Andrea Eitzenberger

MPAcc 809:

Martha’s Designs

July 8, 2005

Andrea Eitzenberger

Michael Fitton

Kelly McShane

Yuri Stefurak

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Table of Contents

Executive Summary...... 3

Introduction...... 5

Martha’s Background...... 5

Industry Information...... 6

Critical Success Factors...... 8

Objectives...... 9

Marketing Plan...... 9

Operations...... 21

Financial Information Analysis

Income Statement...... 23

Balance Sheet...... 28

Cash Flows...... 29

Break Even Analysis...... 29

Sensitivity Analysis...... 29

Scenario Analysis...... 28

Recommendations...... 31

References...... 35

List of Appendices

Appendices

Positioning Strategy...... 1

SWOT Analysis...... 2

Base Case:

Income Statement...... 3A

Balance Sheet...... 3B

Cash Flows...... 3C

Break Even Analysis...... 3D

Best Case:

Income Statement...... 4A

Balance Sheet...... 4B

Cash Flows...... 4C

Worst Case:

Income Statement...... 5A

Balance Sheet...... 5B

Cash Flows...... 5C

Sensitivity Analysis...... 6

Executive Summary

With an initial investment of $9,000 and optimistic sales results, you will earn after-tax profits of $15,000 within the first 5 years of operations based on the base case. We recommend for you to continue the existing business channels in addition to boosting your sales by expanding into third-party retail distribution. Any unfavorable sales results will present a minimal opportunity cost.

Socio-economic trends such as accumulating wealth in Western Canada and a growing tourism industry provide for ample opportunity to achieve profitability in the garments industry. Most importantly, Martha Design’s (MD) success lies in the ability to differentiate your product and present it as truly unique, fashionable merchandise that is Canadian made.

Your target market is high income earners between the ages of 25 and 45. The most suitable markets for this demographic are Western Canadian Resort destinations as well as several urban centers. In 2005, Alberta Tourism statistically supported that Banff and Jasper are the most visited destinations in Alberta. In addition to being the host of 2010 Olympic Winter Games, Whistler, British Columbia is one of the most popular destinations in the province. Vancouver and Calgary are rapidly growing cities that suit MD’s desired demographics. These urban centers are two of the wealthiest cities in Western Canada. These five markets should provide MD with an optimal growth opportunity.

Within the proposed business model, the distribution channels pursed are a critical component. We propose you aggressively promote your product line to owners of boutiques in the suggested markets. Your competitive advantage is a ‘made in Canada’, differentiated, high quality line of casual coats. The chosen retailer’s vision and mission statements should be aligned to yours. The chosen boutiques must have an aura of high quality and they must support a unique, casual product line that is very fashionable. You must convince the boutique owners that your product is superior to the competition and will sell in that particular market. Furthermore, synergy may be achieved if boutique owners have shops in multiple locations and choose to sell your product at several of their stores.

Primary research shows that, in general, boutique owners purchase goods in batches for the entire season. The benefit of this arrangement is to avoid consignment and having the ability to collect your revenues once the coats are shipped to the retailer. As well, it will become retailer’s responsibility to sell the product to the final consumer.

From the standpoint of operations, distribution of your product through the proposed retailers will allow for you to continue the existing business into the future at a reasonable growth rate. Our approximations indicate that you will have to spend one and one-half to two months annually on the retailing segment. This projected period includes time allocated to designing new product lines, ensuring quality output, traveling and promoting the product. The expected production should be within the co-op’s capacity, which is projected to be 45 coats in the first year. In any case this expansion into retail stores fails, the existing distribution channel will provide a source of stable income.

Key financial considerations are the prices of inputs. Profitability will be driven by the price of labor and material. In order to have positive cash flows, you must ensure that revenues after cost of labor and material provide for a minimum approximate 30% margin. Labor is a significant cost if North American labor is used. However, the cheaper Asian labor is not desired as we believe using overseas labor will result in a poorer quality coat. It is imperative that your differentiation strategy involves a truly unique product that is superior in quality and design to the garments which are mass produced overseas at a lower cost.

The competitive landscape and industry trends favor strong sales results for high quality, differentiated products. The key differentiation features must appeal to the consumers’ desire for a distinctive garment. Primary market research suggests that today’s fashionable consumer is looking for individualist fashions which are tailored for variety and uniqueness. You can provide this by designing a variety of coats for each of the fall-winter and spring-summer seasons. Adding flexibility such as reversible and multi-layered features will also attract the desired target market.

You must reinforce that MD’s mission and vision is focused on profitability as much as it is built on the framework of working for the enjoyment that comes with this business opportunity. We have developed a business plan that is written with your needs in mind, any limitations that can exist (both personnel and industry), and that suits your desires for expansion.

Introduction

This business plan has been created at your request for Martha’s Design. This plan outlines our understanding of your background; the clothing manufacturing and retail industry; marketing plan; operations plan and financial analysis. At your request our marketing plan examines MD’s past performance, market analysis, competitiveness, target market, etc.The financial analysis includes a projected income statement; balance sheet; cash flow statement; break-even analysis; sensitivity analysis; and scenario analysis. The sensitivity analysis examines the significance of labor costs, while the scenario analysis includes a base case, worst case and best case. These projections were done for a 10 year period and are based on Martha Design’s 2004 financial information, which was our base year. Within this analysis we examined the possibility of expanding your existing business through different distribution channels as you have been given the opportunity to use a co-operative, which will allow for greater production. Our analysis includes the feasibility of this expansion and considers both quantitative and qualitative factors. The detailed financial analysis can be found in the appendices.

Martha Millwork’s Background

You are middle aged and have been married for several years. You do not have any children and you do not plan to have any children in the future. Your husband, Bob Millwork, earns a reasonably high income, thus you do not have to work in order to enjoy a comfortable lifestyle. However, you do own and run Martha’s Designs (MD). Your only savings are a small inheritance you received from your mother 10 years ago and the profits from Martha’s Designs. Therefore, you do not have a great deal of resources for financing. Any money you require can be best obtained from your husband, who is supportive of your entrepreneurialism. Bob will also provide any personal guarantees that you need in order to obtain some debt financing.

You have a limited knowledge of business; however you have completed a business degree at a local community college in Saskatchewan. Your strengths are your innovation and creativity, which can be seen with MD’s unique coat designs, as well as your problem-solving skills that are used for solving shipping issues, and your ability to sell. These strengths have allowed you to establish your business and make a small profit from this business.

Clothing Manufacturing andClothing Retail IndustryBackground[1]

In order to understand the Canadian clothing manufacturing industry, the clothing retail industry in Canadamust be understood, as consumer’s preferences drive the clothing manufacturing.

Clothing Manufacturing

Coats are typically made in three lengths: short (knee length), long and car (hip length) and are produced according to season or event. For example, coats are made for the spring-summer season, the autumn-winter season and holiday season. The holiday season attire consists of clothing worn for vacations, such as cruising. It should be noted that the holiday season is not applicable to Martha’s Designs as there is no indication that itproduces clothes specifically for an event or a holiday. Clothes are typically designed and manufactured 1.5 years before the season for large manufacturers. Thus, coats that would be made for autumn 2005 would be designed and made in late spring 2004. Since MD is small manufacturer, you would need less time to prepare a season’s design as you produce your coats on a smaller scale. Consequently, you would probably need to produce the coat half a year to a year in advance of a particular season.

It takes approximately 2 days for a seamstress or tailor to make a coat if they are using a pattern. If a pattern needs to be made than it will take an additional half a day of labor, which totals to 2.5 days to design and produce a coat. Manufacturing a coat involves cutting the material; sewing; lining the coat; and proofing the coat on a model or mannequin. The average cost of labor to make a coat in two days is $100. The materials used to make a higher quality coat costs $250 to $300, but these costs can be reduced by $50 if lower quality materials are used. It is recommended that MD uses better quality material as you are differentiating your product from your competitors through the use of customization and high quality. Product differentiation typically requires the use ofhigh quality materials.

Clothing Retail

In most Canadian cities people dress casually;therefore, they usually own one coat for each season. The reason for this is that most people view coats as commodities. Coats are an item of clothing that keeps them warm when they are outdoors and are not always considered an accessory. Consequently, most people are not willing to spend a great deal of money unless a coat has unique features.

Retailers purchase their inventory through consignment or based on a suggested sales price. The selling of coats through consignment is often done with small privately owned retail stores because they are unable to take on the risk of not being able to sell a new product. However, consignment sales are never done with large stores. Therefore, large stores in cities or in resort towns (the stores in resort towns tend to be medium sized established stores) do not use consignment as a basis for purchasing inventory. The suggested retail price is predetermined by the clothing manufacturer and discussed when the sales order is made by the retailer. Clothing retailers are unable to negotiate the suggested retail price, however they may be able negotiate their purchase price. The difference between the retail stores purchase price and the suggested retail price is the retailer’s gross margin or mark-up.

Most retailers carry two or three labels of coats per store and will carry 20 coats per label. Therefore, a store can carry between 40 to 60 coats per season. In addition, retailers have two options in purchasing a coat and the option available to them depends on the manufacturer’s preferences. The options are as follows:

1. The retail store is able to purchase their desired sizes and the quantities that they want. Typically the sizes they purchase are the sizes that they know will sell well in their stores or are their customers’ average sizes.

1. The retail store must purchase a set of coats at a predetermined quantity. The set will have a predetermined range of coat sizes and quantity of coats per size. For example, a set may include sizes 2 to 10 and will have 3 coats per size. Therefore, the total coats in the set are 15 coats (5 sizes, with 3 coats per size).

Product line growth in a retail store depends on the product’s ability to sell. Retailers observe the product to see how long it takes for it to sell and whether it sells only at a discounted (sale) price. Retailers will have 2 or 3 mark downs on a long shelf product. Normally, once the 3rd mark-down occurs, the retailers are not making a profit from the item as they are no longer able to recover their shipping costs. If the retailer considers a product to be slow moving, they typically do not reorder that label.

Coats are shipped on clothing racks and not in boxes as it is less expensive to ship a clothing rack than large boxes. Six to ten coats can fit on a clothing rack. Clothing shipping costs are incurred by the retailer and not the manufacturer. Thus, the retailer is always concerned about making a profit after the cost of shipping is taken into consideration.

Critical Success Factors

We have identified several success factors that are critical to MD. Without these success factors we believe that the proposed expansion will not be successful. As well, identifying these critical success factors is essential in determining the best and worst case scenarios for the company. (These scenarios can be found in the financial analysis section in the business plan). The critical success factors for MD are as follows:

• Ensuring quality and uniqueness of the product, as these two characteristics are key in differentiating MD from its competitors;
• Maintaining the minimum gross margins near the 30% level for future years;
• Keeping the cost of sales (COS) figure as low as possible, without compromising the products’ quality; however, this will be a challenge as the cost of labor and material for the coats is quite high;
• Ensuring that the existing distribution channel, direct sales to customers, continues to grow at a reasonable rate;
• Entering into the retail stores after spending time to travel to select cities and determining which cities are best for penetration into this distribution channel. and money traveling to select cities to penetrate this distribution channel;
• Using retail stores that are connected by the same management or owners as this will reduce the required traveling;
• Ensuring that you continue to have the same lifestyle as you currently enjoy, maintaining the appropriate level of work life balance

Objectives

Mission – To provide differentiated and exclusive, high quality outer wear that is trend setting and appealing to the fashion conscious individual.

Vision – To enjoy the business opportunity by becoming an exclusive designer of high quality coats in unique market niches.

The Marketing Plan

Past Performance

The means and the scale of production are the predominant differences between the past and proposed business models.Past key success factors such as the quality of the product remain imperative to MD’s profitability in the future. Previously, it was easier to manage quality control because of low production volumes. You were able to examine the final product before it was delivered to the customer. Given that the business is seeking expansion, maintaining a high level of quality will be a significant challenge. However less traveling will result in cost savings and is required as you must proof the coats before they are sent to the retailer or customer. Conversely, the weakness of the past model is that prior levels of production did not meet your growth ambitions. Both the scale and the means of production can have an inverse impact on the quality of the product. Refer to the Operations Plan for discussion of quality control in the proposed production environment.

Previously, you sold a relatively small number of coats (67 per year on the basis of $30,000 of gross revenues and an average selling price of $450 per coat). MD did not have any intermediary distribution channels and the products were sold directly to the final customer.Your main marketing tools were fashion shows, displays at events and a small amount of newspaper advertising. The former two are most indicative of your success because they involved personal interaction and community relations work with the potential customers.

MD experienced minimal competition by advertising in niche markets and highlighting your product at fashion shows and displays at various events. In addition,MD was able to sell products for a significant premium because it was able to bypass intermediaries and sell directly to the final consumer. However, low production volumes are a burden on cost of sales (COS), as MDis unable to achieve economies of scale at current production levels.

The Market

National economic analysis suggests that real growth, measured by GDP[2], is expected to be 2.7% and 3.2% in 2005 and 2006 respectively. In general, Canadians are becoming wealthier and consequently have higher levels of disposable income. For the most part, North Americans are also extremely conscious of their appearance in public. Competitive social pressures lead to increased consumption and the materialistic desires create a market for a genuinely unique product. MD has the resources to fulfill consumers’ demands.