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The purpose and scope of this information memorandum is to introduce the subject
matter and provide a general idea and information on the said area. All the material
included in this document is based on data/information gathered from various
sources and is based on certain assumptions. Although, due care and diligence has
been taken to compile this document, the contained information may vary due to any
change in any of the concerned factors, and the actual results may differ substantially
from the presented information. SMEDA does not assume any liability for any
financial or other loss resulting from this memorandum in consequence of
undertaking this activity. The prospective user of this memorandum is encouraged to
carry out additional diligence and gather any information he/she feels necessary for
making an informed decision.
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DOCUMENT CONTROL
Document No. PREF-76
Prepared by SMEDA-Punjab
Revision 2
Revision Date SEP, 2006
Issued by SMEDA-Punjab
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1 INTRODUCTION TO SMEDA......................................................................5
2 PURPOSE OF THE DOCUMENT .................................................................5
3 CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR INVESTMENT.......................................................................................................5
The Small and Medium Enterprise Development Authority (SMEDA) was established with the objective to provide fresh impetus to the economy through the launch of an aggressive SME support program.
Since its inception in October 1998, SMEDA had adopted a sectoral SME development approach. A few priority sectors were selected on the criterion of SME presence. In depth research was conducted and comprehensive development plans were formulated after identification of impediments and retardants. The all-encompassing sectoral development strategy involved overhauling of the regulatory environment by taking into consideration other important aspects including finance, marketing, technology and human resource development.
SMEDA has so far successfully formulated strategies for sectors including, fruits and vegetables, marble and granite, gems and jewelry, marine fisheries, leather and footwear, textiles, surgical instruments, transport and dairy. Whereas the task of SME development at a broader scale still requires more coverage and enhanced reach in terms of SMEDA’s areas of operation.
Along with the sectoral focus a broad spectrum of business development services is also offered to the SMEs by SMEDA. These services include identification of viable business opportunities for potential SME investors. In order to facilitate these investors, SMEDA provides help desk services as well as development of project specific documents. These documents consist of information required to make well researched investment decisions. Pre-feasibility studies and business plan development are some of the services provided to enhance the capacity of individual SMEs to exploit viable business opportunities in an effective way.
2 PURPOSE OF THE DOCUMENT
This particular pre-feasibility is regarding Departmental Store, which comes under trading sector. The objective of the pre-feasibility is primarily to facilitate potential entrepreneurs in project identification for investment and in order to serve this objective, the document covers various aspects of the project concept development, startup, marketing, and finance and business management.
3 CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR INVESTMENT
3.1 SWOT Analysis
A SWOT Analysis is a strategic planning tool used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or business venture. Strengths and weaknesses are internal to the company. Opportunities and threats originate from outside the company. A SWOT analysis is usually performed early in
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the project development process, and helps organizations evaluate the environmental factors and internal situation facing a project.
3.1.1 Strengths and opportunities
Easy availability of resources(manpower/salesman) Growing population Expanding cities Status symbol to shop from big stores Popularity of variety shopping under single roof
3.1.2 Weaknesses and threats
Government polices Heavy taxes in the form of sales tax and income tax on retail business High competition Credibility factor in the initial phase, as suppliers do not give credit to newly
entrants
4 PROJECT PROFILE
Departmental store is a large retail store organized into departments offering a variety of merchandize, commonly part of retail chain under one roof.
4.1 Opportunity rationale
In Pakistan concept of departmental store has gained popularity in late eighties after the emergence of UTILITY STORES by the government. Though due to lack of proper management and planning but private sector made it one of the successful businesses in Pakistan. Public has liked this concept due to the availability of all basic utilities under one roof which saves their time about which people are more conscious these days. The factors that make this project viable in Pakistan are:
Easy access to wholesale markets Plentiful availability of resources/salesman No process/transformation involve No specialized/technical knowledge required for entrepreneur Variety of goods under one roof Margin for innovation Easy diversification towards new product mix
4.2 Project brief
The proposed departmental store will provide variety of goods ranges from grocery to garments and alike to customers under one roof. The proposed project is a single floor departmental store on an area of approximately 3000 sq. ft. The project will offer following broad categories of goods to its customers:
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Groceries and food items Baby garments and baby products Crockery and plastic items Soaps detergents and chemicals Ice-cream and beverages Stationery, greeting cards and gifts Cosmetics and artificial jewellery Watches and clocks Electronics/electrical products General items
4.3 Proposed business legal status
Legal status is recommended to be a sole proprietorship/partnership because it requires less legal requirement to start with than a company. Similarly a lower income tax rate of tax is applicable to sole proprietorship than that of companies.
4.4 Project Capacity and Rationale
The proposed departmental store will have an area of 3000 sqft having covered/indoor shopping facilities. The store will operate for 12 to 15 hours from morning to midnight. Operating time depend on localities requirements.
4.5 Project investment
Sr.# Description Rupees1. Capital cost 9,679,000
2. Working capital/Cash in Hand 2,361,395 Total 12,040,395
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4.6 Product mix
The store will offer the following broad categories of goods to its customer:Category of item Proportion Avg Gross MarginGroceries and food items 55% 10%Baby garments and baby products 10% 35%Crockery and plastic items 8% 30%Soaps detergents and chemicals 3% 10%Ice-cream and beverages 10% 25%Stationery, greeting cards and gifts 3% 10%Cosmetics and artificial jewellery 2% 20%Watches and clocks 2% 30%Electronics/electrical products 3% 30%General items 4% 15%
4.7 Recommended project parameters
Capacity Human resource Technology LocationRs. 300,000 per day1 18 Local Metropolitan
Financial SummaryProject cost IRR NPV Payback period
Rs. 12.04 Million 38% Rs. 8.4 Million 3.7 Years
4.8 Proposed Location
Location of stores is of primary concern with any retail organization. Spending time and money wisely in the process of site selection is of primary importance. Some retailers open shop in a location simply because it is the only vacant space within a stones throw of their home or office. Knowledgeable retailers make a thorough examination of possible locations before investing their money and dreams.
The departmental store should be centrally and conveniently located within a developing or a newly developed residential town in any of the big cities like Lahore Islamabad/Rawalpindi, Faisalabad Sargodha etc.
1 Assumption taken that store is situated in a town where there are 4,500 families/houses and each house shop for Rs. 2,000 every month from the proposed store
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TTaabbllee 44..88..11::LLooccaattiioonn
City Areas
Lahore Mustafa Town
Johar Town
Wapda Town
Nespak
PIA Colony
Islamabad/Rwalpindi
Chack Lala
F-10
G-9
G-8
Abpara Market
Faisalabad
D Ground
Peoples Colony
Batala Colony
Muslim Town
Surgodha
University Road
Shaheen Park
Umer Park
The proposed departmental store is feasible in any area where there are 4,500 houses/family units..
4.9 Key success factors/Practical Tips for success
Retail/departmental store is full of opportunities for success, but that success is reserved for those who are prepared to commit themselves to everlasting change.
To obtain a good average of profits it is necessary to provide state of art facilities to customers.
There should be regular and sustained marketing through fliers distribution and Cable TV.
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The store should have an ample space for customer car parking. It is advisable to maintain a parking space whereby around 15-20 cars can be parked
The staff hired should be well mannered and well trained in dealing with the customers.
5 STRATEGIC RECOMMENDATIONS
5.1 Marketing
Regular and sustained marketing is required for a successful business of departmental store. The important marketing channels would be flyer distribution,billboards, banners, Cable TV, etc. Regular advertisement expense should be at least 0.5% to 1% of sales in the departmental store business. Some marketing and promotional tips are as under: Existing customers are best referrals. Know customers’ needs. Introduce home delivery services. Frequent clearance sales
5.2 Pricing
Every retailer has a basic philosophy towards pricing their product. What is important is that they create and stick to a strategy for pricing so as to convey a clear message to the consumer. The market has certainly created the need for all retailers, even those at the higher end, to become more value oriented. That is not to suggest that you necessarily need to compete on price, only that you be aware of providing consumer perceived value.
Some value pricing strategies are as follows: Provides the consumer with an incentive to become a repeat customer by
offering a future discount. Frequent clearance sales Include a gift with purchase, buy one get one free. Feature your discounted prices predominantly.
5.3 Store layout and presentation
Today’s successful retailer is the one making the most profitable use of every square foot of space in the store and in the warehouse. Because space is costly, retailers need to take a strategic approach to its use. Floor patterns, location of merchandise, amounts of merchandise and the appropriate displays are critical in determining space. Misuse of space can be as detrimental to success as poor buying. It is very important for every store to create a suitable atmosphere and appealing presentations in order to trigger the consumer’s buying decision. In a world where one can find identical merchandise in more than one store, layout and presentation becomes a key-differentiating factor.
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The proposed store should be air-conditioned. Goods should be properly arranged in shelves categorically having ample passage between the shelves for service trolleys and customers. There should be proper arrangement of lightening.
5.4 Use of computer
The computer is an invaluable aid in processing the large number of transactions and vast amounts of information involved in managing a retail operation. The amount of data needed for merchandise planning would require hundreds of man-hours to produce, whereas a well-designed computer system can perform the task in seconds. Software for inventory and sales recording and management should be used to have updated data at all the times. This software not only records each and every sales transaction but also updates stock and cash position after every transaction. This cost around Rs. 20,000/-
6 SECTOR AND INDUSTRY ANALYSIS
6.1 National Analysis
Departmental stores business is emerging as one of the good business ventures in Pakistan as it provides all the basic merchandise under one roof.
In late eighties a paradigm shift in grocery store science occurred. The concept of the "Self-Serving Store" was started. Customers entered the revolutionary store and walked through a narrow maze of shelves containing groceries. They selected their goods as they continued through the maze to a cashier.
This phenomenon grew rapidly; and today thousands of stores exist in the big cities. These stores also began to offer products beyond the normal scope of the dry-good grocery store. They added meat, dairy, fruit and vegetables, and breads to their offerings (which had formerly been offered by individual stores such as butchers, bakeries, and the "milk man").
Over the decades, the departmental stores have evolved even further. Now, one sees that offer greeting cards, flowers, video rental, fast food, childcare, and much more.
Departmental stores business falls under retail sector. This sector has shown a significant growth over the last few years. In 2005-2006 this sector showed a growth of 9.9%.2 This sector’s contribution towards GDP in the year 2005-2006 is 19.2%3. The following table shows the contribution of retail and wholesale sector towards GDP for the last 6 years at constant factor cost.
Gross fixed capital formation (Investment in fixed assets) in this industry by private sector has also shown a progressive trend. In year 2005-2006 growth in gross fixed capital formation by private sector has shown an increase of 17.9%5. The following table shows gross fixed capital formation by the private sector for the last five years:
Year Retail and wholesale sector Rs. M1999-2000 7,1112000-2001 8,3692001-2002 9,9252002-2003 11,6922004-2005 15,1632005-2006 17,875
There are thousands of departmental stores in Rawalpinidi, Faisalbad , Multan ,Gujranwala and this number is increasing day by day. In Lahore there are about 85 to 100 big departmental stores, some of these are:
Europa DHAAl Fatah Liberty GulbergNaimat Khana The Mall
CSD Stores Cavalry GroundRaheem store Allama Iqbal Town
Although in Pakistan the retail business is not providing employment at a large scale directly, but indirectly it is contributing in the employment growth. As more and more retail outlets are opening and consumer buying has shifted towards packaged/branded products. Companies are coming with top quality products and with the increase in production level the employment also increases.
6.2 Legal issues regarding industry7
In order to fulfill its liabilities under Income Tax Ordinance, 2001 and Sales Tax Act, 1990, a sole proprietor, firm or company doing only retail business as departmental store shall obtain NTN and Sales tax registration number from concerned departments.
Under Sales Tax Act, 1990, a retailer whose annual turnover from supplies, whatsoever taxable or otherwise, made in any tax period during the last twelve months ending any tax period if exceeds rupees five million are required to register with sales tax department.
A registered retailer shall issue invoice and charge and collect sales tax at the rate of three percent (two percent sales tax and one percent income tax) of the value of taxable supplies at the time of supplies thereof, which shall be paid on monthly basis with return by the 15th day of the month following the tax period in which supplies are made.
Retailers shall not be entitled to adjustment of any input tax or claim refund of sales tax or income tax. However, one third of tax paid by the company shall be adjustable against the final income tax liability.
For the year 2006-07 rate of tax for a small company is 20% of taxable income, while 35% income tax rate shall be applicable on all other companies.
For the year 2006-2007, income up to Rs100, 000/- of a retailer (sole proprietor and firm whose supplies are exempt from sales tax) in a year is exempt from income tax. Income acceding Rs.100, 000/- shall be charged to tax in various slabs ranging from 0.50% to 25%.
7 All information only relates to retail business under departmental store
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7 MARKET INFORMATION
7.1 Market potential
The market for departmental stores industry in Pakistan has been developing steadily over the last decade and a mushroom growth of large stores observed in all big cities. Still a good potential is available for new stores as population of big cities increasing day by day and new societies are being developed. New residential towns are being developed. Location and amenities are some of the most vital factors in the success of a store.
7.2 Target customers
The target customer for departmental stores is the population/family units of big cities. Population of urban areas of Pakistan is 33% of total population. Total estimated current population of Pakistan is 150,863,000 8(151 million).
7.3 Resource merchandise
Pakistan is one of those countries where abundance of grocery merchandise is available in wholesale markets of every city. Suppliers normally hesitate to supply goods on credit to new stores but after confidence building process a reasonable credit period of 15 days to one month is available to purchasers. The major wholesale markets in Lahore are:
Shahalam Market/Rang Mahal Akbari Mandi Hall Road Urdu Bazar Abid Market Temple Road Moochi Gate
8 Source: FBS
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8 ELECTRIC AND OTHER EQUIPMENT REQUIREMENT
Following is the detail of equipment required for this project.
7 Signboard 1 60,000 60,000 Local8 Motor cycle with
delivery cabin1 60,000 60,000 Local
9 Electric Fittings and installation
100,000 100,000 Local
10 Generator 10 KW 1 85,000 85,000 Local11 Service Trolleys 15 4,000 60,000 Local13 Shelves & Counters 450,000 Local
Total 1,129,000
9 Total of 5 refregerators are required , 2 out of them will be purchased ,rest ones can be easly obtained through Beverage & Ice cream companies.
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9 LAND AND BUILDING REQUIREMENT
9.1 Land Requirement
The proposed departmental store requires an area of approx 3000 sq ft. it is recommended that departmental store should be started at owned place rather on rented premises. The main investment in this business is of land and building, which is very high due to very expensive land in the proposed locations and high construction cost. The cost of required land will be ranging from Rs. 4,000,000 to Rs. 6,000,000. In this pre feasibility the cost of 3000 sqft land taken Rs. 6.00 million. Following table shows the covered area requirement for a departmental store:
Current construction cost of departmental stores is approximately Rs. 800 per sq. ft. Total construction cost of 3000 sq. ft area will be Rs. 2,400,000/-
9.3 Rent cost
If the required land acquired on rent, it will cost around Rs. 100,000 to Rs. 150,000 per month in different proposed areas of Lahore.
9.4 Utilities requirement
The necessary utilities are Electricity, telephone and water. A three-phase commercial electricity connection is required. Current rate of electricity for these connections is Rs 8.8 per kilowatt-hour. At least two telephone connections are required; one solely used for home delivery service calls.
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10 HUMAN RESOURCE REQUIREMENT
Skilled salesmen are easily available at competitive wage rates. Number of workers required for each department is given below:
Accounts receivable (average) 0 daysAccounts payable average 15 days
12.4 Expense Assumptions
Telephone Expenses (% of Revenue) 0.3%Repair and maintenance (% of revenue) 0.1%Insurance of stocks (% of stock) 4%Annual sales growth 10%Amortization of deferred cost 20%Advertisement % of sales 0.5% to 1%Electricity growth rate 10%Traveling and conveyance % of sales 0.3%Printing and stationery % of sales 0.08%Proportion of sales tax taxable sales and purchases 70%Revenue price growth rate 6%
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Purchase price growth rate 4%
12.5 Financials Assumptions
Project life (Years) 10Debt 50%Equity 50%Interest rate on long-term debt 14%Debt tenure (Years) 5Debt payments per year 12