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This is a sample SFP Project submission.

Please note that the emphasis of this


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Rubbersole Business Plan Report

1. Executive Summary

To succeed and survive, Rubbersole must develop new footwear markets and offer new

footwear products responding to changes in consumer demand and behaviour. Rubbersole

cannot compete on price and nor can it differentiate itself selling its current branded

products. Latest projections show the business making increasing and unsustainable losses

to 2021.

A ‘perfect storm’ of increased costs, rising inflation, and low wage growth threatens

consumer confidence (Deloitte, 2017). The shift to online sales has empowered customers

with information, choice and increasing expectations. (Retail Economics 2017). Clothing and

footwear retailers are exposed to additional variables: fashion, seasonality and even the

weather.

However, market analysis demonstrates that there are opportunities in an increasingly

polarised market. Rubbersole should adopt a strategic position to meet the needs of a wider

demographic of more affluent consumers, particularly men, who are more focused on

quality, style and comfort and who are less price-sensitive.

2. Market Analysis

The UK had a retail footwear market worth £10.6bn in 2016 (Statista, 2017), part of a global

footwear consumer market estimated to be over $200bn annually (Euromonitor, 2016). The

UK market has been growing against a backdrop of low inflation with 39.3% growth in the

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last five years and 6.2% in 2015-2016, pre-referendum. Since the referendum, the rate of

retail sales growth has slowed and begun to decline as sterling weakness has driven higher

inflation (FT, 2017). Online sales for clothing and footwear account 14.1% of the market and

continue to grow strongly: 11.7% year on year to April 2017 (ONS, 2017).

Consumer Spending on Footwear


£12,000 14.0%

£10,000 12.0%

10.0%
£8,000
8.0%
£6,000
6.0%
£4,000
4.0%

£2,000 2.0%

£0 0.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Market value £m Growth Rate %

Source:
Statista/ONS

Although women’s footwear is the largest part of the market, growth in male footwear sales

has been stronger than female in recent years. In the US, the value of male footwear sales is

fast catching up with female (Woolhouse, 2017). Men are adopting a wider choice of

footwear driven by changing work patterns, images of ‘success’, culture and social media.

Retail Gazette finds the same trend for UK males with the male/female spending gap

narrowing. ONS data puts the ratio of female/male/children’s footwear sales at

49%/28%/23% for the UK. There seems little doubt that male footwear is the fastest

growing segment.

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3. Industry Analysis

Market share of the UK’s largest footwear retailers is as follows:

A segmental analysis can be drawn from this secondary data combined with primary market

research from visits to UK footwear retailers (Appendix) and online:

 Retail market players can be categorised between specialist or ‘pureplay’ clothing or

footwear retailers and multiple or online retailers selling a wide range of products.

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 Supermarkets, discount pureplay retailers such as Primark and multiples such as

M&S and Next are capturing price-sensitive less brand-sensitive value-oriented

consumers.

 Own brand stores are a notable segment. Clarks “the world's number one in

everyday footwear” as a manufacturer and a retailer has existed since 1825.

Manufacturers are growing vertically, controlling marketing, retail experience, and

margins. Church’s, Eco, Geox, Hunter and Ugg are adopting this model focusing on

higher-spending brand-conscious affluent urban consumers.

 Dune, Kurt Geiger, Office, and Schuh are instore and online retailers selling branded

and own-branded footwear. Schuh aims to offer “aspirational but accessible fashion

footwear”. Dune and Office are less focused on price and more focused on fashion,

brand, quality and innovation.

 Independent shoe retailers range from single stores to multiple outlet retailers.

Charles Clinkard is typical - owner-managed with 33 UK stores and online selling

branded footwear with a family, quality and fit orientation.

 Luxury brand retailers such a Selfridges, Harvey Nichols and Net-A-Porter/Mr Porter

(online) with a premium/luxury footwear product range.

Together the large retailers graphed had a 74.9% market share with multiples the largest

segment at 43.4% leaving around 25% of the market for independent and other retailers.

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The number of UK footwear stores is in long-term decline, down 20% from 2008 to 2014

(ONS). Brantano, Jones Bootmaker, are Barratts Priceless are examples of recent

insolvencies.

Further secondary research was conducted by analysing the financial statements of a

sample of leading footwear retailers:

Major Footwear Retailers: Margin and ROCE


61.3%
60.7%

70.0%

59.0%
53.1%
52.5%

52.1%
47.7%
47.5%
60.0%
45.3%
44.4%
42.2%

50.0%
40.0%
28.2%

24.6%
22.8%

20.6%
22.1%

16.8%

19.4%
30.0%

15.7%
14.8%

15.9%
12.2%

13.5%
11.0%

20.0%
7.8%

7.5%

7.5%
6.4%
5.1%
4.6%

4.5%
4.3%
4.3%

4.1%
4.1%

3.0%
10.0%
0.0%
C&J Clark Intl Clinkard Group Dune Group Office Holdings Schuh Group Rubbersole
Gross Margin LY Gross Margin PY Op margin LY Op margin PY ROCE LY ROCE PY

LY=Last Accounting Period PY=Previous Accounting Period

With total annual sales of £160m, Rubbersole has a market share of around 1.5% with a

falling trend. The graph indicates that Rubbersole is generally underperforming compared

with its similarly-sized competitors regarding margins and ROCE.

4. Opportunities and Threats

From the primary and secondary market analysis and macro review, the table below

summarises the PESTEL factors applicable to Rubbersole to inform its choice of strategic

options.

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Political Technological

 Volatility makes planning uncertain  Online search is driving all retail sales, both

 Forces behind globalisation are shifting online and instore

 Brexit: negatively impacting supply  Automation technologies, analytics and big

chain and margins data can drive competitive advantage

 Brexit: Uncertainty of residency and  Increasing mobile device usage among

employment status for EU nationals in consumers

the UK affecting customers and staff  Dependency on IT systems, the risk of failure

 Post-election UK uncertainty. and cybersecurity threat.

Economic Environmental

 Consumer confidence is falling with  Sustainability an increasing concern for

rising inflation and pressure on incomes customers and stakeholders

 Brexit uncertainty for trade, imports  Potentially less use of leather and tanning,

and tariffs. and more environmentally-friendly shoes and

 Business rates increases, particularly in packaging.

the South-East  Having an ethical supply chain, particularly

 Depreciation of sterling supplier employee welfare is essential for

 Forex hedging to expire in supply chain. long-term value creation.

 Risk of underage workers in the supply chain.

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Social Legal

 Changes in lifestyle and buying trends –  Changes in regulated pay likely to increase

shoes as a status symbol staff costs eg National Living Wage

 Men buying more footwear  Statutory levies eg apprenticeship levy

 Cultural diversity trend increasing the cost burden

 Urban migration, more people living in  Digital regulation increasing complexity and

towns and cities cost

 Social media and fashion influencers  Equal pay, pensions, and parental care

increasingly driving demand legislation tending to increase compliance

 Changes in retail shopping habits, rise burden.

of the malls, airports and stations

 Ageing population

Key: Opportunity | Threat | Both

Rubbersole sells a pair of shoes on average for £37. Data from Numbeo would suggest an

average men’s price of around £60 and this was broadly substantiated by the retailer visits.

This positions Rubbersole towards the value-led category where it cannot compete against

far larger rivals.

Retail research is indicating a polarisation of the clothing and footwear markets.

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 A “squeezed middle” has emerged – a large demographic of middle-income earners

facing a fall in real income and cost of living rising, a trend driven by the forces of

globalisation, skills gaps, and technological change. Sales to this segment are

dominated by the large multiples online and offline focused on cost-leadership.

 For more affluent consumers, PwC believes that the UK “premium lifestyle” segment

of the footwear and clothing market can grow by 6.6% CAGR to 2020, above a

forecast range of 2-4.4% for the market overall. It identifies a shift towards more

casual clothing in the workplace and socially. The growth of social media, celebrity

endorsement, and the desire to identify, and share experiences is driving sales in this

segment. This creates an opportunity Rubbersole should seize.

In the children’s market, population and birth rate growth, the trend towards parenting

later in life, and an ageing demographic of grandparents with higher disposable incomes are

all driving growth at the premium end. The children’s footwear market is driven by growth

(literally). Children are harder to fit, increasingly fashion conscious and sales online have a

50% returns rate compared to 35% for women’s footwear (KPMG, 2017). However, of the

three market segments, PwC see this as the market with the least potential for growth:

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UK Clothing, Footwear and Accessories Market CAGR

Forecast

2009-15 2015-20

Footwear 2.6% 3.4%

Childrenswear 2.1% 2.6%

Menswear 3.1% 5.3%

Womenswear 3.6% 5.0%

Source: PwC

Footwear comfort matters more than style to over 75% of males and 85% of females (Levin,

2015) and independent shoe retailers are the go-to source for expertise and footwear that

fits. Rubbersole should exploit this opportunity.

In-store experience can help drive brand identity and loyalty online. Around 20% of the

£50bn clothing, footwear and accessory sales market in 2015 was online, up from 9.3% in

2010 (PwC, 2017). The online channel is expected to continue to take market share from the

in-store channel accounting for 28% of sales by 2020. All this research is though pre-

referendum. KPMG reports that:

 A key factor driving online sales of clothing and footwear is returns, and multiple

online purchases with the intention of returning something is commonplace.

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 62% of customers cite easy returns and free returns as a major driver of online sales.

 BORIS returns (bought online returned in store) and click and collect can effectively

integrate the online and instore channels and increase instore footfall.

The UK and Europe has a long heritage in high-quality men’s footwear and the weakness of

sterling makes these home-produced products more attractive. A further trend Rubbersole

can exploit is ‘athleisure’ wear - how sports footwear has morphed into leisure and office

wear. ‘Premium sneakers’ worn with a business suit is a very different segment to value-

oriented sports footwear and represents an opportunity for Rubbersole.

Data from Statista (2014) showed that the 30-49 age group spend the most on footwear, 9%

more than the under 30s, an average of £6.30 per week compared £5.80. UK Census data

shows that 28% of the population are the 30-49 age group, a market currently not served by

Rubbersole. This represents a significant opportunity to broaden the customer base and

products to meet the needs of this segment, focused particularly on the premium lifestyle

and aspirational drivers identified.

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UK Population Analysis

Age Population % %
0–4 3,914,000 6.2
5–9 3,517,000 5.6
10–14 3,670,000 5.8
15–19 3,997,000 6.3
20–24 4,297,000 6.8
25–29 4,307,000 6.8 37.5 Current Rubbersole demographic
30–34 4,126,000 6.5
35–39 4,194,000 6.6
40–44 4,626,000 7.3
45–49 4,643,000 7.3 27.7 Additional potential target demographic
50–54 4,095,000 6.5
55–59 3,614,000 5.7
60–64 3,807,000 6
65–69 3,017,000 4.8
70–74 2,463,000 3.9
75–79 2,006,000 3.2
80–84 1,496,000 2.4
85–89 918,000 1.5
90+ 476,000 0.8

Total 63,183,000 100 65 Combined demographic

Source: ONS, Census 2011

5. Strategies: Identification and Justification

Porter (1985) provides a framework for evaluating the strategic options available to

Rubbersole by analysing competitive forces and generic strategic approaches to gain

competitive advantage based on the preceding market analysis:

Cost Leadership: exploiting sources of cost advantage through its products and

supply chain to compete industrywide on price. This is the strategy of footwear

retailers such as the supermarkets and Primark.

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Differentiation: unique product range industrywide in a way which has value for

customers and potentially allows a premium price. Selfridges is an example of a

footwear retailer differentiated on style, aspiration and luxury for more affluent

customers.

Focus: meeting the needs of a market segment with two variants: cost focus and

differentiation focus. The footwear retailer Herring has a differentiation focus on

largely English branded premium quality men’s shoes sold mostly online.

Porter argues that the firm must adopt one of these strategies or face being stuck in a

strategic no man’s land. Applying the ideas of Porter to Rubbersole:

Competitive Generic strategy which could be adopted by Rubbersole

Force Cost Leadership Differentiation Focus

Buyer Power Footwear customers Rubbersole is mostly Core competencies

can easily switch selling branded around range,

between large national footwear which is quality, fit and

retailers offering the not unique to the customer service

same brands or market. can enable

alternatives at the Rubbersole to

lowest price. reduce customer

Rubbersole is unable to price-sensitivity

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compete.

Supplier Power Rubbersoles’ relatively Rubbersole is not Developing

low market share at likely to be able to Rubbersole’s own-

1.5% diminishes offer a unique brand footwear

leverage with suppliers product or control a range could reduce

on terms. market segment dependency on

industry-wide to manufacturers’

increase its brands and provide

bargaining power competitive

with suppliers. advantage.

Competitive Competition is intense Luxury footwear Focus on customer

Rivalry among low-cost retailers achieve service, customer

retailers. differentiation with experience and a

unique and more distinctive

desirable products product mix can give

but with high capital some differentiation

and marketing costs. focus.

Entry Barriers Ability to offer low Selling branded Core competencies

prices is restricted to shoes makes offer some

differentiation protection from new

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other higher volume difficult for entrants but the

retailers Rubbersole. threat remains,

particularly online.

Threat of Footwear cannot be substituted for another Rubbersole must

Substitutes product but rivalry is high. A threat exists in ensure its online

substitution of in-store for online sales by product offer is

competitors and new entrants. differentiated and

online customer

experience is better

than competitors.

Key: Competitive advantage for Rubbersole:

Not achievable

Both threats and opportunities may exist

Potential exists to compete.

Hunt and Morgan (2001) advocate that comparative advantage and market orientation will

enable a business to compete where it chooses its target market more astutely than its

competitors and its products and services are better suited to customers’ preferences. In

line with this and based on the opportunities identified in the market analysis, a mission

statement for Rubbersole on which to base its strategy is conceived:

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To provide the best footwear products and buying experience to attract, engage and

delight our customers through our stores and online, always focused on quality, style

and fit.

Combining Porter’ notion of focus for Rubbersole and based on the work of Ansoff (1957)

and the market analysis, four alternatives strategies are considered in line with this mission:

Rubbersole Strategic Options

Existing Products New Products

Existing Markets 1. Market penetration 3. Product development

New Markets 2. Market development 3. Related diversification

Option 1: Market penetration

This strategy focuses on existing markets and existing products:

 New stores would be opened each year where opportunity exists for example in new

shopping malls or airports acknowledging the changing patterns in buying habits.

 It is assumed there are some underperforming stores and a small number of stores

would be closed each year when for example leases expire.

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 Online sales growth would be achieved by investing in the website for the UK market

to improve online customer experience, information on choice, style, fit and an

efficient returns process. Click and collect will also be offered.

 Improve customer service with improved training and staff incentive scheme.

 Measure and target improvement in customer satisfaction (see NPS)

Option 2: Market development

A new market for existing products potentially exists in Europe. This could be achieved with

stores in European locations and/or online sales in Europe with a multi-language mobile

enabled website and pricing selling existing products.

However, this would require significant research on the European footwear market of which

it is assumed the current management have limited knowledge. The uncertainty around

Brexit and the economic risk factors identified in the PESTEL analysis make trading in Europe

unattractive at this time and this option is rejected.

Option 3: Product development

This strategy would be focused on new products for existing markets:

 New product would be sourced from manufacturers focused on the premium lifestyle

segment identified in the market analysis at higher selling prices and improved margin.

 A premium athleisure range of products would be launched for existing markets,

focused on quality, choice, fit and exclusivity.

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 Emphasis would be placed on sourcing UK and EU product with improved quality,

exclusivity and sustainability and improved margins

 Rubbersole would introduce exclusive own brand footwear, sourced in the UK and

Europe focused in line with its new mission on quality, style and fit.

 The staff incentive scheme and customer satisfaction initiative would also be introduced

described in Option 1.

Option 4: Related diversification

This would focus on developing new footwear products for new footwear markets

leveraging the current retail infrastructure and management competencies.

 The market penetration and product development initiatives from Options 1 and 3

would both be pursued.

 In addition, Rubbersole would extend its market demographic into the 30-49 age group

across all product ranges for men and women as identified as an opportunity in the

market analysis.

With each of these strategies goes a measurable commitment to customer and employee

satisfaction addressed with other KPIs below.

The following operational factors have been considered in defining these strategic options:

 Staff: retail is the largest low pay sector in the UK (Clarke & D’arcy, 2016) and

Rubbersole is only paying the national minimum wage. Pay is its largest expense.

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Staff motivation is critical to a successful change of strategy. For this reason, a staff

sales incentive scheme is proposed linked to growth to enable staff to share in the

success of the strategy.

 Staff training: all the strategic options require change and increased commitment

from staff, hence training will be augmented.

 Customer satisfaction: A major initiative underlying all strategic options will be

increasing customer satisfaction, examined under KPIs below.

 Supply chain: An assumption is made that suitable quality products to drive the

product-oriented growth strategies can be sourced. Italy, Spain, and Portugal

produce 2/3 of all EU-manufactured footwear, with Italy alone producing 50% of

production (EC, 2012). These sources will be key to Rubbersole to improve quality,

style, exclusivity and value, particularly the launch of own-brand product.

 Coffee shops: the coffee shops do appear to be increasing footfall and possibly

customer dwell time. However retailing coffee is not the core business. The

expansion of the men’s range and the pressure on floor space may make the coffee

shops obsolete or even a hindrance to growth in the long term.

Other major strategic choices for Rubbersole considered but rejected where:

 Expansion into clothing: this is unrelated diversification and significantly riskier. It is

outside the knowledge of the management and extension of the brand name and

retail network resources and requires a new supply chain.

 Acquisition/consolidation: this may be viable but needs more market data and

analysis.

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The potential financial outcome from each of the three strategies identified (1,3 and 4) is

modelled below.

6. Shareholder Value and KPI selection

Rumelt (2011) believes that strategy involves identifying critical factors and directing

management actions to deal with these factors. Based on the external market analysis and

PESTEL analysis, three critical success factors can be identified for Rubbersole:

1. Financial sustainability and profitability

2. An attractive product and retail offer

3. Satisfied stakeholders

Smith (2015) describes shareholder value as the creation of additional wealth for the

ultimate business owners and whether management is acting appropriately to create this

wealth. Smith believes this requires a rate of return higher than the cost of the capital

utilised to generate that return, with the rate of return given by:

Operating cash flow

Shareholder’s equity and net debt

However, by itself this return on capital (ROCE) is not necessarily an effective indicator of

long-term value creation. Measuring the cost of capital involves theoretical assumptions on

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the risk-free rate, market rates of return and risk sensitivity. Agency theory suggests that

conflicts of interest can arise in the narrow management of ROCE and it can be manipulated

by management. Lazonick and O’Sullivan (2000) suggest that an aggressive short term

pursuit of narrow shareholder value may run down a company for example attempting to

reduce workforce or pay, increase dividends, or creating unjustified incentives for senior

management.

Rappaport (1998) describes ‘enlighted self-interest’ as a more comprehensive alternative

where long-term shareholder value is created by sound commercial and financial

management but also engaging with shareholders and stakeholders. Mauboussin and

Rappaport (2016) suggest that shareholder value can be 'reclaimed' from manipulation and

Friedman’s (1970) now unpopular view of profit maximisation by:

1. Clear strategic objectives at board level and acceptable compromises where

objectives may come into conflict with an aggressive definition of shareholder value.

2. Encouraging behaviours consistent with achieving non-financial and financial

performance targets.

3. Communication with all stakeholders: planning, decision-making, and policies that

support strategy and long-term value.

For Rubbersole, a more comprehensive measure of shareholder value creation necessitates

a range of financial and non-financial KPIs which recognizes that stakeholder engagement is

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the route to create long-term value for Rubbersole and its owners. Dividend level will not be

a KPI for Rubbersole. In a period when the business is investing, the dividend may need to

be temporarily foregone in the interests of long-term shareholder and brand value.

The following 10 KPIs are proposed for Rubbersole with indicative targets as a broader

indicator of shareholder value:

Critical Success Factor KPI Target

Financial sustainability and Sales total and by category 20% growth within 5

profitability Years

Gross margin 5% growth within 5 Years

ROCE 5%, in line with

competitors

Attractive product and retail Sales per sq foot 5% annual improvement

offer

Inventory Turn <6 weeks

Average customer transaction 5% annual improvement

spend

Footfall and conversion – in-store 5% annual improvement

and online equivalent

Sales to retail staff costs 5% annual improvement

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Satisfied stakeholders Customer satisfaction/Net 50+

Promoter Score

Employee engagement 2% annual improvement

A concise number of KPIs spanning the critical success factors is also consistent with the

work of Kaplan and Norton (2004).

The reasoning behind each KPI is as follows:

 Sales total and by category: measures retail revenue performance across any period,

per store, region, product group or in aggregate.

 Gross margin: given by (revenue-costs of sales)/revenue, provides a measure of

product profitability and retail performance.

 ROCE: an indicator, though not the only indicator of shareholder value creation and

the effectiveness of capital utilisation, useful for benchmarking with competitors.

 Sales per sq foot: average revenue for every square foot of sales space, indicates the

efficiency of the retail operation and product demand.

 Inventory Turn (cost of sales/inventory): indicates sales efficiency, a low turn may

indicate obsolete stock which is failing to sell.

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 Average customer transaction spend: this can be measured in a single transaction or

tracked across a year for customers as a measure of loyalty and repeat business. A

loyalty card and promotions can augment this KPI.

 Footfall and conversion: the number of people entering a store or accessing the

website and the number who subsequently make a purchase. A measure of the

attractiveness of the product and the effectiveness of the sales conversion process.

 Sales to retail staff costs: measures the sales performance of retail staff collectively

or individually.

 Customer satisfaction/Net Promoter Score: measuring customer satisfaction instore

or online by quantifying promoters, detractors and passives (Reichheld, 2003). An

NPS of 50+ should be an aim and can be benchmarked. Data for this KPI can be

gathered instore using a Smiley Terminal or online.

 Employee engagement: can be measured through an annual survey possibly

combined with staff turnover and absenteeism rates.

Many of these KPIs can be looked at on a consolidated company level and sub-levels for

products and individual stores.

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There will be a larger number of operational performance indicators. For example, online

sales performance indicators might be abandoned carts, retuning customers, social media

engagement, pay-per-click traffic volume v organic search and returns rate.

7. Financial analysis and projections

Analysis of Rubbersole’s currently projected financial performance indicates escalating

losses and negative ROCE. The liquidity and cash position is weakening and there is a risk

that a breach of bank covenants linked to financial performance and position could lead to

withdrawal of bank support and insolvency. Status quo is clearly not an option.

Rubbersole Shoes: Liquidity Analysis

2015 2016 2017 2018 2019 2020 2021


Current Assets - Current Liabilites 10,183 10,495 10,920 10,264 8,204 4,739 -242
Current ratio 1.52 1.52 1.53 1.50 1.38 1.20 0.99
Quick ratio 0.06 0.06 0.06 0.06 0.06 0.05 0.04
Net Cash Flow £'000 5,531 -5,324 -1,866 -132 -894 -2,124 -3,488
Closing Cash £'000 -4,419 -9,743 -11,610 -11,742 -12,635 -14,760 -18,248

Rubbersole Shoes: 2016 Product Sales and margin analysis

Product line Margin SKUs SKU Weight Shelf space Sales £'000 Sales Weight Avg Item £
Web site 53% 401 9.4% 15,663 9.9% 39.09
Female adult range 55% 2,093 49.2% 55.0% 90,927 57.7% 43.44
Male adult range 48% 515 12.1% 17.0% 18,898 12.0% 36.68
Children and Young Teenage 60% 998 23.4% 22.0% 31,045 19.7% 31.12
Accessories 46% 250 5.9% 6.0% 1,101 0.7% 4.40
Total 4,257 100.0% 100.0% 157,634 100.0% 37.03

Conclusions can be drawn from this data:

 Rubbersole’s average price point positions it dangerously in the cost leaders’ market

but without the volume and buying power to sustain low prices.

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 The accessories segment is significantly underperforming comparing sales (0.7%)

with shelf-space (6.0%).

 Male footwear sales are significantly below potential based on the market analysis.

Based on the strategic options identified earlier, the following options have been modelled

with assumptions shown:

Option 1: Market Penetration Strategy

Assumptions:

 A net reduction by 1 store each year: 2 under-performing stores closing and one new

store opening where opportunity exists.

 1% increase in pricing v benchmarks each year.

 5% increase in staff costs to fund a sales incentive scheme and a 1% increase in staff

training linked to sales and margin improvement.

 5 additional coffee shops per year.

 Reduced space allocated to accessories with the space used proportionately for

footwear segments. The ratio of female/male/childrens/accessories becomes

57%/18%/23%/2%.

 Online sales increase by 4% with marketing budget increased by 1% and 1% added to

overheads for website expenses.

Outcome:

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Strategic Option: Market Penetration
Income Statement 2016 2017 2018 2019 2020 2021
KPI Total Retail and Web Sales £'000 159,874 189,896 197,554 205,464 213,670 222,218
Direct Costs 83,561 99,892 107,648 113,587 119,634 126,026
Gross Profit 76,312 90,004 89,905 91,877 94,036 96,192
Retail outlet wages 37,587 39,997 39,643 39,289 38,935 38,581
Marketing 8,561 8,821 10,333 10,715 11,110 11,519
Overheads 25,396 28,327 28,795 29,277 29,774 30,289
Operating Profit 4,769 12,859 11,135 12,596 14,217 15,803
Interest and Tax 1,554 3,735 2,903 3,041 3,182 3,301 5 Years
Profit after Tax 3,215 9,124 8,232 9,555 11,036 12,501 50,448

EBITDA 15,389 23,754 21,972 23,374 24,936 26,461


KPI Gross Margin % 48% 47% 46% 45% 44% 43%
Net operating margin % 3% 7% 6% 6% 7% 7%
KPI ROCE 6% 17% 14% 15% 17% 18%
Net Debt / Equity % 54% 36% 25% 8% -10% -26%
Net Cash Balance -9,743 -640 5,146 15,204 26,142 37,778
5 Years
Base Case Operating Profit 3,215 -735 -1,817 -2,874 -4,019 -5,267 -14,710
Improvement/(Decline) 0 9,859 10,049 12,429 15,054 17,768 65,159

Sales Growth 18.8% 4.0% 4.0% 4.0% 4.0%


KPI Sales per square foot 6,765 7,792 8,143 8,509 8,893 9,297
KPI Inventory days 180.3 159.6 131.7 104.4 78.2 53.2
KPI Average transaction value £ 37.03 38.85 38.94 39.02 39.11 39.19
KPI Sales:retail staff costs ratio 4.25 4.75 4.98 5.23 5.49 5.76

Option 3: Product development

Assumptions:

 New premium lifestyle, athleisure and men’s products enable a 5-10% increase in

price v benchmarks.

 Staff incentive and training as per Option 1

 1% increase in advertising

27
 Further increase in men’s segment share, female/male/childrens/accessories now

55%/20%/23%/2% in line with market analysis.

 Cost prices increase by 4% reflecting new product mix

Outcome:

Strategic Option: Product Development


Income Statement 2016 2017 2018 2019 2020 2021
KPI Total Retail and Web Sales £'000 159,874 202,851 214,835 219,307 223,023 228,247
Direct Costs 83,561 103,284 116,299 123,090 124,341 130,901
Gross Profit 76,312 99,566 98,536 96,217 98,682 97,346
Retail outlet wages 37,587 40,351 40,351 40,351 40,351 40,351
Marketing 8,561 10,398 13,051 13,798 14,095 14,400
Overheads 25,396 28,623 29,337 29,772 30,184 30,661
Operating Profit 4,769 20,195 15,798 12,297 14,053 11,934
Interest and Tax 1,554 5,085 3,633 2,824 3,079 2,553 5 Years
Profit after Tax 3,215 15,109 12,165 9,473 10,974 9,381 57,102

EBITDA 15,389 30,782 26,385 22,884 24,640 22,521


KPI Gross Margin % 48% 49% 46% 44% 44% 43%
Net operating margin % 3% 10% 7% 6% 6% 5%
KPI ROCE 6% 26% 19% 15% 16% 13%
Net Debt / Equity % 54% 18% 6% -3% -11% -20%
Net Cash Balance -9,743 9,450 16,434 21,943 27,413 33,544
5 Years
Base Case Operating Profit 3,215 -735 -1,817 -2,874 -4,019 -5,267 -14,710
Improvement/(Decline) 0 15,844 13,981 12,347 14,993 14,648 71,813

Sales Growth 26.9% 5.9% 2.1% 1.7% 2.3%


KPI Sales per square foot 6,765 7,974 8,444 8,594 8,283 8,455
KPI Inventory days 180.3 137.9 98.3 77.1 77.8 57.1
KPI Average transaction value £ 37.03 40.45 40.56 40.64 42.63 42.71
KPI Sales:retail staff costs ratio 4.25 5.03 5.32 5.44 5.53 5.66

Option 4: Related Diversification

Assumptions

 Store changes as per Option 1

 New premium lifestyle, athleisure and men’s products together with market

development initiatives enable a 10-25%% increase in price v benchmarks.

28
 Female/male/childrens/accessories now 48%/27%/23%/2% close to the ONS overall

market analysis.

 Advertising increased by 2%

 Staff incentive and training as per Option 1

 Cost prices increase by 6%

 2 additional coffee shops per year

 Sterling weakens to USD 1.25 (or Euro equivalently)

 Interest rate increases to 4% pa

Outcome:

Strategic Option: Related Diversification


Income Statement 2016 2017 2018 2019 2020 2021
KPI Total Retail and Web Sales £'000 159,874 206,550 214,830 217,945 218,921 224,173
Direct Costs 83,561 105,386 110,604 117,502 119,537 127,384
Gross Profit 76,312 101,164 104,225 100,443 99,383 96,789
Retail outlet wages 37,587 39,997 39,643 39,289 38,935 38,581
Marketing 8,561 12,131 15,534 16,259 16,510 16,675
Overheads 25,396 28,972 29,476 29,788 30,025 30,429
Operating Profit 4,769 20,065 19,572 15,107 13,914 11,105
Interest and Tax 1,554 5,030 4,464 3,521 3,197 2,530 5 Years
Profit after Tax 3,215 15,035 15,109 11,586 10,717 8,574 61,021

EBITDA 15,389 30,959 30,409 25,885 24,633 21,763


KPI Gross Margin % 48% 49% 49% 46% 45% 43%
Net operating margin % 3% 10% 9% 7% 6% 5%
KPI ROCE 6% 26% 24% 18% 16% 12%
Net Debt / Equity % 54% 13% 12% 4% -2% -11%
Net Cash Balance -9,743 12,383 12,708 17,329 21,289 27,769
5 Years
Base Case Operating Profit 3,215 -735 -1,817 -2,874 -4,019 -5,267 -14,710
Improvement/(Decline) 0 15,769 16,925 14,460 14,736 13,841 75,731

Sales Growth 29.2% 4.0% 1.5% 0.4% 2.4%


KPI Sales per square foot 6,765 7,772 7,410 7,540 7,262 7,467
KPI Inventory days 180.3 120.1 144.5 115.4 112.6 85.1
KPI Average transaction value £ 37.03 42.45 46.29 46.39 48.35 48.45
KPI Sales:retail staff costs ratio 4.25 5.16 5.42 5.55 5.62 5.81

29
It is concluded that the related diversification strategy is the recommended option for

Rubbersole giving the best financial KPI performance over the other options for profit and

ROCE and cash. However non-financial KPIs would also have to be modelled and taken into

account before reaching a final decision.

7. Strategic Risks

In addition to the generic PESTEL risks identified, the selected strategy of related

diversification presents specific risks:

 Management may be unable to successfully manage change or take forward a bold

and risky strategy of market and product development.

 The business may not be able to find sources of supply for the right new products at

the right price in the UK and internationally.

 Rubbersole may have to rely on the design knowledge of suppliers to develop new

products who lack insight into the UK market.

 Rubbersole’s product buyers may could make poor judgements on product

development.

 Attempting to increase the average transaction value carries the risk that products

will not be attractive to existing customers and it proves difficult to attract new

customers.

 Store locations and local demographics may not be favourable for the strategy to

work.

30
 Increasing marketing spend and getting the optimal marketing mix (product, price,

promotion, place) may prove elusive.

 Staff may not buy-in to the change in selling to a wider age group of customers and

new processes to operate even with the incentive scheme.

 Web site development costs may not be controlled and there are delays, cost

overruns or technical shortcomings.

 Environmental, sustainability and worker rights policies could be compromised in the

pressure to compete and find new products.

 Reporting mechanisms may not be able to measure the select KPIs and more general

performance indicators accurately and regularly.

 Competitors could react tactically or strategically to actively prevent Rubbersole’s

strategy working for example with aggressive pricing.

 The loss of a key supplier could constrain Rubbersole’s ability to sell products and

compete.

 Rubbersole may be dependent on key staff or management whose services it may be

unable to retain with the change.

 Liquidity risk increases as the business grows.

8. Recommendations and conclusion

Rubbersole should follow a strategy of related diversification to reposition itself towards

serving a more affluent urban consumer by focusing on:

 New premium lifestyle, high-quality products

 Increasing its emphasis on the growing demand for men’s footwear.

 Developing premium athleisure footwear

31
 Developing new stores in optimal locations

 Closing underperforming stores

 Ensuring it’s online product offer is attractive and efficient in areas such a fit/sizing

and returns.

 Promoting its expertise in footwear comfort and fit

This must be combined with improving customer and staff satisfaction and optimising the

financial and non-financial KPIs identified. A 5-year plan for the strategy is as follows:

Rubbersole: 5 Year Strategic Plan


Year 1 Year 2 Year 3 Year 4 Year 5
2017 2018 2019 2020 2021
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Activity
Product Development: athleisure
Product Launch: athleisure
Product Development: Premium lifestyle
Product Launch: Premium lifestyle
Product Development: Men's
Product Launch: Men's
Product Development: 30-49 Segment
Product Launch: 30-39 Segment
Identify new UK and EU suppliers
Store reconfiguration
Phased price increases
Additional marketing and promotion
Staff Incentive development and training
Web redevelopment: Phase 1
Web redevelopment: Phase 2
Performance Review
KPI Benchmarking and strategy calibration

Word Count: 4,499

32
Appendix: Retailer Visits

Retailer Store Location Date of Visit


Asda Watford 03-Jun-17
Church's Bicester 27-May-17
Clarks Bicester 27-May-17
Dune London, St Pancras 31-May-17
M&S Watford 03-Jun-17
Next Watford 03-Jun-17
Office London, Bruswick Centre 31-May-17
Primark Watford 03-Jun-17
Schuh Watford 03-Jun-17
Selfridges London, Oxford Street 31-May-17
Shoe Zone Watford 03-Jun-17
Sports Direct Borehamwood 28-May-17
Tesco Watford 03-Jun-17
Tod's Bicester 27-May-17
Ugg Bicester 27-May-17

Retailer Website Date of Visit


http://direct.asda.com/george/women/shoe
Asda 04-Jun-17
s/D1M1G20C20,default,sc.html
Church's http://www.church-footwear.com/it/en 04-Jun-17
Clarks https://www.clarks.co.uk/ 04-Jun-17
Dune https://www.dunelondon.com/ 04-Jun-17
Herring http://www.herringshoes.co.uk/ 04-Jun-17
http://www.marksandspencer.com/l/wome
M&S 04-Jun-17
n/shoes-and-boots/all-shoes
http://www.next.co.uk/shop/productaffiliati
Next 04-Jun-17
on-footwear
Office http://www.office.co.uk/ 04-Jun-17
https://www.primark.com/en/products/cate
Primark 04-Jun-17
gory/women,womens-shoes,ladies-shoes
Schuh http://www.schuh.co.uk/ 05-Jun-17
Selfridges http://www.selfridges.com/shoes 05-Jun-17
Shoe Zone https://www.shoezone.com/ 05-Jun-17
http://www.sportsdirect.com/mens/mens-
Sports Direct 05-Jun-17
shoes
https://www.tesco.com/direct/clothing-
Tesco 05-Jun-17
accessories/footwear/cat3376662.cat

33
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