Problem Statement-
West Lake is aiming to boost its sales and achieve an annual steady growth rate of 10-15 percent and
become the most recognizable name in its category. However, the current sales growth of the
company is about 1 percent, primarily due to the presence of competition in the market. Hence, in
order to meet the gap in the sales growth rate, the company can either choose to accept the offer of
the retailer or it can reject the offer and increase sales through other channels like the retail store
and internet.
Options-
The following options are available-
1. Accept the offer of the U.S. based retail chain
2. Reject the offer of the U.S. based retail chain
Criteria for Evaluation-
1. Opportunity & financial impact
2. Risks involved
Evaluation of Options-
1. Accept the offer of the U.S.-based retail chain-
I. Opportunity & Financial impact: There can be an increase in the demand for the product
with the increase in visibility and the target growth rate can be achieved. If West Lake
reduces the price, sales can increase by 400 percent from 38,101 to 190,503 units. This
can double the sales revenue from $2,666,667 to $5,713,197. The gross profit margin
from this retail store would drop to 33% from 57% but it can be brought back to previous
levels with gradual price increases, once the promotional offer ends. (Refer to Exhibit 1 for
the financial statements of 2007-08 of the company)
II. Risks Involved:
The other two retailers can demand the same concession, and this can either lead
to decrease in gross profit margin further, or they can discontinue their business
with the company.
The share of the U.S.-based retail chain in the wholesale business of West Lake
would increase to 51 percent. This would result in the majority of the wholesale
business being concentrated in favour of the retail chain.
2. Reject the offer of the U.S.-based retail chain
I. Opportunity & Financial impact-
West Lake can focus on increasing its internet sales as this can provide a gross
profit margin of 70 percent. However, the company will forgo the opportunity to
increase its sales by 5 folds, and it is also not guaranteed that it will achieve the
targeted growth rate of 10-15 percent through store and internet sales.
There can be a loss of one-third of the wholesale business if the retailer
discontinues its business with the company.
II. Risks involved:
If rejected the offer, the retail chain has other similar suppliers in Asia who can
manufacture a similar-looking private label, and thus increase the competition for the
company’s products in the market
Also, there are new entrants in the market, and with already existing competition, if
West Lake is not able to increase the sales, it may face a decrease in demand.
Recommendation:
After evaluating the options available, it is recommended that West Lake should accept the offer of
the retailer and offer the retail price of $29.99 to gain a prominent shelf-space. This option has the
potential to increase the sales of the company by five folds, and can help it in achieving an annual
growth rate of 10-15 percent. The company should also focus on growing its internet and retail
business.
Action Plan:
1. West Lake can offer better commissions to the other two major retailers so as to
avoid the demand for lower prices from them.
2. Once the special one-year promotion is over, the marketing team should conduct a
market research in the Canadian retail market to assess the nature of the demand
for the signature line products, through methods such as focus group and online
surveys.
3. Based on the market research, the marketing and accounting team can decide to
increase the price of the signature line product gradually over the years. This will
help in avoiding the sticker shock.
4. Simultaneously, to retain the most profitable customers, the sales team can provide
special loyalty offers for future purchases.
5. In order to increase its internet presence and sales, the sales and marketing team
should tie up with e-commerce platforms such as e-Bay and The Home Depot.
6. The design team should introduce innovative designs and the HR department should
hire a sales consultant to attract the business from the home designers as this can
also lead to an increase in the sales of custom lighting and fixtures.
Exhibit 1: Projected Financial Statement of West lake Home Furnishings Ltd
2006 2007-08 (Expected) % Change
Sales 2666666.67 Sales 5713197.12 114%
Price/unit 69.99 Price/unit 29.99 -57%
No of units sold 38101 No of units sold 190503 400%
COGS @ $30 1143020.43 COGS @ $20 3810068.10 233%
Gross Profit 1523646.24 Gross Profit 1903129.01 25%
Gross Profit Margin 57% Gross Profit Margin 33% -42%
SG&A 714000.00 SG&A 856800 20%
S&W 197540.00 S&W 493850 150%
Operating Income 612106.24 Operating Income 552479.01 -10%
Tax 214237.18 Tax 193367.65 -10%
Net Income 397869.05 Net Income 359111.36 -10%
Exhibit 2: Financial data for U.S based retain chain
2006 2007-08 (Expected) % Change
Sales 2666666.667 Sales 5713197.12 114%
Price/unit 69.99 Price/unit 29.99 -57%
No of units 38101 No of units 190503 400%
Gross profit @ 30% 800000 Gross profit @ 15% 856979.5685 7%
Exhibit 3: Projected change in share of retailers in the wholesale segment
2006 2007-08 (Expected)
Total Wholesale
revenues 8000000 11094530.46
a) U.S retailer 2666666.67 5713197.12
% of total 33% 51%
b) Rest 5333333.33 5381333.33
% of total 67% 49%
Exhibit 4: Projected change in sales growth of the three segments of the company
Category 2006 2007-08 (Expected) % Change
Store 3000000 3027000 1%
Wholesale 8000000 11094530.46 39%
internet 200000 201800 1%
Total 11200000 14323330.46 28%
Assumptions:
1. The growth rate in sales of retail store, internet and other retailers of whole segment is
taken as 1% based on the growth rate of sales from 2005 too 2006, which is 1%.
2. The SG&A and S&W expenses have been allocated proportional to sales.