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SFP Project

This is a sample SFP Project submission. Please note that the emphasis of this particular project brief is different to yours and has been provided to you simply as an example that may help with the preparation of your own submission.

It is not a submission which scored 100% and it is not perfect but it does cover a number of the aspects relevant to the specific assignment brief it related to. Be aware that there are numerous ways in which to approach your project brief so this is NOT meant to be used a checklist of things to include. Nor is it to be used as a ‘model’ answer.

The usage of this sample is strictly prohibited and remains the intellectual property of the author - the author has given their permission for it to be used as a sample piece of work. Any copying of this work will be considered an act of plagiarism. The company used in this particular project brief is a fictious one.

Rubbersole Business Plan Report

1. Executive Summary

To succeed and survive, Rubbersole must develop new footwear markets and offer new footwear products responding to changes in consumer demand and behaviour. Rubbersole cannot compete on price and nor can it differentiate itself selling its current branded products. Latest projections show the business making increasing and unsustainable losses to 2021.

A ‘perfect storm’ of increased costs, rising inflation, and low wage growth threatens consumer confidence (Deloitte, 2017). The shift to online sales has empowered customers with information, choice and increasing expectations. (Retail Economics 2017). Clothing and footwear retailers are exposed to additional variables: fashion, seasonality and even the weather.

However, market analysis demonstrates that there are opportunities in an increasingly polarised market. Rubbersole should adopt a strategic position to meet the needs of a wider demographic of more affluent consumers, particularly men, who are more focused on quality, style and comfort and who are less price-sensitive.

2. Market Analysis

The UK had a retail footwear market worth £10.6bn in 2016 (Statista, 2017), part of a global footwear consumer market estimated to be over $200bn annually (Euromonitor, 2016). The UK market has been growing against a backdrop of low inflation with 39.3% growth in the

last five years and 6.2% in 2015-2016, pre-referendum. Since the referendum, the rate of retail sales growth has slowed and begun to decline as sterling weakness has driven higher inflation (FT, 2017). Online sales for clothing and footwear account 14.1% of the market and continue to grow strongly: 11.7% year on year to April 2017 (ONS, 2017).

Consumer Spending on Footwear

Although women’s footwear is the largest part of the market, growth in male footwear sales has been stronger than female in recent years. In the US, the value of male footwear sales is fast catching up with female (Woolhouse, 2017). Men are adopting a wider choice of footwear driven by changing work patterns, images of ‘success’, culture and social media.

Retail Gazette finds the same trend for UK males with the male/female spending gap narrowing. ONS data puts the ratio of female/male/children’s footwear sales at 49%/28%/23% for the UK. There seems little doubt that male footwear is the fastest growing segment.

3. Industry Analysis

Market share of the UK’s largest footwear retailers is as follows:

UK Footwear Retailers Market Share 2012

A segmental analysis can be drawn from this secondary data combined with primary market research from visits to UK footwear retailers (Appendix) and online:

  • Retail market players can be categorised between specialist or ‘pureplay’ clothing or footwear retailers and multiple or online retailers selling a wide range of
  • Supermarkets, discount pureplay retailers such as Primark and multiples such as M&S and Next are capturing price-sensitive less brand-sensitive value-oriented consumers.
  • Own brand stores are a notable segment. Clarks “the world's number one in everyday footwear” as a manufacturer and a retailer has existed since

Manufacturers are growing vertically, controlling marketing, retail experience, and margins. Church’s, Eco, Geox, Hunter and Ugg are adopting this model focusing on higher-spending brand-conscious affluent urban consumers.

  • Dune, Kurt Geiger, Office, and Schuh are instore and online retailers selling branded

and own-branded footwear. Schuh aims to offer “aspirational but accessible fashion footwear”. Dune and Office are less focused on price and more focused on fashion, brand, quality and innovation.

  • Independent shoe retailers range from single stores to multiple outlet

Charles Clinkard is typical - owner-managed with 33 UK stores and online selling

branded footwear with a family, quality and fit orientation.

  • Luxury brand retailers such a Selfridges, Harvey Nichols and Net-A-Porter/Mr Porter (online) with a premium/luxury footwear product

Together the large retailers graphed had a 74.9% market share with multiples the largest segment at 43.4% leaving around 25% of the market for independent and other retailers.

The number of UK footwear stores is in long-term decline, down 20% from 2008 to 2014 (ONS). Brantano, Jones Bootmaker, are Barratts Priceless are examples of recent insolvencies.

Further secondary research was conducted by analysing the financial statements of a sample of leading footwear retailers:

Major Footwear Retailers: Margin and ROCE

With total annual sales of £160m, Rubbersole has a market share of around 1.5% with a falling trend. The graph indicates that Rubbersole is generally underperforming compared with its similarly-sized competitors regarding margins and ROCE.

4. Opportunities and Threats

From the primary and secondary market analysis and macro review, the table below summarises the PESTEL factors applicable to Rubbersole to inform its choice of strategic options.

Political

Volatility makes planning uncertain

Forces behind globalisation are shifting

Brexit: negatively impacting supply chain and margins

Brexit: Uncertainty of residency and employment status for EU nationals in the UK affecting customers and staff

Post-election UK uncertainty.

Technological

Online search is driving all retail sales, both online and instore

Automation technologies, analytics and big data can drive competitive advantage

Increasing mobile device usage among consumers

Dependency on IT systems, the risk of failure and cybersecurity threat.

Economic

Consumer confidence is falling with rising inflation and pressure on incomes

Brexit uncertainty for trade, imports and tariffs.

Business rates increases, particularly in the South-East

Depreciation of sterling

Forex hedging to expire in supply chain.

Environmental

Sustainability an increasing concern for customers and stakeholders

Potentially less use of leather and tanning, and more environmentally-friendly shoes and packaging.

Having an ethical supply chain, particularly supplier employee welfare is essential for long-term value creation.

Risk of underage workers in the supply chain.

Social

Changes in lifestyle and buying trends – shoes as a status symbol

Men buying more footwear

Cultural diversity trend

Urban migration, more people living in towns and cities

Social media and fashion influencers increasingly driving demand

Changes in retail shopping habits, rise of the malls, airports and stations

Ageing population

Legal

Changes in regulated pay likely to increase staff costs eg National Living Wage

Statutory levies eg apprenticeship levy increasing the cost burden

Digital regulation increasing complexity and cost

Equal pay, pensions, and parental care legislation tending to increase compliance burden.

Key: Opportunity | Threat | Both

Rubbersole sells a pair of shoes on average for £37. Data from Numbeo would suggest an average men’s price of around £60 and this was broadly substantiated by the retailer visits. This positions Rubbersole towards the value-led category where it cannot compete against far larger rivals.

Retail research is indicating a polarisation of the clothing and footwear markets.

  • A “squeezed middle” has emerged – a large demographic of middle-income earners facing a fall in real income and cost of living rising, a trend driven by the forces of globalisation, skills gaps, and technological change. Sales to this segment are dominated by the large multiples online and offline focused on cost-leadership.
  • For more affluent consumers, PwC believes that the UK “premium lifestyle” segment of the footwear and clothing market can grow by 6.6% CAGR to 2020, above a forecast range of 2-4.4% for the market overall. It identifies a shift towards more casual clothing in the workplace and socially. The growth of social media, celebrity endorsement, and the desire to identify, and share experiences is driving sales in this segment. This creates an opportunity Rubbersole should

In the children’s market, population and birth rate growth, the trend towards parenting

later in life, and an ageing demographic of grandparents with higher disposable incomes are

all driving growth at the premium end. The children’s footwear market is driven by growth (literally). Children are harder to fit, increasingly fashion conscious and sales online have a 50% returns rate compared to 35% for women’s footwear (KPMG, 2017). However, of the

three market segments, PwC see this as the market with the least potential for growth:

UK Clothing, Footwear and Accessories Market CAGR

Forecast

2009-15

2015-20

Footwear

2.6%

3.4%

Childrenswear

2.1%

2.6%

Menswear

3.1%

5.3%

Womenswear

3.6%

5.0%

Source: PwC

Footwear comfort matters more than style to over 75% of males and 85% of females (Levin, 2015) and independent shoe retailers are the go-to source for expertise and footwear that fits. Rubbersole should exploit this opportunity.

In-store experience can help drive brand identity and loyalty online. Around 20% of the

£50bn clothing, footwear and accessory sales market in 2015 was online, up from 9.3% in 2010 (PwC, 2017). The online channel is expected to continue to take market share from the in-store channel accounting for 28% of sales by 2020. All this research is though pre- referendum. KPMG reports that:

  • A key factor driving online sales of clothing and footwear is returns, and multiple online purchases with the intention of returning something is
  • 62% of customers cite easy returns and free returns as a major driver of online
  • BORIS returns (bought online returned in store) and click and collect can effectively integrate the online and instore channels and increase instore

The UK and Europe has a long heritage in high-quality men’s footwear and the weakness of sterling makes these home-produced products more attractive. A further trend Rubbersole can exploit is ‘athleisure’ wear - how sports footwear has morphed into leisure and office wear. ‘Premium sneakers’ worn with a business suit is a very different segment to value- oriented sports footwear and represents an opportunity for Rubbersole.

Data from Statista (2014) showed that the 30-49 age group spend the most on footwear, 9% more than the under 30s, an average of £6.30 per week compared £5.80. UK Census data shows that 28% of the population are the 30-49 age group, a market currently not served by Rubbersole. This represents a significant opportunity to broaden the customer base and products to meet the needs of this segment, focused particularly on the premium lifestyle and aspirational drivers identified.

Age

Population

%

%

0–4

3,914,000

6.2

5–9

3,517,000

5.6

10–14

3,670,000

5.8

15–19

3,997,000

6.3

20–24

4,297,000

6.8

25–29

4,307,000

6.8

37.5

Current Rubbersole demographic

30–34

4,126,000

6.5

35–39

4,194,000

6.6

40–44

4,626,000

7.3

50–54

4,095,000

6.5

55–59

3,614,000

5.7

60–64

3,807,000

6

65–69

3,017,000

4.8

70–74

2,463,000

3.9

75–79

2,006,000

3.2

80–84

1,496,000

2.4

85–89

918,000

1.5

90+

476,000

0.8

Total

63,183,000

100

65

Combined demographic

5. Strategies: Identification and Justification

Porter (1985) provides a framework for evaluating the strategic options available to Rubbersole by analysing competitive forces and generic strategic approaches to gain competitive advantage based on the preceding market analysis:

Cost Leadership: exploiting sources of cost advantage through its products and supply chain to compete industrywide on price. This is the strategy of footwear retailers such as the supermarkets and Primark.

Differentiation: unique product range industrywide in a way which has value for customers and potentially allows a premium price. Selfridges is an example of a footwear retailer differentiated on style, aspiration and luxury for more affluent customers.

Focus: meeting the needs of a market segment with two variants: cost focus and differentiation focus. The footwear retailer Herring has a differentiation focus on largely English branded premium quality men’s shoes sold mostly online.

Porter argues that the firm must adopt one of these strategies or face being stuck in a strategic no man’s land. Applying the ideas of Porter to Rubbersole:

Competitive

Force

Generic strategy which could be adopted by Rubbersole

Cost Leadership

Differentiation

Focus

Buyer Power

Footwear customers can easily switch between large national retailers offering the same brands or alternatives at the lowest price.

Rubbersole is unable to

Rubbersole is mostly selling branded footwear which is not unique to the market.

Core competencies around range, quality, fit and customer service can enable Rubbersole to reduce customer

price-sensitivity

compete.

Supplier Power

Rubbersoles’ relatively low market share at 1.5% diminishes leverage with suppliers on terms.

Rubbersole is not likely to be able to offer a unique product or control a market segment industry-wide to increase its bargaining power with suppliers.

Developing

Rubbersole’s own- brand footwear range could reduce dependency on manufacturers’ brands and provide competitive advantage.

Competitive Rivalry

Competition is intense among low-cost retailers.

Luxury footwear retailers achieve differentiation with unique and desirable products but with high capital and marketing costs.

Focus on customer service, customer experience and a more distinctive product mix can give some differentiation focus.

Entry Barriers

Ability to offer low prices is restricted to

Selling branded

shoes makes differentiation

Core competencies

offer some protection from new

other higher volume retailers

difficult for Rubbersole.

entrants but the threat remains, particularly online.

Threat of

Footwear cannot be substituted for another

Rubbersole must

Substitutes

product but rivalry is high. A threat exists in

ensure its online

substitution of in-store for online sales by

product offer is

competitors and new entrants.

differentiated and

online customer

experience is better

than competitors.

Hunt and Morgan (2001) advocate that comparative advantage and market orientation will enable a business to compete where it chooses its target market more astutely than its competitors and its products and services are better suited to customers’ preferences. In line with this and based on the opportunities identified in the market analysis, a mission statement for Rubbersole on which to base its strategy is conceived:

To provide the best footwear products and buying experience to attract, engage and delight our customers through our stores and online, always focused on quality, style and fit.

Combining Porter’ notion of focus for Rubbersole and based on the work of Ansoff (1957) and the market analysis, four alternatives strategies are considered in line with this mission:

Rubbersole Strategic Options

Existing Products

New Products

Existing Markets

1. Market penetration

3. Product development

New Markets

2. Market development

3. Related diversification

Option 1: Market penetration

This strategy focuses on existing markets and existing products:

  • New stores would be opened each year where opportunity exists for example in new shopping malls or airports acknowledging the changing patterns in buying
  • It is assumed there are some underperforming stores and a small number of stores would be closed each year when for example leases
  • Online sales growth would be achieved by investing in the website for the UK market to improve online customer experience, information on choice, style, fit and an efficient returns process. Click and collect will also be
  • Improve customer service with improved training and staff incentive
  • Measure and target improvement in customer satisfaction (see NPS)

Option 2: Market development

A new market for existing products potentially exists in Europe. This could be achieved with stores in European locations and/or online sales in Europe with a multi-language mobile enabled website and pricing selling existing products.

However, this would require significant research on the European footwear market of which it is assumed the current management have limited knowledge. The uncertainty around Brexit and the economic risk factors identified in the PESTEL analysis make trading in Europe unattractive at this time and this option is rejected.

Option 3: Product development

This strategy would be focused on new products for existing markets:

  • New product would be sourced from manufacturers focused on the premium lifestyle segment identified in the market analysis at higher selling prices and improved
  • A premium athleisure range of products would be launched for existing markets, focused on quality, choice, fit and
  • Emphasis would be placed on sourcing UK and EU product with improved quality, exclusivity and sustainability and improved margins
  • Rubbersole would introduce exclusive own brand footwear, sourced in the UK and Europe focused in line with its new mission on quality, style and
  • The staff incentive scheme and customer satisfaction initiative would also be introduced described in Option

Option 4: Related diversification

This would focus on developing new footwear products for new footwear markets leveraging the current retail infrastructure and management competencies.

  • The market penetration and product development initiatives from Options 1 and 3 would both be
  • In addition, Rubbersole would extend its market demographic into the 30-49 age group across all product ranges for men and women as identified as an opportunity in the market

With each of these strategies goes a measurable commitment to customer and employee satisfaction addressed with other KPIs below.

The following operational factors have been considered in defining these strategic options:

  • Staff: retail is the largest low pay sector in the UK (Clarke & D’arcy, 2016) and Rubbersole is only paying the national minimum wage. Pay is its largest

Staff motivation is critical to a successful change of strategy. For this reason, a staff sales incentive scheme is proposed linked to growth to enable staff to share in the success of the strategy.

  • Staff training: all the strategic options require change and increased commitment from staff, hence training will be
  • Customer satisfaction: A major initiative underlying all strategic options will be increasing customer satisfaction, examined under KPIs
  • Supply chain: An assumption is made that suitable quality products to drive the product-oriented growth strategies can be sourced. Italy, Spain, and Portugal produce 2/3 of all EU-manufactured footwear, with Italy alone producing 50% of production (EC, 2012). These sources will be key to Rubbersole to improve quality, style, exclusivity and value, particularly the launch of own-brand
  • Coffee shops: the coffee shops do appear to be increasing footfall and possibly customer dwell time. However retailing coffee is not the core business. The

expansion of the men’s range and the pressure on floor space may make the coffee shops obsolete or even a hindrance to growth in the long term.

Other major strategic choices for Rubbersole considered but rejected where:

  • Expansion into clothing: this is unrelated diversification and significantly riskier. It is outside the knowledge of the management and extension of the brand name and retail network resources and requires a new supply
  • Acquisition/consolidation: this may be viable but needs more market data and analysis.

The potential financial outcome from each of the three strategies identified (1,3 and 4) is modelled below.

6. Shareholder Value and KPI selection

Rumelt (2011) believes that strategy involves identifying critical factors and directing management actions to deal with these factors. Based on the external market analysis and PESTEL analysis, three critical success factors can be identified for Rubbersole:

  1. Financial sustainability and profitability
  1. An attractive product and retail offer
  1. Satisfied stakeholders

Smith (2015) describes shareholder value as the creation of additional wealth for the ultimate business owners and whether management is acting appropriately to create this wealth. Smith believes this requires a rate of return higher than the cost of the capital utilised to generate that return, with the rate of return given by:

Operating cash flow

Shareholder’s equity and net debt

However, by itself this return on capital (ROCE) is not necessarily an effective indicator of long-term value creation. Measuring the cost of capital involves theoretical assumptions on

the risk-free rate, market rates of return and risk sensitivity. Agency theory suggests that conflicts of interest can arise in the narrow management of ROCE and it can be manipulated by management. Lazonick and O’Sullivan (2000) suggest that an aggressive short term pursuit of narrow shareholder value may run down a company for example attempting to reduce workforce or pay, increase dividends, or creating unjustified incentives for senior management.

Rappaport (1998) describes ‘enlighted self-interest’ as a more comprehensive alternative where long-term shareholder value is created by sound commercial and financial management but also engaging with shareholders and stakeholders. Mauboussin and Rappaport (2016) suggest that shareholder value can be 'reclaimed' from manipulation and Friedman’s (1970) now unpopular view of profit maximisation by:

  1. Clear strategic objectives at board level and acceptable compromises where objectives may come into conflict with an aggressive definition of shareholder
  1. Encouraging behaviours consistent with achieving non-financial and financial performance
  1. Communication with all stakeholders: planning, decision-making, and policies that support strategy and long-term

For Rubbersole, a more comprehensive measure of shareholder value creation necessitates a range of financial and non-financial KPIs which recognizes that stakeholder engagement is

the route to create long-term value for Rubbersole and its owners. Dividend level will not be a KPI for Rubbersole. In a period when the business is investing, the dividend may need to be temporarily foregone in the interests of long-term shareholder and brand value.

The following 10 KPIs are proposed for Rubbersole with indicative targets as a broader indicator of shareholder value:

Critical Success Factor

KPI

Target

Financial sustainability and

profitability

Sales total and by category

20% growth within 5

Years

Gross margin

5% growth within 5 Years

ROCE

5%, in line with

competitors

Attractive product and retail

offer

Sales per sq foot

5% annual improvement

Inventory Turn

<6 weeks

Average customer transaction

spend

5% annual improvement

Footfall and conversion – in-store

and online equivalent

5% annual improvement

Sales to retail staff costs

5% annual improvement

Satisfied stakeholders

Customer satisfaction/Net

Promoter Score

50+

Employee engagement

2% annual improvement

A concise number of KPIs spanning the critical success factors is also consistent with the work of Kaplan and Norton (2004).

The reasoning behind each KPI is as follows:

  • Sales total and by category: measures retail revenue performance across any period, per store, region, product group or in
  • Gross margin: given by (revenue-costs of sales)/revenue, provides a measure of product profitability and retail
  • ROCE: an indicator, though not the only indicator of shareholder value creation and the effectiveness of capital utilisation, useful for benchmarking with
  • Sales per sq foot: average revenue for every square foot of sales space, indicates the efficiency of the retail operation and product
  • Inventory Turn (cost of sales/inventory): indicates sales efficiency, a low turn may indicate obsolete stock which is failing to
  • Average customer transaction spend: this can be measured in a single transaction or tracked across a year for customers as a measure of loyalty and repeat business. A loyalty card and promotions can augment this
  • Footfall and conversion: the number of people entering a store or accessing the website and the number who subsequently make a purchase. A measure of the attractiveness of the product and the effectiveness of the sales conversion
  • Sales to retail staff costs: measures the sales performance of retail staff collectively or individually.
  • Customer satisfaction/Net Promoter Score: measuring customer satisfaction instore or online by quantifying promoters, detractors and passives (Reichheld, 2003). An NPS of 50+ should be an aim and can be benchmarked. Data for this KPI can be gathered instore using a Smiley Terminal or
  • Employee engagement: can be measured through an annual survey possibly combined with staff turnover and absenteeism rates.

Many of these KPIs can be looked at on a consolidated company level and sub-levels for products and individual stores.

There will be a larger number of operational performance indicators. For example, online sales performance indicators might be abandoned carts, retuning customers, social media engagement, pay-per-click traffic volume v organic search and returns rate.

7. Financial analysis and projections

Analysis of Rubbersole’s currently projected financial performance indicates escalating losses and negative ROCE. The liquidity and cash position is weakening and there is a risk that a breach of bank covenants linked to financial performance and position could lead to withdrawal of bank support and insolvency. Status quo is clearly not an option.

Rubbersole Shoes: Liquidity Analysis

2015 2016 2017 2018 2019 2020 2021

Current Assets - Current

Liabilites

10,183

10,495

10,920

10,264

8,204

4,739

-242

Current ratio

1.52

1.52

1.53

1.50

1.38

1.20

0.99

Quick ratio

0.06

0.06

0.06

0.06

0.06

0.05

0.04

Net Cash Flow £'000

5,531

-5,324

-1,866

-132

-894

-2,124

-3,488

Closing Cash £'000

-4,419

-9,743

-11,610

-11,742

-12,635

-14,760

-18,248

Rubbersole Shoes: 2016 Product Sales and margin analysis

Product line

Margin

SKUs

SKU

Weight

Shelf space

Sales £'000

Sales

Weight

Avg

Item £

Web site

53%

401

9.4%

15,663

9.9%

39.09

Female adult range

55%

2,093

49.2%

55.0%

90,927

57.7%

43.44

Male adult range

48%

515

12.1%

17.0%

18,898

12.0%

36.68

Children and Young Teenage

60%

998

23.4%

22.0%

31,045

19.7%

31.12

Accessories

46%

250

5.9%

6.0%

1,101

0.7%

4.40

Total

4,257

100.0%

100.0%

157,634

100.0%

37.03

Conclusions can be drawn from this data:

  • Rubbersole’s average price point positions it dangerously in the cost leaders’ market but without the volume and buying power to sustain low
  • The accessories segment is significantly underperforming comparing sales (0.7%) with shelf-space (6.0%).
  • Male footwear sales are significantly below potential based on the market

Based on the strategic options identified earlier, the following options have been modelled with assumptions shown:

Option 1: Market Penetration Strategy

Assumptions:

  • A net reduction by 1 store each year: 2 under-performing stores closing and one new store opening where opportunity
  • 1% increase in pricing v benchmarks each year.
  • 5% increase in staff costs to fund a sales incentive scheme and a 1% increase in staff training linked to sales and margin improvement.
  • 5 additional coffee shops per
  • Reduced space allocated to accessories with the space used proportionately for footwear segments. The ratio of female/male/childrens/accessories becomes 57%/18%/23%/2%.
  • Online sales increase by 4% with marketing budget increased by 1% and 1% added to overheads for website

Outcome:

Strategic Option: Market Penetration

Income Statement

2016

2017

2018

2019

2020

2021

KPI

Total Retail and Web Sales £'000

159,874

189,896

197,554

205,464

213,670

222,218

Direct Costs

83,561

99,892

107,648

113,587

119,634

126,026

Gross Profit

76,312

90,004

89,905

91,877

94,036

96,192

Retail outlet wages

37,587

39,997

39,643

39,289

38,935

38,581

Marketing

8,561

8,821

10,333

10,715

11,110

11,519

Overheads

25,396

28,327

28,795

29,277

29,774

30,289

Operating Profit

4,769

12,859

11,135

12,596

14,217

15,803

Interest and Tax

1,554

3,735

2,903

3,041

3,182

3,301

5 Years

Profit after Tax

3,215

9,124

8,232

9,555

11,036

12,501

50,448

EBITDA

15,389

23,754

21,972

23,374

24,936

26,461

KPI

Gross Margin %

48%

47%

46%

45%

44%

43%

Net operating margin %

3%

7%

6%

6%

7%

7%

KPI

ROCE

6%

17%

14%

15%

17%

18%

Net Debt / Equity %

54%

36%

25%

8%

-10%

-26%

Net Cash Balance

-9,743

-640

5,146

15,204

26,142

37,778

5 Years

Base Case Operating Profit

3,215

-735

-1,817

-2,874

-4,019

-5,267

-14,710

Improvement/(Decline)

0

9,859

10,049

12,429

15,054

17,768

65,159

Sales Growth

18.8%

4.0%

4.0%

4.0%

4.0%

KPI

Sales per square foot

6,765

7,792

8,143

8,509

8,893

9,297

KPI

Inventory days

180.3

159.6

131.7

104.4

78.2

53.2

KPI

Average transaction value £

37.03

38.85

38.94

39.02

39.11

39.19

KPI

Sales:retail staff costs ratio

4.25

4.75

4.98

5.23

5.49

5.76

Option 3: Product development

Assumptions:

  • New premium lifestyle, athleisure and men’s products enable a 5-10% increase in price v
  • Staff incentive and training as per Option 1
  • 1% increase in advertising
  • Further increase in men’s segment share, female/male/childrens/accessories now 55%/20%/23%/2% in line with market
  • Cost prices increase by 4% reflecting new product mix

Outcome:

Strategic Option: Product Development

Income Statement

2016

2017

2018

2019

2020

2021

KPI

Total Retail and Web Sales £'000

159,874

202,851

214,835

219,307

223,023

228,247

Direct Costs

83,561

103,284

116,299

123,090

124,341

130,901

Gross Profit

76,312

99,566

98,536

96,217

98,682

97,346

Retail outlet wages

37,587

40,351

40,351

40,351

40,351

40,351

Marketing

8,561

10,398

13,051

13,798

14,095

14,400

Overheads

25,396

28,623

29,337

29,772

30,184

30,661

Operating Profit

4,769

20,195

15,798

12,297

14,053

11,934

Interest and Tax

1,554

5,085

3,633

2,824

3,079

2,553

5 Years

Profit after Tax

3,215

15,109

12,165

9,473

10,974

9,381

57,102

EBITDA

15,389

30,782

26,385

22,884

24,640

22,521

KPI

Gross Margin %

48%

49%

46%

44%

44%

43%

Net operating margin %

3%

10%

7%

6%

6%

5%

KPI

ROCE

6%

26%

19%

15%

16%

13%

Net Debt / Equity %

54%

18%

6%

-3%

-11%

-20%

Net Cash Balance

-9,743

9,450

16,434

21,943

27,413

33,544

5 Years

Base Case Operating Profit

3,215

-735

-1,817

-2,874

-4,019

-5,267

-14,710

Improvement/(Decline)

0

15,844

13,981

12,347

14,993

14,648

71,813

Sales Growth

26.9%

5.9%

2.1%

1.7%

2.3%

KPI

Sales per square foot

6,765

7,974

8,444

8,594

8,283

8,455

KPI

Inventory days

180.3

137.9

98.3

77.1

77.8

57.1

KPI

Average transaction value £

37.03

40.45

40.56

40.64

42.63

42.71

KPI

Sales:retail staff costs ratio

4.25

5.03

5.32

5.44

5.53

5.66

Option 4: Related Diversification

Assumptions

  • Store changes as per Option 1
  • New premium lifestyle, athleisure and men’s products together with market development initiatives enable a 10-25%% increase in price v
  • Female/male/childrens/accessories now 48%/27%/23%/2% close to the ONS overall market
  • Advertising increased by 2%
  • Staff incentive and training as per Option 1
  • Cost prices increase by 6%
  • 2 additional coffee shops per year
  • Sterling weakens to USD 1.25 (or Euro equivalently)
  • Interest rate increases to 4% pa Outcome:

Strategic Option: Related Diver

sification

Income Statement

2016

2017

2018

2019

2020

2021

KPI

Total Retail and Web Sales £'000

159,874

206,550

214,830

217,945

218,921

224,173

Direct Costs

83,561

105,386

110,604

117,502

119,537

127,384

Gross Profit

76,312

101,164

104,225

100,443

99,383

96,789

Retail outlet wages

37,587

39,997

39,643

39,289

38,935

38,581

Marketing

8,561

12,131

15,534

16,259

16,510

16,675

Overheads

25,396

28,972

29,476

29,788

30,025

30,429

Operating Profit

4,769

20,065

19,572

15,107

13,914

11,105

Interest and Tax

1,554

5,030

4,464

3,521

3,197

2,530

5 Years

Profit after Tax

3,215

15,035

15,109

11,586

10,717

8,574

61,021

EBITDA

15,389

30,959

30,409

25,885

24,633

21,763

KPI

Gross Margin %

48%

49%

49%

46%

45%

43%

Net operating margin %

3%

10%

9%

7%

6%

5%

KPI

ROCE

6%

26%

24%

18%

16%

12%

Net Debt / Equity %

54%

13%

12%

4%

-2%

-11%

Net Cash Balance

-9,743

12,383

12,708

17,329

21,289

27,769

5 Years

Base Case Operating Profit

3,215

-735

-1,817

-2,874

-4,019

-5,267

-14,710

Improvement/(Decline)

0

15,769

16,925

14,460

14,736

13,841

75,731

Sales Growth

29.2%

4.0%

1.5%

0.4%

2.4%

KPI

Sales per square foot

6,765

7,772

7,410

7,540

7,262

7,467

KPI

Inventory days

180.3

120.1

144.5

115.4

112.6

85.1

KPI

Average transaction value £

37.03

42.45

46.29

46.39

48.35

48.45

KPI

Sales:retail staff costs ratio

4.25

5.16

5.42

5.55

5.62

5.81

It is concluded that the related diversification strategy is the recommended option for Rubbersole giving the best financial KPI performance over the other options for profit and ROCE and cash. However non-financial KPIs would also have to be modelled and taken into account before reaching a final decision.

7. Strategic Risks

In addition to the generic PESTEL risks identified, the selected strategy of related diversification presents specific risks:

  • Management may be unable to successfully manage change or take forward a bold and risky strategy of market and product
  • The business may not be able to find sources of supply for the right new products at the right price in the UK and
  • Rubbersole may have to rely on the design knowledge of suppliers to develop new products who lack insight into the UK
  • Rubbersole’s product buyers may could make poor judgements on product development.
  • Attempting to increase the average transaction value carries the risk that products will not be attractive to existing customers and it proves difficult to attract new customers.
  • Store locations and local demographics may not be favourable for the strategy to work.
  • Increasing marketing spend and getting the optimal marketing mix (product, price, promotion, place) may prove
  • Staff may not buy-in to the change in selling to a wider age group of customers and new processes to operate even with the incentive
  • Web site development costs may not be controlled and there are delays, cost overruns or technical
  • Environmental, sustainability and worker rights policies could be compromised in the pressure to compete and find new
  • Reporting mechanisms may not be able to measure the select KPIs and more general performance indicators accurately and
  • Competitors could react tactically or strategically to actively prevent Rubbersole’s strategy working for example with aggressive
  • The loss of a key supplier could constrain Rubbersole’s ability to sell products and compete.
  • Rubbersole may be dependent on key staff or management whose services it may be unable to retain with the
  • Liquidity risk increases as the business

8. Recommendations and conclusion

Rubbersole should follow a strategy of related diversification to reposition itself towards serving a more affluent urban consumer by focusing on:

  • New premium lifestyle, high-quality products
  • Increasing its emphasis on the growing demand for men’s
  • Developing premium athleisure footwear
  • Developing new stores in optimal locations
  • Closing underperforming stores
  • Ensuring it’s online product offer is attractive and efficient in areas such a fit/sizing and
  • Promoting its expertise in footwear comfort and fit

This must be combined with improving customer and staff satisfaction and optimising the financial and non-financial KPIs identified. A 5-year plan for the strategy is as follows:

Rubbersole: 5 Year Strategic Plan

Appendix: Retailer Visits

Retailer

Store Location

Date of Visit

Asda

Watford

03-Jun-17

Church's

Bicester

27-May-17

Clarks

Bicester

27-May-17

Dune

London, St Pancras

31-May-17

M&S

Watford

03-Jun-17

Next

Watford

03-Jun-17

Office

London, Bruswick Centre

31-May-17

Primark

Watford

03-Jun-17

Schuh

Watford

03-Jun-17

Selfridges

London, Oxford Street

31-May-17

Shoe Zone

Watford

03-Jun-17

Sports Direct

Borehamwood

28-May-17

Tesco

Watford

03-Jun-17

Tod's

Bicester

27-May-17

Ugg

Bicester

27-May-17

Retailer

Website

Date of Visit

Asda

http://direct.asda.com/george/women/shoe s/D1M1G20C20,default,sc.html http://www.church-footwear.com/it/en https://www.clarks.co.uk/ https://www.dunelondon.com/http://www.herringshoes.co.uk/http://www.marksandspencer.com/l/wome n/shoes-and-boots/all-shoes http://www.next.co.uk/shop/productaffiliati on-footwear

http://www.office.co.uk/ https://www.primark.com/en/products/cate gory/women,womens-shoes,ladies-shoes http://www.schuh.co.uk/http://www.selfridges.com/shoes https://www.shoezone.com/http://www.sportsdirect.com/mens/mens- shoes https://www.tesco.com/direct/clothing-

accessories/footwear/cat3376662.cat

04-Jun-17

Church's Clarks Dune Herring

04-Jun-17

04-Jun-17

04-Jun-17

04-Jun-17

M&S

04-Jun-17

Next

04-Jun-17

Office

04-Jun-17

Primark

04-Jun-17

Schuh Selfridges Shoe Zone

05-Jun-17

05-Jun-17

05-Jun-17

Sports Direct

05-Jun-17

Tesco

05-Jun-17

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