One of the most critical business decisions
One of the most critical business decisions is always to retain or refurbish the entire business or a section of it. There are factors to be considered before one decides on either option. For a business to succeed, this critical decision has to be handled with the greatest possible care as wrong decisions may lead to deterioration of business operations and eventually failure and closure. Some of the key considerations to make includes; profitability, competitors, incremental costs and the liquidity of the company or department in question. For Birmingham food hall stores however, the main factor in question is the ability of the store to compete in the near future. Competitor activity is mainly a factor that determines the market leadership of a business, how profitable it can be and the demand created for the product by the customers and the business owners (Hansen and Gillert 2008). This paper seeks to analyze and evaluate the provided reports of the Birmingham Food Hall Store in order to determine the relevance of the business and its ability to continue as a going concern in the few coming years.
2. Methodology
This evaluation puts into consideration the various financial statements provided. The report uses cash flow forecasts for the years 2014 to second quarter of 2018. This is a good enough period to determine whether or not the food hall store has been making profits. Then i will go ahead and evaluate the expected cash flows from the food hall stores in the years ending 2019, 2020 and 2021. I will then compare and contrast the difference in cash flows, suppose we replaced the food hall stores with a garden living. I will also evaluate the revenue charts provided featuring if no changes are made and if changes are made. The results will then be reported in the findings section of the paper.
I will then conduct a sensibility analysis which majorly will be a series of reasoned out points despite the initial findings. The sensibility analysis will either support the findings or disagree in a way that ensures the best decision will be made. I will also research on the markets of the two options to determine their position and the chances of each option surviving in its own market. I will then conclude and give personal recommendations on the option that I think will be best for Birmingham. The options are either refurbishing Food Hall Store or replacing it with a Garden Living.
3. Results
3.1 Initial Findings
An evaluation of the cash flow statements gives a net present value of 2.9 million if the food hall was just refurbished and 2.8 million if the place is replaced with a garden living. The difference of 0.1 million indicates that in the long run, refurbishing the food hall will be more profitable over the years compared to replacing it. Secondly, the initial refurbishing investment capital was established to be 72, 000 as compared to the 135,000 for replacing the food hall with a garden living. From 2019 Q2 all the way to 2021 Q1, the expected revenues for each of the two options fluctuate but remain positive. Finding the average revenues for the eight quarters under reviews gives 1281517 for refurbishing and 946688 for replacing the food hall. The difference is 334829 or 35.4% of the average expected revenues of the garden living. An analysis into the costs of operation for the two options indicates an average quarterly operation cost of 1065304 for refurbishing the food hall and 549194 for replacing it with a garden living. The costs of operation are much lower if the food hall is replaced with a garden living. This forms the basis for us to determine the profit margin, which will guide us into determining whether or not the food hall store will be able to pay for its acquired assets or should we replace it all the same.
An analysis of the forecasting template if no change occur, gives the average revenue of 1281520 for the eight quarters under review. This forecasting assumes that neither refurbishing nor replacement is chosen. The revenues are positive and slightly on a refurbished food hall. This is an indication that neither refurbishing nor replacing is as good as letting the food hall the way it is. The average revenues are still good enough to sustain the Birmingham food hall stores in business with the rising competition if no change occurs. Not making any changes will not delay any business processes and limit the potential for the food hall to make any profits since, as it is, the business is already making good profits, even much more than it can make when the changes are made. However, the maximum possible profit level for the food hall store is represented as 1.6 million. This can be achieved if necessary business processes are adhered to. The processes include; new product innovation, efficiency in customer service, effective resource utilization, maintaining a well motivated team among many other processes. All these requires a business expansion plan which may be costly than adopting a new venture as the new product innovated.
3.2 Sensitivity Analysis
Two major factors to consider in this analysis are the net present value and the net profit margin. We are assuming that the total costs of operation represent the variable costs. In addition, the variable costs and the revenues represent the entire inflows and out flows of the business except for fixed assets acquisition.
Description
Formulae
Refurbishing option
Replacing option
Implications
Net present value
2.9 million
2.8 million
Refurbishing is more profitable over the years compared to replacing it
Net profit margin
Total revenues-variable costs.
(1281517-1065304) = 216213
(946688- 549194) = 397494
The company is more capable to pay for its future asset acquisitions in replacement option than the refurbish option.
From the look of things, refurbishing the food hall results in a 0.1 million extra profits. However, the possibility of the food hall stores to pay have a full cash cover for its assets are relatively lower for the refurbishing option than for the replacement option. It therefore makes more sense to replace the food hall store with the garden living based on the operation cost minimization policy. If we base all arguments on profitability, then the store may overlook the need to reduce on expenditure, and utilize resources efficiently. The store will end up spending more on variable costs than it can manage. On the other hand, retaining and refurbishing the food hall store will enable Birmingham to specify its products and start serving the vegetarians that are now increasing. Demand for greens is on the rise as people tend to move towards healthy foods for healthy living (Jones 2018). This is however not certain as the venture is still unknown and the store will have to budget for its implementation in terms of space, monetary resources, labor and product marketing.
3.3 Environment
In order to understand the environment for each of the two options, I did a research on the market analysis for each option. In both markets, there are competitors and various other market dynamics that would greatly influence the decision to be made. For instance, Garden Living is competing against major market giants like Argos, Laura Ashley, M"S, Home Bargains as well as the B"M. All the competitors for Garden Living are located within the town center, thus making the market quite concentrated and demanding. The food hall store if refurbished will have to face stiff competition from other food and wines companies like Co-op food, Iceland, M"S, Morrison’s and Heron foods. All these competitors are located in the neighborhoods of food hall stores and thus making it hard to trade effectively (Jones 2018). Other small food vendors are also creating cheaper and affordable food options for customers within the area thus reducing the demand for food hall stores. Since the refurbished food hall store will be a new business altogether, customers would prefer a long existing venture like the nearby supermarkets of Morrison’s, Tesco, Asda and Sainsbury;s also called “The Big 4”. This makes competition a really tough element of the business.
If the food hall was to be refurbished, the owners will have to think about repackaging, pricing, service deliveries and the available product floor space. The idea is to create a marketing strategy that will put the business to its current position and even surpass the present conditions in terms of market coverage. The implication is that the cash flow projections will fluctuate and thus to some extent, go below the forecasted figures. However, choosing to replace it with the Garden Living in itself presents a wide floor area that will enable partitioning and stocking of a wide range of products. Market indicators show that the market for Garden Living has a growth potential of 22% from the financial years starting 2016 all the way to 2021. This will give the business a competitive advantage and a broad consumer portfolio given the many departmental stores created in the floor space (Mintel, 2017).
4. Final Conclusions and Recommendations
Given the above description of analyses and financial forecasts, retaining and refurbishing the food hall stores is not as viable and promising as replacing it with the Garden Living. Long term profitability can only be achieved if predictions and forecasts are more certain and the probabilities of them being affected by major market dynamics are low. Refurbishing option leaves the business with much more market pressure which may lead to massive loss than the anticipated profits. It is therefore more prudent for the business to replace the Food hall stores and move into a new venture with promising productivity, asset management and customer valuation. The investment capital may be lower for refurbishing but the bigger burden lies with the operations costs which are twice costly than the operation costs for the Garden Living.
Similarly, Thinking about additional space area will raise the costs of refurbishing, a scenario which will not be necessary for the Garden Living. The general business knowledge and skills that the team has is good enough to help them get started on the new business venture. As can be seen from the business forecasts of the food hall without making any changes, the food hall store has already reached its maximum profitability on the business graph. For this reason, there are no major positive changes expected rather, the business will either stagnate or decline and gradually fail (see graphical presentation of this scenario in the appendix section, Diagram 1). Making it profitable will need a great effort to put up new interventions and ideas that will ensure value-addition, product rebranding, target marketing and customer satisfaction. This is a factor that has not been well covered by the forecasted cash flows.
In addition to these remarks, the historic data for food hall indicates very limited growth potential. Following the trends, it is not the best idea to refurbish the business. The food hall store is seen to be at the maximum profitability position in the graph (Diagram 2). A new beginning is essential for business growth and inclusion of fresh innovative products that will be more appealing and less straining in the market (Nakata and Viswanathan 2012). Despite the rise in veganism, it is not quite clear how food hall stores will use this to its advantage since the other foods and wines stores are also aiming at market leadership. They may probably be the first to embrace the veganism idea and implement it to block market entry and competition. Relevance of information and timing may not be too accurate to give food hall stores a market leadership advantage over the rest of the competitors.
5. Conclusion
References
Mintel. (2017). Garden Product Retailing UK . Retrieved from Mintel Academic: http://academic.mintel.com/display/834099/?highlight#hit1
Jones-Evans, D. (2018). The rise and rise of veganism and a global market worth billions. Retrieved from Wales Online: https://www.walesonline.co.uk/business/business-opinion/rise-rise-veganism-global-market-14199168
Nakata, C. and Viswanathan, M. (2012). From impactful research to sustainable innovations for subsistence marketplaces. Journal of Business Research, 65(12), pp.1655-1657.
Google Maps (2018,March 20). Retrieved from Google maps: https://www.google.co.uk/maps/place/Foodhall+FHS+6AZ/@53.7979102,-1.5411159,17z/data=!3m1!4b1!4m5!3m4!1s0x48795c1a294968b5:0x57aa1e6e221bf172!8m2!3d53.7978908!4d-1.5411389?hl=en-gb
Hansen, W. and Gillert, F. (2008). RFID for the optimization of business processes. Chichester, England: John Wiley " Sons.
6. Appendices
Diagram 1: A general business life-cycle curve
Diagram 2: Historical, current and future forecast of Birmingham Store Revenues
