76e9442b eztravaganzza warehouse

Boutique Eztravaganzza warehouse

C28-01-023

This case was written by Professor Xiomara Vázquez Guillén and translated by Professors Carlos Melendez and Yolanda Cruz. It was prepared solely to provide material for class discussion. Some of the names have been modified to protect the privacy of the people or institutions envolved. C.R. © Instituto Tecnológico y de Estudios Superiores de Monterrey, Av. General Ramón Corona No. 2514, Col. Nvo. México, Zapopan, Jalisco, 45140, México. ITESM prohibits any form of reproduction, storage or transmittal without its written permission. Centro Internacional de Casos Revision date: April 01, 2008. Tecnológico de Monterrey Last revision: April 14, 2008.

In May 2004, Irma Garcia was in her business’ Boutique Eztravaganzza warehouse. She was ready to go to a meeting with her main client, Lourdes Mendoza, who was interested in buying medical clothing and equipment. Lourdes just a few days earlier had proposed to become partners with her in the new market. Irma would find a supplier to deliver the merchandize at her store. Lourdes would sell the products on retail. This deal meant a possibility to increase her business. Background In 1994, Irma Garcia began Boutique Eztravaganzza as a small business in the retail sale of recognized clothing’s brands and fashion accessories in Orizaba, Veracruz. At the beginning, Irma sold among her relatives and friends as way to complement her full time salary as hospital manager. The business grew in volume of sales and product diversification. What Irma had begun as the retail sale of clothing and accessories now expanded to shoes and other leather products, as well as gold, silver and imitation jewelry. In 2000, Irma turned 50 and therefore was eligible to retire from the full-time job, having worked there for 30 years. From then, a new life began for her that permitted her to dedicate all of her time to managing and expanding her business. In that same year, Irma had decided to begin selling perfumes, something she had rarely done before, only to satisfy special orders by important clients. However, the ease in the product’s handling, due to its small size and attractive profit margin, made her think of the possibility of adding this line to her business. At the end of 2000, the sale of perfumes represented a third of the total income of the boutique.

C28-01-023 Boutique Eztravaganzza warehouse

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The market The sale of clothes was in a fragmented market. The region had several department stores that sold clothes to the middle and upper middle class. There were also many boutiques that exclusively sold special brands. The department stores were national or state chains whose prices were higher than of the small boutiques. However, this was often compensated by the sale promotions they offered with attractive discounts, especially at the end of season, special popular dates like Mother’s Day, Father’s Day, Christmas and return to classes, among others. They also offered installment plans without interests that went from 6 to 18 months, not only with their own credit cards but also with bank cards. The boutiques were changing their system of payments from the old layaway system to the sale on installments. The layaway usually consisted on a down payment of between 10 to 20% of the product’s price. The product would be kept in the store until the customer paid in full, when it would be handed over to them. However, the credit offered by department stores had forced boutiques to initiate the sale in installments, delivering the goods from the beginning, which caused them a cash flow and uncollectible accounts problems. These small businesses did not have a credit and collection department, nor did they do exhaustive credit research of their customers. “Pirate” brands and informal sales were starting to proliferate. The first had not affected the middle and upper middle classes, since it was obvious that the low quality of the product showed they were imitations: these products were consumed mostly by the popular classes. However, informal sales were expanding. They were generally young people who distributed their products among friends and family: since they did not have set premises they did not pay taxes. Therefore, their prices were lower, although they made larger profits. The products In 1999, five years after having started the business, Irma had become a well-known supplier in Orizaba and surroundings. This was not only because of the quality and variety of clothes and accessories, but also because her prices were always below those of the competition. She had achieved this thanks to dealing directly with manufacturers and importers, in their own offices in Mexico City. Therefore, she eliminated intermediaries, incrementing volume. Being known for paying punctually, Irma was able to obtain greater discounts from her suppliers, therefore offering better prices to her customers. In the first years of the boutique, the gold segment offered a high level of sales and attractive profit margins. This was principally because of the devaluation at the end of 1994, when the peso fell 100% of its value with the dollar. During this period, people generally bought real estate or gold, instead of risking losing their buying power by leaving their money in bank accounts. That is why the income generated by the gold segment grew to being close to that of the clothing segment. Perfume sales had begun because of sporadic demands from important clients in special occasions. It was at the end of 2000, after her retirement and being able to dedicate herself full-time to the business that Irma began to interest herself in this line of sales, due to the profit margins she obtained. At the end of 2002, her income from perfumes had doubled that of gold, which were beginning to rise.


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Shoes and other leather goods, such as jackets, wallets and belts usually accompanied the clothes sales. In previous years, this line had generated high sales and profits. However, in recent ones, Irma was convinced that sales were going to drop due to saturation in the shoe market as well as to the lowering of prices in the shoe industry. Jewelry and imitation jewelry represented the lowest income, besides having also he lowest profit margin. Irma began asking herself if she should not eliminate this segment but was afraid of losing clients who bought exclusively silver. On the other hand, this segment was very sought after by clients who looked for accessible priced gifts. Finally, in 2003 and 2004 the composition of the boutique’s sales and its profits were the following:

Product Sales Composition Profit margins Brand name clothing and accessories

40% 35%

Perfumes 30% 40% Gold jewelry 15% 28% Shoes and leather goods 10% 22% Silver jewelry and imitation jewelry

5% 10%

Management The boutique’s management was divided into three: 1. Purchases; Irma headed and negotiated directly with her suppliers in Mexico City. She

generally traveled twice a month to get a feel as to the new fashion and to maintain a close relationship with her suppliers. Likewise, merchandize delivery was four times a month, which costs were paid for by the boutique.

2. Retail cash sales to the general public were handled by an employee in the shop. Sometimes clients given credit were handled by the employee, when Irma was absent.

3. Wholesale and collection: Both of these were solely Irma’s responsibility. She considered it very important to negotiate and visit debtors fortnightly to collect payment.

Because of the boutique’s sales volume, Irma and her employee could not cope with it to keep the clients satisfied, the majority of which had been faithful for 10 years. The majority were still family relations, friends and people who had been sent by others and who were not payment problems. The costs In Irma’s words, “the operation is simple and the costs are well controlled”. The following are detailed below:

Concept Amount Travel allowance $ 800 per trip


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Freight $ 1,000 per delivery Employee commission 5% of each sale Employee salary $ 2,000 fortnightly Administrative salaries $ 10,000 monthly Rent of the premises $ 4,000 monthly Public utilities $ 1,200 monthly

The proposal Lourdes Mendoza had been one of her best clients and debtors. She was a retired nurse who had contacts in private and public hospitals and clinics in the area. She was interested in becoming the middle man in the supply of surgical clothing and products in the city. In order for her to do this Lourdes had promised Irma to buy 30 thousand pesos a month during the rest of 2004 and all of 2005. Irma did not have to make an additional effort to supply Lourdes her merchandize. Irma had contacted a medical industry supplier in Mexico City. However, her proposed monthly purchases were not attractive to him. Therefore, the profit margin she negotiated was of 20%. However, she had calculated that there would be a 15% charge in freight and that her travel expenses would run to $1,200 per trip, since she had to add a new visit to her customary route. Irma knew that, if she accepted the proposal, her sales composition would be altered. She had recalculated that they would act in the following manner:

Product New sales % Brand name clothing and accessories 32% Perfumes 24% Gold jewelry 12% Shoes and leather goods 8% Silver jewelry and imitation jewelry 4% Medical clothing and equipment 20%

Up to the time of the meeting, Irma continued thinking that the new line would demand greater costs and that the profits would not be as attractive as with the other lines. In the first place, she wanted to determine which would be the minimum sales necessary to recover her investment. Secondly, she needed to know if she should accept Lourdes’ proposal or not.


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ANNEXES

Boutique Eztravaganzza Results statement

For 2003 Sales $ 1,440,000.00 Cost of sales $ 936,000.00 Net profits $ 504,000.00 Operational costs $ 340,800.00 Operational profits $ 163,200.00

Boutique Eztravaganzza General Balance

Up to 31 December 2003 Cash $ 25,100.00 Suppliers $ 33,500.00 Clients $ 40,500.00 Capital $ 50,000.00 Net computer equipment $ 8,400.00 Withheld profits $ 80,500.00 Net transport equipment $ 90,000.00 $ 164,000.00 $ 164,000.00

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76e9442b eztravaganzza warehouse

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