Blaine Kitchenware Capital Structure Case
Founded in 1927 and listed in 1994, Blaine Kitchenware, Inc. (the “Company”) has been engaged in the business of small kitchen appliances manufacturing, in which it produced in three segments: cooking appliances, food preparation appliances, and beverage-making appliances. The majority of its revenue came from cooking appliances and food preparation appliances, which constituted 98% of its revenue. As a result of its long-standing participation and devotion to the market, by 2006, the company had established itself as a mid-sized player and had market share of around 10%. Compared to its peers, the company had higher profitability metrics (Exhibit A-1), as a result of its brand awareness and competing strategy of not compromising to the aggressive price cutting industry dynamics. In terms of customers and end markets, the company has been providing to affluent households, which implies the business drivers are mainly the housing cycle and the disposable income of households. As a result, the company had enjoyed a steady growing rate of revenue, with the top line growth rate in the past three years being 3.2%, 5.5%, and 11.1% respectively. One thing worth mentioning would be that the company’s growth rate had been driven by its acquisition activities over the past years, with the industry trend of consolidation proliferation. The company had relied on primarily mass merchandisers to distribute its products to customers, with the remainders coming from specialty stores. In recent years, the mass merchandisers had been competing among themselves by aggressive pricing, which has been detrimental to the company’s profit margins and went against its pricing strategy, which was to differentiate itself from others and increase customers’ willingness to pay. Industry Analysis
The industry had benefited from a mixed result of a strong housing cycle, growing number of affluent households, and innovations, while it faced downward pressures from importers with aggressive pricing strategies and distribution channels. Although historically the industry had been segmented, a recent trend of consolidations within the industry had signaled market participants trying to gain economies of scale by acquiring smaller players. Current Situation Analysis
As indicated by the company’s income statement, 85% of its revenue is generated from its mid-tier products. Only around 80% of its operating income came from these products, whereas the high-end products had a higher operating margin. In addition, according to the company’s market research, its brand could potentially translate into higher profitability, provided the company position itself in the high-end market. As a consequence, it is encouraged to continue its pricing strategies and invest more into product development, for the sake of further differentiating itself and capitalizing its brand equity. Moreover, as the company had the weakest market presence in the beverage appliance segment with only 2% of the market share, while the segment demonstrated strongest growth potential, the company’s acquisition-based growth strategy in this segment is worth pursuing. Given the industry as a whole was suffering from the pricing war in the mass merchandise industry, it is beneficial for the company to consider acquiring its distributers. This vertical integration would further cushion the company’s earnings and diversify the business risk of the company. The aforementioned growth opportunities of the firm, both organic growth via capital expenditures and acquisition, required significant capital that is separate from the company’s operating cash requirement. As it is operated in an industry characterized by seasonality and driven by economic cycles, its cash flow pattern is predictable as the seasonal peaks came between summer and winter. Therefore, the company should look into its capital...
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