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COMPANY OVERVIEW:

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.

CeeCee’s marketing strategy is to differentiate itself based on Porter’s Generic Strategies, by


delivering large ranges of new products. The product life cycle of each product line is short, as it does
not hold inventory for very long. Unlike Marks and Spencer, which holds the same products
throughout each season (such as Winter season, where the same products are available from October
through to March in European shops), inventory in CeeCee shops is constantly being replaced by new,
but similar, product lines.

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.

This fast fashion concept relies on 4 key factors:


• Sophisticated IT systems that feedback sales data to Head Office daily
• Close contact, via IT systems, with all of CeeCee’s manufacturers
• Fast creation and supply to shops of small numbers of new products
• Swift sale of new inventory items, shortening the product life cycle

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:

1 Sales bonus scheme proposal due to reduced 2010 forecast


CeeCee’s latest forecast shows sales €150 million lower than planned for 2010 and action is
necessary to boost sales. Therefore, this proposal to incentivise shop-based employees is the top
priority. It is a major change in the way CeeCee pays its employees and the proposed introduction
date is 1 July 2010 and therefore it is urgent. The proposal could help boost sales to enable CeeCee to
achieve the original planned profitability.

2 Proposal to close 300 small shops


This issue is the second priority as it is a major change to the number of shops, and locations, that
CeeCee operates. It should not affect sales in 2010, as it is forecast that sales revenue would remain
constant as the same sales area will be available in the proposed 150 medium-sized shops. This
proposal would allow CeeCee to generate operating efficiencies and achieve a higher operating
margin at mediumsized shops. The outcome of this decision will be phased in over 2 years.

3 Legal case against CeeCee


This has been placed as the third priority issue as CeeCee is currently selling clothing that appear to
breach another designer’s IPR and a legal challenge has been filed against CeeCee. This is not good
business practice and could damage the brand reputation of CeeCee and have a longer term impact
on customers’ perceptions of the CeeCee brand name. This long term view should not be influenced
by a short term increase of sales for these items. CeeCee also faces the risk of losing the legal
challenge. The cost could be €40 million. This would have a significant effect on the profit for 2010
and therefore CeeCee’s share price. An urgent decision is required.

4 Proposal to introduce matching accessories


CeeCee currently sells accessories and this proposal is to increase the range by having matching
accessories to match some of its clothing ranges. Depending on the level of sales, these new products
could generate a large margin of €40 million in 2010. This could contribute towards the forecast
shortfall in operating profit.

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:

Sales bonus scheme proposal:


CeeCee needs to take action to try to boost sales revenue. The latest forecast shows a fall of €150
million. The proposal is that even at the latest forecast level of sales, of €2,835 million, all shop-based
employees could earn 5% more than they did earn previously. The total cost of the sales bonus
scheme proposal will vary depending on the level of sales achieved in 2010. At the highest bonus rate
of 14% bonus, the extra cost to CeeCee would be €57 million in sales bonus payable to shop-based
employees. This would increase CeeCee total wage bill for shop-based employees from €410 million
per year (at current staffing levels) to €467m, an increase of 14% in a full year.

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.

Proposal to close 300 small shops:


CeeCee had 630 shops operational at the end of 2009. These included 300 small shops which achieve
a low average operating profit margin of only 13.2%. The proposal is to either close the 300 small
shops and replace them with 150 medium sized shops or to refurbish the 300 small shops.

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.

Legal case against CeeCee


CeeCee has 2 clear choices in respect of the legal challenge by KK. It can defend its position and go to
court or it could concede the case and settle out of court. Both actions will have a negative impact on
profits in 2010. This is a similar situation to the legal challenge that Burberry made against a small
fashion retailer which copied its plaid designs. Burberry was successful in its legal challenge and was
able to claim substantial damages.

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:

- end year 610 630 650 650 -


-average for year 590 620 640 640 -
Sales area - average 600,00 648,000 680,000 680,000 -
for year 0
Square metres
Sales revenue € million 2,700 2,781 2,985 2,835 -150
Operating profit € 616 634 690 614 -76
million
Sales revenue per 4.58 4.49 4.66 4.43 -0.23
shop
€ million
Sales revenue 4,500 4,292 4,390 4,169 -221
per square metre €
Operating profit per 1.04 1.02 1.08 0.96 -0.12
shop
€ million
Operating profit 1,027 978 1,015 903 -112
per square metre €
Growth in sales +14.5 +3.0% +7.3% +1.9% -5.0%
revenue % %

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