HANSSON PRIVATE LABEL INC Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

HANSSON PRIVATE LABEL INC Case Solution

Question 1

Do you recommend Tucker Hansson to proceed with the investment? Why or why not?

Hansson Private Label Company is basically the manufacturer of the personal care products and it provides its products to the retail partners. The strategy of the company has always been customer retention, cost control, focus on efficiency and the relationship with the customers and based upon this the company had generated solid revenue growth till the end of the year 2007. The revenues of the company had grown to a level of about $ 681 million at the end of 2007 and this account for about 28% of the total sales in the national market.

The current capacity of the company is operating at maximum level and there is no room to accommodate for increased demand from the retailers. In other words, sales revenues of the company have been growing at a level of 1% and the capacity utilization level for Hansson Private Label Company has reached to a level of 90% therefore, there is no room for more increases in the sales revenues of the company if until and unless the management does not expands its manufacturing facility.

Now the management of the company has determined one such expansion opportunity after four years of fierce competition and low growth rates for the company. One of the closest clients of the company has approached the company for signing a three years contract with the company related to the personal care products line. If the management of the company serves this customer and avails this opportunity then the margins of the company would increase rapidly, since the costs for the private label goods is 50% lower as compared to the costs of the branded products despite the facts that the selling prices are lower. This expansion opportunity was not at all free from risks.

First of all, this was the first investment opportunity the management was evaluating of such a huge size. Moreover, the risks associated with increased level of debt and the financial distress costs would also increase if the management invests in this project. Moreover, if the client faced the financial distress then it would also leave a significant impact upon the financial stability of Hansson Private Label Company. Other risks were also there related to these investments which were the personal financial risk for Hansson’s huge investment in the company.

However, if at this point of time the company does not expands its facility then it will ultimately end up cannibalizing its sales of the products and the company would also lose their long term customer contract. The choice of the appropriate discount rate which was also an issue in order to value this project. Overall, this is a significant opportunity for Hansson Private Label Company and its management. Although the risks are quite high, but if the management does not make this investment and expands its capacity, it will freeze its sales growth and the company would reach its maturity stage. Moreover, the financial analysis of this project, its payback and its return on investment also show that this project is recommended for Hansson (see below)...............

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