Case 1: Unicloth

Type: Profitability, market sizing, etc.

Our client, Unicloth, is an Asian clothing retailer attempting to establish a profitable presence in the United States. However, since they arrived five years ago, they have struggled to achieve that goal and have engaged our firm to find out why and to recommend the next steps. How can we help?

--> Here we would be using the profitability framework.

Here, as a consultant, it's your job to extract the needed input from your client. Using the profitability framework we come up with the following questions:

Market:
1. Who are the competitors?
2. What are the economic conditions?
3. Have there been new entrants?

Revenue:
1. What do they sell?
2. Where is the product made?
3. Average price per unit?
4. The number of units sold in the US per day?
5. Competitive product?

Cost:
1. COGS?
2. Rent?
3. Store maintenance?
4. Labor?
5. PP&E? etc.

Customer segment:
1. Whom do they sell?

We get the following input from the client:

Market:

1. The retail market has been stable, with no economic downturns, etc.

Revenue:

This company sells casual clothing, think jeans, t-shirts, knit sweaters, dresses, etc.
They follow the designs of the company’s home market in Asia
They are manufactured in China and Bangladesh.
Price: average product price is ~$40. This is in line with mid-tier competitors such as American retailer Bap and a bit below European retailer Mara.

Cost:

1. COGS -
• The profit margin on clothing sales is 30%
2. Rent –
• Flagship store rent: $1.5 M per month
• Mall store: $200K per month * 3 stores = $600K per month,

3. Maintenance of stores, utilities, etc. –
• $5 M per year.
4. Labour –
• Flagship store:
a) 500 associates, average 20 hours per week, $8.5 per hour
b) 5 managers, $100K salary
• Mall stores:
a) 20 associates per store * 3, 20 hours per week, $8.5/hour
b) 1 manager, $100K salary
5. Storage, sending unsold clothes back to warehouse, markdowns, etc.-
• $12M per year

From these data provided we have to identify the problem and make suitable recommendations.

Revenue and Cost calculation-

REVENUE:

1. Price: average product price is ~$40. This is in line with mid-tier competitors such as American retailer Bap and a bit below European retailer Mara

2. Sales:
• Market sizing: The retailer has a US presence comprised of three mall stores plus one flagship store on 5th Avenue.
a. Three mall stores:
- Sell on average 1,375 items per day
- 1375 items * $40 = $55,000 per day
- $165,000 per day all mall stores put together
- $60,225,000 annual revenue from mall store

b. Flagship store on 5th Avenue:
- Sell 4,500 items per day
- 4,500 items *$40 = $180,000 per day
- $65,700,000 per year

We move forward with $125 M revenue per year

COST:

1. COGS:
- The profit margin on clothing sales is 30%
- Cost of items per year is $125 M * .7= $87.5M
- Round to $90M/year

2. Rent:
- Flagship store rent: $1.5 M per month = $18 M per year
- Mall store: $200K per month * 3 stores = $600K per month, $7.2 M per year
- Round to $25M per year
3. Maintenance of stores, utilities, etc.
- $5 M per year
4. Labour:
• Flagship store:
- 500 associates, average 20 hours per week, $8.5 per hour = $85,000/week, $4.42 M per year.
- 5 managers, $100K salary = $.5M per year

• Mall stores:
- 20 associates per store * 3, 20 hours per week, $8.5/hour, $10,200/week, $530,400 per year
- 1 manager, $100K salary
- $1.2 M per year
- Total Labour Cost round to – $6 M per year

5. Storage, sending unsold clothes back to the warehouse, markdowns, etc.
• $12M per year

We have a total cost of $138M per year – Not Breaking even (under by $13M)

IMPROVING PROFITABILITY

Now that we have all of the revenue and costs, let’s work on making the company more profitable. Here you have to work with your free flowing thoughts to come up with suitable suggestions and calculations. All the data required to prove your argument have to be sought out through market surveys and suitable assumptions.

● Costs:

1. Manufacturing- We are already producing our clothing in the cheapest manner possible.
2. Shipping- We could cut 5% of our COGS by shipping the clothing by boat instead of air
- Savings: $4.5M annual (90M * 5%)
3. Labor- We have what we need, cannot reduce
4. Rent- Some options:
- Move the location of the flagship- No, we need it for marketing
- Close mall stores- We are not ready to make that move as we are hoping to continue expanding in the suburbs in the future.
- Share the rent with another business- YES! Opening a coffee shop within the store would cut 25% of our debt burden at the flagship store.

- Savings: $1.75M annual.

● Revenue:

Train the sales staff better to sell- No, they’re pretty well trained
Lower prices- No, it wouldn’t solve our margin issue
Online store- We are not ready to make that investment at this time
Turns out that American customers don’t love the styles and have some trouble with Asian sizes (the styles tend to be too conservative, the colors are too muted, our clothing tends to run small for the US market)
Adjusting design and sizes and continuing to manufacture separately for the American market will cost us $12M annually, but it will provide $23M additional revenue per year (these data are not provided, You come up with them through market survey and suitable assumptions)

- Incremental revenue: $11M annual

Total incremental income

$1.75M + $4.5M savings
$11M incremental revenue

- Total - $17.25M→ makes up for $13M deficit

RECOMMENDATIONS:

The CEO is about to walk in and she would like to hear the recommendations- Currently we are seeing revenues of $125M annually, but costs of $138M, meaning we are $13M in the red. However, we have studied the cost and revenue structure of your retail operation and found that there are a few actions you can take at this time. On the cost side, we recommend changing your means of shipping from air to boat, a change we have found will bring $4.5M in annual savings. Additionally, we recommend seeking a partner to share your rent/space at the flagship store. We believe, for example, that placing a coffee shop within the store would save you 25% in rent, for a savings of $1.75M annually and perhaps encourage your customers to shop more. Finally, we recommend revamping your inventory for the American market by adjusting designs and sizes to better meet demand. We estimate this will drive $11M in additional annual revenue. Together, these measures will more than make you profitable, breaking even and making $4.25M in profit. Potential risks of this plan include having an unreliable retail partner at the flagship store, making products that the American market still doesn’t like, and delaying inventory stocking through the new shipping method. For this, we recommend a study into whom the retail partner should be, engaging in extensive market research to produce the correct SKUs for the market, and adjusting US warehouse operations and lead times to ensure that stocking is not delayed.