N Retail – unseen material provided on examination

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Mission statement and strategy

Mission statement and strategy At the last board meeting Ms. Bilder, the
company’s new CEO expressed concern that there was a lack of a mission
statement for the company, and that this was hindering the development of a
clear strategy.

She stated that “With the market becoming increasingly competitive, I am

concerned that although recent performance has been satisfactory, longer
term, the company will find itself stuck in no mans land between the highest
quality providers and those focusing on low cost. We need to be clear where
we stand if we are to succeed longer term. In particular we must decide what
role CSR has to play in the company’s future.”

She would like the following 3 possible strategies to be considered:

(1) Focus on own brand products, increasing the level of own brand products
from the current 60% of sales to 80% over a 3 year period, retaining only the
most profitable concessions and branded products. There is no additional
investment required for this option. Revenues are hoped to increase by 3%,
while gross profit margins would be expected to rise by 2% from current 2013
levels. Other costs would remain unchanged.

(2) Cement N’s position in the upper end of the market, focusing exclusively on
a high quality, high price focus, both in-store and online and moving away from
low to mid price offerings in store. The focus would be middle to higher wealth
individuals, and quality, famous brands. Only 20% of current stores in Z would
be deemed of suitable standard, and as such a store refurbishment
programme would be required for this option. It is estimated that 50% of
stores would cost Z$1.7m each, 10% Z$2.4m, while 20% of remaining stores
would need to be closed at an initial average cost of Z$1.4m each. Sales of
these stores are hoped to raise Z$46m at current market values. These stores
currently account for 25% of 2013 revenues. Gross margins after the change
are expected to rise to 18.1%.

(3) Competing on price with all the main competitors in the market including
online companies, with a price promise marketing strategy.

If this strategy is adopted revenues are estimated to increase by 23% from

2013 levels within 2 years, while gross profit margins would fall to 6.2%. An
efficiency savings programme would be implemented that would aim to save
10% of distribution costs and cut Z$5m of administrative expenses.

She is also considering a whether to formulate a full mission statement and

strategy, possibly including a review by an external firm of consultants.
Ultimately she wants to secure a strong long term direction for the company
and start to turn around the rather directionless approach that has plagued the
company over recent years.

Greenbean report
Two weeks ago, the environmental group Greenbean held a press conference
highlighting the damage done in the industry. N was singled out as having little
environmental awareness and was “one of the few companies in the industry
that does not produce an environmental report”. In particular Greenbean had
gained a list of N’s suppliers and traced the environmental credentials of each,
concluding that, per Euro of profit, N contributed more to global carbon
emissions in its supply chain than any other significant company in the
industry.

Asked to investigate, you have viewed Greenbean’s website and found that
one of the worst offending suppliers on the list associated with N, Carlos Toy, is
a South American Company which does not supply N. In fact N’s supplier is
Carlo Toi, a small Chinese supplier. It seems unlikely that Carlo Toi has any
noticeable environmental effect.

Fire at distribution centre

Four days ago, a fire broke out during the night at one of N’s 6 regional
distribution centres in Country Z. The fire has destroyed the entire inventory of
goods held there awaiting transportation to stores. The centre was the main
distribution centre for the North East of the country where there are a total of
12 stores, and the centre itself was almost completely destroyed. This centre
was fully owned by Z.

In addition to the total loss of all inventories, there was several days loss of
data from the computer systems at that centre. In accordance with usual
routines, the IT systems had been backed up each night, but the back up files
had not been stored in a fire-proof cabinet or off site, as required by N’s IT
instructions. Therefore, the factory manager has not been able to ascertain
what deliveries have been made to stores over the preceding four days before
the fire. Many stores are still chasing for deliveries in the confusion following
the fire, and many are reporting empty shelves of many essential items. In
some cases this confusion and loss of data has caused them to be overstocked
in some areas.

Warehouse Investment
Of the other 5 regional centres, N leases three of these, each of which are
ageing and are at the limit of current capacity requirements. The cost of
continuing with the leases and refurbishing to acceptable standards for current
usage needs to be Z$2m per warehouse over the next few months. The
warehouses are large enough for growth expectations in the next year but if
the CEO’s new strategy goes well N will need more capacity beyond that
period. If business is less good than expected then these warehouses will be
sufficient. Any delay beyond this year in taking action is also expected to leave
the warehouses falling below legal safety standards. Workers in two
warehouses have complained about Health and Safety hazards and the unions
have demanded consultation on the maintenance decision, and threatened
action if progress is not seen to be made.

One of the warehouses has an annexe that is currently leased to another

organisation but N could take over the lease next year. If N wants to use this
annexe then it needs to act within the next six months or the lessor has
indicated they will aim to re-lease the space to another organisation on a five
year contract. This annexe will cost a further Z$2m and ensure capacity
requirements are met for the next two years.

An alternative is to end the leases and find alternative sites. The operations
manager says that he could source more modern alternatives for these three
warehouses at an initial total cost of Z$10m which would meet the very best in
current standards and future proof the business for the next five years.
Stock management
N’s stock management system led to a number of minor mishaps last year
including a number of instances of stock-outs. While this did not result in
significant loss of sales it seriously affected relations between N and some of
its customers. The operations manager has put forward two possible proposals
to invest in improved IT to manage inventory.

The first option is to switch to a system suggested by Grumbley, N’s leading

supplier of “own brand” products, accounting for 20% of all “own brand”
products. This would cost Z$20m payable towards the end of the first year of
implementation. Grumbley have suggested this would enable them to make
significant efficiency savings and they would accept this as a significant gesture
of goodwill and in return would consider this a long-term partnership and N
could expect assured delivery times, and a 1% price discount from Grumbley
for the next 5 years. This is expected to help increase profits by Z$0.58m in the
first year, with a Z$0.02m increase in the next two years and Z$0.03m increase
in the two years after that.On the other hand the operations manager has
been quoted for an upgrade to the current system for Z$5m, payable at the
end of year one, which would meet all usual requirements from suppliers. He
is not sure whether Grumbley’s would accept this as “assurance” and suspects
that the increased orders would not be forthcoming in this case.

The cost of capital to be used for IT investment appraisal has been calculated
at 14%.
Personal injury claim
A customer was walking outside one of your premises recently tripped and fell,
breaking their leg. The individual was in plaster for some weeks and off work
for 3 months during the recovery period costing them a significant personal
loss of income totalling Z$6,244 during that period.

N have been contacted by a personal injury lawyer acting on the individual’s

behalf with a claim totalling Z$9,888 which has been referred to the company’s
solicitor. They are also threatening going to the local press to highlight the
issue. The solicitor is adamant that because the injury took place on land
owned by the council outside your property that there is no liability to N, and
has had a number of similar cases from what she called ‘disreputable legal
companies out for a quick buck’ over the last few years and none had ever
gone beyond the initial stages after she had become involved.