Over the last year, the Women’s Sportswear and Accessories division has seen increases in prices and difficulties acquiring the required raw materials from around the world. Between rising costs, suppliers changing business models and bad weather, the cost of raw materials have begun to rise and in turn causes the divisions profit margins begin to dwindle. There are multiple course of action Burberry can take to overcome these issues, each with their pros and cons.
Method Pros and Cons
As noted by Garrison Noreen Brewer (2012) there three common methods of dealing with rising cost of raw materials. The first is to operate with a lower profit margin by maintaining the price of the finished products. Price increases can be passed along to the customer and finally renegotiation can happen to attempt to lower or lock in the costs.
Working at a lower profit margin would not benefit the division as Burberry prides itself upon providing high quality luxurious products. The company markets to a higher class clientele, making fewer sales, thus relying upon high profit margins to maintain a profit. As stated by Brian Bass (Chron), “[Low Profit Margin] businesses need to keep prices competitive and sell a large volume of goods,” whereas “[High Profit Margin] businesses commonly prefer this model because it does not rely on a large sales volume to make a profit.” Therefore it would likely be detrimental to work at a lower profit margin.
The rising costs can also be offset by passing the cost along to the customer. Total change it price would be minimal, and as we market to high class clientele it would likely be overlooked. Many of the consumers of Burberry buy the products for the name and the quality, regardless of the price. This theory can be a double edged sword though as seen by the attempt by ConAgra Foods to increase their price points. The example given by Garrison Noreen Brewer shows how the “Banquet” brand of frozen meals, normally priced at $1.00, were given a price hike to $1.25. This price increase dramatically affected sales, dropping total sales 40%, pushing the overall gross profits well below the profits they were making before. Profits per unit went up, but total sales plummeted. Because Burberry is known as a luxury brand the repercussions of such a move would likely not be this drastic, but sales would likely stumble a bit.
Finally Burberry can negotiate deals with its suppliers to lock in prices or change suppliers all together. Hedge contracts can be negotiated with supplier as it is known how much of each material is needed, thus locking in prices for a period of time. This can be very successful in reducing the effects of turns in the economy as seen by the Fuel Hedging done by Southwest Airlines who saved over $4 billion between 1999 and 2008. By locking in the prices of the needed materials, for the length of the contract it will be expect that the cost will not change
At this time renegotiation of contracts would be the best course of action. The procurement department should push to lock in prices to limit the effects of economy. Minimal amounts of pushing the cost to the customer can be used to offset the costs in the short term. This method should be used sparingly as to not scare away the clientele. The idea of working with lower profit margins should be avoided as Burberry is a High Profit Margin business, selling high priced but fewer total sales.
Garrison, R.H. Noreen, E.W., & Brewer, P.C. (2015). Managerial Accounting. New York: McGraw-Hill Education.
Bass, B. (N.D). Low-Margin Business vs. High-Margin. Chron. Recovered from: http://smallbusiness.chron.com/lowmargin-business-…
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