Feasibility Study of Car Retail Business - Essay Example

Feasibility Study of Car Retail Business Student’s Name: Institutional Affiliation: Instructor’s Name: Course: Due Date: Table of Contents Market Survey 3 Description of Competition 4 Barriers of entry 5 Substitute products 5 Purchasing power of buyers 5 Bargaining Power of the sellers 5 Business positioning 5 The marketing Plan 6 Pricing strategy 6 Promotion Strategy 6 Advertisement 7 Operations Plan 8 Service process flow chart 9 Facilities Required 10 Inventory Control System 11 Regulatory and Legal Issue 11 A Human Resource Plan Comprising: 11 Legal Form of the Business 13 Financial Analysis 14 Income Expenditure and Cash flows 14 Financial analysis based on the most likely situation (Profitability analysis of the investment) 16 Simple Rate of Return (SRR) 16 Payback Period (PBP) 16 Net Present Value (NPV) 17 Interest Rate of Return (IRR) 17 Conclusion 17 References 19 APPENDICES 20 Market Survey The business intends to target people who want a reliable and convenient access to a car for occasional use. Individuals who don’t need a vehicle on a daily basis are of great interest to our business. In Australia, the major market comprise those groups of people who perceive convince and economic advantages of car-sharing. The users (buyers) are mainly people with high education levels, modest incomes and are between 25-40 years of age. Education is an important necessity because the buyers and users of rented vehicles ought to be open to a two-way sales pitch. This implies that customers must be able to purchase the concept before purchasing the service. In addition, other specific target markets may include the less affluent people who do not travel often, the elderly who don’t want to encounter the responsibilities and expenses that come with owning a car and richer people who desire to have a second hand or specialized cars. Car buying and renting business is suitable for densely populated urban or suburban neighbourhoods that has good cycling, walking as well as transit services. The concept of car renting and renting began in Europe during the 1980s. Since then, the market has grown and expanded to the parts of the word due to high demand. The success of the Australian trade in car business is seen from the rapid growth in the industry. Most organizations engaged in trade in car business have not survived in the industry because they have either been bought by large companies or have remained local and small. Contrary to this, the entrepreneurial-oriented businesses have experience rapid growth and expansion. Our research on transportation survey indicated that there is a demand gap as majority of the population studied walked, took a bus to work or bicycled. Most of them expressed their displeasure of how not having a car makes them to limit their lives within downtown region. However, the volume of sales is subjected to various demand aspects. For instance, most people prefer using cars during weekends for out-of town trips, shopping and entertainments. Also, the sales are affected by weather and seasons. There is a likelihood of high sales during winter because most people prefer driving or taking a bus to biking, as compared to summer when the weather is relatively good. Description of Competition There is a high competition in Australia’s car retail market industry. The industry is characterized by many car buyers and sellers who are actively engaged in the business (Kindervatter & OEF International, 2010). There are over 4700 car dealers across the country who trade in more than 60 models of cars. Our major competitor is the Automotive Holdings Group Limited. It is the largest in the industry with a market share of 5% and estimated revenue of $3.68 billion in 2013-2014 financial years. Another competitor is A P Eagers Limited which has a market share of 3.8%. The top four car retail dealers holds about 10.8% of the market share in Australia (Porter, 2014). This implies that there is still a low market concentration in the industry. From a global perspective, it is apparent that Australia has the highest level of competition in the car retail market. The level of competition is denoted by the number of brands sold. As shown in the table below, Australia has the largest number of brands (67) and the smallest market size per brand compared to Canada, United Kingdom and the United states. This is an indication that Australia is relatively competitive. Australia Canada UK USA Number of brands in Australia 67 49 53 51 Sales (car units) 1,112,032 1,620,221 2,249,483 13,040,632 Market size per brand (car units) 16,597 33,066 42,443 255,699 Fig 1: Competitiveness of global car markets Barriers of entry The already existing competitors have established their loyalty with the customers making it hard to convince the customers to leave their long-time partners for ours. The likelihood of low volume of sales during the first year of operations makes may lead to difficulties in penetrating the market due to low market share. Substitute products The availability of other means of transport like bicycles and public service transport is a threat to the industry. This is because people tend to use them especially when the weather is favourable. Also, the some people would prefer using public transport e.g. taking a bus in order to avoid difficulties such as lack of parking space and increase in the cost of fuel. Purchasing power of buyers The buyers can determine the number of cars that the suppliers can offer them. Their ability to buy the cars from the sellers at a reasonable price makes determines the size of stock available to the market. As the purchasing power increase, the size of stock increase too. Bargaining Power of the sellers The ability of the sellers to come in terms with the buyers concerning the price for their items is very important. It determines the volume of sales offered to the market and the overall profitability of the business. Business positioning Like any other entrepreneur, our business looks for operational excellence and service innovation. Our strength lies in our differentiation strategy. Our ability to diversify our business from buying used cars to renting them makes our business unique as this will increase our revenues and the profitability of the business. Our business will also entail car-sharing, a form of business in which people will be given access to various models of cars at a fee. The fee will be based on the mileage covered and the period in which the car is rented. We will be also assisting customers to sell their cars in the right price and in the process earn a commission. The marketing Plan Pricing strategy We intend to employ different pricing strategies to come up with prices for our services and products. Penetration pricing method will be used during the first year of operations. This is where the prices of goods and services are set to be relatively lower than the prevailing market prices (Bruce and Duane, 2006). It allows the business to penetrate the market for the first time. After successful entry into the market, the prices will be readjusted to fit the existing economic conditions in the market (Slijper, 2012). Cost-Plus strategy will be used. This is a method in which a certain percentage is added to the total cost of production (Kotler, 2005). For our case, we will add 21% of the total cost of production of a product to its price. The final price is arrived after all costs associated with the product have been taken into account as illustrated in the figure below. Fig 2: Pricing Management Model Promotion Strategy The aim of promotion al strategy is to ensure that the message reaches the highest number of potential customers possible, through economical use of personnel, resources and facilities (Bob, 2011), Our business firm will use different communication channels that can reach out to the target customers. Sign Posts- our company shall have two sign posts with its name painted on them. One will be placed on the main road entering Sydney City and the other will be placed at the entrance in which the office is located. The estimated cost of the two sign posts is $15 each. The fee is payable to the local county council. Public relations efforts- the main emphasis of our business will be the creation and development of a new venture. The Chief Executive Officer of the company will be a Master’s degree holder in Entrepreneurial Management. The CEO will act as a public figure given the fact that he will be definitely required to give talks in seminars and workshops. Such events will be of great importance to our business since any information published will have the name of our CEO and the company, hence publicising our business. T-shirts- the firm will make 20 T-shirts, each with our business’s name printed on it. This implies that the view will read the label whenever one wears the t-shirt. Each T-shirt will cost $5 (Total $100). The first 15 purchases of cars will receive one T-shirt each and the remaining will be given to the operational team. Advertisement Advertisement will be done through two major channels of communication, radio and newspaper advertisements. Radio advertisement will be done daily and the cost is $10 for an advertisement to be aired twice a week. On the other hand newspaper advertisement will cost $60 per advert for a period of one year. Fig 3: Promotion and Advertisement expenditure forecast for 3 years Year 1 2 3 Notes Currency $ $ $ Promotion/Advertising 710 725 740 2.1% increase Fig 4: Promotion and Advertisement analysis for year 1 Description Monthly Rate Yearly Rate $ $ Sign Posts (County Council fee) 30 T-shirts 100 Newspaper advertisement 60 Radio advertisement 43.3 520 Total expenditure/ Promotion and advertisement 710 Operations Plan According to Tom (2006), strategic location is important when setting up a new business. Our business will be situated in Sydney City for the first three years. This makes it possible for the employees to meet with their customers on a regular basis. Among the advantages of the location is that Sydney is the largest and most famous city. The city also has vibrant culture, historical landmarks and iconic buildings which attracts many visitors every year. The disadvantage of the place is that there is a likelihood of overpopulation and overcrowding as a result of increased number of visitors. The effect of this is that crimes will increase hence becoming threat to the safety of our business. The premises will be leased for the first three years at a cost of $300 per month. The acquisition of the premises will be done with the help of the Sydney City Council Authorities. Service process flow chart Service delivery process shall begin with the reception of purchased cars from the customers. The purchased vehicles are cleaned (both inside and outside) before they are sterilized. The cars are then polished to remove any dust before they are waxed. After waxing, the cars will be then ready for re-sell. Some cars shall be rented as they await potential buyers. By so doing, it help in generating revenues for to the business, hence differentiating our business from the normal business of buying and selling cars by competitors. Fig.5: Service process flow chart Facilities Required The facilities shall include office furniture, electricity and water. The cost of the three items per month is: $5000, $150 and $90 respectively. Office furniture will be leased for the first three years of operation. Miscellaneous expenses shall cover car repairs, fuel and transport. Their estimated cost per month is $700. Fig 6: Utilities, Miscellaneous and administrative cost for the first 3 years. Year 1 2 3 Notes Details Utilities 62,880 65,000 70,000 7.7% increase Miscellaneous 8400 10,000 12,000 20% increase Administration 2,000 3,000 4,500 16.7% increase Inventory Control System The business will use the Periodic Ordering System of inventory control. This is a technique where orders are placed after a specific time (Stevenson and Jarillo, 2009). The system has the following feature; a) It can handle seasonal variations adequately b) The quantity of items ordered will vary depending on the level of demand c) Orders are placed after a specific time interval The following formula is used t obtained the order quantity Ordering quantity = scheduled demand (ordering cycle + lead time) +safety stock – inventory quantity + released order. We intend to manage seasonal variation by ensuring that the level expenses are closely monitored when the demand is low. This will help in preventing unnecessary expenses that might lead to loss to the business. Also, the fact that the Periodic Ordering System of inventory will be used will help in tracking of cars as they are purchased up to when they are sold or rented to the third parties. Regulatory and Legal Issue Donald and Richard (2007) asserts that trade in car rental business requires one to have legal documents of operations s as to establish the legitimacy of the business. Therefore, we intend to register our company with the relevant authorities in Sydney City. It is also a requirement by law to file returns after every month in order to ensure compliance with the Tax Regulatory Authorities. We will acquire our business permit before the official commencement of business. A Human Resource Plan Comprising: Our company shall operate with the following human source; 1. Chief Executive Officer (CEO) 2. Chief Accountant 3. Director (in charge of Purchases and Logics) 4. Sales and Marketing Officers ( 2) 5. Driver 6. Mechanic The six employees will be employed on a full-time basis and their remuneration packages will be based on the level of education, Skills, responsibilities and overall competence. The estimated salary is estimated to increase by 5.5% for the first 3 years. Fig 7: Personnel/ Labour expenditure for the first 3 years Year 1 2 3 Notes Details $ $ $ Labour 1,030,000 1,086,650 1,146,415 5.5% Increase Fig 8: Monthly analysis for year 1 Description Amount ($) Chief Executive Officer (CEO) 250,000 Chief Accountant 200,000 Director of Purchases and Logistics 200,000 2 Sales& Marketing Officers 280,000 Driver 50,000 Mechanic 50,000 TOTAL 1,030,000 The employees will be trained on basic management functions and leadership. They will also be trained on governance and how to handle employee relations, including disciplinary actions at workplace. This will help in smooth execution of responsibilities within the company. The performance of every employee will be assessed periodically through the performance appraisal. Depending on the outcome, adjustments will be made with respect to how each employee has met his goals. The employees are expected to comply with laws set up by the owners of the company. The laws act as a binding factor between the company functions and the employees. Above all they are expected to uphold workplace ethics and dignity. To ensure compliance, the board shall set up rules and regulations to be followed by everyone within the company. Legal Form of the Business Our business will be a small and medium sized business firm with six (6). It therefore respects and conforms to Awe’s (2006) definition of SME’s as an enterprise made up of 1-10 employees. The business intend to operate throughout the year, with the closing periods (dates) conforming to the Australian laws. It will operate under the normal working hours from 8AM to 4PM during the weekdays and from 9AM to 12PM on Saturdays. Therefore, it is preferable to other forms of business due to its flexibility of the schedule. Financial Analysis The business venture is extremely rewarding. Despite being new in the industry, our retail car business will serve as a source of employment and job security to its founders. The financial projection of the business shows that it will be able to make profits within the first years of operations, hence able to repay the loan in 3 years and cede dividends to the owners of the business. Income Expenditure and Cash flows As shown in the forecast in table 8 below, our business will make profit at the end of the first year. However, the fact that $2,000,000 will be obtained in form of loan means that the payback will be done at the end of each financial year. Therefore, the cash flow of the firm will be negative during the first year ($503,990). The business will reach its breakeven point within the second year and will have a positive cash flow at the end of year 2 ($4,434,625). The trend is projected to continue to the 3rd year when it is expected to make a positive cash flow after full repayment of loan. Fig 9: Income Expenditure and Cash Flow Statement Year 1 2 3 Notes Details Amount $ $ $ Turnover 95,000,000 115,000,000 135,000,000 17.4% Increase COGS 65,000,000 81,000,000 95,000,000 17.3% of turnover Gross Profit 30,000,000 34,000,000 40,000,000 Operating Expenses Sales-COGS Labour 1,030,000 1,086,650 1,146,415 5.5% increase utilities 62,880 65,000 70,000 7.7% increase Promotion/advertising 710 725 740 2.1% increase Administration 2,000 3,000 4,500 16.7% increase Miscellaneous 8400 10,000 12,000 20% increase Total Operating Expenses 1,103,990 1,165,375 1,233,655 Interest on loan 9,000,000 9,000,000 0 18% Total Exp. before tax 10,103,990 10,165,375 1,233,655 Earnings before tax 19,896,010 23,834,625 38,766,345 Taxes 9,400,000 10,400,000 12,500,000 32.2% Earnings after tax 10,496,010 13,434,625 26,266,345 Loan Refund 11,000,000 9,000,000 0 Surplus/Deficit(-) -503,990 4,434,625 26,266,345 Financial analysis based on the most likely situation (Profitability analysis of the investment) Simple Rate of Return (SRR) R= (Cash in – Cash out +y) *100% Initial Investment Fig 10: Simple Rate of Return for the first 3 years R1 =(95,000,000-1,103,990+525000)/1,103,990 85.5 R2 =(115,000,000-1,165,375+525000)/1,103990 103.6 R3 =(135,000,000-1,233,655+525000)/ 1,103990 121.7 Where, is the simple rate of return and y, is the cost of fund From the above calculations, the Simple Rate of Return is higher than the prevailing market interest rates, hence it is acceptable. Payback Period (PBP) Fig 11: Payback Period Year Turnover Cash out Net profit 1 95,000,000 95,503,990 -503,990 2 115,000,000 110,565,375 4,434,625 3 135,000,000 108,733,655 26,266,345 The payback period is within the 2nd year, which is acceptable Net Present Value (NPV) Assuming the discount rate is 10%, the NPV formula is given as, NPV= 95000000/ (1.2) + 115000000/ (1.2)2+ 135000000/ (1.2)3 =79,166,666.67+ 79,861,111.11+78,125,000 =94, 027,777.78 NPV is positive, thus acceptable. Interest Rate of Return (IRR) IRR =20000000/ {95000000/ (1.2) + 115000000/ (1.2)2+ 135000000/ (1.2)3}*100% = 47% The IRR is higher than the interest rate in the market which is acceptable Conclusion From the financial analysis, it is evident that the Simple Rate of Return (SRR) is greater than the present interest rate in the market, the payback period is within the second year of operation, the Net Present Value (NPV) is positive and the Internal Rate of Return ratio is also higher than the current interest rate in the market. This implies that the project is very feasible and acceptable. References Awe, S. (2006). The entrepreneur's information sourcebook: Charting the path to small business success. Westport, Conn: Libraries Unlimited. Bob Adams (2011), Small Business Start-up: Your Comprehensive Guide to Starting and Managing a Business, Adams Media Corporation, Holbrook, Massachusetts. Bruce R. Barringer and Duane R. Ireland (2006), Entrepreneurship: Successfully Launching NewVentures, Pearson Prentice Hall, Pearson Education Inc. Donald F. Kuratko and Richard M. Hodgetts (2007) Entrepreneurship: Theory, Process, Practice,7th ed., Thomson South-Western, Thompson Corporation, Mason. Kindervatter, S., & OEF International. (2010). Doing a feasibility study: Training activities for starting or reviewing a small business. Washington, D.C: OEF International. Kotler, P. (2005) Principles of Marketing, Prentice Hall Harlow Porter, E. M. (2014) Competitive strategy: techniques for analyzing industries and competitors Free Press, New York. Slijper, M. T. (2012). Assessing export potential: How to conduct a feasibility study into the profitability of export activities. London: Gower Press. Stevenson H. and J.C Jarillo, (2009). “A paradigm for Entrepreneurship: Entrepreneurial Management,”Strategic Management Journal, Vol.11 p17-27. Tom Harris (2006), Start-up: A Practical Guide to Starting and Running a New Business, Springer is a part of Springer-Verlag, Berlin. APPENDICES APPENDIX I: Competitiveness of global car markets Australia Canada UK USA Number of brands in Australia 67 49 53 51 Sales (car units) 1,112,032 1,620,221 2,249,483 13,040,632 Market size per brand (car units) 16,597 33,066 42,443 255,699 APPENDIX II: Pricing Management Model APPENDIX III: Promotion and Advertisement expenditure forecast for 3 years Year 1 2 3 Notes Currency $ $ $ Promotion/Advertising 710 725 740 2.1% increase APPENDIX IV: Promotion and Advertisement analysis for year 1 Description Monthly Rate Yearly Rate $ $ Sign Posts (County Council fee) 30 T-shirts 100 Newspaper advertisement 60 Radio advertisement 43.3 520 Total expenditure/ Promotion and advertisement 710 APPENDIX V: Service process flow chart APPENDIX VI: Utilities, Miscellaneous and administrative cost for the first 3 years. Year 1 2 3 Notes Details Utilities 62,880 65,000 70,000 7.7% increase Miscellaneous 8400 10,000 12,000 20% increase Administration 2,000 3,000 4,500 16.7% increase APPENDIX VII: Personnel/ Labour expenditure for the first 3 years Year 1 2 3 Notes Details $ $ $ Labour 1,030,000 1,086,650 1,146,415 5.5% Increase APPENDIX VIII: Monthly analysis for year 1 Description Amount ($) Chief Executive Officer (CEO) 250,000 Chief Accountant 200,000 Director of Purchases and Logistics 200,000 2 Sales& Marketing Officers 280,000 Driver 50,000 Mechanic 50,000 TOTAL 1,030,000 APPENDIX IX: Expenditure and Cash Flow Statement Year 1 2 3 Notes Details Amount $ $ $ Turnover 95,000,000 115,000,000 135,000,000 17.4% Increase COGS 65,000,000 81,000,000 95,000,000 17.3% of turnover Gross Profit 30,000,000 34,000,000 40,000,000 Operating Expenses Sales-COGS Labour 1,030,000 1,086,650 1,146,415 5.5% increase utilities 62,880 65,000 70,000 7.7% increase Promotion/advertising 710 725 740 2.1% increase Administration 2,000 3,000 4,500 16.7% increase Miscellaneous 8400 10,000 12,000 20% increase Total Operating Expenses 1,103,990 1,165,375 1,233,655 Interest on loan 9,000,000 9,000,000 0 18% Total Exp. before tax 10,103,990 10,165,375 1,233,655 Earnings before tax 19,896,010 23,834,625 38,766,345 Taxes 9,400,000 10,400,000 12,500,000 32.2% Earnings after tax 10,496,010 13,434,625 26,266,345 Loan Refund 11,000,000 9,000,000 0 Surplus/Deficit(-) -503,990 4,434,625 26,266,345 APPENDIX X: Simple Rate of Return for the first 3 years R1 =(95,000,000-1,103,990+525000)/1,103,990 85.5 R2 =(115,000,000-1,165,375+525000)/1,103990 103.6 R3 =(135,000,000-1,233,655+525000)/ 1,103990 121.7 APPENDIX XI: Payback Period Year Turnover Cash out Net profit 1 95,000,000 95,503,990 -503,990 2 115,000,000 110,565,375 4,434,625 3 135,000,000 108,733,655 26,266,345 Read More