El Cerrito Case | September 11, 2017

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


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

0% 10 2. (in $ mn) 1997 1998 1999 2000 Competitors which are mostly based in Europe. 540 8. 2.00% -2.00% 6.400 indirect retail Net Sales Revenue Growth locations in the US with less than 1% of sales are from online sales.0% Operations in recent years. and Others (16%). Putra. which account for 64% of all sales while (in $ mn) 1997 1998 1999 2000 36% of sales come from 1. Li.00% • Primary sales channel are 169 company-owned 480 -4.00% 500 0.00% • Revenue had been inconsistent in recent years but 520 4. El Cerrito has been slowly increasing its reliance on more production outsourcing.00% Market Accessories (21%). 560 10. El Cerrito Net Income • 13% of revenue come from 175 points of 60 12. 50 10. they have a Operating Income Operating Income unique advantage to their lower pricing and emphasis on its American roots. Marcelo. 20 4. 30 6.00% is currently on an upward trajectory. Gao.0% 0 0.Background El Cerrito is a brand-driven business with healthy operating margins El Cerrito Revenue • 3 main sources of revenue: Handbags (63%).0% • Products are primarily internally manufactured but.0% 40 8. and Sharma 3 .0% • While El Cerrito competes with other luxury brands. Li.0% distribution in 18 countries outside the US.00% Channel stores.

operating income for 2001 is projected to increase by 4. such as fabric.2%.0% 30.0% ladder and increase margin even further 1999 2000 2001 (est.0% 10.0% Increase Price by 2% 20. Putra. Li.Analysis Proposed initiatives are modest and insufficient for target growth El Cerrito Projected Financials New Product Line: Large Bags 70. 50. Marcelo.0% • Be more diverse: explore ways to bring quality 60. brotherhoods.) Gross margin SG&A Operating Income % Expand Gift Business  With Balden’s initiatives. • Improve beyond presentation and packaging: investigate into loyalty program. design bags that celebrate friendship. (encourage loyal customers to buy for people around them) Gao.0% • Increase more and/or evaluate to move up the luxury 0. and Sharma . Li.0% product using other materials. sisterhoods.0% 40. relationships. etc.

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

Recommendations More aggressive outsourcing can improve margins by reducing productions costs as proven by past initiatives. El Cerrito should increase outsourced production. and Sharma 6 . Gao. by a magnitude similar to 1999. Putra. Li.2% in 1999 to 10.2% in 2000 as a result of increased reliance on outsourcing (5% increase). • By analyzing and evaluating current operations overseas. Li. • The transformation should be gradual so the brand identity can be sustained and maintained. Marcelo. • Consider having full-time employee overseas to QA/QC and facilitate. • Operating income grew from 5.

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

El Cerrito • The proposed price increase can be more needs more data on the effectiveness of drastic.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. conversion done to explore the willingness to pay of rate) the current customer segment.) member only sales. • Expand into other geographic markets travel. such as multi-level marketing.e. etc. Li. class. Marcelo. and Sharma 8 . Putra. canvas. More market research should be its current campaigns (i. etc. Club- etc.) and current international markets Promotion Price • With a 7 million customer base. • 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. • Bags for different usage (sports.

human resource and logistics. • Licensing only when appropriate Gao.Insights El Cerrito is at its core a brand-driven company. and Sharma 9 . As such. however. Li. This. • Long-Term Strategy: • Outsourcing Integration with International Expansion • International expansion appears to be a great opportunity to boost revenue. aggressive expansion at the possible expense of brand equity must be curtailed in order to preserve positive investor sentiment. 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. it is a luxury brand nonetheless. Li. which can be communicated to investors. Putra. requires large upfront capital investment in terms of stores. • While there is a consensus that El Cerrito must grow it must grow carefully and in line with a more long-term growth strategy.

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