Group DeltaJeffrey Jau

David ZoellePeter Teerakijpong

Erick HamdjaAnkur Mohindru

Introduction

Crosswell Background

• Hospital Specialty Company

• Manufacturing investments

• Seek high quality products

• Introducing new product lines

• Leveraging strong customer relationships

• Precious Ultra Thin Baby Diapers

Brazilian Market Qualities• New-found economic stability

– Growing middle class

• Price conscious consumers

• Language barrier (Portuguese speaking)

• High growth market, excess demand

• Economic recovery plan– Drastically restructuring the economy

• Personal care market booming

Brazil’s Real Plan

• Pronounced 'hay-ow'• Establishment of a new currency• Focus on reducing the inflation rate

– dropped from 50% per month to 2% per month

• Interest rates remain high– 3-4% per month

Brazilian diaper market

• Diapers first introduced in mid 1980’s by J&J• Growing competition• Many new companies manufacturing and

distributing in Brazil• Prices range from R$0.30 to R$0.60 per diaper• Current diapers largely inferior in quality

– Technological and capital constraints– Relevant only to domestically producing companies

Brazilian diaper market Cont.• 4 groups of competition

– Foreign multinational corporations• J&J sells highest quality diaper

– Brazilian, domestic producing companies• Lower, quality and lower-price market segment

– Argentinian companies• Low quality and low cost diapers

– Foreign companies• Also high quality diapers with high pricing

Immediate Issue Matrix

Importance

UrgencyLow High

Low -Payment Terms

High Distributors Relationship Market Entry Pricing Market Entry Timing

Basic Issue Matrix

Importance

UrgencyLow High

Low Product Differentiation Exchange Rate

High Market Share Interest Rate

Cause and Effect

Exchange Commission Quality Rate

Market Price

Arbitrage Sousa’s Markup Retailer’s MarginInterest Rate

Constraints and Opportunities

• Constraints– Price conscious customers– Domestically producing competitors– Brand image– Lack of marketing budget

Constraints and Opportunities (2)

• Opportunities– Expanding Brazil diaper market– Increasing middle class– Current diapers’ quality are inferior to Precious line

Common decision criteria

• Risk• Ethics/Legality• Market entry timing• Cost• Ease of implementation

1st Alternative – FCIA & US Ex-Im Bank

• Provide Loan guarantees• Encourage and facilitate exports from the US• Political and commercial insurance• Viable for long run

1st Alternative – FCIA & US Ex-Im Bank

• Advantages– Provides loan guarantees– Low financing cost

• Disadvantages– Requires min. 3 month time to evaluate the loan

• Constraints– Crosswell International-unfamiliar with loan

guarantee programs

2nd Alternative – Uruguay

Import goods through Uruguay• Import tariffs about half as high as Brazilian• Mercosur regional trade agreement

• Advantages– Reduced product price– Low import tariffs

• Disadvantages– Very time consuming- 2weeks delivery time– Offset on gains by other costs:

• Higher financing costs• Inland transportation costs

• Constraints– Finding importer or distributor in Uruguay– Invest capital to create Import/Export corporation

2nd Alternative – Uruguay

3rd Alternative – Under Invoicing

• Obtain import license• Split payments –

– 50% cash upfront– 50% on LC per under-invoice

• Advantages– Low import tariffs – reduces product cost

• Disadvantages– Unethical– Violate US-SEC Regulations

3rd Alternative – Under Invoicing

4th Alternative – 180-day Letter of Credit

• Brazil’s high interest rate arbitrage• Extend payment terms to 180-day L/C

• Advantage– Arbitrage opportunity – Interest gains lower product cost

• Disadvantage– For short term only– High transaction cost

• Constraints– Stability of Real/Dollar exchange rate

Alternatives analysis matrixAlternative Risk Ethics/

LegalityMarket Entry Timing

Cost Ease of Implementation

Total

FCIA & US Ex-Im Bank

3 5 1 4 2 15

Import through Uruguay

2 1 2 4 1 14

Under Invoicing 1 1 4 5 4 15

180-day Letter of Credit

5 5 4 3 5 22

Criteria: 5 Best to 1 Worst

Method of Action

• Alternative # 4• Easy to implement• Reduced cost at minimal risk• Determine pricing

– Below target price– Distributor makes same profit

Determine Actual NumbersMethods

Original20% DM

Cash in Advance(Lower Commission)

20% DM

Letter of Credit(Lower Commission)

8% DM

Letter of Credit8% DM

Price/case to Mathieux (US$) 32.57 32.07 32.07 32.57Commission (Mathieux) 1.50 1.00 1.00 1.50FOB price per case (US$) 34.07 33.07 33.07 34.07

Freight, loading, & documentation 4.32 4.32 4.32 4.32CFR price 38.39 37.39 37.39 38.39Export insurance 0.86 0.84 0.84 0.86CIF/ case to distributor (US$) 39.25 38.23 38.23 39.25

Exchange rate (R$/US$) 0.935 0.935 0.935 0.935

CIF price/ case to distributor (R$) 36.70 35.74 35.74 36.70Total Import Fees 3.74 3.67 3.67 3.74Total cost to distributor (R$) 40.44 39.41 39.41 40.44

Possible Discount Fee Added 0.00 0.00 1.69 1.74Adjusted Total cost to distributor (R$) 40.44 39.41 41.11 42.18

Storage cost 0.55 0.54 0.54 0.55Cost of financing diaper inventory 2.57 2.50 0.00 0.00Distributor's margin 8.71 8.49 3.33 3.42Price to retailer (R$) 52.27 50.94 44.98 46.15

Estimated Interest Arbitrage Gain @ 3%/mon 5.40 5.54Total Distributor's Profit 8.71 8.49 8.73 8.96

Total price increase after distribution 39.94 38.93 34.37 35.26Price per case to consumer (R$) 92.21 89.87 79.34 81.41

Short Term Outcome

• Early market entry• Interest rate arbitrage• Product recognition• Retain distributor’s profitability• Adjust profit margin of Sousa• Provide base for future product expansion

Long Term Outcome

• Capture market share• Establish brand image• Distributor relationship• Increase profit margin

Implementation Timeline

Contingency Plans

• Adjust payment terms when necessary• Price mark-up to optimal profit point• High elasticity of demand

– Less price flexibility– Pull out possibly if profits fall below break even

point