75734991-Cross-Well

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Crosswells Brazilian Diapers

What costs must be included in the total costing, pricing, andfinancing related to exporting products into a target market?

Copyright 2009 Pearson Prentice Hall. All rights reserved. 20-2

Crosswell International is a U.S.-based manufacturer and distributor of health care products, including childrens diapers.

Crosswell has been approached by Leonardo Sousa, the president of Material Hospitalar, a distributor of health care products throughout Brazil.

Sousa is interested in distributing Crosswells major diaper product, Precious, but only if an acceptable arrangement regarding pricing and payment terms can be reached.

Considerable competition exists in the Brazilian diaper market, so pricing and therefore cost control will be critical

Crosswells manager for export operations is Geoff Mathieux Geoff followed up the preliminary discussions by putting together an estimate of export

costs and pricing for discussion purposes with Sousa. Crosswell needs to know all of the costs and pricing assumptions for the entire supply and

value chain as it reaches the consumer. Mathieux believes it critical that any arrangement that Crosswell enters into results in a price

to consumers in the Brazilian marketplace that is both fair to all parties involved and competitive, given the market niche Crosswell hopes to penetrate



Crosswell also requests from Sousa Financial statements, banking references, foreign commercial references, descriptions of

regional sales forces, and sales forecasts for the Precious diaper line. These last requests by Crosswell are very important for Crosswell to be able to assess

Material Hospitalars ability to be a dependable, creditworthy, and capable long-term partner and representative of the firm in the Brazilian marketplace.

The discussions that follow focus on finding acceptable common ground between the two parties and working to increase the competitiveness of the Precious diaper in the Brazilian marketplace.

Proposed sale by Crosswell to Material Hospitalar 10 containers of 968 cases of diapers at $39.18 per case, CIF Brazil, payable in U.S. dollars;

a total invoice amount of $379,262.40 Payment terms are that a confirmed L/C will be required of Material Hospitalar on a U.S.

bank. The payment will be based on a time draft of 60 days, presentation to the bank for acceptance with other documents on the date of shipment.

Both the exporter and the exporters bank will expect payment from the importer or importers bank 60 days from this date of shipment


Exhibit 1 Export Pricing for the Precious Diaper Line to Brazil


Crosswell Ships Simultaneous with the shipment, in which Crosswell has lost physical control

over the goods, Crosswell will present the bill of lading acquired at the time of shipment with the other needed documents to its bank requesting payment.

Because the export is under a confirmed L/C, assuming all documents are in order, Crosswells bank will give Crosswell two choices:

1. Wait the full time period of the time draft60 days and receive the entire payment in full ($379,262.40)

1. Receive the discounted value today The discounted amount, assuming U.S. dollar interest rate of 6.00% per annum

(1.00% per 60 days) is $375,507 Because the invoice is denominated in U.S. dollars, Crosswell need not worry

about currency value changes (currency risk). And because its bank has confirmed the L/C, it is protected against changes or deteriorations in Material Hospitalars ability to pay on the future date



Exhibit 2 Export Payment Terms on Crosswells Export to Brazil


Continuing Concern The concern the two companies share, however, is that the total price to

the consumer in Brazil, R$245.48 per case, or R$0.70/diaper (small size), is too high.

The major competitors in the Brazilian market for premium quality diapers, Kenko do Brasil (Japan), Johnson & Johnson (USA), and Procter & Gamble (USA), are cheaper (see Exhibit 3).

The competitors all manufacture in-country, thus avoiding the series of import duties and tariffs that have added significantly to Crosswells landed prices in the Brazilian marketplace



Exhibit 3 Competitive Diaper Prices in the Brazilian Market (in Brazilian Reais)


1. How are pricing, currency of denomination, and financing interrelated in the value-chain for Crosswells penetration of the Brazilian market? Can you summarize them using Exhibit 2?

2. How important is Sosa to the value-chain of Crosswell? What worries might Crosswell have regarding Sosas ability to fulfill his obligations?

3. If Crosswell is to penetrate the market, some way of reducing its prices will be required. What do you suggest?

Crosswells Diapers: Case Questions


1. How are pricing, currency of denomination, and financing interrelated in the value-chain for Crosswells penetration of the Brazilian market? Can you summarize them using Exhibit 2?

A variety of sensitivities can be analyzed using the cost analysis of Exhibit 2; the spreadsheet on the following page reproduces the analysis.

For successful market penetration, Crosswell needs to hit the consumer market at a price of about R$0.65 to R$0.68; the preliminary cost analysis indicates a price of R$0.70 too high.

Obviously, currency risk will always be present for Crosswell/Sosa because the product is being imported from the United States with a dollar-cost basis, and the primary competitors are all manufactured locally. According to the preliminary analysis, a case of small diapers which costs R$97.95 in the Santos harbor (port city closest to Sao Paulo), ends up costing R$245.48 per case to consumers.

Financing is a significant cost concern in the competitive analysis. The cost of financing the diaper inventory needed for distribution in Brazil, according to Sosa, is 7.000% for a one month inventory period, exceedingly high by either U.S. or international standards. Crosswell should explore this cost with Sosa, and evaluate to what degree this rate truly reflects Brazilian costs of funds, whether they can be reduced, and what types of alternative (cheaper) financing may be available.



2. How important is Sosa to the value-chain of Crosswell? What worries might Crosswell have regarding Sosas ability to fulfill his obligations?

The role that the distributor, in this case Sosa, plays in the success of a product for a consumer product is critical. Crosswells entire success in the Brazilian marketplace will depend on not only the price-quality offering of Crosswells products, but also the ability of Sosa to search out and penetrate retail distribution outlets to reach the consumer.

If Sosa is not a credible or reliable distributor, it could very possibly result in a failed market entry and Crosswells name and future being tainted for time to come.

If Sosa is not adequately financed or staffed to handle the scope of the distribution, costs and reliability may hender market entry, again resulting in either poor service, higher prices than competitors, or both.

Note: Because it is always difficult for a company like Crosswell, with no presence or knowledge of the Brazilian market, to find good business partners in a country like Brazil, the role of institutions like the American Chamber of Commerce (AmCham) in Sao Paulo, Brazil, is critical. AmCham seeks to provide information and introductions for U.S. firms wishing to enter the Brazilian marketplace on a reliable and successful basis.



3. If Crosswell is to penetrate the market, some way of reducing its prices will be required. What do you suggest?

As discussed in question 1, financing expenses may be one area where savings could still be found. Sosas margin on distribution, 20% in Exhibit 2, also is relatively high given that the retailers themselves will add on another30%.

Retailers themselves carry differing levels of negotiating strength, depending on whether they are major chains such as Carrefour, or smaller corner mom and pop shops called tienditas across Latin America.

Taxes and government charges are clearly not negotiable, and represent the costs and complexities of attempting to compete through importation.


Crosswells Brazilian DiapersSlide 2Slide 3Exhibit 1 Export Pricing for the Precious Diaper Line to BrazilSlide 5Exhibit 2 Export Payment Terms on Crosswells Export to BrazilSlide 7Exhibit 3 Competitive Diaper Prices in the Brazilian Market (in Brazilian Reais)Slide 9Slide 10Slide 11Slide 12

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