El Cerrito Case | September 11, 2017

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

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” Gao. With that said. • It is a brand-driven company with “brand at the core of the company’s vision and strategy. • 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. and carrying out more extensive brand licensing strategy could augment current forecasts. his CEO is targeting a 20% increase bottom line increase instead in order to ensure that their stock price ($3.00 per share) is well-supported.2% in the coming year. Putra. which are forecasted to increase the profit margin by 4. • Michael Belden. innovation. However. Therefore. and other products. and a loyal customer base. the current VP of marketing for RS International (parent company of El Cerrito). It has a consistent line of products. and Sharma 2 . Marcelo.Background Executive Summary • El Cerrito is 64-year old leather goods company that operates in the luxury goods space. • Initiatives such as expanding sales in outlet channels. Li. has proposed three initiatives. and collaboration. Its portfolio of products includes handbags. steady operations. integrity. accessories. these proposed initiatives still carry risks and restrictions that could erode brand equity.” As such. • Long-term sustainability of the business model is imperative to support stock price. implementing more robust production outsourcing. El Cerrito embraced the values of customer satisfaction. El Cerrito should be concerned with partnering with suitable investors and not be swept up by “short-termism. Li.

0% • Products are primarily internally manufactured but. Putra.0% 10 2. El Cerrito has been slowly increasing its reliance on more production outsourcing. (in $ mn) 1997 1998 1999 2000 Competitors which are mostly based in Europe.00% Market Accessories (21%).0% Operations in recent years. 30 6.00% • Primary sales channel are 169 company-owned 480 -4. 540 8. Li.00% -2.0% distribution in 18 countries outside the US. which account for 64% of all sales while (in $ mn) 1997 1998 1999 2000 36% of sales come from 1. Gao.00% Channel stores. El Cerrito Net Income • 13% of revenue come from 175 points of 60 12.0% 0 0.00% 6. Marcelo. 20 4. 50 10.00% 500 0. they have a Operating Income Operating Income unique advantage to their lower pricing and emphasis on its American roots.Background El Cerrito is a brand-driven business with healthy operating margins El Cerrito Revenue • 3 main sources of revenue: Handbags (63%).0% 40 8. and Others (16%).00% • Revenue had been inconsistent in recent years but 520 4. Li. 2.0% • While El Cerrito competes with other luxury brands. and Sharma 3 .00% is currently on an upward trajectory. 560 10.400 indirect retail Net Sales Revenue Growth locations in the US with less than 1% of sales are from online sales.

) Gross margin SG&A Operating Income % Expand Gift Business  With Balden’s initiatives.2%.0% 40. operating income for 2001 is projected to increase by 4. • Improve beyond presentation and packaging: investigate into loyalty program. etc. Li. relationships. Marcelo. sisterhoods.0% • Increase more and/or evaluate to move up the luxury 0.0% • Be more diverse: explore ways to bring quality 60. Putra.0% ladder and increase margin even further 1999 2000 2001 (est. design bags that celebrate friendship.0% 10.0% Increase Price by 2% 20.Analysis Proposed initiatives are modest and insufficient for target growth El Cerrito Projected Financials New Product Line: Large Bags 70. Li. (encourage loyal customers to buy for people around them) Gao. 50.0% 30. and Sharma . brotherhoods. such as fabric.0% product using other materials.

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

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

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

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

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

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