Business Plan CD Shop

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Business Plan For A Cd Shop

Contact Information:

95 Jackson AvenueDallas, TX 63453

(325) 555-2642 [email protected]

This document contains confidential information. It is disclosed to you for informationalpurposes only. Its contents shall remain the property of Business Plan For A Cd Shop and shallbe returned to Business Plan For A Cd Shop when requested.

This is a business plan and does not imply an offering of securities.



Table of Contents

1. Executive Summary 1

Business Opportunity

Product/Service Description 2. Company Background 3

Business DescriptionCompany History

3. Business Plan For A CD Shop 5

4. Services 6

5. The Industry, Competition, and Market 7

Market DefinitionPrimary CompetitorsCustomer Profile

6. Marketing Plan 10

7. Financial Plan 11

Investment PlanBreak-even AnalysisLiquidity PlanEarnings Plan

Risk Analysis

8. Conclusion 19



Business Plan For A Cd Shop 1

1. Executive SummaryThe retail industry shows a constant positive demand especially for CDs and musicequipment. Compared to other business activities, the retail business has low risks because of low required investments. New forms of cost cutting and store optimization will help to setup a successful business. The return on this kind of retail business has a growth rate of about

5% to 7% per year. A company that provides additional service activities for the customerscan be sure to have a high demand and a strong competitive advantage.

The goal of this start-up is the operation of a shop for CDs and music equipment with onelocation that offers a comprehensive range of products and additional services, depending oncustomer demand. New forms of marketing and distribution will increase sales revenues andutilize personnel capacity.

1.1 Business Opportunity

The development of new business strategies and solutions seems critical for industryplayers to survive the problems in the music industry and regain a market share in this

highly competitive industry. The choice of new products, as well as the architecture of the store and additional services, can be one strategy in this development. Additionally,sound cost management is of critical importance for a solid stream of revenues. Bigindustry players have shown that even in a stagnating market, growth rates of more than5% can be sustained.

The operation of a retail business that offers the following entertainment products andcustomer services is the core of this start-up:

CDDVD

electronic gamesmusic equipmentDVD player

A strong focus of this business will be placed on the development of new and innovativestrategies for the customers that deliver a significant value. As an add-on, a broad rangeof service activities will be offered, which will help utilize company and employeecapacity. The range of products is selected to provide solid growth potentials. This canlead to a fast change of items or whole item groups, as well as services.

The operation of this business requires a good knowledge of the market to select acompetitive service concept to increase customer satisfaction. However, it is critical thatthis service is offered with a strong focus on cost management.

One central goal of the proposed business strategy is the development of a uniquecorporate identity. Such identity will create customer loyalty and help gain a competitiveadvantage. Therefore, it is planned that additional to the selection of new and interestingservices, a company design is developed. For this reason, the service around the offered




applications and the additional businesses is very extensive.

The required investment for the proposed business is moderate compared to othercompanies in the industry. Labor and the costs for goods are expected to be the main costdriver, whereas no other substantial investment in fixed assets is required. Depending

upon the location, the minimum required investment amount ranges between $50,000 and$55,000 in the start-up phase, based on a 15-18% average revenue margin. This amountis well within the financial requirements observed for other comparable companies.

1.2 Product/Service Description

The business will operate in the retail industry segment with a variety of entertainmentproducts. Additional sources of revenues, beside the sale of products, is the developmentof customized CD packages and Mp3 products. Cross selling is planned to be one of theprime strategies in this business since all products are targeted to serve a similar need andcan easily be combined. Synergy in selling product across business segments is likely toboost earning further. Net earning are expected to be at least 2.5% above traditional retail

businesses with only one or two sales segments.

Figure 1.1 shows the revenue mix across segments in the start-up phase. This projectionis based on the expected strategic direction, investment amount and businessenvironment. Being the core business, the sales segment is expected to generate thelargest share in revenues. The sale of individual services is expected to be anotherimportant generator of revenues, which also helps utilize invested capacity. The selectionof products that shows the highest revenues will be another task that will be performedduring the business phase.




2. Company Background

The goal of this start-up is the operation of a shop for CDs and DVDs. The focus of thisbusiness will be on the product segment for individuals which shows the highest profits.Additionally, the sale of service activities is planned to reach an optimal utilization of personnel and company capacity. An initial investment amount of at least $50,000 to $55,000is required, which will allow the operation of a typical store business with 2 to 5 employees.Sales revenues are expected to range between $150,000 and $200,000 in the start-up phaseand the operation is expected to generate profits starting at least in the second or thirdbusiness year.

2.1 Business Description

Management is expected to have a solid knowledge of the offered entertainment productsand services to influence the customers. The goal is to create an innovative business inwhich the customer experiences competent service. A well chosen and targeted selectionof offerings will complement this strategy. Both aspects are core requirements to buildcustomer loyalty. Repeat customers are expected to generate revenues of 40% and more.Although this strategy is likely to require additional investments, it is expected thatrevenues per customer will increase significantly and range above industry average.Furthermore, this strategy will provide a clear entrance barrier for prospectivecompetitors.

The development and promotion of a corporate identity is another central task formanagement. Given the homogeneity of businesses in this industry, the development of acorporate identity will markedly increase sales revenues and build a customer base.Furthermore, a corporate identity will support expanding the business to a largerinternational target market.

2.2 Company History

In the start-up phase, the business is operated as a one-person-business. This set upcarries a certain risk potential because of the high equity stake the manager bears and thepersonal and statutory liability assumed. However, this set-up preserves a high degree of flexibility in managerial decision making.

The number of personnel to be employed depends on the structural complexity of theoperations and the desired size. Figure 2.1 shows a break up of costs in the industry. It is

expected that the target employee earns a monthly salary of $2,000 to $3,000 based on 40hours per week. The sales and service area requires 1 to 2 employees on average workingin 2 shifts. Due to illness and vacation times in the long run, an average of 4 permanentemployees will be required after the start-up phase. With increasing sales and betterutilization of employee work time, revenue margins will increase and thus costs peremployee will decrease on average. With revenues ranging around $500,000, capacityutilization is expected to be around 85%.




During the start-up phase, a single person will attend to all necessary management task,coordinate employees and provide strategic direction to the developing business.Accounting, administrative and machine maintenance will be outsourced to an externalpartner since those tasks can typically be provided at better rates externally. Sourcing andmarketing will require one employee.

Finding the optimal location for a business is one of the success factors in the short andlong run. This is also important for virtual businesses because taxes, employees andadditional costs are crucial for all businesses. The following analysis is based on 10businesses in the trading and retail industry. Since a small company is recruiting itscustomers typically from the home country and later from a worldwide area, a nationallocation is considered as the core market.

For the location with a core market in the selected region following factors are relevant:

Rent is low.Administration cost are low.Customer demand has growth potential.A young clientele is required.Competition should be low.The possibility to recruit additional personnel is favorable.Public institutions are expected to provide additional sponsoring.




3. Business Plan For A CD Shop

One of the key elements of a successful business in the retail industry is the selection of products and services that are currently as profitable as possible. The shop will provide thefollowing product groups:

CD productsDVD productsCD and DVD playerelectronic equipment like Mp3 playercomputer softwareelectronic games

The specific selection of products, services and applications offered will be monitoredconstantly and vary according to business needs. This strategy provides a competitive edgeagainst other regional retail companies in the environment and is expected to generate anadditional demand and the possibility for a price mark-up. The selection of products is basedon the following financial figures:

profitabilityabsolute priceabsolute demandhandling costsadditional service capacity

It is expected that the shop covers about 10000 products.




4. Services

Additional service offerings independent from the core sales business provide additionalfields of business. The available competence will be used for further business activities thatwill generate additional revenues. While this is not a core business segment, this concept hasgrowth potential because the demand for services is rising. Initially, the investment ininventory, technical equipment and personnel capacity of this segment is limited.

Especially the supply of the following services is expected:




5. The Industry, Competition, and Market

A careful analysis of the market and competitive forces in this industry is a key element inassessing the business potential of our project. This analysis will provide marketing and salesdata that are indispensable to develop the business potential optimally. The main competitorsare comparably-sized retail companies in the regional environment with a similar selection of products and services. Since the planned project is of national scope, the competitive analysiswill only have to focus on the local market. The market and competition analysis will bebased on the entire market.

5.1 Market Definition

Figure 5.1 shows average growth figures in revenues of typical retail companies duringthe past 10 years. Despite slowing global economic growth in genera,l and in the retailand service industry in particular, a lot of companies have experienced constant growthrates of more than 5% to 10% since 1999. For 2004, a growth of 6% is expected with astrong development in the third and last quarter.

Despite slowing economic growth and decreasing customer demand, the retail industryunderwent a relatively favorable development. New and innovative business concepts inthe retail sector still show high growth potentials, while growth rates of traditionalbusinesses in that industry were below average. The significant growth of new businessconcepts is primarily due to sharp cost control and more efficient business strategies thataccounted for higher revenue and earning figures. According to industry estimates, 35%of such innovative businesses gained from cross-selling activities between their businesssegments. Sinking prices of input products and service costs have allowed the industry topartially compensate for slowing demand. Savings in input costs were also due todecreased labor costs. However, starting in 2005, this trend is expected to reverse andgrowth rates will pick up markedly, despite the uncertainty in the development of inputprices and worldwide economic developments.

5.2 Primary Competitors

The competitive environment is primarily determined by the choice of item groups andthe regional location. But regardless of the selection of items, high mark-ups are not




feasible in the long run since this will attract competitors who compete away any rents.With a high density of businesses in one location, businesses with the highest marginalcost will be driven out of the market. Such locations will yield a return of 12-15% onaverage. This is the expected equilibrium return in a saturated market. To further analyzethe competitive environment, it is necessary to define the players in that environment. A

firm that generates $300,000 to $1,000,000 in revenues and employs 5 to 10 peopleshould regard a firm with revenues and personnel 3 times this figures as a viablecompetitor. On the product and service side, businesses with a comparable selection of offers are regarded as competing in the same market segment. Figure 5.2 shows the sizeof businesses in this market segment, which also includes different products and servicesthat will be sold worldwide. The numbers are based on average revenues of companiesthat run their business more than five years.

5.3 Customer Profile

The specialized product and service offerings are primarily targeting a young and

financially strong clientele. A possible segmentation to identify this group is income aswell social groups, which determines revenue and earnings per customer or totalrevenues and earnings. Segmenting the target market is a key element for the design of anappropriate marketing strategy.

Figure 5.3 shows revenues by social group. Numbers are based on average sales percustomer of a particular group multiplied by the member of individuals in the respectivegroup. This gives total revenues per group. As can be seen, business people, pupils andstudents generate high revenue streams. Members of these groups are frequent customers.Although the total visits of random visitors are relatively higher, total revenues from thissegment are smaller because members in this group are less frequent visitors.

Figure 5.4 shows revenues by yearly income. The figure shows revenues generated perincome group. Numbers are based on the average income per customer and the number of customers per income group. As can be seen, customers in the middle income bracketgenerate the highest revenues. High frequented low income groups, such as students andpupils, also generate relatively high revenue streams, although revenues per customer arerelatively lower.







6. Marketing Plan

In the start-up phase, it is a central task of the marketing concept to establish a namerecognition and a unique trade mark. Later on, the strategy will primarily be targeted to gainnew customers and create customer loyalty of repeat customers. Several marketing and salespromotion strategies are available in the retail industry. Figure 6.1 shows different marketingelements and their use in marketing strategies, as well as their estimated potential successfactor. The figure can serve as a direction for the planning of a marketing and salespromotion strategy. The numbers are based on typical businesses in the retail industry. Ascan be seen, printed advertisements target a large potential customer group, but at a relativelyhigh cost. Printed advertisements in regional newspapers and magazines are regarded as verybeneficial in the start-up phase to attract a large group of potential customers and drawattention to the range of articles offered. 49% of businesses in the retail industry use printedadvertisements and about 60% of this group regard this as the most beneficial form of marketing. Sales promotion strategies have temporary effects only. They are used at businessopenings primarily and offer special discounts. 49% of businesses use sales promotionstrategies frequently and 81% of the users responded that this instrument is successful.Marketing alliances with other online businesses to generate cost savings and increaseefficiency are used rarely. Such strategies include mutual use of marketing and webpromotion events and joint promotion arrangements. Only 45% of businesses have used theseelements and 55% of these regard this instrument as beneficial. Web and e-mail marketing isused frequently in the retail industry, although this would be a relatively inexpensiveadditional effort. Direct mailings are a very efficient strategy that sends mailing to selectedcustomers or businessmen groups. Since spreading costs of such mailing are very low, thismarketing element provides a useful tool for special offer promotions.

The use of marketing and sales promotions proceeds as follows: as a broad base to attractnew customers, the strategy will include a combination of printed advertisements and specialoffers with opening discounts. Furthermore, a group of customers will be selected for directmailings. This strategy is expected to continue for 3-4 months, after which the effort will turntowards creating customer loyalty for regular customers. This strategy is supplemented by aregular marketing strategy and direct mailings to regular customers. A marketing allianceand online advertisements will also come to use.




7. Financial Plan

A sound financial plan is the key factor for the success of a business start-up. Investors andbanks will base their funding decision on the information given in this plan. Besides a plan of the financial needs, this plan must insure that the business is always liquid and ultimatelyprofitable. Since the sales and earnings projections in the business plan are based onexpectations, the financial plan has to be revised and refined on a constant basis so thatdiscrepancies can be uncovered and solved instantly. The inputs for this financial plan arebased on 40 businesses of different size and market segments in the retail industry, whichserve as a group of comparable firms, as well as own estimates based on the planned businessenvironment. Revenue estimates are conservative and expense projections include a cushionfor unforeseen contingencies.

The initial capital requirement is estimated to be $50,000 to $55,000. The sales margin isexpected to be 12-15%, whereby each business segment contributes differently to sales andearnings. The classical product sales segment will, of all segments have the smallestcontribution to sales in relative terms (11%), but given the high sales volume, the largest inabsolute terms. The sale of goods is expected to generate a 10% sales margin, while themargin from sales of services is expected to be closer to 15%. Since the sales revenue of lower priced consumer products is expected to be larger, this segment will generate asignificantly higher profit. Figure 7.1 shows the source of revenues by segment during thestart-up phase.

Depending on the initial investment, sum cost and revenue estimates vary. Figure 7.2 showsthe expected relationship of cost and revenues. As can be seen, the relationship is not lineareverywhere but costs decrease relative to sales at an initial investment of $50,000. This effectis due to the better utilization of capacities in personnel at rising revenues at constant cost. If capacity is fully utilized, additional personnel must be recruited. At an investment sum of $100,000, administrative costs are expected to return to a linear relationship of sales. At saleslevels between $1,000,000 to $2,000,000, costs increase by the factor 1.85. The cost revenuerelationship is important not only during the start-up phase, but also for planned furtherexpansion. Often such expansion strategies are based on this relationship. Other industriesare able to generate cost savings of 30-50% during expansion periods, while for the retailindustry this factor is close to 15%. At a specific size, this relationship reverses becauseadministrative costs rise sharply. This affects small businesses between 10 and 20 employeesmost severely.

The details of the financial plan are laid out in more detail as follows:

Section 7.1 gives an investments schedule. This includes all investments necessary during thestart-up phase.

Section 7.2 gives a break-even analysis that shows revenues at the break-even point. Everyadditional sales revenue adds to profit and vice versa.

Section 7.3 gives a liquidity plan. This plan is based on current cost and revenue estimates




from Section 7.2. Liquidity must always be positive.

Section 7.4 contains a long-term profit projection for the first 4 years of business. Theprojection shows the critical amount of revenues at which the business is profitable and howprofit develops over time.

Section 7.5 provides a risk analysis. The risk analysis contains critical factors that mayimpact the financial numbers presented in this plan.

7.1 Investment Plan

The investment plan comprises primary capital needs for the foundation and operation of a retail company with different CD and DVD products and services for sale. The planalso includes initial marketing and sales promotion expenses.

The figures are based on a business with 3-5 employees and expected revenues of




$350,000 in year 2-3.

7.2 Break-even Analysis

The break-even analysis shows how earnings rise as a function of sales. The break-evenpoint is the point at which revenues from sales cover total costs (fix costs and costs risingwith sales). This analysis is important for the development of the liquidity plan. If thebreak-even point is not achieved, in the long run the business loses liquidity and maybecome insolvent. This requires that a critical amount of revenues must be generated.

At a sale revenue of $200,000 and given fixed costs, the business will generate a profit.Fixed costs are estimated at $90,000 to $100,000 and variable costs at $100,000.

At a realizable revenue of $500,000, after 2-3 years profits will rise to $125,000 pre-tax.This represents an earnings margin of 25% pre-tax and 14% after-tax. These estimatesare realistic in this market segment. Increasing sales volume will increase pre-tax




earnings margins, but this development reverses when administrative costs begin to risesharply. Up to a sales volume of $1,000,000, earnings margins rise to 27.5%, after whichthe margin decreases to constant 25.5%.

Figure 7.3 shows at which critical sales volume the business generates a profit. This

serves as a base for a pricing strategy. Additionally, the graph shows the amount of salesat which a marketing campaign can be run profitably.

7.3 Liquidity Plan

The liquidity plan shows the amount of finances necessary to assure permanent liquidity

of the business. The plan is based on 4 representative months of a typical business with 3to 5 employees and annual sales of $300,000. Revenue estimates are drawn from astandard normal distribution.




7.4 Earnings Plan

The earnings plan shows the results from ordinary operations. The plan is based on thefirst 4 years of business. Revenue estimates are drawn from a normal distribution with anestimated growth rate of 20 to 30%. Figure 7.4 shows profit over time.




7.5 Risk Analysis

The risk analysis considers critical factors that may lead to a failure of the businessconcept. Such factors can involve failures during the implementation phase, as well asduring operations. Such potential factors are ordered according to the probability atwhich they can arise. Shown is the key factor that led to the failure only. Data are drawnfrom questionnaires of 25 retail businesses with comparable product offerings andrevenue- and cost structures that went bankrupt during the last 3 years, as well as




analyses of different research institutes.

1. Insufficient demand: This is the most frequent reason that leads to businessfailure. This includes permanently low demand as well as a temporary collapse indemand. Often demand estimates were too optimistic at the outset. Such failures might

also come from external shocks instead of operating deficiencies. 19% of businesses withinsufficient demand go bankrupt. 50% of these businesses report that once demandslacked they did not react accordingly, because they believed that this phenomenon wasonly temporary. Since the expected frequency of customers during the start-up phase isstill low, a critical success factor is to focus promotional effort so as to generate customerloyalty early on, which will help minimize the effects of demand fluctuations. This is alsoimportant for the future development of the business.

2. Behavior of Competition: Due to low entry barriers, additional businesses canenter the market at low cost. Approximately 16% of insolvent businesses were driven outof the market by that competition. A better service concept, innovative ideas and

concentration on core businesses are an easy means for an entrant to gain a competitiveedge.

3. Personnel and capacity utilization: Often personnel capacity cannot be adjustedeasily when demand slows down. Currently retail businesses have a capacity utilizationrate of personnel of 70% to 75%, i.e. 70% of employee working hours can be directlycredited to sales. At small businesses, this value is often lower, which means that 30% of working hours arise without generating any further revenue. 13% of such businesses gobankrupt for this reason.

4. Liquidity constraints: Another frequent reasons for bankruptcy is insufficient

liquidity. In that case, it is possible that all liquid funds are used to cover losses or thatliquidity needs were planned too tight. To be able to flexibly react to changing liquidityneeds, it is important that sufficient funds be planned even during the start-up phase.Thus, 5-10% of the investment sum should be held as liquidity reserve permanently. 13%of insolvent businesses reported liquidity as the reason for bankruptcy.

5. Over-indebtedness: Many business are run on a small equity base. The majority of investments are funded by debt. If the business becomes unprofitable, debt obligationscannot be covered. Little more over 10% of insolvent firms reported over-indebtedness asthe reason for going bankrupt. It is therefore important that a share of earnings is retainedfor debt service.

6. Macroeconomic Conditions: In a cyclical downturn, revenue expectations my notcome in according to expectation. Although this factor does not affect the business initself, it does have an impact on profitability, liquidity and leverage. Costs remainconstant during such period, but revenues typically decrease, which affects overallprofitability. 10% of all insolvent businesses report that they went bankrupt due tomacroeconomic conditions, although the relevant indicators of the business lookedhealthy.




7. Location and market: The market of the business and the selection of the rightpotential customers is an important success factor and one of the fundamental decisionsthat have an impact on the future prosperity of a retail company. Therefore, a carefulanalysis is necessary. More than 10% of insolvent businesses reported that they went

bankrupt because of the wrong market selection. Often start-ups did not consider thateven when the choice of market may not be wrong at the outset, it may later become sowhen economic conditions worsen. This may be due to structural changes or differentinterest of customers.

8. Wrong Business Decisions: Often wrong business decisions and difficult situations gounnoticed for some period, which can lead to a failure of the business. A critical andindependent reflection of a decision are critical factors to determine the value of amanagement decision and evaluate the business' profitability. Studies have shown thatmany businesses fail in their start-up phase because of management’s inability to makesound business decisions, while once a business is settled such mistakes are very rare. A

critical management instrument is the ability to detect potential failures and problems.Certain key figures can help measure this ability and allow to objectively determine adecision's chance for success. Small businesses should use such indicator ratios to assesstheir business outlooks.

Figure 7.5 shows the relative importance of each factor for businesses that went bankrupt.The numbers are based on the most relevant reason that triggered bankruptcy, but not thereason responsible for bankruptcy. As can be seen, external factors that changed thecompetitive environment and changing macroeconomic conditions were the mostimportant reasons relative to internal factors.




8. Conclusion

The retail business with different products and additional service elements is a veryprofitable business, while almost any other segment in the market currently lives through adifficult time. This situation is mostly driven by the competition of larger companies. Abusiness that successfully survives the current temporary slow down can be certain of increased profitability once the situation rebounds.

The relatively modest investment requirements and running costs compared to otherbusinesses are a favorable argument, since external funds from banks becomes more difficultgiven that the risk aversion to finance such ventures has risen. A company with specificknowledge and innovative ideas has good chances to move into profitable market niches andrun a successful business. Market conditions change constantly, as do customer demands.This is the chance for businesses with innovative ideas and new offerings to secure adependable customer basis. Service is a critical factor that can earn a competitive edge. Thisis also true for new trends in the retail industry to better control costs and increase efficiency.

For a successful operation of a retail company, five factors are critical and central for thebusiness strategy:

- Employees should have a good knowledge of the CD and DVD products. This increasescustomer loyalty.

- The utilization of personnel capacity is critical for the long-term profitability, because of changing margins and the constraints to flexibly reduce personnel. Therefore, the additionalselling of service elements, like the development of customized products, is a furthersegment of the business that is integrated in the sale of the whole business process.

- A carefully selected assortment of interesting and profitable products, as well as the selectedchoice of new technologies, provides the potential to gain a competitive edge againstcompetitors. Furthermore, a service that aims to give the customer an added value throughnew services can justify price mark-ups.

- A critical factor in the retail industry is quality management. Better quality of products andservices at lower cost increases customer satisfaction. Deficiencies in service quality canlower demand, while good service quality can help create customer loyalty.

- Cost management is a critical success factor for businesses in industries where margins are

low. Computer aided planning for the store is an integral part of cost management.

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