High-End and Luxury industries management – case study #2
Making sense of the “coefficient” in a distribution agreement?
Mastering product cost structure and the distribution agreement “cost waterfall”
Del Principe shoes
After successfully completing his degree at Politecnico di Milano, Ascanio del Principe entered the family business.
He is the younger of 4 siblings representing the third generation of a high-quality artisanal shoemaker located in
Parabiago, in the outskirts of Milano.
The founder of the company, Patrizio del Principe, Ascanio’s grandfather, conceived the “Calzaturificio Del Principe” as
an outsourcer, producing premium men’s laced shoes for important fashion brands. After having compared his small
company with more coveted competitors, Ascanio understood that his company has a very powerful asset: the heritage
of craftsmanship, a Critical Success Factor for each luxury brand.
As a consequence, he focused his Master Thesis on “how to turn a third party manufacturer of personal luxury goods into
a brand”, and immediately after graduation started working to turn the final dissertation into a real life project.
First of all, he asked to his friend Cecilia, a young lawyer specialized in Intellectual Property Rights (IPR), to properly
register the brand “Del Principe shoes”.
Second he downloaded from the AIDA database the last Financial Statements of 4 mid-sizes Italian players, manufacturer
of high-end shoes, and located in the famous Italian shoemaking districts:
- Fratelli Rossetti, located in Parabiago: 290 employees, 42M€ sales;
- Moreschi, located in Vigevano: 279 employees, 24M€ turnover;
- Fabi, located in monte San Giusto (Macerata): 334 employees, 30M€ sales;
- Giuseppe Zanotti, located in San Mauro Pascoli: 738 employees, 124M€ sales (in comparison with the first three,
this company is an “outsider” for several reasons – the size, the focus on women’s shoes, the fact of being
partly owned by LVMH – yet Ascanio wanted to check whether a designer brand focused on women’s shoes
would have more or less the same figures that we expect for a men’s shoe producer).
With 210 employees, he thought, the size of his company was comparable with F.lli Rossetti, Moreschi, Fabi. Yet the
turnover of just 15M€ the “turnover per employee” ratio was simply not good enough.
Third, he analysed the cost card related to the production of a pair of Derby shoes, the jewel in the crown of Del Principe
product line.
Fourth, he checked the slides of the course “High-End and Luxury Industries Management”, and in the lecture on “Luxury
Distribution – cost structure and distribution agreement” he found the typical cost structure of a distributor and an
interesting example of distribution agreement contract.
The growth strategy of Del Principe shoes necessarily starts from expanding to international markets signing distribution
agreements with
Help Ascanio
1. List the top 10 markets* in which he would like to launch the brand internationally, explaining the reasons of the
choice
2. Analyse the retail prices of the benchmark competitors for their reference shoe models in the target country,
and set your Recommended Retail Price (RRP) for Del Principe “Derby Classica” shoes, adequately commenting
your choice;
High-end and luxury industries management
Prof. A. Brun
3. Pick one of the countries in the above list and try to develop a realistic Distributor Cost structure (also checking,
e.g., the VAT % in that country etc); as a consequence, starting from the RRP defined at point 2, calculate the
Ex-Works (EXW) price to be applied to the distributor;
4. Complete the analysis of the cost card, in order to know the exact Cost of Good Sold (CoGS) for one pair of Derby
shoes; as a consequence, calculate the resulting contribution margin per pair of shoes sold (as difference
between EXW and CoGS);
5. Based on the results of point 2-3-4, analyse and discuss the potential margins of Del Principe Derby shoes in
case of international expansion through exclusive distribution agreements.
* Please list 10 specific countries, not regions: i.e. ASIA PACIFIC is WRONG (too wide, too generic), INDONESIA is
CORRECT; LATIN AMERICA is WRONG (too wide), BRAZIL is CORRECT.
High-end and luxury industries management
Prof. A. Brun