PolyPrin Clothing Inc. is a manufacturer of women’s fashion clothing out of San Diego, California. The company has been in business for five years operating a plant capable of producing 4 million items per annum. PolyPrin’s fashion lines are a series of casual yet elegant light dresses designed with the tropical spirit in mind. The name of the company is derived from the influence of Pacific culture, and positioned for young to middle aged women seeking an exotic image.
At present PolyPrin produces and sells 3 million dresses a year. It distributes its products through its own retail outlets and to some specialty stores across the US west coast. Details of the company’s 2012 financial statement are as follows:
All items expressed in $millions
Revenue – 90
Labour – 12
Materials – 22
Energy – 6
Plant Overhead – 3
Total Operating Costs – 43
SG&A Costs – 14
Profit Before Tax – 33
Tax – 10
NET PROFIT – 23
After years of success in the west coast of the USA, PolyPrin has decided to export its fashions to Australia in 2013. The company believes the culture of Australia is similar to that of California, and so should be successful. As well, Polyprin also feels its products are well suited across a variety of global cultures. As a result, Australia’s increasingly multicultural society, as well as its similar business practices with the USA, makes the company believe it is an ideal overseas market to enter. It is eventually looking to take its products into neighbouring emerging nations.
Moreover, the company believes Australia as a nation promises good economic prospects, especially in lieu of the growing importance of its commodity exports to nearby emerging Asian nations. The rising demand for commodities has increased the value of its currency, the Australian dollar, from as low as $US0.60 in late 2008 to $US1.03 at present. In the last couple of year, monetary policy has been relatively tight and interest rates are double those in the US at nearly 4%. This is in response to strong economic activity, due to surging commodity exports, that has pushed up the inflation rate in Australia.
Polyprin has been considering setting up a wholly owned retail subsidiary in Australia, and/or distribute its products through other retail stores. The cost of establishing a wholly owned retail subsidiary is $30m. Under the tax agreement between the USA and Australia, the profits of the retail subsidiary are subject to a 10% tax rate. All profits may be repatriated back to the US.
Market research studies have indicated that the market for casual type wear in Australia is around $5bn per year. While there are several competitors in the country, Australia has faced rising competition from apparel producers in Asia. Average retail prices for some imported products are estimated to be around $A30-35. In neighbouring New Zealand and certain Southeast Asian nations, retail pricing for standard clothing is as high as $US45. Many of these dresses are distributed through mid to large retail outlets in the major urban centres. PolyPrin believes its material and quality is superior, and that its in-house custom designs are unique.
PolyPrin is now considering the price it wishes to sell its product to the retailer, and to determine what the final retail price should be. It is believed that the mark-up from manufacturer to the retailer is 10% (mark-up is after manufacturing and shipping costs), and the mark-up from the retailer to the customer is usually 20-25%. The cost of shipping and insurance for delivery from Los Angeles to the port in Sydney is $5 per dress. Import duties of 5% are applied on the price to the retailer on a CIF basis.
a) Using the domestic price PolyPrin receives and the normal mark-ups, distribution costs and duties, calculate a possible retail price in the Australian market for one dress. (Price Escalation).
b) Determine the cost to produce one dress, and using this plus the normal mark-ups and distribution costs and duties, calculate the potential retail price in the Australian market for one dress.
2) Which pricing scenario is better for the company? Explain your answer, considering key factors beyond costing that influences pricing decisions.
3) Given this information, what price would you ultimately charge, and why? How would you enter the Australian market and distribute the product? Explain fully!