You are on page 1of 7

Indian Institute of Management, Nagpur

A case analysis on

West Lake Home Furnishing Limited

Submitted to

Professor: Danesh Gojer

As an assignment for

Written Analysis and Communication-1


Letter of Transmittal

May 30, 2007

To,

Mr. Charles Bowman

Chief Executive Officer

West Lake Home Furnishings Limited

From,

Dhruv Sonagara( Consultant)

Subject: Report on whether west lake home furnishings ltd. should accept the offer made by a
large US- Based retail chain.

This report analyse the position of west lake will be in if organisation accepts the offer made
by US based retail chain. After considering the aspects of income generated and expenditure
incurred, it is suggested that West Lake should accept the offer made.
Executive Summary

US-based retail chain, one of the three major wholesaler, has proposed an offer to quintuple
the sales of signature line decorative lamp by providing prominent shelf space with a
condition of to reduce its current price from $69.99 to $29.99 for a period of one year. One
side it offers this enticing increment in sales, on the other side, other two wholesaler would
also demand such offer from West Lake which will not be appreciated. Once prices are
reduced it would also stop them to enter them into niche segment. But the offer made by is
one of the prominent wholesaler, deal would reap greater benefit for West Lake. So it is
recommended to accept the offer.
Contents

1. Situation Analysis...........................................................................1

2. Problem Statement.........................................................................

3. Options Available...........................................................................

4. Criteria for evaluation...................................................................

5. Evaluation of the Options..............................................................

6. Recommendations....................................................................

7. Action Plan....................................................................................

Exhibit...........................................................................................
1. Situational analysis:
2. West Lake Home Furnishing ltd. was considering an offer made by US based Retail
Chain. The offer made was to reduce the retail price of signature line of decorative lamps
from $ 69.99 to $ 29.99. In return, the wholesaler would give that product a prominent
shelf space which has the potential to quintuple the sale of that product.
3. West Lake working in retail which is highly competitive. The sales reaching over $
200 billion, it offers wide selection of products in market. Big companies like Walmart
and Tire accounting for one third share while remaining is captured by small companies,
most of which has local presence. Sales in furnishing category has shown 6.1% CAGR
from the $ 7.b billion in 2002 to $ 9.7 billion in 2006. This growth is commendable as
Canadian retail industry as a whole has shown the growth of 5.34% CAGR. In the same
time, price of the products offered under furnishing are falling at high rate of 15%. The
baby boomers population of the age from 45 to 64 earned high income and had higher
levels of home ownership. As home ownership rate rose, their spending also shown same
trend.
4. Customers of home furnishing typically patronized small set of retailers and the larger
retailers are generally the first choice as they offer one-stop experience. Consumers also
visit such store which expertise in one area like lighting store.
5. The market for lighting, in retail, was $ 900 million in 2006. The peculiar thing is that
no retailer have more than 20% share in market. Suppliers to such retailers are mainly of
two type: importers of ready-made products in low price segment and others are North
American manufactures which offered attractive designs. Market is highly fragmented and
no retailer have more than 5% of share.
6. West Lake broadening its business into wholesale line of floor lamp, lighting fixtures,
started own retail store and website also. Till 1992, manufacturing was done in-house at
Toronto, after that outsourcing of production started to Asian countries. By 1999, half of
the production was done in china. And in 2006, only 10% production was done in Canada.
West Lake was working on negative working capital and consistently profitable.
7. West Lake Operates mainly in three ways: wholesale, Retail Store, Interned store.
West Lakes product were sold in main three national chains. These three chains
represents almost 71% of wholesale sales. Consumers were attracted to West Lake
because of lower price and modern designs.
8. West Lake has built up a retail store east of totanto, selling a broad line of home
furnishing products. West Lakes 50% stock keeping units are present in this store.
Bowman estimated additional $ 300000 sales, if he hires sales consultant with a cost of $
80000.
9. At the end of 2005, West Lake entered into internet sales also. Though share of sales
through internet was $ 200000 only, small compared to other means but enjoys 70%
margin.
10. Overall, to achieve steady 10-15% growth per year West Lake need to put some effort
into custom lighting and fixtures department. Also needed to attract customer from
interior decorators.
11. Options available in front of West Lake is to accept the offer made by retailer or not
to. If West Lake accept the offer some of the issues are like, other two big retailers will
also ask products at lower price. Once discounted prices are offered it will be difficult to
enter into niche and premium segment. Customer will become wary about the quality as it
will be offered at lower price. But by accepting offer sales will rise and market share can
be increased. As they have started retail store and sale through internet, revenue can be
generated from there, but still wholesale remain the big business channel.
12.
13.Problem statement:
14. Should West Lake accept the offer from US based retail chain?
15.
16.Options available:
17. There are two options available in front of bowman as follows:
A) Accept the offer made by US based retail chain.
B) Decline the offer made by US based retail chain.
18.
19.Criteria for evaluation:
A) Sales increased
B) Brand value
C) Relation with other two retailers
20.
21.Evaluation of the Options:
A) The offer made by retailer is heavily based on the increment in sales. This offer is
accepted will quintuple the sales of West Lake. This is very big advantage as it will
help to capture the market. Sale will rise from 54429 units to 272147 units. This will
increase some of the cost like sales, general and administration cost and warehousing
cost. Also will made west lake to take line of credit. But overall, net income will rise
from $82775 to $93684.
B) Brand value will the issue needs some more consideration. As West Lake will start to
sell at discounted price will be difficult to enter into premium market after that. It may
also be possible that customer after getting used to new price may demand more
discount. Also many customer will start to question the quality as it is offered at lower
price.
C) When other two big retailers will came to know about this they will also demand the
products at lower prices which will question the supply from West Lake at discounted
price.
22.Recommendations:
23. West Lake should accept the offer made by retail chain as it would reap many
benefits. Like it will increase the sales by four times. With this it will give the advantage
of being in visible range over shelf space. This will give competitive advantage over
current competitors.
24.
25.Action plan:
26. Some of the points needs to be taken care of while accepting the offer. Some of the
steps can be taken are as follows:
A) West Lake need to ensure smooth production and supply from china as this consumes
time and also involves uncertainty.
B) West Lake needs to come with strategy for the other two retailers, as sooner or later
they will come to know about this offer.
C) Delivery to the stores needs to be known as accurately as possible, otherwise it will
cause unwanted warehousing cost.
D) With wholesaling business, they need to concentrate the sales thorough internet as it
gives very high margin.

27.
28.

29.Exhibit:

30. The comparison of income statement in the years 2006 and 2007. Numbers are in US$.

31. Year 32. 20 33. 200


06 7
34. Total sales 35. 11 36. 293
200000 22959
37. Sales to 38. 80 39. 208
wholesales 00000 19301
40. Sales to 41. 26 42. 693
retail chain 66666.67 9767
43. Price per 44. 48. 45. 25.5
unit 993
46. Number of 47. 54 48. 272
units 429.5444 147.7
49. cost of one 50. 30 51. 20
unit
52. COGS 53. 16 54. 544
32886.33 2954
55. SG&A 56. 71 57. 852
0000 000
58. S&W 59. 19 60. 491
6433.333 083.3
61. Inventory(20 62. 63. 960
% of sales) 0
64. Operating 65. 12 66. 144
Income 7347.003 129.1
67. Tax 68. 0.3 69. 0.35
5
70. Net income 71. 82 72. 936
775.551 83.94
7
73.

74.

75.

76.

77.

78.