PETITE SHOP (B)

Now that Alice Wood has a better idea of the market potential and market share for her proposed retail store, she wants to be satisfied that the Petite Shop will be successful and provide an adequat return on the $45,000 she has saved over the last few years to invest.

Rather than conduct an actual survey cn the viability of her business, Alice starts to engage with her social network on Instagram about whether she should open her Petite Shop. While Alice's friends are supportive, she doesn't think she has had enough feedback, so she creates new Facebook, Twitter, and Pinterest accounts to share information about her potential store. Alice spends some time every day talking to her friends and people she has met online, and most people support her idea. However, she has become a bit concerned that some of her friends have suggested she should consider selling online or on eBay as the business would require less cash investment to start and could involve less risk. While Alice agrees that more and more shopping is occurring online, she is convinced there is still room for a bricks-and-mortar Petite Shop.

Alice now begins investigating the typical costs she would incur in operating the store. Alice thinks she can operate her new store with one other full-time person and some part-time help at an estimated monthly cost of

$4,000. In looking at potential rental costs, she came across a retail outlet for lease on a busy street in the central business district of Jacakes that seems ideal for the Petite Shop. She learns that the site leases for $20 per square foot, with no royalty payments except $2,550 per year to cover municipal taxes. The estimated utility expenses the owner provided were $300 per month, and the insurance for the retail shoe store that had previously been located there was $2,500 per year. Alice has also spoken to a local entrepreneur who has agreed to build her a website that will work well on mobile devices for $3,000. The hosting costs for the site would be $35 a year.

Although Alice is excited about the potential of this site, she estimates she will need to spend approximately $20,000 for leasehold improvements, of which $12,000 will be depreciable items (20 percent). When obtaining the secondary information from Jacakes City Hall, she learned that the business licences will be $100. Alice estimates all miscellaneous expenses, such as stationery, bad debt expense, credit expense, and telephone, to be about $5,000 per year. These figures are based on her experience at the store where she currently works.

		Key Business Ratios, CanadaCorporations
		LINE OF BUSINESS CLOTHING, WOMEN'S
		(Number of concerns reporting) Cost of goods sold Gross margin Current assets to current debt Profits on sales Profits on tangible net worth Sales to tangible net worth Sales to inventory Fixed assets to tangible net worth Current debt to tangible net worth Total debt to tangible net worth	(2,323) 58.4% 41.6 1 .4 2.7 1 5.6 5.9 5.7 63.6 127.6 177.3

Alice knows she will have to raise some additional money to purchase inventory. She visited her local bank and found out that the interest rate for a business loan was 10 percent, but the bank would only lend her the money if she could pledge personal assets against the loan. She also learned that any potential lender would expect to see a completed income statement and a more-thorough proposal. The bank officer mentioned that, in addition to leasehold improvements, she would need one-fourth of the year's cash expenses as operating funds. Although a bit surprised at the bank's reaction, Alice is determined to prepare such a proposal. She knows the new store will need to be promoted but does not know how much she should spend on advertising. The banker suggested the average for ladies' clothing stores was about 2 percent of sales and gave her a copy of a recent Dun and Bradstreet financial ratio sheet to assist her (Table 1). Alice also thinks that the industry is changing and perhaps the banker is stuck in the past. While she thinks she may need to spend some money on advertising she thinks social media and word of mouth might be sufficient.

Alice now finds herself in the same dilemma she was in when determining market potential and market share.

She has a lot of information but is not sure how to use it.

Questions

1 . Using the information presented in Petite Shop (A) and this case, prepare an estimated income statement and return on investment calculation for the Petite Shop's first year of operation.

2. What are some of the potential advantages and disadvantages of using social media to determine the potential for success for Alice's store compared to more formal market research?

3. What areas has Alice overlooked in her investigation?

4. If Alice does not raise money from a bank, what are some alternate sources of funds?

5. Do you think Alice should open up an actual store or sell online instead? Why?

6. Do you think Alice will have to spend as much money on advertising as her banker suggests? Why or why not?

7. Given your analysis, what would you recommend to Alice?