Median household EBI of Wardlow is less than that of Westville; hence total EBI of Wardlow is strictly less than 1/4. 6 (population ratio) times that of Westville. The market share of new store in Wardlow should be at least 4. 6 times that of the Stan’s Sound market share in Westville in order to generate the profit of same order. Assuming additional expanses of startup (traveling etc) and 15% discount on rent balances each other.
This means that the least market share gain factor of 4.6 has to come from the competition advantage offered by the trade area and the shopping mall. Since median EBI of Wardlow is less compared with Westville, demand for quality audio components and custom designed systems (higher price) would be less in comparison with Westville. Therefore standard sound system will be safer option to start with. The above analysis shows that for expansion to be a success competitive advantage must increase market share in Wardlow significantly compared with current market share in Westville.
Current financial position of the business for expansion After analyzing the various opportunities associated with the location and various expectations, situation come down to whether the business is in position to invest or not? The business has only 7% of cash compared with total asset. 74. 2% of assets are in the form inventory. Current ratio (Current assets / Current liabilities) is 2. 04 and Quick ratio (remove inventory from current assets) is . 26. This shows that at the moment business is too much dependent on inventories.
Previous year (1976) these figures were much better. The reason is investments in Cen-Tex Audio. See Exhibit I for exact figures From the previous two expansions (Northtown Shopping centre and Cen-Tex Audio) it could be found out that on an average investment of 22000$ is required for the expansion. It implies that generation of cash for investments in new store would be one of major problems. Bank or other loan is one option, but already leverage ratios (Debt-to-assets ratio) are very high (42%).
The business has low profit margins as shown by low return on sales (7 to 5%) but the return on total assets is good (28 to 19%), this shows that on investment business is capable of generating cash. Though, retailer has much more discretion in setting prices on components and custom designed systems but the 2 months return figure from Cen-Tax Audio is not very encouraging in fact both it’s gross profit margin and return on sales is less compared with San’s sounds figure for the year 1977.
But, the larger amount of sales (in 2 months) for Cen-Tax shows it’s potential to grow at significant pace on investment. To conclude because of the Cen-Tex Audio expansion most of the figures are in decline compared with 1976, so back to back expansion at this point of time could turn out to be really costly affairs due to low operating profit margin for covering interest charges that will accrue from the capital structure after expansion. Meanwhile, the current stores also require investment for recovering with the declines. Decision Making
Financial analysis clearly shows that right now business is not in good position to make investment in unknown territory. Also, considering average case scenario of the market analysis of Wardlow shows that market may not be good for custom designed systems and the success is very much dependent on capturing large market share. So based on criteria and constraints mentioned above right now final decision has to “Not open new store in Wardlow and take measure to minimize operating expenses hence improve net profit and liquidity ratio of business, so as to be in better position for expansion in future”.