Section 4 Team 11 Fall 2013 Business Plan Business Description: Smart Shopper Inc. is an S-corporation based out of Woodland, California. Smart Shopper operates on the business to business level and serves primarily as a software development company that incorporates Point of Sale scanning technology to facilitate a user friendly and efficient grocery store shopping experience. Team Members: Email Address John Clyne _____________________ _clynejp@dukes.jmu.edu______ Lauren Crain _____________________ _crainlf@dukes.jmu.edu_______ Jacob Farrell Joshua Morrow _____________________ _____________________ _farreljb@dukes.jmu.edu_______ _morrowjl@dukes.jmu.edu_____ Sean O’Connell _____________________ oconnesr@dukes.jmu.edu____ John Riedy _____________________ riedyjk@dukes.jmu.edu________ Senai Tesfagiorgis _____________________ _tesfagsk@dukes.jmu.edu________ TABLE OF CONTENTS EXECUTIVE SUMMARY PITCH TO INVESTORS PRODUCT DESCRIPTION COMPETITIVE ADVANTAGE MARKETING INDUSTRY ANALYSIS SWOT DIAGRAM TARGET MARKETING AND SEGMENTATION 3 4 4 4-5 5 5 6 6 MARKET SEGMENTATION ANALYSIS TABLE 7 TRENDS SUPPORTIVE OF TARGET MARKETS 7 POSITIONING STRATEGY 7-8 POSITIONING STATEMENT 8 PERCEPTUAL MAP 8 QUANTIFICATION OF MARKET 8-9 FORECAST ANALYSIS 9-10 FORECASTED SALES 10 MONTHLY FORECAST 10-11 MONTHLY SALES TABLE 10 PRICING STRATEGY 11 PRODUCT STRATEGY 11 BRANDING STRATEGY 11-12 DISTRIBUTION STRATEGY 12 PROMOTIONAL STRATEGY 12 OPERATIONS 12 OPERATIONAL STRATEGY 12 INVENTORY 13 OPERATIONAL PROCESS 13 SOFTWARE PROCESS MAP 14 OPERATIONS PROCESS MAP 14 OUTSOURCING 15 QUALITY ASSURANCE 15 MANAGEMENT 16 ORGANIZATIONAL STRUCTURE 16 ORGANIZATIONAL CHART 16 IDENTIFICATION OF EMPLOYEES 17 COMPENSATION REWARDS AND BENEFITS __ _17-18 EMPLOYEE WAGES CHART________________________________________________ _ 18 STAFFING_____________________________________________________________________18 BUSINESS CALENDAR____________________________________________________________19 CONCERNS_________________________________________________________________19-20 FINANCIALS__________________________________________________________________20 FINANCIAL PLAN_______________________________________________________________20 BALANCE SHEET_______________________________________________________________21 INCOME STATEMENT___________________________________________________________22 FINANCIAL RATIOS_____________________________________________________________22 STATEMENT OF CASH FLOWS_____________________________________________________23 STATEMENT OF RETAINED EARNINGS_________________________________________ ____23 FINANCIAL NOTES/ASSUMPTIONS_______________________________________________23-24 BIBLIOGRAPHY_____________________________________________________________25-26 2 Executive Summary Smart Shopper Inc. Lauren Crain 1542 Tanforan Avenue, Woodland, CA 95776 Phone: (757) 373-9605 Email: Crainlf@dukes.jmu.edu Amount of Financing Sought: $1,510,034 Products/Services: Smart Shopper Inc. develops and installs software on tablets that allow grocery store customers to experience a more convenient checkout process. The software will allow customers to locate specific items throughout the store. Smart Shopper software will also enable our grocery store clients to choose from a menu of options to customize their store database and increase sales through coupons and complementary recommendation items. Current Investors: Company Background: Start-up Industry: Software Development and Grocery Store Technologies Number of Employees: 19 Bank: Bank of America Future Auditor: Capital Accounting Founders -$400,000 Venture Capitalists-$500,000 Bank of America-$610,034 Use of Funds: Marketing/Promotional Expenses, Salaries and Wages, Transportation Costs, Rent/Utilities, Operational Expenses, Equipment Purchase, Software Licensing, Inventory Purchase Competitive Advantage: Smart Shopper technology will derive its competitive advantage primarily through innovative software technologies in grocery store point of sale processing. Markets: The first market targeted over the first two years will consist of smaller, locally owned grocery stores looking to differentiate their businesses and compete with larger chains. After Smart Shopper proves its product to be beneficial on a smaller scale, a second target market will be exploited. From year three on, Smart Shopper will continue to target small grocery stores and the five highest grossing grocery store chains in Northern California. Distribution Channels: Smart Shopper software and tablets will be sold directly to grocery stores. Competition: Revel systems technology, Home Depots First Phone, Motorola Scan It, UPC Bar Code technology, Point of Sale Processing Technology, Wal-Mart’s RFID chip Financial Projections: Revenue: EBIT: 2014 345,000 (1,219,955) 2015 1,155,000 (782,042) 2016 2,435,000 154,331 3 2017 3,483,000 1,006,222 2018 4,590,000 1,174,395 Pitch to Investors: An important consideration for grocery stores to operate productively and efficiently is to have the latest technology in point-of-sale processing (Competitive Landscape, 2013.) The Smart Shopper will combine these technologies along with superior software to provide grocery stores with a competitive edge within their market. Investing in Smart Shopper will allow investors to capitalize on a rapidly growing technological trend penetrating throughout grocery stores and generate huge rewards through the development of our revolutionary software. Product Description: Smart Shopper Inc. will produce and sell tablets to businesses that will improve the shopping experience making a faster self-checkout process. Our Smart Shopper tablets will be fully equipped with a credit card reader, a printer, and a front camera that will be used to scan barcodes and coupons. We will install pre-designed software that stores link to their inventory database and credit card security system. Kroger, Albertsons, Trader Joes, etc. all have different store layouts. Our software is designed so that our clients’ stores can upload their inventory, which will then coincide with the location of items throughout their store. This will allow store inventory to be wirelessly updated and accessible through each customer’s tablet. There will be a menu of options that our software programmer previously designed that grocery stores can choose to implement. These features include the location of items throughout the store, price check, coupons, recommendations on complementary items, and the ability to make a shopping list online. Competitive Advantage: Smart Shopper Inc. operates on a business to business level. However, our product must satisfy the needs of not only the businesses we sell to but also our clients’ respective shoppers. Smart Shopper’s internally designed software will be key to our competitive advantage. Smart Shopper technology will give our clients options that our competitors do not offer. One advantage of our software is that it allows shoppers to easily locate the aisles of items throughout the store. There will also be suggestions on the side of the tablet screen that will give customers advice on complementary items. For example, if pasta is scanned, then stores will have the capability to choose a particular pasta sauce they want to display on the side as a suggestion. Smart Shopper Inc. will develop the software that will allow stores to add their own coupons to the tablet. The Smart Shopper will also provide coupons for every 5 scanned items that can be used immediately or at a later date. If they use the coupon immediately, the customer can simply press the coupon on the tablet and automatically discount their bill. The customer can print the coupon if they choose to use 4 it on a later date. These software capabilities, along with the extinction of lines because of the attached credit card scanner will create a user-friendly shopping experience for grocery store customers. These features not only benefit shoppers, but also add immense value to grocery stores. Eliminating lines in grocery stores means happier customers that are more likely to shop at our client’s stores. Smart Shopper’s technology will also enable store managers to know when and how their customers are shopping, essential in today’s supermarket industry (Imlay, 2006). Self-scanning technology in grocery stores has shown to increase sales by up to ten percent (Zimmerman, 2011). Smart Shopper Inc. anticipates grocery store sales to increase even more through the addition of coupons and suggestions for complimentary items. These software features will lead to more items being purchased during visits and more repeat customers. Other benefits includes a 7 inch screen that is twice as large as the leading competitor. This is important because a larger screen makes it easier to read, more user- friendly, and provides more space for additional features. Marketing: Industry Analysis: According to Porter’s five forces the threat of substitute products is relatively high. Substitute products include self-checkout systems or checking out with a cashier using current UPC and point of sale processing technology. The market for technology and self-scanning systems within stores is growing rapidly. There are multiple new products that are starting to penetrate the market in this rapidly growing industry. Competitors similar to the Smart Shopper include the Motorola Scan-It, Home Depots First Touch, iPhone scanners, and Revel Systems. Each of these products incorporate point of sale processing technology that facilitates the shopping experience for customers during store visits and enables stores to accurately track inventory. In the future, Walmart’s RFID chip which automatically scans and updates store inventory when items are removed from the shelf will become a competitor against the Smart Shopper. The bargaining power of buyers is high pressure, as Smart Shopper Inc. is a start-up company and has yet to develop any lasting customer and brand loyalties. The bargaining power of our suppliers is low pressure as the raw materials used in the Smart Shopper are not very differentiated from our competitor’s products. The rivalry among existing firms can be seen as high because our main competitors such as Motorola’s Scan-It are already spreading throughout grocery stores in the Northeast. 5 Table 1-1: SWOT Diagram Strengths •We are small and personable to the company we are servicing •Will have less clientele so will be more accommodating with service •Produce our own software and tablets Opportunities •Our product does not exist in California •Rapid technological movement in society •Many shoppers strive to be more efficient during trips •Self-scanners increase grocery store sales by 10% and increase customer loyalty Weaknesses •We are a startup company that does not have a recognizable brand •Competing with a known enterprise •Low Capital budget Threats •Shoppers who are not tech savvy who would prefer checkout lines •Competes with Motorola/motive scanner which is a similar existing product •Self-checkout systems •Difference in profit margin might not be enough to make the switch meaning that fixed cost associated with our product might exceed that of paying cashier wages Target Marketing and Segmentation: We operate on a business to business level and will employ segmentation by organization type, location, and customer size. These variables will effectively and sufficiently aggregate prospective business consumers that will respond similarly to the introduction of our Smart Shopper product. We have decided on three different segments. These include Northern California grocery stores, retail stores, and hardware stores. These stores will be separated further into the Big Whales, Regional Chains, and locally owned mom and pop stores. Refer to Table 1-2 for a description of our designated segments. We have decided to target grocery stores in Northern California. Over the first two years we plan on targeting locally owned grocery stores such as Nugget Markets, Fresh and Easy, etc. This will be our initial target market because we can prove ourselves in the marketplace at a lower risk and lesser cost. These stores will be enticed by the Smart Shopper because it will differentiate their businesses from smaller grocery stores and give them a competitive advantage. Once we demonstrate in the marketplace how effective our product can be for prospective businesses, we will then proceed to target the Big Whales from year three on. These consist of the top five highest grossing grocery store chains in Northern California; Kroger, Safeway, Albertsons, Trader Joe’s, and Smart & Final Stores (Hildebrand, 2004). We decided to wait to target the top grossing grocery stores until year 3 because these are nationally established enterprises that will require proof that our product adds value before investing in our technology. 6 Table 1-2: Market Segmentation Analysis Market Segment: Big Whales Regional Chains Mom and Pop/Locally Owned Description: Grocery Stores, retail stores, and hardware stores that have established themselves as successful enterprises on the national level. Highest grossing stores with hugely recognizable name brands. (Kroger, Safeway, Albertsons, Trader Joes, Smart & Final Stores. Grocery Stores, retail stores, and hardware stores that are strictly located in the Northern California region. Recognizable brand for the citizens of California and are successful chains in their own right. Segment consists of any stores that are not chains, but rather are independently owned and operate on a much smaller level. Trends Supportive of Target Markets The Supermarket industry in the United States is rapidly changing. Retailers such as WalMart, Costco, Sam’s Club, and various dollar stores have penetrated the food industry and cut into the market share for traditional grocers (Imlay, 2006). The supermarket industry is faced with the challenges of maintaining market share and profits while attempting new concepts and store formats in an effort to differentiate themselves from other types of retailers (Imlay, 2006). Purchasing Smart Shopper technology will allow small, locally owned grocers to differentiate their businesses and maintain market share in the multibillion-dollar food industry. After year 2 we will target the Big Whale grocery stores. California households indicate that the high-end grocery stores we are targeting after year 2 will greatly benefit from the introduction of the Smart Shopper. California shoppers are spending 20% more at high-end grocers than they are at more general grocery stores (Hicken, 2013). In addition, the average size of a California household is 2.89 people, third highest in the nation behind Hawaii and Utah (California Average Household Size, 2010). The more people in a household, the more demand for food. And the more demand for food, the higher volume of shoppers there are at grocery stores. Although we aren’t selling directly to the shoppers themselves, our target market will allow us to capitalize in an area where grocery stores need more efficiency in the marketplace. Positioning Strategy Our product is relatively new and unknown in the Northern California region. As a result, our product will be concentrated in a smaller, less competitive market since California grocery stores have not been introduced to self-scanning technology. Smart Shopper will establish a head-to-head position and employ a differentiating strategy based on superior software. We will emphasize user7 friendliness by incorporating a menu of options, allowing grocery store shoppers to locate items throughout the store and select coupons for complimentary items. Our product will increase grocery store sales by up to ten percent (Zimmerman, 2011) and maintain market share in an increasingly competitive food industry. These features along with excellent quality assurance will differentiate our product based on attributes and quality in the minds of our customers. Positioning Statement For grocery stores in Northern California, we will make the grocery store shopping experience more efficient through our user friendly Smart Shopper tablet. Our innovative software will separate our product from point of sale processing technology competitors (refer to chart 1-3) and enable an easier checkout process for shoppers. Our product will make lines extinct and enhance customer satisfaction. Grocery stores will understand how and when customers like to shop, leading to increased profits and a more loyal customer base. We guarantee the shopping experience will never be the same. Chart 1-3: Perceptual Map Quantification of Market In the first 5 years Smart Shopper Inc. will be targeting grocery stores in the Northern part of California. This encompasses the Bay Area, Capital and Gold Country, the Central Valley, and the Central Coast. We found there are approximately 3,212 grocery stores in this area. We calculated this by dividing the number of grocery stores in California (7,737) into the population of California (38,041,430). This came out to be 4,916 which is the average number of people per grocery store in 8 the state of California. To calculate our market potential, we then divided the population of Northern California (15,789,982) by the average number of people per grocery store (4,916) to calculate the number of grocery stores within our target market (Census Bureau, 2007). We found this to be 3,212 which is 41.5 percent of the grocery stores in the state. In the first two years we will be targeting locally owned and regional chain grocery stores. There are about 1,374 locally owned and smaller chain grocery stores within the Northern California region. In years 3 and on we will be targeting the Big Whales. These include Kroger, Safeway, Albertsons, Trader Joe’s, and Smart and Final Stores. There are 504 Krogers, 541 Safeways, 483 Albertsons, 117 Trader Joes, and 157 Smart & Final stores in the state. We took the figure 41.5% and multiplied it by each of these respective numbers to calculate that there are approximately 209 Krogers, 225 Safeways, 200 Albertsons, 49 Trader Joes, and 65 Smart & Final Stores within our target market. (Hildebrand, 2004) Adding the 1,374 locally owned stores to the total number of big whales (748) means our target market consists of a total of 2,122 stores. Our market potential is the product of the total number of stores within our first target market (1,374), the average number of Smart Shoppers sold to each store (25), and the price of each Smart Shopper ($300). Our total market potential for our smaller target market is $10,305,000. The market potential for the Big Whales is the product of 748 stores and 50 tablets a store at $300 per Smart Shopper. This equals $11,220,000. Our total market potential is $21,525,000. Forecast Analysis To calculate the amount of forecasted sales for the Smart Shopper, we identified the demand for a similar product used in Virginia and Maryland. 50 out of 99 or nearly 50% of Giants in Maryland use self-scanner technology. 28 out of 66 or approximately 42% of Giants use similar technology in Virginia. This means that 78 out of 165 or 47% of Giants in Virginia and Maryland employ a similar product (Giants Locations, 2013). 47% of Giants have deemed this a worthwhile technology since its introduction in 2009; therefore, five years from when we start selling to the Big Whales, we will capture 47% of our second target market. This is approximately 337 Big Whale grocery stores in Northern California. Taking the 337 Big Whales we plan to sell to by year 6, and dividing it by 4 years means that on average we will sell to 89 stores per year. In the first two years we will be selling 25 tablets per store to smaller, locally owned grocery stores. We will be operating and selling our product beginning in April. This means we will only be selling Smart Shoppers three quarters of the year. Multiplying the percentage of months we are selling in year one by 89 means we would under normal circumstances sell to approximately to 67 9 stores. To account for the fact that we are a new start-up business and don’t have any reference clients, we plan on selling to just 30 stores in the first year. In year 2 we will continue to market to small chain grocery stores. We plan on operating at full capacity and selling to 90 smaller, locally owned grocery Year Store Size Stores Tablets Unit Sold Sales 2014 Small Chain Stores 30* 25= 750 stores. We project the increased sales because year one 2015 Big Whale 90* 50= 4,750 clientele will demonstrate that the Smart Shopper 2016 Big Whale 95* 50= 4,500 2017 Big Whale 90* 50= 4,500 Small Chain Stores 22* 25= 550 Big Whale 100* 50= 5,000 Small Chain Stores 28* 25= 700 product operates efficiently. This will allow companies to feel they are taking less of a risk incorporating our technology because our product will prove to be 2018 beneficial, increasing their sense of security. Table 1-4: Forecasted Sales In year 3 we will solely target our Big Whale target market. We will sell an average of 50 scanners to each of our Big Whale grocery stores. We decided we would be able to sell 50 units per store based on market demand of Motorola’s Scan-It in Maryland and Virginia Giant grocery stores. They have an average of 48 scanners per store (Giant, 2013). This figure is very comparable with our average and it’s reasonable to expect that grocery stores in Northern California would need this amount of tablets to meet consumer demand. We forecast selling our product to 95 Big Whales. Year 4 we plan on selling to 90 Big Whales and 22 smaller, locally owned stores giving us a grand total of 112 new grocery stores. In year 5 Smart Shopper Inc. will sell to 100 Big Whales as well as 28 locally owned grocers. As our brand becomes more recognizable throughout Northern California, we expect to sell to 16 more stores or roughly a 14% increase from year 4. Monthly Forecast Smart Shopper Inc. understands prospective grocery store clients will be more willing to invest in our product when the new fiscal budget comes out as well as the end of the budget period. As a result, we anticipate more demand during these periods. We also note that grocery stores will be less likely to purchase our product during the October through December months due to seasonal factors. Big holidays such as Thanksgiving and Christmas means a high volume of customers during these months and prospective businesses will be less willing to invest in new technology. Therefore, we expect to sell to fewer stores per month on average from October through December. Sales Apr 6 May 4 Jun 5 Jul 3 Table 1-5: Monthly Sales Aug Sept Oct Nov 4 4 3 1 10 Dec 0 Jan 13 Feb 12 Mar 15 Year 70 We forecast our first years monthly forecast, starting in April, to be as followed; 6 stores in April, 4 stores in May, 5 stores June, 3 stores in July, 4 stores in August, 4 stores in September, 3 stores in October, 1 store in November, 0 stores in December, 13 stores in January, 12 stores in February, 15 stores in March. Pricing Strategy Smart Shopper Inc. will use cost-based pricing by adding a specified percent of cost to the product. We will make our product for $87(material costs) +$43 (software costs) = $130 and sell it for $300 a tablet. The average markup for manufactured electronics is between 100% and 200% (Waits, 2010). A markup of 130% at a price of $300 will be enticing enough for businesses to buy our product while also satisfying our main goal of maximizing profits. We will be charging each of our large customers $8,000 per year and $4,000 for small companies to provide them with service maintenance and replace any defective products. Product Strategy In the first two years, Smart Shopper Inc. will practice a niche strategy based on the fact that self-scanning technology in grocery stores has not spread to the West Coast. We will concentrate our Smart Shopper technology strictly in the Northern California region and target our marketing platform to smaller, locally owned grocery stores. These first two years will be critical to our company’s development as we prove to the Big Whales that the Smart Shopper will add value to their businesses. Smart Shopper Inc. will also employ a product differentiation strategy based on software capabilities that our competitors do not currently have. Complementary item coupons and food aisle locations are not employed by any point of sale processing company within the industry. In addition, the menu of options created by our internal software-design team will give grocery stores more flexibility, instead of the “one size fits all” approach that other companies use. These features will gain Smart Shopper brand recognition. Smart Shopper Inc. will also demonstrate product and service reliability through quality assurance techniques. Branding Strategy Smart Shopper Inc. will employ a family branding strategy, as we will use the company name to distinguish our product in the marketplace. This is important because we are a start-up company trying to attain a reputable image. Once clients realize the benefits of our product and the services we provide, they will associate Smart Shopper tablets with our company being a quality enterprise. If other Smart Shopper Inc. products were to be released in the future, the marketplace would be more 11 willing to buy into our new products. Our brand promise is to provide a reliable product along with maintaining quality customer relationships. Distribution Strategy Smart Shopper Inc. will be selling directly to grocery stores in the marketplace. We will design our software in-house and order hardware from a distributor. Technicians will deliver and install Smart Shopper tablets and software to our grocery store clientele. Promotional Strategy Since Smart Shopper Inc. operates on a business to business level, we will use personal selling to directly target grocery stores within our target markets. Smart Shopper Inc. will use sampling as a means to promote our product. We are marketing a new, high cost product so allowing stores to try our product before investing in it will increase our chances of capturing new clientele. Our key promotional objective is maintaining strong customer relationships and increasing market share as our brand gains recognition. This will be critical to the foundation of our business. Not only is it important to gain new clients, but it is essential our company keep existing stores satisfied with our Smart Shopper product. A substantial amount of our revenue comes from yearly service charges, and thus it’s important we give grocery stores a reason to continue to use our product. We will manage our sales reps internally so they are directly tied to the company and motivated to further the reputation of Smart Shopper Inc. Our sales reps will be sufficient to market to the Northern California area. Our office is located in Woodland California, a central location that will enable our sales reps to directly market to smaller grocery stores in Northern California for the first two years. Once we target the Big Whales, decisions for these stores are executed at a corporate level, purchasing all the desired scanners at once opposed to buying them incrementally (Jason, 2013). Our promotional budget is strictly comprised of salaries for sales reps and commissions based on the number of Smart Shoppers sold in a year. Operations: Operational strategy: Smart Shopper Inc. strives to only provide customers with products that are of high quality and customer service that exceeds expectations. All of our employees will go through intensive training that will teach them how to recognize quality defects during software development, installation of software and delivering the final product. 12 Inventory: We will keep enough raw materials in-stock to produce one month of orders without a delay from suppliers. This will be our safety stock. It takes 2 weeks to receive raw materials from our suppliers (Alibaba, 2013). We will keep one month of inventory in stock so that if demand rises we can meet our customers’ requirements to make sure orders are not delayed. Operational Process: Our operational procedure will be assemble-to-order. This will help us lower our cost and manage the process with a given number of inventories. We will write our software 3 months before the start of the business and will be updating the system and the tablets frequently with the latest software technology advancements. As our business grows we will be expanding the SQL database cloud storage system to hold larger software programs. Our customers have 3 different menu options to add onto the software which are coupons, complementary items, and store aisle numbers. Having pre-assembled software will allow us to easily select the specifications that the customer wants and deliver the products to our customer. Our software will allow the tablets to wirelessly update the store’s inventory automatically when store aisle setup is changed. The tablet will be able to scan the three different types of barcodes: linear symbologies, stacked matrix symbologies and composite symbologies. This will allow us to work with all types of grocery stores. Credit card security will be easier when working with the large chain grocery stores, since we are selling to corporate grocers and the stores have uniform security systems. More time will be spent on developing locally owned store’s software because they have different security systems. Large chains will involve one software code because their security systems are the same, for each additional locally owned stores we sell to will require another code. At the start of our business we expect to sell to locally owned stores and have acquired staffing to reflect the need for more focus on software. 13 Figure 1-6: Software Process Map Table 1-7: Software Failure Points Failure Points F1 – White Box testing F2 – Black Box testing F3 – Front End (interface) software testing F4 – Usability testing Description Software has errors in the development stage. Software has errors after the development stage Software does not run smoothly on the OS. Software is not user friendly. Figure 1-8: Operations Process Map 14 Failure Point F1 – Defect products received. F2 – Software programing problems. F3 – Software not working as expected. F4 – Tablet does not perform at the store. Description Produced that are ordered from our suppliers do not function properly so have to be replaced. Different issues can arise while writing the software. Final inspection of the tablet before being sent to the customer. Tablet does not seem to by synchronizing with store network. Table 1-9: Production Failure Points Outsourcing: Accounting, including payroll, will be outsourced because we will not continuously need their services, and will use their services when need be. We will be outsourcing our accounting to Capital Accounting located in Woodland, California (Capital Accounting Solutions, 2013). We are purchasing our tablets from our suppliers, so that we can allocate our resources towards the software development process. Quality Assurance: Smart Shopper has multiple proactive quality assurance steps to ensure when the product gets to the customer it will work accurately. The first step is to have the software that will be developed at the start of the company go through a rigorous inspection by the quality manager, quality testers, and the software programmers will inspect the software. This process will take up to two weeks. This quality test is very important because it will become the basis for our software options for our Smart Shopper so only software of the highest quality will suffice. After our preliminary software has been written our quality inspection will consist of inspecting and testing each of the tablets. This includes having the quality control manager visually inspect the products when they arrive from the supplier. The defective products would be noted and reported back to the supplier. Our quality testers will check the quality of the software and functionality of each tablet once the software programmers have uploaded the software. Our reactive quality assurance also consists of multiple steps. Once the technicians have installed it at each individual store they will make sure the tablets can scan the store items, print receipts and store coupons. The technicians will show it to store manager so that they understand the basic functions of the product. They will check the tablets every time they go in the store and update them when necessary. If somehow the store receives a defective product we will fix or replace the tablet. Smart Shopper has a one year warranty on the tablet hardware and a lifetime warranty on the software. We go into such detail with quality inspection of the tablets because we 15 understand how vital it will be for the stores to have products that are user friendly and functional. A store cannot function without having a proper checkout system and they cannot afford to be down for even a few hours, so we take quality inspections very seriously. Management: Organizational structure: Smart Shopper will require 19 employees to start up and as the company expands we will hire accordingly, with our projected sales we expect to have a staff of 24 employees by year 5. Chart 1-10: Organizational Chart We will obtain staffing by posting on monster.com, zoominfo.com, as well as local ads in the newspaper, and local job fairs for basic positions such as technicians, customer service representatives, janitor and secretary. We will recruit upper level management and sales representatives that are previously experienced business professionals. Employees that are hired after startup will go through the same training as employees hired at the startup but they will also shadow employees already in their position. We will train all our employees immediately after they join the company. They will have basic training on the company goals, mission and an overview on the development process of our product with a focus on the software. The second phase of the training will take a week and involve specific training depending on what their job is. For software programmers, there will be in-depth training on the types of software that will be created along with an overview of our software system. It will be instructed by the software development manager. The training for sales representatives will be held by the sales manager and involve intensive training on the operation of the product, our target market, and our positioning strategies. Any time we update the software there will be additional training session for all employees held by the software development manager. The quality 16 control testers will be trained by the quality control manager on how to detect defects, how the software should operate and the overall operation of the smart shopper. The technicians will be trained by the quality control manager on the installation of the product to the stores, how to detect a defective product that might make it to the store, and an overview of the software and operation of the smart shopper. Identification of employees: The President will run Smart Shopper and oversee daily operations of the smart shopper product. Our general manager will order the product from Alibaba and relay the order of the product to the software programmers. The software programmers write codes and interface for the software of the product. They will also be in charge of uploading the software to the tablets once the code has been written. Technicians go into the store for installation and maintenance of the product including updating the smart shopper products when the software is updated. Sales representatives talk to potential customers and are focused on creating a network among potential clients, product awareness, and sales. Customer service representatives will answer phone calls from our clients that may involve questions or quality concerns. Quality testers inspect the product to make sure it is fully functional and up to par with company standards before the product is given to the customer. Compensation Rewards and Benefits All of Smart Shopper employees will receive competitive pay and benefits. To ensure qualified and motivated employees, Smart Shopper Inc. will pay all employees above the 70th percentile salary for the State of California. We will also incentivize employees with a 2.5% salary increase each year that they stay with the company; which will give them motivation to stay with the company for a number of years. Our sales representatives will receive a great base salary and a commission plan of 15% of dollar sales each year, which by year 5 under optimistic conditions will double their salary. Employees will be covered under worker's compensation program through Zurich Insurance Group - Zurich in North America which will be charged at 1.62% of each employee’s salary, totaling $9778.32 per year. Employees will be given the option of receiving health insurance. Our insurance provider will be Kaiser Permanente, which will cost us $5762 per employee for a total of $109,478 per year. 100% of our health insurance will be cover outpatient surgery and emergency visits, as well as doctor office visits for a $30 co-pay, prescription drugs and mental health services. The Federal Unemployment (FUTA) will be taxed at a rate of 0.6% on each employee’s salary for the first $7000 totaling $588 for each year (Internal Service Revenue 2013). The California State Unemployment (SUTA) is taxed at a rate of 3.4% on the first $7000 of taxable 17 income earned by each employee for a total of $3332 (California Employment Development Department, 2013). Social Security will be taxed at a rate of 6.2% on each employee’s wage for a total of $73,242 (Internal Revenue Service 2013). Medicare is paid at a rate of 1.45% per each employee’s salary for a total of $8752.20 (Internal Revenue Service, 2013). Lastly, Smart Shopper employees will receive 10 days paid vacation, which can be used for personal use, sick days and or vacation. Employees will also be given time off for national holidays. All costs of this time off have been accounted for and any additional time off needed must notify the managers at least two weeks in advance. Additional time off will not be paid leave. All days off will be on a year-by-year basis and will not accumulate so all employees are encouraged to use all of their days throughout the year. The following table shows the breakdown of information provided above. Chart 1-11: Employee Wages Chart Staffing: At Smart Shopper our goal is to create products of high quality, and we strive to keep our customer satisfaction ratings high. If our customer service representatives do not meet their monthly goals for a period of 3 months they will have to meet with upper-level management. If this occurs for the next 3 month period that employee will be terminated. If our technicians receive a customer satisfaction rating of less than 85% for a period of 6 months they will also be under grounds for dismissal. We take pride in the types of product we are giving to our consumers and if our quality inspectors fail to meet 92% of quality inspections for a period of 6 months they will be terminated. If our demand rises faster than we have expected we will hire additional employees, with the first being sales representatives, technicians and software programmers. If demand does not meet what 18 we have forecasted we will either reduce the hours of our employees or potentially let go ones that are not needed until demand rises again. Business Calendar: Here is a timeline from initial investments to the opening of the business: Date(s) Day(s) from Day One Event Date(s) October 1, 2013 -93 January 17, 2014 15 Post the additional job openings December 2, 2013 -31 January 20, 2014 18 Hire software programmers and manager January 2, 2014 0 0 January 2, 2014 0 January 3, 2014 1 January 22, 2014 – January 29, 2014 January 30, 2014 – April 30, 2014 February 3, 2014 – February 14, 2014 February 18, 2014 20 – 27 January 2, 2014 January 3, 2014 1 Pitch business idea to venture capitalists – startup capital Post software programmers and software manager job openings Seed capital from business members Register and attain business license Obtain a federal employer identification number Establish checking account and credit card Attain startup capital from banks January 3, 2014 1 January 3, 2014 1 January 6, 2014 4 January 6, 2014 4 January 7, 2014 – January 17, 2014 5-15 Obtain a CA sales tax vendor ID number Purchase CA retail permit and pay S-Corp fees Acquire business insurance Enter rent agreement Choose software programmers and manager applicants and perform interviews Day(s) from Day One 28 – 117 32 -43 Event Train software programmers and manager Software development process 47 Choose job applicants and perform interviews Hire employees February 20, 2014 – February 28, 2014 April 1, 2014 49 -57 Train employees 86 Begin selling to businesses April 21, 2014 – May 5, 2014 May 1, 2014 106 - 120 Quality software testing 116 First inventories arrive May 6, 2014 121 May 8, 2014 123 Assemble products to be models for potential clients Smart Shopper Inc. Opens Concerns: Do Stores run the Risk of Theft? One of the main concerns pertaining to the implementation of the Smart Shopper is the risk of grocery store customers leaving the store without paying for all items in their shopping cart. Although it is ultimately up to store management, this problem can be addressed through conducting random audits on customer carts as they leave the store. This will require an employee of the store to verify that all items have been scanned and paid for properly. Other stores that incorporate similar self-checkout systems have proven this to be an effective measure of preventing theft and will mitigate risk associated with the Smart Shopper. 19 Is the Smart Shopper Financially worth it for grocery stores? The Smart Shopper will eliminate the need to pay cashier wages which will save grocery stores on average 377,377 in annual salaries. Although the Smart Shopper will require an installation fee as well as a yearly maintenance cost, it will cost far less to invest in Smart Shopper technology than it would to pay cashier annual salaries. What if Customers Pay with Cash? Smart Shopper tablets are designed so that grocery store shoppers can swipe their credit cards on the attached credit card reader without having to check out with a cashier. Customers that would like to pay with cash will have to pay the amount rung up on the tablet to a grocery store employee. Although this means the customer will have to wait to checkout before leaving the store, it will still drastically reduce wait time since the items will have already been scanned. Financials: Financial Plan Smart Shopper, Inc. will seek a total investment of $2,654,818 composed of a $400,000 contribution from the founders, three separate loans acquired from Bank of America amounting to $1,454,818, and two issues of 36,000 and 12,000 shares of $25 par stock sold to venture capitalists totaling $1,200,000. With these funds, Smart Shopper, Inc. will build a strong foundation to compete in the mobile point of sales software industry. An investor of Smart Shopper, Inc. will begin to recognize returns of a 25% dividend payout ratio in Year 3, reaching 59% and Dividends of $14 per share by Year 5. An extraordinary ROE of 280% can be expected by the end of year 5 with growth continuing in the future. An IRR of 34.6%, MIRR of 34%, and NPV $475,508 can be expected as Smart Shopper reinvests at the WACC of 25%. After the fifth year of operations, Smart Shopper, Inc. will continue to grow at a yearly rate of 24% into perpetuity. Smart Shopper, Inc. will demonstrate increasing sales as it gains brand recognition from corporate chain grocers throughout the United States. At the end of year 5 we will have $700,000 excess cash to spend. This money will go toward research and development to create mobile point of sale software to be incorporated in superstores and retail store. In order to do this we will hire a new team of software programmers. Also, we will plan on increasing our database storage to meet our expanding customer base. This is a good idea because the technology field is an ever changing and rapidly advancing field. 20 21 22 23 Financial Notes/Assumptions: **Legal Entity: Smart Shopper, Inc. will be founded as an S-Corporation for tax benefits and limited liability to stockholders 1.) Contributed Capital - At inception; John Clyne, Sean O’Connell, Lauren Crain, Jake Farrell, Senai Tesfagiorgis, Josh Morrow, and John Riedy contributed combined capital of $400,000. 2.) Common Stock - 36,000 shares of common stock were issued and outstanding on inception with a par value of $25. $25 per share * 20,000 shares to outside investors = $500,000. Contributed capital amounts to: $400,000 ÷ $25 per share = 16,000 shares. The founders will maintain 44% ownership throughout the first year. During Year 2, 12,000 additional shares of common stock will be issued at $25 per share amounting to $300,000. The founders will now maintain 33% ownership from Year 2 onwards. For a total of 48,000 shares by the end of year 2. 3.) Dividends Policy - Calculated at 25% of Net Income. Due to a surplus of cash in Year 5, we decided to increase the dividend to 59% of net income to appeal to investors. Year 3 dividends paid will amount to $33,594. Year 4 dividends paid amount to $248,442. Year 5 dividends paid amount to $664,969. 4.) Sales Revenue – 750 units are sold in year one based on sales forecasts. Sales for each year can be found in Forecast chart 1-4. Dollar sales were calculated by multiplying unit sales by the $300 selling price and adding a $4000 annual service fee for small stores and an $8000 annual service fee for large stores. 5.) Cost of Goods (Material) – Cost of Goods (Materials) was computed by multiplying the variable expense of each unit ($87.816) by the units purchased each year (units sold + two months of additional inventory). Yr. 1 (750*87.816) =$65,862+ (2/12*(750*87.816)) = $76,839 Production Materials Purchased. Chart 1-12 System Sales Unit Sales Dollars Sales Variable cost Materials Purchases Year 1 30 750 $225,000.00 $65,862.00 $76,839.00 Year 2 90 2250 $675,000.00 $197,586.00 $230,517.00 Year 3 85 4250 $1,275,000.00 $373,218.00 $435,421.00 Year 4 112 5050 $1,515,000.00 $443,470.80 $517,382.60 Year 5 128 5700 $1,710,000.00 $500,551.20 $583,976.40 6.) Cost of Goods (Labor) – Cost of Goods (Labor) was computed by adding the salaries of Production Workers, Software Programmers, and Quality Control Testers. 7.) Salary/Wages - Refer to Table 1-11 for annual employee expenses (salaries, health insurance, and employment taxes). Each year we increased salaries by 2.5% as an added employee incentive. Sales Reps are paid on a yearly salary + commission. Commission featured 1-13. Chart 1-13 Unit Sales Dollar Sales Commission Percentage Total Commission Number of Sales Reps Commission Per Sales Rep 8.) 9.) 10.) 11.) 12.) 13.) 14.) 15.) 16.) 17.) 18.) 19.) Year 1 750 $225,000.00 15.00% $33,750.00 2 $16,875.00 Year 2 2250 $675,000.00 15.00% $101,250.00 2 $50,625.00 Year 3 4250 $1,275,000.00 15.00% $191,250.00 3 $63,750.00 Year 4 5050 $1,515,000.00 15.00% $227,250.00 4 $56,812.50 Year 5 5700 $1,710,000.00 15.00% $256,500.00 4 $64,125.00 Employee Benefits – Provided an annual healthcare payment of $5,762.00 per employee plus base salary raise (Table 1-4). Employee Tax Expense – Mandatory deductions include Social Security (6.2%), FUTA (6% on first $7000 earned), SUTA (3.4% on first $7000 earned), Medicare (1.45%), and Workers Comp (1.62%). Tax deducted from workers payroll each year, adjusted for base salary raise. Utilities + Internet & Phone – Estimated cost of Water + Electric ($2500), Waste Disposal ($264), and Internet + Phone ($4500) for all locations. Fixed Assets a. Office Equipment – Purchase of $10,983.31 of computers, software, etc. $1500 salvage value. 5-year useful life. $1,896.66 annual depreciation using straight line. b. Truck – Purchase of $18,459 service and delivery truck. $5000 salvage value. 8-year useful life. $1,682.38 annual depreciation using straight line. Fuel Expense – The truck will drive an average of 50 miles (25 each way) to each store. The truck gas tank holds 25 gallons of gas and earns an estimated 6 miles per gallon. The formula: ((30 customers*50 avg. miles)/6mph = 250 total gallons of gas used in year one. With the current price of gas in California being $3.52, the total fuel expense in yr 1 = $880. Travel Expense – $80 average meal price, $140 average hotel room fee. Values are calculated assuming 2/3 of clients are being treated to lunch/dinner and reps require hotels for 1/3 of their trips to corporate chain grocers. Inventory Management – Inventory will be managed so that 2 months of additional inventory is always on hand to account for potential demand increases. Payment Policy - For all purchases in one month: 15% - Month of Purchase; 65% - Month 2; 20% - Month 3. Terms have been arranged with suppliers as 2/10, N/90. Composition of Debt – Consists of three, 6% bank loans offered from Bank of America. The Year 1 Loan = $610,034, Year 2 Loan = $750,965, and Year 3 Loan = $93,819. Smart Shopper, Inc. withdrew these loans in order meet our target ending cash balance. All loans will be paid off by 2017. The financial statements quantify the interest and principal paid over all 5 years. Rent Expense – Rent expense is an annual payment of $45,888 for a 12,000 sq ft. Software Development and Office Facility. Payment is calculated by multiplying the $.32 dollar/sq ft. charge by the 12,000 sq ft. layout. Insurance Expense – General Liability Insurance Expense ($3646), Truck Insurance ($1800), and Business Insurance Expense ($5446) were determined by applying for quotes and filling out worker and business specific information. Audit Expense – Audit Expense ($8000) determined by reviewing small business audit quotes and adjusting for our industry. 24 20.) Database Expense – Expenses for maintaining the software database cost $538 for years 1-2 then $1,027 years 3-5. 21.) Packing Fee – purchase of each of box equals $.70. Each box can hold 5 tablets. Total units produced (750)/5 tablets per box x $.70 per box = $105 packaging fee for year 1. 22.) 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