Private Label Case (G20)

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School

Boston College *

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Course

1127

Subject

Finance

Date

Feb 20, 2024

Type

pdf

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Uploaded by anthonyzihenni

Part 1: Background A. How would you describe HPL and its position within the private label personal care industry? A. HPL is a leading manufacturer of private label personal care products such as soap, shampoo, mouthwash, etc. It sells these products to major retail chains like supermarkets, drugstores, mass merchants, and club stores, which then sell them under their own brand labels. Some key facts about HPL's position: ● Has grown steadily over the years, now generating $681 million in revenue in 2007. Has 4 manufacturing plants operating at over 90% capacity. ● Has most major national and regional retailers as customers. Has about 28% market share of the $2.4 billion private label personal care products market. ● Specializes only in manufacturing, does not do any R&D, marketing, or branding. Reliant on retailers for sales and promotion. B. Why is HPL considering expansion? What are the key benefits and risks? HPL is considering a $50 million expansion to add more production capacity for several reasons: Benefits: ● Accommodate its largest customer that wants to significantly increase its orders from HPL. Important to maintain this key relationship. ● Opportunity to grow business with other customers as well by having extra capacity. ● Increased scale and utilization could improve profit margins. Risks: ● Large investments would significantly increase debt load and financial risk. ● Majority of new capacity would be dependent on one large customer, at least initially. Risk of losing their business after a 3 year contract. ● Increased customer concentration versus current diverse customer base. ● Expansion would prevent other investment opportunities for the foreseeable future due to tapping out financial and managerial resources. Overall, the expansion presents a major growth opportunity but also increases business and financial risks for HPL. The company needs to evaluate if the potential rewards justify taking on these risks . Part 2: Free Cash Flows [bulk of the work – will mostly appear in the appendix] A. Construct free cash flows for the years 2009 to 2018 based on the projections presented in exhibit 5. Work with the spreadsheet on Canvas (you shouldn’t be manually entering numbers). Make sure to cover revenue, COGS, SG&A, depreciation, taxes, investment, and working capital. Make sure that you understand how each line in exhibit 5 fits in. a.

B. Calculate the NPV of the expansion using each of the following discount rates (use excel data-table): 9%, 9.25%, 9.5%, 9.75%, 10%. a. Part 3: Cash flow assumptions A. How can we determine which assumptions in exhibit 5 are good and which are bad? a. By comparing certain assumptions with the historical data from past years for projected growth for revenues and costs etc. For instance, from 2003 to 2007, the revenue for Hanson has grown at around ~1% per year. Similarly in the project revenue for upcoming years, we see a similar 1% increase in revenue per year which indicates that this might be a relatively valid assumption. B. What is Tucker Hansson key operational concern (not the discount rate) with the expansion? To which variable in exhibit 5 does this concern relate? a. I believe the key operational concern for Hansson when it comes to expansion would be better predicting how much they want their selling price to increase per year for the next few years. I was a bit shocked to notice that they expect the selling price to consistently increase by 2% each year. a 2% increase in price every single year is quite significant, especially since price increases will be compounding on top of previous years’ price increase every year. I believe it would have been more feasible if Hansson had adopted a different approach which resulted in price increases by different percentages each year. Going from a product selling at $1.77 in 2009 to $2.12 in 2018 is a large jump in prices that may not be so well received by the customers over the next few years. C. How sensitive is the NPV of the expansion to Tucker Hansson’s concern? To answer this, calculate the NPV of the expansion using a discount rate of 9.5% and alternative values for the variable you identified in 3.B above. a. Initially as it stood with a standard increase of 2% in selling price per year, the NPV was calculated to be $16,560.01. However as we began to manipulate the increase in price per year value, NPV immediately decreased, exhibiting a very aggressive sensitivity towards how much price gets to be increased per year. For instance when an increase in price per year was brought down to 1%, NPV drastically went down to $929. Similarly, when price increase per year was settled at 1.5%, NPV decreased to $7,736. Moreso, when the increase in price per year

was brought down to 0.5%, NPV became negative as it settled at - $ 9441.19, demonstrating that the NPV of the project is extremely sensitive to how much Hansson can increase their price of product each year going forward. Part 4: Recommendation A. Would you recommend that Tucker Hansson proceed with the investment? a. Yes, they should take the investment due to the positive NPV of $16,352. Overall, the anticipated discounted cash flows outweigh the costs, therefore it would be worth Hansson’s time to invest in the project.

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