El Cerrito Case | September 11, 2017

Prepared by: Group of Gao, Li, Li, Marcelo, Putra, and Sharma

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which are forecasted to increase the profit margin by 4. and other products. accessories.” As such. • It is a brand-driven company with “brand at the core of the company’s vision and strategy. integrity.00 per share) is well-supported. • Initiatives such as expanding sales in outlet channels. Li. innovation.Background Executive Summary • El Cerrito is 64-year old leather goods company that operates in the luxury goods space. implementing more robust production outsourcing. steady operations. Therefore. • Long-term sustainability of the business model is imperative to support stock price. With that said. Li. El Cerrito should be concerned with partnering with suitable investors and not be swept up by “short-termism. Marcelo. El Cerrito embraced the values of customer satisfaction.” Gao. his CEO is targeting a 20% increase bottom line increase instead in order to ensure that their stock price ($3. Its portfolio of products includes handbags. Putra. the current VP of marketing for RS International (parent company of El Cerrito). and collaboration. these proposed initiatives still carry risks and restrictions that could erode brand equity. It has a consistent line of products. However.2% in the coming year. and Sharma 2 . and a loyal customer base. • In order to achieve the aggressive net income growth target of 20% there must be a disruption to the current business model as anything less would fall short of the target. • Michael Belden. has proposed three initiatives. and carrying out more extensive brand licensing strategy could augment current forecasts.

00% is currently on an upward trajectory.0% • While El Cerrito competes with other luxury brands.00% 500 0.400 indirect retail Net Sales Revenue Growth locations in the US with less than 1% of sales are from online sales. and Sharma 3 .0% • Products are primarily internally manufactured but. 540 8. (in $ mn) 1997 1998 1999 2000 Competitors which are mostly based in Europe. Li. Marcelo. El Cerrito Net Income • 13% of revenue come from 175 points of 60 12. El Cerrito has been slowly increasing its reliance on more production outsourcing.00% Channel stores. 30 6.00% 6.00% • Primary sales channel are 169 company-owned 480 -4. which account for 64% of all sales while (in $ mn) 1997 1998 1999 2000 36% of sales come from 1.0% distribution in 18 countries outside the US. 2. Putra.00% Market Accessories (21%).0% 10 2.0% Operations in recent years.0% 0 0. they have a Operating Income Operating Income unique advantage to their lower pricing and emphasis on its American roots. 50 10. 560 10. and Others (16%).00% -2. Gao.Background El Cerrito is a brand-driven business with healthy operating margins El Cerrito Revenue • 3 main sources of revenue: Handbags (63%).00% • Revenue had been inconsistent in recent years but 520 4.0% 40 8. 20 4. Li.

0% 40. Putra.0% ladder and increase margin even further 1999 2000 2001 (est. relationships. Li.Analysis Proposed initiatives are modest and insufficient for target growth El Cerrito Projected Financials New Product Line: Large Bags 70. such as fabric.0% • Be more diverse: explore ways to bring quality 60. sisterhoods. Li. • Improve beyond presentation and packaging: investigate into loyalty program.) Gross margin SG&A Operating Income % Expand Gift Business  With Balden’s initiatives. brotherhoods.0% 10. (encourage loyal customers to buy for people around them) Gao.0% Increase Price by 2% 20.0% • Increase more and/or evaluate to move up the luxury 0.0% product using other materials. and Sharma . etc. design bags that celebrate friendship.2%. operating income for 2001 is projected to increase by 4.0% 30. Marcelo. 50.

As such. • There are still brand dilution risks though associated with such efforts to exploit the rapidly growing outlet market. and Sharma 5 . outlet stores not only provide an opportunity to expand sales but also carry with them a low possibility of cannibalizing existing sales. With this.Recommendations Capitalizing on the fast-growing outlet market allows El Cerrito to expand its customer base. • Possible Solution: add a factory sub-brand to include the current the lower-price and quality products under that brand. Marcelo. which was not included in the current business scope. Li. Li. Putra. large bags to test the fashion trend without hurting the main brand and enter the fashion industry. El Cerrito could capitalizing on the outlet trend by Increase presence in outlets to boost revenue. • Retail experts have found that different kinds of consumers shopped at outlets versus company stores. this new sub-brand could also be used for experimental products such as fabric products. Gao. • Other benefits of this solution. there would be less association with the main brand even if the loyal main brand customers saw the outlet stores selling lower price and quality products. Without this concern.

• By analyzing and evaluating current operations overseas. Marcelo. • Consider having full-time employee overseas to QA/QC and facilitate. Li. • The transformation should be gradual so the brand identity can be sustained and maintained. Gao. Putra. Li.Recommendations More aggressive outsourcing can improve margins by reducing productions costs as proven by past initiatives.2% in 1999 to 10. and Sharma 6 . El Cerrito should increase outsourced production. • Operating income grew from 5.2% in 2000 as a result of increased reliance on outsourcing (5% increase). by a magnitude similar to 1999.

licensing would not utilize actual capital for operation and could easily be grown depending on demand. • Licensing agreements must be carefully executed though as licensed products can impair brand equity if not well-managed. Additionally. Li. Putra. these two agreements combined already account for 16% of sales. from $507. El Cerrito signed licensing deal for watches and footwear. gross margins are expected to remain healthy.9m.Recommendations Licensing is a low-hanging fruit that can easily increase revenues while improving margins. and Sharma 7 .8m to $548. This rapid growth is also evidenced by the great net sales increase from 1999 to 2000. Within only 2 years. Gao. • Given that production of these products will be conducted by the licensees. • In 1998 and 1999. Li. Marcelo.

and Sharma 8 . El Cerrito • The proposed price increase can be more needs more data on the effectiveness of drastic.) member only sales. Club- etc. class. canvas. conversion done to explore the willingness to pay of rate) the current customer segment. etc. Marcelo. More market research should be its current campaigns (i.) and current international markets Promotion Price • With a 7 million customer base. etc.e. • Bags for different usage (sports. • Explore ways to fortify brand identity: • Raising the price more might reposition collaboration with companies from the brand in a more lucrative space different industries for PR? Gao. Li. • Expand into other geographic markets travel. Li. such as multi-level marketing. Putra.Recommendations In order to achieve the aggressive net income growth target of 20% there must be a disruption to the current business model Product Place • Explore New Product line that targets a • Explore new distribution channels that different customer segment capitalize on the brand and e-commerce • Different material bags (fabric.

Insights El Cerrito is at its core a brand-driven company. it is a luxury brand nonetheless. As such. and Sharma 9 . This. • While there is a consensus that El Cerrito must grow it must grow carefully and in line with a more long-term growth strategy. human resource and logistics. Putra. which can be communicated to investors. however. • Long-Term Strategy: • Outsourcing Integration with International Expansion • International expansion appears to be a great opportunity to boost revenue. Li. requires large upfront capital investment in terms of stores. aggressive expansion at the possible expense of brand equity must be curtailed in order to preserve positive investor sentiment. • Licensing only when appropriate Gao. Marcelo. deviation from this basic tenet will not only erode brand equity but also the share stock price • Although El Cerrito can be seen as affordable luxury. Li.