Planning for a Business Start Up

Planning for a Business Start Up Would it be feasible to open an electrical goods store in Thame? Thame is in Oxon (Oxfordshire). Abstract This report examines the business case for a start up business in Thame, Oxfordshire. The business in question is that of an electrical retailer, and the possibilities for both a small, independent enterprise and a large chain multiple are considered here. The report first considers the contemporary economic and retail environment, and then the relevant facts about Thame itself. It then looks at the possible market segmentation associated with the business, and considers some projected cashflow and expenditure models. In conclusion, the report does not foresee any guarantees of success for such a venture in the present climate, although it may be possible to accrue small margins through diversifying the business into e.commerce. Conversely, it may be that forthcoming large scale ventures have better prospects. 1. Introduction. This report examines the business case for starting a new venture in the form of an electrical retailer in Thame, Oxfordshire. It does so with due regard for the contemporary economic and retailing environment, as well as the relative prospects of a small, independent business as against a larger, diversified one. As Groom speculates, ‘A recession can be a smart time to launch a business or innovate, if you can find the money to invest. Competitors are struggling to cut costs and you can look forward to the upturn.’ (1). Liquidity in terms of start up costs, inventory, stock and rents is a key factor for consumer facing businesses, who cannot confidently predict their actual margins in the current climate. As will be discussed below, there are likely to be significant developments in UK electrical retailing sector over the next few years: not even the established multiple chains are assured of retaining their current margins. The one area which may offer smaller players a significant opportunity is e.commerce. As Hooley et al. point out, ‘A significant feature of the Internet is the shift in power away from manufacturers and retailers towards customers. While the period to the middle of the twentieth century saw power concentrated in the hands of manufacturers and suppliersthe customer now typically initiates an information search, whereas in the past the manufacturer or the retailer initiated and controlled this.’ (2) 2. A worthwhile business opportunity? The local/national competition. In the absence of detailed and focused market research data, the business case must be projected from the available circumstantial evidence. We will begin this discussion by looking at the market conditions for electrical goods and UK retailing in general. Both the British Retail Consortium and the Royal Institution of Chartered Surveyors reported worsening trade figures in November 2008, with non-discretionary purchases, i.e. food and drink, the only categories not to be depressed. (3) A recent Bank of England survey reported that Banks are imposing tougher lending standards on loans and credit cards, although interest rate cuts may encourage households to spend money freed off by heaper mortgage repayments. As one analyst observes, ‘Non-food retail sales are driven by real wage growth, credit availability and housing wealth. Since real incomes, after inflation, have been falling for about two years, consumers have dipped into savings, and used remortgaging and credit cards to maintain spending. Things are now reversing.’ (4) A depressed housing market will further impact upon electrical retailing through a lower demand for appliances. The major multiple and discount electrical store chains are suffering from poor sales and margins at present, due to the following factors†¦ Depressed housing markets have resulted in lower sales of refrigerators, washing machines and other white goods. A price war between television manufacturers has depressed profit margins on these goods by 1 per cent in the second half of 2008. Sales of flat-screen TV’s have slowed to the level of white goods. Margins have been further reduced in pre-Christmas price cutting, with rival chains holding sales to reduce stock levels. (5) In specific company terms, this means that Comet’s like for like sales are down 11.6 per cent from 2007, and Kesa, its Anglo-French owned parent company, has suffered a first half loss. Its shares recently suffered an 11.9 pence fall to 142.5 pence, and it is planning to cut costs through redundancies in its UK stores. DSG International, Comet’s closest competitor, has recently scrapped its dividend on the same basis. (6) As a background to this, large format outlets in retail park developments have been contracting, with Comet and Curry’s planning to rationalise their chains. Meanwhile, Tesco and Asda are expanding their non-discretionary and homewares businesses, and Argos is reportedly expanding. DSG have also opened a 60,000 square foot outlet near Birmingham, under the Currys megastore brand. In the long term, there may be competition from completely new entrants, such as Carphone Warehoue, which is currently opening US electrical stores in partnership with Best Buy. ( 7) The Best Buy/Carphone partnership has already projected 200 large consumer electrical stores in Europe by 2013, with 100 of these in the UK. They will be going head to head with Curry’s, Comet and PC World, and projecting sales of  £6.2 billion by 2013. ( 8) This is based on anticipated margins of 5.6 per cent, whereas current incumbents such as Currys and Comet trade on typical margins of 1 per cent. It is planned to achieve this more favourable margin by adopting a ‘know your customer’ approach: as Charles Dunstone puts it, ‘If you go to a lot of electrical stores now, they just keep the rain off the stock, no one there does anything, they don’t display it nicely, if you ask a question they just read the label back to you.’ (9). 3. The Local and Regional Trading Context. Thame is in a relatively affluent area. A detached house in the town is currently valued at an average of  £383,799, with the entry level flat or maisonette costing an average of  £167,994. (10) Council tax is likely to rise in 2009, with a Band ‘D’ tax payer facing an increase of  £3.05. (11) . The area is already well provided with electrical retail outlets. Curry’s has ten stores within a twenty five mile radius of Thame, including three in Reading, two in High Wycombe and two in Aylesbury. There are five Comet electrical stores within the same area : Aylesbury, Oxford (Cowley), Oxford, High Wycombe, and Reading, the closest of which is 8.7 miles away. Tesco and Asda, which both sell household electricals, have stores within an 8 mile radius of Thame: Tesco’s Princes Risborough store is 7.65 miles away, whilst Asda’s Wheatley outlet is only 6.05 miles. DIY outlets such as BQ, who also sell some electrical appliances, also have stores in the area. Thame is listed as having two independent electrical retailers: Thame Audio, of Swan Walk, and Domesco Ltd, in Thame High Street. No trading figures are available for the latter, but in 2008 Thame Audio publicly reported a drop in turnover to  £100,000. (12 ) The local credit situation for new or small enterprises is not encouraging. The proprietor of Thames AV, the independent television and hi-fi store, has recently complained of having his business overdraft interest rate doubled to 8 per cent, with the bank (Barclays) unwilling to extend further credit. (13) This is redolent of the wider national situation: The Federation of Small Businesses indicates that ‘†¦Our members are being refused loans and threatened with overdraft withdrawals unless they agree to new, hiked-up rates. The banks have had their bail-out. They should not pass their problems on to loyal . . . customers.’ (14 ) There are support organisations for new enterprise in the region, including the Oxford Trust, and Oxford Innovation. (15) It must also be borne in mind that the balance of the regulatory framework is unlikely to be tipped towards small retailers in the near future. As one of their Trade Organisation representatives has commented, ‘Having received the recommendations of a detailed and extensive inquiry there is no justification for the government not driving forward the †¦remedy put forward by the†¦competition authorities.’ (16) However, the response from the Office of Fair Trading has so far been unequivocal: ‘It is not for the competition authorities to deny any players in a market opportunities for organic growth†¦out of a perceived need and ability to meet consumer demand.’ (17). In other words, there will be no regulatory leveling of the playing field to encourage or assist small businesses. 4. Market entry prospects and Cash flow Forecast. Deacons and Freely point out that ‘converting an idea into a business opportunity is the key element of the process of business creation†¦Ã¢â‚¬â„¢, simultaneously indicating that a number of elements need to converge: ‘The economic environment has to be conducive, the culture must be appropriate for risk-taking and the nascent entrepreneur must have the confidence to take an idea suggested by opportunities through to fulfilment.’ (18) Whilst not all of these factors are currently present, it is proposed here that small retailers can still take advantage of the untapped capacity in eCommerce. As Hooley et al point out, this market is not homogenous, consisting of highly differentiated segments, i.e. ‘†¦Explorers – highly optimistic and innovative; Pioneers – the innovative but cautious: Skeptics – who need to have the benefits of technology proved to them: Paranoids – those who are insecure about the technology; and Laggar ds – those who will resist the technology†¦Ã¢â‚¬â„¢. (19). In a survey of small retailers, over half said that they were already augmenting their footfall business with trading on the web. All of those who had done so considered the initial outlay had been well invested, and considered that they had already recouped their investment. Whilst none agreed with the idea that the web might eventually supplant their high street business, they all foresaw it playing an increasing role in their margins even those who had not yet started trading on the web. (Appendix 3). Cashflow Forecast. Individuals will not enter the sphere of business start ups on a level playing field, as financial institutions are applying increasingly stringent lending criteria. As Deakins and Freel point out, ‘The importance of human capital tends to be reinforced by external financial institutions, since research has shown that bank managers rate previous experience as an important factor in lending to new-venture entrepreneurs.’ (20) The margins cited above, i.e. those of between 1 and 5 per cent as accepted in the trading of the large electrical multiples, illustrate how difficult it is going to be for a small scale enterprise to expand or even survive in close proximity to them. The cashflow forecast prepared for this study is based on a reasonably well capitalized start up, with only a  £24,000 loan required, and this deferred until the second year of trading, i.e. no repayments due in the first twelve months. It also assumes the trader has personal liquidity of  £500 a month from their existing assets, which they are prepared to commit to the business. The business has a target monthly income of between  £8,000 and  £10,000, seasonally adjusted: taking into account all other income, this would accrue a grand total of  £134.000. (See Appendix 1). Assuming an annual stock inventory of  £96,000, the other major outgoing will be Rent and rates, which are currently high in both the high street and out of town sites, despite vacant lots and falling demand. This will amount to  £14,400 including business rates, and there will also be a  £4,000 start up cost for interactive website design. With nothing factored in for contingencies, a total expected expenditure of  £125,120 is perhaps a little optimistic, and the predicted profit of  £8880 may be reduced to a break even situation. This is not regarded as a bad result in the first year’s trading for an independent retailer. (Appendix 2). 5. Conclusion. Current retail trading conditions are, arguably, not auspicious for any scale of enterprise. However, they are particularly hazardous for the small retailer, and especially one which is relying on any element of credit. There is no guarantee that the latter will be available at all, or that the terms agreed for it will remain unchanged: as has been discussed above, if they do change, it is likely to be in favour of the bank, rather than the other way round. As Deakins and Freel point out, ‘For obvious reasons, little research has been done on new business ventures that subsequently fail, but it is commonly asserted that one of the main reasons for the reported high failure rates of such new ventures is under-capitalization.’ (21). With forthcoming large scale businesses such as Carphone concentrating on creating customer value through service, small businesses will no longer be able to claim any discernible advantage in that respect, unless they can apply to new areas of retailing such as e.commerce. On the positive side, small businesses may derive some advantage from official nervousness about their role in the overall economy. Chancellor Alistair Darling has augmented the Small Firms Loan Guarantee Scheme, and widened the availability of Insurance from the Export Credits Guarantee Department. Stephen Alambritis, who is the head of parliamentary affairs for the Federation of Small Businesses, has indicated that ‘†¦Something’s happened somewhere [in government] that recognises that the real economy is small businesses, and if they don’t get the money and †¦the credit, then we’ll be in a recession.’ (22). With over 13 million people in the UK working in the small business sector, much depends on their sustainability. (23) However, the precise amount of support which might be available to any individual enterprise, such as the one under discussion here, cannot be anticipated. It must also be considered tha t any such support may be ephemeral in nature, and be reflected in higher taxes and lower business allowances when the fiscal books have to be balanced. Overall, the factors uncovered by this report indicate that this is not an appropriate time to open a small independent electrical retail business in Thame. Conversely, it may a propitious time for the kind of audacious, service orientated superstore mooted by Carphone Warehouse. As Blumentritt observes, ‘†¦Because defenders value efficiency and stability in their technology, structure, and organizational routines, they are sensitized to problems associated with innovation (e.g., high cost, risk of failure, threat to the established order)†¦Ã¢â‚¬â„¢ (24) If this is true of the existing electrical multiples, Thame may be a promising site for such a venture. Footnotes 1.) Groom, B., ‘A Great Time for New Businesses?’, Financial Times, 18.11.08, INTERNET, available at http://www.ft.com/cms/s/0/b8fc9ccc-b510-11dd-b780-0000779fd18c.html [viewed 21.12.08] 2.) Hooley, G., Saunders, J., and Piercy, N., (2004), Marketing Strategy and Competitive Position, 3rd Edition, Financial Times/Prentice Hall, p.515. 3.) Cohen, N., ‘Plunge in UK retail sales and home deals’, Financial Times, 11 Nov 2008, INTERNET, available at http://www.ft.com/cms/s/0/71a9f746-af7c-11dd-a4bf-000077b07658.html [viewed 22.12.08] 4.) Unattributed, ‘UK retail’, Financial Times, 7th Oct 2008, INTERNET, available at http://www.ft.com/cms/s/1/d898f024-9447-11dd-953e-000077b07658.html [viewed 22.12.08] 5. ) O’Connor, S., ‘The pain in Spain spreads to Kesa’s electrical goods’, Financial Times, 17th December 2008 INTERNET, available at http://www.ft.com/cms/s/0/b2777ac0-cbdb-11dd-ba02-000077b07658.html [viewed 22.12.08] 6.) Urry, M., ‘Kesa plunges on Comet warning’, Financial Times, 10 Sept 2008, INTERNET, available at http://www.ft.com/cms/s/0/ae1807ca-7f18-11dd-a3da-000077b07658.html [viewed 22.12.08] 7.) Thomas, D., and Rigby, E., ‘Wind of change blows through retail parks’, Financial Times, 17 Oct 2008, INTERNET, available at http://www.ft.com/cms/s/0/c93c46ae-9c7a-11dd-a42e-000077b07658.html [viewed 22.12.08] 8.) Rigby, E., and Parker, A., ‘Best Buy and Carphone detail Europe venture’, Financial Times, 15 Oct 2008, INTERNET, available at http://www.ft.com/cms/s/0/e2da7750-9a51-11dd-bfe2-000077b07658.html [viewed 22.12.08] 9. ) Rigby, E., and Parker, A., ‘Carphone upbeat over ambitious new venture’, Financial Times, 15 Oct 2008, INTERNET, available at http://www.ft.com/cms/s/0/fc98369a-9ae8-11dd-a653-000077b07658.html [22.12.08] 10.) Proviser, Thame House Prices, INTERNET, available at http://www.proviser.com/regional/towns/thame/ [viewed 22.12.08] 11.) ThameNews.Net, ‘Council Tax rise likely for 2009’, INTERNET, available at http://www.thamenews.net/readmore.asp?Content_ID=3972 [viewed 22.12.08] 12.) Guthrie, J., ‘Store owner ‘disgusted’ with bank’, Financial Times, 24 Oct 2008, INTERNET, available at http://www.ft.com/cms/s/0/d30ec254-a163-11dd-82fd-000077b07658.html [viewed 22.12.08] 13.) Ibid. 14.) ibid. 15.) O’Connor, S., ‘The pain in Spain spreads to Kesa’s electrical goods’, Financial Times, 17th Dec 2008 INTERNET, available at http://www.ft.com/cms/s/0/b2777ac0-cbdb-11dd-ba02-000077b07658.html [viewed 22.12.08] 16.) Unattributed, ‘ACS Calls for Political Action’, Association of Convenience Stores Website, INTERNET, available at http://www.acs.org.uk/en/Press_Office/details/index.cfm/obj_id/7082D32C-933E-4313-9CC47A5603AD2C50 [viewed 28.10.08] 17. ) Office of Fair Trading, (2005), Supermarkets: The code of practice and other competition issues. Conclusions. August, OFT807, HMSO, London, p.9. 18.) Deakins, D., and Freel, M., (2006), Entrepreneurship and Small Firms, McGraw Hill, London, p.228). 19.) Hooley, G., Saunders, J., and Piercy, N., (2004), Marketing Strategy and Competitive Position, 3rd Edition, Financial Times/Prentice Hall. p.493 20.) Deakins and Freel, op.cit., p.226. 21.) Ibid. p.229. 22.) Eaglesham, J., ‘Brown sharpens focus on small businesses’, Financial Times, Published 12.10.08, INTERNET, available at http://www.ft.com/cms/s/0/7566b7c8-9877-11dd-ace3-000077b07658.html [viewed 22.12.08] 23.) Wright, W., ‘Dear Chancellor:  £1 billion Small Business Survival Fund’, Federation of Small Businesses Website, INTERNET, available at http://www.fsb.org.uk/frontpage/assets/fsbadvert.pdf [viewed 21.11.08] 24.) Blumentritt, T., and Danis, W.M., ‘Business Strategy Types and Innovative Practices’, Journal of Managerial Issues, Vol. 18, 2006. INTERNET, available at http://www.questia.com/read/5016256465?title=Business%20Strategy%20Types%20and%20Innovative%20Practices [viewed 24.12.08] Bibliography Blumentritt, T., and Danis, W.M., ‘Business Strategy Types and Innovative Practices’, Journal of Managerial Issues, Vol. 18, 2006. INTERNET, available at http://www.questia.com/read/5016256465?title=Business%20Strategy%20Types%20and%20Innovative%20Practices [viewed 24.12.08] Cohen, N., ‘Plunge in UK retail sales and home deals’, Financial Times, 11 Nov 2008, INTERNET, available at http://www.ft.com/cms/s/0/71a9f746-af7c-11dd-a4bf-000077b07658.html [viewed 22.12.08] Competition Commission, (2008), Market investigation into the supply of groceries in the UK, HMSO London. Deakins, D., and Freel, M., (2006), Entrepreneurship and Small Firms, McGraw Hill, London. 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ThameNews.Net, ‘Council Tax rise likely for 2009’, INTERNET, available at http://www.thamenews.net/readmore.asp?Content_ID=3972 [viewed 22.12.08] Thomas, D., and Rigby, E., ‘Wind of change blows through retail parks’, Financial Times, 17 Oct 2008, INTERNET, available at http://www.ft.com/cms/s/0/c93c46ae-9c7a-11dd-a42e-000077b07658.html [viewed 22.12.08] Urry, M., ‘Kesa plunges on Comet warning’, Financial Times, 10 Sept 2008, INTERNET, available at http://www.ft.com/cms/s/0/ae1807ca-7f18-11dd-a3da-000077b07658.html [viewed 22.12.08] Unattributed, ‘ACS Calls for Political Action’, Association of Convenience Stores Website, INTERNET, available at http://www.acs.org.uk/en/Press_Office/details/index.cfm/obj_id/7082D32C-933E-4313-9CC47A5603AD2C50 [viewed 28.10.08] Unattributed, ‘UK retail’, Financial Times, 7th Oct 2008, INTERNET, available at http://www.ft.com/cms/s/1/d898f024-9447-11dd-953e-000077b07658.html [viewed 22.12.08] Wright, W., ‘Dear Chancellor:  £1 billion Small Business Survival Fund’, Federation of Small Businesses Website, INTERNET, available at http://www.fsb.org.uk/frontpage/assets/fsbadvert.pdf [viewed 21.11.08] Appendices. Appendix One. Cashflow forecast, Income.  ­Appendix Two Cashflow Forecast: Expenditure. Month 1 2 3 4 5 6 7 8 9 10 11 12 Total Stock 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 96,000 Accounting 500 500 1,000 Advertising 300 300 300 300 300 300 300 300 300 300 300 300 3,600 Bank Charges 25 25 25 25 25 25 25 25 25