El Cerrito Case | September 11, 2017

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

1
Background

Executive Summary
El Cerrito is 64-year old leather goods company that operates in the luxury goods space. It has a
consistent line of products, steady operations, and a loyal customer base. Its portfolio of products
includes handbags, accessories, and other products.
It is a brand-driven company with brand at the core of the companys vision and strategy. As such, El
Cerrito embraced the values of customer satisfaction, integrity, innovation, and collaboration.
Michael Belden, the current VP of marketing for RS International (parent company of El Cerrito), has
proposed three initiatives, which are forecasted to increase the profit margin by 4.2% in the coming
year. However, 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.
Initiatives such as expanding sales in outlet channels, implementing more robust production
outsourcing, and carrying out more extensive brand licensing strategy could augment current forecasts.
With that said, these proposed initiatives still carry risks and restrictions that could erode brand equity.
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.
Long-term sustainability of the business model is imperative to support stock price. Therefore, El Cerrito
should be concerned with partnering with suitable investors and not be swept up by short-termism.

Gao, Li, Li, Marcelo, Putra, and Sharma 2

Background

El Cerrito is a brand-driven business with healthy operating margins

El Cerrito Revenue
3 main sources of revenue: Handbags (63%), 560 10.00%

Market Accessories (21%), and Others (16%). 540

8.00%
6.00%
Revenue had been inconsistent in recent years but 520
4.00%

is currently on an upward trajectory. 2.00%

500 0.00%
-2.00%
Primary sales channel are 169 company-owned 480 -4.00%

Channel stores, which account for 64% of all sales while (in $ mn) 1997 1998 1999 2000

36% of sales come from 1,400 indirect retail Net Sales Revenue Growth

locations in the US with less than 1% of sales are

from online sales.
El Cerrito Net Income
13% of revenue come from 175 points of 60 12.0%

distribution in 18 countries outside the US. 50 10.0%

40 8.0%
Products are primarily internally manufactured but,
30 6.0%
Operations in recent years, El Cerrito has been slowly increasing
its reliance on more production outsourcing. 20 4.0%

10 2.0%

0 0.0%
While El Cerrito competes with other luxury brands, (in $ mn) 1997 1998 1999 2000

Competitors which are mostly based in Europe, they have a Operating Income Operating Income
unique advantage to their lower pricing and
emphasis on its American roots.
Gao, Li, Li, Marcelo, Putra, and Sharma 3
Analysis

Proposed initiatives are modest and insufficient for target growth

El Cerrito Projected Financials
New Product Line: Large Bags 70.0%

Be more diverse: explore ways to bring quality 60.0%

product using other materials, such as fabric. 50.0%

40.0%

30.0%

Increase Price by 2% 20.0%

10.0%
Increase more and/or evaluate to move up the luxury 0.0%
ladder and increase margin even further 1999 2000 2001 (est.)

Gross margin SG&A Operating Income %

Expand Gift Business With Baldens initiatives, operating income for

2001 is projected to increase by 4.2%.
Improve beyond presentation and packaging:
investigate into loyalty program, design bags that
celebrate friendship, sisterhoods, brotherhoods,
relationships, etc. (encourage loyal customers to buy
for people around them)

Gao, Li, Li, Marcelo, Putra, and Sharma

Recommendations

Capitalizing on the fast-growing outlet market allows El Cerrito to

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

Gao, Li, Li, Marcelo, Putra, and Sharma 5

Recommendations

More aggressive outsourcing can improve margins by reducing

productions costs as proven by past initiatives.
Operating income grew from 5.2% in 1999 to 10.2% in 2000 as a result of
increased reliance on outsourcing (5% increase).
By analyzing and evaluating current operations overseas, El Cerrito
should increase outsourced production, by a magnitude similar to 1999.
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.

Gao, Li, Li, Marcelo, Putra, and Sharma 6

Recommendations

Licensing is a low-hanging fruit that can easily increase revenues while

improving margins.
In 1998 and 1999, El Cerrito signed licensing deal for watches and footwear. Within
only 2 years, these two agreements combined already account for 16% of sales. This
rapid growth is also evidenced by the great net sales increase from 1999 to 2000,
from $507.8m to $548.9m.
Given that production of these products will be conducted by the licensees, gross
margins are expected to remain healthy. Additionally, 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.

Gao, Li, Li, Marcelo, Putra, and Sharma 7

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

El Cerrito is at its core a brand-driven company, 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. As such, aggressive expansion at the possible expense of
brand equity must be curtailed in order to preserve positive investor
sentiment.
While there is a consensus that El Cerrito must grow it must grow
carefully and in line with a more long-term growth strategy, 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. This, however,
requires large upfront capital investment in terms of stores, human resource and logistics.
Licensing only when appropriate
Gao, Li, Li, Marcelo, Putra, and Sharma 9