Profitability and possible success of a mobile phone shop

This report is to advise Mr. Paco Bravo make a vital decision concerning his company. He owns various mobile phone shops in the south of Spain, in Estepona, the town centre of Malaga, etc. He is now considering the opening of another shop in the area between Malaga and Fuengirola, in Torremolinos, a town full of foreigners that move to Spain with a possible need to purchase a new mobile phone. The outcome of this report will show if it would be profitable to open the shop in that area, considering financial but also non-financial factors such as the existence of similar shops in the area, population, location of the shop, etc.

The financial factors will be analysed by putting the financial information that is known already or has been predicted through a thorough ratio analyses process. In order to obtain the information, Paco Bravo was consulted various times making sure that the information he published was not going against his franchise contract. Other shops had to be visited over a period of time in the summer looking how everything went about. Another important final thing was that the location of the new shop was inspected. Location: the locating of a business is the most important non-financial factor to consider.

Why, because it makes it easy for people to find and see it, the possibility of being a good competitor is as good as lost if the shop is badly located. If your business is located in a strategic place then most of your problems are solved. In the case of the new Feria Fone shop, there shouldi?? nt be any problems at all as the premis Mr. Bravo is looking at is placed at ground level in the most visited streets of Torremolinos1. The fact that the shop is placed at the entrance of the road is also very promising because like this people see it straight away without maybe thinking to go and look for another one that might be closer.

Very important is the fact that Mr. Bravo has actually managed to have the possibility of renting parking space just for customers at a very low price. Competitors present in the area: the market for mobile phones in Spain has risen at a spectacular speed; this had a direct impact on the opening of mobile phone shops all around the country. In the area Mr. Bravo offers his services, the number of mobile phone shops has increased round about by 400%2. This is a huge number and therefore competition is very high in the area. Despite these facts, Mr. Bravo has his permanent customers that always went to his shops.

We are almost sure that it will continue in this fashion and that many of his customers will appreciate a new shop in Torremolinos. Apart from this in the street where Mr. Bravo is planning to locate the shop, at the moment there are only another two shops present, both selling phones from providers distinct to the one franchised by Mr. Bravo. Population: the people that live in the close surroundings of the shop are mainly foreigners3 that decided to move to Spain after having holidays in the area. Land line telephones take very long to install, which makes people get a mobile phone in the meantime.

Due to this there is a market in the area that would welcome the opening of a new mobile phone shop. A very important point to look at, is that most of the people that choose to live in Torremolinos come from Nordic countries such as Sweden, etc4 and therefore expect high standards of top of the range mobile phone shops. Mr. Bravo is known to have some of the latest phones on the market in his shops before anybody else. From the forecasted financial information5, based upon the data obtained from the other shops, we can forecast how profitable and liquid this new shop could be in a near future.

To be able to analyse all this information, it is substantial to make use of ratios that are specially elaborated for this kind of analysis. There are several other factors like the payback period that have to be considered to get an even better picture of whether the opening of a new shop is reasonable or not. Profitability analysis 72% is a very high result for the Gross Profit, but on its own it doesnt say much about the profitability of the new shop as it has to be combined with other ratios, that give more exact information about the actual profit made.

So far, we can say that the business is very profitable. Combining this result, being 25%, with the one obtained from the Net Profit Margin, we can appreciate that the business will be profitable, but not quite as much as the Gross Profit Margin ratio predicted it to be. Being in the 20%, the business is unlikely to encounter major problems with their profit making. Having a close look at these results we can conclude that the new shop is going to be profitable and its performance will be of reasonably high standard, as the result of the ROCE is in the 40’s making this an elevated, promising result.

Considering the other results in this category, we can say that the business is capable of making profit but is also at a reasonably high standard of performance. Liquidity Analysis A business should have an optimum asset ratio of 1,5:1 or highest 2:1. By having a current ratio of 2,4:1, the cash inside the business might not get used well enough or not in a productive fashion. To be sure about the real liquidity position the business finds itself in, I shall precede with another, more severe ratio that analyses liquidity.

Having gone through the acid Test Ratio, we get to the other extreme, where the business is in danger of not having enough cash to cover daily bills and fall into a state called overtrading or overborrowing. Businesses can survive under these conditions even though, we have to take in account that the numbers are approximations, making a proper analysis difficult, and could therefore disprove the liquidity problem. To conclude on financial ratios, the new shop is very capable of making high numbers of sales and get to a stage were profits are high, but it could have minor problems considering liquidity as this is below the recommended level..

Non-Financial factors-discussed Location: it easy to say that Mr. Bravo will not encounter any problems as geographically, the shop couldnt be placed better. This is very likely to get reflected, over medium or long term, in the financial accounts of Mr. Bravo’s business as many people will be attracted to the place and therefore buy more and raise incomes. Competitors: as the shops in the direct neighbourhood provide different operators, it will not be hard, for Mr: Bravo, to get the attention of the people, as his shops apart from being at the highest technological standard, also have the most original marketing and decoration strategies.

Another important point to mention are his permanent customers who come from the area but usually visit him in his other shops will now be more satisfied, promoting the shop verbally with partners, etc. Population: the increase of population in this case is very important as this is what businesses depend on, customers. As the growth in the area is very high and the operator Mr. Bravo franchises, is extremely efficient and known internationally, a direct impact on sales will be appreciated.