Hugo Boss USA to Increase Profits by Going Online

Case Type: increase profits; marketing, new sales channel.
Consulting Firm: Samsung Global Strategy Group (GSG) first round full time job interview.
Industry Coverage: retail; apparel, clothing, textiles; e-commerce, online business.

Case Interview Question #01285: The client Hugo Boss AG (FWB: BOSS) is a global apparel producing company and luxury fashion house. It was founded in 1924 by German fashion designer and businessman Hugo Boss and is headquartered in Metzingen, Germany. Originally focusing on men’s suits only, the company added mens and womenswear diffusion lines in 1997, a full women’s collection in 2000 as well as children’s clothing in 2007, and has since evolved into a major global fashion house with more than 1,100 company-owned retail stores worldwide.

For this case, we will focus on the company’s US business only. Hugo Boss USA wants to increase profits by opening an online sales channel. They want to increase profit by at least 20%. The CEO of Hugo Boss USA has approached us to figure out if this goal is possible and how they should proceed. What would you recommend they do?

Additional Information: to be provided upon request

* Hugo Boss USA is a premier apparel band that produces clothes and shoes for men and women of all ages.

* Their current profit (Hugo Boss USA) is USD $1B.

* There are two product lines — regular and premium. Regular is a less pricey, more casual, and more young consumer oriented. Premium — higher priced and focuses on business attire.

* Focus only on US market.

* Hugo Boss USA sells through large premium retail stores line such as Macy’s and Nordstrom as well as through their own retail stores.

* (Only on direct request) – Assume that retail stores currently do not sell items online.

* Industry is stable.

* Client company has sufficient human, financial and other resources to go into this online business.

Possible Answers:

1. Suggested Structure

Allow the candidate to prepare the initial structure. It is good if the candidate recognizes that there are at least
three ways to start on-line sales:

a. establish their own platform,
b. use online platform available at existing retailers (Macy’s and Nordstrom), or
c. use existing online platforms such as Amazon to start sale.

2. Detailed Analysis

A. Profitability of establishing their own platform

Questions to help the candidate gather more data:

* What information would you need to start analysis?
* How would you price products? Should the price stay the same for on-line and off-line retail?

Additional Data:

* Capital investment in building their own online platform – $5M. This includes development of the website, design and creation.
* Retail price of a regular item is $240 and retail price of a premium item is $345.
* For online sales, the client Hugo Boss USA decides to decrease the price by $40 for regular items and $45 for premium items.

Possible Solution:

Revenue:
* Regular item: will be able to sell 5,500 SKU / day at an average price of $240 – $40 = $200
* Premium item: will be able to sell 2,500 SKU / day at an average price of $345 – $45 = $300
* Assume 350 days in a year
* Total revenue = 350 * (5.5K*$200 + 2.5K*$300) = $647M

Fixed costs:
* Annual service: $25M
* Insurance and other costs: $3M
* Wages: $15M
* Incremental Warehouse cost: $25M
* Marketing: $50M
* Total fixed costs = $25M + $3M + $15M + $25M + $50M = $118M

Variable cost:
* Regular: $80 / SKU
* Premium: $85 / SKU
* Delivery cost: $10 per item
* Packaging: $3 per item
* Total variable cost = 350 * ( 5.5K*($80+$10+$3) + 2.5K*($85+$10+$3) ) = ~$270M

Total cost:
* Total cost = fixted cost + variable cost = $270M + $118M = ~$388M

Profit
* Profit = revenue – costs = $647M – $388M = $259M

Cannibalization Cost:
* Due to online sales initiatives profit in regular stores will drop 20%.
* Total profit = $1B – $200M + $259 = $1.059B
* Cannibalization cost are mainly due to premier items.

Now, ask what solutions the candidate sees. One of the possible solutions — don’t decrease price for the products sold online, offer them at the same price you offer them in retail stores.

B. Partnership with another platforms

If the client company decides to use existing platforms, ask the candidate:
* What might change in revenue and cost structure?
* How would you think about pricing in this case?
* What are the costs you might think about?
* Calculate the client’s profit in this case.

Possible Solution:

Additional Data:
* Assume discount for regular items of 20% and no discount for premium items.

In this case,

Revenue
* Regular item: will be able to sell 7,000 SKU / day at an average price of $200
* Premium item: will be able to sell 2,500 SKU / day at an average price of $345
* Assume 350 days in a year
* Total revenue = 350 * (7K*$200 + 2.5K*$345) = $790M

Fixed costs:
* Annual cost of using platform: $50M
* Insurance and other costs $3M
* Wages: $5M.
* Incremental Warehouse cost: $30M
* Marketing: $20M
* Total fixed cost: $108M

Variable cost:
* Regular: $80 for SKU
* Premium: $85 for SKU
* Delivery cost: $10 per item
* Packaging: $3 per item
* Total variable cost = 350 * ( 7K*($80+$10+$3) + 2.5K*($85+$10+$3) ) = ~$314M

Total cost:
* Total cost = fixted cost + variable cost = $108M + $314M = ~$422M

Profit
* Profit = revenue – costs = $790M – $422M = $368M (without cannibalization cost)

C. Pros and Cons of each way

Ask the candidate what are strategic benefits of running own website v/s using existing platforms?

Possible Answer:

Benefits of running own platform:
* strategic control of sales channel — transparency and availability of shelf place
* opportunity to sell additional staff offered by other retailers — additional source of revenue
* control of marketing and sales strategy will allow to avoid brand deterioration — brand control

Benefits of using existing online retailers:
* Will offer database to better manage inventory and marketing campaign
* Marketing savings
* Larger consumer base

3. Conclusion

a. Recommendation

* It is up to the candidate to decide which way to go, as long as he/she provides good rational.
* Own web-site will prevent brand deterioration and might offer greater business flexibility in future. However, might result in negative NPV.
* Partnership with Amazon-like platform might result in higher sales and better sales forecast. However, might result in higher cannibalization, and brand deterioration.

b. Next Steps (Depending on the strategy the candidate chooses)

If the candidate chooses to go with own platform:
* Sell premium products at the same price.
* Decrease price only for regular line. Think about making some items available on-line only to prevent cannibalization.
* Analyze opportunities for cooperation with other apparel produces that provide supplements for the Hugo Boss collections.

If the candidate chooses to form partnership with existing platform:
* Contract should include control over prices to prevent cannibalization and brand deterioration.
* Sign sales data sharing agreement to strengthen sales forecast.