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EVA CONSULTING University of New South Wales – Sydney, Australia

Nelson Boyd, Jared Goh, Paulette Lo, Matthew Zaidan

Mentor: Brian Burfitt

CeeCee Business Challenges and Strategic Solutions 15 May 2010

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TABLE OF CONTENTS

INTRODUCTION 3

DISTRIBUTION STRIKE 5

CHALLENGE 5

RECOMMENDATIONS 6

IT FAILURE 7

CHALLENGE 7

RECOMMENDATIONS 8

CELEBRITY MARKETING 9

EXPANSION INTO JEWELLERY RANGE 9

CHILD LABOUR ACCUSATION 10

CHALLENGE 10

RECOMMENDATIONS 11

CONCLUSION 11

APPENDICES Error! Bookmark not defined.

APPENDIX A-1: DISTRIBUTOR STRIKE Error! Bookmark not defined.

APPENDIX A-2: DISTRIBUTOR STRIKE Error! Bookmark not defined.

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APPENDIX A-4: DISTRIBUTOR STRIKE Error! Bookmark not defined.

APPENDIX B: IT SYSTEM FAILURE Error! Bookmark not defined.

APPENDIX C: CELEBRITY MARKETING Error! Bookmark not defined.

APPENDIX D: JEWELLERY RANGE EXPANSION Error! Bookmark not defined.

APPENDIX E: COMPETITIVE ENVIRONMENT Error! Bookmark not defined.

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INTRODUCTION

CeeCee is a retail fashion company that was established in 1989, operating

630 shops across 18 European countries. The success of the company is

grounded upon employing the ‘fast fashion’ business model that utilizes the

manufacturing ‘Just In Time (JIT)’ principle combined with efficient design and

delivery systems. This business model relies on sophisticated IT systems,

close contact with manufacturers, fast creation and supply to shops, and the

swift sale of new inventory items. CeeCee has employed this business model

to great effect, capturing significant market share in their target market of

young professional women looking for fashionable but affordable clothing. It

has since expanded into menswear, children’s wear and home furnishings.

The following SWOT analysis highlights key attributes and opportunities

CeeCee should leverage, threats to be mitigated and weaknesses to

overcome. Despite intense rivalry between numerous competitors such as

Zara and H&M, CeeCee offers a unique value proposition that differentiates it

and positions it competitively in the market (see Appendix E).

SWOT Analysis

Leverage Mitigate

Internal Strengths • Fast creation and supply to

shops • Integrated inventory and

logistics system • Competitive prices • Excellent customer care • Global manufacturing

sources

Weaknesses • Very reliant on one

distributor (EIT) • IT system failure

External Opportunities • Expansion of jewellery range • Celebrity endorsement • Trend towards ethical

products

Threats • Distribution strike • Child labor accusations • Seasonal nature of

clothing industry • Economic recession • Intense competition

However, CeeCee has recently encountered significant business challenges.

Distribution strikes, IT failure, child labor accusation threaten to disrupt the

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successful functioning of the business. They pose significant long term

ramifications to CeeCee’s image and in the short term affect financials. In

addition, there are opportunities to select payment methods for a new

celebrity marketing campaign and expand by offering a jewellery range.

In this report, EVA Consulting will analyze the challenges and opportunities

faced by CeeCee, and provide strategic recommendations to ensure

sustainable and profitable growth as a leader in the fashion industry.

EVA Consulting has prioritized the above challenges based on a criterion that

includes:

− Direct effect on immediate business operations

− Indirect effect on the long-term growth of the company and brand

image

− Impact on long-term customer relationships, particularly repeat

customers

The most critical challenge is the distribution strike which strikes at the heart

of the company as it disrupts the delivery of the product sold and damages

relationships with repeat customers expecting on-trend items. It has more

severe financial consequences than the IT failure, which is the second most

critical challenge as managing receivables is crucial for cash flow. Celebrity

marketing payment options should be decided to ensure the most efficient

methods are agreed upon. Timely expansion into the jewelry range is

important, but not as pressing as the previous challenges. Finally the child

labour accusations are crucial to CeeCee’s long term image and reputation,

however, in comparison to the distribution strike and IT failure it is unlikely to

have a large immediate impact on revenues.

DISTRIBUTION STRIKE

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CHALLENGE

EIT, which is the only distribution company utilised by CeeCee, is unable to

deliver goods for five weeks and in the following five weeks is able to

distribute half the deliveries due to servicing and repair work. The success of

CeeCee’s fast fashion model, that delivers clothes which are on trend,

depends on fast creation and supply to shops. This severe delivery disruption

has significant financial consequences in the short term and in the long term

damage of CeeCee’s reputation. The disruption will cost each of CeeCee’s

stores approximately €493,314 in revenues (See Appendix A-1). Based on the

average number of stores in 2010, 640, this disruption will cost CeeCee

€316m in revenues, €221m in profits and 100% of sales in week 10 compared

with initial projections (See Appendix A-2). Revenues will decline 11% and

profit for the period will fall 48% (See Appendix A-2). Operating profit margin

is projected to decline from a prediction of 23% to 14% (See Appendix A-3).

The graph below illustrates that the disruption will cause predicted revenue to

fall from €2,985m to €2,669m. See Appendix A-4 for a year to year

comparison.

The delivery crisis will have long term consequences, negatively impacting

CeeCee’s reputation and image. CeeCee’s ‘runway to rack’ approach, gets

runway looks on its shelves within 15 days. Clothing which arrives 6 weeks

late could result in a spring item arriving during autumn. Late fashions

2,985

2,669

2010 Prediction

Impact of delivery crisis on revenue (€m)

Initial sales revenue prediction Delivery crisis revenue prediction

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combined with stock-outs as inventory is not replenished could damage

CeeCee’s reputation with customers who return frequently expecting a fresh

supply of fashionable designs. Thus, going forward management should to

develop a course of action to ensure the reliability and effectiveness of its

delivery systems.

RECOMMENDATIONS

As EIT expects vehicles to be fully operational after ten weeks, CeeCee could

absorb the sales lost and continue its relationship with EIT as occurred before

the union crisis. EIT’s reliable and on-time delivery was provided at the

expense of maintenance of its vehicles. Future deliveries may be late as

maintenance is now a priority for EIT. Thus, relying solely on EIT’s distribution

services is highly risky.

To minimise the immediate loss in sales revenue, CeeCee has three options:

1. It may enter a short term delivery contract with an alternative distributor

for the 10 week period. A short term contract with little notice may

attract a premium. However, with the company’s reputation and sales

at stake, a premium is a worthwhile investment.

2. Alternatively, another clothing company with established distribution

networks in similar areas could be approached with a fee to utilise their

networks for the 10 week period. A combined effort would also

increase leverage when bargaining with delivery companies.

3. CeeCee could sue EIT for damages for breach of contract. The

success of legal action depends on the length of the contract. A failure

to deliver 10 weeks of a six month contract may constitute a substantial

failure to deliver the service promised. With a 5 year contract, a 10

week failure to deliver may be determined as an insignificant time

frame. Failed legal action would be costly, cause negative media

attention, and severely damage CeeCee’s future relationship with EIT.

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In the long term, to diversify its distribution options, Cee has three options:

1. CeeCee could vertically integrate and acquire an existing delivery

company, establish its own distribution network or contract more firms

to distribute clothing. Owning a delivery network would result in cost

savings, reducing the fees required for outsourcing and ensure control

over delivery reliability. However, due diligence of prospective targets,

the maintenance of delivery trucks and the expansion of human

resources could be a challenge.

2. A second option is to establish a new delivery business unit. This will

require extensive capital investment, which will leverage CeeCee’s

strong ability to raise finances, but will require expertise in an area that

CeeCee lacks experience. Acquiring an existing delivery company is

less time consuming and complex compared with starting a delivery

business.

3. Switching some orders to EIT’s distribution rivals will make CeeCee

less vulnerable to distribution shocks. There is a risk that smaller

companies will be unable to meet deadlines, and costs may increase

as CeeCee loses leverage in negotiations, as it becomes a smaller

customer to both distributors. Whilst new distributors would require

updating information systems and adapting communication channels to

accommodate different systems, the reduction in risk is significant.

Multiple distributors may reduce costs and improve delivery reliabilities

as delivery companies compete to retain CeeCee’s business.

Through increasing the distributors CeeCee utilises, the company can

transform its weakness of reliance on one distributor and significantly reduce

the risk of a similar crisis in the future.

IT FAILURE

CHALLENGE

The online sales system delivered by ProveIT accepted sales order without

payment, which has led to a discrepancy between website sales figures and

cash received. Approximately 50,000 orders have been processed without

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payment at an average transaction value of 120 per order. This has led to

financial loss of approximately €6,000,000 damaged reputation and potential

loss of future business. In addition, this failure has cast doubt on the reliability

of the online sales system delivered by ProveIT.

RECOMMENDATIONS

Recovery of unpaid goods by the Finance department would impose

additional workload leading to staff morale and productivity issues, as the

finance team is currently overstretched. The expected monetary recovery is

also comparatively less than the recovery by an external debt collection

agency (see Appendix B). Hiring an external agency would be more cost

effective and maximises recovery (see Appendix B) and does not distract the

finance team from carrying out their regular day-to-day work. An external

debt agency should be engaged by the Finance Director to recover the

outstanding payments immediately.

ProveIT, as the outsourced IT service provider responsible for the design and

development of the online sales system, has failed to deliver a working

product. ProveIT is responsible for supervising and managing the quality of

the work done by CeeCee’s seconded staff during the development of the

system. The fact that CeeCee failed to detect the programming error in the

system does not waive ProveIT’s liability. Both the Finance and IT Directors

should be responsible for reviewing the design of the online sales system and

identifying the need for additional internal controls to prevent any further

errors. Sales reconciliation should be done using reports generated from CCF

and CCIPL – in particular weekly sales revenue and weekly inventory sold.

Due to a lack of legal expertise in CeeCee, the Finance and IT Directors

should enlist the assistance of an external legal firm to sue ProveIT for

liquidated damages for financial loss, damaged reputation and potential loss

of future business. It is recommended that CeeCee undertake a re-

assessment of the robustness and reliability of the online sales system.

CELEBRITY MARKETING

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It is important for CeeCee to consider the two proposed payment methods for

the endorsement of CeeCee by Kool (a popular European rock singer) to

ensure the most cost efficient method that maximises value for shareholders

is selected. The two payment methods include:

• Payment Option 1: Kool would accept a fixed payment of €50,000 with a

bonus of €150,000 should incremental sales reach €2 Million

(probability of 0.1)

• Payment Option 2: Royalty basis, earning 5% of incremental sales

revenue

Both methods of payment have different projected costs for different

associated levels of revenue as evident in figure 1 (see Appendix C). This

costs result in a projected level of profit as shown in figure 2 and 3 (see

Appendix C). The incremental revenue level of $1 Million is the estimated

break even sale value, that is, where the cost method of payment option 1

and option 2 are both equal and thus the estimated profit level at that

incremental revenue level is equal as shown in table 1 (see Appendix C).

CeeCee’s payment option 1 for Kool is the cheaper option within the sales

revenue range of €1.2m to €2m. However, it’s important for CeeCee to

consider, that although there is a probability of 0.1 for sales to exceed €2

million, outside of this range (above and below), payment option 2 is the

cheaper option.

EXPANSION INTO JEWELLERY RANGE

CeeCee should take advantage of complacent competitors in the Jewellery

market that are not upgrading the shopping experience for consumers. The

Chief Executive Officer recommended the launch of a new jewellery range.

This strategy should be supported. The project involves the allocation of

150 of space for the new jewellery range. This provision of space cannot

be supported by smaller shops, so will only be introduced by 320 medium or

larger stores.

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In order to assess the viability of undergoing such a project, a net present

value analysis must be conducted. In reference to the Net Present Value of

the jewellery range expansion project conducted in table 1 and 2 (see

Appendix D), it was projected that the jewellery expansion project per shop is

a viable option. With an internal rate of return of 53% being greater than the

required discount rate of 12%, the Profit Index of 2.77 and Net Present Value

of €37,216.09 the project is viable and it is highly recommended that CeeCee

pursues it. Whilst the CeeCee already allocated significant expense to shop

refurbishment and expansion, the company is in a strong financial position

with strong sales and profit margins, indicating a cost efficient system and a

current ratio in 2008 of 3.26 indicating the company has the liquidity to meet

short term obligations. In terms of financing the jewellery range expansion, it

is noted that CeeCee should have little difficulty in raising finances as it is a

listed company. Jewellery expansion can be timed to occur during regular

shop refurbishments to minimise sales disruptions.

CHILD LABOUR ACCUSATION

CHALLENGE

The management of CeeCee has encountered an ethical dilemma with the

knowledge that a substantial number of the Asian suppliers have been using

child labour to manufacture garments for CeeCee. Although this information is

not yet public, and although the agent believes that the child labour issue is so

commonly reported that many newspapers have grown bored of the story- this

is still illegal. If reported, this could significantly damage CeeCee image and

cause it to lose loyal customers who are affronted by the violations. Child

labour is a sensitive issue amongst CeeCee’s target market, young educated

women.

This creates a conflict of interests for management between a cheap labour

option which ensures manufacturing cost are low and being ethical, by not

engaging in contracts with suppliers who do not abide by child labour laws.

Management must choose whether to turn a blind eye to the illegal production

of their product, or act ethically – not for their own positive publicity or to avoid

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legal action – but because acting ethically and fairly is a long-term goal of any

company, as companies such as CeeCee have a social responsibility to not

promote or encourage child labour.

RECOMMENDATIONS

For these reasons we recommend that CeeCee conduct a review of its

suppliers, not just in the Asian region but in Europe as well, reviewing working

conditions and the age of workers. CeeCee can identify which suppliers are

acting ethically and refused to engage with suppliers who breach these ethical

borders. By leveraging its position, CeeCee may be able to persuade

suppliers from hiring child workers. This is important not just for the company

in promoting an ethical image and operating legally, but in acting as a

responsible social entity that promotes fairness and honourable operations.

Whilst CeeCee may suffer slightly higher manufacturing costs as adult

workers are paid higher wages, this could save long term sales losses if the

child labour issue were to get into media attention. In addition, CeeCee can

capitalise on its ethical choices by publicly declaring its careful selection of

suppliers. Customers are increasingly willing to pay a premium for products

created ethically, an image CeeCee can aggressively portray.

CONCLUSION

The current challenges faced by CeeCee pose a unique opportunity to

establish a firm foundation in all areas of performance and establish the

company for sustained and profitable growth in the future. It is critical that

CeeCee prioritizes a solution to the threat posed by the distribution crisis,

which strikes at the very heart of the business model employed. The company

can transform its weakness of reliance on one distributor by diversifying and

contracting multiple distribution companies. Despite the urgency of recovering

lost monies, what is ultimately necessary is that CeeCee reviews the IT

system and ascertain its reliability. By paying endorser Kool with a fixed

payment method (payment option 1), CeeCee maximises return from the

marketing strategy, as incremental sales are less likely to exceed €2 million.

CeeCee should expand its jewellery range to capitalize on competitor

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complacency and consumer demand. Not only will CeeCee benefit from sale

of this range, but through cross selling and attracting customers into the store,

the firm can ensure that it increases market share and achieve long term

sustainable growth in sales. Finally it is recommended that CeeCee reviews

suppliers, regardless of region and importance, to ensure they are operating

ethically, to ensure long term cost savings. Whilst manufacturing costs may

increase slightly, these are eclipsed by potential costs if consumers were to

discover the child labour accusations.