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Zeta is a company distributing consumer electronics and white-goods products through a point-of-sale (173) network spread around the national territory. Main suppliers of Zeta are Samsung, LG, Sony, Apple, and Asus. The company manages logistics activities in a centralized way. Suppliers deliver the goods to the logistics center of Zeta, which in turn passes the received goods to the points of sale, based on the latter demands.

Promotional activity is managed partly by the central structure, which takes care, for instance, of the promotional campaigns with national diffusion, and partly of the single points of sale.

The following paragraphs will analyze the main hypotheses formulated by Zeta management to develop the company business plan (which spans a time horizon of five years).

Assumptions on Revenues

Based on the activity performed by Zeta, the expected revenues over the business plan period have been quantified based on, in particular, the forecasts on:

● Commercial surface managed by the company, which is a function of the number and dimension of the points of sale. To this end, Zeta management has hypothesized:

● The closure of five points of sale (1 for each year of the business plan period) (Exhibit 2.12)

● The opening of 35 new points of sale (1 in t0, 4 in t1, 10 in t2, t3, t4, and t5) (Exhibit 2.12)

Exhibit 2.12 Evolution in the number of points of sale

● The total managed surface to evolve, during the business plan period, from 282,061 square meters to about 325,561 square meters (Exhibit 2.13)

Exhibit 2.13 Evolution of managed commercial surface

● Revenue per square meter for the managed surface. Zeta management has hypothesized that over the business plan horizon this KPI will evolve from €3,905 to €4,207 (Exhibit 2.14).

Exhibit 2.14 Evolution in revenue per square meter for the managed surface (€)

This dynamic is underpinned by the following:

● The expected competition level in the reference market is likely.

● The number of points of sale will change. In this respect, it is worth noting that:

● Revenues per square meter of the points of sale for which closure is foreseen are far less than the average ones for Zeta points of sale.

● Start-up phase of a new point of sale lasts about 1 year.

● Based on Zeta management experience, after a refurbishing intervention, the revenue per square meter KPI generally rises. In this business plan, the management has assumed that it will carry out renovation of 20 points of sale per year over the business plan horizon.

● Zeta has decided to undertake new promotional/commercial activities over the horizon plan.

Assumptions on the Contribution Margin

As described, Zeta carries out a pure commercial activity by buying consumer electronics and white goods finished products from major international suppliers and reselling them through proprietary points-of-sale network for a profit. The contribution margin should be sufficient not only to outweigh the costs incurred in the business activity, but also to guarantee the desired rate of return on the capital invested in the business by the equity holders.

In this specific case, Zeta management expects over the business plan years a small contraction of the unitary average price per purchase from the suppliers. Accordingly, Zeta management has hypothesized the percentage contribution margin to expand over the business plan period (Exhibit 2.15).

Exhibit 2.15 Evolution of the percentage contribution margin

As a direct consequence of the above, Zeta management expects the cost of goods sold to lie in the 71.5 to 71.7 percent (as a percentage of revenues) range.

In the business plan, the contribution margins for each of the business plan years have been constructed as the product between revenues and percentage contribution margin.

Assumptions on Sales Force Employees Costs

The major part of Zeta employees are engaged in the points of sale managed by the company and carry out commercial activities. As specified above, at the end of t0 Zeta managed as much as 173 points of sale. The sales force employees cost at t0 was €108 million (about 9.8 percent of revenues); over the business plan years it has been calculated as the algebraic sum of:

● Cost of sale force employees at t0, increase each year by 2.0 percent compound annual growth rate (CAGR)

● Additional cost of sale force employees deriving from opening of new points of sale

● Cost saving of sale force employees deriving from the closure of some points of sale

Assumptions on the Costs for the Location of the Points of Sale

The number of points of sale managed by Zeta is expected to increase to 203 in t5. Points of sale are all rented, so that rental costs are a key item in Zeta's income statement. In t0, they amount to €58 million (5.2 percent of total revenues) – that is, about €205 per sqm.

Zeta management, taking into account the particular crisis currently afflicting the real estate market, believes the average rental cost per sqm can be squeezed down to €194 (Exhibit 2.16).

Exhibit 2.16 Evolution of average rental cost per sqm

Euro

Assumptions on Promotional Activities Costs

As said, Zeta promotional activities are managed by the central structure, which takes care of the advertising campaign with national reach and, partly, of the promotional campaigns at single points-of-sale level. In t0, Zeta has borne costs linked to promotional activities of €31 million (equal to about 2.8 percent of revenues).

For each year of the business plan, the promotional activities costs are calculated as the algebraic sum of:

● The costs of the promotional activities of t0, increase by 1 percent CAGR each year

● The additional costs deriving from the opening of new points of sale

● The cost saving from the closing of some old points of sale

Assumptions on the Logistics Management Cost

Zeta manages the logistics in a centralized way. As such, suppliers deliver their goods at the central logistics warehouse of Zeta, which in turn redistributes the goods to the points of sale. In t0, Zeta has borne logistics management costs of €62 million (5.6 percent of revenues).

For each year of the business plan the logistics management costs are calculated as the algebraic sum of:

● The costs of the logistics management of t0, increase by 2 percent CAGR each year

● The additional costs deriving from the opening of new points of sale

● The cost saving from the closing of some old points of sale

Assumptions on the Central Structure Costs

The activity of Zeta points of sale is coordinated in a centralized manner by the holding, which also manages, inter alia, the following activities:

● Purchase management

● Definition of the commercial strategy

● Business financial control

● Administration

● IT management

In exercise t0, central structure costs have been €21 million (equal to 1.9 percent of revenues). During the business planning, Zeta management has hypothesized that these costs grow by 2 percent CAGR each year.

Assumptions on Working Capital

At the end of t0, Zeta working capital is negative:

● Trade credits are practically zero, thanks to the very business activity of Zeta.

● Trade debts outweigh the value of inventory.

In preparing the business plan:

● Trade debts have been estimated based on the average days payable outstanding, which Zeta management estimates will decrease from 90 (t0) to 85 (t5).

● Inventory has been estimated based on the assumption that the company maintains about €850 of inventory for each commercial sqm managed.

Assumptions on the Capital Expenditures

The investments mainly relate to the points of sale. As anticipated, over the plan horizon, these are expected to evolve in number as an effect of management's opening and closing decisions. The capex envisaged in the plan relates to mainly three areas:

1. The maintenance capex necessary to guarantee the normal operations of the points of sale.

2. The growth capex aimed at improving some of the points of sale. As anticipated, Zeta management expects to renew 20 points of sale in each exercise.

3. The growth capex needed to open the new points of sale (35 in total over the plan, as explained above).

Conclusions

This business case shows us some general rules applicable to the commercial companies selling goods through proprietary stores. Usually, the planning process starts from the forecasts on the evolution of the following:

● Commercial surface managed by the company, which is in turn a function of the number and dimension of the points of sale.

● Revenue per sq foot of managed commercial surface. In turn, this is forecast based on:

● The expected evolution of the competition level among the different actors in the market.

● The expected evolution of the number of the points of sale. For instance, the average revenues per sqm are positively influenced by the decision to close the points of sale underperforming versus the average. On the contrary, in the short run, they could be negatively affected by the decision to open some new points of sale, since the new points of sale can reach regime profitability only after a certain time lag (which depends on the industry features).

● The frequency of the interventions aimed at renewing the points of sale. Generally speaking, after a renewal intervention, the average revenue per sqm soars.

● The new commercial/promotional activities envisaged in the plan horizon.

The major part of the operating costs is represented by the costs incurred to purchase the finished goods to be sold in the point of sale. In general, their incidence (and their effect on the contribution margin) is a function of the forecasts on the evolution of average unitary prices paid to suppliers.

The other most relevant cost items attributable to the commercial activity are:

● Sales force employees' costs. For commercial companies operating through a points-of-sale network, most employees are engaged in the stores.

● Rental costs. These are factors when points of sale are not proprietary.

● Promotional activity costs. These consist of both advertising with local/national reach and initiatives carried out at the single point-of-sale level.

● Logistics management costs. Usually, suppliers deliver the finished goods to the central logistics warehousing of the commercial company, which in turn redistributes them to the different points of sale on the basis of their needs.

● The points-of-sale activity is coordinated by a central entity/structure. In the business planning phase, it is thereby necessary to carry out a series of forecasts also on the costs to run the central management structure.

● Working capital available. The nature of the business activity of commercial companies is such that working capital is usually very close to zero or even negative.

● Capital expenditures. Capex is mainly related to points of sale and is made up by three types:

● Maintenance capex, necessary to guarantee the normal operations of the points of sale

● Growth capex to better already existing points of sale

● Growth capex to create new points of sale