business plan retail company

8/8/2019 Business Plan Retail Company

http://slidepdf.com/reader/full/business-plan-retail-company 1/21

Business Plan For A Retail Company

Contact Information:

604 Harmony LaneNew York, NY 10007

(212) 555-1234

This document contains confidential information. It is disclosed to you for informationalpurposes only. Its contents shall remain the property of Business Plan For A Retail Companyand shall be returned to Business Plan For A Retail Company when requested.

This is a business plan and does not imply an offering of securities.



Table of Contents

1. Executive Summary 1

Business Opportunity

Product/Service Description 2. Company Background 3

Business DescriptionCompany History

3. Business Plan For A Retail Company 5

4. Services 6

5. The Industry, Competition, and Market 7

Market DefinitionPrimary CompetitorsCustomer Profile

6. Marketing Plan 10

7. Financial Plan 11

Investment PlanBreak-even AnalysisLiquidity PlanEarnings Plan

Risk Analysis

8. Conclusion 19



Business Plan For A Retail Company 1

1. Executive SummaryThe retail business is one of the growing businesses. The current growth rates show that thereis a demand for retail companies. Compared to other business activities the retail businesshas low risks because of low required investments. New forms of cost cutting and storeoptimization will help to set up a successful business. The return on retail business has a

growth rate of about 5% to 8% per year. A company that provides additional serviceactivities for the customers can be sure to have a high demand and a strong competitionadvantage.

The goal of this start-up is the general operation of a retail company with one store thatoffers a selected range of products and additional services depending on customer demand.New forms of marketing and distribution will increase sales revenues and utilize personnelcapacity.

1.1 Business Opportunity

The retail industry shows currently a strong growth marked by a higher demand but also

growing costs. The development of new business strategies and solutions seems criticalfor new industry players to get market shares and survive in this highly competitiveindustry. The choice of services as well as the development of applications can be onestrategy in this field of business. Additionally a sound cost management is of criticalimportance for a solid stream of revenues. Big industry players have shown that even in acompetitive market growth rates of more than 8% can be sustained.

Many businesses in the industry have failed to adjust their strategy when customerdemands and environmental factors changed. The most critical failures in such timeswere non-competitive offerings, unsatisfactory service, slacking cost control andmanagement mistakes. On the other hand, companies that reacted flexibly to their

changing environment show significantly higher revenues and margins and increasedshareholder value. Especially new forms of distribution support the successfulbusinesses.

The operation of a retail business that offers a range of products and services is the coreof this start-up. A strong focus of this business will be placed on the development of newand innovative strategies for the customers that deliver a significant value. As an add-ona broad range of service activities will be offered, which will help utilize company andemployee capacity. The range of products is selected to provide solid growth potentials.This can lead to a fast change of items or whole item groups as well as services.

The operation of this business requires a good knowledge of the selected product area aswell as a competitive service concept to increase customer satisfaction. The demand toexplain the handling of special items and products for the customers is likely to require ahigh degree of individual customer advise. However, it is critical that this service isoffered with a strong focus on cost management.

One central goal of the proposed business strategy is the development of an own




corporate identity. Such identity will create customer loyalty and help gain a competitiveadvantage. Therefore it is planned that additional to the selection of new and interestingservices a company design is developed. For this reason the service around the offeredapplications and the additional businesses are very extensive.

The required investment for the proposed business is moderate compared to othercompanies in the industry. Labor and the costs for goods are expected to be the main costdriver whereas no other substantial investment in fixed assets is required. Dependingupon the location the minimum required investment amount ranges between $50,000 and$55,000 in the start-up phase based on a 15-18% average revenue margin. This amount iswell within the financial requirements observed for other comparable companies.

1.2 Product/Service Description

The business will operate in the retail industry segment with a variety of products,services and applications. Additional sources of revenues beside the sale of products areone important element to optimize the profits. Cross selling is planned to be one of the

prime strategies in this business since all products are targeted to serve a similar need andcan easily be combined. Synergies in selling product across business segments is likely toboost earning further. Net earning are expected to be at least 2.5% above traditional retailbusinesses with only one or two sales segments.

Figure 1.1 shows the revenue mix across segments in the start-up phase. This projectionis based on the expected strategic direction, investment amount and businessenvironment. Being the core business the sales segment is expected to generate thelargest share in revenues. The sale of individual services is expected to be anotherimportant generator of revenues which also helps utilize invested capacity. The selectionof products that show the highest revenues will be another task that will be performed

during the business phase.




2. Company Background

The goal of this start-up is the operation of a retail business with different products andservices and similar offers. The focus of this business will be on the product segment forindividuals which shows the highest profits. Additionally, the sale of service activities isplanned to reach an optimal utilization of personnel and company capacity. An initialinvestment amount of at least $50,000 to $55,000 is required which will allow the operationof a typical store business with 2 to 5 employees. Sales revenues are expected to rangebetween $150,000 and $200,000 in the start-up phase and the operation is expected togenerate profits starting at least in the second or third business year.

2.1 Business Description

Management is expected to have a solid knowledge of the offered products and servicesto influence the customers. The goal is to create an innovative business in which thecustomer experiences competent service. A well chosen and targeted selection of offerings will complement this strategy. Both aspects are a core requirement to buildcustomer loyalty. In the mean run repeat customers are expected to generate revenues of 40% and more. Although this strategy is likely to require additional investments it isexpected that revenues per customer will increase significantly and range above industryaverage. Furthermore this strategy will provide a clear entrance barrier for prospectivecompetitors.

The development and promotion of a corporate identity is another central task formanagement. Given the homogeneity of businesses in this industry the development of acorporate identity will markedly increase sales revenues and build a customer base.Furthermore a corporate identity will support expanding the business to a largerinternational target market.

2.2 Company History

In the start-up phase the business is operated as a one-man-business. This set up carries acertain risk potential because of the high equity stake the manager bears and the personaland statutory liability assumed. However, this set-up preserves a high degree of flexibility in managerial decision taking.

The number of personnel to be employed depends on the structural complexity of theoperations and the desired size. Figure 2.1 shows a break up of costs in the industry. It is

expected that the target employee earns a monthly salary of $2,000 to $3,000 based on 40hours per week. Thesales and service area requires 1 to 2 employees on average working in 2 shifts. Due toillness and vacation times in the long run an average of 4 permanent employees will berequired after the start-up phase. With increasing sales and better utilization of employeework time revenue margins will and thus costs per employee will decrease on average.With revenues ranging around $500,000 capacity utilization is expected to be around85%.




During the start-up phase a single person will attend to all necessary management task,coordinate employees and provide strategic direction to the developing business.Accounting, administrative and machine maintenance will be outsourced to externalpartner since those tasks can typically be provided at better rates externally. Sourcing and

marketing will require one employee.

Finding the optimal location for a business is one of the success factors in the short andlong run. This is especially important for stationary businesses because customers, taxes,employees and additional costs are crucial for all businesses. The following analysis isbased on 35 businesses in the retail industry. Since a small company is recruiting itscustomers typically from the home country a national location is considered as the coremarket.

For the planned location the following factors are regarded as relevant:

The taxes and other administration costs are low.Administrative costs are expected comparably small given the expected revenues.The possibility to recruit additional personnel is favorable.Public institutions are expected to provide additional sponsoring.It is easy to find appropriate employees.

Because of the favorable growth perspectives in the chosen market and growinginvestment activities we expect to realize yearly growth rates in revenues of 10-15%given an average 4% economic growth rate.




3. Business Plan For A Retail Company

One of the key elements of a successful business in the retail industry is the selection of products and services that are currently as profitable as possible. One key element of aproduct presentation against the customers is to minimize the costs and to increase the profit.The costs for the selection of products and the optimization of the store have to becompensated by additional revenues and a higher profitability. The following products showthe highest demand and the best profitability.

High priced and individual products combined with additional services that show a highprofitability per product.Low priced products that show a high profitability based on the whole sales quantity but alsoa high competition.New and innovative products with a low competition.

The specific selection of products, services and applications offered will be monitoredconstantly and vary according to business needs. The selection will include low and highpriced combinations as well as new and innovative elements. This strategy provides acompetitive edge against other regional retail companies in the environment and is expectedto generate an additional demand and the possibility for a price mark-up. Such mark-ups areimpossible to achieve in the classical retail segment since the high competitiveness of thissegment competes away any price differentials. New applications and services with anadditional functionality for the customer will have a mark-up potential of 10-12% aboveaverage while the additional cost is minimal at 5%. This provides a 10-15% margin. Suchstrategy should focus on items with the highest mark-up potential for the future. Theselection of products is based on the following financial figures:

ProfitabilityAbsolute priceAbsolute demandHandling costsAdditional service capacity




4. Services

Additional service offerings independent from the core sales business are another field of business. The available competence will be used for further business activities that willgenerate additional revenues. While this is not a core business segment this concept hasgrowth potential because the demand for services is rising. Initially the investment ininventory, technical equipment and personnel capacity of this segment is limited.

Especially the supply of complex product offerings with a higher priced range will requireextensive service activities for the customers. This strategy will help utilize the capacity inpersonnel since it allows for an optimal coordination of employees. All employees will betrained to cover all aspects of individual services for the customer. Therefore it is necessaryto have a high knowledge about the offered outputs. This concept is adaptive to changes incustomer demand.




5. The Industry, Competition, and Market

A careful analysis of the market and competitive forces in this industry is a key element inassessing the business potential of our project. This analysis will provide marketing and salesdata that are indispensable to develop the business potential optimally. The main competitorsare retail companies in the regional environment with a similar selection of products andservices and comparable size. Since the planned project is of national scope the competitiveanalysis will only have to focus on the local market. The market and competition analysiswill be based on the entire market.

5.1 Market Definition

Figure 5.1 shows average growth figures in revenues of typical retail companies duringthe past 10 years. Despite slowing global economic growth in general and in the retailand service industry in particular, a lot of companies have experienced constant growthrates of more than 5% to 10% since 1999. For 2004 a growth of 6% is expected with astrong development in the third and last quarter.

Despite slowing economic growth and decreasing customer demand the retail industryunderwent a relatively favorable development. New and innovative business concepts inthe retail sector still show high growth potentials while growth rates of traditionalbusinesses in that industry were below average. The significant growth of new businessconcepts is primarily due to sharp cost control and more efficient business strategies thataccounted for higher revenue and earning figures. According to industry estimates 35%of such innovative businesses gained from cross-selling activities between their businesssegments. Sinking prices of input products and service costs have allowed the industry topartially compensate for slowing demand. Savings in input costs were also due todecreased labor costs. However, starting in 2005 this trend is expected to reverse andgrowth rates will pick up markedly despite the uncertainty in the development of inputprices and worldwide economic developments.

5.2 Primary Competitors

The competitive environment is primarily determined by the choice of item groups andthe regional location. But regardless of the selection of items high mark-ups are not




feasible in the long run since this will attract competitors who compete away any rents.With a high density of businesses in one location businesses with the highest marginalcost will be driven out of the market. Such locations will yield a return of 12-15% onaverage. This is the expected equilibrium return in a saturated market. To further analyzethe competitive environment it is necessary to define the players in that environment. A

firm that generates $300,000 to $1,000,000 in revenues and employs 5 to 10 peopleshould regard a firm with revenues and personnel 3 times this figures as a viablecompetitor. On the product and service side, businesses with a comparable selection of offers are regarded competing in the same market segment. Figure 5.4 shows the size of businesses in this market segment which also includes different products and servicesthat will be sold worldwide. The numbers are based on average revenues of companiesthat run their business more than five years.

5.3 Customer Profile

Independent of the specific products and services the company primarily targeting a

young and financially strong clientele. A possible segmentation to identify this group isincome as well social groups which allows to determine revenue and earnings percustomer or total revenues and earnings. Segmenting the target market is a key elementfor the design of an appropriate marketing strategy.

Figure 5.2 shows revenues for different retail companies by social group. Numbers arebased on average sales per customer of a particular group multiplied by the member of individuals in the respective group. This gives total revenues per group. As can be seenbusinessmen and random customers generate high revenue streams. Members of thesegroups are frequent buyers of consumer products. Although the total visits of youngpeople are relatively high total revenues from this segment are smaller because members

in this group have less free cash.

Figure 5.3 shows revenues by yearly income. The figure shows revenues generated perincome group. Numbers are based on the average income per customer and the number of customers per income group. As can be seen customers in the middle income cohortgenerate the highest revenues. High frequented low income groups such as students andpupils also generate relatively high revenue streams although revenues per customer arerelatively lower.




6. Marketing Plan

In the start-up phase it is a central task of the marketing concept to establish a namerecognition and own trade mark. Later on the strategy will primarily be targeted to gain newcustomers and create customer loyalty of repeat customers. Several marketing and salespromotion strategies are available in the retail industry. Figure 6.1 shows different marketingelements and their use in marketing strategies as well as their estimated potential successfactor. The figure can serve as a direction for the planning of a marketing and salespromotion strategy. The numbers are based on typical businesses in the retail industry. Ascan be seen printed advertisements targets a large potential customer group but at a relativelyhigh cost. Printed advertisements in international newspapers and magazines is regarded asvery beneficial in the start-up phase to attract a large group of potential customers and drawattention to the range of articles offered. 49% of businesses in the retail industry use printedadvertisements and about 60% of this group regard this as the most beneficial form of marketing. Sales promotion strategies have temporary effects only. They are used at businessopenings primarily and offer special discounts. 49% of businesses use sales promotionstrategies frequently and 81% of the users responded that this instrument is successful.Marketing alliances with other online businesses to generate cost savings and increaseefficiency are used rarely. Such strategies include mutual use of marketing and webpromotion events and joint promotion arrangements. Only 45% of businesses have used theseelements and 55% of these regard this instrument as beneficial. Web and e-mail marketing isused frequently in the retail industry although this would be a relatively inexpensiveadditional effort. Direct mailings are a very efficient strategy that sends mailing to selectedcustomers or businessmen groups. Since spreading costs of such mailing are very low thismarketing element provides a useful tool for special offer promotions.

The use of marketing and sales promotions proceeds as follows: to a broad base attract newcustomers the strategy will include a combination of printed advertisements and specialoffers with opening discounts. Furthermore a group of customers will be selected for directmailings. This strategy is expected to continue for 3-4 months after which the effort will turntowards creating a customer loyalty for regular customers. This strategy is supplemented by aregular marketing strategy and direct mailings to regular customers. A marketing allianceand online advertisements will also come to use.




7. Financial Plan

A sound financial plan is the key factor for the success of a business start-up. Investors andbanks will base their funding decision on the information given in this plan. Besides a plan of the financial needs this plan must insure that the business is always liquid and ultimatelyprofitable. Since the sales and earnings projections in the business plan are based onexpectations, the financial plan has to be revised and refined on a constant basis so thatdiscrepancies can be uncovered and solved instantly. The inputs for this financial plan arebased on 40 businesses of different size and market segments in the retail industry whichserve as a group of comparable firms as well as own estimates based on the planned businessenvironment. Revenue estimates are conservative and expense projections include a cushionfor unforeseen contingencies.

The initial capital requirement is estimated to be $50,000 to $55,000. The sales margin isexpected to be 12-15% whereby each business segment contributes differently to sales andearnings. The classical product sales segment will of all segments have the smallestcontribution to sales in relative terms (11%) but given the high sales volume the largest inabsolute terms. Revenues from service sales can be differentiated into those from low pricedservices to sophisticated services with some elements. The sale of goods is expected togenerate a 10% sales margin while the margin from sales of services is expected to be closerto 15%. Since the sales revenue of lower priced consumer products is expected to be largerthis segment will generate a significantly higher profit. Figure 7.1 shows the source of revenues by segment during the start-up phase.

Depending on the initial investment sum cost and revenue estimates vary. Figure 7.2 showsthe expected relationship of cost and revenues. As can be seen the relationship is not lineareverywhere but costs decrease relative to sales at an initial investment of $50,000. Thiseffects is due to the better utilization of capacities in personnel at rising revenues at constantcost. If capacity is fully utilized additional personnel must be recruited. At an investmentsum of $100,000 administrative costs are expected to return to a linear relationship of sales.At sales levels between $1,000,000 to $2,000,000 costs increase by the factor 1,85. The costrevenue relationship is important not only during the start-up phase but also for plannedfurther expansion. Often such expansion strategies are based on this relationship. Otherindustries are able to generate cost savings of 30-50% during expansion periods while for theretail industry this factor is close to 15%. At a specific size this relationship reverses becauseadministrative costs rise sharply. This affects small businesses between 10 and 20 employeesmost severely.

The details of the financial plan are laid out in more detail as follows:

Section 7.1 gives an investments schedule. This includes all investments necessary during thestart-up phase.

Section 7.2 gives a break-even analysis that shows revenues at the break-even point. Everyadditional sales revenue adds to profit and vice versa.




Section 7.3 gives a liquidity plan. This plan is based on current cost and revenue estimatesfrom Section 7.2. Liquidity must always be positive.

Section 7.4 contains a long-term profit projection for the first 4 years of business. Theprojection shows that the critical amount of revenues at which the business is profitable and

how profit develops over time.

Section 7.5 provides a risk analysis. The risk analysis contains critical factors that mayimpact the financial numbers presented in this plan.

7.1 Investment Plan

The investment plan comprises primary capital needs for the foundation and operation of a retail company with different products and services for sale. The plan also includesinitial marketing and sales promotion expenses.

The figures are based on a business with 3-5 employees and expected revenues of $350,000 in year 2-3.




7.2 Break-even Analysis

The break-even analysis shows how earnings rise as a function of sales. The break-evenpoint is the point at which revenues from sales cover total costs (fix costs and costs risingwith sales). This analysis is important for the development of the liquidity plan. If thebreak-even point is not achieved in the long run the business loses liquidity and maybecome insolvent. This requires that a critical amount of revenues must be generated.

At a sale revenue of $200,000 and given fixed costs the business will generate a profit.Fixed costs are estimated at $90,000 to $100,000 and variable costs at $100,000.

At a realizable revenue of $500,000 after 2-3 years profits will rise to $125,000 pre-tax.This represents an earnings margin of 25% pre-tax and 14% after-tax. These estimatesare realistic in this market segment. Increasing sales volume will increase pre-taxearnings margins but this development reverses when administrative costs begin to rise




sharply. Up to a sales volume of $1,000,000 earnings margins rise to 27.5% after whichthe margin decreases to constant 25.5%.

Figure 7.3 shows at which critical sales volume the business generates a profit. Thisserves as a base for a pricing strategy. Additionally the graph shows the amount of sales

at which a marketing campaign can be run profitably.

7.3 Liquidity Plan

The liquidity plan shows the amount of finances necessary to assure permanent liquidityof the business. The plan is based on 4 representative months of a typical business with 3

to 5 employees and annual sales of $300,000. Revenue estimates are drawn from astandard normal distribution.




7.4 Earnings Plan

The earnings plan shows the results from ordinary operations. The plan is based on thefirst 4 years of business. Revenue estimates are drawn from a normal distribution with anestimated growth rate of 20 to 30%. Figure 7.4 shows profit over time.




7.5 Risk Analysis

The risk analysis considers critical factors that may lead to a failure of the businessconcept. Such factors can involve failures during the implementation phase as well asduring operations. Such potential factors are ordered according to the probability atwhich they can arise. Shown is the key factor that led to the failure only. Data are drawnfrom questionnaires of 25 retail businesses with comparable product offerings andrevenue- and cost structures that went bankrupt during the last 3 years as well as analysesof different research institutes.

1. Insufficient demand: This is the most frequent reason that leads to businessfailure. This includes permanently low demand as well as a temporary collapse indemand. Often demand estimates were too optimistic at the outset. Such failures mightalso come from external shocks instead of operating deficiencies. 19% of businesses withinsufficient demand go bankrupt. 50% of these businesses report that once demandslacked they did not react accordingly because they believed that this phenomenon wasonly temporary. Since the expected frequency of customers during the start-up phase are




still low a critical success factor is to focus promotional effort so as to generate customerloyalty early on which will help minimize the effects of demand fluctuations. This is alsoimportant for the future development of the business.

2. Behavior of Competition: Due to low entry barriers additional businesses can

enter the market at low cost. Approximately 16% of insolvent businesses were driven outof the market by that competition. A better service concept, innovative ideas andconcentration on core businesses are an easy means for an entrant to gain a competitiveedge.

3. Personnel and capacity utilization: Often personnel capacity cannot be adjustedflexibly easily when demand slows down. Currently retail businesses have a capacityutilization rate of personnel of 70% to 75%, i.e. 70% of employee working hours can bedirectly credited to sales. At small businesses this value is often lower which means that30% of working hours arise without generating any further revenue. 13% of suchbusinesses go bankrupt for this reason.

4. Liquidity constraints: Another frequent reasons for bankruptcy is in sufficientliquidity. In that case it is possible that all liquid funds are used to cover losses or thatliquidity needs were planned too tight. To be able to flexibly react to changing liquidityneeds it is important that sufficient funds be planned even during the start-up phase thus5-10% of the investment sum should be held as liquidity reserve permanently. 13% of insolvent businesses reported liquidity as the reason for bankruptcy.

5. Over-indebtedness: Many business are run on a small equity base. The majority of investments are funded by debt. If the business becomes unprofitable, debt obligationscannot be covered. Little more over 10% of insolvent firms reported over-indebtedness as

the reason for going bankrupt. It is therefore important that a share of earnings is retainedfor debt service.6. Macroeconomic Conditions: In a cyclical downturn revenue expectations my notcome in according to expectation. Although this factor does not affect the business initself it does have an impact on profitability, liquidity and leverage. Cost remain constantduring such period but revenues typically decrease which affects overall profitability.10% of all insolvent businesses report that they went bankrupt due to macroeconomicconditions although the relevant indicators of the business looked healthy.

7. Location and market: The market of the business and the selection of the rightpotential customers is an important success factor and one of the fundamental decisions

that have an impact on the future prosperity of a retail company. Therefore a carefulanalysis is necessary. More than 10% of insolvent businesses reported that they wentbankrupt because of the wrong market selection. Often start-ups did not consider thateven when the choice of market may not be wrong at the outset it may later become sowhen economic conditions worsen. This may be due to structural changes or differentinterest of customers.

8. Wrong Business Decisions: Often wrong business decisions and difficult situations go




unnoticed for some period which can lead to a failure of the business. A critical andindependent reflection of a decision are critical factors to determine the value of amanagement decision and evaluate the business' profitability. Studies have shown thatmany businesses fail in their start-up phase because of management’s inability to makesound business decisions while one a business is settled such mistakes are very rare. A

critical management instrument is the ability to detect potential failures and problems.Certain key figures can help measure this ability and allow to objectively determine adecision's chance for success. Small businesses should use such indicator ratios to assesstheir business outlooks.

Figure 7.5 shows the relative importance of each factor for businesses that went bankrupt.The numbers are based on the most relevant reason that triggered bankruptcy but not thereason responsible for bankruptcy. As can be external factors that changed thecompetitive environment and changing macroeconomic conditions were the mostimportant reasons relative to internal factors.




8. Conclusion

The retail business with different products and additional service elements is a veryprofitable business while almost any other segment in the market currently lives through adifficult time. This situation is mostly driven by the competition of larger companies. Abusiness that successfully survives the current temporary slow down can be certain of increased profitability one the situation rebounds.

The relatively modest investment requirements and running costs compared to otherbusinesses are a favorable argument since external funds from banks becomes more difficultsince the risk aversion to finance such ventures has risen. A company with specificknowledge and innovative ideas has good chances to move into profitable market niches andrun a successful business. Market conditions change constantly as do customer demands.This is the chance for businesses with innovative ideas and new offerings to secure adependable customer basis. Service is a critical factor that can earn a competitive edge. Thisis also true for new trends in the retail industry to better control costs and increase efficiency.

For a successful operation of a retail company 5 factors are critical and central for thebusiness strategy:

- In the retail industry it is important that the customer experiences a comprehensive andcompetent service. This will secure customer loyalty and optimize profitability in a marketthat is very competitive.

- The utilization of personnel capacity is critical for the long-term profitability because of changing margins and the constraints to flexibly reduce personnel. Therefore the additionalselling of service elements like the development of customized products is a further segmentof the business that is integrated in the sale of the whole business process.

- A carefully selected assortment of interesting and profitable products as well as the selectedchoice of new technologies is a potential to gain a competitive edge against competitors.Furthermore a service that aims to give the customer an added value through new servicescan justify price mark-ups.

- A critical factor in the retail industry is quality management. Better quality of products andservices at lower cost increases customer satisfaction. Deficiencies in service quality canlower demand while good service quality can help create customer loyalty.

- Cost management is a critical success factor for businesses in industries where margins arelow. Computer aided planning for the store is an integral part of cost management.

business plan retail company

Documents