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Hollydazzle.com
Hollydazzle.com
HOLLYDAZZLE.COM
(FINAL SUBMISSION)
Submitted by:
GROUP NO: 1
Shanu Kumar (PGP30342)
Shashank Sinha (PGP30343)
Shikha Gupta (PGP30344)
Shruti Goyal (PGP30345)
Suman Sanya (PGP30346)
Swadesh Kumar (PGP30347)
Letter of Transmittal
Dear Madam,
Enclosed here is the report you commissioned on 20 Nov 2014 on Hollydazzle.com.
This report is about a new venture, a website called Hollydazzle.com which was aimed to sell the
seasonal holiday merchandise. The report contains the financial analysis about the various decisions
that firm needs to take to check the viability and feasibility of their business.
We would like to you thank you to provide an opportunity to work on this report.
We hope that you find the report satisfactory.
Thanks & Regards
Group 1
ii
Declaration
We, Shanu Kumar, Shashank Sinha, Shikha Gupta, Shruti Goyal, Suman Sanya and Swadesh Kumar,
hereby declare that the report is a group effort and we all have contributed to it to the fullest of our
knowledge.
iii
Table of Contents
Executive Summary.v
List of Illustrationsvi
Introduction....1
Problem Statement..1
Purpose Statement..1
Major Assumptions1
Evaluation of Income Statement..3
Forecasting Operating Income.....4
Outsourcing Decision..6
Allocating Additional Cost Decision................................................................................7
Gross Margin Profit Analysis.8
Key Decision Factors9
Conclusion10
Recommendation.10
References.
iv
Executive Summary
Three graduating Harvard Business School students, John Carlisle, Kristin Chambers & Eric Walsh
decided to be entrepreneurs and start a venture of their own. They made this decision because eretail was expected to grow at around 50-55% for the next 3-4 years. Our main aim in this project is
to check the economic viability of their idea.
Kristin prepared the financial statements of the company, by looking into the financials of Happydays,
their main competitor, as well as by making certain assumptions of her own. On evaluating her income
statements, we find that she has covered most of the costs pretty well. However site development cost
of $1, 00,000 was incurred as a one time expenditure. Instead it needed to be amortized over a period
of time. Also the opportunity costs of the three graduates needed to be accounted for.
We further found that the sales was projected to grow by 50% over the forecasted sales for June, 1999
and that the outsourcing of the warehousing and distribution centre was saving the company $3360.
However, three additional costs needed to be allocated properly for running good business
(i)
(ii)
(iii)
In addition to this, we also tried to find some key decision factors which help in the growth of the eretail business. They were:
(i)
(ii)
(iii)
Number of Transactions
Gross Profit Margin
Net Profit Margin
Based based on all our analysis, we have given certain reccommendations which should help
Hollydazzle.com grow its busines
List of Illustrations
1.
2.
3.
4.
vi
Introduction
This case is about 3 graduating Harvard Business School students, John Carlisle, Kristin Chambers &
Eric Walsh. Each of them had a handsome offer of $120,000 p.a. But seeing the boom in online retail
business sector, they decided to consider the other option of being entrepreneurs and to start a
venture of their own in the e retailing business. The primary reason for going in this sector was that
many research firms had predicted the best growth opportunities in this sector. One eminent
consulting research firm, Forrester Research, forecasted annual sales for e-retailing business to grow
at the rate of 50-55 % for the next 3 to 4 years. These predictions were the basis of investments into
the e-retailing business.
For the same, they considered starting a website named Hollydazzle.com which was aimed to sell the
seasonal holiday merchandise. After doing some background research, they decide to venture into
this the business of merchandise as the costs were comparatively lower and the associated profit
margin could be possibly quite high.
For taking the final decision, they decided to go through some financial analysis, the result of which
will ensure them whether they should go for it or not. The financial analysis has been covered in the
description below.
Problem Statement
HollyDazzle.com is a proposed entrepreneurial venture by 3 Harvard Graduates. The viability of the
proposal has to be checked. The financial analysis undergone will be focusing this problem statement
of this case.
Purpose Statement
The important points which this report will try to cover are as below:
1.
2.
3.
4.
To
To
To
To
Major Assumptions
As the graduates had now made up their mind to get into the online retail business, they had to work
out the finances of the whole venture. Kristin, who had prior work experience in finance, volunteered
to prepare a financial plan for the whole venture. For this purpose, she consulted the financial
statements of Fundays, their main competitors, as well as made certain assumption of her own. Some
of the major assumptions she made were:
5.
The depreciation of computing capacity was expected to cost the company around $7000 per
year. However, the installed computer capacity was expected to be adequate for the foreseeable
future.
$444000
COGS:
Merchandise
$ 408000
Shipping expenses
$53280
Shipping income
$(53280)
$ 30000
Gross Profit
$6000
Less Expenses:
SG& A
$7104
$87720
Computer Depreciation
$7000
Site Development
$100000
Site Maintenance
$36000
Total Expenses
$237824
Operating Income
$(231824)
On analysing the income statement (Table 1), all the explicit cost like merchendise,shipping
expense,center expense,advertising, depreciation amount have been accounted in estimating the
gross profit. But there is one issue regarding the site development cost. The cost was estimated
around $ 100 000 and it was incurred as one time expenditure but it should be amortize over a period
of time.
John ,kristen and Eric each had job offers with annual salaries of about $125000.Here the opportunity
cost of giving up salary $375000 ($125000*3) need to be accounted.Also value of other benefits earn
from Job offers also need to be consider while looking over the opportunity costs.All these costs and
benefits would not be included in their income statement but they are important as a part of their
decision process.
Assumption
Hollydazzle.coms price and cost structure and relationships remain the same as in 1998, and as
before, 1200 new customers make purchases each month.
Calculations
1) If the sales grew by 50%, the new sales will be 1.5 times of the sales in 1999. Therefore, the
new sales can be calculated as below:
(100 + 50)
= $666000
100
2) The Merchandise will also increase by 50%. The value can be calculated as below:
New Merchandise = $408000
(100 + 50)
= $612000
100
3) Similarly, the shipping expenses and income will become 1.5 times. They can be calculated as
below:
Shipping Expenses = $53280
(100 + 50)
= $79920
100
(100 + 50)
= $79920
100
4) Since the growth in sales doesnt affect the distribution centre expenses, sales and
administrative expenses, advertising and marketing expenses, computer depreciation and the
costs of site development and maintenance, they remain same as that of previous year.
5) The profit & loss statement has been shown in Table 2 which shows final results.
1) The gross profit has increased from $6000 in 1999 to $24000 in 2000, which is a 300%
increase.
Percentage increase in Gross profit =
24000 6000
= 300%
6000
2) The operating income has increased from -$231824 to -$213824. Though it is still negative
but it has increased by the following percentage:
231824 (213824)
= 7.7 %
231824
$666000
COGS:
Merchandise
$ 612000
Shipping expenses
$79920
Shipping income
$(79920)
$ 30000
Gross Profit
$24000
Less Expenses:
SG& A
$7104
$87720
Computer Depreciation
$7000
Site Development
$100000
Site Maintenance
$36000
Total Expenses
$237824
Operating Income
$(213824)
Analysis:
Increase in sales volume will increase the profitability of Hollydazzle.com as the profit will increase by
300% and operating income by 7.7 %.
Assumption:
All other expenses in the profit and loss statement remain the same as in year 1999.
Calculations:
Total sales in 1998=$444000
Cost of Outsourcing = 444000
6
= $26640
100
Analysis:
The outsourcing of the warehousing and distribution centre saves $3360. Also in the long run, the
company would not be able to recover the shipping expenses from the customers as competitors will
enter the market and hence they should see the long term profit and viability of outsourcing
distribution.
Hollydazzles Actual Gross Margin and its deviation from Kristins forecast
We have below findings which helped us to comment in the profitability of the Hollydazzle.
1. The average number of transaction has increased from 48000 to 50000.
2. Average selling price has decreased from $ 9.5 to $ 9.25
3. Increase in average merchandising cost from $ 8.50 to $ 8.75
Analysing these Data we calculated and found that as a whole the profitability of Hollydazzle.com has
increased which can be seen in the table below
Table 1.3: Annual operating income showing G/P ratio
Hollydazzle.com's Projected Annual Operating Income, June1999
Revenues
COGS
Merchandise
$ 437500
Shipping expenses
$ 55500
Shipping income
$ (55500)
$ 30000
Gross Profit
$(17500)
G/P Ratio
-3.89%
Reasons
1. Greater bargaining power of suppliers
Due to greater bargaining powers of suppliers the average merchandising cost increases
resulted in decrease in profitability.
2. Error in Demand Estimation
Hollydazzle was unable to estimate the demand properly and had planned for 50000
transactions as opposed to 48000. They didnt even prepare for contingencies and hence face
loses next year also.
Number of Transactions
For an e-tailer, as the number of transactions increase, they are able to achieve economies of scale as
it involves a huge cost in form of website construction. As the number of transactions increase, the cost
is allocated over more number of transactions. In the given case, the number of transactions affects
not just the revenues but also the cost and the site maintenance cost. That is why it is very important
to monitor the number of transactions. Also for a new business, it is important to generate sales as in
the beginning the sales are low and profits are negative. As the company increases its sales, profits
also begin to grow. After a point the sales remain fairly stable. Then the sales may start falling unless
the company adopts some renewal strategy for the product. So the company needs to monitor its
number of transactions.
Conclusions
1) Amortization of the site development cost per year could enhance the overall the Gross profit
estimates.
2) Increase in sales volume will increase the profitability of Hollydazzle.com.
3) The outsourcing of the warehousing and distribution centre saves cost.
Recommendations
As per analysis we recommend the following for Hollydazzle.com:
10
References
1. Stephen,
A
Product
Life
Cycle.
Marketing
Diary.
http://annettestephenmarketingjournal.blogspot.in/2013/09/product-life-cycle.html [Retrieved 26-11-2014]
2. Dahl,
D
The
Cost
of
Starting
up
a
Retail
Shop .
Inc.
Magazine.
http://www.inc.com/welcome.html?destination=http://www.inc.com/articles/201108/business
-start-up-costs-retail-store.html [Retrieved 27-11-2014]
3. Anderson, R & Dunkelberg, J (1990) Entrepreurship: Starting a new Business. London. Harper
& Row
4. Drucker,
C
Why
so
Many
Internet
Start-ups
are
Failing
Today?
http://www.chrisducker.com/internet-business-failures/ [Retrieved 23-11-2014]
5. Datta, P. A Preliminary Study of ecommerce adoption in developing countries. Information
Systems Journal. January 2011. Vol 21, pp. 4-8
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