Case Study: Hansson Private Label, Inc.

Expansion and Risk at Hansson Private Label, Inc.: Evaluating Investment in the Goliath Facility

Background:

About Hansson Private Label (HPL)

  • Started in 1992 (Purchase of manufacturing assets from Simon Health and Beauty Products)
  • Purchased by Hansson for $42 million ($25 million equity & $17 million debt) – Hansson’s largest single investment
  • Hansson believed he was paying significantly less than replacement costs for the assets
  • Hansson was confident private-label growth will continue

HPL’s development and success:

  • Hansson’s focus on manufacturing efficiency, expense management and customer service turned HPL into a success
  • Secured most major national and regional retailers as customers
  • Conservative expansion of HPL – opening of any new facility only if (>60% capacity utilization)
  • Currently, all operating at (>90%) capacity

HPL’s Business Operations & Performance:

  • Manufacturer of personal care products (soap, shampoo, mouthwash, shaving cream, sun screen and others) under brand label of HPL’s retail partners (supermarkets, drug stores, mass merchants)
  • Generated $681 million (revenue) in 2007 [28% of total wholesale sales of $2.4 billion]

Situation:

  • $170 million investment proposal (expand manufacturing capacity of Hansson Private Label [HPL]) to accomodate request by HPL’s largest retail customer to increase their share of private label manufacturing
    • Land acquisition ($16 million)
    • Plant construction ($56 million)
    • Manufacturing equipment ($52 million)
    • Packaging equipment ($24 million)
    • Working capital for yr 1 ($22 million)
  • Customer will only commit to a 3-yr contract
  • Expect from Hansson a go/no-go commitment within 30 days

Dilemma:

  • Needs to determine return on the investment to justify effort and risk
  • May risk future opportunities of rapid growth and significant value creation by locking in strong relationship with huge, powerful retailer
  • Need to maintain debt at modest level to contain risk of financial distress in the event the company loses a big customer

Perspectives: (Pro-Investment)

  • Additional capacity will allow HPL to expand relationship with its largest customer (growing sales in US)
  • Generate attractive payback
  • Expansion will enable HPL’s growth from addition of new customers
  • Deter HPL competitors from expanding production capacity in HPL’s personal care sub-segments

Perspectives: (Con-Investment)

  • Making investment and incurring associated debt -> significantly increasing HPL’s annual fixed costs and increase risk of financial distress should sales fall or cost rises (or both)
  • Sales (from HPL’s largest customer) may initially increase. However, demand may disappear at end of 3-yr contract

Industry Trends: (Personal Care Product Market)

  • Personal care market (hand&body care, personal hygiene, oral hygiene, and skin care products)
  • US sales ~ $21.6 billion in 2007
  • Volumes increased (<1%) in each of past 4 years
  • Dollar sales growth (driven by price increases) averaged growth of 1.7% annually the past 4 years
  • Featured numerous national names (high-end to low-end) with considerable brand loyalty
  • Private label penetration range (3% in hair care to 20% in hand sanitizers)
  • Personal care products are sold mainly through (1) mass merchants, (2) club stores, (3) supermarkets, (4) drug stores and (5) dollar stores
  • Over past 15 years, manufactures heavily depended on small number of retailers who had large national presence
  • Intense competition for shelf space (~80,000 new products launched each year)

Industry Trends: (Private Label Industry)

  • With private label brands, retailers rather than manufacturers controlled production, packaging and production of goods
  • Retailers carry private label goods to provide consumers with lower-priced alternatives to national branded goods
  • Quality improvements in private label goods led to increased acceptance by customers
  • Private label sales exceeded $70 billion in 2007
  • Private label products accounted for $4 billion of sales at retail (19% of $21.6 billion), translating to $2.4 billion in wholesale sales from manufacturers

Benefits of Private Label:

  • Potential to increase profits by capturing a greater share of value chain
  • Manufacturer profits per unit could double those of retailer (esp. if brand was famous)
  • Retailers’ cost of goods was 50% lower than branded goods -> can double profit-per-unit sold despite lower selling prices
  • Opportunity for growth (sales of private label goods <5% in many product categories)
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~ by doctorexpert on September 14, 2009.

One Response to “Case Study: Hansson Private Label, Inc.”

  1. Hai doctorexpert, nice considerations……. however you the exact details?
    Thanks

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