1. Should Lowe’s expand into Canada, or renew efforts to acquire Rona? 2 . Would
ID: 456039 • Letter: 1
Question
1. Should Lowe’s expand into Canada, or renew efforts to acquire Rona?
2. Would you recommend Lowe’s enter the Australian market with 150 new stores as currently planned in an attempt to match Ace’s international presence?
3. Would you recommend Lowe’s reduce the size of its stores to match Home Depot, and even smaller stores such as Ace and True Value?
4. What do you think are the best strategies for Lowe’s to outperform Home Depot as the housing market and world economy continue to improve?
5. Develop the projected financial statements that fully assess and evaluate the impact of your proposed strategy.
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Explanation / Answer
1. Lowe should expand into Canada as the housing market in USA is in a bad position and is expected to take some tome to recover. Acquistion of Rona is a good way to expand its presence inorganically. Rona is a Canada based chain and has 79 large stores and 700 smaller stores. Expansion in Canada is important as Lowe's operations are under pressure in the USA. The pent up Canadian consumer demand is opening up and this is the right time to take advantage of the market opportunity.
2. Lowe should enter the Australian market but not with 150 new stores. In order to pursue its vision of being the first choice for home improvement Lowe has to ensure a strong international presence. But it should consider the option of capturing the Australian market through an online business model. Online business model are more cost effective than the brick-and-mortar model. Lowe can start by opening few stores and augmenting them with service stores and regional distribution centers for the online model.
3. Reducing the size of the stores is a good option. This will help the company lower various costs. Currently, Lowe stocks 40,000 items compared to the 30,000 items stocked by rival Home Depot. By reducing the size of its stores, its inventory holding costs will go down. Home Depot is outperforming Lowe and Lowe should consider reducing the size of its stores to achieve operational efficiencies. It can increase customer transactions by increasing its online presence.
4. Lowe should increase its international presence in order to combat competition from Home Depot. As home prices and home constructions are rising, Lowe should be prepared to take advantage of this opportunity. The first focus should be to arrest the fall in customer transactions. Secondly, Lowe should reduce its selection of home improvement products so that it can better focus on its product portfolio. This will help the company build competitive advantages. Lastly, Lowe should focus on building and expanding its internet business model.
5. Projected financial statement:
Assumptions:
(i) sales will increase by 5%, 6%, 7% and 7.5% for the years 2014,2015,2016 and 2017. (ii) cost of sales as a % of sales will gradually decline over the years (iii) all expenses will grow by 4% per year (lower than sales growth due to higher efficiencies).
2011 2012 2013 2014 2015 2016 2017 actual actual actual projected projected projected projected Net sales 48,815 50,208 50,251 52,764 55,929 59,844 64,333 year on year growth 2.85% 0.09% 5.00% 6.00% 7.00% 7.50% Cost of sales 31,663 32,858 33,194 34,296 35,795 37,702 39,886 as a % of sales 64.86% 65.44% 66.06% 65.00% 64.00% 63.00% 62.00% Gross margin 17,152 17,350 17,057 18,467 20,135 22,142 24,446 Expenses SG&A 12,006 12,593 12,244 12,734 13,243 13,773 14,324 Depreciation 1,586 1,480 1,523 1,584 1,647 1,713 1,782 Interest 332 371 423 440 458 476 495 Total expenses 13,924 14,444 14,190 14,758 15,348 15,962 16,600 Pre tax earnings 3,228 2,906 2,867 3,710 4,787 6,181 7,846 Tax provisions 1,218 1,067 1,178 1,484 1,819 2,287 2,903 as a % of pre tax earnings 37.73% 36.72% 41.09% 40.00% 38.00% 37.00% 37.00% Net earnings 2,010 1,839 1,689 2,226 2,968 3,894 4,943Related Questions
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