Staff rarely leaves the
company. The staff is almost entirely employed in the distribution and packaging function, although there are two
other sales people apart from Sam, but they only deal with the smaller buyers. With the continued growth in
turnover, it is inevitable that the number of employees will have to increase. It is expected that there will have to be
a total of about 30 staff, all non managerial, in two years if sales continue to increase at the current rate.

The success of Hair Care Ltd can be accounted for by a number of factors. Sam is a very good salesman who is
responsible for looking after all the major accounts. He is popular and much of the business is built on his personal
relationship with the key clients. There is a considerable amount of customer loyalty which is mainly attributable to
Sam, and both he and his wife are always accessible to customers and they go out of their way to provide a first class
service. Even on vacation the two owners are in daily contact with the office. The company has been able to manage
its purchases wisely. Most of the products, being purchased abroad, require payment in a foreign currency. Hair Care
has been able to benefit from the relative weakness of the euro against sterling for its European supplies. Although
most of the products sourced in the Far East are priced in US dollars, the relative strength of that currency has
enabled Hair Care Ltd to negotiate lower purchasing prices. However it is questionable as to how long this situation
concerning foreign exchange can be held. The situation may change should the United Kingdom join the euro in the
near future in which case much would depend upon the level at which sterling enters the euro exchange.

Sam has also developed strong links with his suppliers and he has, until recently, attempted to trade with only a few
so that his lines of communication and control are kept as simple as possible. Most of his current suppliers have
been with him since the start of the company in 1998. This has provided the company with reliable and good quality
products. In fact Hair Care Ltd often has exclusive access to certain products. For example it has the sole rights to
distribute an Italian hair-dryer which is generally recognized to be the best on the market. This product strength has
enabled the company to build on the customer loyalty. However, it is inevitable that as demand has increased,
existing suppliers have not been able to keep up with the necessary volumes and Sam has had to look for, and buy
from, new manufacturers.

The company has benefited from a period of relatively steady growth in the economy and even in the current
economic down-turn Sam has argued that demand for hair care products is usually recession-proof. Furthermore
Hair Care Ltd has currently no near competitors. Many of the small competitors in the wholesale market place have
chosen to concentrate on other areas of the hair care business - salon furnishings and the supply of cheap, low-value
items such as towels, razors etc, leaving much of this basic business (sales of other relatively low-value and mainly
disposable products) to Sam's company. Additionally quite a number of the small firms have even left the market.
All this has helped to contribute to the overall growth rate of Hair Care Ltd. There are some major international
companies who make shampoos, conditioners and other cosmetic type products who also buy-in consumer
hairdressing products such as the ones sold by Hair Care Ltd. They then sell these mainly to the retail trade for
domestic use by consumers and not directly to the hairdressing salons as does Hair Care Ltd. Furthermore these are
large companies and Sam believes that they do not currently see his company as a major threat.

The company has registered a brand name for its main products which it re-packages, rather than using the individual
brands of the original manufacturers. This has enabled Hair Care Ltd to generate even greater loyalty from its
customers and often to obtain a price premium from these products. Sam believes that part of the company's success
stems from the fact that he has an organisation with minimal administrative overheads. He outsources all of his
products, adding value mainly through branding and the maintenance of customer care. He believes that strategy is
not mainly about beating the competition but in serving the real needs of the customer. The company has also been
able to develop a strong relationship with the country's leading retail chemist chain, providing it with good quality,
low-cost disposable products such as hair nets and brushes to be sold under an own-brand label. Although the
margins are inevitably small, the volumes involved more than compensate for this. The company has had to incur
increased investment as a result of the large growth in turnover. The building of the warehouse, the increased
inventory-holding costs, capital expenditure on items such as computing systems, fork- lift trucks and automated
inventory control and retrieval systems could not be financed out of current earnings, but the company's bank was
only too ready to lend the company the necessary money considering that the original loan had been repaid ahead
of schedule.

All the success which Hair Care Ltd has achieved has not diminished Sam's appetite for growth. He now seems to be
driven more by seeking power and influence than acquiring wealth. He questions the ability of the company to
continue its current growth in the prevailing environment and therefore he is looking for ideas which may facilitate
corporate expansion. He has asked his accountant to provide some options for him to consider.
 Table 1: Details of Performance of Hair Care Ltd: 2000-2003

(unless otherwise stated, figures are in £'000)

2000 2001 2002 2003

£'000 £'000 £'000 £'000
Sales 2,300 3,506 5,010 7,500
Cost of Sales 1,450 2,380 3,507 5,250
Marketing Costs 200 250 290 350
Distribution Costs 300 400 430 500
Administration 50 55 80 120
Interest Payments 0 80 220 700
Operating Profit 300 335 483 580
Loans 0 850 2,400 5,000
Number of suppliers (actual) 15 20 30 50
Range of products (actual) 35 85 110 130
Total staff including Sam and Annabelle 12 14 15 23
Inventories 231 406 700 1,400
Non-current assets 500 1,500 2,700 6,300
Return on Sales (%) 13.6 9.6 9.6 7.7

Required
a) Assuming the role of Sam's accountant, prepare a report for Sam, evaluating the current position of Hair Care
Ltd and highlighting any financial and strategic issues concerning future developments which you feel should
be brought to his attention: ,
(21 marks)

b) Identify and assess the strategies which Sam could consider in attempting to further the company's
development.
(16 marks)
Professional skills marks are available for demonstrating analysis skill (4 marks)

c) Sam currently appears to have a successful formula for growth. Using the concept of the value chain,
demonstrate how he has been able to achieve this success.
(10 marks)
(Total = 50 marks)