Hansson Private Label, Inc.: Evaluating an Investment in Expansion
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HBS Professor Erik Stafford, Illinois Institute of Technology Adjunct Finance Professor Joel L. Heilprin, and writer Jeff DeVolder prepared this
case specifically for the Harvard Business Publishing Brief Case Collection.
Though inspired by real events, the case does not represent a specific situation at an existing company, and any resemblance to actual persons or
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E R I K S T A F F O R D
J O E L L . H E I L P R I N
J E F F R E Y D E V O L D E R
Hansson Private Label, Inc.:
Evaluating an Investment in Expansion
Introduction
On a frigid Sunday night in late Fe
uary 2008, Tucker Hansson pored over a proposal developed
y his firm’s manufacturing team. It called for investing $50 million to expand production capacity at
Hansson Private Label (Hansson or HPL). For Hansson, a private company, this would be a
significant investment. The company had not initiated a project of that magnitude for more than a
decade, and the expansion wasn’t without significant risk. It would be likely to double HPL’s debt
and to greatly increase customer concentration. This was a critical juncture for the firm Tucker
Hansson had carefully built over 15 years. He wondered whether the return on investment would be
large enough to justify the effort and risk. He also wondered about the best means of evaluating the
potential investment.
HPL manufactured personal care products—soap, shampoo, mouthwash, shaving cream,
sunscreen, and the like—all sold under the
and label of one or another of HPL’s retail partners,
which included supermarkets, drug stores, and mass merchants. The firm, whose sales had grown
steadily over the years, generated $681 million in revenue in 2007.
Three weeks earlier, HPL’s largest retail customer had told Hansson that it wanted to significantly
increase HPL’s share of their private label manufacturing. Given that HPL was already operating
near full capacity, it would need to expand to accommodate this important customer without
“cannibalizing” a significant portion of HPL’s existing business. The rub was, the customer would
commit to only a three-year contract—and it expected a go/no-go commitment from Hansson within
30 days.
Although he was wo
ied about risk, Hansson was equally invigorated by the prospects of rapid
growth and significant value creation. He knew of numerous examples of manufacturers, both in
private label and
anded businesses, who had risked their future by locking in a strong relationship
with a huge, powerful retailer. For many, the bet had delivered a big payout that lasted for decades.
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4021 | Hansson Private Label, Inc.: Evaluating an Investment in Expansion
2 BRIEFCASES | HARVARD BUSINESS PUBLISHING
Hansson’s employees had completed their fact-gathering and provided a multifaceted analysis of
the proposed project, which he now held in his hands. The time had come to do a final analysis on his
own and make a decision.
Company Background
HPL started in 1992, when Tucker Hansson purchased most of the manufacturing assets of Simon
Health and Beauty Products. Simon had decided to exit the market after struggling for years as a
ottom-tier player in
anded personal care products. Hansson was a serial entrepreneur who had
spent the previous nine years buying manufacturing businesses and selling them for a profit after he
improved their efficiency and grew their sales. He bought HPL for $42 million—$25 million of his
own funds and $17 million that he bo
owed—which was (and remained) the largest single
investment Hansson had ever made. Hansson was seeking to capitalize on what he saw as the
nascent but powerful trend of private label products’ increasing their share of consumer-products
sales. Although the concentration of his wealth into a single investment was risky, Hansson believed
he was paying significantly less than replacement costs for the assets—and he was confident that
private label growth would continue unabated.
Hansson’s assessment of private label growth prospects proved to be prescient, and his
unrelenting focus on manufacturing efficiency, expense management, and customer service had
turned HPL into a success. HPL now counted most of the major national and regional retailers as
customers. Hansson had expanded conservatively, never adding significant capacity until he had
clear enough visibility of the sales pipeline to ensure that any new facility would commence
operations with at least 60% capacity utilization. He now had four plants, all operating at more than
90% of capacity. He had also maintained debt at a modest level to contain the risk of financial distress
in the event that the company lost a big customer. HPL’s mission had remained the same: to be a
leading provider of high-quality private label personal care products to America’s leading retailers.
(See Exhibit 1, which presents HPL’s historical financial statements.)
The Market for Personal Care Products
The personal care market included hand and body care, personal hygiene, oral hygiene, and skin
care products. U.S. sales of these products totaled $21.6 billion in 2007. The market was stable, and
unit volumes had increased less than 1% in each of the past four years. The dollar sales growth of the
category was driven by price increases, which were also modest, averaging 1.7% annually during the
past four years. The category featured numerous national names with considerable
and loyalty.
Branded offerings ranged from high-end products such as Oral-B in the oral hygiene category to
lower-end names such as Suave in hair care. Private label penetration, measured as a percentage of
subsegment dollar sales, ranged from 3% in hair care to 20% in hand sanitizers. (Exhibits 2 and 3
present data about private label sales and market share.)
Consumers purchased personal care products mainly through retailers in five primary categories:
mass merchants (e.g., Wal-Mart), club stores (e.g., Costco), supermarkets (e.g., Kroger), drug stores
(e.g., CVS), and dollar stores (e.g., Dollar General). As a result of significant consolidation and growth
in retail chains over the past 15 years, manufacturers of consumer products depended heavily on a
elatively small number of retailers that had a large national presence. To survive in the personal care
category, manufacturers had to persuade large chains to ca
y their products, provide adequate and
highly visible shelf space, and cooperate with product promotions. Many consumer-goods companies
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HARVARD BUSINESS PUBLISHING | BRIEFCASES 3
found it increasingly difficult to do so, as roughly 80,000 new products were launched each year,
creating intense competition for shelf space.
The Private Label Industry
With private label
ands, retailers rather than manufacturers controlled the production,
packaging, and promotion of the goods. Although some large retailers had integrated vertically and
owned the manufacturing facilities for their private label products, most retailers purchased their
goods from third-party manufacturers. Some manufacturers produced private label products in
addition to their
anded goods (e.g., Kimberly-Clark), whereas others (e.g., Procter & Gamble) did
not produce any private label products.
Historically, retailers had ca
ied private label goods to offer consumers lower-priced alternatives
to national
anded goods. Over time, quality improvements in private label goods and their
packaging led to increased acceptance by consumers. Acceptance was so widespread that 99.9% of
U.S. consumers purchased at least one private label product in 2007, according to AC Nielsen. This
greater acceptance led private label sales across all product categories to exceed $70 billion in 2007.
Retailers had driven, and still drove, these increases in consumer acceptance. They could increase
their profits by capturing a greater share of the value chain than they did with
anded goods, on
which manufacturer profits per unit could be twice those of the retailer, especially if the
and was
well known (e.g., Crest toothpaste). With private label goods, retailers’ cost of goods was as much as
50% lower than with
anded products. Given the reduced cost, retailers could double their profit per
unit sold despite lower selling prices. Gaining further consumer acceptance of private label goods
and prices remained a huge opportunity for retailers, as these goods constituted less than 5% of sales
in many product categories. In the $21.6 billion personal care category, private label products
accounted for $4 billion of sales at retail (less than 19%), which translated to $2.4 billion in wholesale
sales from the manufacturers. Hansson estimated that HPL had a little more than a 28% share of that
total (see Exhibit 4, which shows HPL’s sales into its retail channels).
Investment Proposal
The investment proposal in Hansson’s hands included the following elements:
Cost Components Amount Est. Life Depr.
Facility Expansion $10,000 20yrs. $ 500
Manufacturing Equipment