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SYNOPSIS
Baldwin Bicycle Company (BBC)
Hi-Valu Stores Inc, discount retail chain Hi-Valu proposes a private label agreement
not top line product Sales through independently owned retailers and bicycle shops 10 models 75% of its shift capacity utilization (bicycle boom flattened out and poor economy sales volume fall ) It is profitable but only modestly so Heavily leveraged Strategic niche is eroding away
moves from Hi Value's regional warehouse to particular retail store/ 4 months old in the warehouse, payment within 30 days) Challenger price lower than the brand name but same dollar gross profit margin Somewhat different in appearance from Baldwin's other bikes (frame & mechanical components same; fenders, seats and handlebars, on tire name molded on sidewalls) ( BB's purchasing , inventorying and production cost increases over and above its volume benefit) - Thus, for the cosmetic difference Baldwin buyers will be paying more ($67) than Challenger buyers
FINANCIAL POSITION
PARTICULARS SALES REVENUE COST OF GOODS SOLD GROSS MARGIN SELLING & ADMINISTRATION EXP $ AMT (THSDS) 13179 9775 3404 2835
570
263 370
Debt to equity
1.50
Suppliers
Potential New Entrants Bicycle industry not attractive in early 1980s. Relatively large capital outlay to enter market. Relatively difficult to exit market due to large capital investment.
May be able to offset incremental materials cost by credit arrangement with suppliers Short term profitability crucial to maintaining supplier relationships and credit.
PROBLEM STATEMENT
Should Baldwin accept the offer from HiValue Discount chain?
Stay in their current niche Go to the premium segment Try to find new product opportunities in the value niche (mountain bikes etc.)
achieving and that reasonable profit levels hinge on much higher volume levels ( Strategy dependent on scale of economies) Added volume and Utilizes excess capacity Hi Value would buy its house brand bicycles only from BB for 3 yrs and can be extended YOY Opens new channels of distribution for Baldwin that is a growth market
CYCLES Accepting will alienate the Baldwin's current dealers, they might ask for the similar deal or might leave Baldwin Trying to be a significant supplier simultaneously in two price segments with substantially identical product Might loose its premium price by making itself readily available in Discount chains
growing low end bike segment and away from the declining mid value segment
a. b. c. d.
Contribution margin will fall to $23 from $44 because of Taiwanese and Koreans competition Breakeven point will become 170 K units (130 % of one shift capacity, currently 84K) Just to earn 15% ROE , the firm will have to reduce its fixed costs by more than 40% in the short run Under continuous pressure from foreign firms VC has to be reduced, else margins will fall and overhead will have to be cut even more
dying market segment If Baldwin declines the offer then someone else will accept it and thereby further eroding Baldwins niche Entering into new niche will take far more money than BBC could muster
RECOMMENDATIONS
Segment Target Positioning
Explore alternative Discount retailers Develop New Products that lead to competitive Advantages Innovative new products
THANK YOU