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REV: MARCH 1, 2010
ERIK STAFFORD
JOEL L. HEILPRIN
JEFFREY DEVOLDER
Hansson Private Label, Inc.:
Evaluating an Investment in Expansion
Introduction
On a frigid Sunday night in late February 2008, Tucker Hansson pored over a proposal developed by his firm’s manufacturing team. It called for investing $50 million to expand production capacity at
Hansson Private Label (Hansson or HPL). For Hansson, a private company, this would be a significant investment. The company had not initiated a project of that magnitude for more than a decade, and the expansion wasn’t without significant risk. It would be likely to double HPL’s debt and to greatly increase customer concentration. This was a critical juncture for the firm Tucker
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Hansson was seeking to capitalize on what he saw as the nascent but powerful trend of private label products’ increasing their share of consumer-products sales. Although the concentration of his wealth into a single investment was risky, Hansson believed he was paying significantly less than replacement costs for the assets—and he was confident that private label growth would continue unabated.
Hansson’s assessment of private label growth prospects proved to be prescient, and his unrelenting focus on manufacturing efficiency, expense management, and customer service had turned HPL into a success. HPL now counted most of the major national and regional retailers as customers. Hansson had expanded conservatively, never adding significant capacity until he had clear enough visibility of the sales pipeline to ensure that any new facility would commence operations with at least 60% capacity utilization. He now had four plants, all operating at more than
90% of capacity. He had also maintained debt at a modest level to contain the risk of financial distress in the event that the company lost a big customer. HPL’s mission had remained the same: to be a leading provider of high-quality private label personal care products to America’s leading retailers.
(See Exhibit 1, which presents HPL’s historical financial
service to other companies and organizations. It was necessary for these two companies to be
Unlike the previous two cash flows where we considered them based on the direct impact they bring, the super project’s share of the building and agglomerator capacity must not be considered in our cash flow for the following reasons:
a Additional Sec. 263A costs of $7,000 for the current year are included in other costs.
employees to keep up with the sales leading to job opportunities or else that company will lose its customers.
millions of dollars of structured settlements at a discounted price so that he could generate
investing $20.5 million in the new system, which represented the most ambitious project in the
The investment requested is £12 million. Strategic and operating benefits were summarized in our previous memo to you. We have made, however, some changes to our investment analyses, which appear below.
Despite his many efforts to tighten operations while continuing to grow the business, the new
Financial risks include the short payback period. A 3-year payback period would not allow Hansson the opportunity to breakeven. With a negative NPV in the first 3 years Hansson’s decision to invest in the project would be based on his ability to negotiate a longer contract time. The Net Present Value (NPV) would have to be examined in tandem with the other non-financial variables.
1. How would you describe HPL and its position within the private label personal care industry?
* Production capacity is 10,000 units a year however they hope to construct a $45 million facility with a capacity of
HPL benefits from the private labels as a whole gaining competitive advantages over brand names. Its more pertinent competition, however, will come from its private label peers. A 28% market share among comparable companies has not yet made HPL a private label personal care industry leader. The opportunity of locking in a strong relationship with a large retailer will provide HPL the opportunity to significantly increase its market shares and also the possibility of becoming the industry leader.
There was another problem of setting up capital required by the company for starting the production.
Addressing the needs of its employees. Meeting the needs of the employees and maintaining a profit margin.
The company aims at improving their sales to ensure that there is a high return on the investment and maximize the profits that the company targets to accomplish.