Analysis of Retail Television Industry by arv17287

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 Venture Opportunity Screening Analysis




Industry Name: Household and Institutional Furniture Manufacturing

Members: Andy Staney, Troy Williams, Jonathan Baker, Sam Cabani, Zoraida Ruiz

Course: GEB 4111 - New Venture Finance

Section: Wednesdays 1:30 – 4:20


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                                   1. Industry Analysis

   What is the industry that addresses this market?
        o Household and Institutional Furniture Manufacturing (NAICS)
   NAICS Code
        o 33712 (NAICS)
   Market Capitalization
        o This industry’s market capitalization is $31,238.8 million (―Household and‖ p6)
   Growth Rate
        o The market grew 0.8% from 2004 to 2005 (―Household and‖ p5)
   Number of competitors
        o The major competitors in this industry are:
                   Ashley Furniture Industries, Inc.,
                   La-Z-Boy Incorporated,
                   Furniture Brands International, Inc., and
                   Herman Miller, Inc. (―Household and‖ p24)
   Relative size of competitors
        o Ashley Furniture Industries, Inc. – 5.90% Market Share
        o La-Z-Boy Incorporated – 5.60% Market Share
        o Furniture Brands International, Inc. – 5.50% Market Share
        o Herman Miller, Inc. – 2.30% Market Share (―Household and‖ p24)
        o Other companies – 83.30% (―Household and‖ p30)
   What trends are important in this industry?
        o Sociocultural trends?
                   The industry is sensitive to:
                           fashion trends and
                           consumer taste (―Household and‖ p33)
        o Demographic trends?
                   The Baby Boomer generation has the largest impact on this industry
                   Baby Boomers spend the most money in this industry (―Household
                    Durables‖)




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       o Technology trends?
                  Technology varies based on the company’s size and level of competition
                  New machines enable more efficient products
                  When advances in material occur, all companies in the industry benefit
                   (―Household and‖ p19)
       o Economic trends?
                  This industry is sensitive to:
                          economic changes,
                          the amount and usage of disposable income, and
                          changes in demand for raw materials (―Household and‖ p33).
       o Geopolitical trends?
                  Exports in this industry are low but increasing
                  Imports in the industry are high and increasing
                  The largest source of imports is China—followed by Canada, Italy and
                   Mexico (―Household and‖ p7)
   How does this industry segment the market?
       o The industry is segmented into the following product and service segments:
                  non-upholstered household furniture,
                  upholstered household furniture,
                  institutional furniture,
                  metal household furniture,
                  household furniture (except wood and metal), and
                  wood television, radio, and sewing machine cabinets (―Household and‖
                   p12).




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                          2. Product/Service Delivery

   What exactly are the types of products or services being offered in the industry?

       o Types of products being offered in the industry include:

                  upholstered household furniture manufacturing,
                  non-upholstered wood household furniture manufacturing,
                  metal household furniture manufacturing,
                  household furniture (except wood and metal) manufacturing,
                  institutional furniture manufacturing, and
                  wood television, radio, and sewing machine cabinet manufacturing
                   (―Household and‖ p12).
   What aren’t they? Carefully describe.

       o This industry does not cover:

                  the installation of institutional furniture items such as theatre, stadium,
                   and park seats, restaurant furniture and work benches,
                  the manufacture of office furniture and/or office or store fixtures,
                  the wholesaling of furniture, or
                  the repairing or refinishing of furniture (―Household and‖ p3).
   What is unique about these products/services?

       o This industry is comprised of establishments primarily engaged in
         manufacturing household and public building furniture (i.e., library,
         school, theater, and church furniture) (―Household and‖ p3).
   What are their key features and benefits?
       o The furniture may be made on a stock or custom basis and may be
         assembled or unassembled (i.e., knockdown), and
       o household and institutional furniture manufacturers distribute the bulk of
         their products to wholesalers and contract outfitters (―Household and‖ p3).
   Do the industry competitors benefit from any proprietary rights to the
    products/services (for example, technology, patents, copyrights, trade secrets,
    etc.)?
       o Several proprietary rights include:

                  agreements with suppliers and contractors that lock them into using
                   products directly from that particular company,



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                  access to skilled carpenters, and the

                  dominance of the existing major competitors (―Household and‖ p15).

   What differentiates the competitors, and what are the similarities?

       o The larger companies benefit greater from new technology with the
         materials and machinery while the smaller companies do not see this
         benefit to the same degree, but

       o changes in the level of disposable household income influence demand for
         products for all competitors (―Household and‖ p19).




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                                  3. Marketplace Analysis

   What is the market that the industry currently serves?

        o The industry currently serves the following markets:

                      homeowners,

                      renters,

                      businesses,

                      government institutions, and

                      educational institutions.

   How large is it?

        o Bruce Bursma implied that this is an 11—12 billion dollar market.

   What is its growth potential?

        o Bursma also believes this market is modestly growing at a double digit rate but
          is projected to slow down due to the deferring of business purchasing.

   What motivates customer purchase decisions?

        o Kathy Leadman said the motivation of customer purchase decisions lies
          within the price, quality, brand name, fashion trends, state of the economy,
          and consumer taste.




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                               4. Marketing Dynamics

   Who are the target customers of the marketplace?

       o Individuals, businesses, hotels, and architects

   What problems are being solved for them?

       o Finding superior quality furniture with high level of customization

   What are their profiles?

       o Individuals and families with median income over $50,000 (―Marketing‖)

       o Small to large businesses including hotels

   What motivates their buying decisions?

       o Kathy Leadman explained price, quality, brand name, fashion trends, state
         of the economy, and consumer taste motivate buying decisions.

   What are the strengths of the products/services currently being offered?

       o Several strengths include:

                  lower prices due to economies of scale (―Ashley‖),

                  online storefronts with multiple physical locations for easy access,
                   and

                  offering no interest payment plans, or no payments for an allocated
                   period of time.

   Weaknesses?

       o Several weaknesses include:

                  product standardization,

                  lower quality materials,

                  limited amount of customization—if any,

                  weak distribution channels, and

                  poor customer service (Bostrom)




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   Who are the key competitors?

       o Ashley Furniture Industries, La-Z-Boy Incorporate, Furniture Brands
         International Inc., and Herman Miller Inc. (―Household and‖ p24)

   How do they differentiate their products or services?

       o According to Kathy Leadman, La-Z-Boy differentiates its products by
         providing an excellent shopping experience with the ability to utilize its in-
         home designers to customize products free of charge;

       o Ashley furniture utilizes a GERS retail system that integrates the
         company’s inventory and store operations solutions with Ashley Furniture
         Industries’ corporate system for online inventory allocation and shipment
         scheduling (―Ashley‖);

       o Furniture Brands differentiates its products by employing talented
         designers who excel in keeping products innovative and fresh
         (FurnitureBrands.com), and

       o According to Mark Schurman, Herman Miller differentiates its product by
         creating a product based on large amounts of research with a problem
         solving purpose—for example, the intent to reduce heat buildup.

   How are the products or services currently priced?

       o Prices range for different furniture products with different optional
         equipment, and

       o prices start from as low as $100 for a single chair to well over $5,000 for
         entertainment and bedroom sets (FurnitureOnline.com).

   What are gross revenues per unit sold?

       o The industry average for gross revenue per unit sold is $766.71
         (―United‖).

   What are anticipated annual sales?

       o The anticipated annual sales for a startup company is $40 million,
         contingent upon opening 20 stores throughout the United States based on
         a scaled down figure from La-Z-Boy Incorporated’s 10-K report
         (―United‖).




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                       5. Distribution & Sales Dynamics

   What distribution channels does the marketplace currently use (e.g., direct sales,
    mail-order, wholesalers, etc.)?

       o Kathy Leadman reported that the industry mainly uses direct sales
         through retailers, and

       o Leadman also mentioned retail storefronts are preferred as opposed to
         online sales.

   How does the marketplace currently communicate with customers (e.g., advertising,
    promotions, etc.)?

       o Leadman declared print, television, radio, online, and mail order promotions
         and advertisements are used both on a corporate and individual retail store
         level.

   How does the marketplace currently sell its products or services?

       o Leadman mentioned all of the following selling methods:

                  mainly in retail locations—usually individual franchises,

                  little to no online selling in the industry, and

                  customer may order by phone.

   Who does the selling (internal sales people, manufacturing representatives, etc.)?

       o Leadman explained sales personnel in individual franchise locations sell
         the products.

   What are the costs associated with this sales strategy?

       o Leadman described the following costs:

                  employee pay and

                  advertisements.

   Which costs are fixed?

       o Advertisements go out regularly in newspapers and other print sources.

   Which are variable?

       o Employee pay is based on commission only.


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                                 6. Financial Estimates

          Answers found through the 10-K report for La-Z-Boy Incorporated.

Summarize estimates made in previous sections:

A.                                              Annual unit sales:        51,613
B.                                                  Price per unit:       $775.00
C.                 Variable cost per unit (production and sales):         $580.00
D.                   Fixed costs (admin, production, and sales):       $8,563,291.00
E.               One-time start-up costs (eqpmt, mktg, legal, etc.):   $4,226,098.00
F.              Working capital rqd (receivables, inventory, etc.):     $752,980.00

Calculate estimated annual gross revenues and income:

G.                             Estimated annual revenues (AxB):        $40,000,000.00
H.                        Estimated annual variable costs (AxC):       $30,400,057.00
I.                 Estimated annual contribution margin (G-H-D):        $1,036,652.00

Calculate break-even figures:

J.                             Contribution margin per unit (B-C):        $186.00
K.                               Annual break-even quantity (D/J):         46,040
L.                Ratio of break-even to expected quantities (K/A):         0.89

Estimate the money you will initially need to start your business:

M.                          Total up-front funds required (E+F):       $4,979,078.00
N.                  Additional units to cover up-front funds (M/J):       26,770
O.                Break-even quantity with up-front funds (K+N):          72,810

Calculate financial performance figures:

P.                       Payback period for startup funds (M/I):            4.81
Q.                     Annual return on start-up investment (I/M):          0.21
R                             Variable cost to price ratio (C/B):           0.76
S.                                Contribution margin ratio (I/G):         0.026




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7. Venture Opportunity Screening (VOS) Analysis

                        VOS Indicator

Factor Categories              High Average Low

Industry/Market
   Market Size Potential         X
   Venture Growth Rate                       X
   Market Share (year three)                 X
   Entry barriers                            X

Pricing/Profitability
   Gross margins                         X
   After-tax margins                         X
   Asset intensity                       X
   Return on assets                      X

Financial/Harvest
   Cash flow breakeven                       X
   Rates of return                       X
   IPO potential                             X
   Founders control              X

Management Team
  Experience/Expertise           X
  Functional areas                           X
  Flexibility/Adaptability       X
  Entrepreneurial focus          X

Total Points by ranking         15       8   7

Overall total points (OTP)      30

  Average core (OTP/16)        1.875


              High=3; Average=2; Low=1




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                                 8. Conclusions

   Do these results look attractive enough to proceed with the development
    of a new venture in this industry?

       o Given the maturity and size of the industry, a new venture in this
         industry would most likely not be profitable for approximately five
         years.

   How can we improve the probability of success of a new venture in this
    industry?

       o By using overseas manufacturing and resource procurement,

       o by increasing marketing towards institutions and government
         organizations, and

       o by establishing corporate and government contracts.

   If we were to start a new venture in this industry, what size (scale) and
    scope (breadth of product offerings) would have the greatest probability
    of success?

       o A regional scale and wide variety of products wo uld insure the
         greatest probability of success for a new venture in this industry.

   What other information do we need in order to make an effective decision
    to proceed with a new venture in this industry, or to choose another
    industry for analysis?

       o We would need to know the following:

                 the failure rate of furniture manufacturing and/or retail facilities
                  within the first five years,

                 investment possibilities in this type of venture,

                 the availability of resources and distribution channels, and

                 demographic information that could dictate the most profitable
                  region of the United States to start in.




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                                9. Works Consulted

―Ashley Furniture HomeStores Integrate Supply Chain with GERS Retail Systems and
      FurnishNet.‖ Freshnews.com. 28 July 2005. Freshnews.com San Diego/Orange
      County. 4 Oct 2006 <http://www.freshnews.com/news/computers-
      internet/article_25740.html?Furnishnet>.

Bostrom, Matthew and Tari Titherington. ―Traditional Intermediaries.‖ 4 Oct. 2006
      <http://www.american.edu/carmel/tt6157a/traditional.html>.

Bursma, Bruce. Herman Miller. Telephone interview. 4 Oct. 2006.

FurnitureBrands.com. 2006. Furniture Brands Strategy. 3 Oct. 2006
       <http://www.furniturebrands.com/investor/OurStrategy.aspx>.

FurnitureOnline.com. 4 Oct. 2006 <http://www2.furnitureonline.com>.

―Household and Institutional Furniture Manufacturing in the US 33712.‖ IBISWorld
      Industry Market Research. 2006. IBISWorld Inc. 13 Sept. 2006
      <http://www.ibisworld.com.ucfproxy.fcla.edu/industry/default.aspx?indid=862>.

―Household Durables Industry Surveys.‖ NetAdvantage. 2006. Standard & Poor’s. 26
      Sept. 2006
      <http://www.netadvantage.standardpoor.com.ucfproxy.fcla.edu/NASApp/NetAdv
      antage/showIndustrySurvey.do?code=hhd>.

Leadman, Kathy. La-Z-Boy. Telephone interview. 4 Oct. 2006.

―Marketing that Motivates.‖ La-Z-Boy.com. 2006. La-Z-Boy Opportunities. 4 Oct. 2006
      <http://www.la-z-boy.com/opportunities/marketing.html>.

NAICS. U.S. Census Bureau. 2006. 13 Sept. 2006
     <http://www.census.gov/epcd/www/naics.html>.

Schurman, Mark. Herman Miller. Telephone interview. 4 Oct. 2006.

―United States Securities and Exchange Commission, Form 10-K.‖ La-Z-Boy
       Incorporated. 4 Oct. 2006
       <http://www.sec.gov/Archives/edgar/data/57131/000005713106000025/tenkall.ht
       m 06/22/2006>.




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