This case study depicts the development of the start-up Beautiful Legs by Post which is engaged in the mail order business of selling women's tights. As MBA students at INSEAD in France, Elizabeth Preis and Dickon Addis, the company's principals, created a business plan to raise money which they used after graduating.
William D. Bygrave
Harvard Business Review (BAB071-PDF-ENG)
January 01, 2000
Case questions answered:
- Why did Elisabeth choose tights as the first product?
- Evaluate the Team.
- What are the keys to success for Beautiful Legs by Post?
- Would you invest in this deal? Why? / Why not?
- What might happen if they fail to raise £110,000 in the next 30 days?
- What is the possible value, and return to an investor based on the existing assumptions in the case?
- As a VC firm, would you invest? Explain.
- Would a large strategic partner invest? Explain.
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Beautiful Legs by Post Case Answers
Question 1: Why did Elisabeth choose tights as the first product?
Elisabeth got the idea to pick tights as the first product because of her previous experience in Bloomingdale’s and her exposure to several products and purchase behaviors of her target market segment; the working woman.
- Tights are usually a high margin item (over 40%). Companies have high markups on tights and no markdowns on old items. There are no markdowns because work tights are basic and they don’t go out of style after some time.
- Tights have virtually zero return rate, which means that it is very unlikely for customers to return tights after a purchase is made. This is a characteristic of both traditional methods of selling tights and the new method of mail order. This is also especially true for the supplier that Elisabeth had chosen that guarantees a low percentage of faulty products and accepts returns in case of any faulty products returns.
- Tights are considered an impulse buy and woman don’t think ahead or plan for the purchase.
- Tights don’t break during delivery to customers since they are not fragile. Tights are also very light in weight so they are easy to deliver and fit in letterboxes of customers.
- Tights are a staple in working women’s uniform and working women tend to buy big amounts regularly.
- Customers don’t have brand loyalty when purchasing tights and so it would be easy for Elisabeth to penetrate the market of high-quality tights and attract new customers based on quality rather than brand loyalty.
Question 2: Evaluate the Team
The team is adequate to run a business together.
Both Elisabeth and Dickon have complementary sets of skills and experience.
Elizabeth is specialized in retailing and marketing whereas Dickon has broad experience in accounting, finance and logistics.
Both Elisabeth and Dickon has held managerial roles and therefore have leadership skills.
They decided to set the business up in London; Dickon knows the market in London really well since he lives and works there. Dickon will be able to advice Elisabeth on any matter pertaining to real estate in London or even conducting any type of business in London.
Elisabeth knows her target market really well since she herself is a working woman and has been exposed to women coworkers her whole career. She also knows the product well since she wears tights as a working woman. Moreover, she knows how to manage suppliers and supplies since she worked as a fashion buyer at Bloomingdale’s.
Dickon and Elisabeth both realize there is a gap in the market for mail order and Elisabeth has done previous research about it.
They are both fully qualified when considering their skills and their experiences and how complementary they are. Their skills don’t overlap and are sufficient to start and run the business. They both work well together since they have been working on this venture since they were MBA students together.
The risk borne by both of them is the same; they both invested the same amount of capital into the business and they are both fresh MBA graduates from the same university (INSEAD). Given that their risk exposure is similar, this decreases the odds of one of them quitting the venture too early.
Dickon is certainly capable in the position he has not quitting his job and starting from scratch. Will he adapt? Will he have the ability of an entrepreneur?
Nb of orders, frequency order, hit rate ( how many people buy from distributing a 100 catalogue), and friend of friend rate.
Question 3: What are the keys to success for Beautiful Legs by Post?
The keys to success of Beautiful Legs by Post are:
- The trend of women wearing skirts to work instead of pantsuits should continue and grow rather than the trend falling back to pantsuits like they did in the 80s.
- Beautiful Legs by Post have very targeted product offering and therefore, the number of working women should increase in the coming years rather than fall.
- Specialogues should gain trend in Europe rather than just USA.
- People in the UK and Europe should adapt to mail ordering rather than traditional forms of shopping.
- Women should continue to value quality when shopping rather than valuing price or brand loyalty.
- The supply chain should be efficient in delivering orders and in maintaining a high caliber of quality and guarantees of returns.
Question 4: Would you invest in this deal? Why? / Why not?
I would invest in this deal because I believe the return I would be receiving overweighs the risk I will be incurring.
- The team running the company (Elisabeth and Dickon) have good team skills and can work together effectively and efficiently. They have complimentary skills and roles. Also, the risk borne by both is similar so there is a low risk any of them will leave the venture.
- The service they are providing is special and there are no mail order companies in Europe and UK to be specific. Also, specialty catalogs are not prevalent in Europe. Beautiful Legs will be the first company with such service offering and this will help them secure a large market share.
- The product they are providing is high quality. Their supply chain seems to be very well organized; their suppliers are guaranteeing faulty returns and are accepting special terms to adjust to the firm’s changing needs.
- The trends in woman in the workplace is in their favor. More women are working (16% increase in 10 years’ period in North Europe) and the trend is for them to wear skirts and tights to work. Their dress code requirements and their need for convenience make them a good target for the company.
- Surveys conducted by Beautiful legs and by market intelligence industry reports support the belief that there is an underserved market in the UK and northern Europe in general.
- The threat of new entry to the mail order industry in the UK is very low. In case new entrants come, Beautiful Legs have a good exit strategy to hedge against it.
Finally, I would invest in this company because they have a valid growth strategy and exit strategy. Their growth strategy to expand into norther Europe will guarantee growing sales, earnings and brand exposure.
Question 5: What might happen if they fail to raise £110,000 in the next 30 days?
Elisabeth and Dickon need the 110,000 in order to mail the 120,000 catalogs they planned to mail in the span of November, January and February. In case they cannot raise the money necessary, they won’t be able to finance these mailings. They have already mailed 4000 catalogs using the seed money they invested on their own just to test the market response to the catalogs.
Catalogs are important to mail out because:
Beautiful Legs by Post’s marketing plan relies on people receiving catalogs and passing on the catalogs to their friends and family while recommending the quality of the product. Given that this case takes place in the 90s then people couldn’t get exposure to the company’s products from online sources; they had to have the physical catalog to browse and discover the products the company has to offer or the promotions that the company is running. Also, people couldn’t place their orders online on a website, they needed to call the numbers provided on the catalogs distributed.
For the above stated reasons, catalog distribution is the best way to raise awareness and demand for the product and failing to do so will jeopardize the company.
If they fail to raise 110,000 in the next 30 days, Elisabeth and Dickon would have to rely solely on the 4000 catalogs mailed and the response on them. Based on their calculations, a newly acquired customer will only generate positive revenues by the 6th order (before that, beautiful legs by post would be losing money per order). The 6th order in a year span is towards the end of the year given that they assumed that a customer would order an average of 8 times per year only (which is around every 1 month and a half or 45 days).
Therefore, the business will not be able to survive the costs they have to incur to acquire their new customers if they don’t receive the 110,000 in investment money.
Question 6: What is the possible value, and return to an investor based on the existing assumptions in the case?
According to the given financials, the EBIT for year 3 is £195,811, Price to earnings ratio is 7 times the price (according to their exit strategy). They’re requiring an equity investment of £30,000. The firm’s gross margin is 40% (which is quite high), ROI would be 60%. As for the possible value of the company would be equal to the founders cost of exist price: £1.372M.
Question 7: As a VC firm, would you invest? Explain
As a VC, I would not invest in the business. The reasoning is described below:
As a VC firm:
- We don’t have enough knowledge about the European market or the market in UK to be specific. None of us have lived there so we don’t understand how business is done there; we don’t understand purchasing behaviors or the gaps in the market that beautiful legs is trying to fill.
- We are familiar with the product offering; however, we are not familiar with the method of delivering and selling the product. We never worked with catalogs before so we don’t know how effective they are. We also don’t have the retail experience that is necessary to run a business like this.
Beautiful Legs by Post
- Dickon and Elisabeth both have the skills and experience required to manage the company effectively.
- They both presented the business plan in a very detailed and well researched manner which shows that they are committed to the business and that they have the managerial capabilities to run the business for a long time.
As a VC, I can see that the key people in the firm are present and that they have the background required to lead the company into success. Dickon and Elisabeth seem to be great teammates that are willing to stick together throughout the whole process.
The product that they are selling is basic and can be found anywhere; however, their distribution channel makes their business special.
Nobody have thought about this type of business in the UK because specialogues were not prevalent at that point in Europe; they were well known in USA but haven’t reached Europe. They didn’t create a new distribution channel they just brought the idea to the UK from USA and they are the first to do that.
Their new distribution channel is better for working woman because it solves their problem of convenience. This distribution channel isn’t cheaper because customers are now paying for delivery as well. It might be a faster way of buying tights because it allows the customer to buy bundles of the product by just calling the number at the catalog without having to physically go to a store to pick it up.
This new distribution channel will be able to solve problems of working women in both UK and northern Europe; surveys show that women in Germany and other northern European countries are highly interested in such service and are willing to try it.
The target market is correctly studied and understood. They want to target working women and so beautiful legs by post provided styles and colors that match the professional dress codes of women. They also understand how the customers make a decision; they understand that when women shop for tights, price falls second to quality. Elisabeth and Dickon have studied their market well and are targeting their customers by marketing the quality of their tights rather than by price cutting.
Customer acquisition is going to cost the company money for the first 6 order but after that, retaining the customer is easy and every order after that would become profitable for beautiful legs.
This is an attractive market because no direct competitors exist so far. The only competitors are indirect: grocery stores, variety stores and department stores. There is only one threating strong new entrant but in case that happens, beautiful legs has an exit strategy.
Context and Deals
The company would be facing risk of failure if they don’t receive their 110,000 pounds in investment money and if Pretty Polly enters the market. Other than that, the current context of the business poses low risk.
The 110,000-pound investment is very important because it will determine how many customers Beautiful Legs is able to reach through their catalogs. The more people they can mail the more orders they are likely to receive.
Beautiful Legs is aiming to sell 20% of the firm for 80,000 pounds and 30,000 in debenture stocks (total of 110,000). They have already invested their own money as seed money (total of 8,000 pounds).
If the investors decide to buy in the company, they will receive a share of the money the company receives upon selling their business. They are investing 110,000 pounds now for 20% and upon selling they will receive 274,400 (20% of 1,372,000 pounds).
- 1,372,000 is the expected value to sell the company after 3 years of operations.
Question 8: Would a large strategic partner invest? Explain
According to the below reasons, a large strategic partner won’t be optimistically investing in Beautiful legs by Post:
- It is true that both partners are experts in their fields, yet one cannot assume that both would be able to successfully work together on their own. Managing a company for the first time raises a lot of issues concerning its success and later, on its sustainable growth. Having no previous record of running a successful start-up on their own is quite alarming. As large investors, it is necessary to have a proven record of success for a start-up, in order to consider such a risky investment.
- Having a short period of time to make the deal also raises questions. 30 days is quite a short period of time for large strategic partners to meet the co-founders, analyze their business plan, study its feasibility, and finally make a decision on whether or not they should consider such an investment. Usually, large investors would require several months to decide on their future investments.
Question 9: Evaluate as best you can the sensitivity of the financial results to changes in the Hit Rate.
According to the given numbers in the case analysis: the hit rate is 1.5%, customer retention rate is 95%, average order size is 4, friend of friend “word of mouth” rate is 1.5% and Price to earnings ratio is 7 times the earnings. Kindly check our excel sheet attached for detailed analysis of the effects of these factors and their sensitivity. The results showed how this business is extremely sensitive to any drop-in response rate, order, and retention rate of 25%.