Pirelli-Investing in Reifen Ritter

Memorandum

To: Uberto Thun

From: LAS Consulting Group (Li Shi - 301211226; Alistair Li - 301199654; Simon Leung - 301137570)

Date: 2015-12-17

Subject: Pirelli-Investing in Reifen Ritter

To aid in your decision for whether or not to provide financial assistance to Reifen Ritter, we have prepared a few key points for you to consider. Our decision was based on forecasting the company’s future performance within the next few years from past data, and analysis of the company’s position in the industry environment.

Given that Pirelli has a significant market share in the European tire industry and whose biggest client is Reifen Ritter, an independent and well-known regional company, we can assume that the two combined will have a certain hold over competition. The tire industry is very capital-intensive and economies of scale are critical for success. Reifen Ritter who has established its brand over the years have certainly proved itself to the market putting them on a higher pedestal than potential entrants; hence, barriers to entry are high. Consumers in the tire industry are prone to being price-sensitive and switching costs to other brands are low. However, Reifen Ritter’s brand awareness also provided them with considerable power over consumers and an edge over new entrants. In the foreseeable future, there are a lack of substitutes in the tire industry. Unless there is a technological breakthrough that manufactures a product more cost-efficient and improves margins than tires, in which consumers can afford on a consistent basis, we can assume the level of substitutes are low. Finally, suppliers have very low power in the industry because the inputs for producing tires are commodities. With an already established and proven successful business relationship with Reifen Ritter, this factor can help guide which direction your financial decision should go.

It is also important to note that consumers’ brand awareness for tires is low. If retailers were to push their preferred brands, consumers would learn to expect the consistent service and quality of the specific brand and could garner prospective sales. Growth in the tire industry have also slowed in the recent years causing the market to consolidate. For Pirelli to remain successful, it is crucial to have good distribution networks and maintain business relationships.

After extensive quantitative analysis, we have come to the conclusion that the best possible outcome for both parties would be for Pirelli to grant the €1 million loan to Reifen Ritter, but not doubling the size of its credit line to €400,000. This outcome incorporates the forecasted sales growth of Reifen Ritter of 15% or 50% over the next three years. On first glance, it may seem the best course of action