Liza Davis Case Questions

Liza Davis Case Questions

Your team solution to this case is due on April 20, 12:00 p.m.

1. Please refer to Exhibit 6 where calculations are provided regarding the profitability of full price and discount customers.  These calculations presume there are no dependencies between the two classes of customers.  Give considerations to the dependencies of these two customer segments, and, then, provide your calculation of the value of the discount customer.  You may do so using the “index” metric provided in the exhibit.

I am using the word “dependency “in this question to capture the idea that the shopping experience of one group of shoppers (full price shoppers) may be influenced by (dependent upon) the existence of another group of shoppers (bargain shoppers).  To illustrate, consider this question:  are the inventories available for purchase by the full price shoppers more expansive because the company knows the unsold, leftover merchandise will be acquired, in large part, by bargain shoppers?  If the bargain shoppers did not exist, would the inventories be leaner?  Would the shopping experience in this circumstance be less appealing to full price shoppers and would such shoppers then prefer to shop elsewhere? 

Answer # 1

Liza Davis, a publicly-traded women’s fashion chain store, is facing a difficult situation in a sluggish market. Liza Davis wanted to adopt the bargain hunter strategy to stay competitive in the market and find out ways to encourage more sales by revamping its rewards program. However, the company's challenge is to provide customer incentives while being able to maintain its profitability.

Liza Davis target customers are professional career women aged 35 and older with medium to high income brackets. Liza Davis attributes its competitive advantage to its product design, marketing, brand image, and customer service.

Typically, the planning of a new product takes around 16 months - from design concept to delivery at the retail store location. Therefore, predicting future design and needs is a cumbersome task for the designers. Once the product hits the store it will be sold at 190% over invoice for the first three months; soon after it will roll into a series of discount cycles.

After a product has completed six months of being marked down 60% it will be liquidated for an average of 50% off. On average, 50% of the products are sold at full price, 18% are sold at a 25% discount, and 22.5% sell at 60% off . The discount rate is market driven and Liza Davis follows the market structure.

The table below displays the pre-forma profitability for full price and 60% discount customers. The value of the discount customer is calculated in the index price of 100.

                     Exhibit 6 (from the case study)

At full price, the operating margin is above 50% of the sales revenue, which is very promising. However, the operating margin for the 60% discount customer is $1.30, which is still reasonable.

Logistics and merchandising costs: These have not been considered as these costs are sunk costs. It is assumed that discounted products will not be moved to other stores, and will stay in the same store until sold. These costs should be moved to the full price segment, which will reduce the operating margin of the full price.

New season cost: This is not included as the cost incurred in the advertisement and product promotion is applied to only new products, so it will be transferred to full price. Some of the stores advertise their “discount offers,” but since there is limited information on the 25% discount, it is assumed that all the advertisement costs will bear the full price.