Report on

HOLLYDAZZLE.COM

(FINAL SUBMISSION)

Submitted to: Prof. Payal Mehra

Submitted by:

GROUP NO: 1

Shanu Kumar (PGP30342)

Shashank Sinha (PGP30343)

Shikha Gupta (PGP30344)

Shruti Goyal (PGP30345)

Suman Sanya (PGP30346)

Swadesh Kumar (PGP30347)

ii

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

iii

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.

iv

Table of Contents

Executive Summary…………………………………………………………………………………………………….v

List of Illustrations………………………………………………………………………………………………………vi

Introduction………………………………….……….…………………………………………………………………..1

Problem Statement………………………………………..……………………………………………………………1

Purpose Statement…………………………………………………………………………..…………………………1

Major Assumptions………………………………………………………………………………………………………1

Evaluation of Income Statement………………………………………………………..…………………………3

Forecasting Operating Income………………………………………………………………………………….....4

Outsourcing Decision………………………………………………………………………………………………..…6

Allocating Additional Cost Decision…................................................................................7

Gross Margin Profit Analysis………………………………………………………………………………………….8

Key Decision Factors……………………………………………………………………………………………………9

Conclusion…………………………………………………………………………………………………………………10

Recommendation……………………………………………………………………………………………………….10

References………………………………………………………………………………………………………………….

v

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 e-

retail 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) Advertising and Marketing Expenditure cost

(ii) Site Maintenance cost

(iii) Image Building Cost

In addition to this, we also tried to find some key decision factors which help in the growth of the e-

retail business. They were:

(i) Number of Transactions

(ii) Gross Profit Margin

(iii) Net Profit Margin

Based based on all our analysis, we have given certain reccommendations which should help

Hollydazzle.com grow its busines

vi

List of Illustrations

1. Table 1.1: Hollydazzle.com’s Projected Annual Operating Income…………………………….3

2. Table 1.2: Hollydazzle.com's Projected Annual Operating Income, June 2000……………5

3. Table 1.3: Annual operating income showing G/P ratio……………………………………………8

4. Fig 1.1: Product Life cycle…………………………………………………………………………………….9

1

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. To examine the potential market and costs of the business

2. To construct a financial plan for Holydazzle.com

3. To evaluate the projected income statement

4. To analyze the effects of changes in sales, costs, distribution channel on operating income

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:

1. 4000 sales transactions per month

The Company expected to cross 4000 sales transactions in the 1st year of operation itself. Though

it looks a pretty bold assumption at first, the three graduates had enough faith in their idea to go

ahead with such an estimate.

2. Lower average selling price than FunDays

Since e-tailers generally priced more aggressively than brick and mortar shops, the average

selling price per transaction for Hollydazzle.com was expected to be lower than Fundays. Kristin

put the price at $9.25, compared to $12 for Fundays.

2

3. Warehousing & distribution

In order to deliver orders efficiently, it was important for Hollydazzle.com to hold a good stock of

inventory. This prompted them to keep inventory comparable to that of Fundays. They leased

warehousing and distribution facilities similar in size and scope to Fundays, with capacity to serve

up to 3, 00,000 transactions annually. This was expected to cost the company $30,000 per year.

4. Total SG&A costs of $7,104 per year

This was Hollydazzle.com’s biggest advantage. SG&A was a cost category which directly favoured

the e-tailers. Fundays sales, good and administrative expense, for a comparable inventory, was

around 50 times higher. Kristin was confident that these savings would give Hozzydazzle.com the

competitive advantage it needed to succeed in this highly competitive business.

5. Annual depreciation on assets worth $7,000

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.

6. Annual expenditure of $60,000 to associate name with home & family

publications

This was important for the promotion of the company in the initial stages. Kristin also decided to

pay 3% of all sales revenue to different art and crafts online web sites to promote its products.

7. $1200 paid per month to website portals, for directing customers to

Hollydazzle.com

Customers could buy from Hollydazzle.com only if they visit the website. Keeping this in mind,

Kristin decided to award the portals which directed audience to the website. For each transaction

which occurred on Hollydazzle.com, through audience directed from other portals, Kristin decided

to pay that portal $1. Overall in a month, this was expected to cost the company around $1200.

8. Site development expenditure

The company expected to pay a one-time site development expenditure of $100,000 & a site

maintenance cost of $0.75 per transaction. This was especially critical for an e-tailer as getting

the audience to linger at one place was more difficult here, as compared to a brick and mortar

shop.

3

Evaluation of projected Income Statement and Other costs

Hollydazzle.com case highlights the basic economics scenario of a start-up Internet retailing

company. It gives descriptive analysis for profit,internet marketing and cost of the components that

varied with volume.

Table1:Hollydazzle.com’s Projected Annual Operating Income

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.

Annual Operating P&L June 1999

Revenues $444000

COGS:

Merchandise $ 408000

Shipping expenses $53280

Shipping income $(53280)

Distribution Centre Expenses $ 30000

Gross Profit $6000

Less Expenses:

SG& A $7104

Advertising & Marketing $87720

Computer Depreciation $7000

Site Development $100000

Site Maintenance $36000

Total Expenses $237824

Operating Income $(231824)

4

Forecasting Operating Income

Given:

The sales are projected to grow by 50% over the forecasted sales for the June 30, 1999.

Assumption

Hollydazzle.com’s 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:

New Sales = $444000 ∗(100 + 50)

100= $666000

2) The Merchandise will also increase by 50%. The value can be calculated as below:

New Merchandise = $408000 ∗(100 + 50)

100= $612000

3) Similarly, the shipping expenses and income will become 1.5 times. They can be calculated as

below:

Shipping Expenses = $53280 ∗(100 + 50)

100= $79920

Shipping Income = −$53280 ∗(100 + 50)

100= −$79920

4) Since the growth in sales doesn’t 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

6000= 300%

2) The operating income has increased from -$231824 to -$213824. Though it is still negative

but it has increased by the following percentage:

5

Percentage increase in Operating Income =−231824 − (−213824)

−231824= 7.7 %

Table 1.2: Hollydazzle.com's Projected Annual Operating Income, June 2000

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 %.

Annual Operating Profit & Loss Statement June 2000

Revenues $666000

COGS:

Merchandise $ 612000

Shipping expenses $79920

Shipping income $(79920)

Distribution Centre Expenses $ 30000

Gross Profit $24000

Less Expenses:

SG& A $7104

Advertising & Marketing $87720

Computer Depreciation $7000

Site Development $100000

Site Maintenance $36000

Total Expenses $237824

Operating Income $(213824)

6

Outsourcing the Warehousing and Distribution Function

Given:

Cost of outsourcing and distribution is 6% of the total sales.

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

100= $26640

Current Distribution Centre Expenses = $30000

Net Saving = Current Distribution Expenses − Cost of Outsourcing

Net Saving = $30000 − $26640 = $3360

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.

7

Decision of Allocating Additional Cost

John and Eric got an offer from other e-tailers of the complementary products to advertise on

Hollydazzle’s website. Kristin has to allocate costs in order to analyse the relative profitability of the

merchandising and advertising parts of Hollydazzle’s business. According to our analysis we came up

with these three costs that can be allocated to other products if we accept the offer:

1. Advertising and Marketing Expenditure cost

Marketing Expenditure is an organization's total expenditure on marketing activities. This

typically includes advertising and non-price promotion. It sometimes includes sales force spending

and may also include price promotions. As Hollydazzle.com marketed their own website the other

complementary e-tailers products get advertised simultaneously. Also Hollydazzle has to invest a

lot in marketing the website so this additional costs has to be allocated to the other e-tailers of

the complementary products.

2. Site Maintenance cost

One universal measurement of maintenance performance, and perhaps the measure that

matters most in the end, is the cost of maintenance. Unfortunately maintenance costs are often

used to compare maintenance performance between companies or between plants within the

same company. As we know that more the content on the website more work is required to

maintain the website. More the work required, more the cost incurred. When the complementary

e-tailers place their products on Hollydazzle website the company can allocate this cost over the

products of other sellers and can charge them for the same. This can help reduce per unit cost

and also by allocating to other products, we have a benefit of pricing our products lower.

3. Image Building cost

As a vendor, it is important to identify the significant obstacles facing a new entrant into your

company's market including legal, market, and/or capital barriers. This will provide evidence to a

buyer that it is better to pursue an acquisition than to try to build it themselves. Before acquiring

a company, the e-tailers of complementary products will analyse the cost to build internally. As

Hollydazzle evolves more and more, the image of complementary products on their website

strengthen. So Kristin would have to allocate the Image building costs to the e-tailers of the

complementary products.

8

Hollydazzle’s Actual Gross Margin and its deviation from Kristin’s 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

ANNUAL OPERATING P&L JUNE1999

Revenues $450000

COGS

Merchandise $ 437500

Shipping expenses $ 55500

Shipping income $ (55500)

Distribution Centre Expenses $ 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 didn’t even prepare for contingencies and hence face

loses next year also.

9

Key Decision Factors

To Find Key Decision factors to measure performance.

The major decision factors are:

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.

Fig1.1: Product Life cycle

Gross Profit Margins: (Sales- Cost of Goods Sold)/ Sales

It reveals the financial health of the company. It also gives insights into the pricing strategy of

the company. A company should always have a positive GP Margin or else it would mean that

the company is losing money for each unit that it is selling.’

For Hollydazzle.com, the gross profit margin is fairly important as this reveals the information

about their pricing. Since it is a new business, the company may be following erroneous pricing

policy. Monitoring gross profit margins will help them achieve a proper strategy. Also in the

long run, the gross profit margin should be stable.

Net Profit Margins: Net Profit/ Sales

Net Profit Margin reflects the bottom line figure i.e. what the company has earned at the end

of the year from its operations. The net margins for the business should be at par with the

industry standards if not more. This is the final figure which does not just give information

about the financial health but also provides the ability to procure loans and fresh investment.

Hence it is important for Hollydazzle.com to monitor its Net profit margins as it is a new business

and the net profit margins will affect its ability to procure fresh investment and loans.

10

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:

The firm should focus on increasing the sales volume.

The firm should outsource its warehousing and distribution centre to move.

There is an error in demand estimation so firm should have a cost management system that

can help in predicting the future demand more accurately.

To spend more on advertising to create more knowledge about the site and to get more people

to visit the site and then purchase more.

Also, they can hold a few days discount sales which will increase the sales during the promotion

period.

The company should also look to tie up with other vendors who want to sell their products

online on their platform.

The company should also try to penetrate the market as much as possible since its in its

introduction stage, it should just try to create an advertising campaign which is informative.

Also, in the long run recovering delivery charges from customers is not sustainable as

competitors will enter the market. So the company should look for options to outsource

delivery.

11

References

1. Stephen, A ‘Product Life Cycle’. Marketing Diary. http://annettestephen-

marketingjournal.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-up’s 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