marketing plan for peds inc
TRANSCRIPT
MBA 607, Marketing management
Prepared by: Radoslav Petrov
Course Instructor: Dr. Fred Ingle
Pfeiffer/Triangle, Fall 2007
3 December 2007
Marketing Plan for Peds Inc
This marketing plan is being prepared for presentation to Chris and Anna Harkey.
I. Executive summary
Peds Inc was founded by Chris Harkey who had the idea to open a small retail bicycle
shop. The idea came from his passion for cycling, and after being unable to obtain permanent
employment with his software engineering degree, Chris decided to start a bicycle shop.
The shop will offer retailing of bicycles, bike apparel and accessories, maintenance and
repair services, bicycle excursions, and also fitness equipment, performance shoes and clothing
for runners. This will allow the company to appeal more effectively to total fitness lifestyles and
will therefore increase both sales and profits. The shop will be located near a busy strip shopping
center and it will be targeting competitive and recreational customers in Raleigh – Durham –
Chapel Hill area.
The analysis of the Macro-environment reveals fairly good opportunities for investment
in such venture. Peds will invest $250,000 – all from Chris’s personal savings and retirement.
The analysis of the Micro-environment reveals that Peds will be very competitive at the
local market. The success of the bicycle shop will depend primarily on Chris’s knowledge and
Petrov 2
skills. Having the connections and knowing the right people is definitely an advantage for
Chris’s new venture.
An industry overview reveals that specialty bicycle retail is a growing market and the
outlook for the future is positive because cycling participation is increasing. Although the bicycle
industry is a seasonal business, industry sales of bicycles are reaching over 15 million bicycle
units annually, plus parts, accessories and services (Industry Overview 2006). The market
growth is also determined by the rapid increase of the Raleigh-Durham-Chapel Hill population
during the past several years - 1,421,599 last count of total residents, a 3.7% or 50,811 increase
from 2005 to 2006 (US Bureau of Census).
The main marketing objectives are to position Peds as the premier bicycle retail shop in
the trade area and to develop a good reputation for offering quality product lines and services at
fair prices. The primary financial objectives consist of improving sales revenues on a monthly
basis; reaching breakeven point at the end of the first year (FY2008) - $400,000 in total revenues
are expected; and steady increase in profitability in the following five years.
Peds’s marketing strategy includes creating customer awareness by conducting Grand
Opening, and increasing market share by attacking small, local bicycle retailers of its own size.
In terms of meeting the financial objectives in a long run, the revenue will be increased by
gaining more market share and relying on built reputation.
Peds is expected to reach its maturity at the end of the fifth year (FY2012) when the total
annual costs will remain relatively the same - $440,000, and the sales will be steady – no more
than 5% increase in total annual sales, leaving a net result of $200,000 - average annual profit.
The payback period for recovering the initial investment of $250,000 is 3.26 years. Average
Petrov 3
gross margins are expected to gradually increase from 34% during the first year (FY2008) to
45% at the end of the fifth year (FY2012).
II. Current situation and trends
A. Macro-environmental situation
The analysis of the macro-environment includes forces outside the control of Peds Inc
that can substantially impact market opportunity. The major forces that Chris Harkey has to
examine and pay close attention to, are the following six environments:
1. Demographic environment
According to the National Sporting Goods Association, 35.6 million Americans age
seven and older were estimated to have ridden a bicycle six times or more in 2006. This was
down compared to 2005, when 43.1 million rode a bicycle six times or more. The peak
participation year was 1992, with 54.6 million participants. It should be noted that the age limit
on this number eliminates millions of young people who ride bicycles and are under seven years
of age.
According to the same source, in 2006 cycling was the eighth most popular recreational
activity in the U.S., behind exercise walking, swimming, exercising with equipment, camping,
bowling, fishing, and workout at club (2006 Participation - Ranked by Total Participation).
During 2006, the popularity of cycling among men was 9.4% higher than among women, 54.7%
and 45.3% respectively. The average age for a male rider was 31.1 years, and for a female rider –
29.4 years of age (2002-2006 Participation by Mean Age - Male & Female).
2. Sociocultural environment
These days, living an active and healthy life is a top priority for many people. Bicycle
riding is proven to be an excellent method for exercising, a stress reliever, and a pleasurable
Petrov 4
activity. Increasing activity levels contributes to the prevention and management of over 20
conditions and diseases including heart disease, stroke, high blood pressure, diabetes, cancer,
weight management, and positive mental health. Every year, more and more people from
different ages join cycling clubs around the country. They participate in tournaments and
competitions, win prices, or just ride for pleasure. For many people, being a member of a club,
give them a sense of belonging, a good social feeling of acceptance from the others.
For these reasons, the popularity of sport activities is constantly increasing, which reflects
the sales of exercise equipment, footwear, and clothing. According to the National Sporting
Goods Association, the total sales for 2007 are expected to reach $90.7 million, which is an
increase by 1% compared to the last year. (2006 Consumer Purchases by Category).
3. Economic environment
Economic trends affect all aspects of the economy as a whole, and the retail industry in
particular, doesn’t make an exception. For example, according to the U.S. Bureau of Economic
Analysis, the real disposable personal income per capita is on the rise for the last few years,
reaching almost $29,000 in August 2007 (Personal income and outlays). This, of course,
positively affects the purchasing power of the consumers, who are more likely to direct their
disposable personal income towards sports goods, and in particular – bicycles and other related
accessories and equipment.
Petrov 5
Another example of the impact of the economic factors is the increase of the oil prices -
$90 per barrel of crude oil as of end November 2007. The skyrocketing gas prices will trigger
many consumers to look for alternative ways of transportation. So many people consider buying
a bicycle, others are already using them to travel short distances.
4. Technological environment
The bicycle industry has been riding a wave of technological advances recently (Building
a Better Bicycle). For example, engineers are looking beyond alloy steel - which is found in most
frames - and using materials such as aluminum, titanium, and carbon fiber composites to make
bikes lighter, stiffer and better able to shift the peddler's energy to the back wheel. And aside
from material modifications, engineers are implementing geometry changes to enhance
performance. Some of the recent innovations include: a device that uses the pedaling of the rider
to automatically replenish the air in a bicycle's tires; a new type of front lamp that runs on the
bicycle's kinetic energy but does not make pedaling harder; a puncture-resistant tire (a layer of
ceramic material is included in the rubber part of the tire, making it hard for nails and other sharp
objects to penetrate); and a lamp that uses a blue/white LED with 12 times the brightness of
Petrov 6
conventional lights, developed for the purpose of preventing accidents (Building a Better
Bicycle). No doubt, the future technology innovations and advances will make bicycling more
enjoyable and safer activity.
5. Regulatory environment
Government agencies can play a significant role in improving bicycle safety in many
different ways. For instance - by educating bicycle operators on how to avoid accidents, and on
the benefits of safety equipment. For example, according to Bikexprt.com, just educating riders
not to ride into a street without looking for other traffic first could reduce fatalities by 15% and
nonfatal motor vehicle accidents by a comparable amount. Similarly, eliminating riding on the
wrong side of the street would reduce fatalities by 8% and nonfatal injuries by over 20%.
Moreover, the safety standard requires that consumer information on bicycle maintenance be
provided with the purchase of a bicycle (Ross, D. Petty).
6. Natural environment
Environmental groups advocate cycling as a means of reducing pollution. The fewer cars
people drive and the fewer car trips they make, the cleaner our air becomes. According to
EnvironmentalDefence.org, U.S. has 30 percent of the world's cars, but they account for 45
percent of automotive carbon dioxide (the main gas that contributes to global warming).
Consider this: If everyone who lives within 5 miles of their workplace were to cycle to work just
one day a week and left the car at home, nearly 5 million tons of global warming pollution would
be saved every year, the equivalent of taking about a million cars off the road. Today,
approximately 5.2% of those who ride bicycles do so as a means of transportation (Bicycle
Commuting Enjoys a Rebirth). Bicycles don't pollute! By choosing to bike, people will reduce
Petrov 7
automobile congestion and pollution, thus improving the quality of life, and also stop
contributing to the global warming.
B. Micro-environmental situation
To completely assess market opportunities, Chris Harkey has to look at the Micro level as
well. The key question is how Peds Inc is going to be competitive at the local market, and for
how long the firm can keep its competitive advantage before rivals duplicate or imitate its
business model.
An assessment of the management team is also crucial in examining the attractiveness of
the market. Since Chris Harkey is the owner and the main person who will run the show, the
success of the bicycle shop will strongly depend on his knowledge and skills. The fact that Chris
is an avid cyclist and that he still competes, indicates that he is really passionate about cycling
and he will do anything for his shop to prosper. Chris knows a lot about the cycling in general,
and he also has some past experience in bike shop operations. However, being an entrepreneur is
something new and challenging for Chris. He used to ride with a local bike club where he got to
know many people involved in cycling. Having the connections and knowing the right people
will definitely help Chris in his new venture.
C. Market trends
According to the National Bicycle Dealers Association, bicycles and related products
appeal primarily to a recreation market in the United States (Industry Overview 2006).
According to the same source 94.5% of those who ride bicycles do so for recreation or fitness,
0.3% for racing, and nearly 5.2% for transportation, a growing market that is important for the
industry because it establishes cycling as a legitimate part of the nation’s transportation mix.
Petrov 8
According to Bicycle Retailer and Industry News, specialty retailers took the biggest hit
from the overall sales decrease. In 2006, specialty retailers sold 2.6 million units, 14 percent of
the total units sold. In 2005, the channel sold 3.2 million units, which accounted for 16 percent of
the total units (Wiebe 40).
Many specialty bicycle retailers also carry related fitness and lifestyle products such as
indoor fitness equipment — exercise bikes, weight machines and associated accessories. This
further broadens the industry’s offerings, and allows the bicycle dealer to appeal better to a total
fitness lifestyle. Roughly 25% of the bicycle stores in the U.S. sell some kind of indoor exercise
equipment. Other non-bike categories sold through bicycle retailers include inline skates (14%),
snowboards (14%), skiwear (13%), and a variety of other recreational products (Industry
Overview 2006). According to the NBDA Cost of Doing Business Study, a strong accessories
segment is also important in the sales mix. Parts, accessories and service count for approximately
50% of the average bicycle store’s sales. Information from the same survey shows that the
average bicycle dealer's revenue comes from: 47% - bicycles, 35.1% - parts and accessories,
11.4% - bicycle repair, 1.6% - bicycle rental, and 4.9% - "other" that includes fitness equipment.
The average store sells approximately 650 bicycles per year, carries five bicycle brands, and
numerous accessories brands.
D. Market growth
The outlook for the future in bicycles is positive, though market growth has leveled off in
recent years. The bicycle industry is a seasonal business that can be impacted by unusual
weather, as well as an industry that relies on discretionary spending impacted by economic
conditions. Industry sales of bicycles seem to be stable at over 15 million bicycle units annually,
Petrov 9
plus parts, accessories and service, which historically is a very healthy number for the industry
(Industry Overview 2006).
Cycling facilities construction is at an all-time high. This continues to be an important
factor in the industry’s growth, as bicycles continue to provide residents with a clean and healthy
transportation alternative. Most public buses are equipped with bicycle racks, and some roads are
equipped with bicycle lanes. Bicyclists can also use Raleigh's extensive Greenway System, with
trails found throughout the city. Raleigh’s Parks and Recreation Department offers a wide variety
of leisure services at more than 150 sites: 8,100 acres (33 km²) of park land, 54 miles (87 km) of
greenway, 22 staffed community centers, a BMX champion race track, 112 tennis courts at 25
locations, 5 lakes, and 8 swimming facilities. The NC-DOT Mountains-to-Sea bike route goes
through Raleigh, as does the U.S. Maine-to-Florida bicycle route #1. The NC-DOT Cape Fear
Run bicycle route connects Apex to Wilmington and closely parallels the RUSA 600 km brevet
route (NCDOT Division of Bicycle and Pedestrian Transportation).
The market growth is also determined by the rapid increase of the population in the area
during the past several years, which can be seen from the table below:
Raleigh-Durham-Chapel Hill, NC Population and Components of Change
Components of Change
Date Population %
Change
Total Population Change Births Deaths
International Immigration
Net Domestic Migration
2001 1,233,054 3.8 45,113 23,615 9,420 12,322 20,360
2002 1,266,352 2.7 33,298 19,501 7,498 9,719 10,813
2003 1,296,066 2.3 29,714 19,730 7,704 8,452 8,468
2004 1,328,103 2.5 32,037 20,437 8,130 7,805 12,361
2005 1,370,788 3.2 42,685 21,004 7,996 8,247 21,781
2006 1,421,599 3.7 50,811 21,438 8,236 8,290 29,511
Petrov 10
Source: US Bureau of Census E. Customer Analysis
A critical step in analyzing market opportunities is examining the existing and potential
customers’ personal characteristics – their needs, benefits sought, attitudes, values, past
experiences, and lifestyles – and their social influences – their social class, reference groups, and
family situations (Mullins, Walker, and Boyd 98). Customers for Peds Inc can be grouped into
the following categories: avid cyclists, students, and general part of the population in the trade
area. Each of these groups has different needs, and also seeks a different set of benefits when
purchasing a bicycle or other related products or service:
• Avid cyclists
- they are drawn by athletic pursuits
- they are image and brand conscious
- small growth and turnover, but on the whole, the group is pretty stable
- they will patronize a shop that gives personal service
- they want stable, comfortable bikes, and a full range of accessories
• University students and academic staff
- they are willing to commute by bicycle to school/work
- students have great annual turnover
- university employees are relatively stable group
- the lack of parking in the university area and the general ease of bike mobility
throughout campus motivates them to use bicycles as inexpensive transport
- they want convenience for sales and service
- main market for bike accessories
Petrov 11
• Greater Raleigh – Durham – Chapel Hill population
- they ride for fun
- they seek more comfort and safety rather than speed
- they look for variety in colors, sizes, styles, and prices of bicycles
- the area provides great places to ride (parks and bike trails)
- they will chose a bike shop located closer to their home
- when their bikes need service and maintenance, local drop off/pickup
convenience is important
Understanding how such characteristics and social influences impact consumers’ decisions in a
product category provides an important foundation for marketing decisions concerning the
definition of market segments, the selection of target markets, and the design of marketing
programs to appeal to those markets (Mullins, Walker, and Boyd 119). The more Chris Harkey
knows about the factors affecting the existing and potential customers’ buying behavior, the
better off he will be in developing meaningful marketing programs and strategies that fit the
desires of those customers.
F. Market Segmentation, Targeting, and Positioning
Having identified the specific needs and benefits sought, outlined in the section above (E.
Customer Analysis), Chris Harkey is now able to define the market segments where customers
are more likely to respond in a similar manner to the firm’s marketing programs. The three
distinct market segments described above have several needs in common, which are also current
and potential customers’ expectations. These common market needs are:
- Quality bikes at several price points
- Various styles, sizes, colors, and the latest in the bike trend
Petrov 12
- Importance on comfort and safety – reliable bikes and accessories
- Plenty of replacement components and service parts
- Range of accessories
- Friendly personal relationships between cyclists and shop staff
- Prompt and convenient service
Chris Harkey should target those segments and position Peds Inc in such manner that will give
his firm a competitive advantage over its rivals. This optimal positioning could be done by
following a differentiation strategy and fulfillment of all the above common market needs. From
Michael Porter’s prospective, differentiation is when “the business concentrates on achieving
superior performance in an important customer benefit area valued by a large part of the market”
(Kotler and Keller 56). By doing so, Peds will have a real chance to outperform its rivals in the
trade area.
III. Performance review
Peds Inc is a new company and it doesn’t have any past data, so its performance cannot
be evaluated.
IV. Key issues
The key issues for Peds can be comprised in a SWOT analysis. This analysis includes
examining Peds’s strengths, weaknesses, opportunities, and threats:
A. Strengths:
• Sells a variety of low, mid, and high-end bikes, also bike apparel and accessories
• Provides bike maintenance and repair services
• Offers bicycling excursions to Yellowstone and the Maritime Islands in Canada
• Offers fitness equipment, performance shoes, and clothing for runners
Petrov 13
• Chris Harkey’s personal characteristics – has a solid experience as an avid cyclist who
rode competitively in the past. Chris has a degree in computer engineering from NCSU.
• Good location – the store is conveniently located near a busy strip shopping center
• Cycling is a healthy, practical, non-polluting, affordable, safe, and enjoyable activity
B. Weaknesses:
• Peds Inc is a new start-up firm
• Small size, a very resource limited firm
• Owner’s lack of entrepreneurial skills
• Challenges posed by the seasonality of the bicycle retail business
C. Opportunities:
• Increasing trends for active and healthy lifestyle
• Fast population growth in the area, including Spanish population
• Increasing state government investments in improving bicycle facilities like bike paths
and road improvements
• Relatively high number of public and private universities, collages, and schools in the
area
D. Threats:
• Many small and large competitors on the market
• Low prices offered by local mass merchants and large discount stores
• Challenges posed by the unstable economy at the moment
V. Objectives
Petrov 14
In order to be successful in his venture, Chris should have clear goals in terms of sales
volume, market share, profit, reputation, and customer satisfaction. These objectives can be
grouped into two main categories: Marketing Objectives and Financial Objectives.
A. Marketing Objectives:
• Provide high quality products and services.
• Focus on attracting customers, achieve and maintain a steady increase of market share.
• Increase market awareness by promoting its products and services by stressing on the
benefits of cycling. Conduct a smooth Grand Opening and maintain a financially healthy
business thereafter.
• Develop a good reputation in the trade area for quality product lines and services at a fair
price. Peds will establish itself as the premier bicycle retail shop in the trade area.
• Create friendly and professional relationships with its customers, competitors and
suppliers. Constantly monitor customer satisfaction and make sure the customers are
always happy with the purchase they make or the service they get.
B. Financial Objectives:
• Aim to improve sales revenue on a monthly basis. The goal is 15% increase in annual
sales for the next few years (see Projected Sales table at section VIII).
• Break even by the end of the first year. The goal is $400,000 in total revenues by the end
of FY 2008 (see Break-even Analysis at section VIII).
• Steady increase in profitability after the first year – after the break-even point is reached
(see Sales Forecast table at section VIII).
VI. Marketing strategy
Petrov 15
Peds’s marketing strategy is to first create customer awareness concerning its products
and services and then develop the customer base. A Grand Opening is panned at the begging of
2008, which will help Chris Harkey to communicate the message that Peds wants to deliver –
offering various kinds of bicycles, accessories, and services at a fair price.
Peds’s strategy on increasing market share will include attacking small, local bicycle
retailers of its own size that are charging excessive prices, or are not satisfying customers by
offering mediocre services. The key objective is to position Peds as the premier bicycle retail
shop in the trade area and win a good reputation over its customers who can depend on quality
products, quick repair and maintenance services.
In terms of meeting the financial objectives, Peds will stick to the basic rule stating that
profit can be increased by increasing revenue and reducing expenses (see Expenses and Sales
Forecast table at section VIII). At the beginning, the revenue will be increased by creating a
short-term sales surge (Grand Opening will help, also offering coupons for discounts, specials
and other incentives), while in a long-run the revenue will be increased by gaining more market
share and relying on built reputation.
VII. Action plans
A. Target market
As it was outlined above (E. Customer Analysis), customers for Peds Inc are grouped into
the following categories: avid cyclists, students, and general part of the population in the trade
area. Although each segment is distinct in terms of its users, for simplicity purpose, the potential
Peds’s customers can be grouped into two general categories: Competitive and Recreational. In
this respect, it can be concluded: Bicycle retailer Peds Inc aims to generate profit in the
Petrov 16
upcoming years by targeting competitive and recreational customers in Raleigh – Durham –
Chapel Hill area.
B. Specific actions taken with respect to each of the 4 Ps
In order to be easily implemented, followed, and successfully accomplished, Peds’s
marketing strategies need to be broken down into strategies in specific areas such as product,
pricing, distribution, and promotion.
1. Product
The majority of Peds’s inventory consists of common products offered by typical bicycle
retailers. The shop will also have some fancy equipment just to draw peculiar customers in. More
specifically, Peds will offer the following products:
• Bicycles. Peds will sell new high-end road and mountain bikes with costs between $2,000
- $10,000, and also medium-end to low-end bikes for casual riders with costs between
$300 and $2,000. Peds is also considering selling used bikes in the future.
• Accessories. Peds will offer a variety of accessories. The shop will have in stock only the
most useful and desired accessories by customers. Peds will offer its customers options
for ordering by catalogs.
• Clothing. Peds will offer cycling apparel which will be rotated seasonally, from summer
jerseys and racing shorts to winter jackets, pants, gloves and shoe covers. The shop will
experiment by selling a line of clothing and shoes for runners.
• Parts. Peds will offer parts for repair and maintenance from a variety of suppliers. The
shop will cover the most common parts, others will be ordered from catalogs when
needed. The majority of parts will be installed during service and will be an additional
Petrov 17
charge beyond the service fees. Other parts will be sold separately to customers who
prefer to work on their bikes themselves.
• Services. Peds will offer fast, convenient and reliable services and maintenance.
Specifically, the shop will provide customers with professional services like: assembling,
tune-ups, flat tire repairs, break adjustments, installation of all accessories, custom bike
building, etc.
• Fitness equipment, performance shoes and clothing for runners. Peds will carry a small
inventory of these items just with experimental purpose at the beginning, and will
increase inventory in the future if successful.
• Bicycling excursions to points such as Yellowstone and the Maritime Islands in Canada.
Peds Inc will offer bicycle limited warranty, replacement, repair or crash replacement programs,
or money back to its customers for any product or service performed.
2. Price
As a specialty bicycle retail shop, Peds will be selling on slightly higher prices than the
mass discounted retailers (Wal-Mart, K-Mart, REI) due to the higher prices charged by suppliers.
However, maintenance and repair services will be offered at cheaper prices. Peds will base its
hourly shop rate fees on industry standards which will be adjusted for the local target market.
The shop rates will be compared to other specialty bike shops with the same size in the area, but
the service will be offered at a higher level in terms of quality. Bicycles will be priced with a
markup of between 25% and 40% depending upon the brand and model. The markup of parts
and accessories will be much higher – between 100% and 200%, due to the high shipping,
handling and care costs. The markup on clothes and shoes can vary significantly depending upon
product manufacturer, country of origin, customer perception and value.
Petrov 18
3. Place
The bicycle shop is conveniently located near a busy strip shopping center that contains
other big stores like Old Navy, Best Buy, Petsmart, Harris Teeter, and Bed Bath and Beyond.
The proximity to these big stores guarantees good traffic flows that will bring customers in.
Outside parking lot is available for customers’ vehicles. The shop will be well lit, with a large
number of windows that will show the attractive displays of bicycles and accessories offered by
Peds. The shop environment will be design for the convenience of the customers and will simply
facilitate and encourage buying. The physical space of the shop will be arranged in the
following manner:
- The majority of the space is for bicycles display. Different brands and colors will be displayed,
arranged diagonally in order to save space;
- Additional space will be allocated to a small checkout point of sales;
- Service area – space for assembling new bikes, maintenance and repair;
- Storage - space at the back of the store used for keeping inventories;
- Space for bicycle accessories and fitness equipment;
- A special section will be designed for runners displaying performance shoes and clothing;
4. Promotion
Chris Harkey will use a variety of marketing programs to promote Peds. A Grand
Opening will help to create customer awareness of the products and services offered by the shop.
The following methods of advertising will be used:
• Yellow Pages
Petrov 19
• Newspaper print adds – advertise in local newspapers such as News & Observer,
Heraldsun, The Cary News, The Chapel Hill News, other university newspapers, and
specialty bike magazines
• Direct mailing – coupons, rebates, special offers – will be send to trade area’s zip codes
• Business cards, also brochures, pamphlets, and service sheets
• Distributing fliers and posters around the area
• A big A-frame sign on the sidewalk
• Line of bicycles on sale outside the store (if allowed)
• Displaying bicycles and other promotional items at local sport events using Peds cargo
trailer
• Sponsorship of regional cycling events and a local competitive bike club
• Website – providing store information, announced sales, maps of area’s cycling routes,
information about regional cycling events, benefits of cycling, and many other useful
links to other websites
C. Who is responsible for each action?
The general operations including selling and main management functions will be
performed by the owner and founder – Chris Harkey. He will hire two part-time employees to
handle bicycle repair and assembly, and also assist in sales. As a bike enthusiast, Chris knows a
lot about the bicycle industry, he has a great interest about the sport and he is really passionate
about it. That gives him an advantage in promoting sales because his knowledge and awareness
of cycling events, state-of-the-art equipment, safety devices and accessories. Not having
entrepreneurial experience in the past requires that Chris focus on his management skills and
improve his ability to cope with customers and employees.
Petrov 20
D. When the actions will be engaged in?
The implementation of the marketing programs and strategies will start as soon as the
shop opens at the beginning of next year. Grand Opening is schedule for January 2008.
F. How much will be budgeted for each action?
The total amount of investment is $250,000. For his venture Chris Harkey is not
borrowing any money from outside sources but using his own funds primarily from personal
savings and retirement. The star-up expenses for the first three months include:
- Rent - $4,500
- Grand Opening - $15,000
- Start-up inventory - $85,000
- Salaries and benefits - $5,000
- Utilities plus utility deposit – $4,100
- Store fixture and renovation – $21,000
- Company truck and cargo trailer - $12,000
- Sponsorship of local bike club and cycling events - $6,000
After the first three months, Peds will change its investment patterns and it will budget different
amounts for its activities, which are explained in the assumptions of the next section (see item
VIII. B Projections of the next five years).
When dealing with suppliers at the beginning, Peds will use cash on delivery (COD) payment
option. This COD status will remain in effect until the store gains financial stability and be able
to cut business checks for larger amounts.
VIII. Projected profit-and-loss statements
A. Assumptions
Petrov 21
The financial projections presented here are based on the following assumptions:
• After the initial inventory of $85,000, the company will spend an average $20,000 per
month for purchasing new items till the end of FY 2008. For every year on, Peds will
spend 10% more money on inventory than the previous year.
• During the first year, Peds will spend $15,000 for Grand Opening, and 5% of Total
Revenue for advertising. After the first year the company will reduce the advertising
expenses to 3%.
• The projected sales for FY 2008 are $400,000. For every year after, the company expects
15% increase in Total Sales than the prior year. The company is expected to reach its
maturity by the end of the fifth year (FY 2012) when the total costs will not change and
the sales will be steady (between 1% and 5% increase in total sales).
B. Projections for the next five years
Simplified Annual Expense Budget and Sales Forecast for the next five years:
Cost Description
Jan – March 2008
April - December 2008
Total
FY 2008
1
FY 2009
2
FY 2010
3
FY 2011
4
FY 2012
5
Variable costs:
Inventory
85,000
177,000
262,000 (10%↑) 288,000
(10%↑) 317,000
(10%↑) 349,000
349,000
Fixed costs:
Rent Salary/benefits Utilities Company SUV Cargo trailer Utility deposits Store fixture Store renovation Promotion: - grand opening - advertising Sponsorship: - local bike club - cycling events
4,500 5,000 3,000 8,000 4,000 1,000 9,000 12,000
15,000
5% of Sales
3,000 3,000
13,500 15,000 9,000
- - - - - -
15,000
9,000 9,000
18,000 20,000 12,000 8,000 4,000 1,000 9,000 12,000
15,000 15,000
12,000 12,000
18,000 20,000 12,000
- - - - - -
14,000
12,000 12,000
18,000 20,000 12,000
- - - - - -
16,000
12,000 12,000
18,000 20,000 12,000
- - - - - -
18,000
12,000 12,000
18,000 20,000 12,000
- - - - - -
18,000
12,000 12,000
Petrov 22
Total Costs:
400,000
376,000
407,000
441,000
441,000
Projected Sales:
400,000
(15% ↑) 460,000
(15% ↑) 529,000
(15% ↑) 608,000
(5% ↑) 638,000
Profit/Loss
0
84,000
122,000
167,000
197,000
C. Break-even analysis
The break-even analysis indicates that an average of $33,333 will be required in monthly
sales revenue ($400,000 annual sales) to reach the break-even point. Because Peds Inc sells more
than one product (each bicycle, accessory, equipment, or service has different unit revenue or
unit variable cost), it is impossible to calculate how many units of each must be sold in order for
Peds to break even. However, in terms of Total $, it is expected that the company will reach its
break-even point at the end of FY 2008 when the Total Revenue = Total Costs.
Break-even Analysis
638,000200,000 400,000 460,000 529,000
Projected Sales
Loss/Profit
608,000
0
(400,000)
(200,000)
84,000
122,000
167,000197,000
FY2008
FY2009
FY2010
FY2011 FY2012
D. Payback period
Petrov 23
It is going to take Chris Harkey 3.26 years to fully recover his initial investment of
$250,000 because:
Payback period = fitAnnualBene
estmentInitialInv=
000,197000,167000,122000,840
000,250$
++++=3.26
At the beginning of Year 3, the company will recover $206,000 of the original $250,000. At the
end of Year 3, the remaining $44,000 of the initial investment will be recovered with the cash
flow of $167,000 earned during this period. The payback period is then 3 +
($44,000/$167,000=0.26) or 3.26 years.
The Payback Period is a tool that is easy to use and understand, but it does have its limitations: it
does not address the time value of money, nor does it measure profitability.
E. Gross Margin
A better indicator of company’s profitability is the concept of the gross margin, which
shows directly how many of the sales dollars are profit:
Gross Margin percentage = ( )
venue
sSoldCostofGoodvenue
Re
Re −×100
For Peds Inc, the following Gross Margin Percentages have been calculated:
• Year 1 (FY 2008) – 34%
• Year 2 (FY 2009) – 37%
• Year 3 (FY 2010) – 40%
• Year 4 (FY 2011) – 42%
• Year 5 (FY 2012) – 45%
The above percentages are average because Peds will sell different products that will contribute
differently to the total revenue. Accessories products and parts generally carry higher profit
margins than bicycles, which are driven by the higher markups they receive.
Petrov 24
IX. Controls
The success of this marketing plan requires an ongoing follow-up and coordination of
activities outlined in VII. Action plans. Chris Harkey should make sure strategies are followed
according to the priority in the plan, they fit in the budgeted resources, and objectives are
accomplished within the specified time frames. Peds will use the following methods to gauge
performance and control:
• Sales reports and Expense records to monitor Revenues, Expenses and Profits
• Product inspections and quality checks to ensure superior product offerings
• Customer feedback – monitor customer service satisfaction
By implementing and following these control measures Chris will be able to identify any
problems or performance variations that may occur, and to react quickly in correcting them.
X. Contingency plans
In case the marketing plan for Peds Inc fails to meet the expectations and budgeted goals
presented above, contingency plans come into play. The criteria for invoking the plans include
natural disasters (earthquake, flood, landslide, etc), or man-made disasters (fire,etc). Also,
serious competition – existing or potential – is always a threat. For example, a contingency plan
should be ready in response to competitors’ actions. If a competitor lowers its price on the exact
same product as Peds, the company will match its price on that product. Besides, Peds will
emphasize on products that competitors are not selling, thus eliminating direct price war.
Because Peds’s budget is fixed and financially constrained, in a case of crisis, the company will
keep as low inventories as possible, only of the most popular products.
Petrov 25
Chris Harkey will be solely responsible for making the decisions to implement, change,
and discontinue the contingent operations and return to normal operating mode. The estimated
length of time that the contingency operations will cover depends on the duration and seriousness
of the threat. The worst case risks include situations in which Peds will not be able to support
itself on an on-going basis and it will eventually have to liquidate some of its equipment in order
to cover its liabilities.
The contingency plans will be routinely reviewed and updated by Chris, if necessary to
enable normal operations and resources to be restored as quickly as possible and to keep losses at
a minimum. Overall, the contingency plans will help Chris to ensure smooth operations under
critical conditions posed by external to Peds factors.
Petrov 26
Works Cited
"2002 - 2006 Participation by Mean Age - Male & Female." www.nsga.org. National Sporting
Good Association. 24 Oct 2007 <http://www.nsga.org/public/pages/ pageid=1358
"2006 Consumer Purchases by Category." www.nsga.org. National Sporting Good Association.
24 Oct 2007 <http://www.nsga.org/public/pages/index.cfm?pageid=161>
"2006 Participation - Ranked by Total Participation." www.nsga.org. National Sporting Good
Association. 24 Oct 2007 <http://www.nsga.org/public/pages/index.cfm?pageid=150>.
"Bicycle Commuting Enjoys a Rebirth." Environmental Defense. 24 Oct 2007
<http://www.environmentaldefense.org/article.cfm?contentID=5483>.
"Building a Better Bicycle." Trends in Japan. 24 Oct 2007 <http://web-japan.org/trends/science/
sci040322.html>.
"Industry Overview 2006." www.nbda.com. National Bicycle Dealers Association. 29 Oct 2007
<http://nbda.com/page.cfm?pageID=34>.
Kotler , Philip, and Kevin Keller. Marketing Management. 12th ed: Prentice-Hall, Inc, 2006.
Mullins, John, Orville Walker, and Harper Boyd. Marketing Management. 6th ed. New York:
McGraw-Hill, 2007.
"NCDOT Division of Bicycle and Pedestrian Transportation." www.ncdot.org. NC Department
of Transportation. 29 Oct 2007 <http://www.ncdot.org/transit/bicycle/biking/
biking_intro.html>.
"Personal Income and Outlays." www.bea.gov. Bureau of Economic Analysis. 24 Oct 2007
<http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm>.
Petrov 27
Ross, D. Petty. "Regulation vs. the Market: The Case of Bicycle Safety - Conclusion and
Recommendations." www.bikexprt.com. 24 Oct 2007 <http://www.bikexprt.com/
research/petty/conclus.htm>.
"The NBDA Cost of Doing Business Study." www.nbda.com. National Bicycle Dealers
Association. 29 Oct 2007 <http://nbda.com/page.cfm?pageID=40>.
Wiebe, Matt. "Specialty bike, sports chains deliver dollars." Bicycle Retailer and Industry News
April 1st, 2007: 40.