Harrington Case

HARRINGTON CASE 1

HarringtonCase

UniversityAffiliation

HarringtonCollection was founded in 1960 by Steven and Ella Harrington. Thecompany was formed as a producer and distributor of fashionablewomen’s clothing. Initially, the entity focused on formal dressesfor high-end specialty stores. Subsequently, the company expanded itsproduct line to include women’s coats, blouses, pants, and suits.By the 1980s, Harrington had established several retail and specialtystores. The company also acquired other brands such as Christina Coleand Vigor to entice the market of stylish, younger buyers. In the1980s, Harrington also exploited the demand for fashionable andprofessional apparel for working class women. Consequently, thecompany increased its market presence and developed into arespectable brand.

ProblemIdentification

In 2008,Harrington Collection realized lackluster sales for the past threeyears. The company also had all-time low margins. The financialperformance was quite disappointing for the manufacturer and retailerof stylish and fashionable women’s attire. Consequently, Sara Huey,vice-president of strategic planning, gathered members of herstrategy team and other key operating managers. The meeting wasintended to discuss the financial results and develop innovativestrategies to improve the company’s performance. Blake Myers, thegeneral manager of the Vigor division, proposed that the entityshould offer new products. On the other hand, Karen Allen stated thatsuch a plan was not a competent long-term strategy. Furthermore, shehighlighted the fact that a new product launch would drain thecompany’s financial resources. The enterprise could not guaranteethat it would capture enough sales in the first year to break even.Therefore, it was important to evaluate the industry and determinewhether the company would benefit from creating a product line withmore casual, low-priced fashions.

Overview of theactive-wear industry

Notably, theactive-wear industry was mature and highly competitive. Furthermore,the economic downturn had made consumers to be price-sensitive. Pricepressure was intensified by the trend toward casual and lessexpensive types of clothing. The active-wear industry was alsoaffected by the increasing supply of low-cost, imported apparel. Someof the potential lines include matching hoodies, pants, andtee-shirts. Many consumers preferred to acquire contemporary,athletic fashion clothing. Active-wear was highly demanded since itcould be worn everywhere. The price-sensitive nature of consumers wasa critical factor to explain their demand for low-cost apparel.

In addition, manycustomers acquired stylish active-wear lines in department stores.Notably, the new product would fit well with the company’s currentline. Harrington had acquired the Christina Cole and Vigo brands toappeal to younger consumers. The larger percentage of buyers wasattracted to stylish types of clothing. The Vigor division couldassimilate active-wear attire since the former’s styles were lesstraditional and more focused on fashion and comfort. Therefore,Harrington had an incredible opportunity to penetrate the market.

Harrington couldexploit the wonderful opportunity arising from the considerableinterest shown by consumers in active-wear clothing. The companycould retain some of the consumers that were loyal to its brand.Focus groups had revealed that some clients no longer desired toadorn the tailored, professional look. Such consumers desired freshand comfortable fashions that allowed them to pursue activelifestyles. In fact, many consumers preferred attire that made themfeel young. Despite the high prices of active-wear apparel, somebuyers would avoid alternative forms of clothing.

Admittedly,retail trade and competitors would react to Harrington’s plan byendeavoring to offer higher quality goods at cheaper prices. Besides,rival companies would focus their efforts on large-scale advertisingcampaigns. The average price points would be set below$100. Notably,advertising costs for active-wear apparel were estimated at $3million each year, exclusive of launch costs. In this regard,competitors are likely to increase their expenditure on marketing.The prices of active-wear apparel may also rise. Nevertheless,Harrington was quite capable of combating the stiff competitionthrough its Vigor division. In this respect, the company could setthe prices for pants, tee-shirts, and hoodies at $80, $40, and $100respectively. Consequently, Harrington would combat the stiffcompetition in the active-wear industry.

Analysis of thepotential market and sales for 2009

In 2007,Harrington estimated that almost eight million forms of active-wearapparel were sold. However, the company expected the level of salesto double by 2009. Manufacturing experts showed that many consumerswere satisfied with the durability, look, fit, and feel of productsthat seemed of poor-quality. Hence, Harrington would realize highersales volume if they offered their customary high-quality apparel.Furthermore, reliable reports proved that active-wear inventory soldquickly. In fact, the rate of turnover was twice the rate ofHarrington’s clothing.

Final decision

Sara Huey shouldapprove the decision to create a new product line. Harrington shouldoffer active-wear apparel to reverse its negative trends. The companyhad experienced decreased sales volume and low margins over athree-year period. Therefore, it would be proper to pursue other waysof increasing revenue. Active-wear clothing would provide a wonderfulopportunity to increase the corporation’s consumer base. Numeroussurveys and focus groups had shown that buyers preferred to acquireathletic and fashionable styles. Furthermore, Harrington could offercheaper active-wear apparel of higher quality than the products inthe market. Hence, the company could count on attracting moreconsumers. Harrington could provide active-wear clothing through itsVigor division to retain its competitive advantage of in-houseproduction.

FinancialOverview

Demand andProfitability Analysis

The consumermarket manifested considerable demand for active-wear apparel.Additionally, the markdowns for the latter product lines were not asextreme as other types of clothing. The financial results reveal thatthe firm will make a profit margin of 5%.

Start-Up Costs

$

Start-up costs pants plant

1.2

Start-up costs hoodies and tee-shirt plant

2.5

Equipment pants plant

2

Equipment hoodie and tee-shirt plant

2.5

Launch- PR &amp Advertising

2

Fixtures for company stores

6

Total Startup costs

16.2 millions

Annual depreciated start-up costs

5

Annual Ongoing Operating Costs -Fixed

Overhead Pants plant

3

Overhead hoodie and tee-shirt

3.5

Rent pants plant

0.5

Rent hoodie and tee-shirt plant

0.5

Management/Support

1

Advertising

0.6

Total fixed operating costs

9.1

Direct Variable Costs

Hoodie

Tee-Shirt

Pants

20.55

7.5

16.4

Direct variable costs translated into unit cost

20.55*0.5

7.5*1.5

16.4*1

10.275

11.25

16.4

Indirect Variable costs

Wholesale unit price

$100

Total variable costs per unit

10%

Indirect variable costs

$10

Direct variable cost per unit

10.275

Total variable cost

$20.275

Contribution

Wholesale price

100

Less total variable

20.275

Contribution per unit

79.725

Breakeven

Fixed annual costs

9.1 million

/contribution per unit

/79.725

Breakeven units

114, 143

Profit margin

Revenue

22,828,600

Less fixed annual costs

9,100,000

Less total variable costs

2,314, 236

Profit before tax

11,414,364

Profit margin before tax

5%