Option 1: Retail in Retail at Boots Plc

Boots Plc has an opportunity to refurbish and refit one of its less profitable stores, with a view to achieve two objectives; to reduce the product lines, rebranding to a speciality Boots store only selling premium beauty, and to free up floor space. The space created would be used to invite in a concession from another brand, a practice known as retail in retail.

Boots has identified the store that will be refurbished and will be ready for work to begin on 1^st September 2024 and to benefit from winter trading it will aim to commence trading on 1^st December 2024.

Preliminary analysis has identified a total project investment cost which is made up of the following items:

Refurbishment description	000
Shopfitting and internal signs	85
Doors/walls/floor/ceilings	90
New shopfront and external signs	30
Alarms/telecommunications/CCTV and other electrical installations	126
Mechanical installations & sprinklers	48
Lifts/hoists/escalators	79
Preliminaries (including contractor site works, supervision, inspections, insurance)	54
Additional construction consultant fees	57
Additional professional and legal fees if the project goes ahead	48
Internal project management costs (general recharge from head office)	93
Feasibility study (already completed in 2023)	90
Estimated total project investment cost	800

Strategic rationale

The store is located on the high street of the local town centre. Shopping in the town centre is difficult due to the heavy traffic congestion and parking charges. Refurbishing this store potentially creates an opportunity to revitalise the store and support a return to a healthier profit level. This proposal assumes an opening date of 1^st December 2024.

Catchment

The proposed refurbishment project is based on attracting people within a 15-minute drive time to the high street. This can however vary depending on traffic conditions, as the traffic levels can be moderate to high, particularly at the weekend. Although there is parking nearby, this is typically full at the weekends, and wait times can exceed 30 minutes. The town has a total resident population of 260,000. The demographic of this stores catchment is weighted towards the lower-income demographic group. In the proposed catchment area 57% of potential customers are in this group compared to the UK average of 40%.

Market share

Boots currently has a 15% market share of the personal care and toiletries retail market within the local catchment area which is below their national average market share.

Competition

Preliminary market research has identified that there is no established store offering premium beauty services within the immediate vicinity of the high street.

Sales of standard items

The table below shows typical monthly sales takings for the high street store.

Month	Typical sales
January	41,650
February	57,850
March	42,875
April	44,100
May	45,325
June	46,550
July	47,775
August	46,550
September	45,325
October	42,875
November	45,815
December	47,775

The sale of standard items typically generated a 50% gross margin.

Sales of premium beauty

You need to research the premium beauty (e.g. Clarins, Clinique, Dior) sector using the university databases and your own research to work out whether this is a growing or declining market. You will then include your best estimate of forecast sales for premium beauty using the following sales revenue forecasts with an average gross profit margin of 75%.

For example, if you identify that this is a declining market then you would not be able to justify the highest level of sales 4,600 per week as this is unlikely to be achieved.

Forecast sales per week (Year 1)	Probability given by marketing
1,500	40%
3,750	50%
4,600	10%

There would be additional capital investment costs to add high quality beauty counter units which cost 30,000 in total.

Store detail

Operationally the new speciality store:

• will cease to sell all product lines that fall within the standard items category
• will have an average gross margin of 75% on premium beauty sales
• will benefit from the following extra annualised store operational fixed cost savings (stated at Year 1 values) because of the new speciality store approach

Annual store running extra cost savings**
Store staff payroll costs	95,000
Other store costs	45,000
Logistics/ distribution costs	5,800
Total annual store running cost savings	145,800

Retail-in-retail concession

In a move to boost the store profitability, a small independent caf has been invited to rent the excess space in the store. Boots Plc expected to generate additional income from rent, while also benefiting from the aforementioned running cost savings. Boots Plc could expect to earn around 180,000 per year** in net rental income from a concession.

**Inflation for these cashflows is 5% per annum which should be applied for Year 2 values onwards.

The Year 1 trading period for the refurbished store will be 39 weeks rather than 52 weeks so needs adjusting in your financial analysis.

Tax rate

The average tax rate applicable to Boots Plc is 20% and is assumed to be paid in the year to which it relates.

Depreciation

Assume that all preliminary project costs of 800,000 are eligible for accounting capitalisation and depreciation is based on this. The project will be depreciated over 10 years on a straight-line basis.

Benchmarking

Boots typically have a real cost of capital of 4.7% and average inflation in the economy is approximately 7%. The internal rate of return (IRR) benchmark minimum for similar stores is 14%.

Cannibalisation of existing business at other locations

There is another Boots store (Store X) which is located 4km from the high street. There are two further Boots stores which might also be affected. These are Store Y and Store Z as although they are over 10km distance from the proposed new store, their core catchments do overlap with the high street catchment. All three of these stores sell premium beauty lines. The estimated cannibalisation of sales from these neighbouring stores is gross sales of 1,000 per week in total.

Milestones

Investment date 1^st September 2024

Completion of refurb and refit 30^th September 2024

Completion of snagging and handover 1^st November 2024

Target opening date 1^st December 2024

Excel proforma provided

You will update this spreadsheet to calculate the NPV and IRR of Option 1 and include it as an appendix to your report.

Option 2: An alternative retail investment to support online sales growth

There is no financial data available for this option as the aim is that you research this option yourself using the library databases, quality news and your own findings on the online retail sector and its development in recent years and post covid times.

Remember to back up your discussions with evidence, quality information and data sources. Although there is no right answer, we will be considering whether your suggestion is relevant and feasible and would potentially lead to more online sales for boots.

Appendix 1: Detailed NPV and IRR analysis Boots Investment Case: Store Refurb Project Lost revenue on standard sales Cannibalisation Total net sales Gross profit 50% Add: Premium Beauty Sales Revenue - your justified forecast Gross profit 75% Add: Concession Rental Rental income Total Gross Profit \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|} \hline Add: Additional store running & & & & & & & & & & & \\ \hline \multicolumn{12}{|l|}{ Deduct: Depreciation } \\ \hline Pre tax profit & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 \\ \hline Tax20% & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 \\ \hline Add back: depreciation & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 \\ \hline Operating post tax cash flow & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 \\ \hline \multicolumn{12}{|l|}{ Capital costs } \\ \hline \multicolumn{12}{|l|}{ Premium Beauty shelving cost } \\ \hline \multicolumn{12}{|c|}{ Store capital relevant investment costs } \\ \hline Net cash flow & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 \\ \hline \multicolumn{12}{|l|}{ Net Present Value (NPV) } \\ \hline Internal Rate of Return (IRR) & & & & & & & & & & & \\ \hline \end{tabular}