APMG8119 digital enterprise
KATHMANDU BUSINESS MODEL ANALYSIS
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Shuang Yang 1466706
Yan Li 1455986
Yating Xu 1463093
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EXECUTIVE SUMMARY
This report provides a business model analysis of Kathmandu Holdings Limited, which is a specialist retailer in clothing and equipment for travel and adventure in New Zealand and Australia, with a small business in the United Kingdom. The business model analysis of Kathmandu conducted in three parts: revenue analysis, cost analysis and value creation; and with a brief business background.
The report showed the understandings of the business model analysis. Results of data analysed show that Kathmandu are expanding the business and try to do cost efficiency.
The report also faces the facts that the analysis conducted has limitations. For instance, if the information is not up-to-date, the results are based on past performance and some forecasting data.
Table of Contents
BUSINESS BACKGROUND
Kathmandu Holdings Limited (Kathmandu) is a New Zealand local company listed on both the New Zealand Stock Exchange (NZX) and the Australian Stock Exchange (ASX). It was established in 1987 and has developed to become a leading specialist retailer in clothing and equipment for travel and adventure in New Zealand and Australia, with a small business in the United Kingdom. Kathmandu operates 110 stores in Australia, 46 stores in New Zealand and 4 stores in the United Kingdom (Kathmandu.com).
Key Findings
- Over the last four years Kathmandu has added 50 stores with most of the growth occurring in Australia where store numbers have grown from 66 to 110 (Kathmandu.com). Kathmandu is targeting to in Australasia to 180 stores and further expansion is also targeted for international and online markets.
- Kathmandu opened the online and mail order operations since 2008 and from 2009, Kathmandu’s business platform has grown steadily, including staff, IT infrastructure and distribution capacity. Strengthening the distinctiveness of brand can also open up opportunities to be relevant in international markets as well as on social, digital and online channels. (Strang, 2016)
- The three broad target customer segments of Kathmandu are ‘Adventurous Families’, ‘Young Go Getters’ and ‘Older Outdoor Enthusiasts’ (Grant Samuel, 2015).
- Kathmandu’s growth strategies include:
Ÿ completion of the store network in Australia and New Zealand;
Ÿ improving brand positioning in international and online market;
Ÿ more effectively marketing promotion for Summit Club memberships;
Ÿ continuing to develop its online and international capabilities through website and network.
REVENUE ANALYSIS
Summary of Results (Revenue increased by 4.0% to NZ$425.6m in 2016):
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Total Revenue (NZD $m)
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Total Revenue Growth (NZD)
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Australia
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278.4
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5.2%
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New Zealand
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141.7
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1.9%
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United Kingdom
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5.5
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3.1%
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Total
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425.6
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4.0%
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Source: APP Securities Company Research (APP Securities, 2016)
Revenue recognition
Revenue comprises the consideration received or receivable for the sale of goods and services, tangible and Intangible assets of Kathmandu.
(i) Sale of goods are recognized at point of sale for Kathmandu customers and when product is dispatched to the customer for online or onsite sales.
(ii) Kathmandu’s tangible assets include store and office fit-out, equipment used in sales, relative support activities and all that the elements can generate revenue.
(iii) Kathmandu intangible assets include brands, licenses, software development and goodwill for revenue generation.
Key Findings
- Kathmandu runs a comprehensively integrated retail model - approximately 95% of sales are ‘Kathmandu’ branded products, made to Kathmandu design specifications, and distributed to the store network via Kathmandu distribution centers - Christchurch and Melbourne. Kathmandu product is only sold in Kathmandu stores, on its website and on selected other international online channels, such as Trade Me, eBay Australia, Amazon UK and eBay UK. Online sales rose 23 percent for about 6.6 percent of total revenue ($13 million) in 2016 (Underhill, 2016).
- A basis of the Kathmandu marketing model has been to have major sales initiatives in 3 distinct timeslots: Christmas/New Year, Easter Days and Winter. Approximately 60% of revenue is generated in these three periods.
- Kathmandu’s revenue split is 65% clothing and 35% equipment approximately. Most Kathmandu product is designed in New Zealand and then assign to a range of manufacturers in the worldwide. Approximately 85% of Kathmandu’s product is made in China.
- An important asset of Kathmandu is the “Summit Club” where consumers as memberships for a nominal fee, and enjoy discounts and promotions (Halkett, 2012). The Summit Club initiative has continued to be extremely successful and so far, Kathmandu generates around two thirds of group sales from Summit Club members. The Summit Club database of Kathmandu is a key source of information supporting the consumer research and market analysis. The database help Kathmandu better understand its customers, their interests, purchasing habits and communication preferences.
COST ANALYSIS
Cost analysis is used to estimate the value of a business, which the simple explanation is to calculate total expenses and benefits to uncover the results of the business creating revenue while preserving saving(Schröder, Falk, & Schmitt, 2015). The cost analysis of Kathmandu is listed below to show whether Kathmandu made any profit last year (FY2015) or not.
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FY2015
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FY2014
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Sales (NZ$m)
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$409.40
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$392.90
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EBIT (NZ$m)
EBIT: earnings before interest and tax
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$33.20 ¯
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$64.30
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Source: Kathmandu Annual Report 2015 (Kathmandu Holdings Limited, 2015)
To compare the sales data, Kathmandu increased 4.2% in FY2015 than FY2014. But record of EBIT declined by nearly half over FY2014. The reasons for this are the total costs of running the business, which showed some costs in FY2014 and FY2015 below as a chart:
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FY2015
(NZ$’000)
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FY2014
(NZ$’000)
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Cost of sales
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$157.482
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$144,777
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Selling expenses
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$142.893
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$116,174
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Administration and general expenses
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$61,986
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$58,876
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Depreciation and amortisation
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$13,875
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$10,198
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Finance expenses
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$4,195 ¯
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$4,850
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Wages, salaries and other short-term benefits
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$81,676
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$71,871
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Source: Kathmandu Annual Report 2015 (Kathmandu Holdings Limited, 2015)
Based on learning the theory of Business Model, it is clearly to identify the major costs components of Kathmandu: fixed costs (salaries, rents, advertising and office supplies), variable costs (costs of sales, selling expenses), economies of scale and economies of scope. At first, fixed costs not vary with changes in level of activity (Kaplan & Atkinson, 2015). For example, if Kathmandu rent a property as its physical store at $4,000 per month, the rental will not be changed no matter Kathmandu made any sells or not. However, for variable costs, are related directly with activity, which means it will fluctuate with changes of each segment in activity (Kaplan & Atkinson, 2015). Then whilst expanding the business, economies of scale is reflected by Kathmandu’s cost advantage. Economies of scope happened when business realise resource-efficient product diversification. For example, in Christmas sales period, a Christmas travel set is cheaper than if it sells separately. There are many risks along with these cost components, for instance, due to rising prices will cause HR issues related to employees; instability of international currency exchange rate will affect product price and transportation charge.
Key findings
- Although Kathmandu is a value-driven company, its growth strategies indicate the company needs to improve cost efficiency in FY2016.
- Operating costs increased due to the summer season’s sagging sales and gross margin results.
- Operating expenses excluding depreciation, amortisation and financing costs increased, which more than half of the increase are because of online operating costs and retail stores.
- Based on the Microsoft Dynamics AX platform, capital expenditure trimmed down by cutting investment in information systems in the third year of readjusting all core systems. Depreciation and amortisation expense increased due to the new systems platform released.
VALUE CREATION
Value is created by organizations from a wide range of interactions with its consumers, employees, stakeholders, regulators, suppliers and others operating contacts who conduct business activities (Madden, 2016). Value creation consist of financial and non-financial factors, as well as it has been mainly affected by global economic, natural and environmental limits. Kathmandu’s stock price on New Zealand Stock Exchange (NZX) and the Australian Stock Exchange (ASX) directly manifest its financial value creation. While financial value is a relevant indicator for assessing value creation of organization, but it is not enough to evaluate organization growth. Non-financial performance also has an impact on creating value, in this case, Kathmandu’s brand awareness and recognition have rooted deeper as it has becoming leading professional outdoor apparel and gear retailer according set expansion store and focus on international customer strategy.
Internal Organization Perspective
Kathmandu operating in ethical way which it is a regular donator to Australia and New Zealand Red Cross organization and partner of Australian Red Cross, they donate $10,000 and rescue apparels on the Tasmanian bushfire destruction rebuild in 2013(Kathmandu.com).
Kathmandu implement sustainable development approach on respecting human rights, ensure products are ethically produced, as well as utilize sustainable designs into the construction of new stores by using numbers of recycle or sustainable materials to improve energy efficiency. Kathmandu follows moral tenet governing the conduct of business was that the goods should be genuine and on the fair price. The environmental consideration aims to reduce negative impacts on nature and minimize environment footprint are reaping customers supporting, particular from environmentalists (Hastings&Saperstein,2014).
External Customer Perspective
Kathmandu provide scholarship program to encourage people attend Outward Bound courses meantime have more outdoor experience since 2005 (Kathmandu.com). In this course, participants’ potential life instinct or skill would be challenged and enhanced since they have more opportunities to immerse in nature.
Gibbs (2012) mentioned that developing online and digital channel capabilities as one of the most important marketing strategy nowadays especially for retailers since the purchasing behavior has been changed. Kathmandu has an almost completed digital presence throughout all the contemporary social media platform and own an integrated official website which consist of online shopping function and brand advertise. Moreover, they created separate official websites for UK, Australia and New Zealand due to some different ongoing events broadcast and culture diversification, this approach is designed for maximum customer experience and enhance satisfaction. Kathmandu also provide international shipping to certain other countries.
Kathmandu incorporate with World Nomads travel insurance company that to fulfill a comprehensive and convenient service for their customers (Kathmandu.com).
CONCLUSION
Kathmandu is an industry leader in sustainability, with diverting waste from landfill to more sustainable sources a priority. They care customers by designing quality and trusted products and at the same time protect environment. Compared with past financial performance, Kathmandu didn’t perform well in 2015 as they are implementing store expansion strategy and system upgrading but the overall sales still increased. And Kathmandu has becoming a vital player in outdoor retail industry since stepped into international market.
REFERENCE
APP Securities, (2016). Kathmandu to further expand into international market in FY17.
Retrieved from: https://appsecurities.com.au/public/4C696C79Files/APP%20
Securities%20KMD_160921.pdf
Gibbs R. J.(2012),Principles of Urban Retail Planning and Development, 1st Edition, Wiley
Grant Samuel, (2015), Kathmandu Holdings Limited – Takeovers Panel. Retrieved from:
http://www.asx.com.au/asxpdf/20150806/pdf/430b9cxwyby2cc.pdf
Hastings H.& Saperstein J. (2014), Service Thinking: The Seven Principles to Discover
Innovative Opportunities, Business Expert Press
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Kathmandu.com, (2016), About Us. Retrieved from: http://www.kathmanduholdings.com/about-
us/our-history/
Kathmandu.com, (2016), Company News. Retrieved from: http://www.kathmandu.co.nz/get-to-
know-us/company-news
Kathmandu Holdings Limited. (2015). Kathmandu Annual Report 2015 (p. 80). Retrieved from http://www.kathmanduholdings.com/wp-content/uploads/2012/08/Kathmandu-AR-2015-web-ready.pdf
Madden B. J.(2016),Value Creation Thinking,1st edition, LearningWhatWorks
Schröder, M., Falk, B., & Schmitt, R. (2015). Evaluation of Cost Structures of Additive Manufacturing Processes Using a New Business Model. Procedia CIRP, 30, 311–316. https://doi.org/10.1016/j.procir.2015.02.144
Strang, E (2016), Kathmandu makes a comeback with 64 percent profit jump. Retrieved from:
http://theregister.co.nz/tag/xavier-simonet
Underhill, J. (2016), Kathmandu targets 10% of total sales online, plans “capital-light”
international expansion. Retrieved from: https://www.nbr.co.nz/article/kathmandu-turns-
first-half-profit-margins-widen-b-186565
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