Transcript Group Delta Jeffrey Jau David Zoelle Peter Teerakijpong

Group Delta
Jeffrey Jau
David Zoelle
Peter Teerakijpong
Erick Hamdja
Ankur Mohindru
Introduction
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• Hespeco- Manufacturer
• Crosswell Int’l- Int’ distribution company
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Hector Lans-CEO
• Doug and Geoff Mathieux- brokers
• Material Hospitalar- Distributor
• Leonardo Sousa- President
• Retailers
• Brazilian consumers
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
Low
High
Urgency
Payment Terms
Low
High
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Distributors Relationship
Market Entry Pricing
Market Entry Timing
Basic Issue Matrix
Importance
Low
High
Low
Product Differentiation
Exchange Rate
High
Market Share
Interest Rate
Urgency
Cause and Effect
Exchange
Rate
Commission
Quality
Market Price
Arbitrage
Interest Rate
Sousa’s Markup
Retailer’s Margin
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
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Risk
Ethics/Legality
Market entry timing
Cost
Ease of implementation
1st Alternative – FCIA & US Ex-Im Bank
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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
2nd Alternative – Uruguay
• 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
3rd Alternative – Under Invoicing
• Obtain import license
• Split payments –
– 50% cash upfront
– 50% on LC per under-invoice
3rd Alternative – Under Invoicing
• Advantages
– Low import tariffs – reduces product cost
• Disadvantages
– Unethical
– Violate US-SEC Regulations
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 matrix
Alternative
Risk
Ethics/
Legality
Market 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
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Alternative # 4
Easy to implement
Reduced cost at minimal risk
Determine pricing
– Below target price
– Distributor makes same profit
Determine Actual Numbers
Methods
Original
20% DM
Cash in Advance
(Lower Commission)
20% DM
Letter of Credit
(Lower Commission)
8% DM
Letter of Credit
8% DM
Price/case to Mathieux (US$)
Commission (Mathieux)
FOB price per case (US$)
32.57
1.50
34.07
32.07
1.00
33.07
32.07
1.00
33.07
32.57
1.50
34.07
Freight, loading, & documentation
CFR price
Export insurance
CIF/ case to distributor (US$)
4.32
38.39
0.86
39.25
4.32
37.39
0.84
38.23
4.32
37.39
0.84
38.23
4.32
38.39
0.86
39.25
Exchange rate (R$/US$)
0.935
0.935
0.935
0.935
CIF price/ case to distributor (R$)
Total Import Fees
Total cost to distributor (R$)
36.70
3.74
40.44
35.74
3.67
39.41
35.74
3.67
39.41
36.70
3.74
40.44
Possible Discount Fee Added
Adjusted Total cost to distributor (R$)
0.00
40.44
0.00
39.41
1.69
41.11
1.74
42.18
Storage cost
Cost of financing diaper inventory
Distributor's margin
Price to retailer (R$)
0.55
2.57
8.71
52.27
0.54
2.50
8.49
50.94
0.54
0.00
3.33
44.98
0.55
0.00
3.42
46.15
8.71
8.49
5.40
8.73
5.54
8.96
39.94
92.21
38.93
89.87
34.37
79.34
35.26
81.41
Estimated Interest Arbitrage Gain @ 3%/mon
Total Distributor's Profit
Total price increase after distribution
Price per case to consumer (R$)
Short Term Outcome
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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
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Capture market share
Establish brand image
Distributor relationship
Increase profit margin
Implementation Timeline
Purchase (Day 1 to
Day 7)
Place Order  Ship
Goods
Crosswell Gets Paid
by Its Bank Once
Goods Are Shipped
Distribution (Day 8
to Day 30)
Importer Receives
Goods  Sells to
Retailers
Collections & Begin
Interest Arbitrage
(Day 31 to Day 60)
Importer Collects
Cash from Retailers
Importer Deposits
Money in Brazil
Fulfill Terms for
Letter of Credit
(Day 180)
Importer Collects
Interests 
Importer Pays His
Bank
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