Q8. How has your level of customers fluctuated in the last year? If it has fluctuated, what would you account with this fluctuation?
Generally my trade is nearly 50% up on last year, due to a clean up, disposal of old stock, and the introduction of many new lines including a small but comprehensive grocery range and morning goods range. Overall converting the shop from a more conventional newsagent to more of a convenience store
Q9. How many staff do you employ, what is their basic rate, what jobs do they do?
I only employ 1 member of staff and their basic rate is 500pp/h. Their duties include; serving and assisting customers, stock replenishment, and general cleaning and tidying to keep the shop looking at its best.
Q10. Has cash flow decreased recently, if yes to what would you attribute this to? If no, why do you think this is?
Cash flow doesn’t really affect this business, as it is a cash business. Some people have newspaper accounts, but this is consistent and varies from £1000- £1500 debt. But there are no bad accounts and nobody owes more than 8 weeks on their accounts. However everybody who owes more than 4 weeks at any one time automatically gets a bill sent out to them with their morning paper
Q11. If cash flow were to drop, how would you seek to improve revenue?
Can’t see it happening because of answer given in Q7. However should it happen, I would have to keep a closer eye on stock levels, and maybe reduce stock levels but order more frequently, but less at a time, but maybe also look at opening longer hours and introducing new lines such as DVD rental etc…
In Q6, I asked the owner if the rising interest rates had directly affected his business, i.e. through mortgage or overdraft, the owner responded that the shop had no mortgage or overdraft. This is a fortunate position to be in, as it improves the overall profitability of the shop, because of the lower fixed costs. If the shop had had a mortgage or overdraft, then the varying interest rates would have increased the costs of the shop. If the fixed costs had increased, then to account for the increase in the cost of each item, it would make sense to increase the price of the item, to restore the profitability of the item. But as many of the items are considered luxuries, such as chocolate bars and other confectionary, they would most likely be price elastic, meaning that the shops profits would drop. Unless the owner realised that certain items are Price elastic, and dropped the price to increase demand, therefore increasing the profits. If the business wanted to expand, to get a mortgage to afford the expansion would be more expensive then before the interest rate increases.
I am surprised that the demand for products from D & D newsagents has remained relatively unaffected. The grocery range such as Milk and Bread, are considered to be necessities by many people, and since they are not expensive, its means that they are most likely very price & income inelastic. The other products that the shop sells; Papers, Magazines, Confectionary, are luxuries, so should be very price & income elastic, but as these are very small proportion of peoples incomes, meaning that they are also unaffected by changes in price.
The shops main competition would be the nearby supermarkets. Near D & D newsagents, there is an Asda and Sainsburys Supermarket, as well as a nearby convenience store Alldays, owned by the Co-Op. These are all big firms, so would benefit from Scales of Economy. The economies of scale that these larger supermarkets may benefit from are-
- Managerial Economies of Scale, by which larger firms can afford to employ specialist managers, making the business more efficient and profitable.
- Diversifying, the larger firms can afford to sell different kinds of products, protecting the business if one product fails
- Financial, the larger firms are able to get larger loans more easily from the bank, at lower interest rates, because they have more capital, and are more likely to pay it back.
- Advertising, the larger firms can afford to advertise their business, attracting more customers.
- Mass production, the larger firms can mass produce their products reducing the fixed costs per item, making the products cheaper to manufacture.
- Bulk Buying, the larger firms can buy raw materials in bulk, reducing the costs of each item.
The newsagents are at a disadvantage to the supermarkets because they do not get as large economies of scale so the supermarkets can charge lower prices, undercutting the newsagents market, but the larger firms suffer from Diseconomies of scale, where the business is so large it starts to become a disadvantage. The smaller newsagent does not suffer from these. The diseconomies of scale are-
- Losing touch with the customers, the smaller newsagents is a more friendly and helpful shop to visit than the supermarkets.
- The managers lose touch with the workers causing demoralisation, whereas there is only one worker in the newsagents, apart from the owner, and he is a friend of the owner.
- Communication in the larger firms is hard because of their size, causing demoralisation as the workers do not feel valued.
One of the advantages that the Newsagents holds over the larger firms, is that it holds a “convenience factor”, this means that it is easier to walk down the road to the local corner shop, than to drive to the supermarket, as well as it is considered unnecessary to go to the supermarket for one or two items. Because of this, the newsagents can charge higher prices, increasing its profit margins because the demand will remain relatively unaffected.
The shop may encounter increased costs in the near future; it employs one worker, at £5.00 per hour. The national minimum is set at £4.85, as of the 1st October 04. The Government has already announced the minimum wages changes until 2006, in October of 2005, it is set to rise to £5.05, and in 2006 it is provisionally set to rise to £5.35. This will cause the shop to increase its labour costs, if the shop pays slightly more than the minimum wage in 2006 (as it does now), it is looking at an approximately 10% increase in labour costs. As well as the increased staff costs, increases in external influences may have an indirect affect on the business, for instance, if the shops supplier has a mortgage, then their monthly costs have increased, therefore they will need to increase their revenue in order to compensate for this, which means increased stock costs for the shop.
In Q7, the owner said that a by product of increased costs to consumers, leads to stress. Stressful customers are more likely to buy alcohol, cigarettes, and lottery tickets/gambling. This is interesting, as it means that the shop benefits from a tighter monetary policy. I asked the shop owner about the percentage increase of sales of these items for the months with interest rate changes, the sales defiantly increase for the months listed above, where there is an interest rate increase, by small amounts (approximately 5-7%) compared to the months with no interest rate increases, or an interest rate decrease. While this is good for the shop, as it increases the profits, it causes negative externalities or social costs, such as healthcare costs for treatment for smoking related diseases, and anti smoking advertising, lost labour hours at business where the workers are unable to get to work due to having drunk too much the night before, and customers getting into debt by buying too many lottery tickets in hope of a ‘quick fix’.
I can work out the shops net profit margin from the information that the shop owner gave me for the last two financial years.
Net Profit
Net Profit Margin = x100
Revenue
= 97760
X100
208000
=0.3738 x100
= 37.38% profitability
Net Profit
Net Profit Margin = x100
Revenue
= 47760
X100
168000
=0.28425 x100
= 28.42% profitability
As well as these figures he gave me an estimate for the previous year’s profitability, at approximately 25%.
From this graph you can see that from 2002, the net profitability has increased by approximately 50%.
In Q11, the owner talks about what actions he would take if the shop’s revenue were to drop. In his answer he mentions diversifying into new markets such as DVD rental. Diversifying is one of the economies of scale that the larger supermarkets benefit from, which shows that if the shop began to lose revenue, the way to increase the revenue is to appeal to a newer market and increase the customer base.
Increasing interest rates are not the only external influence that affects the business, other factors could be; the European integration, this means that shops in competition can buy cheaper, better goods from abroad. Also when or if the country takes the Euro as it’s currency, this will cause confusion in prices and cause demand fluctuations. But since the country is still using the Pound Stirling, this hasn’t affected the Newsagent.
There are social factors such as BSE or ‘Mad cow Disease’ scaring the public into reducing demand for certain products, but since the Newsagents best selling products are newspapers (Q1, and Q5,) it could be said that profits increased as more people bought the newspapers to learn about the BSE situation. Inflation is also rising, but many peoples wages are Index linked (they increase in relation to inflation so this effect is limited). The Newsagent’s competition has stayed reasonably the same, as the Newsagents manages to offer a “Connivance Factor” that the larger supermarkets cannot offer.
The demographics of this country are changing, the total population is increasing, the population is also aging, with 16% over 65 in 2003, and the fertility rate has increased to 1.71 children per woman. The total population is increasing, meaning that more housing is needed, in 2002; John Prescott announced that thousands of new homes were to be built in the south east of England. Due to the increase of housing, there is going to be an increase in local population, as well as a larger customer base for the Newsagents as there are more people living nearby. The aging population is increasing, since retired people have more spare time than the working middle aged population, they are more likely to visit the local Newsagents for a Newspaper, as well as the friendlier atmosphere it offers, it is also more convenient and accessible for people to get to. Since the fertility and birth rates have increased, in 5-10years, when these babies grow up, they will form part of the newsagent’s customer market for confectionary.
Conclusion
The Newsagents is affected by many different influences, some in positive ways such as the fact that sales of certain products (alcohol, cigarettes, lottery) increase during times of increased inflation, interest rates and taxes, and some in negative ways, such as larger competition and social factors. But the newsagents has survived changes in the past, and there is no sign that this is going to change, mainly because of the convenience factor that it offers nearby customers, and that fact that almost all the goods sold are price & income inelastic, due to the fact they make up small portions of peoples income.
If the shop were to be affected in the future, I would recommend achieving economies of scale, as this will allow them to compete with their competition on a more even level. Since it is not easy to achieve economies of scale, as it takes time, I would recommend diversifying, as it will allow the Shop access to new markets, and therefore profits, as well as advertising, even if it is on a small scale, i.e., local newspaper or shop window advertisements, to raise awareness of the shop to potential customers. I would also recommend maintaining the Strengths that the shop has, such as the newspapers and magazines, and possibly dropping the weaker lines, such as the children’s toys, currently offered for the social benefit it offers mothers with children, but if the shop comes into financial difficulty, it will need to make sure it is as profitable as possible.
