Pepsi Street-Vend Project

Following a Financial Management Methodology to

analyse the Project as an investment opportunity.

Done by: Faraaz Gani BaccSc (WITS) CIMA Adv Dip Ma.

Contact no. 078 651 9292

Email address: [email protected]

1. Investment Decision. 1.1 Detailed Business description. 1.2 Profitability Analysis. 1.3 Scalability Analysis. 1.4 Risks facing the Investment. 1.5 Risk Management Strategies. 1.6 Remarks on Street-vend investment:

2. Financing Decision.

3. Dividend Decision.

4. Conclusion.

The Street-Vend Project is basically the launch of a mobile street-vending beverage business

whereby an employee/salesman sells beverages to motorists and pedestrians on the street or 4-

way stop intersections. The salesman will have a cooler box of beverages on his person from

which he dispenses cold beverages when a sale takes place.

The form the business is analogous to how Nestle and Gatti ‘icre-cream boys’ operate using a

bicycle with an attached cooler box selling product directly to end consumers. Because the Street-

Vend focuses on one area, there is no need for improved mobility and consumers are reachable

in close proximity to the salesman. The Capital Expenditure is thus reduced as no equipment

such as bicycles or motorcycles are required.

Specifically for this project, a busy locality in terms of footfall motorcars has been selected as the

4 way stop on Beyers Naude drive between the corners of ABSA Bank and Rustenburg Local

Municipality (RLM). Drawing traffic to the site further up the street are busy hospitals and medical

centres such as Platinum Health.

The business model is strictly a cash business in which cash profits are generated through the

sale of beverages directly to the end consumer. The starting point of the operation is when the

entrepreneur cools/freezes the beverages (in a domestic fridge) before handing them over to the

salesman each morning in a cooler box which holds a maximum of 2 cases of beverage cans and

bottles along with small amount of cash float if necessary.

The salesman is then tasked with selling at minimum, 48 cans or bottles of beverages throughout the day. The 48 beverage products being the initial amount supplied to him in the morning (typically 8am) and returning the cooler box, any remaining beverage products, cash float and cash revenue from sales. He then receives a cut of the cash profits based on the quantities he sold.

This cycle continues throughout a 4 to 5 day working week with an estimated total monthly cycle of 20 days per month.

Additional chilled beverage may be kept in a secondary cooler box should the salesman require additional beverage product pending if the entrepreneur has an office job very close to the locality of the street-vend operation. If this is not possible then, additional logistics must be made available should the need to re-stock products arise.

The reason for the rationale for choosing to sell Pepsi Cola and not the market leader Coca Cola aka COKE, is that the Coke product does not offer enough scalable profits in terms of pricing and volumes. This is because generally Coke 330ml can be purchased at discounts only in very large quantities which would make the working capital requirements for such a project unyielding. With the Pepsi product both imported and local, the cost price is almost always favourable for great returns selling a reasonable volume of product.

See illustration of the street locality and the cooler box concept.

Street Locality Branded Cooler Box

Nestle Nescafe Street-vend Concept

Nestle Ice-Cream Street-vend Concept

Basic Costing Per Product at Case and Unit Level:

Product Imported Pepsi Cola 300ml Nestle Still Water 500ml PET

Cost of sales per case of 24 units. R95.00 R72.00

Total cost of sales for 2 cases minimum quantity comprising

of 1 x 24 Case Pepsi Cola and 1 x 24 Case of Nestle Still

Water.

R167.00

Unit cost. R3.96 R3.00

Proposed Selling Price Per Unit. R7.99 R5.99

Gross Profit Per Unit. R4.03 R3.00

Mark up % 102% 100%

Gross Profit per case of each profit. R97.00 R72.00

Total Gross Profit PER DAY from the sales of minimum

quantity of 2 cases: 1 Case of Pepsi Cola and 1 Case of Nestle

Still Water.

R169

Cooling and freezing costs R0.00 - > This is because a domestic fridge would already be in use and the quantities of 2 cases do not

increase or represent a material amount of electrical energy usage over and above the current domestic

fridges usage. Thus these costs are not traced back to the product.

1.4.1. Compliance Risk:

The operation may be shut down before it can achieve significant growth due to legal implications of street vending. Street-Vending is a grey area in terms of a definite legal ruling. In some areas, street vending is illegal, in some areas street vending is legal so long as it does not obstruct traffic and in other areas it may be illegal but in practise it is tolerated and no action is taken to remove street vendors. Via observation of the proposed locality of the operation, street vendors are already present selling newspapers and other items with no legal ramifications i.e. Forceful eviction off the street by local law enforcement or confiscation of inventory. Degree of Compliance Risk: LOW TO STANDARD

1.4.2 Theft Risk: The risk of capital and revenue theft exists. Capital theft may occur if the cooler box, inventory and cash float is stolen at the onset of the operation when such items are handed over to the salesman to begin the operation. Given the fact that no formal contract or trace mechanism will be in place on the employment of the salesman enhances this risk.

Revenue risk may occur if the salesman begins stealing cash from sales and cash from the cash float. During the last activity of the daily operation, the owner must reconcile all cash and inventory, however given the nature of cash as mostly coins and small monies, one may miss the theft of small amounts of cash or inventory for that matter. In aggregate, the theft of these small amounts can ruin the profitability of the business in the long term. Degree of Theft/Fraud Risk: HIGH

1.4.3. Inventory Price Inflation Risk:

Profits may reduce if imported Pepsi Cola cannot be sourced consistently at a consistent price level. For example, imported Pepsi Cola is only available through the informal wholesale trade and often the availability is very volatile depending on Rand-Dollar exchange rate. There may be times when the imported Pepsi Cola may not be available or be available but not at the favourable price level. Degree of Inventory Cost Inflation Risk: HIGH

1.4.4. Lack of ‘Buy-In’: The risk that an employee will not be found to initiate the business or the salesman employed may be too lazy to drive the sales beyond or even to the minimum 2 cases per day such that profit estimations are thrown off, employee turnover is experienced whereby a salesman quits the job mid month and during the interim, sales are lost while the search goes on to find a new salesman.

Before the project was documented robustly, potential salesmen were approached as part of a pre-appraisal activity. The findings were that potential salesmen even though in a poverty stricken situation simply lacked the motivation, drive and willingness to work hard to earn a decent income.

The responses from these interviewed people were such that all of them came off as lazy people who did not want to work hard to improve their current state but were merely content with what they had. This is in stark contrast to the qualitative implicit objectives of the project in which poverty stricken individuals are empowered. Degree of Lack of ‘Buy-In’ Risk: HIGH

1.4.1. Compliance Risk: The degree of the compliance risk is low to standard, thus this risk should be accepted as its likelihood is low as well as the impact is low since no evidence points otherwise. Therefore, no contingency or risk mitigation action plan is required for this risk.

1.4.2 Theft Risk: The degree of theft risk is high, therefore the probability of theft occurring is high however the impact of such a risk is low. This is because the only items will be lost are the minimum 2 cases of beverage and the cooler bag which when combined form a loss of R169 + R170 = R337 which represent a revenue and capital loss with the revenue loss being the cost of the beverage and the capital being the cooler box. This amount is marginal and does not represent a crippling financial loss to the entrepreneur. Another reason why the impact is low, is that the salesman can only steal the cooler box once before he is flagged or never returns and obviously if the theft occurs the first time, the risk appetite of the entrepreneur will change. Thus, he will be more sceptical in his selection of a new salesman. The theoretical strategy would be to transfer the risk via insurance, however it is not worth while for a side-line project as this one. Hence, the practical strategy would be to use a fear tactic whereby you make a fictional threat to the salesman that he will be reported to local law enforcement should he be caught stealing. In extreme cases a copy of the salesman’s Identity Document may reduce the probability of theft.

1.4.3. Inventory Price Inflation Risk:

The degree of risk is high. Therefore the strategy that must be applied to mitigate the risk is to

avoid the risk altogether. This will mean either buying in bulk (e.g. 50 cases of Pepsi Cola at a

time) or working closely with wholesalers to estimate the time frame of availability of the imported

Pepsi Cola.

The upside risk to avoiding imported Pepsi Cola products is that one would be able to buy local

Pepsi Product Range of products in mixed cases (4 x 6 Packs) at a marginally inflated cost when

they are on special for example: R100.00 Deals from Massmart’s Makro. At the normal R113.00

one can vary the product range kept which may well keep profit levels up as people are offered a

wider variety of Pepsi Range Products such Mirinda Orange, 7up and Mountain dew and Diet

Pepsi.

Therefore some profit margin is lost, however the opportunity to try new flavours with minimal risk

arises since imported Pepsi Products can only be bought by the case load.

1.4.4. Lack of ‘Buy-In’:

The risk of lack of ‘Buy-In’ is high in terms of finding an person to sell the beverages and finding a

person who will actively drive the sales to and possibly above the minimum level of 2 cases per

day. The probability of is high and the impact of the risk is high since the project cannot run

without an employee and cannot operate efficiently with a lazy employee also. The Strategy is to

avoid finding a lazy employee in the first place although this is very hard to ascertain on the onset

of the project.

The strategy proposed to limiting this risk is that salesman need to be targeted from a set group

rather than just trying to empower any random person. This set group refers to poaching

employees who sell ice-cream unofficially or current street vendors who are selling alternative

products such as those who sell hangers and cellphone chargers. Persons from this group

understand the dynamic of street vending, the hard work that goes into making and sustaining

sales as well as some basic knowledge of how to manage cash and products.

The projected net profits, capital expenditures and cash flows appear to be reasonable and at a

greater than acceptable level versus wholesale, direct to retail and other resale channels and

mechanisms including vending machines. It would appear that the investment should be

approved for further consideration even in speculative capacity.

The entire project should be financed out of equity since the project is small relative to the total

distribution footprint of current distribution channels which the Pepsi Product range makes use of.

The risk of using equity financing is low since even a resulting loss will not remotely affect capital

structure and investor sentiment would hardly be affected also.

Equity finance is the easiest mechanism of financing this project as it can be accessed and

approved without any stings such as debt covenants or credit risk analysis etc.

Therefore, in concluding on the means of financing the project, equity finance from current cash

reserves on hand should be used.

Investor’s may receive dividends via a percentage of the profits from the street vending project or

from royalties that external franchisees may pay to the holding company which a percentage then

gets remunerated to investors.

Based on all the factors and risk as highlighted in earlier sections of this report it would appear

that this project offers high returns for the capital employed but also bears high risk that it will not

progress as planned due to all the risk indicators having a high risk magnitude of occurrence.

However it must be noted, that should the project not succeed, the overall monetary loss is not a

substantial or even a material amount. Thus even if core/scarce capital is used, it will not change

the company’s/individuals financial position drastically.

Apart from the great financial returns in terms of profits and return on investment, the project

offers intangible benefits such as market reach, market presence and an element of market share

gain.

For these reasons, the project should be approved and be carried out. Risks from a financial,

operating and compliance standpoint are not pervasive beyond that of the street vend project in

its individual isolation.