Survivability Concept of Argos Easy Shop - Essay Example

?Easy Shop (Argos India Gurgaon Introduction India’s emergence as a rapidly developing economy has meant that many multinational and foreignoperations are implanting their business operations in India in order to make profits out of the increasing disposable incomes. Over the course of only two decades new financial centres and trade hubs have emerged all across India. This trend has been all the more marked with the emergence of new urban centres that are more or less sub-urban in nature. With the creation of new urban centres and with the rapid expansion in the Indian middle class there is good reason to believe that retail businesses would do well in a country like India. This reasoning has led to the development of new shopping centres and retail businesses throughout India. This report will look into the survivability of Argos’s Easy Shop concept located in a suburb of New Delhi, India’s capital. The nature of the city and the nature of the retailer will be looked into to see the suitability of business. Furthermore, the cash flow statement of the retailer will be presented in order to discern if the retailer would be able to survive the current market conditions. The basic approach will be to contrast earnings from sales and the incurred costs. A worst case scenario or a pessimistic business picture has also been developed in order to assess the survivability of the business if faced with overwhelming odds in the first year. The major expense areas have been identified realistically along with the local taxation scheme in order to present as realistic a picture as possible. 2. Gurgaon City’s Developing Economic Prowess Gurgaon has emerged as the second largest urban centre in the Indian state of Haryana becoming its chief most industrial and financial hub. The urban centre can also be looked at from the perspective of New Delhi’s suburb given that it is only a 30 kilometres ride from New Delhi. As such Gurgaon is considered as one of the four major satellite cities that surround New Delhi (Sustainable Cities Collective, 2011). The city also hosts the third highest per capita income in India (Behl, 2009) making it a particularly attractive place for launching a retail business. Most of the city’s workers are employed by Fortune 500 companies as well as local businesses in and around Gurgaon (Taleja, 2009). This ensures that the local population have high levels of disposable incomes which are essential to the survival of any retailing business. Disposable incomes are particularly higher in the younger generation so there is no danger of sustainability in terms of business. Also the chances for disposable income to increase are on the rise given that Gurgaon is fast becoming one of India’s largest outsourcing hubs (Government of Gurgaon, 2010). Instead there are chances that operating a retail business in a financial and industrial hub such as Gurgaon would lead to expansion in upcoming years. This fact can also be gauged from the presence of over forty five different malls around Gurgaon that are only set to increase further in upcoming times. 3. Background to Argos Argos is one the largest catalogue merchants being based in the United Kingdom and Ireland. Within the geographic domains of the United Kingdom, Argos is the largest retail brand with over 800 stores around the United Kingdom. Argos is owned and operated along with its sister concern Homebase by the Home Retail Group. Argos relies on catalogue retailing and so offers a wide range of brands that it owns and operates thereby adding greater value to both the consumer’s purchase and the business. The more notable brands being operated under Argos include Elizabeth Duke, Chad Valley, Sun Pearl, Challenge, Alba, Schreiber and Bush as well as a number of other brands (Intellectual Property Office, 2012). Argos is now looking to expand into the Indian market using the Easy Shop concept which would serve as a retail outlet for the Indian market. The first retail store is planned for Gurgaon in order to enter the Indian market. 4. Challenges of Argos to Survive in India As mentioned before Gurgaon has over forty five malls in all which provide a strong presence to international brands and retail stores. Whenever Argos expands into India it will have to face a number of challenges including competition from previously established retailers. In order to deal with this competition and to make things as realistic as possible, a cash flow statement was developed for the Easy Shop based in Gurgaon. The contention behind the cash flow sheet is to provide a realistic picture to the expenses incurred and the profits earned in order to justify the survivability in the Indian market. Moreover, local measures such as taxation in the form of the value added tax (VAT) also need due consideration. The cash flow sheet for Easy Shop in Gurgaon is discussed in the discussion below in order to appraise the reader with the confronted challenges. One of the more challenging aspects is the amount of profit deemed suitable from the operation of the Easy Shop. The profit levels have to be kept such that the return on investment is justified and prices are kept attractive enough for customers. 5. Explanation for the Cash Flow Sheet 5.1. VAT The cash flow sheet being used for the Easy Shop based in Gurgaon takes a number of factors and a worst case scenario into account in order to estimate the generated profit levels. The primary aspect that needs consideration is the VAT enforced in the Indian taxation system. The Indian state of Haryana (where Gurgaon is located) was the first to implement VAT in April 2003 and has since kept the rates fixed at 12.5%. one of the chief reasons to implement the VAT was to ensure that cross state trade was kept to a low so that localised services could be developed (OECD, 2008). The current slab for entry into the VAT regime is a total annual turnover of Indian rupees (IR) 500,000 (Sharma, 2005). Since the current business is starting out with a capital base of over IR 4,800,000 along with venture capital levels of IR 1,600,000 so the VAT slab applies to the business. Moreover, the expected profit levels are also expected to cross the IR 500,000 slab so VAT is a major consideration in this business. VAT applies to the Easy Shop venture in two different forms. The basic supplies needed for retailing are taxed through VAT at 12.5% while services such as public utilities such as gas and electricity are charged at 10%. In contrast water is charged with a VAT rate of 0% along with insurance. This indicates that two different VAT levels will have to be applied at the appropriate levels in order to project the cash flows for the Easy Shop business venture. 5.2. Rent Since the business is being started up at a control scale at this point in time so it makes little sense to commit a large amount of resources to procuring a retail store. Instead, in order to minimise costs the current retail outlet is being rented out with a fixed rent of IR 50,000 per month. In case that the business fails there is little blowback that could arise from the purchase of a retail outlet in the commercial districts of Gurgaon. The rent is fixed for the first year at IR 50,000 while it is expected to escalate at 10% for every subsequent year. This practice lies in line with the current market trends that mandate an increase of 10% in rents every year. Moreover, this is also connected to the larger phenomenon of inflation in India that tends to soar at around 10% per annum. Although this amount of inflation seems to be high but India’s status as a developing economy and food insecurity in the regional markets has kept inflation levels high in the entire region. Therefore, it would be realistic to expect that such an amount of inflation would arise as a cost in subsequent years. 5.3. Partner Drawings Since a partner is also subscribed for business so the partner’s drawings in income have been maintained at a constant IR 120,000 every month beginning from month 8 of the first year. In contrast the partner’s drawings in income have been kept constant at IR 120,000 every month for the second year. This cost is also complemented by the employee’s salaries that are expected to be IR 15,000 in the first year and are tabulated for every single month. The second year increases the salary levels by 10% to IR 16,500 given the application of inflation based adjustments. 5.4. Public Utilities 5.4.1. Electricity The use of public utilities has been managed as per actual need and requirement. Electricity usage has been kept high for the hotter and more humid months while it has been kept low for more pleasant months. The consumption of electricity has been decreased for the second year based on projections that lower electricity will be consumed after the first year. This will occur as the lighting expenses will go down in the second year as the first year would require more than adequate lighting in order to bring in customers. This lighting could be directed at boards in and around the mall that Easy Shop would have to pay for. In contrast, in the second year lighting costs would go down but air-conditioning costs would remain in place as such. 5.4.2. Natural Gas The other major public utility to consider is natural gas. Since no manufacturing is going on and since there is no other use for natural gas so its consumption has been kept at zero. This trend continues into the second year as well. 5.4.3. Telephone The third public utility considered is telephone that has been provided with high consumption levels in the first 5 months after which its bill has been tapered off. The second year sees some escalation in the telephone costs near the start of the year but the bill has been tapered off subsequently. The added levels for telephone bills have been kept in the cash flow to deal with unexpected usage that occurred especially after the opening of Easy Shop. 5.4.4. Water The next public utility is water. Water consumption in India is generally not measured and instead fixed bills are issued for water consumption. A water connection was deemed appropriate and procured such that a fixed water bill is paid. This bill remains fixed throughout the first and second years and is expected to continue at the same rate for the next few years. 5.4.5. Internet Services Internet services are cheap in India and have been procured to ensure adequate communication across the Argos network. The internet service rates per month are fixed and continue in the same fashion for the first and second years. 5.4.6. Professional Fees Professional fees for cleaners and other such services have been kept at lower levels for the first year as compared to the second year. This is because more service provision is expected in the second year as customer levels increase. 5.4.7. Insurance Insurance is kept fixed to the first month of both years and tends to decrease in the second year. 5.4.8. Advertising Advertising costs have been kept high for the first year’s start after which advertising costs have been tapered off to constant levels after the third month. The advertising costs for the second year have been kept for the first and eleventh month only to attract appropriate audiences (near Christmas). However, the advertising costs for the second year are low compared to those of the first year which stands in line with standard business practice. 5.4.9. Stationary Stationary levels have been kept high in the beginning of the first year after which they have been tapered off into the second year. 5.4.10. Capital Assets Capital assets have been accounted for in the first month of the first year at IR 200,000. No capital asset costs have been attributed to the second year since no investment is deemed necessary. 5.4.11. Interest Charges and Loan Repayment Interest charges have been kept at constant levels of IR 40,000 per month while loan repayment levels have been kept constant at IR 66,667 per month throughout the first and second years. This is deemed appropriate as banking transaction regarding loans is transacted in fixed amounts per month. 5.4.12. Legal Fees Legal fees have been paid at the start of the first year for issues such as licencing the trademarks and brand names in India. No other legal costs have been included throughout the first and second year otherwise. Furthermore, no escalation in these costs is expected given the nature of business and the state of claims in Indian courts. 5.4.13. Transportation (including Maintenance) Transportation requirements have been met through the procurement of a vehicle at a cost of IR 15,00,000 which has been paid at the start of the first year. The transportation expenses have also been augmented with fuel costs fixed at IR 20,000 per month throughout both years. The maintenance of the vehicle has been kept constant at IR 25,000 for each year. No other transport costs such as buses or the like have been included. 5.4.14. Postage Postage has been tapered for the first year with higher costs in the first few months. The second year sees nearly constant postage costs throughout. 5.5. Pessimistic Scenario A pessimistic scenario has also been developed to ensure the resilience of the business. This was carried out simply by reducing the sales levels of the first year to 70% of their original levels. Since the first year has the most associated start-up costs so surviving the first year will mean sustainability for the business. 6. Results The profit margin levels were manipulated in order to ascertain the profit taking capacity of the Easy Shop operation. Profit levels were varied in increments of 10% from a level of 10% to 50% which was deemed sufficient for steadying the closing bank balances. These scenarios and the resulting graphs are shown in the Appendix. The gross profit levels (per annum) are listed in the table below against the appropriate profit margin levels. Profit Margin (% age) Year One (IR) Year Two (IR) Total (IR) 10 -39,02,640 -22,49,517 -61,52,157 20 -29,02,083 -6,50,617 -35,52,700 30 -20,55,459 7,02,298 -13,53,161 40 -13,29,780 18,61,939 5,32,159 50 -7,00,859 28,66,962 21,66,103 The table above clearly shows that profit margins of 10% show serious shortcomings in terms of return on investment. The first section of the Appendix shows a similar trend as the closing bank balance decreases rapidly. At the end of the second year essentially nearly all of the original investment is gone. In contrast, at a profit margin of 20% ensures a gradually decreasing closing bank balance for either year resulting in the loss of nearly half of the original investment after the second year. Using a profit margin level of 30%, the closing bank balance tends to increase and then decrease in the first year while a steady gain is seen in the second year. However, a loss of around 20% of the original investment is seen after the second year. In contrast, a profit margin level of 40% registers loss in the first year (20% of the original investment) and provides steady increasing returns in the second year leading to an overall profit of just over IR 500,000. Increasing the profit margin leads to increasing closing bank returns with a loss of around IR 7,00,000 in the first year followed by profits in the second year. The overall profit after the second year is around 32% of the original investment. This is deemed appropriate as increasing the profit levels to higher margins would lead to over priced goods that might not survive in the Indian market. 7. References Behl, T.N.S., 2009. Gurgaon: India’s ‘Millennium City’. [Online] Available at: HYPERLINK "http://businesstoday.intoday.in/story/best-cities-to-work,-play-and-live.html/1/4266.html" http://businesstoday.intoday.in/story/best-cities-to-work,-play-and-live.html/1/4266.html [Accessed 2 May 2012]. Government of Gurgaon, 2010. MODERN GURGAON. [Online] Available at: HYPERLINK "http://gurgaon.gov.in/modern_ggn.htm" http://gurgaon.gov.in/modern_ggn.htm [Accessed 2 May 2012]. Intellectual Property Office, 2012. These are all the UK Domestic Trade Mark Applications or Registrations in the name of Argos Limited. [Online] Available at: HYPERLINK "http://www.ipo.gov.uk/tm/t-find/t-find-adp?propnum=0352388001" http://www.ipo.gov.uk/tm/t-find/t-find-adp?propnum=0352388001 [Accessed 3 May 2012]. OECD, 2008. Consumption Tax Trends 2008: Vat/Gst and Excise Rates, Trends and Administration Issues. New Delhi: OECD Publishing. Sharma, C.K., 2005. Implementing VAT in India: Implications for Federal Polity. Indian Journal of Political Science, LXVI(4), p.915–934. Sustainable Cities Collective, 2011. Gurgaon: India’s ‘Millennium City’. [Online] Available at: HYPERLINK "http://sustainablecitiescollective.com/polis-blog/22342/gurgaon-india-s-millennium-city" http://sustainablecitiescollective.com/polis-blog/22342/gurgaon-india-s-millennium-city [Accessed 2 May 2012]. Taleja, B., 2009. The top five cities. [Online] Available at: HYPERLINK "http://businesstoday.intoday.in/story/the-top-five-cities.html/1/4265.html" http://businesstoday.intoday.in/story/the-top-five-cities.html/1/4265.html [Accessed 2 May 2012]. 8. Appendix 8.1. A – Profit Level 10% 8.2. B – Profit Level 20% 8.3. C – Profit Level 30% 8.4. D – Profit Level 40% 8.5. E – Profit Level 50% Read More