Reference no: EM133041203

Your Uncle Nick has agreed to sell you his supermarket where you have worked for seven years since graduating from college. Uncle Nick is 72 years old and is ready to step down from day-to-day management.

After operating the Crest Supermarket on your own for six months, you begin to analyze how you can increase store traffic and, consequently, annual sales and profitability. During a recent trip to the Food Marketing Institute convention, you ran across several successful grocers. Some of them competed largely on price, while others competed more on promotion and advertising.

You decide to pursue a heavy promotion-oriented strategy. Consequently, you budget to increase advertising by $20,000 monthly or $240,000 annually and to also have a weekly contest where you give away $100 in groceries to 25 families. This will cost you $130,000 (52 × $100 × 25) annually.

Currently, Crest Supermarket serves a trade area with a 2-mile radius and a household density of 171 per square mile. Seventy percent of these households shop at Crest an average of 45 times per year. Of those that visit Crest, 98 percent make a purchase that averages $24.45. Crest operates on a 25-percent gross margin.

You estimate that with your new promotion program, the radius of Crest's trade area will increase to 2.5 miles. Assuming that all other relevant factors remain constant (171 households per square mile, 70 percent of households shop Crest, 98-percent closure rate, $24.45 average transaction size, 25-percent gross margin percent), is the planned promotion program and investment of an additional $370,000 (annually) a profitable strategy?

(Hint: Assume the trade area is circular and thus its size in square miles can be computed as pi (3.142) times the radius of the circle squared. The total square miles of the trade area can be multiplied by the number of households per square mile to obtain total households in the trade area. This in turn can be multiplied by the percentage that shop at Crest, which in turn can be multiplied by the average number of trips annually to Crest, which will yield total traffic. This traffic statistic can be multiplied by the percent of visitors that make a purchase, which will yield total transactions. You should be able to figure out on your own the rest of the computations that are needed to determine if the promotional strategy is profitable.