Harrington Collection

Case #4
Ahmed Aubaid

Anastasia Knyazeva Ameen Al-Mohsen Yuan Cheng

1. Problem Statement Harrington, a large manufacturer and retailer of high-end womens apparel, had posted lackluster sales for the past three years and margins were now at an all-time low. Harrington needs some fresh ideas if its going to continue to remain an industry leader and needs to try to decide whether or not expanding into a product line with more casual, lower-priced fashions would boost sales, since there has been a tremendous growth in the active-wear segment. Karen Allen, a director in strategic planning feels that a new product launch would probably put a significant drain on their resources. 2. Situational Analysis Industry: There is a trend toward less expensive, casual, active-wear clothing, which means that the company should enter the active-wear market through the lower cost product classifications, such as better, moderate and budget. 82% of womens apparel is imported in to the U.S., which means that 82% are manufactured outside of U.S. - in China and other developing nations where the labor costs and costs of goods sold is significantly less than for the similar apparel produced in the United States. Harrington could save money on production and manufacturing costs through manufacturing outside of U.S. One of the biggest challenges facing the industry is managing the short-lived product life cycles. If outsourcing to China, far away from U.S., it does not provide an adequate control over quality and turn-around times. Retailers have to wait long time until they receive a product. The barrier to enter the industry is low, as the outsourcing production became easy. This means that the women retail markets have lots of players, competitors and thus, low profit margins. This way this market becomes a perfect competition where Harrington has to compete for product quality, price, and customer experience/service. There is a new trend for casual, active-wear clothing. Consumer tastes change rapidly, and they no longer desire the tailored, professional look, but more fresh and comfortable (key attributes) clothing. This means that a large number of women would go for activewear, fresh comfortable clothing.

Consumers Consumers had become very price-sensitive. Half of all apparel purchased was sold on sale. People began spending less money on things like clothing, as it is not in a high demand (compared to technological gadgets), which could be due to the economic recession. This means that Harrington should sell low end, less expensive clothing, but remain good quality fabric and product. Harrington survey findings showed 10 percent of customers purchasing apparel in the $100-$200 price range would buy an active-wear set if one with superior styling, fabric,

and fit was available. This price range is within a better product classification, which means that an alternative with this classification will get 10% of Harrington customers. Similarly, baby boomer population wants clothing that doesnt make them feel old. So, we can assume that females age 45 to 60 would go for more active, comfortable clothing, rather than formal, elegant clothing that makes them feel old. Harrington customers developed a brand loyalty due to the superior quality, knowledgeable sales staff, and designer styles. 95% of purchasers were satisfied with the products durability, feel, fit, and look (key attributes), which means that it is important to be consistent in the new active-wear product development, so that the loyal customers dont turn away.

Competition: When it comes to Harrington Collection and Vigor, there are numerous competitors. Due to the ease of outsourcing production, there are very low barriers to entry of the clothing industry. As well, there has been an increase in retail outlets giving more competition. This means companies will be competing for the customers through brand, price, and quality. The intensity of rivalry would be high and many brands would be competing for shelf space and market share. The leading brands are Jones Apparel Group and Liz Claiborne who are known for their diverse portfolios. They both outsource their production of apparel overseas and are both involved in design, marketing, wholesaling, and retailing of womens apparel. Jones currently has 396 specialty retail stores and their brands include Jones, New York, Nine West, Anne Klein, and Gloria Vanderbilt amongst many others. Liz Claiborne currently has 338 retail stores around the world with 201 of those locations being in the US. Some of their brands include Mexx, Juicy Couture, Lucky Brand Jeans, and Ellen Tracy. This would give Harrington Collection trouble because these brands have locations around the world and have a huge number of brands that target people with different clothing styles with attractive pricing.

Company: Harrington Collection owns and operates their own manufacturing in facilities located in the United States, Mexico, and the Caribbean. The benefit of this is that they can produce and control the quality of whats being manufactured. Rather than outsource their product and have no control of how its being produced, they have full control. As well, these facilities are located close to the United States meaning transportation and having products shipped are less wait times than having it shipped in from an outside source. Harrington Collection differentiated its products through design, marketing, and outstanding service. The company was known for its top in-house design staff, extensive national advertising campaigns, and its exceptional quality and styling. Also, Harrington Collections brand image and reputation are both great, stores are loving to deal with them because they can count on reliable deliveries, help in selling the merchandise, and credibility that comes with carrying the Harrington labels.

3. Key decision criteria: Quantitative: Increase profit margin, as the margin has been declining in the past three years, which is a major issue for the company. Break-even within the first year

Qualitative: Maintain the same brand image of a superior quality, design and standards not to turn away existing customers. It is important to be consistent in products durability, feel, fit, and design. To have a less costly production, so that Herrington could decrease the selling price to be competitive, but still differentiate through superior product wuality

4. Possible alternatives and analysis of each: 1) To lunch a new stylish, casual and good quality active-wear product line of a better classification to be distributed through the Vigor division at a suggested selling price of $100 for hoodie, $40 for a tee-shirt, and $80 for pants to target women age 25 to 60 with an average household income of $60,000 - 75,000. Women who would buy the activewear are stylish and trendy but are tiered of an uncomfortable formal look. The product would get manufactured in Mexico, as it would be easier to control the product quality and would not be far from U.S.; at the same time the labor costs are a lot cheaper than in U.S., assuming that the cost of goods sold for hoodie is $10.55, for tee-shirt - $3.50, and $8.40 for the pants. Having the companys own manufacturing facility in Mexico would offer the company an advantage of a larger contribution margin. 2) To lunch a new stylish, good quality casual active-wear product line of a better classification to be distributed through a Vigor division of a selling price at about $100 for hoodie, $40 for a tee-shirt, and $80 for pants, targeting women aged 25 to 50 with an average household income of $100,000 who want to look young, stylish and wear comfortable active-wear. The product would get manufactured in U.S, so that the product quality to be well controlled. 3) To lunch a new stylish, great quality casual active-wear product line of a designer classification to be distributed through a Harrington Limited division at a high selling price from $500-$1,000 per item - $699 for hoodie, $250 for a tee-shirt, and $450 for pants, targeting women aged 35 to 60 with an average household income of $200,000 who want to look young and wear stylish, comfortable active wear of a great quality and fabric. The product would get manufactured in U.S, so that the product quality is well controlled. 4) To lunch a new stylish, casual active-wear product line of a budget product classification to be distributed through a newly created division at an affordable selling price of less than $50 per item - $40 for hoodie, $15 for a tee-shirt, and $30 for pants, targeting women age 20 to 60 of a low to medium income who still want to look young,

stylish, fashionable, but feel comfortable. The product would get manufactured in China with the use of cheap labour and other costs of production. 5) Status quo. Do not enter the active-wear segment. Although the company wants to enter the high-growth active-wear market, there is a lot of competition. This means that the pricing has to be competitive, which is risky, as Harrington targets mostly medium-high income households. If they start selling their clothing for as much as their competitors do, Harrington customers brand perception of a fashionable and high quality product may change. 5. Choice and good rationale The choice is the alternative #1 manufacturing through Mexico so that the costs of production are lower than in U.S., which will give Harrington an ability to set lower selling prices. If the company can save on labour and manufacturing costs, it could remain be competitive in terms of price, as the market becomes more price sensitive and is not willing to spend as much money on clothing. At the same time if they manufacture in Mexico they can have a better ability to control the product quality and respond quicker to the new products and trends than if they manufacture in China (Mexico is right next to U.S.). Compared to China, they could save on increasing shipping costs. Distribution through Vigor division and its better product classification is the best option, as it is the cheapest division out of Harringtons four. Active-wear products could be easily added to/replaced some of the Vigors dresses, skirts, blouses, pants or coats, as people are willing to wear fresh comfortable clothing instead of elegant and formal that often make them look old. Vigor consumers were labelled as trend setters, which means that Vigor customers would be willing to dress accordingly to the new trend casual, comfortable active-wear clothing.

6. Implementation Target market: When implementing alternative #1, Harrington should focus on Vigor target market as well as new customers interested in good quality casual and comfortable clothing. New active-wear products target market is: women age 25-60, with an average household income of $60,000 to $75,000 +, busy college-educated professionals or retired baby boomers who care about new trends, fashionable clothing of a very good quality that is fresh, comfortable and helps to look young. Marketing mix: Product: Very good quality fabric, stylish, comfortable hoodies, tee-shirts, and pants that could be wore to work during very busy days when people want to feel comfortable, or anywhere else. As the number one factor of customer decision-making is fabrication, it is important that Harington remains production of clothing of a high fabric material and quality.

Price: Although the Vigors average selling prices are from $150-$500, it is important that they set lower pricing, as peoples lifestyles and demands changed and they no longer looking to buy expensive clothing. The pricing should be competitive, but at the same time not cheap to reflect a superior product quality (what Harrington customers case about the most). The selling prices should now be between $40-$200 affordable but at the same time not cheap -, and almost no of their customers (only 2%) thought that a less-expensive active-wear line would cheapen the brand. Promotion: As Harrington was always good at its advertising and promotion strategies, they should remain doing the same thing. Harrington Collection differentiated its product through marketing and was always known for its extensive national advertising campaigns. So, it should remain heavy advertising for its new product line. Place: The distribution is through the Vigor division as Myers explained, Vigor has the strength to branch out and support a more casual, less-expensive line. It is the best division out of four for this new line. A new, cheaper division/brand could be created for the active-wear; however, the biggest Vigors benefit is that the brand is well known and widely advertised. Vigor customers are trend setters, who are a perfect market for the new active-wear trend.

7. Control: Margins: Measure: Overall profit margins for the first year. Implement: If margins are not at 15%, well look to decrease production costs and increase sales training. If margins are above, consider expansion of line into possibly new colors, styles, and shoes. Awareness: Measure: Survey consumers about product knowledge Implement: If product knowledge is low amongst consumers, well focus on promotions and personal selling. Retail Outlets: Measure: Measure sales in the outlets Implement: If sales are low in an outlet, well figure out why that is and what could be done to increase sales. If sales are high in outlets, well consider expanding in similar stores and focus on what theyre doing and emphasize that to other retailers.

Financial Analysis:
demand and profitability Analysis Template start-up costs start-up costs pants plant start-up costs tee shrts and hoodies plant equipmant pants plant equipmant tee shrts and hoodies plant launch- PR, Advertisment Fixture for Company Stores total start-up costs Annual Depreciated Start-up costs Annual Ongoing Operating Costs- Fixed: overhead pants Plant overhead Hoodies and tees Plant Rent Pants Plant Rent hoodies and tees Plant mangment/Support advertising total fixed operating costs
direct variable costs Sew and Press Cut Other Variable Labor Fabric Finding Hoodies 3.25 1.15 3.2 9.1 3.85 20.55

1,200,000.00 2,500,000.00 2,000,000.00 2,500,000.00 2,000,000.00 50,000.00 10,250,000.00 2,050,000.00

3000000 3500000 500000 500000 1000000 3000000 11500000

Tee-shirt 2 0.4 2.4 2.2 0.5 7.5 Pants 2.85 0.7 3.05 7.5 2.3 16.4

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alternative(1) Breakeven
Direct VC Translated into "Unit" Cost Hoodie $20.55 Tee-Shirt $7.50 1.5 $11.25 Pants $16.40 1 $16.40

0.5 $10.28

Suggested Retail Price for Vigor products Suggested Whole sale Price for Vigor products

$100.00 $50.00

$40.00 $20.00

$80.00 $40.00

Indirect VC: Wholesale "unit" price Total Variable Costs as % of whole sale price Indirect variable costs per "unit" $95.00 9.09% $8.64

Direct VC per "unit" Indirect VC per "unit" Total VC per "unit"

$37.93 $8.64 $46.56

Contribution: Wholesale price per "unit" Less total variable costs per "unit" Contribution per "unit" $95.00 $46.56 $48.44

Breakeven:

Fixed annual costs (operating & depreciated start up)

$21,750,000.00

Contri buti on pe r uni t Breakeven units

$48.44 449,009.08

Profit Margin:
Revenue Less fixed annual costs less total VC Profit before tax Profit margin before tax (%)

(1555400 units with 7% market share)

$ 155,540,000.00 $21,750,000.00 $72,419,424.00 $61,370,576.00 39.46

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alternative(2) Breakeven
Direct VC Translated into "Unit" Cost

mexico
Hoodie $10.55 0.5 $5.28 Tee-Shirt $3.50 1.5 $5.25 Pants $8.40 1 $8.40

Suggested Retai l Pri ce for Vi gor products

$100.00

$40.00

$80.00

Indirect VC: Whol esal e "uni t" pri ce Total Vari abl e Costs as % of whol e sal e pri ce Indirect variable costs per "unit" $65.00 8.12% $5.28

Di rect VC per "uni t" Total VC per "unit"

$20.55 $25.83

Contribution: Whol esal e pri ce per "uni t" Less total vari abl e costs per "uni t" Contri buti on per "uni t" $65.00 $25.83 $39.18

Breakeven:

Fi xed annual costs (operati ng & depreci ated start up)

$21,750,000.00

Contri buti on pe r uni t Breakeven uni ts

$39.18 555,130.17

Profit Margin:
Revenue Less fixed annual costs l ess total VC Profi t before tax Profi t margi n before tax (%)

(1555400 units with 7% market share)

$ 155,540,000.00 $21,750,000.00 $40,168,205.00 $93,621,795.00 60.19

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alternative(3) Breakeven
Direct VC Translated into "Unit" Cost

mexico
Hoodie $10.55 0.5 $5.28 Tee-Shirt $3.50 1.5 $5.25 Pants $8.40 1 $8.40

Suggested Retai l Pri ce for Vi gor products

$699.00

$250.00

$450.00

Indirect VC: Whol esal e "uni t" pri ce Total Vari abl e Costs as % of whol e sal e pri ce Indirect variable costs per "unit" $350.00 0.75% $2.64

Di rect VC per "uni t" Total VC per "unit"

$20.55 $23.19

Contribution: Whol esal e pri ce per "uni t" Less total vari abl e costs per "uni t" Contri buti on per "uni t" $350.00 $23.19 $326.81

Breakeven:

Fi xed annual costs (operati ng & depreci ated start up)

$21,750,000.00

Contri buti on pe r uni t Breakeven uni ts

$23.19 937,852.78

Profit Margin:
Revenue Less fixed annual costs l ess total VC Profi t before tax Profi t margi n before tax (%)

(1555400 units with 7% market share)

$ 1,087,224,600.00 $21,750,000.00 $36,071,706.41 $1,029,402,893.59 661.83

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alternative(4) Breakeven
Direct VC Translated into "Unit" Cost

mexico
Hoodie $10.55 0.5 $5.28 Tee-Shirt $3.50 1.5 $5.25 Pants $8.40 1 $8.40

Sugges ted Retai l Pri ce for Vi gor products

$40.00

$15.00

$30.00

Indirect VC: Whol es al e "uni t" pri ce Total Vari abl e Cos ts as % of whol e s al e pri ce Indirect variable costs per "unit" $25.99 13.19% $3.43

Di rect VC per "uni t" Total VC per "unit"

$20.55 $23.98

Contribution: Whol es al e pri ce per "uni t" Les s total vari abl e cos ts per "uni t" Contri buti on per "uni t" $25.99 $23.98 $2.01

Breakeven:

Fi xed annual cos ts (operati ng & depreci ated s tart up)

$21,750,000.00

Contri buti on pe r uni t Breakeven uni ts

$23.98 907,103.01

Profit Margin:
Revenue Less fixed annual costs l es s total VC Profi t before tax Profi t margi n before tax (%)

(1555400 units with 7% market share)

$ 62,216,000.00 $21,750,000.00 $37,294,496.57 $3,171,503.43 2.04