Scenario Analysis
Hartwell Foods — Near-Shore vs. Offshore Production Decision
Date: 2026-05-30 · Prepared by: Resolvix · Status: Sample Deliverable
Deliverable type: Financial Analysis — Scenario Analysis (~$800)
Industry: Specialty Food Manufacturing / Consumer Packaged Goods
Decision: Whether to migrate 60% of production from Guangdong, China to Monterrey, Mexico over 18 months
About this sample. This is one example of what a successful Resolvix deliverable looks like at this scope and type — not a template that every engagement follows. Your expert brings their own expertise and judgment to the work: the structure, the emphasis, which angles they dig into, and how they organize their findings will all vary based on your industry, your specific question, and where the research leads. What stays consistent across every engagement is the standard: analysis grounded in evidence, prioritized recommendations, concrete action steps, and a phased implementation plan. All company names, figures, and scenarios in this sample are illustrative.
Executive Summary
Hartwell Foods ($38M revenue, specialty sauces and condiments, sold through Whole Foods, Sprouts, and 3,200 independent natural grocery outlets) manufactures 78% of its product volume in Guangdong, China. The 2024 tariff environment imposed a 30% Section 301 tariff on Hartwell's primary import category (HTS 2103.90.90), compressing gross margin from 52% to 41% in 18 months. The board is evaluating three scenarios: (1) remain in China and absorb or pass through tariffs, (2) migrate 60% of production to a co-manufacturer in Monterrey, Mexico over 18 months, or (3) build a U.S. manufacturing facility in Tennessee (3-year timeline, capital-intensive). This analysis models the financial impact of each scenario over 5 years across revenue, COGS, gross margin, EBITDA, and cash position. The central finding: Scenario 2 (Mexico near-shore) is financially dominant under all reasonable tariff assumptions. It restores gross margin to 49–52% within 24 months, requires $2.1M in transition capital (manageable on the existing revolving credit facility), and maintains strategic flexibility in a way that Scenario 3 (U.S. manufacturing) does not. Scenario 1 is viable only if tariffs are removed in full — a politically improbable outcome.
Decision Context
Current State
| Metric | FY2023 (Pre-Tariff) | FY2025 (Current) | Change |
|---|---|---|---|
| Revenue | $31,200,000 | $38,400,000 | +23% |
| COGS | $15,000,000 | $22,700,000 | +51% |
| Gross Profit | $16,200,000 | $15,700,000 | −3% |
| Gross Margin | 52.0% | 40.9% | −11.1 pts |
| EBITDA | $5,580,000 | $2,450,000 | −56% |
| EBITDA Margin | 17.9% | 6.4% | −11.5 pts |
Revenue grew 23% from distribution wins and price increases, but EBITDA nearly collapsed. The tariff burden on FY2025 COGS is approximately $4.2M — the difference between current and pre-tariff economics. Hartwell has passed through approximately $1.8M via price increases (5.8% blended price increase); the remaining $2.4M is absorbed by the company.
Key Cost Assumptions by Scenario
| Cost Driver | China (Current) | Mexico (Scenario 2) | U.S. Tennessee (Scenario 3) |
|---|---|---|---|
| Manufacturing labor (% of COGS) | 14% | 22% | 38% |
| Raw material cost (indexed, China=100) | 100 | 108 | 115 |
| Logistics (ocean/ground, per unit) | $0.34 | $0.18 | $0.06 |
| Tariff (current 30% Section 301) | 30% | 0% (USMCA) | 0% |
| Tariff (upside — tariff removed) | 0% | 0% | 0% |
| Tariff (stress — tariff increases to 40%) | 40% | 0% | 0% |
| Quality control / compliance overhead | Low | Medium | High |
| Transition capex (one-time) | $— | $2,100,000 | $12,500,000 |
| Transition timeline | — | 18 months | 36 months |
| Flexibility to reverse | High | High | Very Low |
Scenario 1: Remain in China (Status Quo / Tariff Absorption)
Assumptions
- 30% tariff maintained in base; 25% in bull (partial relief); 40% in stress (escalation)
- Revenue grows at 8% annually through distribution wins and modest price increases
- Gross margin slowly recovers through price pass-through (2% annually)
- No transition capital required; no transition risk
5-Year Financial Summary — Scenario 1
| Y1 | Y2 | Y3 | Y4 | Y5 | |
|---|---|---|---|---|---|
| Revenue | $41,472,000 | $44,790,000 | $48,373,000 | $52,243,000 | $56,422,000 |
| COGS (base, 30% tariff) | $(25,312,000) | $(26,874,000) | $(28,539,000) | $(30,303,000) | $(32,179,000) |
| Gross Profit (Base) | $16,160,000 | $17,916,000 | $19,834,000 | $21,940,000 | $24,243,000 |
| Gross Margin (Base) | 39.0% | 40.0% | 41.0% | 42.0% | 43.0% |
| COGS (bull, 25% tariff) | $(24,208,000) | $(25,720,000) | $(27,320,000) | $(29,020,000) | $(30,820,000) |
| Gross Margin (Bull) | 41.6% | 42.6% | 43.5% | 44.4% | 45.4% |
| COGS (stress, 40% tariff) | $(27,020,000) | $(28,700,000) | $(30,480,000) | $(32,360,000) | $(34,360,000) |
| Gross Margin (Stress) | 34.8% | 35.9% | 37.0% | 38.0% | 39.1% |
| EBITDA (Base) | $2,810,000 | $3,760,000 | $4,900,000 | $6,090,000 | $7,400,000 |
| EBITDA (Stress) | $(990,000) | $(340,000) | $720,000 | $1,800,000 | $3,000,000 |
Scenario 1 findings:
- Base case is marginally viable but permanently impaired — gross margin never recovers to the 52% pre-tariff level
- Stress case (40% tariff) creates EBITDA losses in Years 1–2, requiring either additional financing or deep cost cuts
- Bull case (tariff removed) restores economics but is contingent on a political outcome the company cannot control
- No capital required; no execution risk; full flexibility maintained
Scenario 2: Near-Shore to Mexico (Recommended)
Assumptions
- 18-month transition: 30% of volume migrated by Month 6; 60% by Month 12; full target volume by Month 18
- Co-manufacturing partner in Monterrey identified; 6-month qualification process begins Month 1
- $2.1M transition capital: $900K co-manufacturer tooling and setup; $600K dual-running cost during parallel production; $420K reformulation and USMCA compliance; $180K contingency
- USMCA tariff-free on qualified products (Hartwell's products qualify under HTS rules of origin)
- Mexico manufacturing COGS is 3–5% higher than China COGS before tariff (labor + raw material premium), but net of tariff removal is significantly lower
- No tariff risk on Mexico volume under current USMCA framework
5-Year Financial Summary — Scenario 2
| Y1 | Y2 | Y3 | Y4 | Y5 | |
|---|---|---|---|---|---|
| Revenue | $41,472,000 | $44,790,000 | $48,373,000 | $52,243,000 | $56,422,000 |
| % of volume in Mexico | 30% | 60% | 60% | 60% | 65% |
| % of volume in China | 70% | 40% | 40% | 40% | 35% |
| Blended COGS | $(24,950,000) | $(23,570,000) | $(24,670,000) | $(26,280,000) | $(27,130,000) |
| Gross Profit | $16,522,000 | $21,220,000 | $23,703,000 | $25,963,000 | $29,292,000 |
| Gross Margin | 39.8% | 47.4% | 49.0% | 49.7% | 51.9% |
| Transition capex (one-time) | $(2,100,000) | $— | $— | $— | $— |
| EBITDA (before transition costs) | $3,600,000 | $8,100,000 | $9,800,000 | $11,400,000 | $13,700,000 |
| EBITDA (after transition costs, Y1) | $1,500,000 | $8,100,000 | $9,800,000 | $11,400,000 | $13,700,000 |
| EBITDA Margin | 3.6% | 18.1% | 20.3% | 21.8% | 24.3% |
| Scenario 1 (Base) | Scenario 2 | Delta | |
|---|---|---|---|
| 5-Year Cumulative Gross Profit | $99,093,000 | $116,700,000 | +$17,607,000 |
| 5-Year Cumulative EBITDA | $24,960,000 | $44,600,000 | +$19,640,000 |
| Year 2 Gross Margin | 40.0% | 47.4% | +7.4 pts |
| Year 5 Gross Margin | 43.0% | 51.9% | +8.9 pts |
| Transition capital required | $— | $2,100,000 | $(2,100,000) |
| NPV of incremental cash flows (10% discount) | — | +$11,240,000 | |
| Payback period on transition capital | — | 11 months |
Scenario 2 generates $11.24M in net present value over 5 years relative to Scenario 1. The 11-month payback on the $2.1M transition investment is compelling. The transition year (Y1) shows compressed EBITDA (3.6%) due to dual-running costs and transition capex, but Year 2 recovery is dramatic.
Stress test — Scenario 2: If USMCA is renegotiated or Mexico tariffs are imposed (low probability, 10–15% in most forecasts), what happens? Even with a 15% Mexico tariff (hypothetical), Scenario 2 gross margin in Year 3 is 44.8% — still 3.8 points better than Scenario 1 base. The Mexico transition is resilient to partial tariff scenarios.
Scenario 3: U.S. Manufacturing (Tennessee)
Assumptions
- 36-month construction and commissioning; no cost benefit until Month 30 at earliest
- $12.5M capex (facility, equipment, FDA compliance, staffing ramp)
- Financed: $8M equipment financing at 7.2% interest; $4.5M from existing revolving credit facility
- Fully staffed facility operational at Month 36; 95 employees
- U.S. COGS is 18–22% higher than Mexico COGS (labor primarily); 0% tariff
5-Year Financial Summary — Scenario 3
| Y1 | Y2 | Y3 | Y4 | Y5 | |
|---|---|---|---|---|---|
| Revenue | $41,472,000 | $44,790,000 | $48,373,000 | $52,243,000 | $56,422,000 |
| % of volume in U.S. facility | 0% | 0% | 35% | 60% | 60% |
| Blended COGS | $(25,312,000) | $(26,874,000) | $(27,520,000) | $(28,940,000) | $(30,650,000) |
| Gross Margin | 39.0% | 40.0% | 43.1% | 44.6% | 45.7% |
| Capex (total, phased) | $(5,500,000) | $(4,500,000) | $(2,500,000) | $— | $— |
| Debt service (interest + principal) | $(890,000) | $(1,050,000) | $(1,210,000) | $(1,380,000) | $(1,380,000) |
| EBITDA (after debt service) | $380,000 | $560,000 | $4,220,000 | $6,700,000 | $8,500,000 |
| EBITDA Margin | 0.9% | 1.3% | 8.7% | 12.8% | 15.1% |
| Scenario 2 | Scenario 3 | Delta | |
|---|---|---|---|
| 5-Year Cumulative EBITDA | $44,600,000 | $20,360,000 | Scenario 2 better by $24,240,000 |
| Year 5 Gross Margin | 51.9% | 45.7% | Scenario 2 better by 6.2 pts |
| Total capital committed | $2,100,000 | $12,500,000 | Scenario 3 requires $10.4M more |
| Strategic flexibility | High (reversible) | Very low (irreversible) | |
| U.S. manufacturing narrative | No | Yes |
Scenario 3 is financially dominated by Scenario 2 across every metric. The only advantage of U.S. manufacturing is the brand narrative ("Made in the USA"), which could command a retail price premium. However, at a $24M cumulative EBITDA disadvantage over 5 years, the price premium required to justify U.S. manufacturing would need to be approximately 12–15% — which is unlikely in the current grocery channel environment. U.S. manufacturing is not the right decision at Hartwell's current scale.
Scenario Comparison Summary
| Metric | Scenario 1 (China) | Scenario 2 (Mexico) | Scenario 3 (U.S.) |
|---|---|---|---|
| 5-Year Gross Margin (avg.) | 41.0% | 47.6% | 42.5% |
| 5-Year EBITDA (cumulative) | $24,960,000 | $44,600,000 | $20,360,000 |
| Capital Required | $— | $2,100,000 | $12,500,000 |
| NPV vs. Scenario 1 | Baseline | +$11.24M | −$3.8M |
| Tariff Sensitivity | High | Low | None |
| Execution Risk | None | Medium | High |
| Reversibility | Full | High | Very Low |
| Time to Benefit | None (permanently impaired) | 12–18 months | 30–36 months |
| Recommended? | No | Yes | No |
6. Recommendations
-
Proceed with the Mexico near-shore transition immediately (Scenario 2). The NPV advantage of $11.24M over 5 years, the 11-month payback, and the strategic flexibility of a reversible decision make Scenario 2 the clear choice under all reasonable tariff assumptions. Do not wait for political clarity on tariffs — USMCA is a durable framework; the China tariff environment is not.
-
Secure co-manufacturer partner selection and qualification in Months 1–3, before committing to the Monterrey facility investment. The $2.1M transition capital is contingent on finding a co-manufacturer that can meet Hartwell's quality standards and USMCA rules-of-origin requirements. Begin the RFP process immediately with 4–5 qualified Monterrey co-manufacturers; complete factory audits by Month 3; select by Month 4.
-
Use the revolving credit facility to fund the $2.1M transition without equity dilution. At Hartwell's current EBITDA ($2.45M) and debt coverage ratio (4.1x), the existing revolving credit facility can support the $2.1M draw. Do not raise equity to fund this transition — the payback is 11 months, well within any reasonable equity cost-of-capital hurdle.
-
Lock in a 3-year price commitment with Whole Foods and Sprouts before announcing the sourcing transition. Retail partners may request assurances on quality continuity and supply stability during the transition period. A proactive conversation — "we are near-shoring for supply chain resilience; here is our quality protocol and our parallel-production plan" — turns a potential buyer concern into a category management story. Some natural grocery buyers view Mexico sourcing favorably (fresher ingredients, shorter supply chain). Use this narrative.
-
Maintain 40% of volume in China as a permanent hedge, not a transition artifact. The current plan migrates 60% of volume to Mexico. The remaining 40% in China should be maintained permanently — not as a cost measure, but as supply chain optionality. If Mexico capacity is constrained or quality issues arise, the China supply chain is intact. This is the advantage of co-manufacturing vs. owned facilities: you can maintain multiple supplier relationships simultaneously.
7. Action Steps
| # | Action | Owner | Time | Tied To |
|---|---|---|---|---|
| 1 | Issue RFP to 5 Monterrey co-manufacturers; define quality requirements, USMCA compliance criteria, capacity requirements | COO + Supply Chain | 2 weeks | Recommendation 2 |
| 2 | Draw $2.1M from revolving credit facility; set up transition project account | CFO | 1 week | Recommendation 3 |
| 3 | Schedule meetings with Whole Foods and Sprouts category managers; prepare near-shore narrative deck | CEO + Sales | 3 weeks | Recommendation 4 |
| 4 | Engage USMCA trade attorney to confirm rules-of-origin qualification for Hartwell's product lines | Legal | 2 weeks | Recommendation 1 |
| 5 | Build transition project plan: Month 1–18 timeline, milestones, dual-running cost budget, quality checkpoints | COO | 3 weeks | Recommendation 1 |
| 6 | Update board financial model with Scenario 2 as base case; retire Scenarios 1 and 3 from ongoing planning | CFO | 1 week | All |
| 7 | Begin Monterrey factory audit visits (Month 3) | COO + Quality | Month 3 | Recommendation 2 |
8. Implementation Plan
Phase 1 — Partner Selection and Deal Structure (Days 1–90)
Objective: Select and qualify the Monterrey co-manufacturing partner; structure the commercial agreement.
- Issue RFP and complete factory audits
- Select co-manufacturer by Month 3
- Execute co-manufacturing agreement with quality and USMCA compliance provisions
- Draw revolving credit facility; establish transition budget tracking
- Complete Whole Foods and Sprouts category manager conversations
Success criteria: Co-manufacturer selected and agreement executed. USMCA qualification confirmed. Credit facility drawn. Retail partners briefed with no adverse reaction.
Phase 2 — Production Qualification and Dual-Running (Months 4–12)
Objective: Qualify the Mexico production line; begin migrating volume.
- Formulation and production testing (Months 4–6): match existing product specs exactly
- First production run and QA sign-off (Month 6)
- Begin volume migration: 30% of volume from Mexico by Month 8
- Dual-running period: China and Mexico production concurrent; quality comparison
- Month 12 target: 60% of volume from Mexico
Success criteria: Mexico production passes QA on first or second run. No retailer product quality complaints during transition. 60% Mexico volume by Month 12.
Phase 3 — Full Transition and Optimization (Months 13–18)
Objective: Stabilize at target production split; capture full gross margin improvement.
- Reduce China volume to permanent 40% steady-state
- Optimize Mexico co-manufacturer relationship (volume scheduling, packaging line improvements)
- Run 12-month financial review: actual vs. projected gross margin
- Present to board: full transition complete; Mexico EBITDA trajectory confirmed
Success criteria: Gross margin at or above 47% (Year 2 projection). Transition capital fully deployed within budget. No supply disruptions to retail partners. Board aligned on Year 3–5 EBITDA trajectory.