Repackaging a Global Brand: A Case Study Analyzing the Capital Expenditure Decision Barbara Tarasovich, DPS, CPA, CGMA Bridget Lyons Associate Accounting Professor Finance Professor Jack Welch College of Business Jack Welch College of Business Sacred Heart University Sacred Heart University INTRODUCTION dull, and cheap looking. It also lacks a contemporary and premium look compared with some of the main competitor's It is early 2014. A leading global skincare manufacturer, products. HBC is in the process of rebranding these product Health & Beauty Co. (HBC), has been losing market share in lines, and newly developed packaging will play a pivotal role the hand and body lotion market. While the firm still leads its in the plan to rebrand and reposition the product. The new competitors in market share in this segment of personal care, packaging aims to convey the brand image of modern, up-to- it seeks to stem further share erosion and, to that end, has date, high-quality, everyday use, and good value. recently developed a strategy to recover market share through Preliminary investigation comparing the existing and rebranding, advertising, and repackaging. The situation is proposed packaging revealed the following: especially critical since a large competitor is believed to be 1. The proposed packaging will keep the brand fresh and launching a new skincare product in the near future. relevant while maintaining the brand heritage and appeal Your task as senior financial analyst is to draft the capital to existing and future consumers. expenditure proposal related to the new packaging proposal. Information to support you in this task follows. You should 2. The project: complete the firm's capital expenditure template included in a. Provides the opportunity to simplify an over- Appendix 1. complicated and confusing pack line-up by reducing the current portfolio of sizes. BACKGROUND: b. May lead to improved margins since there is the potential to raise prices on the newly packaged items. The U.S. skincare market has been growing at an average The current gross margin of the product is 69% rate of 4% over the past three years and is estimated to reach 3. Overall, the new pack design is a cost-effective pack with $1 1 billion in 2018. This market includes facial, body, and package unit prices lower than that of the current brand hair care, as well as other makeup segments. HBC holds pack. a leadership position in the hand and body lotion market 4. The brand team believes that incremental sales growth but needs to evolve to meet consumers' growing needs and is achievable through the combination of new brand compete with an ever-increasing number of competitors. positioning, advertising, and packaging. Feedback from Recent market research by HBC revealed that consumers several large retailers consulted on the new packaging perceive the current packaging as outdated: old, generic, was consistently positive. IMA EDUCATIONAL CASE JOURNAL 1 VOL. 10, NO. 4, ART. 1, DECEMBER 2017 12017 IMAPROJECT INFORMATION: ASSIGNMENT QUESTION: The new packaging would require the purchase of molds and 1. As the accounting financial analyst supporting the brand, assembly equipment (useful life of six years on all) as follows: the CFO assigns you the project of completing a capital Cap/Pump molds $1,590,000 expenditure proposal for the repackaging. You must Change part 260,000 complete the template in Appendix 1. Pump assembly 570,000 In addition, the firm will incur start-up expenses related to partial case returns and other items. It is assumed that ABOUT IMA" (INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA", the association of accountants and financial professionals major customers will be able to manage down their inventory in business, is one of the largest and most respected associations levels with the assistance of the transitions team. Minimal focused exclusively on advancing the management accounting returns will come from large retailers including WalMart and profession. Globally, IMA supports the profession through Kmart due to their quick inventory turnover. It is anticipated research, the CMA" (Certified Management Accountant) that most returns will come from drug retailers as they shift program, continuing education, networking and advocacy of the products to the new packaging and remove unsold product highest ethical business practices. IMA has a global network of from the shelves. more than 85,000 members in 140 countries and 300 professional Partial case returns net of salvage value $1,800,000 and student chapters. Headquartered in Montvale, N.J., USA, IMA provides localized services through its four global regions: Label conversion costs 700,000 The Americas, Asia/Pacific, Europe, and Middle East/India. Freight charge/launch year expenses 400,000 For more information about IMA, please visit www.imanet.org. Other miscellaneous 300,000 The redesign calls for cutting SKU's from 79 to 49. No volume loss is anticipated from this since the transition team will actively manage shelf space on a customer-by-customer basis to minimize loss of shelf presence. The SKU reduction is estimated at $1 19,000 per year since the new package design is less expensive per unit. The brand's current long-term strategic role is to maintain share and grow at category levels. Sales in the most recent year were $139.5 million. Without the redesign, sales are forecast to remain flat at historic levels. With the redesign, management believes that sales can grow at the rate of the skincare category-forecast at 4% per year for the next five years-and there will also be incremental growth related to recovery of market share of 2% in Year 1, 1% in Year 2, 0.5% in Year 3, and 0% thereafter. The gross margin will remain at 69% of net sales. The incremental marketing and development cost is a one-time $700,000 for market research and development. Management thought the project should be evaluated using a discount rate of 7% based on the firm's weighted average cost of capital (WACC) and the perceived riskiness of the project. The tax race is 27%