Baldwin Bicycle Case
This case looks at a âprivate labelâ opportunity for a smallmid-market bicycle manufacturer. Analysis of the problem requires ablending of financial, marketing and strategicconsiderations.
In March 2009, Suzanne Leister, marketing vice president ofBaldwin Bicycle Company, was mulling over the discussion she hadthe previous day with Karl Knott, a buyer from Hi-Valu Inc., aretail mass merchandiser with stores in the Northwest. Hi-Valu'ssales volume had grown to the extent that it was beginning to add"house-brand" (also called "private-label") merchandise to theproduct lines of several of its departments. Mr. Knott, Hi-Valu'sbuyer for sporting goods, has approached Ms. Leister about thepossibility of Baldwin producing bicycles for Hi-Valu. The bicycleswould bear the name "Challenger," which Hi-Valu planned to use forall of its house-brand sporting goods.
Baldwin had been making bicycles for over 10 years. In 2009, thecompany's line included 12 models, ranging from a child's beginnersmodel to a high-end adult's mountain bike targeted at amateurweekend competitors. Sales were currently at an annual rate ofabout $10 million. The company's 2008 financial statements appearin Exhibit 1. Most of Baldwin's sales were through independentlyowned retailers, primarily bike shops but to a lesser extent toystores, hardware stores and sporting goods stores. Baldwin hadnever before distributed its products through store chains of anytype. Ms. Leister felt that Baldwin bicycles had the image of beingabove average in quality and price, but not exclusively a "top ofthe line" product.
Hi-Valu's proposal to Baldwin had features that made it quitedifferent from Baldwin's normal way of doing business. First, itwas very important to Hi-Valu to have ready access to a largeinventory of bicycles, because Hi-Valu had had great difficulty inpredicting bicycle sales, both by store and by month. Hi-Valuwanted to carry these inventories in its regional warehouses, butit did not want title on a bicycle to pass from Baldwin to Hi-Valuuntil the bicycle was shipped from one of its regional warehousesto a specific Hi-Valu store. At that point, Hi-Valu would regardthe bicycle as having been purchased from Baldwin, and would payfor it within 30 days. However, Hi-Valu would agree to take titleto any bicycle that had been in one of its warehouses for fourmonths, again paying for it within 30 days. Mr. Knott estimatedthat on average, a bike would remain in a Hi-Valu regionalwarehouse for two months.
Second, Hi-Valu wanted to sell its Challenger bicycles at lowerprices than the name-brand bicycles it carried, and yet still earnapproximately the same gross margin percentage on each bicycle sold- - the rationale being that Challenger bike sales would erodesomewhat the sales of the name-brand bikes. Hi-Valu expected thatgiven the lower price there would be increased total volume thatwould more than offset the volume loss. Nevertheless, Hi-Valuneeded to purchase bikes from Baldwin at lower prices than thewholesale prices of comparable bikes sold through the more typicalmarket channels.
Finally, Hi-Valu wanted the Challenger bike to be somewhatdifferent in appearance from Baldwin's other bikes. While frame andmechanical components could be the same as used on one of Baldwin'scurrent models, the seats, handlebars and shifters would need to besomewhat different, and the tires would have to have the name"Challenger" molded into their sidewalls. Also, the bicycles wouldhave to be packed in boxes printed with the Hi-Valu and Challengernames. These requirements were expected by Ms. Leister to increaseBaldwin's purchasing, inventorying, and production costs over andabove the added costs that would be incurred for a comparableincrease in volume for Baldwin's regular products.
Ms. Leister was acutely aware that the "bicycle boom" hadflattened out, and this plus a poor economy had caused Baldwin'ssales volume to also flatten out the past two years.[1] As aresult, Baldwin currently was operating its plant at about 80percent of its two-shift capacity. Thus, the added volume fromHi-Valu's purchases could possibly be very attractive. If agreementcould be reached on prices, Hi-Valu would sign a contractguaranteeing to Baldwin that Hi-Valu would buy its house-brandbicycles only from Baldwin for a three-year period. The contractwould then be automatically extended on a year-to-year basis,unless one party gave the other at least three-months' notice thatit did not wish to extend the contract.
Suzanne Leister realized she needed to do some preliminaryfinancial analysis of this proposal before having any furtherdiscussions with Karl Knott. She had written on a pad theinformation she had gathered to use in her initial analysis; thisinformation is shown in Exhibit 2.
Exhibit 1
BALDWIN BICYCLE COMPANY
Balance Sheet, As of December 31, 2008
(thousand of dollars)
Assets Liabilities and Owners Equity
Cash $ 340 Accountspayable $ 520
Accountsreceivable 1,360 Accruedexpenses 340
Inventories 1,760 Short-term bankloan 2,640
Plant and equipment(net) 4,640 Long-term Notespayable 2,000
Total liabilities 5,500
Owner'sequity 2,600
$8,100 $8,100
BALDWIN BICYCLE COMPANY
Income Statement, For the Year Ended December 31,2008
Salesrevenues $10,900
Cost of GoodsSold 8,500
Grossmargin 2,400
Selling, General and Administrative (including interest)costs 1,900
Income beforetaxes 500
Incometaxes 200
Netincome $ 300
Exhibit 2
DATA PERTINENT TO HI-VALU PROPOSAL
(Notes taken by Suzanne Leister)
1. Estimated first-year costs of producing Challenger bicycles(average unit costs, assuming a constant mix of models):
Components andMaterials $40.00
Assembly Labor 20.00
Allocated Overhead
variable manufacturing overhead10.00
fixed manufacturing overhead 15.00
$85.00
Components and materials includes items specific to models forHi-Valu, not used in our standard models. Variable manufacturingoverhead costs includes an estimate of the incremental costs ofhandling materials, shipments out, etc. Fixed manufacturingoverhead includes depreciation on the building, managementsalaries, etc., is allocated over total projected productionvolume.
2. One-time added costs of preparing designs and tooling,arranging sources for seats, handlebars, shifters, tires, andshipping boxes that differ from those used in our standard models:approximately $100,000.
3. Unit price and annual volume: Hi-Valu estimates it will need24,000 bikes a year and proposes to pay us an average of $95.00 perbike for the first year. The contract contains an inflationescalation clause. The price will increase in proportion toinflation-caused increases in costs shown in item 1, above. Thus,the $95.00 and $85.00 figures are, in effect, "constant-dollar"amounts. Knott intimated that there was very little, if any,negotiating leeway in the $95.00 proposed price.
4. Working capital financing costs (annual variable financingcosts, as percent of dollar value of working capital) are:
Pre-tax cost of funds (to finance receivables and inventoriesnot carried by vendors) is 12.0%.
5. Other assumptions for Challenger-related added inventories(average over the year):
Materials: two month's supply.
Work in process: 1,000 bikes, half completed(but all materials for them issued).
Finished goods: 500 bikes (awaiting the next truckload lotshipment to a Hi-Valu warehouse).
6. Impact on our regular sales: Some retail consumers comparisonshop for bikes, and many of them are likely to conclude that aChallenger bike as a good value when compared with a similar bike(either ours or a competitor's) at a higher price in a non-chainstore. Also, our direct customers (local shop owners, etc.) arelikely to recognize these bikes as Baldwin products or to otherwiselearn of this private brand deal. In 2008, we sold 99,000 bikes. Mybest guess is that our sales over the next three years will beabout 100,000 bikes a year if we forego the Hi-Valu deal. If weaccept it, I think we'll lose about 4,000 units of our regularsales volume a year, since our retail distribution is quite strongin Hi-Valu's market region.
CASE QUESTIONS - No Math
1. In a write-up format, answer the questions with anâorganizedâ thought process rather than just doing the math. Thisis meant to help you think thru the case.
a. How did the special order/pricing case apply?
b. In your own words, discuss the blending of Cost &Financial Analysis with Marketing & Strategic consideration
c. Identify and analyze revenues and costs applicable to thespecial order/pricing decision.
d. What other implications are relevant to the case?
2. What are the pertinent aspects of Baldwinsituation?
a. How would you describe Baldwin's financial situationincluding operating
b. performance as of 2008?
c. How would you describe Baldwin's strategic position at theend of 2008?
d. Is the Challenger deal a good strategic fit for Baldwin?
3. Without performing a cost analysis of theChallenger deal, talk about
a. Relevant manufacturing
b. Relevant Costs & Profits
c. Relevant Annual Costs of theWorking Capital involved in the Challenger deal
Baldwin Bicycle Case
This case looks at a âprivate labelâ opportunity for a smallmid-market bicycle manufacturer. Analysis of the problem requires ablending of financial, marketing and strategicconsiderations.
In March 2009, Suzanne Leister, marketing vice president ofBaldwin Bicycle Company, was mulling over the discussion she hadthe previous day with Karl Knott, a buyer from Hi-Valu Inc., aretail mass merchandiser with stores in the Northwest. Hi-Valu'ssales volume had grown to the extent that it was beginning to add"house-brand" (also called "private-label") merchandise to theproduct lines of several of its departments. Mr. Knott, Hi-Valu'sbuyer for sporting goods, has approached Ms. Leister about thepossibility of Baldwin producing bicycles for Hi-Valu. The bicycleswould bear the name "Challenger," which Hi-Valu planned to use forall of its house-brand sporting goods.
Baldwin had been making bicycles for over 10 years. In 2009, thecompany's line included 12 models, ranging from a child's beginnersmodel to a high-end adult's mountain bike targeted at amateurweekend competitors. Sales were currently at an annual rate ofabout $10 million. The company's 2008 financial statements appearin Exhibit 1. Most of Baldwin's sales were through independentlyowned retailers, primarily bike shops but to a lesser extent toystores, hardware stores and sporting goods stores. Baldwin hadnever before distributed its products through store chains of anytype. Ms. Leister felt that Baldwin bicycles had the image of beingabove average in quality and price, but not exclusively a "top ofthe line" product.
Hi-Valu's proposal to Baldwin had features that made it quitedifferent from Baldwin's normal way of doing business. First, itwas very important to Hi-Valu to have ready access to a largeinventory of bicycles, because Hi-Valu had had great difficulty inpredicting bicycle sales, both by store and by month. Hi-Valuwanted to carry these inventories in its regional warehouses, butit did not want title on a bicycle to pass from Baldwin to Hi-Valuuntil the bicycle was shipped from one of its regional warehousesto a specific Hi-Valu store. At that point, Hi-Valu would regardthe bicycle as having been purchased from Baldwin, and would payfor it within 30 days. However, Hi-Valu would agree to take titleto any bicycle that had been in one of its warehouses for fourmonths, again paying for it within 30 days. Mr. Knott estimatedthat on average, a bike would remain in a Hi-Valu regionalwarehouse for two months.
Second, Hi-Valu wanted to sell its Challenger bicycles at lowerprices than the name-brand bicycles it carried, and yet still earnapproximately the same gross margin percentage on each bicycle sold- - the rationale being that Challenger bike sales would erodesomewhat the sales of the name-brand bikes. Hi-Valu expected thatgiven the lower price there would be increased total volume thatwould more than offset the volume loss. Nevertheless, Hi-Valuneeded to purchase bikes from Baldwin at lower prices than thewholesale prices of comparable bikes sold through the more typicalmarket channels.
Finally, Hi-Valu wanted the Challenger bike to be somewhatdifferent in appearance from Baldwin's other bikes. While frame andmechanical components could be the same as used on one of Baldwin'scurrent models, the seats, handlebars and shifters would need to besomewhat different, and the tires would have to have the name"Challenger" molded into their sidewalls. Also, the bicycles wouldhave to be packed in boxes printed with the Hi-Valu and Challengernames. These requirements were expected by Ms. Leister to increaseBaldwin's purchasing, inventorying, and production costs over andabove the added costs that would be incurred for a comparableincrease in volume for Baldwin's regular products.
Ms. Leister was acutely aware that the "bicycle boom" hadflattened out, and this plus a poor economy had caused Baldwin'ssales volume to also flatten out the past two years.[1] As aresult, Baldwin currently was operating its plant at about 80percent of its two-shift capacity. Thus, the added volume fromHi-Valu's purchases could possibly be very attractive. If agreementcould be reached on prices, Hi-Valu would sign a contractguaranteeing to Baldwin that Hi-Valu would buy its house-brandbicycles only from Baldwin for a three-year period. The contractwould then be automatically extended on a year-to-year basis,unless one party gave the other at least three-months' notice thatit did not wish to extend the contract.
Suzanne Leister realized she needed to do some preliminaryfinancial analysis of this proposal before having any furtherdiscussions with Karl Knott. She had written on a pad theinformation she had gathered to use in her initial analysis; thisinformation is shown in Exhibit 2.
Exhibit 1
BALDWIN BICYCLE COMPANY
Balance Sheet, As of December 31, 2008
(thousand of dollars)
Assets Liabilities and Owners Equity
Cash $ 340 Accountspayable $ 520
Accountsreceivable 1,360 Accruedexpenses 340
Inventories 1,760 Short-term bankloan 2,640
Plant and equipment(net) 4,640 Long-term Notespayable 2,000
Total liabilities 5,500
Owner'sequity 2,600
$8,100 $8,100
BALDWIN BICYCLE COMPANY
Income Statement, For the Year Ended December 31,2008
Salesrevenues $10,900
Cost of GoodsSold 8,500
Grossmargin 2,400
Selling, General and Administrative (including interest)costs 1,900
Income beforetaxes 500
Incometaxes 200
Netincome $ 300
Exhibit 2
DATA PERTINENT TO HI-VALU PROPOSAL
(Notes taken by Suzanne Leister)
1. Estimated first-year costs of producing Challenger bicycles(average unit costs, assuming a constant mix of models):
Components andMaterials $40.00
Assembly Labor 20.00
Allocated Overhead
variable manufacturing overhead10.00
fixed manufacturing overhead 15.00
$85.00
Components and materials includes items specific to models forHi-Valu, not used in our standard models. Variable manufacturingoverhead costs includes an estimate of the incremental costs ofhandling materials, shipments out, etc. Fixed manufacturingoverhead includes depreciation on the building, managementsalaries, etc., is allocated over total projected productionvolume.
2. One-time added costs of preparing designs and tooling,arranging sources for seats, handlebars, shifters, tires, andshipping boxes that differ from those used in our standard models:approximately $100,000.
3. Unit price and annual volume: Hi-Valu estimates it will need24,000 bikes a year and proposes to pay us an average of $95.00 perbike for the first year. The contract contains an inflationescalation clause. The price will increase in proportion toinflation-caused increases in costs shown in item 1, above. Thus,the $95.00 and $85.00 figures are, in effect, "constant-dollar"amounts. Knott intimated that there was very little, if any,negotiating leeway in the $95.00 proposed price.
4. Working capital financing costs (annual variable financingcosts, as percent of dollar value of working capital) are:
Pre-tax cost of funds (to finance receivables and inventoriesnot carried by vendors) is 12.0%.
5. Other assumptions for Challenger-related added inventories(average over the year):
Materials: two month's supply.
Work in process: 1,000 bikes, half completed(but all materials for them issued).
Finished goods: 500 bikes (awaiting the next truckload lotshipment to a Hi-Valu warehouse).
6. Impact on our regular sales: Some retail consumers comparisonshop for bikes, and many of them are likely to conclude that aChallenger bike as a good value when compared with a similar bike(either ours or a competitor's) at a higher price in a non-chainstore. Also, our direct customers (local shop owners, etc.) arelikely to recognize these bikes as Baldwin products or to otherwiselearn of this private brand deal. In 2008, we sold 99,000 bikes. Mybest guess is that our sales over the next three years will beabout 100,000 bikes a year if we forego the Hi-Valu deal. If weaccept it, I think we'll lose about 4,000 units of our regularsales volume a year, since our retail distribution is quite strongin Hi-Valu's market region.
CASE QUESTIONS - No Math
1. In a write-up format, answer the questions with anâorganizedâ thought process rather than just doing the math. Thisis meant to help you think thru the case.
a. How did the special order/pricing case apply?
b. In your own words, discuss the blending of Cost &Financial Analysis with Marketing & Strategic consideration
c. Identify and analyze revenues and costs applicable to thespecial order/pricing decision.
d. What other implications are relevant to the case?
2. What are the pertinent aspects of Baldwinsituation?
a. How would you describe Baldwin's financial situationincluding operating
b. performance as of 2008?
c. How would you describe Baldwin's strategic position at theend of 2008?
d. Is the Challenger deal a good strategic fit for Baldwin?
3. Without performing a cost analysis of theChallenger deal, talk about
a. Relevant manufacturing
b. Relevant Costs & Profits
c. Relevant Annual Costs of theWorking Capital involved in the Challenger deal
