Tag Archives: SWOT Analysis

WORTHINGTON INDUSTRIES, INC. – SWOT Analysis

Worthington Industries’ principal activities are to process steel and manufacture metal products. The company manufactures products such as metal framing, pressure cylinders, automotive past model service stampings, metal ceiling grid systems and laser welded blanks in the company specializes in producing flat-rolled steel to exact customer specification but faces a challenge due to declining production in the automobile sector.

Strengths

Customized offerings

Worthington Steel forms flat-rolled steel to exact customer specifications for industrial customers, including automotive, appliance, and machinery companies. It processes steel to the precise type, thickness, length, width, shape, temper and surface quality specifics as required by customers. Customized products are usually not supplied by steel mills or steel end-users. By catering to this niche area, Worthington Steel has established itself as a leader among independent flat-rolled steel processors in the US.

Increasing return on equity

Worthington’s 5-year average ROE of 11.1% is much above the industry’s average (5.6%). This is also higher than 9.5% ROE of the company’s competitor Steel Technologies. Moreover the company’s return on equity (excluding income from unconsolidated affiliates) has increased from 1.5% in 2001 to 15.2% in 2005. The company’s return on assets (excluding income from unconsolidated affiliates) has also increased from 0.7% in 2001 to 6.8% in 2005. Increasing return on equity and return on assets implies company’s ability to increase profitability on invested capital. This also indicates effectiveness of company’s streamlining operations and improving asset quality.

Strong performances by joint ventures

Worthington, apart from its three primary business units, operates through nine joint ventures that contribute through earnings growth, geographic expansion and product diversity. Some of these joint ventures include TWB Company, Viking & Worthington Steel Enterprise, WAVE and WSP. Worthington’s share of joint ventures is significant. Earnings from the unconsolidated joint ventures contribute over 40% of the Worthington’s profits. Moreover earnings from these unconsolidated joint ventures have been consistently increasing since 2002 at CAGR of 32.6% to reach $53.8 million. Strong performance by joint ventures will enable company to expand its presence in new markets while sharing resources, operating expenses and risk.

Weaknesses


Consistent decline in profitability of the pressure cylinders division

Although the sales from pressure cylinder segment have increased, there has been a consistent decline in profitability of the division primarily because of increase in operating expenses. The division’s operating income per ton fell to $0.9 in 2005 from $2.1 in 2004. The operating margins declined to 8.2% in 2005 from 9.5% in 2004 and 10% in 2003. Falling operating margins of the segment could significantly impact the overall profitability growth of the company.

Fall in volume of sales across all product lines

Prime facia, it appears that company has performed well as revenues have risen. But this rise in revenue is either due to increase in its products prices or through current acquisitions. In terms of volume, the company’s sales (excluding acquisitions), has declined across all segments leading to 2% fall in 2005 as compared to 2004. The decline is because of 16% fall in sales from metal framing division and a 3% decrease steel processing division (which contributes over 58% of company’s revenues). Falling volume of sales in all product lines adversely affects Worthington’s operating results and financial position.

Deteriorating cash position

Worthington’s operating cash flow has fallen at a CAGR of 57.7% to $32.3 million in 2005 from $180.7 million in 2002. This is in spite of net income increasing at a CAGR of 54.5% during the same period. This reflects the company’s inability to generate cash through internal operations.

Opportunities

Widening product line and customer base

The Worthington Cylinder business expanded its product line with the acquisition of the propane and specialty gas cylinder assets of Western Industries in 2004. Western’s Propane and Specialty Cylinder Group manufactures disposable cylinders for hand torches, camping stoves, portable heaters and tabletop grills. During 2004, Dietrich Metal Framing and Pacific Steel Construction formed a joint venture named Dietrich Residential Construction to focus on the residential construction market particularly for US military. Another joint venture between Dietrich Metal Framing and Encore Coils named Dietrich Metal Framing Canada opened up new markets in Canada. These joint ventures can help the company through earnings growth, geographical expansion and product diversity.

Growth in the nonresidential construction market

Spending on nonresidential construction in the US started to gain momentum in the second half of 2004, and the so far in 2005 it has achieved a growth of 7%. This is expected to continue during 2005 The growth will continue on account of steady growth in consumer spending, a gradual increase in total employment, high levels of corporate profits and a steady rise in capital investment by the US businesses. Spending on non-residential construction is expected to expand by at least 6% in 2005. Since steel is an important construction material, increasing construction activities will raise the demand for steel providing a boost to company’s sales.

Streamlining activities to focus on core business

The company is divesting non-core assets in line with its hub and spoke model i.e. all business segments relate to the steel processing core competency. In process of streamlining the company sold Decatur, cold rolling assets to Nucor Corporation in August 2004. The company is divested its non-core assets and reinvested in higher growth businesses such as Dietrich and Unimast in the metal framing segment. The restructuring will enhance company’s asset quality, improve financial performance and provide a base for growth in the future.

Threats

Increasing consolidation in the steel industry

Steel industry is getting increasingly consolidated. After Mittal-ISG merger in 2005 the three largest steelmakers command 77% of all domestic shipments of all sheet products. Increasing concentration within the steel manufacturing industry would mean more bargaining power with the suppliers. Since Worthington is a processor of steel (not manufacturer), greater supplier power could translate into margin contraction. This will increase vulnerability of Worthington to economic and market conditions.

Weakness in the automotive sector

The US auto industry is on a decline. The traditional big three – General Motors, Ford Motor and Chrysler Group, the North American unit of DaimlerChrysler, are losing ground to the overseas-based manufacturers. Only Chrysler Group posted a gain in the US market share in 2005, but managed only a little increase. The weakness in the automotive sector is reducing the overall demand for hot rolled steel. General Motors alone reduced first-half North American production by 11%, which reduced the demand for sheet steels by 250,000 tons. Since 30%-35% of Worthington’s consolidated sales are to the automotive sector, the company will be negatively impacted by production cuts by its clients such as Ford.

Excess supply over demand

Demand for consumer-oriented steel products such as sheet has been softening and this has started to pull down the price of flat steel. The decline in prices will continue as world steel production capacity exceeds the world demand by large margin. In 2004, world steel production capacity at 1.016 billion tons, exceeded world demand by more than 100 million tons. It is projected that world production capacity can reach 1.268 billion tons by 2008, compared to a demand of 1.051 billion tons. This is primarily because steel demand in China is slowing without any corresponding decrease in planned capacity. China is expected to produce more than one-third of total global production by 2007. Thus the production of steel could double in the next four years. Moreover low-cost imports from China will further dampen prices in the US. Since the company has stocked large amount of inventories purc

Non-market interventions in world steel markets

The North American steel industry is vulnerable to non-market interventions in world steel markets including China. These interventions include offering low-interest loans, providing cut-rate energy prices, paying employee health care costs or other subsidies. According to NAFTA, recent steel capacity increases are seen in countries whose governments intervene in the market to create artificial advantages for their steel industries. The government of these countries manipulate their currencies, promote export-driven investment agendas, grant government subsidies, protect their home markets and look to export markets (for steel and manufactured products) to solve their unemployment and social problems. Such interventions are resulting in increased steel production at competitive prices. This massive state supported expansion can distort the steel market in North America and worldwide.

SWOT Analysis of WISCONSIN ENERGY

Wisconsin Energy Corporation is a diversified holding company engaged in electric generation; electric, natural gas, steam and water distribution; and other non utility businesses. The company’s strong retail presence, and diversified customer base reduces its business risk. However, the increasing coal and natural gas prices could reduce the operating margins of the company.

Strengths

Weaknesses

Diversified customer base Clean power generation assets Improving revenues

Declining profitability Decreasing cash from operations

Opportunities

Threats

Power the Future plan Increasing focus on renewable energy Projected increase in the demand for electricity Rate increases

Rising coal and natural gas prices Rising US interest rates Environmental regulations

Strengths

Diversified customer base

WEC serves about 1.1 million electric customers and about one million natural gas customers in Wisconsin. Wisconsin Electric provides electric utility service to a diversified base of customers in such industries as mining, paper, foundry, food products and machinery production, as well as to large retail chains. Edison Sault provides electric service to industrial accounts in the paper, crude oil pipeline and limestone quarry industries, as well as to several state and federal government facilities.
In fiscal 2005, retail electricity sales accounted for more than 90% of the total electric utility sales of 32.4 million megawatt hours. Furthermore, residential sales increased by about 6% in 2005, compared to 2004. The customer base of the company is well diversified, with no segment accounting for a high share of electricity sales. In fiscal 2005, the commercial/industrial customers accounted for 64.3% of total electricity

sales, while residential customers accounted for 26.4%. Commercial segment and others accounted for the remaining retail electricity sales. Strong retail sales partially insulates the company from the volatility in the wholesale segment.

Clean power generation assets

WEC has significant clean power generation assets. Nuclear power accounted for about 20% of its generation capacity in 2005, while natural gas accounted for about 3% of total generation capacity. Hydro power accounted for 2% of total generation capacity. In addition, the company has made recent investments in wind energy facilities. WEC would leverage its strong clean power generation assets to derive a cost advantage and improve its brand image.

Improving revenues

The company witnessed a double digit growth in revenues in fiscal 2005. Its revenues increased by about 12% in 2005, as compared to 2004. In addition, the utility segment’s revenues increased by 12.4% and the revenues of non utility segment more than doubled in fiscal 2005. Moreover, this would enable the company to increase its capital spending which was 4.1% during 2001-2005, higher than the industry average of 3.1%. Improving revenues would provide financial stability as well as enhance the company’s market position.

Weaknesses

Declining profitability

WEC’s profit margins have witnessed a marginal decline in recent years. The company’s operating profit margin decreased from 15.6% in 2004 to 14.7% in 2005, while its net profit margin decreased from 9% to 8.1%. In addition, the company’s margins also lagged behind the industry averages. Moreover, the company’s operating profit margin of 14.7% in 2005 was also significantly lower than that of its key competitors such as Duke Energy (21.6%), PPL Corporation (21.6%), Entergy (17.7%) and PSEG (16.8%). Relatively weak profitability suggests scope for improving operating efficiency and capital structure.

Decreasing cash from operations

WEC recorded a decline of about 4% in net cash flows from its operating activities for the fiscal year ending 2005. The net cash flows from operating activities have come down to $576.9 million in 2005, from $599 million in 2004. Declining cash flows from
operations may adversely affect the company’s liquidity and its ambitious growth plans in short term.
Opportunities

’Power the Future’ plan

WEC has been implementing the ’Power the Future’ plan for the period 2001-2010, to improve the supply and reliability of electricity in Wisconsin. Under Power the Future, the company plans to add new coal-fired and natural gas-fired generating capacity to the state’s power portfolio. As part of its Power the Future strategy, WEC plans to invest approximately $2.6 billion in 2,120 megawatts of new natural gas-fired and coal-fired generating capacity at existing sites; upgrade Wisconsin Electric’s existing electric generating facilities; and invest in upgrades of its existing energy distribution system.
Power the Future plan includes two 545 megawatt natural gas units at an existing site in Port Washington, Wisconsin. The first natural gas unit was placed into service in 2005. The second natural gas unit is expected to be operational in 2008. The construction of two 615 megawatt coal units at an existing site in Oak Creek, Wisconsin has been started, and the first coal unit is expected to be placed in service in 2009, followed by the second unit in 2010. When Power the Future is complete, the company expects to reduce emissions system by more than 65% while generating approximately 50% more electricity. The company’s earnings could grow significantly in the short term.

Increasing focus on renewable energy

Total renewable generation in the US, including combined heat and power generation, is projected to grow from 359 billion kWh in 2003 to 489 billion kWh in 2025, expanding by 1.4% per year through to 2025. The company has been increasing its focus on the renewable energy sources in recent years, as a part of the Power the Future plan. We Energies has targeted 5% of its retail electricity sales to be generated from renewable energy sources by 2011. In 2005, We Energies purchased the development rights for two wind farm projects in Wisconsin from Navitas Energy, which are expected to be online by 2008.
The proposed Blue Sky Green Field Wind Project will be located in the towns of Calumet and Marshfield in northeast Fond du Lac County. The wind project is being designed to generate up to 203 megawatts of electricity to power approximately 45,000 residential homes. Increasing focus on renewable energy projects would reduce its dependence on coal fired power generation capacity and improve its brand image.

Projected increase in the demand for electricity

The electricity demand in the Mid-America Interconnected Network (MAIN) region is expected to increase. Residential electricity demand in this region will increase from 79.8 billion kilowatt-hours in 2004 to 94.9 billion kilowatt-hours in 2014. The industrial electricity demand is expected to increase from 82.6 billion kilowatt-hours in 2004 to 93.5 billion kilowatt-hours in 2014. Total electricity sale (including residential, commercial/other, Industrial and transportation) in the region is expected to increase from 251.8 billion kilowatt-hours in 2004 to 302 billion kilowatt-hours in 2014.
In addition, the company also expects the total retail and municipal electric kilowatt-hour sales of utility energy segment to grow at an annual rate of 1.0% to 1.5% over the next five years. And the annual electric demand is expected to grow at a rate of 2.0% to 3.0% over the next five years in the company’s electric utility service territories. The total therm deliveries of natural gas are expected to grow at an annual rate of approximately 1.6% for the combined gas operations of Wisconsin Electric and Wisconsin Gas over the five-year period till 2010.The company could leverage the growing demand to drive its topline growth.

Rate increases

In July 2005, the company filed an electric and steam price increase request with the Public Service Commission of Wisconsin (PSCW). Under a limited rate proceeding, the company requested an increase in electric rates of $143.6 million for 2006, and an $8.8 million total increase in rates for steam over the two year period of 2006 and 2007. The requested electric rate increase included costs associated with the continued investment in Power the Future strategy; recovery of transmission costs incurred; additional sources of renewable energy; and a rate freeze for day to day operations of the electric system until 2008.
In October 2005, WEC filed a letter with the PSCW to include the additional increased cost of natural gas (in 2005) used for generation of electricity in the company’s pending 2006 pricing request. The PSCW considered these additional costs and approved an increase in electric rates of $222.0 million in January 2006. In addition, the PSCW approved an increase in steam rates of $7.8 million or 31.5% to be phased in over the two year period of 2006 and 2007. These rate increases became effective on January 26, 2006 and are expected to boost the company’s revenues in the short term.

Threats

Rising coal and natural gas prices

The company and its subsidiaries largely use coal and natural gas to generate electricity. Coal accounted for 57.6% of total generation capacity in 2005, while natural gas accounted for about 3%. The price of both these commodities has been rising in the last three years. The average spot price for natural gas at the Henry Hub rose from $5.2 per thousand cubic feet (mcf) in September 2004 to $6.33 per mcf in June 2006. Natural gas prices are likely to rise substantially through 2007. Increased natural gas costs increase the risk that customers will switch to alternative sources of fuel or reduce their usage.
Prices of coal too have increased. The price of Central Appalachia coal (one of the key coal supply bases in the US) was, towards the end of 2004, at its highest level in more than a decade at $65 per ton versus $30 per ton in 2002. Although coal prices have recently come off highs, they are still substantial at $50 per ton in June 2006. The company’s total operating expenses increased by about 13% in fiscal 2005, and its fuel and purchased power costs increased by about 31%. Rising coal and natural gas prices are likely to put pressure on the margins of the company.

Rising US interest rates

The US, the company’s market has seen 17 successive interest rate hikes over the past few years leading to the current high of 5.25%. Inflation fears in US may see another raise in the short-term. A one-percentage point change in interest rates would cause the company’s annual interest expense to increase or decrease by approximately $4.6 million before taxes from short-term borrowings and $1.9 million before taxes from variable rate long-term debt outstanding. This in turn could negatively affect its financing costs and offset some of the positive developments in the US for the growth of the company.

Environmental regulations

WEC is subject to several environmental regulations relating to air emissions such as carbon dioxide, sulfur dioxide, nitrogen oxide, small particulates and mercury, water discharges and management of hazardous and solid waste. The company incurs significant expenditures for the installation of pollution control equipment, environmental monitoring and emissions fees. Moreover, the company’s coal fired power generation capacity accounted for about 57.6% in 2005. Due to this, it may have to reckon with higher environmental compliance costs in the coming years
because of higher emissions from coal generation than clean-burning fuels such as natural gas.
WEC may also be forced to replace its coal fired generation capacity with clean power generation capacity at a considerable cost in the coming years. For instance, the company’s 225-megawatt coal-fired plant was recently replaced by Port Washington Generating Station, which is a natural gas combined-cycle unit.

Environmental compliance costs of Wisconsin Electric were approximately $153 million in 2005 compared with $78 million in 2004. These expenditures are expected to be $83 million during 2006, reflecting nitrogen oxide (NOx), sulfur dioxide (SO2) and other pollution control equipment needed to comply with the US Environmental Protection Agency (EPA) regulations. Greater environmental awareness and stringent regulations could lead to higher operating expenses and capital expenditures by the company for environmental compliance. This will adversely affect the operating margins of the company.

Williams-Sonoma, Inc. – SWOT Analysis

Williams-Sonoma is a multi-channel retailer of lifestyle products, focused primarily on the home furnishing and accessories. Williams-Sonoma markets its products through multiple sales platforms such as retail stores, catalogs, and internet. Multiple retail channels increases proximity with customers, which in turn, would lead to top line growth. However, the US home furnishings store industry is fragmented with 50 largest companies comprising 70% of the industry sales.The company primarily competes with players such as Bed Bath & Beyond, The Home Depot, and Linens ‘n Things. Increasing competition could affect Williams-Sonoma’s margins and market share.

Strengths

Weaknesses

Multiple sales platform Strong portfolio of brands Strong infrastructure

Declining profitability Law suit

Opportunities

Threats

Brand revitalization strategy Expanding store base Increasing online sales

Intense competition

Slowdown in US housing market

Low consumer confidence

Strengths

Multiple sales platform
Williams-Sonoma markets its products through multiple sale platforms such as retail stores, catalogs and internet. As of January 2008, the company operated 600 retail stores in 44 US states, Washington, D.C, and Canada. This includes 256 Williams-Sonoma, 198 Pottery Barn, 94 Pottery Barn Kids, 27 West Elm, nine Williams-Sonoma Home and 16 outlet stores. An extensive store network helps it cater to a varied consumer needs and segments and thus create customer loyalty.
Williams-Sonoma also operates in the DTC channel through web portals and catalogs. Williams-Sonoma sells its products from various merchandise concepts through six e-commerce websites.These include williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com, and wshome.com.

The internet continued to be the fastest growing shopping channel, with revenues increasing 19% to $1,103.8 million in FY2008. Online sales, while offering that extra convenience to customers, also improve a company’s margins by cutting down its operating costs. Williams-Sonoma currently operates seven mail-order catalogs.These cater merchandise concepts including Williams-Sonoma, Pottery Barn, Pottery Barn, Kids, Pottery Barn, Bed and Bath, PBteen, West Elm and Williams-Sonoma Home. These websites and catalogs create awareness about its products amongst customers. Multiple retail channels enable the company to enhance its reach, cater to a wider customer base and meet their diverse needs efficiently.

Strong portfolio of brands
Williams-Sonoma’s strong brand portfolio caters to different niche of the home furnishing and accessories industries. The company’s core brands, Williams-Sonoma, Pottery Barn and Pottery Barn Kids, cater to the upper-middle-class and higher-end consumers.

These brands offer a slew of products for the diverse needs of customers.Williams-Sonoma focuses on kitchen-related cookware and other products including pots, pans, cookware, knives, storage containers and small electrical appliances.Williams-Sonoma stores also carry an assortment of table linens, flatware and glassware. These stores also offer private label products including various ‘ingredients’ like oils and sauces. While Pottery Barn caters to the casual home furnishings and table accessories needs of the customers.

Pottery Barn stores sell oversized, stuffed chairs, candles, mirrors, frames, pillows, blankets, rugs and window treatments. Pottery Barn Kids is an extension of the Pottery Barn concept and retails children’s furnishing and accessories. Pottery Barn Kids also offer the option of customization of products. These brands help the company cater to different requirements of its core customers.
Williams-Sonoma’s emerging brands, PBteen, West Elm, and Williams-Sonoma Home, cater to separate customer base. PBteen targets teenagers with its bright colored, sport themed, customized and other theme-based lifestyle products. West Elm is different from the company’s rest of the brands. West Elm’s products are more simple and modern than what is usually found in a Pottery Barn store. The merchandise is priced at ‘mass market’ points. Williams-Sonoma Home targets high-end customers with its more formal furniture and home decor products.The company’s strong portfolio of brands enables it to cater to the diverse needs of customers. Such a portfolio, focused on various demographic segments and varied customer needs, provides a competitive advantage.

Strong infrastructure
Williams-Sonoma’s retail and DTC operations are well supported by its distribution centers located in the US. As of February 2008, the company’s distribution centers include: Olive Branch, Mississippi, occupying a floor-space of 3,275,000 square-feet; Memphis, Tennessee , occupying a floor-space of 1,523,000 square-feet; City of Industry, California , occupying a floor-space of 1,180,000 square-feet; Cranbury, New Jersey, occupying a floor-space of 781,000 square-feet; and South Brunswick, New Jersey , occupying a floor-space of 418,000 square-feet; Williams-Sonoma also forms alliances with third parties for its offsite distribution center requirements. Strong distribution and logistics ensure timely replenishment and delivery of stock.
The company further strengthened its infrastructure to support the growth of its core and emerging brands in 2008. In supply chain operations, the company witnessed good results by in- sourcing east coast operations in FY2007. It improved the delivery experience of customers and reduced furniture return rates. Further, in FY2008, the company in-sourced its west coast furniture hub operations to improve its process.

In addition, in FY2008, the company implemented a new retail inventory management system in the Pottery Barn, West Elm, and Williams-Sonoma Home brands. This system allows the company to optimize the flow of inventory and improve the in-stock position in retail stores. Such initiatives would ensure the long term sustainability of the company. Strong support infrastructure ensures timely delivery of products and indicates efficient inventory management.

Weaknesses

Declining profitability
The profitability of the company has been declining over the past three years. Though the revenues of the company grew at a modest rate over the past three years, the company has witnessed declining profitability from 2006 onwards. The company’s operating profit and net profit declined from $345.1 million and $214.9 million in 2006 to an operating profit and a net profit of $313.4 million and $195.8 million in 2008. In addition, the company’s operating cash flows declined from $348.4 in 2006 to $245.4 in 2008.

The company’s operating profit margin and net profit margin declined to 7.9% and 4.9% in the FY2008 from 9.7% and 6.1% in 2006, respectively. Decline in profitability, operating cash flows and margins could hamper expansion plans which could erode the investor confidence in the company.

Law suit
The company faced copyright infringement suit in 2008. In June 2008, Ms. Weinrib, a New York designer sued Williams-Sonoma for copyright infringement claiming the retailer is selling carpets that are “virtually indistinguishable” from rugs featuring designs she has copyrighted.

The suit, which was filed in US District Court in Manhattan, claims the Moorish Tile Rug and Taksimi Tile Rug sold by Williams-Sonoma through its catalog and website ‘knowingly and willfully copied’ two of her copyrighted Brooke Carpet Design rugs. The suit also claims that the defendants Pottery Barn and West Elm which are owned by Williams-Sonoma, have been able to pass off and sell their respective carpets at a cheaper price bearing reproductions of copyrighted designs without permission or authorization of the plaintiff.

It also alleges the defendants had access to Weinrib’s copyrighted Brooke Carpet Design rugs prior to creation of their copies. The suit argues that unauthorized sale of carpets that are ‘strikingly similar’ to those designed by Weinrib have caused and will continue to cause irreparable injury to plaintiff unless enjoined by this court.

Ms. Weinrib has asked the court to stop Williams-Sonoma’s businesses from directly or indirectly infringing on her copyrights and is seeking a halt to the sale and promotion and a recall of any offending products. She is also seeking actual damages to be determined at trial plus all profits, gains and advantages derived by copyright infringement. Such incidents not only affect the company’s business but also damage its brand image and consumer loyalty.

Opportunities
Brand revitalization strategy
Williams-Sonoma is working towards restoring its brand after the dismal performance of its largest brand, Pottery Barn, in 2007. For this purpose, the company has adopted a five pronged strategy. The company intends to offer innovative, unique products to its core customers. It not only seeks to bring differentiated products in the market but also narrow down the time lag between conceptualization and commercialization. This would allow the company to gain the first mover’s advantages of greater brand recognition and market share by arriving ahead of the competition and capitalizing on the changing trends. Williams-Sonoma is also improving its marketing and visual merchandising for a more exciting shopping experience. Williams-Sonoma intends to ensure the ‘right balance of quality and price’, and is testing new shipping charges to attain the same. The company is stressing on value to attain competitive advantage. It is reworking on its product display and presentation in its mid-sized store units. This includes remixing the assortment, re-allocating floor space among categories, and improving in-store merchandising. The company is also testing new concepts in its stores such as the Outdoor Book and the Bed + Bath stores. These initiatives will not only revive the company’s brand equity in the market but also help acquire new customers, enhance its market position, and generate incremental revenues.
Amongst all the initiative, Williams-Sonoma is primarily focusing on pricing. The company believes that pricing is the key factor that would help it attain competitive advantage. In line with this strategy, the company reduced the shipping rates of Pottery Barn products. Williams-Sonoma adjusted the shipping rates in its 2008 spring catalog. Reducing shipping rates could lend towards ‘Pottery Barn’ brand revitalization. A brand revitalization strategy would enable William Sonoma acquire new customers and also translate to top-line growth.

Expanding store base
Williams-Sonoma intends to increase retail leased square footage by approximately 8% in fiscal 2009. This involves adding 29 net new stores, including 31 new stores such as 12 West Elm, 7 Pottery Barn, 7 Williams-Sonoma, 2 Pottery Barn Kids, 1 Williams-Sonoma Home and 2 Outlet. Besides adding new stores, the company also plans to expand or remodel additional 20 stores. This includes 11 Williams-Sonoma, 7 Pottery Barn and 2 Pottery Barn Kids. The average leased square footage for new and expanded stores in FY2009 will be approximately 17,000 leased square feet for outlet, 16,400 leased square feet for Pottery Barn, 15,300 leased square feet for West Elm, 13,000 leased square feet for Williams-Sonoma Home, 9,600 leased square feet for Pottery Barn Kids and 7,100 leased square feet for Williams-Sonoma. The expanding store base would ensure close proximity with customers and create brand awareness. In addition, stores help in building customer relationship and loyalty owing to personal touch, shopping ambience, and tangible customer experience.

Increasing online sales
Online shopping has steadily grown in popularity in the US. The online retail channel generated revenues of $114.2 billion in 2006, growth at a CAGR of 26.4% during 2004-2006. In 2006 alone, the US online retail channel grew by 32.8%. Given the low operational costs, the online sales channel
has become a lucrative option to many retailers. The US online retail sales are expected to register a similar growth rate over the period 2006-2011 to reach a value of $386 billion by 2011.
In keeping with this trend, Williams-Sonoma is putting high emphasis on direct marketing in order to enhance its customer reach and optimize circulation with customer-specific versioning. In FY2008, the company improved its online sales operations by implementing new functionality in DTC marketing systems, which enabled company to reduce catalog circulation and improve the relevancy of its on-line marketing. In e-commerce, the company launched its first “next generation” website in the Williams-Sonoma brand. Further, in 2008, the company announced plans to implement similar features and functionality to other brands. Through these initiatives, Williams-Sonoma plans to accelerate its e-commerce sales. Online sales while offering that extra convenience to customers, also improve a company’s margins by cutting down its operating costs.

Threats

Intense competition
The US home furnishings store industry is fragmented with 50 largest companies comprising 70% of the industry sales.The US home furnishings industry includes 22,000 stores with combined annual revenues of over $23 billion. Williams-Sonoma faces intense competition from local, regional and national retailers. The company faces competition from various types of retail stores including department stores, specialty stores, mail-order retailers, discount and mass merchandize stores, and national chains. Most of Williams-Sonoma’s brands compete directly with traditional furniture stores.The company primarily competes with players such as Bed Bath & Beyond, The Home Depot, and Linens ‘n Things.These companies are undertaking intense promotional campaigns to increase their brand image and visibility in the market.
Williams-Sonoma’s toughest competitors are small players such as Mom & Pop shops and Crate and Barrel. Players such as Mom & Pop shops and Crate and Barrel focus on a particular niche in the home furnishing industry and thus establish a strong customer relationship and loyalty. Intense competition could restrict market share growth and lower the company’s margins as it undergoes pricing pressures. In addition, there is an increasing competitive pressure in the mass-market home furnishings market mainly due to the entry of major departmental stores such as Wal-Mart, Kmart, Target and JC Penny. Increasing competition could affect Williams-Sonoma’s margins and market share.

Slowdown in US housing market
The US housing market recorded a slowdown in 2005. Housing prices have moderated in several markets, but an expected market-wide meltdown did not happen. The US housing market declined further in 2007. Declining prices coupled with an increase in defaulters has led to a decline in home loan lenders. This caused a slump in the US housing market in 2007. Second-hand house sales declined by 2.6% to reach around six million in April 2007, as compared to April 2006.The reduction

was considerably lower than the forecasted figure of 6.2 million. In the north-east region of the US, the fall in the sales of second-hand house was around 8.8%.
The prices for an average house were $220,900 in the US in April 2007, as compared to $222,600 in April 2006. The backlog of the unsold homes in the US was 4.2 million in May 2007. This market scenario could result in further decline in the US housing market and is expected to continue even in 2008. A weak housing market is likely to reduce demand for home improvement products. As a result, revenues of retailers such as Williams-Sonoma are likely to come under pressure.

Low consumer confidence
Consumer Confidence in the US declined in September 2007, owing to low home values, weakening labor market and harder borrowing standards. Consumers spending on home and holiday furnishings declined from $115 (per customer) in December 2006 to $94 (per customer) in December 2007, owing to slumping home sales, tighter credit standards and rising fuel prices. It has been estimated that consumer spending on furniture and bedding grew by approximately 1.5% in 2007, worst since 2001. According to the Conference Board, the index fell to 99.8 in September 2007 from an adjusted 105.6 in August 2007.

The consumers’ appraisal of the present-day conditions declined further in September 2007. Consumers stating that the conditions were good declined from 26.2% in August 2007 to 25.7% in September 2007, and those saying that the conditions were bad increased from 16.3% to 17.9%, during the same period.

Consumers with a negative outlook towards job market increased to 22.1% in September 2007 from 19.7% in August 2007, and those with a positive outlook decreased to 25.7% from 27.5% during the same period. The expectations for the next six months declined with consumers anticipating worse business conditions rising to 11.8% from 10.2%. A decline in consumer confidence could adversely affect the company’s business.

Whole Foods Market, Inc. – SWOT Analysis

Whole Foods is one of the world’s largest retailer of natural and organic food products.Whole Foods recoded strong financial performance in the recent years. In 2007, the company’s revenues grew by 17.6% over 2006, to reach $6,591.8 million, in 2007. The Strong revenue growth has helped the company to pursue its expansion plans and improve its bargaining power in the market. However, a slowdown in the US economy could adversely affect the sales of the company in the long run.

Strengths

Weaknesses

Strong revenue growth Focused growth strategy Wide product portfolio

Weak international operations Conservative international policy Increasing rental expenses

Opportunities

Threats

Higher demand for organic products

Expansion in the UK

Growth in private label products

Increasing competition Labeling and other regulations Slowdown in the US economy

Strengths

Strong revenue growth
Whole Foods recoded strong financial performance in the recent years. In 2007, the company’s revenues grew by 17.6% over 2006, to reach $6,591.8 million, in 2007. The company’s revenues grew at a compounded annual growth rate CAGR (2005-2007) of 18%. The increase in revenue was driven by 14% square footage growth, excluding acquired Wild Oats locations, and comparable store sales growth of 7.1%. Whole Foods recorded sales per gross square foot of $923 in 2007, an increase of approximately 7% over 2006. The Strong revenue growth has helped the company to pursue its expansion plans and improve its bargaining power in the market.

Focused growth strategy

Whole Food’s focuses on expansion, primarily through new store openings. During 2007, the company opened 21 new stores across the US and Canada. For instance the company opened its first store in Maine, the US, in February 2007. The store has a retail space of 48,000 square feet which offers many unique features not found at an average supermarket, including a coffee bar, an all-natural taffy-pulling machine, a sit-down sushi bar, and a trattoria with an oven featuring hot Italian entrees and a variety of items grilled to order.The company continued its growth strategy in 2008, by opening its new store in Napa, California, in January 2008. The new store also includes a wine bar. Further, the company has signed leases for 87 stores scheduled to open through fiscal year 2010 totaling approximately 4.5 million square feet, or approximately 48% over the existing selling space.
The company has also grown through mergers and acquisitions, with approximately 32% of its existing square footage coming from take-over’s. In August 2007, the company merged with Wild Oats markets based in Boulder, Colorado Since, the natural foods retailing industry is highly fragmented and comprised of many small local and regional chains, mergers and acquisitions have provided the company access to desirable markets, locations and experienced team members.
A focused growth strategy has helped the company to reach a wide customer-base and diversify its revenue streams.
Wide product portfolio
The company offers a broad product selection in all its stores, including seafood, grocery, meat and poultry, bakery, prepared foods, specialty (beer, wine and cheese), whole Body (nutritional supplements, vitamins, body care and educational products such as books), floral, pet products and household products.

In its larger stores (between 60,000 to 80,000 square feet), it stocks an even larger selection of organic food and non-food products. These stores also have catering services where customers can purchase made-to-order foods. Moreover, the company’s emphasis on fresh food gives the company an edge over its competitors who usually just offer packaged foods. Wide product portfolio allows the company to address multiple customer segments, apart from insulating it from any significant fall in demand for any specific product or segment.
Weaknesses

Weak international operations

The company has weak international operation with just three stores in Canada, and six in the UK. The company’s operations in the UK and Canada are not yet large enough to derive economies of scale in purchasing and distribution, resulting in relatively high product prices. These higher prices erode the competitiveness of the company relative to its established international rivals, who have larger scale operations and, therefore, leaner economics.Whole Foods’ weak international operations are likely to prove a drain on the resources of the company.

Conservative advertising policy

Whole Foods relies heavily on word-of-mouth publicity, a disadvantage in comparison to its competitors who aggressively use print, television and online media. The company spends meager amounts on advertising and marketing relative to its competitors. In 2007, the company spent 0.5% of its total revenues on advertising. Since, demand for organic foods is increasing; there is scope to further step up the growth rate through aggressive advertising assuming that consumer awareness of organic products is still relatively low. Competition in the organic product segment is also increasing as more retailers begin to offer organic products. With Whole Foods still relying heavily on word-of-mouth publicity, its new stores may take longer than usual to break even.

Increasing rental expenses
Whole Foods is committed under certain capital leases for rental of equipment and certain operating leases for rental of facilities and equipment. In the recent years company’s rental expenses has increased significantly. During 2007, the company’s rental expense was approximately $201 million as compared with that of $99.9 million in 2004. Moreover the company also paid contingent rental of approximately $9.9 million in 2007 as compared with that of $4.8 million in 2004. Increasing rental expenses have a negative impact on the margins of the company.

Opportunities

Higher demand for organic products
Natural and organic food products segment is one of the fastest growing categories in food retailing. There is an explosive growth in the demand for organic foods because of the increasing preferences among consumers for healthy food. The US, Germany, and the UK would be the key geographical areas of growth for the organic food market.The US organic food market grew by 12.3% in 2006 to reach a value of $15.9 billion.

The US organic food sales are expected to reach almost $24 billion in 2010.The organic food market in Germany is anticipated to grow at a CAGR (2007–2011) of 12%. Japan will be the leading Asia in terms of organic food market revenue and its market is anticipated to grow at a CAGR (2007–2011) of 29.8%.

Although organics represent just about 2% of the total food and beverage sales in the US, the market is growing 20% annually. More and more consumers across the US prefer natural, fat-free and healthy food products. Food items containing trans-fat are losing market share to low calorie, low fat, natural and organic products. Increasing customer preference for organic foods is likely to favorably impact the company’s sales, given its leading market position in the segment.

Expansion in the UK
Whole Foods entered the UK with the acquisition of Fresh & Wild in 2004. Further, in June 2007 the company opened its first flagship store in London. The 80, 000 sq ft store, could be a major step in company’s expansion initiatives outside US. The company currently operates six stores in the UK including new store and the stores acquired from Fresh & Wild.The sales of organic food and drinks in the UK have doubled in recent years and approximately two thirds of British adults consume organic food and drinks.The UK market for organic food and drinks is expected to increase by 72% to reach a value of £2 billion by 2010. The strong growth in the UK organic food and drinks market would eventually translate into higher demand for the company’s products.
Growth of the UK organic food and drinks market provides an opportunity for Whole Foods to expand its existing operations, resulting in economies of scale in supply chain.

Growth in private label products
Private label products in the US are witnessing a strong growth in sales. Consumer spending on private label food, drinks and personal care in the US is expected to rise from $108 billion in 2005 to $137 billion by the end of 2011. Private brands now account for one of every five items sold in US retail stores, drug chains and mass merchandisers. Approximately 41% of the US shoppers currently buy private labels as compared to 36% five years ago. Private labels account for 20% of the items sold in US supermarkets, drug chains, and mass merchandisers. They account for more than $50 billion of current business at retail. It is estimated that US groceries shoppers derive approximately $15.8 billion in annual savings by purchasing private label products.
Whole Foods’ private label offerings feature over 2,000 stock keeping units (SKUs). The company markets its private label products under the following corporate brands: 365 Everyday Value, 365 Organic and the Whole Brands family. Additionally, the company has number of store-made and regionally-made fresh items sold under the Whole Foods Market label. It also offers specialty and organic coffees and teas through its Allegro Coffee Company subsidiary.

The 365 Organic Everyday Value brand provides the benefits of organic food at lower prices. The company has expanded this program to non-grocery departments, including a line of organic fresh vegetables.Whole Kids Organic is an organic food product line developed for children under the Whole Kids label. Whole brands include Whole Kitchen (frozen grocery), Whole Treat (frozen desserts and candies), Whole Catch (frozen seafood items), Whole Fields (produce and produce support items), Whole Pantry (pantry items such as flavored olive oils and vinegars), Whole Creamery (cheeses), Whole Dairy (eggs) and Whole Ranch (frozen burgers and franks).
Private label brands provide higher margins than branded products for the retailer and Whole Foods Market already has an established portfolio of strong private label brands.This increased acceptance of the private label products will have a favorable impact on the company’s margins.

Threats

Increasing competition
Whole Foods’ competitors include natural foods supermarkets, conventional and specialty supermarkets, other natural foods stores, warehouse membership stores, small specialty stores and restaurants. These businesses compete with it in one or more product categories. In addition, some traditional and specialty supermarkets are also expanding more aggressively in marketing a range of natural foods, thereby competing directly with the company for products, customers and locations. For example during 2006, Wal-Mart announced that it will focus on the organic segment. The retail giant aims to become the low-price leader in organics, not just in food but clothing, electronics and other household products. Wal-Mart has already doubled its organic range in fresh produce, dairy and dry food items during 2006.
Some of these existing and potential competitors have greater financial or marketing resources than Whole Foods, and may be able to devote greater resources to sourcing, promoting and selling their products. Increased competition may have an adverse effect on profitability as the result of lower sales, lower gross profits and/or greater operating costs such as marketing.

Labeling and other regulations
As the company operates in the natural and organic foods market, its stores and products are subject to several laws and regulations relating to health, sanitation and food labeling. Several federal agencies and departments including the Food and Drug Administration (FDA), the Federal Trade Commission (FTC), the Consumer Product Safety Commission (CPSC), the United States Department of Agriculture (USDA) and the Environmental Protection Agency (EPA) set critical standards for the manufacture, processing, formulation, packaging, labeling and advertising of products.
Failure to comply with these standards could result in penalties and seizure of marketing and sales licenses.These regulations also result in additional compliance costs, which could reflect in reduced margins.

Slowdown in the US economy
The US is the key market for Whole Foods. According to the Organization for Economic Cooperation and Development (OECD), GDP growth in the US is expected to slowdown in 2008.The GDP growth of the US economy is forecast to slow down from an estimated 3.3% in 2006 to 1.9% in 2008. A slowdown in the US economy would depress the purchasing power of the retail customers, which in turn will depress revenue growth and reduce margins of Whole Foods. Slowdown in the US, the key market for Specialty retail chains such as Whole Foods Market, will put pressure on the revenues of the company.

Weyerhaeuser Company – SWOT Analysis

Weyerhaeuser, an integrated forest products company, is engaged in the growing and harvesting of timber; manufacturing, distribution and sale of forest products. It is also involved in real estate construction, development and related activities.The company has a diverse product portfolio which protects the company from adverse market conditions in any product segments. However imposition of countervailing and anti dumping duties on softwood lumber is exerting pressure on operating margins of the company.

Strengths

Weaknesses

Substantial manufacturing capability Broad product portfolio Higher Returns

Legal proceedings

Highly dependent on third parties

Overdependence on US

Opportunities

Threats

Growing demand for OSB Expanding home improvement market Booming packaging industry in emerging markets

Environmental regulation Lumber export taxes The Domtar transaction

Strengths

Substantial manufacturing capability

The company has substantial manufacturing capability for manufacturing of wood products, cellulose fibers and white papers, and containerboard, packaging and recycling.The wood products, cellulose fibers and white papers, and containerboard, packaging and recycling business segment has manufacturing facilities throughout the US and Canada. In the wood product segment the company has 28 manufacturing facilities for Softwood Lumber, two facilities for plywood, seven for veneer, nine for oriented strand board, eight for hardwood lumber, six joist and eleven for engineered solid section. The company has 6 manufacturing facilities for pulp, and one for liquid packaging board. The company’s huge manufacturing facilities enables it to meet the market demand.

Broad product portfolio

Weyerhaeuser has a broad product portfolio and is not over dependent on any of the business segments. Also all the segments are engaged in selling different type of products. In FY2007, the company’s largest segment, wood products, accounted for 34.9% of the total revenues, while other segments like containerboard, packaging and recycling (31.7%), real estate (14.5%), cellulose fiber (11.2%), and timberlands (5.6%) together accounting for 65.1% to the overall revenues. A broad product portfolio protects the company from adverse market conditions in any product segment which reduces its business risk.

Higher Returns

Weyerhaeuser experienced higher returns in FY2007. For FY2007, the company’s average returns on equity, asset, and investment were at 9.9%, 3.3%, and 0.1%, considerably higher than the previous year’s average of 5%, 1.7%, and 0% respectively. Similarly for the same period the company’s net margin at 4.8% was higher than the previous year’s average of 2.4%. Higher returns indicate operating efficiencies that help the company to enhance its profitability. Increasing net margin indicates the efficient cost management of the company. Higher returns and net margins enable the company to make its financial position strong.

Weaknesses

Legal proceedings

The company is involved in a number of legal proceedings. In FY2002, the Bankruptcy Court held the company liable for breaches of warranty and in the second quarter of FY2005 imposed damages of approximately $470 million. The company appealed the liability and damages determinations to the US District Court for the Northern District of Georgia, and posted a bond of $500 million.

A consolidated lawsuit was filed in US District Court in Pennsylvania in FY2006 seeking class action status for persons and entities that purchased oriented strand board (OSB) directly from Weyerhaeuser, Louisiana-Pacific, Georgia-Pacific, Potlatch, Ainsworth Lumber, Norbord and J.M. Huber, from 2002 through the present.The lawsuit alleges the defendants conspired to fix and raise OSB prices in the US during the class period and as a result, class members paid artificially inflated prices for OSB during that period. Additional lawsuits have also been filed and have been consolidated in the same court for discovery purposes on behalf of indirect purchasers of OSB in different states that have laws permitting such actions on behalf of indirect purchasers.The company’s involvement in a number of legal proceedings and adverse judgments in certain legal proceedings had a material adverse effect on the company’s financial condition.

Highly dependent on third parties

The company’s business is highly dependent on the transportation of a large number of products, both domestically and internationally. It relies primarily on third parties for transportation of the products manufacture and/or distribute as well as delivery of raw materials. In particular, a significant portion of the goods manufactured and raw materials that the company uses are transported by railroad or trucks, which are highly regulated.

Any failure of a third-party transportation provider to deliver raw materials or finished products in a timely manner could harm the company’s reputation, customer relationships and have a material adverse effect on financial condition and results of operation. In addition, an increase in transportation rates or fuel surcharges could materially adversely affect sales and profitability of the company.

Overdependence on US

Although the company has a global presence but its largest share of revenue is generated in the US market. The US accounted for around 81.5% of the company’s sales in the FY2007 and 83.1% in FY2006. The major competitors have more equitable distribution of revenues than the company. This overdependence makes the company vulnerable to the economic fluctuations of the US and might negatively affect its revenues.

Opportunities

Growing demand for OSB

Oriented strand board (OSB) has been fast replacing traditional plywood in North America, in FY2007. OSB is used in residential and commercial construction for walls, roof panels, sub floors, single-layer floors, structural insulated panels, floor joists and rim board. In North America it has captured 75% of the structural panel market for key applications. By 2006, production capacity in North America exceeded 24 million cubic meters.

The growth of production in the US was particularly strong, at about 5.5%, while production of Canadian mills advanced by slightly less than 5%.The total North American OSB annual production is projected to increase by approximately 8.0 billion square feet in the period from FY06-10 while plywood production is projected to decline by 7.8 billion square feet for the same period.The company being a producer of OSB could benefit from the growing demand for OSB.

Expanding home improvement market

The long-term outlook for the home improvement products market remains strong. Total market growth in FY2006-09 is expected to average 3.4% per year in constant dollars.With customer service centers across North America, Weyerhaeuser provides building materials and support to lumber dealers, home improvement warehouses, industrial manufacturers and the manufactured housing and recreational vehicle industries. High growth in the home improvement market would boost demand for the company’s products, thus enhancing its revenue and market share.

Booming packaging industry in emerging markets

The global packaging market is expected to grow at an annual rate of over 4% through FY2004-09. In particular, emerging markets such as India are expected to grow at high rates. The company exports its engineered building materials and industrial hardwood products to Europe and Asia.The

Indian packaging industry is set to reach $13 billion in FY09, an annualized growth of 14.2%. The packaging industry in the Central and Eastern Europe is also expected to witness high growth. Russia is likely to remain the region’s largest consumer, reaching $18.5 billion in FY2009. Expansion in emerging markets such as Australia, Europe, India, China and Japan would enable the company to reduce its dependence on North America.

Threats

Environmental regulation

The company’s business is subjected to numerous environmental laws and regulations.The company is involved in the environmental investigation or remediation of numerous sites.The company spent approximately $10 million in FY2006, and expects to spend equally in FY2008, on environmental remediation of these sites. Also, the United States Environmental Protection Agency (US EPA) has introduced regulations dealing with air emissions from pulp and paper manufacturing facilities, including regulations on hazardous air pollutants that require use of maximum achievable control technology (MACT) and controls for pollutants that contribute to smog and haze. The US EPA has also adopted MACT standards for air emissions from wood products facilities and industrial boilers. Compliance with these regulations will lead to higher costs and lower margins.

Lumber export taxes

The company paid significant lumber export taxes and/or countervailing and antidumping duties. In 2001, the Coalition for Fair Lumber Imports filed two petitions with the US Department of Commerce and the International Trade Commission claiming that production of softwood lumber in Canada was being subsidized by Canada and that imports from Canada were being dumped into the US market (sold at less than fair value). The Coalition asked that countervailing duty (CVD) and anti-dumping tariffs (AD) be imposed on softwood lumber imported from Canada.

During the FY2002-06, the company paid a total of $370 million in deposits for CVD and AD duties.

In 2006, the Canadian and the US governments announced a final settlement to this long-standing dispute. However, the Canadian softwood lumber facilities have to pay an export tax when the price of lumber is at or below a threshold price. The export tax could be as high as 22.5% if a province exceeds its total allotted export share. It is also expected that countervailing duty and antidumping tariffs, or similar types of tariffs could be imposed on the company in the future. The company may experience reduced revenues and margins in the softwood lumber business as a result of the application of the settlement agreement.

The Domtar transaction

The company combined its fine paper business and related assets with Domtar, a Canadian corporation, to form a new company, Domtar Corporation (Domtar). The transaction was tax-free to the company and its shareholders. In connection with the transaction, the company entered into a tax-sharing agreement with Domtar, for a two-year period, followed by closing of the transaction to avoid taking certain actions that might adversely affect the tax-free status of the transaction. To an extent, the tax-free status of the transaction was lost because of actions taken by Domtar. Domtar is generally required to indemnify the company for any resulting tax-related losses incurred. In future, the event conduct by Domtar would affect the tax-free status of the transaction and Domtar would unable to meet its obligation to indemnify the company and shareholders.