B4 Group1A Case 1 Lau Kwan Kit John, Shi Tianxing, Wang Hao, Zheng Zhiqing 1 1. Introduction Hansson Private label (HPL), which manufactures different kinds of personal care products, including Shampoo, Soap, Mouthwash, Shaving cream and sunscreen, now faces a decision of either “go big” or “go home”. As one of the most major national manufacturers, HPL’s largest retailer customer proposed the owner Tucker Hansson to “significantly” increase its share. However, HPL was already operating close to full capacity and the expansion of manufacturing facilities would require an investment of $50 million to expand. The company had not initiated such a large project for more than a decade and it would be likely to double HPL’s debt. In order for Hansson to accept or reject this proposal, he needs to consider whether the return on investment would be large enough to justify the effort and risk, as well as the best means of evaluating the potential investment. In this report, we will analyze the market and risks for private label brands and apply the NPV and IRR methods to evaluate the risk and return of the project; furthermore, sensitivity analyses for the key drivers of the project and scenario analysis under different situations would be conducted in order to provide a more comprehensive perspective. From the analysis, our suggestions would be to accept the investment project since both NPV and IRR indicate the project would add value to the company and its shareholders. In addition, HPL could also expand its business through this investment project although certain risks are involved. 2. HPL: An Investment in Expansion 2.1. Opportunities in the Growing Market The market for personal care products is growing at a stable rate, for both unit volumes and dollar sales in the past four years. From Exhibit 2, it can be seen that the private label products’ share of U.S Consumer Packaged-Goods spending is increasing steadily due to increase in consumer acceptance, and currently private
Hansson Private Label, Inc. Case Study Analysis Essay
2025 WordsApr 22nd, 20139 Pages
Case Study: Hansson Private Label, Inc.
The owner of Hansson Private Label (HPL) must determine whether or not to accept an aggressive expansion project that would preclude the company from pursuing any alternative investment opportunities for several years. The investment, if successful, would offer numerous benefits to the company, capturing greater market share, strengthening relationships with major customers, crowding out competition and increasing firm value. Nonetheless, the decision carries significant risks and could lead to a substantial decline in firm value, if not bankruptcy, should any number of variables prove unfavorable to HPL. Moreover, the project relies heavily on a contract with a single large…show more content…
Barring further analysis, the positive NPV indicates HPL should accept the proposal and proceed with expansion, as it would add value to the company. However, it should be noted that the NPV only becomes positive in year 10 (it is negative in all previous years). Thus, if HPL fails to extend the initial three-year contract with its largest retail customer and the project does not endure the estimated 10-year lifespan, it could in fact produce a loss in value for the company. Furthermore, a sensitivity analysis of factors such as the cost of raw materials, selling price per unit and capacity utilization demonstrates that a small change in any one of these variables could have a major impact on the project’s bottom line. In Appendix B, I examine a scenario in which the selling price per unit decreases by 1% and the cost of raw materials per unit increases by 1% at the outset of the project. In this scenario, the resulting NPV changes from a positive $5.4 million to a loss of $666,000, and the IRR falls below the discount rate to 9.15%. This, to me, reveals that the potential upside of this project is not large enough to account for discrepancies due to imprecise projections, flawed assumptions, or unforeseen risks.
Recommendation Given relatively low NPV, albeit positive, at the end of the 10-year investment horizon, I would recommend that Hansson consider alternative investments. In my opinion, the return simply does not