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Hansson Private Label, Inc.: Evaluating an Investment in Expansion Do N ot C op y or P os t This document is authorized for use only by David Schmitz until September 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. ________________________________________________________________________________________________________________ HBS Professor Erik Stafford, Illinois Institute of Technology Adjunct Finance Professor Joel L. Heilprin, and writer Jeff DeVolder prepared this case specifically for the Harvard Business Publishing Brief Case Collection. Though inspired by real events, the case does not represent a specific situation at an existing company, and any resemblance to actual persons or entities is unintended. Cases are developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2009 Harvard Business Publishing. To order copies or request permission to reproduce materials, call 1-800-545-7685 or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business Publishing. Harvard Business Publishing is an affiliate of Harvard Business School. E R I K S T A F F O R D J O E L L . H E I L P R I N J E F F R E Y D E V O L D E R Hansson Private Label, Inc.: Evaluating an Investment in Expansion Introduction On a frigid Sunday night in late February 2008, Tucker Hansson pored over a proposal developed by his firm’s manufacturing team. It called for investing $50 million to expand production capacity at Hansson Private Label (Hansson or HPL). For Hansson, a private company, this would be a significant investment. The company had not initiated a project of that magnitude for more than a decade, and the expansion wasn’t without significant risk. It would be likely to double HPL’s debt and to greatly increase customer concentration. This was a critical juncture for the firm Tucker Hansson had carefully built over 15 years. He wondered whether the return on investment would be large enough to justify the effort and risk. He also wondered about the best means of evaluating the potential investment. HPL manufactured personal care products—soap, shampoo, mouthwash, shaving cream, sunscreen, and the like—all sold under the brand label of one or another of HPL’s retail partners, which included supermarkets, drug stores, and mass merchants. The firm, whose sales had grown steadily over the years, generated $681 million in revenue in 2007. Three weeks earlier, HPL’s largest retail customer had told Hansson that it wanted to significantly increase HPL’s share of their private label manufacturing. Given that HPL was already operating near full capacity, it would need to expand to accommodate this important customer without “cannibalizing” a significant portion of HPL’s existing business. The rub was, the customer would commit to only a three-year contract—and it expected a go/no-go commitment from Hansson within 30 days. Although he was worried about risk, Hansson was equally invigorated by the prospects of rapid growth and significant value creation. He knew of numerous examples of manufacturers, both in private label and branded businesses, who had risked their future by locking in a strong relationship with a huge, powerful retailer. For many, the bet had delivered a big payout that lasted for decades. 4021 R E V : M A R C H 1 , 2 0 1 0 Do N ot C op y or P os t This document is authorized for use only by David Schmitz until September 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 4021 | Hansson Private Label, Inc.: Evaluating an Investment in Expansion 2 BRIEFCASES | HARVARD BUSINESS PUBLISHING Hansson’s employees had completed their fact-gathering and provided a multifaceted analysis of the proposed project, which he now held in his hands. The time had come to do a final analysis on his own and make a decision. Company Background HPL started in 1992, when Tucker Hansson purchased most of the manufacturing assets of Simon Health and Beauty Products. Simon had decided to exit the market after struggling for years as a bottom-tier player in branded personal care products. Hansson was a serial entrepreneur who had spent the previous nine years buying manufacturing businesses and selling them for a profit after he improved their efficiency and grew their sales. He bought HPL for $42 million—$25 million of his own funds and $17 million that he borrowed—which was (and remained) the largest single investment Hansson had ever made. Hansson was seeking to capitalize on what he saw as the nascent but powerful trend of private label products’ increasing their share of consumer-products sales. Although the concentration of his wealth into a single investment was risky, Hansson believed he was paying significantly less than replacement costs for the assets—and he was confident that private label growth would continue unabated. Hansson’s assessment of private label growth prospects proved to be prescient, and his unrelenting focus on manufacturing efficiency, expense management, and customer service had turned HPL into a success. HPL now counted most of the major national and regional retailers as customers. Hansson had expanded conservatively, never adding significant capacity until he had clear enough visibility of the sales pipeline to ensure that any new facility would commence operations with at least 60% capacity utilization. He now had four plants, all operating at more than 90% of capacity. He had also maintained debt at a modest level to contain the risk of financial distress in the event that the company lost a big customer. HPL’s mission had remained the same: to be a leading provider of high-quality private label personal care products to America’s leading retailers. (See Exhibit 1, which presents HPL’s historical financial statements.) The Market for Personal Care Products The personal care market included hand and body care, personal hygiene, oral hygiene, and skin care products. U.S. sales of these products totaled $21.6 billion in 2007. The market was stable, and unit volumes had increased less than 1% in each of the past four years. The dollar sales growth of the category was driven by price increases, which were also modest, averaging 1.7% annually during the past four years. The category featured numerous national names with considerable brand loyalty. Branded offerings ranged from high-end products such as Oral-B in the oral hygiene category to lower-end names such as Suave in hair care. Private label penetration, measured as a percentage of subsegment dollar sales, ranged from 3% in hair care to 20% in hand sanitizers. (Exhibits 2 and 3 present data about private label sales and market share.) Consumers purchased personal care products mainly through retailers in five primary categories: mass merchants (e.g., Wal-Mart), club stores (e.g., Costco), supermarkets (e.g., Kroger), drug stores (e.g., CVS), and dollar stores (e.g., Dollar General). As a result of significant consolidation and growth in retail chains over the past 15 years, manufacturers of consumer products depended heavily on a relatively small number of retailers that had a large national presence. To survive in the personal care category, manufacturers had to persuade large chains to carry their products, provide adequate and highly visible shelf space, and cooperate with product promotions. Many consumer-goods companies Do N ot C op y or P os t This document is authorized for use only by David Schmitz until September 2011. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. Hansson Private Label, Inc.: Evaluating an Investment in Expansion | 4021 HARVARD BUSINESS PUBLISHING | BRIEFCASES 3 found it increasingly difficult to do so, as roughly 80,000 new products were launched each year, creating intense competition for shelf space. The Private Label Industry With private label brands, retailers rather than manufacturers controlled the production, packaging, and promotion of the goods. Although some large retailers had integrated vertically and owned the manufacturing facilities for their private label products, most retailers purchased their goods from third-party manufacturers. Some manufacturers produced private label products in addition to their branded goods (e.g., Kimberly-Clark), whereas others (e.g., Procter & Gamble) did not produce any private label products. Historically, retailers had carried private label goods to offer consumers lower-priced alternatives to national branded goods. Over time, quality improvements in private label goods and their packaging led to increased acceptance by consumers. Acceptance was so widespread that 99.9% of U.S. consumers purchased at least one private label product in 2007, according to AC Nielsen. This greater acceptance led private label sales across all product categories to exceed $70 billion in 2007. Retailers had driven, and still drove, these increases in consumer acceptance. They could increase their profits by capturing a greater share of the value chain than they did with branded goods, on which manufacturer profits per unit could be twice those of the retailer, especially if the brand was well known (e.g., Crest toothpaste). With private label goods, retailers’ cost of goods was as much as 50% lower than with branded products. Given the reduced cost, retailers could double their profit per unit sold despite lower selling prices. Gaining further consumer acceptance of private label goods and prices remained a huge opportunity for retailers, as these goods constituted less than 5% of sales in many product categories. In the $21.6 billion personal care category, private label products accounted for $4 billion of sales at retail (less than 19%), which translated to $2.4 billion in wholesale sales from the manufacturers. Hansson estimated that HPL had a little more than a 28% share of that total (see Exhibit 4, which shows HPL’s sales into its retail channels). Investment Proposal The investment proposal in Hansson’s hands included the following elements: Cost Components Amount Est. Life Depr. Facility Expansion $10,000 20yrs. $ 500 Manufacturing Equipment
Answered 1 days AfterMay 12, 2022

Answer To: need a qoute for this

Tanmoy answered on May 14 2022
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Hansson Private Label        4
HANSSON PRIVATE LABEL
Table of Contents
Analysis    3
Question. 1    3
Question. 2    4
Question. 3    4
References    
5
Analysis
Question. 1
The comparison of Hansson against its competitors can be compared based on the Net Income, Revenue, Earnings percentage and Debt to Equity percentage. It can be observed that the net income of Hansson as on 2007 was $38.5 as against Cathleen Sinclair’s $21.5, General Health & Beauty at $23.8, Women’s care company at $77.0 and Skin Care Enterprise at $65.3. Hence, it can be stated that Hansson is performing better than Cathleen Sinclair and General Health & Beauty in terms of net income.
Further, the revenue of Hansson as on 2007 is $680.7 as against the revenue of Cathleen Sinclair’s $1346.8, General Health & Beauty at $446.1, Women’s Care company at $397.3 and Skin Care Enterprise at $1247.6. Thus, Hansson is performing better and is able to generate more revenue than General Health & Beauty and Women’s Care. This signifies that Hansson is able to generate revenue which is almost half of Cathleen Sinclair.
The earnings percentage of Hansson as on 2007 is valued at 5.7% compared to that of Cathleen Sinclair’s 1.6%, General Health & Beauty at 5.3%, Women’s Care company at 19.4% and Skin Care Enterprise at 5.2%. Hence, it can be stated that Hansson is earning higher than all the...
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