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Dre$$ense (May 2019) 58 MARKS QUESTION PAPER

Introduction

You have recently joined Dre$$ense as a senior finance manager reporting to the Finance Director.
Dre$$ense is a large clothes retailer in Euland a major developed country where the currency is $. Stores
sell a wide range of clothing to the people living in Euland, and the underlying aim is to sell fashionable
clothes at the lowest possible prices.

Dre$$ense obtains most of its clothes from suppliers in developing countries. A factory belonging to
Fabrykate, one of Dre$$ense’s suppliers, recently collapsed killing or injuring a large number of people.

The Finance Director has several tasks she wants you to help her with and set up a number of meetings
with key members of staff which were held last week. You have a file with the following pieces of information:

Exhibit 1: Press report from a reputable business newspaper: ‘Dre$$ense – Company analysis’.

Exhibit 2: Briefing note given to you by Dre$$ense’s Procurement Director during your meeting
with him.

Exhibit 3: Press article following the accident at Fabrykate’s factory.

Exhibit 4: Press article 1: ‘Consumerism in crisis as millennials stay away from shops’

Exhibit 5: Press article 2: ‘The hidden costs of online shopping – for customers and retailers’

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The case requirements are as follows:

1. The board will also be discussing Dre$$ense’s relationship with its stakeholders and how this
could influence the company’s strategy.

Required:

Analyses the stakeholder claims of Dre$$ense’s customers, suppliers and pressure groups
such as IWCN and explain how these may be in conflict.
(9 marks)

Professional skills marks are available for demonstrating analytical skills in considering the
stakeholders and how Dre$$ense’s strategy may be influenced by the claims and rights of
stakeholders.
(2 marks)

(Total: 11 marks)

2. The Finance Director has asked you to prepare a presentation and some briefing notes for a
forthcoming professional development session for the Board. Following the recent events in
Deeburgh one of the topics covered in the training will be corruption. The other topic will be risk. The
Finance Directors believes that the major risks facing Dre$$ense are market risk, financial risk
(liquidity and gearing), and international political risk.

Required:

(a) In preparation for the presentation, prepare THREE slides with accompanying notes,
explaining each of the risks identified by the Finance Director, and how each may be
of importance to Dre$$ense’s s h a r e h o l d e r s .

(12 marks)

Professional skills marks are available for demonstrating communication skills in highlighting the key
points to include in the slides and clear supporting notes.
(2 marks)

(b) Prepare a briefing note which explains how ‘corruption’ undermines stakeholder
confidence in general and discusses how corruption at Fabrykate contributed to the
collapse of the building and the loss of life.

(9 marks)

Professional skills marks are available for demonstrating commercial acumen in demonstrating
awareness of how corruption contributed to the collapse of the building.
(2 marks)

(Total: 25 marks)
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3. Dre$$ense has successfully followed a cost leadership strategy without having created an on-line
store. The Board are now considering whether they should develop their E-business strategy through
an online store, and are looking to you to explain the key features of an E-business strategy and
whether this is something Dre$$ense should consider.

Required:

Prepare a report which includes the following:

(a) An explanation of what is meant by an E-business strategy and a brief outline of the
processes most likely to be affected by such a strategy.
(8 marks)

Professional skills marks are available for demonstrating communication skills for explaining clearly
an E-business strategy.
(2 marks)

(b) An explanation of the e-marketing principles of interactivity, intelligence,

individualisation and independence of location and how these might be applied to
Dre$$ense.
(10 marks)

Professional skills marks are available for commercial acumen skills for showing awareness of
relevant issues and their potential impact on the business.
(2 marks)

(Total: 22 marks)

(Total 58 marks)

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Exhibit 1 – Company background and analysis

Dre$$ense’s business strategy is based around vigorous cost leadership and it prides itself on selling
fashionable garments for men, women and children at the lowest prices compared to its main rivals.

For most fashion retailers, e-commerce plays a key role in fulfilling customer demands. However,
Dre$$ense has achieved its success despite not having an online store.

The lack of an online store does not mean that Dre$$ense does not have an online presence. Dre$$ense
has generated an active online following, in which customers share photos and images of their recent
purchases via social media.

Dre$$ense recently announced that it is opening five new stores, and the Finance Director said 'Despite
the fact that the economy in Euland is still relatively weak, customers recognise the value for money which
Dre$$ense offers, and we expect to see like-for-like sales continuing to increase over the next year.'

However, the company warned that the rising costs of key raw materials - such as cotton - and the relatively
weak value of Euland's currency could reduce profit margins, as could the increase in the minimum wage
in Euland which the government is expected to announce in its next budget. Many of the retail assistants
who work in Dre$$ense's stores are paid the minimum wage.

One of the contributory factors to the rising cost of cotton, a popular clothing material for customers of
Dre$$ense and other retailers and their suppliers, is the ‘sustainable cotton’ movement championed by
environmentalists across the globe. Whilst cotton is the most profitable non-food crop in the world employing
7% of the labour force in developing countries, the water used in the production of just one cotton t-shirt,
would be enough to sustain a person for nearly 3 years.

The company would not comment on whether its prices would increase during the coming year, but most
analysts think this is likely. As one analyst noted, 'Ensuring product ranges remain fashionable will be vital
for retaining sales, because the cost increases are likely to affect all retailers, putting pressure on their
margins.'

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Exhibit 2 - Briefing note given to you by Dre$$ense’s

Procurement Director during your meeting with him.

Dre$$ense’s business strategy is based on ‘cost leadership’ through carefully sourcing men, women’s and
children’s fashion from carefully chosen suppliers to fit in with our cost leadership aim. Gross margins are
currently 12% as compared to most of our competitors who have margins around 20%, so it is essential
that we keep our costs low. Sources tend to be from suppliers in developing countries where labour cost
are cheaper than in Euland.

For the last few years, 65% of supplies have come from Deeburgh, a relatively poor developing country
known for its low labour costs and weak regulatory controls.

There are a number of issues raised by our supply chain in Deeburgh. For instance we are aware that
Deeburgh has a reputation for corruption, including government officials, but on the plus side, its workforce
is known to be hard-working and reliable. Most employees in Deeburgh’s garment industry are employed
on ‘zero hours’ contracts, meaning that they are employed by the hour as they are needed and released
with no pay when demand from customers including Dre$$ense is lower.

Deeburgh is in a part of the world where there is a physical and economic water scarcity. Physical water
scarcity is where there are inadequate natural water resources to meet a regions domestic, industrial,
agricultural and environmental demands, and economic water scarcity is where a country is unable to
provide water in an accessible manner. The increase in economic activity and agriculture are contributing
to the physical scarcity, and the lack of investment in essential infrastructure or technology to draw water
from rivers, aquifers or other water sources is failing to tackle the economic scarcity. The population in
Deeburgh are included in the one quarter of the world's population affected by economic water scarcity.
Communities are often left without reliable access to water and sometimes have to travel long distances to
fetch water that is often contaminated from rivers for domestic and agricultural uses.

The government are reluctantly addressing the economic water scarcity issues and are planning on
increasing taxation to help fund the investment.

The majority of Dre$$ense’s purchases from Deeburgh are from Fabrykate Company, a longstanding
supplier to Dre$$ense owned by the Fabbio family.

You may have heard about the recent problems Fabrykate have had with one of their factories. Partly in
response to recent events and also because the Government appear to be responding to demands for
improved water supply infrastructure and improved worker conditions, Fabrykate have announced that they
will be asking for a 5%-8% price increase, when it comes to the new contract which will be discussed in the
next few months. We must resist this robustly, so that we can continue to achieve the margins our
shareholders wish to see.

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Exhibit 3 - Press article following the accident at Fabrykate’s

factory.

1000’S KILLED AND INJURED AT FABRYKATE NEW FACTORY – WHO IS TO BLAME?

The collapse of one of Fabrykate’s newest factories killed over a 1,000 people and injured more than twice
that many. This was only five months after, at least 100 workers had lost their lives in another tragic
accident, trapped inside the burning fashion factory on the outskirts of Havara. These disasters, among the
worst industrial accidents on record, awoke the world to the poor labour conditions faced by workers in the
ready-made garment sector in places like Deeburgh.

We MUST ask ourselves how this latest example come about! What do we now know?

Fabrykate outgrew its original premises, largely due to contracts from big companies such as Dre$$ense,
and wished to build a new manufacturing facility in Deeburgh for which permission from the local
government authority was required. It has become clear that in order to gain the best location for the new
factory and to hasten the planning process, the Fabbio family paid a substantial bribe to local government
officials.

Why, we might wonder, did the Fabbio family feel the need to resort to bribery?

Did the Fabbio family feel under so much pressure from companies such as Dre$$ense to keep their prices
low that they sought to reduce overall expenditure including capital investments?

‘Perfect’ conditions!

Because the enforcement of building regulations was weak in Deeburgh, the officials responsible for
building quality enforcement were bribed to provide a weak level of inspection when construction began,
thereby allowing the family to avoid the normal Deeburgh building regulations. In order to save costs, inferior
building materials were used which would result in a lower total capital outlay as well as a faster completion
time. In order to maximise usable floor space, the brothers were also able to have the new building
completed without the necessary number of escape doors or staff facilities. In each case, bribes were paid
to officials to achieve the outcomes the Fabbio family wanted.

Once manufacturing began in the new building, high demand from Dre$$ense meant that Fabrykate was
able to increase employment in the facility. Although, according to Deeburgh building regulations, the floor
area could legally accommodate a maximum of 500 employees, over 1,500 were often working in the
building in order to fulfil orders from overseas customers including Dre$$ense.

The result:

After only two years of normal operation, the new Fabrykate building collapsed with the loss of over 1,000
lives. Collapsing slowly at first, the number of people killed or injured was made much worse by the shortage
of escape exits and the large number of people in the building. As news of the tragedy was broadcast
around the world, commentators reported that the weakness in the building was due to the West’s
‘obsession with cheap clothes’. Dre$$ense was criticised as being part of the cause, with many saying that
if retailers in the developed world pushed too hard for low prices, this (the collapse of the building) was one
consequence of that. In response, Dre$$ense’s public relations department said that it entered into legal
contracts with Fabrykate in order to provide its customers with exceptional value for money. Dre$$ense
said that it was appalled and disgusted that Fabrykate had acted corruptly and that the Dre$$ense board
was completely unaware of the weaknesses and safety breaches in the collapsed building.
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Who is to blame?

One of those able to escape the building was Mai Zum, who was also the leader of a national pressure
group ‘Improve workers’ conditions now!’ (IWCN) lobbying the Deeburgh government for better working
conditions and health and safety practices for workers in the country. Having seen hundreds of people killed
and injured in the collapsed building, she believed that although the government could do more, much of
the blame lay with Dre$$ense and the pressure it continually placed on Fabrykate to keep its prices low.

Mai questioned whether multinational companies such as Dre$$ense should be allowed to exert so much
economic pressure on companies based in developing countries. As concern over the state of other
workplaces in the developing world became an increasing concern in the media, Miss Zum wrote a letter to
the board of Dre$$ense, which she also sent to newspapers and other media both in Deeburgh and Euland.
Many of the newspapers and television channels in both countries reproduced the letter and it became a
talking point in many countries because of the issues it raised.

In the letter, she said that ‘Dre$$ense was an unethical company’ because it supplied a market in its home
country which was obsessed with cheap clothes. As long as its customers bought clothes for a cheap price,
she believed that ‘no-one at Dre$$ense cared about how they were produced’. She said that the constant
pressure on prices had created a culture of ‘exploitative wages’, including at Fabrykate.

Miss Zum received a lot of support after her comments on Dre$$ense’s accountability. She said that large
international companies such as Dre$$ense needed to recognise they had accountabilities to many beyond
their shareholders and they also had a wider fiduciary duty in the public interest. The defective Fabrykate
factory in Deeburgh, she argued, would not have existed without demand from Dre$$ense, and so
Dre$$ense had to recognise that it should account for its actions and recognise its fiduciary duties to its
supply chain as well as its shareholders.

We asked Dre$$ense for a comment, but the company would only state that it had entered into legal
contracts with Fabrykate in order to provide its customers with exceptional value for money, and that all at
Dre$$ense were appalled and disgusted at the corrupt behavior of the Fabrykate board.

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Exhibit 4 – Article 1

Consumerism in crisis as millennials

stay away from shops
January 2019

Christmas may seem like a distant memory, but retailers won’t forget it in a hurry: it was the
worst on the Euland high street since 2008. Miller & Spiller and Deams saw sales fall, while
specialist retailers also struggled. Even that most Christmassy of stores, Waiters, is forecasting a
dive in profits after discounting to keep up with competitors.

Put simply, the Euland high street is a horror story just now. Long established high street
retailers have seen share prices drop some by more than 90% over the past year, others are
closing 100s of stores, and some have gone into administration due to liquidity problems or are
seeking buyers urgently. An estimated 93,000 Euland retail jobs were lost in 2018, and 2019
could well be even worse.

Economic stagnation, unfair online competition and global warming are all cited for the malaise
– and certainly not for the first time. Though online sales have in fact also struggled in 2018,
poor business practice must also be playing a part in the wider problems. Many retailers are
overburdened with debt, focused on cost-cutting rather than reinvestment, have poor
stakeholder relationships, or simply lack vision. Some well-known high street names did not do
well in a recent survey of Euland shoppers by consumer magazine ‘Consumer’, being criticised
for being overpriced and for out-of-date stores.

Yet there is another crucially important culprit that is mostly overlooked. It happens to be the
one that poses the most serious long-term threat to traditional retail. Consumerism is arguably in
terminal decline, with millennials leading the change, not only in the Euland but in many other
leading economies around the world.

The omens
Consumer studies academics have been picking up on changing habits for a number of years.
This includes an increased ambivalence towards consumption itself: people are buying less
often and less overall. This is particularly true in the clothing industry, where research shows that
millenials are especially unforthcoming – even after you factor in the shift to online retail. A lack
of bricks and mortar did not, for instance, prevent online fashion retailer Online-us
from shocking investors with a profit warning shortly before Christmas.

Sales are stalling because younger people seem less interested in ownership. The average age of a
new car buyer in Usaland was 50 in 2015. Or to give one more example, witness Peach – the
number one technological gadget producer’s recent trading problems. People are not only opting
for cheaper smartphones, but they are keeping them for longer. If the world’s first company to
pass the trillion dollar value mark is showing signs of struggling, we ought to take note.

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Some of this shift in consumption may be ideological. Researchers have suggested

that environmental concerns might be pushing some people to consume less. Economic drivers
are also probably involved. Since the 2008 financial crash, for instance, alternative consumer
communities have emerged. They are more collaborative and self-sufficient; doing things among
themselves rather than buying in from outside.

Post-consumer?
Yet more broadly, lifestyle changes are seeing us moving away from the consumer model which
has dominated post-war capitalist economies. Buying more and more things as a source of
identity and meaning seems to be gradually but consistently falling out of favour. People
are increasingly interested in experiences instead; the priority is making and sharing memories –
interacting with other people and places, attending events, undertaking adventures and so on.
We could be talking about the era of the post-consumer.

To fit this new ethos, it has repeatedly been said that the future of the high street lies in providing
experiences. Retailers have tried to incorporate new, interactive and surprising experiences into
their offerings for years now.

The retailers that survive will be the ones that genuinely understand what is happening; the
answer is likely to lie in offering objects, services and experiences that feel genuine and
enriching. In many cases, it will be about building a long-term relationship that foregoes selling
things now and perhaps, say, provides a space where people can make meaning for themselves.

Whether such ‘interactive and surprising’ initiatives can sustain economic growth is another
question, however. Consumerism has been the beating heart of economies such as Euland and
Usaland for generations; if it can’t be resuscitated, it raises profound questions about how society
will function in future.

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Exhibit 5: Article 2

Euland University research project:

The hidden costs of online shopping – for
customers and retailers
January 2019

Internet shopping has grown massively, especially now that free delivery and returns, with
multiple ways of making them, are the norm. You can order a number of variations of the same
piece of clothing, for example, and then just send back the unwanted ones.

While many returned items may be damaged or faulty, a lot of places will let you return
something just because you don’t like what you ordered.

“Customer first” is the basis of all retailer strategies. Many have had to put online sales systems
into place very quickly to beat the competition. But now they are struggling with the
consequences. The return rates from e-commerce are quoted as two to three times higher than
those for in store purchases. And there are downsides for both retailers and customers.

Profits wiped
For customers there’s a time cost. On top of time spent browsing online, click-and-collect often
means queuing to pick up your purchase. With home delivery, there may be time-consuming
work in packaging and making returns. Online shopping can also simply lead customers to
overspend, due to convenience and clever marketing techniques.

Retailers face serious logistical problems when it comes to offering an omnichannel service that
seamlessly connects customer experiences online and offline. This is because most use systems
that are only designed for traditional shop operations. There are a surprising number of
additional costs in being an omnichannel retailer, which are very likely to wipe out profits from
increased internet sales.

The project, based on case studies and interviews with a number of Eurozone retailers, reviewed
online sales and returns policies.

Using benchmark costs, for a reasonably expensive item overheads cost 3% if there were no
returns of the item. At a 20% rate of returns (the average for e-commerce), the cost of returns
rises to 12%. At 35% rate of returns (the average for clothing bought online) the cost of returns is
22%. At a 70% rate of return (reported by some Eurozone clothing firms) the item makes a
straight loss for the company.

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Mounting costs
Intuitively, returning an item to a store, where there are already staff and storerooms, might
appear pretty much costless, but that is far from the case. The cost of handling a return, even in
store, can be as much as three times the cost of delivering the item in the first place. This is
because the systems behind returns are incredibly complex due to the way stock is managed.
Shops must have secure areas to protect returned items from damage and theft, for example.

Then they are costs involved in the returns support systems. There is hardware and specialist
software to manage returned goods as well as initial online sales. A customer might ring the
customer service team, often housed in a call centre, before going to the store. The average
transaction cost of each administrative task in a business is around $7-$10. Online reduces, but
doesn’t eliminate, administration costs.

Most companies find they need a dedicated returns distribution centre, often run by third party
logistics companies, and incur all the costs of running a facility. If unused and in good condition,
returned items might go back on sale, but sometimes for less if seasonal discounts are in place. If
the item is damaged, there may be costs of repair. The item might even be sold onto third parties
that exist just to sell surplus stock in secondary markets, given to charity or go to landfill. All
involve transport, handling and transaction costs.

Most customers return items in good faith (and good condition), but there are fraudulent
transactions – and return frauds are increasing.

Accountants are kept busy matching refunds with items received, a problem especially where
guest checkouts were used for the online purchase. With all the different locations, items and
financial transactions involved, pinning down a cost of returns is extremely time consuming and
none of our case study companies were fully confident yet about their figures.

The good news is that a very small improvement in reducing returns has a significant impact on
the bottom line. One of our case study companies saved $19m over four years through low cost
investments in communications and equipment. These savings are the equivalent of either the
net profit they would gain from $1.9 billion additional sales or 400 people employed on an
average wage.

Nonetheless, it begs the question of how long the ubiquity of free returns, as we’ve come to know
it, can last. You might argue that retailers make enough money to cover the costs and that only
shareholders suffer. But that lost net margin might also pay staff wages, or be re-invested in IT,
new stock and product development, better customer services and in loss prevention. It also pays
for environmental measures to be taken. We suspect change is inevitable when it comes to the
lure of free returns but it will be interesting to see how retailers choose to respond to this
challenge.

END OF EXAMINATION

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