Assignment – 3: West Lake Home Furnishings Ltd.

A report submitted to
Prof. Danesh Gojer

In partial fulfilment of the requirements of the course

Written Analysis and Communication – 1

By
Rohan Kumar Karabu
Section D
Roll No. 188202

On
26-08-2018
 MEMORANDUM

To: Charles Bowman

CEO

From: Rohan Kumar

Executive Assistant

Date: 30/05/207

Subject: To take a decision whether to accept the proposal or to reject the proposal made by the
wholesaler
 EXECUTIVE SUMMARY

Situation Analysis: West Lake Home Furnishings Ltd. business includes the sales of floor lamps and
lighting fixtures. The company has expanded steadily in this market segment since its foundation.
Westlake’s wholesale market constitute 71 percent of sales of whole company in 2006. The products
were sold in three national chains and small retailers. The three chains constitute 71 percent of the
wholesale business. Westlake also sells its products in retail and internet market. These two market
constitute 29 percent of the whole business.

Problem Statement: To decide whether to accept the proposal or to reject the proposal made by
the wholesaler

Options: There are two options whether to accept the proposal or to reject the proposal

Criteria for Evaluation: Below are the criteria for evaluation in Decreasing order

1) Increase in Profitability
2) Competition
The decision must decrease the competition as it affects the sales and revenue of the
company.

3) The decision must meet the goals of the company

Evaluation of Options: West Lake should accept the offer as it satisfies all the above mentioned
criteria. By accepting the offer the profitability will be increased by 8.28 percent. It will also eliminate
the competition with the new entrants. It also meets the goals of the company as to increase the
growth rate to 10 to 15 percent.

Recommendation: West Lake should accept the offer made by the wholesaler as it leads to increase
in the profitability and gives a disadvantage to the new entrants. The decision is also in line with the
goals of the company.
 SITUATION ANALYSIS
West Lake Home Furnishings Ltd. business includes the sales of floor lamps and lighting fixtures. The
company has expanded steadily in this market segment since its foundation. The Canadian Retail
Industry is growing at a CAGR of 5.34 percent. The retail market is highly competitive and one-third
of the market share is occupied by large chains as they provide a wide variety of products and
furnishings which offers a one stop experience to customers. The other market share constitute
small retailers who prefer national brands. The small retailers hold a limited shelf space which makes
them to select only top national brands. Home Furnishing market sales has grown from $7.6 billion
to $9.7 billion in a span of 4 years with CAGR of 6.1 percent. But the average prices have reduced in
this period resulting in an increase in the sales which was greater than the overall sales in retail
market by 15 percent. In this period there were significant trends in the home furnishings market.
Baby Boomers in Canada are earning high incomes and are buying houses. They are showing a great
interest towards spending their income in home furnishings. This further led to increase in the
competitors in industry as the demand for the home furnishings have been increased. The low
production cost in Asia has attracted many manufacturers which made the manufacturers to shift
their production base to Asia.

The retail market in Canada for lighting and light fixtures was $900 million in 2006. There is no
market leader in this segment. It is a fragmented market with top five competitors having a share of
20 percent as a whole. The rest of the market share is occupied equally by the private label and the
small firms. The market share of west lake is around 1.25 percent.

Westlake’s wholesale market constitute 71 percent of sales of whole company in 2006. The products
were sold in three national chains and small retailers. The three chains constitute 71 percent of the
wholesale business. Westlake also sells its products in retail and internet market. These two markets
constitute 29 percent of the whole business. The proposal made by the wholesaler to decrease the
price (69.99 to 29.99) of the signature line so that the wholesaler would increase the shelf space and
boost the sales by 5 times.

Problem Statement: To decide whether to accept the proposal or to reject the proposal made
by the wholesaler

Options
To Reject the Proposal

By rejecting the proposal Westlake will lose one of its most important customer. The wholesaler
accounts for one-third of the sales of the company. The customer knew the name of Chinese factory
which manufactures this product. So the customer can get that product from that factory and even
the new entrants who are competing with the Westlake can grab this opportunity to manufacture
the products. This will affect the market share and brand value of Westlake. The relationship with
the wholesaler will also be affected which can lead to loss in business with them.

To Accept the Proposal

By accepting the proposal Westlake can increase its sales and can have a prominent shelf-space in
the market. With the prominent shelf-space and the increase in the market penetration of the
signature line leads to increase in the brand recognition. By accepting the proposal it will increase
the bonding between the company and the wholesaler. This will even eliminate the competition
from the new entrants and the Asian supplier. The company wanted to achieve steady growth rate
of about 10 to 15 percent. By accepting the proposal company can achieve its target.

Criteria for Evaluation

Below are the criteria for evaluation in Decreasing order

1) Increase in Profitability
2) Competition
The decision must decrease the competition as it affects the sales and revenue of the
company.

3) The decision must meet the goals of the company

Evaluation of Options
1) West Lake should decline the offer

a) Increase in Profitability
By rejecting the proposal West Lake profitability will be decreased as it loses the market
share of the wholesaler as the wholesaler will try to deal with the Chinese factory or the
new entrants. The inventory cost will also increase to $1.76 million.

b) Competition
By rejecting the proposal the West Lake will be losing its most valuable customer. The
newer entrants in the market can accept the proposal which leads to the decline in the
market share of the West Lake company. The wholesaler also knows about the Chinese
company which is manufacturing the signature line product. The wholesaler can also
make a deal with that company which affects the sales of the West Lake.

c) The decision must meet the goals of the company

The company wants to achieve a steady growth rate of 10 to 15 percent in the coming
years. By rejecting the proposal company is losing an opportunity to increase the sale of
the product which directly increase the growth rate.

2) West Lake should accept the offer

a) Increase in the Profitability

By accepting the proposal the profitability will be increased by 8.28 percent (Exhibit 1) .
The increase in profits can be used to invest the money in Internet sales to make the
Internet presence well known to all. The profit amount can be used to reduce the
negative cash flows.

b) Competition
 By accepting the proposal the company maintains a steady relationship with the
wholesaler. The possibility of the wholesaler to deal with the new entrants will be
eliminated. It also enables the other wholesalers to negotiate the price. This makes the
price to decrease and the company may lose an opportunity to become the luxury brand
in the future.

c) The decision must meet the goals of the company

The company wants to achieve a steady growth rate of 10 to 15 percent in the coming
years. By accepting the proposal company’s can increase its sale of the product which
directly increases the growth rate of the company.

Recommendation

West Lake should accept the offer made by the wholesaler as it leads to increase in the
profitability and gives a disadvantage to the new entrants. The decision is also in line with
the goals of the company.

Action Plan

 Ensure that the products from the Chinese Company will be delivered on time.
 Negotiate with the other two wholesalers in the same manner to increase the shelf-
space
 Plan to minimize the inventory costs

Exhibit 1

  Before Accept
Total Sales 11200000  
Revenue from wholesaler 2666666.67  
price per unit 48.99 25.49
Total products 54433 272165
Total Revenue from wholesaler 2666672.67 6937486
cost per unit sales 30 20
COGS 1632986.32 5443240
SGA Expenses 702900 843480
Shipping and Warehouse 486172.
Expenses 194469 5
164593.
Operating Income 136317.35 4
Income tax 47711.1 57607.6
 7
106985.
Net Earnings 88606.25 7
18379.4
Increase in Profit   3

  Present If Rejected
Revenue 11200000 8550080
Exhibit 2:
Sales from Whole
saler 54433 0
Net Earnings 203450 155313.73
   
Decrease in profit 23.66%  

Assuming the sales made by the wholesaler will be zero. He will be buying the product from the
other competitor.