Case Study: Aggro Stores ` Buildings and infrastructure: Another issue the manager raises with the Chairman is the amount of shrinkage that they are suffering due to the poor state of the building. Because the roof is leaking in places, they often find that stocks of animal feed get wet and are spoiled. About 10% of the feed that is bought in is lost in this way and due to health regulations, the store is paying £5,000/year for the disposal of the spoiled feed. That £5,000 and the cost of the spoiled feed are part of the cost of goods sold. As well as this problem the manager points out that the roof is dangerous in places and urgent action needs to be taken. Restoring the roof to a sound condition can be done via a temporary repair for £15,000, or by a full repair for £35,000. The temporary repair would be good for no more than three years at which point the full repair would have to be done. Alternatively, they could rent an empty building on the adjacent site. The lease for this building has become available and could be secured for £1,000/month. All of the animal feed could be shifted into this building, which is sound and dry. Securing the lease would also provide additional storage and yard space for agricultural building products that currently are not stocked. These carry a margin of 50% and up to £100,000 of additional stock could be carried which would turn over every four months. As there is a history in the store of selling these type of products, he is confident of the figures. He is not confident that the lease of the building will not be taken up by someone else if Aggro do not move on it soon. The manager then points out that the drainage problem is a health and safety issue, which threatens not only staff on site, but also their licenses to sell animal feed. The issue is serious, but can be remedied by the installation of a septic tank for £5,000. He is aware that the authorities are currently unaware of the problem, but is concerned that if they find out they would act quickly and close the store. He concedes that it is unlikely that they will find out within the next 6 months. Finally, he raises the issue of the car park. He argues that spreading gravel in the car park will stabilise the surface and make it much more pleasant for customers. This will cost £5,000, but will be good for five years and he estimates will increase footfall in the store. The additional footfall will, he estimates, increase the sales of their core animal feed and agricultural supplies (non-building) by 30% of their current level for each of the next three years, so that in 3 years time, sales will have increased by 90%. He believes that the redecoration and refitting of the part of the store that currently holds this core stock would increase footfall and sales by another 10% each year from current levels. The Chairman is worried by this discussion. He can see that the manager has done a good job and has identified many problems and has offered solutions, but as they are both aware the store does not have the money to make all the improvements right away and there is no prospect of raising finance elsewhere. The manager wants to use all of the available cash to progress things as fast as possible. The Chairman would prefer to progress more slowly as he worries about having no cash reserves. He also worries about the reaction of the rest of the board to this news. The brief: Analyse the situation at Aggro Stores, considering the competitive environment and financial constraints. Aspects of the problem are best shared out amongst the group. Consider the likely outcomes, financial and otherwise, of the options that the manager has offered and seek optimal outcomes. Produce a five year plan that the manager and the Chairman can present to the Board as a way forward for the business that will ensure its future prosperity. You should include budgets and cash flow forecasts for the alternatives and show clearly (in appendices) how you have arrived at the numbers that you present. Clearly justify in the report the choices you have made, discussing in particular how you think the customers and competitors will respond to the actions of Aggro.
Case Study: Aggro Stores
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Buildings and infrastructure:
Another issue the manager raises with the Chairman is the amount of shrinkage that they are suffering due to the poor state of the building. Because the roof is leaking in places, they often find that stocks of animal feed get wet and are spoiled. About 10% of the feed that is bought in is lost in this way and due to health regulations, the store is paying £5,000/year for the disposal of the spoiled feed. That £5,000 and the cost of the spoiled feed are part of the cost of goods sold.
As well as this problem the manager points out that the roof is dangerous in places and urgent action needs to be taken. Restoring the roof to a sound condition can be done via a temporary repair for £15,000, or by a full repair for £35,000. The temporary repair would be good for no more than three years at which point the full repair would have to be done. Alternatively, they could rent an empty building on the adjacent site. The lease for this building has become available and could be secured for £1,000/month. All of the animal feed could be shifted into this building, which is sound and dry. Securing the lease would also provide additional storage and yard space for agricultural building products that currently are not stocked. These carry a margin of 50% and up to £100,000 of additional stock could be carried which would turn over every four months. As there is a history in the store of selling these type of products, he is confident of the figures. He is not confident that the lease of the building will not be taken up by someone else if Aggro do not move on it soon.
The manager then points out that the drainage problem is a health and safety issue, which threatens not only staff on site, but also their licenses to sell animal feed. The issue is serious, but can be remedied by the installation of a septic tank for £5,000. He is aware that the authorities are currently unaware of the problem, but is concerned that if they find out they would act quickly and close the store. He concedes that it is unlikely that they will find out within the next 6 months.
Finally, he raises the issue of the car park. He argues that spreading gravel in the car park will stabilise the surface and make it much more pleasant for customers. This will cost £5,000, but will be good for five years and he estimates will increase footfall in the store. The additional footfall will, he estimates, increase the sales of their core animal feed and agricultural supplies (non-building) by 30% of their current level for each of the next three years, so that in 3 years time, sales will have increased by 90%. He believes that the redecoration and refitting of the part of the store that currently holds this core stock would increase footfall and sales by another 10% each year from current levels.
The Chairman is worried by this discussion. He can see that the manager has done a good job and has identified many problems and has offered solutions, but as they are both aware the store does not have the money to make all the improvements right away and there is no prospect of raising finance elsewhere. The manager wants to use all of the available cash to progress things as fast as possible. The Chairman would prefer to progress more slowly as he worries about having no cash reserves. He also worries about the reaction of the rest of the board to this news.
The brief:
- Analyse the situation at Aggro Stores, considering the competitive environment and financial constraints. Aspects of the problem are best shared out amongst the group.
- Consider the likely outcomes, financial and otherwise, of the options that the manager has offered and seek optimal outcomes.
- Produce a five year plan that the manager and the Chairman can present to the Board as a way forward for the business that will ensure its future prosperity. You should include budgets and cash flow forecasts for the alternatives and show clearly (in appendices) how you have arrived at the numbers that you present. Clearly justify in the report the choices you have made, discussing in particular how you think the customers and competitors will respond to the actions of Aggro.
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