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Case Study: Aggro Stores 2020

Introduction:

Introduction:

Aggro Stores is a 30 year old cooperative (not for profit) business based in a remote island community of less than 10,000 residents. The original purpose of the business was to supply agricultural products such as animal feed and farm equipment to the mainly rural population of the island, which collectively set the business up for that purpose. The business is run by a general manager who has a small staff of five people to support the operations; mainly by taking calls, maintaining and organising stocks, serving the customers and keeping the accounts. Recently a new manager has been appointed after the dismissal of the old manager for undisclosed reasons. The manager reports to the board of the cooperative, but has reasonable autonomy in the way that he wishes to run the business.

On taking up the appointment the new manager is dismayed to find that the business is not, as he had been told, stable and profitable, but is in fact in a poor state after years of underinvestment and neglect. Within a few weeks he has identified that the store carries a very limited range of stock and that stock levels of those lines that are carried are low. In addition, some lines of stock are aging and close to obsolete. Customer footfall is also low as there is not much to buy in the store apart from the agricultural supplies.

There is significant competition on the island from a road haulage contractor who brings in supplies of animal feed on the trucks that would otherwise be empty when they return to the island after shipping out the crops and animals that are the islands main outputs. Further competition comes from a larger haulage company on a neighbouring island, which is also bringing animal feed back in its empty trucks.

The animals (mainly sheep) that leave the island are intended for meat markets on the mainland. Most of the farmers on the island are part of a quality assured meat scheme that increases the value of their animals. As part of the scheme they are required to buy their animal feed from a supplier that is also part of the quality assurance scheme, to ensure that the feed is being of a good standard and is being kept in a safe manner. The facilities to keep the feed in this manner are costly and lead to the feed being more expensive than that supplied by the haulage contractors. The manager is aware that many of the farmers are buying their feed from the haulage contractors, despite that being in breach of the terms of the quality assurance scheme.

The store buildings are large, but underutilised and in poor repair. Purpose built when the store opened 30 years ago, they are suffering from rot in the roof, the drainage is no longer up to standard and the car park is full of holes and is constantly full of mud from the high rainfall in the region. The manager has identified that the roof is unsafe in places and that the drainage is on breach of local environmental regulations. In addition, the interior decoration of the store is very poor and it is an unpleasant place both to work in and to visit.

The store turned over 480,000 in 2018, but cost of goods sold was 360,000 and staff and other operating costs were 140,000. The only good news is that it appears that while the previous manager had run down the stock, he had increased the cash at the bank and there is a positive balance of 136,000 in the stores bank account. Only 10,000 is due to suppliers who provide the feed and agricultural supplies on 30 days credit terms. Customers of Aggro also receive 30 days credit and the debtors balance is currently 80,000.

The manager meets with the Chairman of the Board and discusses the following:

Stocks and margins:

The manager observes that stocks have been run down and that the store cannot sell what it does not have. Additionally, the lack of stock is reducing customer interest in the store and leading to less footfall in the premises. Further, the focus on agricultural products, particularly animal feed has led to very low margins as the market for these products is very competitive and particularly so with the haulage contractors undercutting them on the feed. The manager would like to introduce a wider range of stock lines, such as hardware and other goods, which have much higher margins. The manager calculates that the animal feed has an average margin of 10 %, with the other agricultural products having an average margin of 35%. The current product mix is 40 % animal feed and 60 % other agricultural products. The manager argues that the goods he would like to introduce carry margins of 60-100% with an average of 80 % envisaged. He estimates that any such stock introduced will turnover every six months, but accepts that there is uncertainty as they have never sold this type of thing before, so he suggests that there is a 20 % chance that stocks might turn over every four months and a 30 % chance that they might only turn over every 12 months.

The Chairman acknowledges the problem and concedes that there is a market for other products as the islanders currently have to order many things on the internet and wait for their delivery by sea. This is expensive as mainland companies always charge a premium for delivery to the islands. Nevertheless, he is unsure of diversifying in this way. He has been chairing the board for the last 15 years and feels strongly that there is a need to ensure a retention of focus on the agricultural side as that was the original purpose of the business. He also argues that to bring in these new lines would require the purchase of a lot of new stock, which would be very expensive. Also, the store in its current configuration does not have the display racking for new lines and display racking is also very expensive.

On this last point the manger observes that the large food store on the island is currently being upgraded and he has spoken to its manager about their old racks. He has got an assurance that he can have as much of the racking as he wants as the food store would otherwise have to pay for its disposal. Using staff from Aggro Stores, supported by casual workers to collect and assemble the racking could be done for about 3,000, he argues. This would allow for up to 160,000 of stock (at cost) to be carried. He also argues that some redecoration is required to the area of the store that he plans to use, but that it can be done for another 3,000. As soon as possible he would like to redecorate and refit the rest of the store at a further cost of 10,000.

Buildings and infrastructure:

Another issue the manager raises with the Chairman is the amount of shrinkage that they are suffering due to the poor state of the building. Because the roof is leaking in places, they often find that stocks of animal feed get wet and are spoiled. About 10% of the feed that is bought in is lost in this way and due to health regulations, the store is paying 5,000/year for the disposal of the spoiled feed. That 5,000 and the cost of the spoiled feed are part of the cost of goods sold.

As well as this problem the manager points out that the roof is dangerous in places and urgent action needs to be taken. Restoring the roof to a sound condition can be done via a temporary repair for 15,000, or by a full repair for 35,000. The temporary repair would be good for no more than three years at which point the full repair would have to be done. Alternatively, they could rent an empty building on the adjacent site. The lease for this building has become available and could be secured for 1,000/month. All of the animal feed could be shifted into this building, which is sound and dry. Securing the lease would also provide additional storage and yard space for agricultural building products that currently are not stocked. These carry a margin of 50 % and up to 100,000 of additional stock could be carried which would turn over every four months. As there is a history in the store of selling these type of products, he is confident of the figures. He is not confident that the lease of the building will not be taken up by someone else if Aggro do not move on it soon.

The manager then points out that the drainage problem is a health and safety issue, which threatens not only staff on site, but also their licenses to sell animal feed. The issue is serious, but can be remedied by the installation of a septic tank for 5,000. He is aware that the authorities are currently unaware of the problem, but is concerned that if they find out they would act quickly and close the store. He concedes that it is unlikely that they will find out within the next 6 months.

Finally, he raises the issue of the car park. He argues that spreading gravel in the car park will stabilise the surface and make it much more pleasant for customers. This will cost 5,000, but will be good for five years and he estimates will increase footfall in the store. The additional footfall will, he estimates, increase the sales of their core animal feed and agricultural supplies (non-building) by 30 % of their current level for each of the next three years, so that in 3 years time, sales will have increased by 90 %. He believes that the redecoration and refitting of the part of the store that currently holds this core stock would increase footfall and sales by another 10 % each year from current levels.

The Chairman is worried by this discussion. He can see that the manager has done a good job and has identified many problems and has offered solutions, but as they are both aware the store does not have the money to make all the improvements right away and there is no prospect of raising finance elsewhere. The manager wants to use all of the available cash to progress things as fast as possible. The Chairman would prefer to progress more slowly as he worries about having no cash reserves. He also worries about the reaction of the rest of the board to this news.

The brief:

1. In groups of 5-6, analyse the situation at Aggro Stores, considering the competitive environment and financial constraints. Aspects of the problem are best shared out amongst the group.
2. Consider the likely outcomes, financial and otherwise, of the options that the manager has offered and seek optimal outcomes.
3. In a report of not more than 4,000 words produce a five year plan that the manager and the Chairman can present to the Board as a way forward for the business that will ensure its future prosperity. You should include budgets and cash flow forecasts for the alternatives and show clearly (in appendices) how you have arrived at the numbers that you present. Clearly justify in the report the choices you have made, discussing in particular how you think the customers and competitors will respond to the actions of Aggro.

Remember, there is not one correct way forward in this case. There are a range of options that depend on the quality of the managers information and the likely responses of the competition and the customer base. Credit will be given for creative solutions. You should not restrict yourself to the information that has been provided, but should reflect on other factors and opportunities as well.