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CeeCee is facing challenging times with the latest forecast which shows sales revenue €150 million
lower than planned, which is a fall of 5% from plan. This forecast fall in sales revenue results in
operating profit being €76 million lower, a fall of 11%.
Therefore, Cee Cee is faced with how to boost sales. There is a clear need to motivate shop-based
employees to generate higher sales revenues and also for Cee Cee to find ways to generate additional
revenues, such as the proposal to introduce the new matching accessories range.
CeeCee faces a new risk to its reputation which also could affect the forecast profits for 2010. It is
facing the risk of a legal challenge. It is a high risk strategy to pursue the dispute to court, and this
could also prove to be a strain on management time. If CeeCee were to lose the legal challenge in
court it would face a €40 million payout. This is too risky and the alternative action of settling the
dispute quickly and out of court is lower risk but would still result in an adverse impact on profits,
but only €10 million.
COMPANY OBJECTIVES:
CeeCee targets its customers by making its clothes appear to be exclusive by having short production
runs of many designs. Indeed in 2009, CeeCee had over 250,000 product lines each year (each size or
colour of the same clothing item represents a different product line). Each shop stocks limited
numbers of each design and there is an air of exclusivity, since only a few products of each range are
on display. This has resulted in customers making quick decisions to buy what they see, as they know
that there is a chance that if they do not buy when they first see the item, they may lose the chance if
it is sold out or not available in the size or colour that they would like.
CeeCee employs over 180 designers, all of whom are young (with an average age of 27) who create
approximately 15,000 new designs each year. CeeCee uses a range of clothing manufacturers, both
in Europe and in Asia, who are contracted to work exclusively for CeeCee. They work closely with
CeeCee’s designers and are linked into CeeCee’s IT inventory control systems and have daily updates
on what items to produce and what products to discontinue. CeeCee manages to produce very fast
turnarounds for its fashion designs. CeeCee’s designers have the systems in place to ensure that the
time taken from final design to the product being in the shops has reduced. Currently, with CeeCee’s
IT support systems, it is able to get some new product designs into its shops within just 10 to 15 days.
This fast fashion system depends on a constant exchange of information throughout every part of
CeeCee’s supply chain, which includes shop managers, designers, production staff, buyers and
external clothing manufacturers. The supply chain also includes complex logistics to enable the
correct level of inventory to be delivered to shops at the right time.
COMPANY PROBLEMS:
However, there is a risk of lower sales, but even at the lower level of sales, a positive contribution is
made, although the net margin is low due to inventory write downs. This is a new innovative way of
attracting customers to spend more in each transaction by having a range of matching accessories.
COMPANY SOLUTIONS:
If sales remained at the latest forecast level of €2,835 million, then CeeCee would be worse off under
this proposal, as the gross margin would not increase but the cost of the bonus would be €21 million.
This would result in a further fall in operating profit of €21 million, down from the latest forecast of
€614 million to a possible €593 million. Furthermore, the worse case scenario is that the bonus
scheme did not boost sales at all, and that sales revenue fell a further 4% or more. At this level of
sales, no bonus would be payable, but the gross margin would fall by €68 million.
The closure of the 300 small shops would result in CeeCee only operating 480 shops, and would result
in 150 locations where CeeCee does not have a shop. Whilst the sales area of the proposal is forecast
to stay the same, it is not yet known whether the chosen locations of the new 150 medium-sized
shops could immediately double the sales revenue. However, assuming the forecast sales data is
correct, the NPV for closing 300 small shops and opening 150 medium-sized shops is €622 million.
Therefore the closure of the small shops generates a higher NPV than re-furbishing shops, of €269
million higher (which is 76% higher). The difference in the NPV of 76% is large and should be
sufficient to persuade CeeCee’s management to take the bold action to close the 300 small shops.
Matching accessories:
Currently CeeCee sells ranges of accessories which generate an average gross margin of 75%, which
is higher than that achieved on clothes and other products, which averaged 60.1% in 2008. The
proposal to introduce matching accessories is forecast to generate an even higher gross margin of
80%. However, there is also a higher risk of inventory write offs. If the products do not sell as well as
expected, the matching accessories may also have to be written off. However, the other side of this
alternative is that greater sales could be achieved as customers could spend more on each transaction
as they buy some of the accessories available to match the main product they have chosen to
purchase.
If CeeCee were to defend its position and to state that it does not consider that it has breached KK’s
IPR’s then it could continue to sell these products. They are selling well and CeeCee has recently
placed additional orders with its suppliers. Including these new orders, the loss from inventory
write-offs and an out of court settlement to KK would cost €10 million. However, if CeeCee were to
go to court and lose the case, the cost (including damages) could exceed €40 million. This is a high
risk and potentially very dangerous to CeeCee as it could encourage other designers to challenge
other CeeCee product lines and potentially open the flood gates to other legal challenges.
Furthermore, the impact on CeeCee’s profits for 2010 would be a further reduction of €40 million
and this could affect CeeCee’s share price. This could also have a negative damaging long-term effect
on CeeCee’s reputation.
FINANCIAL ANALYSIS:
All data for the Actual Forecast Plan Latest forecast Change from
financial year ended 2008 2009 2010 2010 plan 2010
31 December
No of shops: