Reference no: EM13381141
You are a business development advisor with the RA Group, a consultancy which provides consultancy and advice services to companies in the retail sector. You have been asked to assist a client, Tony Parker. Tony is proposing to undertake a project to expand his business. He wants to ensure that his proposal has been thoroughly prepared. You have been asked to consider the proposal and include a number of specific points in your report, including how the proposal is likely to be viewed by the company's bank, and how the success of the project should be monitored by the management team. You have already had a number of meetings with Tony and at these meetings you have discussed his reasons for undertaking the project and his objectives for the expanded business.
Background
In the 1950s, Roger Parker (Tony's father) began trading in the UK as ‘R Parker TV Rentals', with only one store. He expected that the launch of commercial broadcasting, combined with increased confidence about the prospects for economic growth meant that there would be an increasing demand for televisions. However, the relatively high prices meant that many potential customers would be unable to afford to buy a television outright. His business plan was to rent TVs to individuals, and he established the business with a loan from his father.
The business was extremely successful, and he quickly expanded it by offering a wider range of electrical goods and by opening more stores. As the relative price of televisions changed and the range of goods expanded, both the nature and the name of the business changed, with rental no longer being a part of the business and the company trading as ‘RP Electrix' to reflect this change.
In 1998, Tony took over the post of Chief Executive Officer. He made a further name change shortly after he took over and since then the business has been branded ‘RPE'. Tony feels that this provides a connection with the original business, but is sufficiently vague to allow him to continually expand the range of products sold by the business. RPE is a private limited company, with all of the shares held by the extended Parker family. It now has 15 stores throughout the UK, selling a wide range of electronic products. Tony has been concerned for some time that, due to their size, very large retail chains are in a position to negotiate better prices with suppliers and that this allows them to sell at lower prices, while maintaining their margin. One of his responses to this was to join a consortium of independent retailers to achieve better terms, based on their combined buying power.
This was reasonably successful, but he feels that unless he can innovate further, the combination of competition and reduced consumer spending will be detrimental in the long term. Indeed, in the year to 31 August 2009, the company reported its first annual post-tax loss for over 40 years. While there was a return to profitability in 2010 and 2011, Tony takes the view that the existing levels of profit are insufficient for the long-term success of the business.
He has therefore formed the opinion that, while retaining a number of stores, the only viable response is to introduce on-line sales. His argument is that the company is effectively competing with on-line retailers already as many customers visit stores to view products and gather information. They then use on-line price comparison websites to identify the most competitive price. They will then buy from that retailer.
Development of the business
Tony believes that, in the past, RPE's success was built on five factors. The first was that the stores are located in prime retail areas. This gave a high degree of visibility, which produced a steady stream of potential customers. The second factor was that, when a customer visited the store, they found that staff had excellent industry and product knowledge. It has always been company policy to employ staff who are passionate about the products they sell. As a consequence, staff have always been well informed about current developments, and up to date with potential new products. (For example, RPE was the first retailer in most of the locations in which stores are situated to stock high definition (HD ready) television receivers1.) The third factor was that staff have always been encouraged to understand the customer's needs and to ensure that what they buy will meet those needs. Both Roger and Tony have consistently told staff that their objective is to meet the customer's needs - not to simply sell products. This focus on meeting customer needs led naturally to the fourth factor - an extremely high quality after-sales service to customers.
Two particular initiatives illustrate this. The first was to offer customers a no-quibble return facility within seven days of a sale. This meant that in the seven days following the sale, a customer could return any product and obtain a full refund. This is significantly more comprehensive than a customer's legal entitlement. Legally, as a product must be ‘fit for purpose' it can be returned within a ‘reasonable period' if it is found to be faulty. The RPE approach is to allow customers to return a product within seven days without any explanation. Therefore a customer may return a product simply because when they take it home and begin to use it, they have decided it does not look attractive when placed with their other furniture or appliances. Tony has noticed that the number of items being returned under this initiative has been increasing in the last year or so. He has also noted that a smaller proportion of customers visiting the shops are actually buying from RPE. His view is that an increasing number of customers are using the shop to physically inspect products as part of their purchasing decision, but are then purchasing from other on-line retailers because they offer lower prices. He refers to such customers as ‘browsers' as they browse the product in a store rather than viewing it on-line. However, their final purchasing decision is made on the basis of price.
A second initiative was to offer customers a ‘home visit' for any product costing more than £500. The purpose of this is to ensure that the customer is enjoying the full benefits of the product. This would include, for example, calibrating the various settings on a sound system to maximise the sound quality, ensuring that a television is positioned so that the highest quality picture and sound can be enjoyed by the maximum number of viewers. In the last 18 months there has been a fall in the number of customers requesting such visits. Tony views this as evidence that customers are either better informed, or less concerned about the quality of their experience from using the product.
These four factors (location, staff knowledge, customer focus, after-sales service) created the fifth factor, which Tony refers to as the primary goal - customer loyalty. RPE has always had a high level of customers who return to buy new and replacement products. He is extremely proud of the fact that a number of regular customers are the children of people who were regular customers when his father was running the business.
However, he makes the point that, if the customers are changing their habits, the only way to drive the business forward is to respond to such changes. He argues that, in doing so, RPE will continue to treat the customer's needs as the most important factor in the business. Staff have commented that he consistently reminds them that ‘the customer has changed, so we have to change too - the customer is still the reason we are here'.
On-line sales - the Business Model
The proposal is to offer on-line sales within the rest of the European Union (EU)2. Negotiations with suppliers have led to a number of agreements on both price and volume based rebates. In general, RPE will be able to buy products from suppliers at a slightly lower price than is currently possible. Additional rebates will be available, depending on the volume of sales. These will be paid quarterly in arrears. Tony is planning to calculate and publish prices on the assumption that the lowest level of sales which will generate a rebate will be achieved. As volumes increase and approach the level at which additional rebates will be triggered, the website will promote ‘special offer' prices in order to encourage sufficient sales to achieve the rebate.
Customers will be able to select whether they wish to pay in sterling or euro, and all payments will be made by credit or debit card. Consequently there will be no period of credit extended to customers and no default is anticipated.
Customers will be able to establish on-line contact with staff to obtain product information and advice. This will be through either email or voice over internet protocol (voip) telephone services. It is planned that calls through voip will include the option to be supplemented with a webcam so that the customer can see the member of staff they are dealing with. In this way, Tony hopes to create an on-line equivalent of the face to face customer support that is regarded as a key strength of the stores.
Some inventory will be held in a central store, but most products will be despatched direct from the supplier to the customer in order to minimise both inventory and delivery times.
The customer order process will be directly linked to suppliers' inventory information, so that potential customers can be advised if the item they wish to purchase is currently in inventory and therefore available for immediate delivery, or when it will be available. Once an order is placed, it will be allocated a reference number to enable customers to receive updates on the order and delivery status via either text or email.
Required:
In your role as business development executive, review the proposal from RPE, and prepare a report which:
(a) provides an assessment of the performance of RPE based on the information provided in Appendix 1 from the perspective of the company's bank;
(b) identifies additional information that the bank is likely to require in order to make a decision on the request for working capital finance;
(c) explains the reasons why the bank will require the information you have referred to in (b) above;
(d) explains the key issues which the management team will need to keep under review as a result of differences between the retail store business and the on-line business, and possible responses to these issues; and
(e) outlines and justifies metrics which could be used to manage the performance of the new on-line business, given the stated strategic objectives.
Professional marks will be awarded for the appropriateness of the format of the report and the effectiveness with which the information is communicated.