Analysis of the Proposed Active-Wear Launch by Harrington Collection

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Analysis of the Proposed Active-Wear Launch by Harrington Collection

Introduction

Harrington Collection has been a large manufacturer and retailer of high-end women’s clothing since its establishment in 1970. While the company had always performed well financially, Harrington Collection has posted lackluster sales in the past three years and registered all time low margins. During the convocation of key operating managers of Harrington Collection called by Sara Huey, the vice president, Blake Myers, the general manager for the Vigor division, proposed his idea to expand into a novel product line. Based on feedback from retailers, Blake Myers believes that stylish, sporty, casual attire is a market that Harrington Collection is missing out on and should venture into so as to reap its vast benefits. This report has been prepared in response to the concerns raised by Karen Allen, a director in strategic planning at Harrington Collection that expanding the company’s lines downstream is not a sound long-term strategy and a novel product would place significant drain on its resources which will cause further financial detriment to the company since it is doubtful whether the proposed product line could capture sufficient sales in the first year to break even. Nonetheless, since there is continued pressure on the company to register profits, the objective of this report is to analyze Blake Myers’s proposal to launch a new product line under the Vigor division so as to determine whether it is a good business venture based on projected profitability. This report conducts qualitative and quantitative analysis before making appropriate recommendations.

Qualitative Analysis-analysis of the Proposed Active-Wear Launch by Harrington Collection

The following are the advantages and disadvantages Harrington Collection faces when considering venturing into the active-wear market by launching its own version of the active-wears through the Vigor division based on qualitative analysis.

Advantages

  • The trend in recent years toward more modern, athletic fashions resulted in swift growth for firms or companies that offered these lines. According to the estimation of Harrington Collection, more than seven and a half million active-wear units were sold in 2007, with the number expected to double by 2009.
  • Stylish active-wear stock sold extremely quickly. The stock of active-wear had an inventory turnover rate of almost twice the rate of current Harrington Collection clothing.
  • Markdowns for the stylish active-wear were not as extreme as other product lines.
  • Focus groups and surveys commissioned by Harrington Collection evinced that their target consumers showed considerable interest in more active-ear clothing such that ten percent of the consumers purchasing clothing in the $100-$120 price range ended up buying an active-wear set also.
  • Active-wear would blend in easily in the Vigor division since its styles are less conventional than other Harrington Collection divisions and it also emphasizes fashion and comfort despite the division focusing on career wear.

Disadvantages-analysis of the Proposed Active-Wear Launch by Harrington Collection

  • This form of clothing or product line that Mires has proposed for Harrington Collection is of low quality as its durability was well below the standards adhered to at Harrington Collection. However, research conducted by the company reveals that ninety-five percent of the purchasers were satisfied with the look, fit and durability of the product.
  • Launching the new product line would come at a huge cost involving annual $500,000 rent, $2 million equipment cost, $3 million overhead cost, $1.2 million start-up cost, $2 million advertising and public relations cost and new fixtures for company-owned stores carrying the active-wear line at a cost of $50,000 per store. According to the report on the United States market, outsourcing resulted in cost advantages of up to fifty percent. However, Allen and Huey were of the opinion that Harrington Collection should not outsource the production of the company’s active-wear product line to a third party to China since it could result in a decline in the quality and agility of its products despite the cost advantages. Instead, the managers opted for a more costly option that involved renting plants in Mexico where the company could have more control on the quality of the active-wear products.

Quantitative Analysis-analysis of the Proposed Active-Wear Launch by Harrington Collection

Demand and Profitability Analysis

 

Start-Up Costs:
Start-up Costs Pants Plant $1,200,000
Start-up Costs Hoodie and Tee-Shirt Plant $2,500,000
Equipment Pants Plant $2,000,000
Equipment Hoodie and Tee-Shirt Plant $2,500,000
Launch –PR, Advertising $2,000,000
Fixtures for Company Store $2,500,000
Total Start-up Costs $12,700,000
Annual Depreciated Start-up Costs $2,540,000
Annual Ongoing Operating Costs – Fixed
Overhead Pants Plant $3,000,000
Overhead Hoodie and Tee-Shirt Plant $3,500,000
Rent Pants Plant $500,000
Rent Hoodie and Tee-Shirt Plant $500,000
Management/Support $1,000,000
Advertising $3,000,000
Total Fixed Operating Costs $11,500,000
Total Fixed Costs $14,040,000
Direct  Variable Costs: Hoodie Tee-shirt Pants
Sew and Press $3.25 $2.00 $2.85
Cut $1.15 $0.40 $0.70
Other Variable Labor $3.20 $2.40 $3.05
Fabric $9.10 $2.20 $7.50
Findings $3.85

$20.55

$0.50

$7.50

$2.30

$16.40

Direct Variable Costs (Unit Cost) Hoodie Tee-shirt Pants
  $20.55 * 0.5

= $10.28

$7.50 * 1.5

= $11.25

$16.40 * 1

= $16.40

Total = $37.93

Indirect Variable Costs
Wholesale “unit” price $95.00
Total variable costs as % of wholesale price 39.93% (($37.93 / $95.00) * 100%)
Direct variable costs per “unit” $37.93
Indirect variable costs per “unit” $8.64 ($95 * 9.09%)
Total variable costs per “unit” $46.57 ($8.64 + $37.93)
Contribution:
Wholesale price per unit $95.00
Less total variable costs per unit ($46.57)
Contribution per unit $48.43
Contribution Margin (($48.43 / $95.00) * 100%) = 50.98%
Breakeven:  
Fixed annual costs (operating and depreciated start-up) / Contribution per unit = Breakeven units  = $14,040,000 / 48.43

= 289,876

Profit Margin:  
Revenue $39,890,000
Less fixed annual costs ($14,040,000)
Less total variable costs ($19,620,400)
Profit before tax $6,229,600
Profit margin before tax 15.62%

 

Recommendation-analysis of the Proposed Active-Wear Launch by Harrington Collection

Based on estimations, obtaining a ten percent return on investment is quite ambitious based on the segment of the market that Vigor division of Harrington Collection captures and the market share. This is also hindered by uncertainties such as how the competition will react to the launch. Nonetheless, based on the research conducted by Harrington Collection through surveys and focus groups, the company could attain its profit targets over a period of time as long as active-wear trend is still vibrant. This means that even though Vigor may apply vast distribution channels and marketing strategies, venturing into active-wear product line will only be feasible in the long-run if the trend persists for a long time among consumers. Fortunately, Harrington Collection insists on quality, thus, I believe that its active-wear product line will maintain a customer base. However, this is not enough as changes in fashions and trends in women clothing is prevalent in this industry and, thus,  the active-wear trend might fade by the time catches up in terms of formidable market share. Hence, Harrington Collection should not go ahead with the launch.