El Cerrito Case | September 11, 2017

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

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

00% 6.0% • While El Cerrito competes with other luxury brands. and Sharma 3 .0% 40 8. Marcelo.00% Channel stores. (in $ mn) 1997 1998 1999 2000 Competitors which are mostly based in Europe.0% Operations in recent years. El Cerrito has been slowly increasing its reliance on more production outsourcing. 560 10. El Cerrito Net Income • 13% of revenue come from 175 points of 60 12.Background El Cerrito is a brand-driven business with healthy operating margins El Cerrito Revenue • 3 main sources of revenue: Handbags (63%).00% -2.00% is currently on an upward trajectory. Li. Putra. and Others (16%). they have a Operating Income Operating Income unique advantage to their lower pricing and emphasis on its American roots.0% 10 2.00% • Primary sales channel are 169 company-owned 480 -4.0% 0 0.00% • Revenue had been inconsistent in recent years but 520 4. 30 6. 2. 20 4.0% • Products are primarily internally manufactured but. 50 10.00% 500 0. which account for 64% of all sales while (in $ mn) 1997 1998 1999 2000 36% of sales come from 1. 540 8.0% distribution in 18 countries outside the US. Gao. Li.00% Market Accessories (21%).400 indirect retail Net Sales Revenue Growth locations in the US with less than 1% of sales are from online sales.

etc.0% 30. Li. • Improve beyond presentation and packaging: investigate into loyalty program.0% 40.Analysis Proposed initiatives are modest and insufficient for target growth El Cerrito Projected Financials New Product Line: Large Bags 70. Marcelo.0% product using other materials.0% • Be more diverse: explore ways to bring quality 60. design bags that celebrate friendship. sisterhoods. (encourage loyal customers to buy for people around them) Gao. relationships.0% • Increase more and/or evaluate to move up the luxury 0.0% Increase Price by 2% 20.2%. Li. and Sharma .0% ladder and increase margin even further 1999 2000 2001 (est.) Gross margin SG&A Operating Income % Expand Gift Business  With Balden’s initiatives. 50. Putra. such as fabric.0% 10. brotherhoods. operating income for 2001 is projected to increase by 4.

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

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

and Sharma 7 . Li. licensing would not utilize actual capital for operation and could easily be grown depending on demand. Marcelo. • Licensing agreements must be carefully executed though as licensed products can impair brand equity if not well-managed. Putra.9m. gross margins are expected to remain healthy. from $507.Recommendations Licensing is a low-hanging fruit that can easily increase revenues while improving margins. Li. Gao. This rapid growth is also evidenced by the great net sales increase from 1999 to 2000.8m to $548. • Given that production of these products will be conducted by the licensees. these two agreements combined already account for 16% of sales. Within only 2 years. • In 1998 and 1999. El Cerrito signed licensing deal for watches and footwear. Additionally.

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

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