case study

OmegaMart plc (OM) is a discount grocery retailer which has been in business for several years. It operates a large store-base across Europe with a significant presence in the UK, where it currently operates over 500 stores. OM has steadily increased its market share within the UK retail industry in recent years. This growth is particularly heightened in period of economic recession as disposable income shrinks and household expenditures become more price sensitive. A key driver of OM’s success has been the low prices, enabled by a lean efficiency focused operating model.

According to a recent retail analysis, UK grocery shoppers are increasingly relying on more channels than ever before and in response, retailers are developing new store formats that cross traditional boundaries. For instance, superstores such as Tesco have successfully moved into online shopping.

As consumers are increasingly leading busy lives, “convenience” has been identified as the key to future growth in the UK grocery retail sector.

The Problem

Despite increase sales in recent years, the board of directors are now concerned about maintaining such growth in the future, especially as the bigger supermarkets are actively seeking to narrow the price gap and win back customers through various strategies (e.g. loyalty cards). Following the publishing of the retail analysis, the board met to discuss how to improve the customer experience by offering more convenient shopping outlets.

They are prepared to invest up to £12.5 million obtained by raising a new share issue. Additional funds will be sourced by borrowing, if necessary.

1 online investment option is currently being considered as follows:

1 Online Investment Option: Continue operating convenience shops and Invest in Online Shopping platform – large initial investment and increased sales

Directors advocating this route hope it would offer them the opportunity to reach more customers thereby allowing OM plc to continue its growth story.

The UK online grocery sector is still relatively small and competition is fiercer. This sector is currently led by larger supermarkets which are able to invest in providing excellent delivery service and innovative technologies. Despite these challenges, the rationale to move towards online shopping is strong. It provides the chance to reach shoppers more often, capture a larger share of their expenditure and encourage greater loyalty. The board is confident that the ‘discount’ model will be equally successful in an online platform. Thus, it is expected that beyond the sales increase from the traditional stores format, additional sales will be generated from the online platform as follows: £18m for the first year, and increasing by 5% in second year and increasing by 10% thereafter.

The costs associated with this course of action include:

· A significant investment in upgrading the current website for online shopping – Initial capital investment of £7.5m in 2020 and annual maintenance fee of £1.5m from 2021

· Increased marketing costs to encourage use of this new channel £1.5m per annum from 2021

· A £1m increase in labour cost for distribution staff and additional in-store staff to pick customers’ orders from 2021

· Investment in delivery vehicles - about £5m in 2020 plus an additional £0.2 million for annual maintenance from 2021

· Other operating costs should increase by £1m and additional cost for goods sold £13m in the first two years from 2021.

The Financial Details

Annual sales

The trend of annual sales of the Company has been fairly constant over the last few years. Details are contained in the following table:-

Revenue per quarter (£m)	2014	2015	2016	2017	2018	2019
Q1			25	27	26	27	29	32
Q2			40	41	43	44	42	45
Q3			35	35	36	36	38	38
Q4			50	62	65	68	71	75
Total Revenue		150	165	170	175	180	190

However, the profitability in each year has been variable. The statement of financial position and the statement of income are shown in the following pages.

£m

£m

Statement of Financial Position

31.12.2018

31.12.2019

Non-Current Assets

Buildings

10

15

Furniture and Fixtures

80

78

Vehicles

50

60

140

153

Current Assets

Inventory

20

29

Trade Receivable

2

1

Cash

8

13

30

43

Total Assets

170

196

Current Liabilities

Trade Payable

8

12

Taxation Payable

1

1

Dividends Payable

1

1

10

14

Equity and Reserves

Share Capital

100

100

Retained Earnings

60

82

160

182

Total Liabilities and Equity

170

196

£m

£m

2018

2019

Revenue

180

190

Cost of Goods Sold

-110

-109

Gross Profit

70

81

Wages

-20

-25

Marketing

-10

-5

Other Operating Cost

-19

-20

Total Operating Cost

-49

-50

Operating Profit

21

31

Interest

0

-2

Profit before Tax

21

29

Taxation

-5

-5

Profit after Tax

16

24

Dividends

2

2

Retained Earnings

14

22

Statement of Income and Expenditure