PHASE FIVE
EXERCISE TWELVE-A
The Impact of a Store Layout and Design Strategy
Anne just returned from attending a three-day executive development program on
high performance retailing. One of the topics she was especially interested in was how to
design a store's environment to enhance the store's image. She was considering a major
remodeling of The House. Anne envisioned three major changes. First she felt that the
orange carpeting was inconsistent with the store's image and usually conflicted with the
apparel being displayed. Therefore, she was considering installing new flooring and
freshly painting the walls and ceiling. The cost of the flooring and painting would be
$10,000. Next, she wanted to install a C.D. sound system which consisted of a six-disc
changer, amplifier, and four speakers in each of the four corners of the store. She also
wanted to purchase 30 recordings of classical and big band music. The cost of this system
would be $2800. Third, she wanted an entire new set of fixtures and tables upon which
to display the merchandise. A local carpenter has given her an estimate to custom build
these fixtures. The cost would be $24,000. These improvements would be expected to
have a five-year life and, thus, the $36,800 written off over the next five years would be
$7360 per year.
When Anne told Fred of her planned changes he balked at the $36,800 in
expenditures. He couldn't understand how such changes would have any influence on
store performance. He was very clear that these changes would not bring more customers
into the store. Anne conceded on this point but argued that the impact would be felt
through a higher closure. Because people would feel more comfortable in the store and
probably browse more, she felt that closure would rise. The instructor in the course she
attended mentioned that a remodeling effort, if properly conducted, would increase sales
by 20-30%. Nonetheless, Anne was very uncertain on what the impact on closure would
be and thus her conservative estimate was that it might only increase to 65%, however,
her optimistic estimate was that closure would rise to 70%.
The spreadsheet you will need to run this simulation is attached. You will need to
double click on this spreadsheet which will bring up the Excel software. Please note that
all rows and columns have been labeled, however, you need to enter the formula for each
row item that occurs under the two scenarios (closure = 65% or 70%) in the simulation.
If the formula or number does not change from the baseline, you can simply copy these
formulas or numbers into the empty cells under the various scenarios. HINT--Treat the
amount of the remodeling as a permanent increase in assets even though these assets
will be depreciated over five years. Be sure to save your work and print a copy once
you are satisfied with its correctness. After you complete your simulation there are two
questions you need to answer. These can be answered by typing your responses below the
questions, saving your work, printing a copy, and handing it in to the instructor if
required
EXERCISE TWELVE-A
tra d e ra d ius
p op ula tion d ensity
m a rket c overa g e
p enetra tion
a vg shop p ing freq uenc y
tra ffic
c losure
tra nsa c tions
a vg no. of item s p rc hsd
tota l item s p rc hsd
a vera g e item p ric e
a vera g e tra na c tion size
net sa les
c ost of m d se sold
g ross m a rg in
va ria b le op c ost
fixed op c ost
tota l op c ost
net p rofit
net p rofit m a rg in
a sset turnover
return on a ssets
Ba seline Mod el Closure = 65% Closure = 70%
3
278.833
7887
0.65
7.8
39987
0.62
24792
5
123960
$10.69
$53.45
$1,325,131
$821,581
$503,550
$148,415
$307,680
$456,095
$47,455
3.58%
2.265
8.11%
QUESTIONS
1. What is the financial impact of the store layout and design strategy?
2. Do you see any ways that The House could reduce the risk of this store layout and
design strategy? Please explain.
PHASE FIVE
EXERCISE TWELVE-B
A Further Evaluation of a Store Layout and Design Strategy
Anne contacted Larry Jones, the instructor she had in the "High Performance
Retailing" executive development seminar. Larry lived 150 miles north and agreed to
drive down to visit Anne and Fred on Friday morning to hear about their plans. He said
he would like to visit with them for about an hour and also spend some time visiting other
stores on the Town Square and driving around town. He hoped to accomplish all of this
in 4-5 hours so he could leave town by 4 p.m. Anne and Fred agreed to pay him $2000
for his services and billed this expense to the year end 2001 financial statements.
Larry was very impressed with the plans that Anne had developed. Based on his
prior experience and the target market of The House, he estimated that closure would rise
to 70%. He explained that they were correct in assuming that all of the benefit of the
remodeling would occur once people had entered the store. However, he did believe,
based on the large number of people visiting the Town Square to go to the U.S. Post
Office, local government offices, and obtain other services, that if they could also
remodel the exterior of the store that penetration could be expected to rise. Also he felt
the dark brown wooden storefront projected an image that was inconsistent with the
remodeled interior. He suggested that they use a red brick front, utilizing old or used
brick, and that a new sign be installed to call attention to the store. With these additional
changes he felt that not only would closure rise, but that penetration would easily rise to
67% or 68%. Larry also mentioned that if other businesses on the town square could
remodel their store or building exteriors, that more people might find it pleasant to visit
the Town Square.
After Larry left town, Anne called their landlord, Bill Henderson, who was also
Anne's father. She told him of her plans to remodel the store and suggested that if Fred
and her do the interior remodeling, that Bill should pay for the exterior remodeling. Anne
had obtained a cost estimate of $15,000 which she mentioned to her dad. After some
negotiating, Bill Henderson and Anne decided to split the cost of the exterior remodeling.
Like the interior remodeling, they decided to write this expenditure off over 60 months.
The spreadsheet you will need to run this simulation is attached. You will need to
double click on this spreadsheet which will bring up the Excel software. Please note that
all rows and columns have been labeled, however, you need to enter the formula for each
row item that occurs under the two scenarios (penetration = 67% or 68%) in the
simulation. If the formula or number does not change from the baseline, you can simply
copy these formulas or numbers into the empty cells under the various scenarios. HINT-Treat the amount of the exterior remodeling as a permanent increase in assets even
though these assets will be depreciated over five years. Also be sure to include the
interior remodeling into the simulation model (see Exercise 12-a). Be sure to save
your work and print a copy once you are satisfied with its correctness. After you
complete your simulation there are two questions you need to answer. These can be
answered by typing your responses below the questions, saving your work, printing a
copy, and handing it in to the instructor if required
EXERCISE TWELVE-B
tra d e ra d ius
p op ula tion d ensity
m a rket c overa g e
p enetra tion
a vg shop p ing freq uenc y
tra ffic
c losure
tra nsa c tions
a vg no. of item s p rc hsd
tota l item s p rc hsd
a vera g e item p ric e
a vera g e tra na c tion size
net sa les
c ost of m d se sold
g ross m a rg in
va ria b le op era ting c ost
fixed op era ting c ost
tota l op era ting c ost
net p rofit
net p rofit m a rg in
a sset turnover
return on a ssets
Ba seline Mod el Penetra tion 67% Penetra tion 68%
3
278.833
7887
0.65
7.8
39987
0.62
24792
5
123960
$10.69
$53.45
$1,325,131
$821,581
$503,550
$148,415
$307,680
$456,095
$47,455
3.58%
2.265
8.11%
QUESTIONS
1. Should the recommendations of Larry Jones be acted upon?
2. Are there any other things that could be done with The House to further enhance the
store's atmosphere?