CASE STUDY: ECOSNEAK - ‘Sustainable sneakers for all’
Ecosneak is a sneaker merchandising company that prides itself
on its environmental credentials; it considers sustainability
(alongside high quality) to be central to its business model. The
company started operating three years ago in the Edinburgh market;
from the start its strategy was to target the higher end of the
market – the ‘quality’ and ‘customer intimacy’ segments - in both
the men’s and women’s markets. Ecosneak was set up two sisters –
Jenny and Jess Wilson; Jenny is responsible for purchasing and
inventory management, while Jess looks after marketing; a year ago
they recruited a former university friend of theirs, John Moto, to
focus on financial matters and he is now a key part of the
business, particularly as Stride has been facing more intense
competition over the last year or so. John has consequently been
asked to review the company’s financial position in 2021 and 2022
(presented in Tables 1, 2 & 3) prior to analysing the impact of
a range of possible decisions on revenues and profits.
Table 1: Sales, Revenue and Cost Data for Ecosneak (2021 and
2022)
- Plz Help Me Here Case Study Ecosneak Sustainable Sneakers For All Ecosneak Is A Sneaker Merchandising Company That 1 (61.52 KiB) Viewed 30 times
- Plz Help Me Here Case Study Ecosneak Sustainable Sneakers For All Ecosneak Is A Sneaker Merchandising Company That 2 (19.52 KiB) Viewed 30 times
Intimacy)
- Plz Help Me Here Case Study Ecosneak Sustainable Sneakers For All Ecosneak Is A Sneaker Merchandising Company That 3 (7.84 KiB) Viewed 30 times
Jenny has begun to wonder whether the company can fight off this
competitive threat or whether it is time to rethink its entire
business strategy. One option that John would like the others to
consider is whether the company should expand into the Kid’s market
(targeting both quality and customer intimacy segments). However,
this option has so not far seemed particularly attractive to Jenny,
who feels that the company has little knowledge of the sorts of
sneakers that kids might like and that Ecosneak has insufficient
resources to expand without increasing borrowing.
In order to decide on the company’s strategy over the next six
years, John commissioned some background research a few months ago
from a consultancy company. On the basis of this he has attempted
to define and quantify the possible outcomes from the following two
(mutually-exclusive) options:
Focus on R&D to improve product quality
This is Jenny’s preferred option. It would require a €300,000
up-front initial expenditure in 2023. John has estimated (based
largely on past experience, one would have to say) that this is
expected capture increased market share in men’s and women’s
market and will result in additional annual net profits for
Ecosneak over the six-year period (from 2024) as follows:
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This option is favoured by John, but appears more risky, because
as far as Ecosneak is concerned, the market is untested and there
are a number of rival firms already operating in the segment.
Nevertheless, there is potential growth in the market and it offers
a route to expansion for the company. It would require investing
€170,000 in 2023 in additional warehouse capacity and other fixed
assets. John believes that the company could capture 10% of the
kid’s market each year from 2024 (total market size currently
amounts to 50,000 pairs of sneakers annually). Each pair of kid’s
sneakers is estimated to generate a net profit of €10. (Assume that
this will have no impact on company sales in the men’s and women’s
markets which will remain at current levels, as will all other
costs). The overall kid’s market will grow by 5% per year over the
six-year planning period.
Q2. Investment Options
Decide whether to invest in R&D or to expand into the kid’s
sneaker market.
2.1Calculate the payback period for each option and
suggest which should be chosen by Ecosneak. Make sure you explain
to the management team both the shortcomings of the payback method
and its strengths.
2.2Calculate the Net Present Value (NPV) for each
option. Which option would you recommend Ecosneak should choose
giving your reasons. Use a cost of capital of 8% for the option of
R&D investment) and 9% for expansion into the kid’s market (as
it is perceived to be riskier).
2.3Explain, in principle, the approach you would use to
calculate the Internal Rate of Return (IRR) of a
project/option. Illustrate this by calculating the IRR of the
R&D option.
2.4Write a brief report for Ecosneak summarising your
findings and offering advice on the best investment option for them
to choose. Apart from the results you have calculated, are there
any other factors you might consider?
2021 Years Sales volume 29,832 Men* Women* 29,000 Total revenues (Men) €2,684,880 Total revenues (Women) €2,320,000 Total revenues €5,004,880 Cost of sales (Men) €1,193,280 Cost of Sales (Women) €1,102,000 Distribution Cost €294,160 Total Cost of sales €2,589,440 Gross margin €2,415,440 Marketing and Sales €400,000 General administration cost €1,400,000 Net profit €615,440 *Total Sales Quality and Customer Intimacy Segments 2022 25,500 30,000 €2,550,000 €2,100,000 €4,650,000 €1,020,000 €1,140,000 €277,500 €2,437,500 €2,212,500 €400,000 €1,500,000 €312,500
Price per pair Purchase Cost Distribution Cost 2021 Men's Sneakers €90 €40 €5 2022 Women's Men's Sneakers Sneakers €80 €100 €38 €40 €5 €5 Women's Sneakers €70 €38 €5
Men's Women's 2021 23% 20% 2022 18% 19%
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 €50,000 €100,000 €100,000 €125,000 €125,000 €50,000