International DreaMerger 2013 | #dm13

1. You have 2 hours to solve 1 Case Study. This will test your logical, analytical, reasoning and innovative skills. 2. Please submit your case solution in the room from which you received it. 3. You are not expected to use additional information. Bear in mind that this case is based as of 24th of August, 2013. All facts and characters are fictional. 4. Mention your assumptions explicitly in your solution and justify them. 5. We will severely penalize any sort of plagiarism.

Instructions:

Online Round: (Slot A)

The Finance & Investment Cell | St. Stephens College

International DreaMerger 2013 | #dm13

Case Study Bonjour!

24th August, Hotel Eden, Paris: There was a huge round of applause as Rohan opens a bottle of Krug to celebrate the success of Pearl!
15 years ago, Rohan came to Paris at scholarship to study at the renowned, International Fashion

Academy. A creative genius, he was soon noticed by revered French designers and was hired to assist the
his own fashion house, Pearl, in 2003. Over the years, Pearl grew to establish itself in the whole of France

famous French designer Pradaa. Having gained considerable experience of designer styles, Rohan started and the neighboring European nations. Now, ten years later, though Pearl is a decently renowned fashion brand in France, it lacks international presence. Its business is restricted to few European countries with a total of just 10 stores, nowhere close to fashion monsters like D&G, Chanel etc. which have more than 200 boutiques worldwide. Amidst all the celebrations, Rohan was however missing his grandfather the man who had introduced him to the fascinating world of colors, fabrics, prints and art. As a child, Rohan remembered his grandfather telling him how fabric and design helped integrate the diverse cultures of the world. A famous boutique owner in India, his grandfather had worked extensively with Indian threads to supply exquisite ethnic wear to the regal class. His work was one of a kind and had earned him deep appreciation. It was he who had inspired Rohan to pursue the intriguing world of design and fashion. As the party drew to a close, Rohan was left with a lingering thought. It was the fact that his work had been unable to integrate the design and uniqueness of Indian culture the way his grandfather had always dreamt. Entering India had been Rohans long-time dream. It would also allow him to exploit the untapped potential of Indian fashion industry which conventional fashion had been unable to touch. Thus, where entering India was an expansion opportunity for Pearl; it held a deeper purpose for Rohanto change the fashion stereotypes and give back to his homeland a fashion identity that it deserves. However this dream is not that easy to fulfill. Besides the vast intrinsic differences between European and Indian tastes, India characterizes a change-resistant rigid population with severe choice inertia. Moreover, lack of information about the internationally prevalent demand patterns among the populace further adds impediments to Rohans expansion plans. Fashion also happens to be one of the riskiest of industries, as it depends on taste and preferences of the customers and the creative potential of the market players. Its dynamic nature implies that a single wrong

The Finance & Investment Cell | St. Stephens College

International DreaMerger 2013 | #dm13

move can cause an operational and financial disaster. Now, Rohan is on the outlook to best employ his limited resources to benefit Pearl as well as the Indian population. OPTION 1: JOINT VENTURE WITH MARRIOT. S.W. Marriott, the international chain of 5 star hotels has recently decided to enter the fashion industry with its own clothing line for the higher-end one of the consumer most sector. Besides the fact that Marriot has extensive clientele of social elite, its loyal customer base can be targeted for optimal advertisement and product-placement. However, Marriot, with no experience in the field of fashion, seeks to establish a joint venture with a fashion house in order to put the project on floor. Through the joint venture, it aims to combine the strengths and abilities of the two parents and gain access to new products, markets and technology while sharing the costs and risks. However, Marriot is on the look-out for a partner that will help them bring about a change in the fashion fabric of India with fresh and unique styles. Pearls exclusive apparel collection in France and Rohans fame for innovation has attracted Marriot to pursue Pearl as the ideal partner in the project. Recognizing the potential Pearl holds in the field of fashion, Marriot intends to present a range of designs unseen by the Indian crowd, by starting its clothing line in association with Pearl. The clothing line will start with its first showroom at Mumbai. However, Rohans long-term desire to enter India and Marriots easy facilitation puts the latter in a stronger bargaining position in the contract. An association with S.W. Marriot is probably one of the best starts that Pearl could get in India. Marriott will provide all its customers and employees with discount cards for this clothing line. Other than a credible brand name, the collaboration will give Rohan a rare opportunity to cater to the high-end consumers of the country. And what better place to enter the Indian market that the fashion hub of Mumbai! Marriot is willing to pitch in 100% investment in the project, in return for 70% of the profits from the venture. A rough estimate of costs and revenues are as follows:
The Finance & Investment Cell | St. Stephens College 3

International DreaMerger 2013 | #dm13

Total Monthly Costs: Production cost = Rs. 60,00,000 (Fabric and stitching) (Assuming 1000 dresses per month at Rs. 6000 per

dress)

Operational cost = Rs. 2,00,000 Marketing Costs = Rs. 2,00,000 Monthly Revenue:

Salary to the designing team = Rs. 8,00,000 (Rohan will recruit a team of designers and train them)

800 dresses at Rs. 9000 each = Rs. 72,00,000

200 unsold dresses at Rs. 6000 each = Rs. 12,00,000 (Considering the elite class of Marriott and the fact

that these are designer dresses)

However, as Rohan exploits the proposal further, he is struck with some serious drawbacks which accompany this seemingly profitable venture. According to the contract, Pearl cannot open any standalone store for 8 years. The decision of expanding the fashion brand to other cities lies solely with Marriot and the terms are non-negotiable. Thus expansion opportunities get majorly restricted. Also, the store will be located close to Marriot hotels which will reduce visibility and restrict the target population. OPTION 2: ACQUISITION OF STEP: We agreed to sell because the company wasnt making any money and we thought, why not make a

good exit.

The above lines by Sabeer Bhatia put an end to Uncle Sams long troubling dilemma. Samish Chandra 1990 at Chandigarh, STEP grew at an exponential rate to become one of the favorite spots for shoe lovers. acceptance. The existence of quality and diversity at Step is the underlying reason for its success. The exciting categories of shoes offered here range from oxfords to pumps to wedges to even cowboy boots! With

a.k.a Uncle Sam is the owner of STEP- a famous Shoe brand of North India. Started on a small scale in In 2000, it expanded and opened big stores in Delhi and Lucknow, where its products found quick

increasing liberalization in the Indian economy, Step started losing its customers to international competitors like Woodland. The company, while still profitable, has failed to project any growth in business over the last 5 yearsreaching stagnation. Uncle Sam sees no point in continuing and wishes to follow the suit of Sabeer Bhatia- the owner of the award winning company Hotmail, who agreed on a friendly acquisition by Microsoft as he preferred a decent exit over a stay full of losses.
The Finance & Investment Cell | St. Stephens College 4

International DreaMerger 2013 | #dm13

Uncle Sam is now ready to sell Step but has one specification- the acquirer must not be from the shoe industry. The old mans ego does not allow him to let his competitors utilize S teps resources for their growth. Since these were the brands which jeopardized Steps success, Uncle Sam is in no mood to let them further increase their market share by absorbing the benefits of his 20 year struggle. Hence, he is looking for an acquirer in a related line of business who can create value out of Steps resources and strike a good financial deal at the same time. Acquiring STEP would be seizing a golden opportunity for Pearl. Shoes and dresses are as complimentary as bread and butter. Such a synergistic external growth strategy could be expected to reap bigger benefits than the traditional growth methods. Not only will it allow Pearl to enter the market of 3 major Indian cities, but also take advantage of Steps established customer base. This proposition is quick, cheap and less risky. Huge reductions in the operational costs occur as the facilities, procedures and employees are in place, all ready to be used. Furthermore, Rohan feels it is an excellent opportunity for Pearl to diversify by entering the shoe industry. Combining a shoe designing team with an apparel designing team creates room for exclusive products. He intends to incorporate drastic improvements in the shoe line, make it more competitive and reach out to outfit maniacs plus shoe freaks. Rohan however needs to remember that considering Steps expertise lies in a different field, Steps shoe designing team, supply and production unit is of no use to Pearl. Pearl still has to recruit a new team of dress designers and set up its own chain of suppliers and apparel manufacturing units. Also, since, Uncle Sam is retiring and settling abroad, he demands 100% payment in lump sum at the beginning itself. This poses a big problem for Rohan. There is absolutely no way he can arrange the amount by his own and securing a bank loan in the present scenario of credit crunch involves insurmountable difficulties. Bankers, not known for being sympathetic with challenging deals, will take a dim view of the plan, especially when the concerned industry is highly unpredictable. Besides this, Rohan has absolutely no experience in the shoe industry which makes it very difficult for him to run the shoe line, leave alone improving it. Failure of his experiment will lead to an unnecessary big burden on Pearl. Cost of Acquisition = 1.2 crores Monthly Costs: Cost on the team of designers = Rs. 8,00,000 Marketing and other costs = Rs. 3,00,000 Production Costs = Rs. 51,00,000 (850 dresses at Rs. 6000 each)

The Finance & Investment Cell | St. Stephens College

International DreaMerger 2013 | #dm13

If he manages to get a bank loan of 1.5 crores, repayable within 5 years at 12% p.a. then the monthly costs shoot up due to installments and interest payments.
Monthly Revenue: Rs. 68,50,000 (700 dresses at Rs. 8500 each and 150 dresses at 6000 each) Steps Monthly Profit: Rs. 50,000 OPTION 3: JHANKAR-PEARL VS. MOVIE Tring! Tring! Rohans mobile breaks his serious contemplation. The famous Bollywood director Karn Johar wants Rohan to design for his upcoming film. Karn saw Pearls designs during a recent visit to Paris last year and couldnt help appreciating the freshness and uniqueness of his styles. Karn feels that over the years, Bollywood films have got restricted to a few top fashion designers allowing no room for new ideas. Thus, utilizing Rohans talent in his movie, he intends on presenting an entire range of unconventional styles. Moreover, there is a need for a French based fashion designer as the movie actress portrays a French woman. Entering the tinsel towns thriving industry would be Rohans biggest opportunity at a personal level. Not only would this open the gates of Bollywood for him, but also fetch his designs a brilliant market from the billion-plus following of the Indian cinema industry. This could well materialize into an exponential growth for Rohans designs. By presenting his apparel collections in a movie, Rohan would get unlimited visibility. Often, movie styles are adopted by the viewers thus updating the existing fashion trends. There could not have been a better way to realize his grandfathers purpose. Estimates: Cost on the team of Designers from Paris = Rs. 15,00,000 per month Revenue after the completion of movie (After 1 year) = Rs. 2,30,00,000 However, there are some conditions on which hell get the movie. Karn wants that Pearl project in India should collaborate with Jhankar- a leading ethnic wear brand by his brother. Jhankar has four big stores in India and was once a favorite spot for traditional wear. But for the past 5 years, it has witnessed a continuous decline in profits owing to the falling quality of clothes and rising westernization. Through this partnership, Jhankar plans to reduce the scale of traditional wear to half and incorporate a westerndesign apparel vertical through Pearl. Apart from the movie, there are separate benefits to this collaboration. From diversification of consumer base to being collaborated with a highly skilled sales force that Jhankar boasts of, Rohan feels that Pearls
The Finance & Investment Cell | St. Stephens College 6

International DreaMerger 2013 | #dm13

entry combined with an effective management can reverse the situation and help deliver quality products by fully exploiting the marketing departments potential. Working with a traditional wear brand would provide Rohan a chance to better understand Indian ethnic designs. After gaining knowledge from Jhankar about the varied textures and prevalent styles in India, he can launch a set of Indian collections in his outlets abroad. But in the end, it is money which concerns Pearl and the financial area does not present that fine a picture. Rohans analysis tells him that Jhankar is on the verge of collapse. Jhankar apparels have lost customer faith and to revive it will be a major challenge. An association with a falling business can badly destroy Pearls image in the beginning itself. With a contact agreement of 10 years, Pearls success might get permanently jeopardized if the venture fails. Pearls Monthly Costs: Cost of production = Rs. 60,00,000 (Here, the scale of operations is small and presently the sales are very

low. So, we assume a production of 250 dresses per city at Rs. 6,000 per dress.) Salary to the Designing Team = Rs. 2,50,000 (This is less because only 250 units are designed each month and Jhankar is ready to provide some of its designers.)
Operational costs = Rs. 80,000 Marketing costs = Rs. 4,00,000 An initial fixed investment of Rs. 1,00,000 per city has to be completely borne by Pearl. Pearls Monthly Revenue: 600 dresses at Rs. 7,500 per dress = Rs. 45,00,000

400 unsold dresses at Rs. 6,000 each = Rs. 24,00,000 (The target population is the general crowd and

there is no ready market. Thus the selling price has to be low).

Two weeks later, still undecided, Rohan reaches him with Delhi for a Though friends marriage. The city fills nostalgia. Rohans grandfather had left him a 3000 square feet land in the heart of the city, he had never got a chance to come back to his homeland in the past 15 years.
7

The Finance & Investment Cell | St. Stephens College

International DreaMerger 2013 | #dm13

Now back in the city, Ron feels elated to see that Delhi has grown into a major economic and cultural hub. At the marriage, he meets some of his grandfathers past business associates, some of whom have grown up to become manufacturing magnates. Rohan realizes that the contacts his grandfather had built had moved beyond mere business relations and he feels so much more at home in India. Fashion is not about presenting the views of celebrities. It involves exploring and culminating the varied

tastes and ideas of the common crowd. Its world holds the potential to incorporate revolutionary changes; exploit it to the fullest.
advisor of Pearl, you are required to present a solution which guarantees Pearls successful market entry in India and fulfills his purpose of choosing India at the same time.

His grandfathers words echo in his mind. Presently, Rohan has no clue which way to go. As the financial

You could choose either of the options given above or come up with something completely on your own. Best of luck! Au Revoir!

The Finance & Investment Cell | St. Stephens College