BUSINESS PLAN FOR AN INDEPENDENTLY OWNED GROCERY STORE

A Comprehensive Analysis to the Creation of a Grocery Store

John M. Stewart III MBA 599 Research Project Mount Saint Mary's University D. Stephen Rockwood, Professor

TABLE OF CONTENTS TABLE OF CONTENTS .................................................................................................... 2 ABSTRACT........................................................................................................................ 3 INTRODUCTION .............................................................................................................. 4 PURPOSE OF A BUSINESS PLAN .................................................................................. 5 BUSINESS STRATEGY .................................................................................................... 6 Importance of Consumer Reports / Market Research ..................................................... 6 Competition..................................................................................................................... 9 Strategy Selection ......................................................................................................... 10 Performance Measures .................................................................................................. 13 LEGAL ENTITY .............................................................................................................. 15 Sole Proprietorship........................................................................................................ 15 Partnership .................................................................................................................... 16 Corporation ................................................................................................................... 16 Limited Liability Company........................................................................................... 17 Basic Questions to Ask Before You Start ..................................................................... 18 Recruiting Partners........................................................................................................ 19 Entity Selection ............................................................................................................. 20 SITE SELECTION ........................................................................................................... 22 Factors to Consider ....................................................................................................... 22 Building a New Store .................................................................................................... 23 Purchasing an Existing Business .................................................................................. 24 Current Listing of Stores For Sale ................................................................................ 25 Selection: Buy ............................................................................................................... 25 FINANCING..................................................................................................................... 27 Salary Expense .............................................................................................................. 27 Inventory Costs ............................................................................................................. 31 Technology Costs.......................................................................................................... 32 Financial Projection ...................................................................................................... 33 Sources of Financing..................................................................................................... 35 Selecting an Investor ..................................................................................................... 36 Debt Financing: How Much? ........................................................................................ 37 Selecting a Bank ........................................................................................................... 38 ADVERTISING AND PUBLIC RELATIONS ............................................................... 40 Importance .................................................................................................................... 40 Selected Methods .......................................................................................................... 40 CONCLUSION ................................................................................................................. 42 REFERENCES ................................................................................................................. 43 APPENDIX A ................................................................................................................... 45 APPENDIX B ................................................................................................................... 46 APPENDIX C ................................................................................................................... 47

Grocery Store Business Plan 3 ABSTRACT Deciding to own a business is a difficult decision to make. It is a balance between risk and reward. Owning a successful business can ensure financial stability throughout a lifetime. On the other hand, approximately 80% of start-up businesses fail within the first few years. Businesses fail for a variety of reasons due primarily to a lack of planning. Failure to plan will decrease the chances of success in the grocery industry as well. Balancing the needs of individual consumers and the restraints on a small business is a challenging experience. This can also be a rewarding personal experience as a professional and a rewarding financial gain if a balance is obtained. The creation of an independently owned grocery store is a daunting task with many obstacles. This text is a comprehensive analysis of the planning process for owning and operating an independent grocery store. The critical planning areas covered are the importance of a business plan, selecting a business strategy, selecting a legal entity, site selection, financing and advertising and public relations.

Grocery Store Business Plan 4 INTRODUCTION Ever since beginning my career in the business world, I have desired to own a small business. The type of business has varied from a restaurant to a bar to a consulting firm. However, recently I have become more focused on the grocery industry. I worked for an independently owned grocery store for six years before beginning a career in the accounting industry. Grocery stores employ a variety of age groups, which create a variety of personalities and motives among the staff. This can also be said for the customers since every person has specific needs. Whereas the majority of these needs remain constant, they do fluctuate with the seasons. Every day presents different issues and needs grocery store personnel must meet. Balancing the needs of customers and motives of the staff is a challenge that I truly miss and one that still intrigues me. Even though the thought of owning a business has been in my head for several years, I have never explored the process in detail. I wish to discover what is involved in the process of establishing a grocery store. The most comprehensive method of establishing a business is through the creation of a business plan. The areas covered in a business plan are business strategy, market research of consumers and competition, selection of a legal entity, site selection, financing and finally advertising.

Grocery Store Business Plan 5 PURPOSE OF A BUSINESS PLAN The first step in the creation of any business venture is an idea. The idea consists of what industry the business will operate in and how operations will take place. The idea focuses on the end goal of making a profit. Fundamentally, a business plan is the primary vehicle for giving credibility to an idea. (Dible, 1974, p. 118). A business plan will act as a guide to organizing ideas on the creation, operation and financial performance of a business. Operating ones own business is a huge time commitment. A well thought out plan provides assistance to the normal course of operations. It prepares one to attend to the crises that require personal attention. The first year of a small business is the most critical and many do not survive. This is a particularly important fact in the retailing industry. In retailing, one out of three new stores does not survive the first year and two out of three close their doors within 6 years. (Baumback, 1973, p. 22). Since the mortality rate of a small business is high wellthought-out planning is vital. This is where a detailed business plan is important. Since a business plan gives creditability to ones ideas it acts as an important tool in obtaining support from potential investors, lenders and partners (www.planware.org). Obtaining third party support is crucial in raising capital. Preparation of a comprehensive plan will not guarantee success in raising funds or mobilizing support, but lack of a sound plan will, almost certainly, ensure failure. (www.planware.org).

Grocery Store Business Plan 6 BUSINESS STRATEGY A business strategy is important in the creation stage as it provides a guiding focal point to decision making. The strategy is the concept that sets the business apart from its competitors. A firms competitive strategy refers to the weighted mix of price, product qualities and features, and service that differentiates its product from those of rivals. (Forgang, 2004, p. 4). An example of differentiating strategies is that of the auto manufacturers BMW and Volkswagen. BMW places a greater emphasis on product qualities, which causes a higher selling price. On the other hand, Volkswagen emphasizes a low selling price, which causes lower product quality. One strategy is not necessarily better than the other, both companies are operating successfully. There are trade-offs in formulating a competitive advantage; a strategy offers a guideline to maintain when making decisions (Forgang, 2004). In the case of Volkswagen, lower prices result in lower profit margins to reinvest in operations and product quality. This results in an effort to sell a high volume of cars to generate the needed cash flow. Venturing outside of the stated strategy could be detrimental to a business, as it would cause the need to obtain different suppliers, customer base and operation process. Importance of Consumer Reports / Market Research The purpose of formulating a strategy is to obtain a competitive advantage over rivals. Conducting market research will give one insight on what consumers desire. Market research can be conducted through consumer surveys or current industry specific consumer reports. Consumer demands will vary by industry, location and demographics. It is necessary to conduct research in the area that one intends to establish ones business. It is also important to obtain regular updates on consumer behavior as it may shift with

Grocery Store Business Plan 7 each generation. In the grocery industry for example, there are more male shoppers as the number of female professionals have increased. More recently racial trends are shifting in the country due to the increased Hispanic population. These two changes have forced companies to shift their marketing strategies accordingly. To begin market research as it pertains to the grocery industry, I surveyed twenty individuals in the Frederick and Columbia Maryland area. The survey questions are listed in appendix A. The questions were aimed to gain an understanding of preferred grocers and shopping preferences. The results are summarized below: Majority of consumers shop at a chain store within five miles of their home. Nearly everyone supplements his or her grocery purchases through value retailers. Overall convenience and quality ranks higher than price and customer service. Families of four or more visit a store 3+ times a week. Self-checkout registers are more popular than cashier attended registers. Poor product quality will lead to changes in selection of grocery supplier. The responses are not surprising. The selection of a chain grocer is expected as there are very few independently owned grocery stores still in operation. Chain stores tend to offer a wider selection over independent grocers as well. Since most households consists of two working professionals the ranking of convenience and shopping within

Grocery Store Business Plan 8 five miles of the home is also to be expected. The expansion of value retailers such as Wal-Mart, into groceries is as favorable to consumers as it is convenient for them. These findings are further supported by a 2004 consumer report issued by Pollack Associates. They discovered that in the end when they rate convenience nutrition and taste. convenience wins! (Pollack Associates, 2004, p. 1). This has lead to the increase of microwaveable meals and one-step bake entrees over the past several years. The convenience factor trumps nutritional considerations, and increasingly it rivals taste as the primary reason consumers continue to buy a product. Examples cited show shoppers willing to pay 2-5 times as much for convenience. (Pollack Associates, 2004, p. 11). Once again, the increasing number of working individuals per household is evident. This trend is important as it affects the types and amount of inventory to carry at any given time. There has also been a recent push for organic and health food products. Almost 60 % of shoppers say that certified organic labels are very or somewhat important to them when purchasing a product. (Pollack Associates, 2004, p. 5). This trend is also evident in the fast food market where salads have become a mainstay on menus. Maintaining a selection of health and organic food inventory is important, however, it must be noted that organic label products tend to cost more. Overall, this relates to the importance of fresh quality products. The third area of note from Pollack Associates consumer report is the shift in minorities. As US Latinos displace African-Americans as the biggest minority group, demographers are focusing on their $450 billion in disposable income. Grocery retailers are taking note because this group shops 4.4 times a week, more than twice the average of

Grocery Store Business Plan 9 non-Latinos. (Pollack Associates, 2004, p. 4). This is an important trend dependent upon the selected location of the grocery store. If one is in an area with a growing population of Latinos, then it is important to maintain an inventory of Hispanic foods. Competition The primary competition in the grocery industry will come directly from other grocers. The industry is dominated by chain stores such as Giant, Safeway and Food Lion. Research and Markets notes this dominance: The $400 billion US retail grocery industry includes about 40,000 companies that operate 70,000 grocery stores (excluding convenience stores). About 50 large national and regional chains like Kroger, Albertsons, Ahold and Safeway hold more than 60 percent of the market. The industry is highly concentrated: 500 companies that own more than five stores control 80 percent of the market. (www.researchandmarkets.com). The dominance of chain stores is a result of price, variety and marketing. Due to the volume of sales, chain stores can offer a lower price compared to independent grocers. The square footage of chain stores also allows them to offer a wider variety of products. This is favorable to niche markets such as the Latin community. Since many grocers own stores from coast to coast, they are able to reach more individuals through marketing efforts. Instead of targeting one market, they are able to reach a wide variety of markets through one marketing program. Recently, large value retailers have recently penetrated the grocery market competing on price. Value retailers such as Wal-Mart have expanded their inventory to include grocery items. PK Hoover, owner of Kennies Markets, acknowledges the increased competition and additional challenges a retailer such as Wal-Mart brings to the

Grocery Store Business Plan 10 grocery industry (personal interview, August 13, 2006). During their market research Pollock Associates noted the effect of value retailers on the grocery industry. Value retailers in food now account for 21% of grocery sales. They grew about 12% annually between 1992 and 2001. While value retailers made their names originally on price, they are building their reputations on breadth of assortment, creative private label programs, a better in-store experience, friendly service and convenience. McKinsey believes the Dallas market is typical of todays reality and as predictive as any other of the future. The study revealed interesting patterns: half of shoppers use value retailers for routine shopping trips, 22% of consumers use value retailers to fill in, 28% use them to stock up. Put simply, the bad news for traditional grocers is that value grocers have effectively penetrated the routine grocery-shopping trip. Beware: 55% of Americans visit a WalMart at least once a week, even though 64% of non-value grocery store shoppers say the deterrent is inconvenience. (2004, p. 1). A retailer such as Wal-Mart has the ability to appeal to two preferences of consumers at once, convenience and price. Due to the frequent trips to Wal-Mart by Americans, it is convenient for them to expand those shopping trips to include grocery items. Including grocery items during their trip is also beneficial due to lower prices. Due to sales volume, inventory turnover, and supply chain management Wal-Mart is capable of offering low prices. Due to these low prices several consumers make additional trips to Wal-Mart for grocery items even if it is inconvenient. The additional trip to value retailers is noted in the percentage of food dollars spent at their primary store declining to 82% from 89% last year. (Pollack Associates, 2004, p. 5). Strategy Selection Now it is time to make a selection in strategy. Based upon market research consumers desire convenience in both shopping experience and product selection, and quality products and service. The industry is dominated by chain stores that control 80 percent of the market. Finally, value retailers have successfully penetrated the industry

Grocery Store Business Plan 11 competing on convenience and price. So how can an independently owned store succeed, let alone survive in this atmosphere? Pollack Associates offers the following advice, the traditional grocery store is no longer a differentiated experience. To ensure survival, [food retailers]: (1) decide what they are going to be famous for, (2) achieve a leaner cost structure, (3) get credit from the consumer for value delivered, (4) out-execute the competition through simplification, and (5) grow through new categories and new formats (2004, p. 1). This advice suggests the traditional grocery store needs to become more focused in its efforts to deliver a quality product to the consumer. Chain stores and value retailers use their size to compete. The downfall of this is strategy is the delivery method becomes complex and it is more difficult to focus on the individual shopper. Marketing efforts are focused on large groups. Customer service directed at the individual tends to suffer. Research and Markets also supports this specialization strategy. Demand for food products is limited by the 1 percent annual growth of the US population. Profitability of individual companies depends on having the right product mix and on efficient operations. Small grocers can compete effectively only by offering specialty products or better produce or special services such as takeout food. (www.researchandmarkets.com). The element I wish to highlight here is better produce. Offering perishable items such as produce, meat and dairy products is a significant investment due to the required equipment and increased labor to support these departments. Therefore, value retailers have yet to widely enter this segment of the grocery industry.

Grocery Store Business Plan 12 As a result of value-retailers, PK Hoover suggested three primary strategies for an independent grocery store - variety, service or quality (personal interview, August 13, 2006). The strategic choice made for Kennies Markets by Mr. Hoover is a primary focus on service followed closely by quality products. Great attention should be given to service since the grocery industry is primarily service oriented. Quality products such as fresh meats and produce should be offered. This is accomplished through store layout, short lines, cleanliness, product placement and friendly customer service. One individual who provided insight on the importance of quality in the grocery industry is Jeremy Rodriguez. Mr. Rodriguez has a total of eleven years experience in the industry. He has worked with Giant Foods as a store manager for five years and was previously employed as a department manager with an independent grocer for six years. When asked about strategy selection for a small grocer Jeremy Rodriguez responded: Customer service first, then quality of all your perishable departments as well as non-perishable departments. Focus on the perishables, as they are the differentiator to a Wal-Mart, mass merchants and other grocers. You will never compete on price or you will go bankrupt, and you cannot compete on selection and variety unless you are 70,000 square feet large. (personal interview, June 1, 2006). Focusing on low pricing is nearly impossible due to the sales volume and supply chain of value retailers and national grocery chains. Greater sales volume in combination with discounted materials costs due to bulk ordering allows large retailers to pass the savings on to consumers in a manner which small retailers cannot. It is also worth noting the difficulty of calculating the lowest price possible to charge on a product-by-product basis. It is virtually impossible for a food retailer to know what his marginal costs are because he is handling thousands of products and it is difficult to identify the cost of

Grocery Store Business Plan 13 selling an individual product, especially when many of the costs in food retailing are common to all the products. Therefore the best method is to mark-up the purchase cost of a product by a percentage based upon the department. Due to the associated labor costs produce and meat department items have the greatest mark up (Jeremy Rodriguez, June 1, 2006). For cost management purposes it is important to set limitations on offered products. One wants to be sure not to handcuff themselves by offering too small of a selection. However, since most small grocers have less than 30,000 square feet of selling space (compared to average chain stores of 40,000+) it is important not to tie up excess cash in inventory. The best way to manage this is by knowing your clientele. It probably is not necessary to offer salt by five different manufactures or to carry high priced gourmet items. Items like these are typically slow movers with high costs. Our selected mission statement will be Offer the areas freshest meats and produce, highest quality dry goods and perishable items, while treating each customer like our only customer. This mission statement plainly states the companys strategy of placing emphasis on the areas large chain stores fall short. It also appeals to consumers desires for quality in both product and experience. Performance Measures Our selected strategy sounds good on paper but it is just that, words on a paper. It is important to set performance measures to ensure proper execution of the strategy. Performance measures offer benchmarks to compare ongoing results against your stated objectives. The majority of small businesses fail within the fist year. In the retail industry the most critical time frame is the first three years of existence. Therefore, a focus must

Grocery Store Business Plan 14 be placed on obtaining goals during this time frame. Setting monthly sales goals for each department with a focus on perishables can be one measure. An approximant weekly sale per square foot of selling area for an independent grocer is $9.00 (PK Hoover, August 13, 2006). At a minimum this figure can be used as a benchmark for each department. Offering employee training on customer interaction, product locations and in their specialized areas can improve service quality. As a manager the performance measure in this area is to offer a set number of training hours per year. Then the employees can have an attendance goal as their performance measure on customer service. A measure for overall customer satisfaction can be taken during the checkout process. The cashiers can briefly survey random customers for number of trips to the store during a given month. The benchmark for this measure can be 2005s industry average of 2.1 trips per week (www.fmi.org). One should ask additional questions of consumers and investigate if it appears ones average is lower. Finally, one must ensure that each department is efficient in its cost items. The primary cost to control is inventory. Cash flow is important to all businesses; however, due to limited resources it is especially important to small businesses. Setting and adhering to strict inventory on hand and turnover goals are vital. Cash is king! The mishandling of inventory increases the cash flow cycle. This can be fatal to a business because cash pays the bills.

Grocery Store Business Plan 15 LEGAL ENTITY A business can be formed in four main legal entities. The entities are a sole proprietorship, partnership, corporation and limited liability company. Each entity offers advantages and disadvantages. Sole Proprietorship The simplest of entities is the sole proprietorship. In a sole proprietorship, one person owns and completely controls the company (Mann and Roberts, 2000). The benefits of operating as a sole proprietorship are listed below. The positive to highlight here is zero sharing of profits or control. There is no need to reach compromises with business partners under this form of entity. No sharing of profits or control Interest is freely transferable No public documents to be filed Taxed once thru the sole proprietor

This type of entity also has unfavorable elements. The primary drawback is unlimited liability for the owner. There is no limit to financial losses or legal actions to the owner that may pass through the company. This along with the remaining unfavorable elements is listed below. Unlimited liability to owner Unless interest is transferred, death dissolves the company No sharing of time; The buck stops here

Grocery Store Business Plan 16 Partnership The second type of entity is a partnership. A partnership consists of two or more people co-owning a business and sharing profits (Mann and Roberts, 2000). There are two typical types of a partnership general and limited. A general partnership consists of equal shares or stated shares between owners. In a limited partnership one owner has limited ownership with no control. This represents an owner investing in a company solely for financial purposes. Favorable characteristics of a partnership are as follows: No public documents to be filed. Can elect to be taxed thru partners alone Sharing of responsibilities and time

A partnership involves the element of reaching compromise with other individuals. In many cases this is easier said than done, especially when owning a business involves a persons livelihood. As noted above, the positive of this is the freeing up of time. But coming to an agreement of how that time is divided can be a daunting task. Therefore, it is included in the unfavorable aspects of a partnership below. Corporation A corporation is uncommon for independently owned grocery stores, but worth noting as it is possible. The majority of large chain stores operate as corporations. A corporation is a legal entity separate and distinct from its owners, and it must file articles of incorporation with the State (Mann and Roberts, 2000, p. 617). The main Reaching agreements on ownership shares, time and profits Partners are liable for debts Sharing of profits

Grocery Store Business Plan 17 difference of a corporation as compared to both a proprietorship and partnership is the separation between company and owner. This creates limited liability for the ownership of a corporation. The liability is limited to the investment in ownership shares of the corporation. This along with the remaining favorable elements is listed below. Limited liability Shares are freely transferable Readily sell shares as an additional source of capital

Since a corporation is separate from the owners, it is taxed as such. The draw back of this is profits are taxed at both the corporate level and individual level. The profits available to the owner(s) are decreased. The remaining unfavorable elements of a corporation are listed below. Papers of incorporation are public information Shares are freely transferable, ownership percentages can change Limited Liability Company One type of entity that is becoming more common among small businesses is a limited liability company (LLC). An LLC is an unincorporated business that provides limited liability to all owners and permits full control to all members (Mann and Roberts, 2000, p. 616). An LLC offers flexibility and is my preference when choosing an entity type for a grocery store. An LLC can exist with one owner or several owners. The liability to the ownership is limited to the investment in the company. This is the most favorable characteristic of an LLC. Limited liability

Grocery Store Business Plan 18 May elect to be taxed solely thru owner(s) No set number of owners

The unfavorable characteristics of an LLC are dependent upon how ownership is defined. An LLC shares many of the unfavorable characteristics of a sole proprietorship if there is one owner. There is no sharing of time or responsibility. If there are several owners, like a partnership, profits are divided and compromises must be reached. Therefore, the drawbacks of an LLC truly depend upon the number of owners. Basic Questions to Ask Before You Start Many factors must be considered before selecting an entity type for ones small business. The favorable and unfavorable characteristics must be weighed based upon ones individual circumstances. In How to Set Up Your Own Small Business, Max Fallek lists several questions that every entrepreneur must ask (1991, p. 6-9). To what extent are you personally able and your family willing to be responsible for business debts and losses? To what extent is your family willing to accept the physical and psychological strains associated with business life? What impact would your death have on the continuity of your business? How easy would it be to transfer your business, or your interest in the business, to your heirs should you die unexpectedly? If your personal goals or national economic conditions should change, how easy would it be to liquidate the business? How much information about you and your business are you willing to make publicly available?

Grocery Store Business Plan 19 Ones choice of entity may be limited based upon the answers to each question. Selecting a partnership decreases the amount of profits available and creates the need to reach compromises; however, it can also create more free time and less stress of responsibility from the day-to-day operations. A family oriented individual will find this attractive. The idea of transferring company interest to family members will also affect their decision. One the other hand, an individual without a family may decide a sole proprietorship is the best avenue for them. Available finances can heavily affect the decision making process as well. Obtaining start-up capital can be a daunting task for one individual. This can also be compounded based on the amount of liability involved. Limitations truly differ from person to person. Recruiting Partners Due to the financial burden and time commitment of owning and operating a grocery store, it is wise to recruit partners. Recruiting two partners is the path I recommend. One partner should have an expertise in the grocery industry and assist in the daily operations of the business. The second partner should be an investor. A large capital commitment is required to enter this industry and obtaining an additional source of equity financing is beneficial. Financing and further details on investors will be discussed later in the Finance section. The primary drawback of entering a partnership has centered around the process of reaching compromises regarding ownership shares, sharing profits and agreeing on operational policies. Tensions can flare during these negotiations because livelihoods are at stake. However, this process does not necessarily have to be unpleasant. It all is

Grocery Store Business Plan 20 dependent upon recruiting the right partner(s). Pick your partners as carefully as you would pick a wife (Dible, 1974, p. 57). Starting ones own business is very time consuming, especially in the grocery industry where one is open for operation seven days a week, nearly 365 days a year. A great deal of time will be spent with partners, so be sure you are able to co-exist. Choosing a person(s) with similar values and vision will make the negotiating process much smoother. Beginning on the same page is extremely important. Furthermore, insofar as possible, choose people who complement your business and personal strengths (Dible, 1974, p. 57). This makes entering a partnership even more favorable. Everyone offers different a set of skills, points of view and experience. Finding the characteristics that strengthen ones weaknesses can increase the potential of success. For example, if one is confident in operational policies but weak in accounting, it will be beneficial to recruit an individual with the same interest who is strong in accounting but may be weak on the operations side. One may want to consider searching for a partner from the pool of people they know. At least 80 percent of all new multiplefounder businesses involve circumstances where two or more members of the founding team were employed by the same firm prior to starting their own company (Dible, 1974, p. 58). Surprises from partners are not necessarily good, knowing what to expect from people is rather important. Recruiting someone one has prior experience with is valuable because they know what to expect. Knowing their work ethic and dedication is key. Entity Selection When selecting an entity for an independent grocery store I suggest a limited liability company with at least one partner. The failure rate of small business is high and

Grocery Store Business Plan 21 having limited liability will reduce the stress of possible financial failure. It will also place limits on any lawsuits as a result of unfavorable incidents. An LLC also gives the ability to bring in partners with different skill sets and share responsibilities. The time commitment to a grocery store can be staggering since it is in operation over thirteen hours a day, seven days a week and 365 days a year. Sharing the time commitment and increasing the knowledge and experience base of the ownership greatly outweighs the sharing of profits. Hopefully increasing both knowledge and experience will increase total profits to share. It is also important at this stage to hire and accountant and lawyer to assist in the planning of financial matters and business agreement.

Grocery Store Business Plan 22 SITE SELECTION Factors to Consider The famous movie line Build it and they will come does not necessary pertain to the grocery industry. Careful consideration must be put into selecting a location for a grocery store. The first two factors to consider are if the area's population can support a grocery store and where is the nearest competition. It may be determined that one market is capable of supporting more than one grocery store. The market's ability to support a grocery store leads into the next factor of demographics. Entering a market with a growing population, especially a market with expanding families would be ideal. Consumers spend an average of $91 per week, ranging from $52 for one person to $138 for households of five or more people (Pollack Associates, 2004). Theoretically, a market with a large number of growing families will result in greater cash flow on a weekly basis. It is also important to determine if the demographics support your strategy. Lowincome urban consumers will shop on price. Our selected strategy of competing on quality of product and service is not favorable to this market. The best market area for this strategy is a suburban or rural area. An area with a tight knit community will value the effort towards personal attention. This will also present the opportunity of creating a loyal following by becoming a part of the community through marketing efforts. The final location factor to consider is the vicinity of the business to the owner's home. Owning and operating a grocery store is time extensive. Working eight to nine hours a day is extremely unlikely. Choosing a site close to the owner's home, or choosing an area the owner is willing to relocate to is important. Less commute time not only

Grocery Store Business Plan 23 benefits the family, but it also improves the owner's reaction time when dealing with a crisis. Building a New Store After selecting the site one is faced with the question of build or buy. Depending on the selected area you may be limited to building a new store. The costs associated with building will depend upon the property value and selected store size. Property value will vary from market to market and will slightly fluctuate due to economic pressures. When purchasing the land some additional factors to consider are How much parking is available to your customer base? How much can you expand in the future? (Jeremy Rodriguez, June 1, 2006). Regardless of the price a store and parking lot can easily cover five acres of land. Currently, most chain stores (i.e. Food Lion, Giant, Safeway) are averaging over 40,000 square feet. The target size for an independent grocery store in a suburban to rural area should be approximately 20,000 to 25,000 square feet. A smaller store is necessary due to the operating cost restrictions on an independent store. Operation costs restrictions are a result of lower sales volume than larger stores and decreased cash flow from inventory kept on hand (Jeremy Rodriguez, June 1, 2006). In order to obtain additional information on building costs I spoke with Jeremy Rodriguez of Giant Foods. The number that was widely used in the retail grocery industry was $100 per square foot to build and equip a store; however, as of late with the rising price of copper used in various refrigeration applications as well as the rising cost of building materials and financing costs the best approach I have seen is to use $150 per square foot as a general guideline. This would include building the shell of the store, the refrigeration and the shelving and most of the outer cases. (personal interview, June 1, 2006)

Grocery Store Business Plan 24 Using the estimate of $150 per square foot for a 20,000 square foot store, we have a total of $3 million. This amount is just an estimate for the stores shell, refrigeration, shelving and outer cases, it does not include registers. Six Microsoft Windows operated cash registers will cost approximately $125,000. A growing trend in the industry is the use of self-checkout registers. A four unit self-checkout system will run at least $125,000 to install (Jeremy Rodriguez, June 1, 2006). These registers may not be considered necessary; however, we will review the benefits of using these registers later. Our current estimates to build a new store is $3.25 million plus land costs. Building a new store will decrease your maintenance and repair expenses for several years in the future. It also gives you a marketing tool to appeal to the publics curiosity. Attracting them away from their preferred shopper just once may be the only chance one needs to retain them. However, building a store that can easily exceed $4 million is a huge commitment. Anxiety surrounds building a new store since there is no track record to base future financial projections. Purchasing an Existing Business Purchasing an existing business may be more favorable than building a new store due to an existing track record of sales and profits. It is easier to prepare future financial projections with an existing business than it is a new business. However, one must do ones due diligence , and ask the right questions of the current owner to determine why they are selling. Selling a business for personal reasons such as retirement or relocation of family are reasonable. Or is it, in fact, more like a used car? Most owners do not sell their cars until they feel need considerable mechanical attention (Baumback, 1973, p. 83). Be sure to do your homework regarding financial trends and store worth. Hire

Grocery Store Business Plan 25 professionals with experience in appraisal of real estate and assets. One does not want to buy a failing business. Setting the purchase price is not an exact science as you are also paying for future potential. Potential can be a dangerous word, as it varies from person to person. It is solely based on estimates and opinions. The use of both appraisers and accountants will be extremely helpful in this process. Current Listing of Stores For Sale A current listing of grocery stores for sale can be found on MergerNetwork.com. Listings on this website show that a 14,000 to 20,000 square foot store in the Northeast averages a sales price of $2 to $3 million. This purchase price includes the land, building, shelves, equipment, registers and inventory. In fact, a grocery store fitting our parameters regarding location and size is currently for sale in Carroll County, Maryland. The store is 19,000 square feet; the nearest competition is 15 miles away; annual sales are approximately $2 million. The listed purchase price is $2,750,000 (www.mergernetwork.com). This is comparable to our estimate of building a new store for $3,250,000 plus land. Selection: Buy Purchasing an existing business is more favorable than building a new store. The research conducted on MergerNetwork.com lists a store costing approximately $3,000,000. This is less than our building estimate of approximately over $4,000,000 (building costs plus land plus inventory). The professional fees of hiring a contractor as compared to an appraiser and accountant should be similar. However, an existing building will most likely need improvements and upgrades. These additional costs to the

Grocery Store Business Plan 26 sales price must be factored into the total purchase price. The overwhelming advantage in purchasing an existing business is the track record. The existing business has an existing customer base and financial reports to base projections from. Building a financial comfort level is much more feasible through purchasing a business. This results in less stress and unknowns for the ownership group.

Grocery Store Business Plan 27 FINANCING Determining how much money will be needed to start a business is no small undertaking, nor is it simple. In addition to the build or purchase costs of a business, Max Fallek expands on the financing needs: A new business needs: 1) enough to buy the equipment, tools, raw materials, inventory or whatever else it needs to build the products or provide the service it sells; and 2) enough to pay the day-to-day operating expenses until the profits begin. Their initial tendency is to ask for too little money. Being as optimistic as they are about the future of their enterprise, they assume that they can make everything work the way they want it to. As a result, they start their business with less money than they need. (1991, p. 5-4) An over looked financing element Fallek points out is the required money to pay the day-to-day operating expenses until the profits begin. The most apparent needs relate to purchase price of a building, inventory and appropriate equipment. Due to the cash flow cycle of a start-up business it is not uncommon to need financing assistance for the first year of operating costs. Financial projections based on track records and future potential is important in determining when a business will be self-sufficient. Salary Expense One of the largest expense items in the grocery industry is salary. The grocery industry is service based. In fact, our selected strategy is to compete on the quality of customer service. In order to improve our ability to compete on this element it is important to hire qualified employees. People and organizations need each other. Organizations need ideas, energy, and talent; people need careers, salaries, and opportunities (Bolman and Deal, 2003, p. 115). Obtaining career orientated individuals for the management level of is difficult for any small business regardless of the industry. Management level personnel provide leadership

Grocery Store Business Plan 28 and set the example for both employees and individuals outside the organization. Dible explains: In the old days, one-man operations were very common in the business community. By and large, this fabric of the business community has not changed too much. However, when the launching of a business concept requires substantial funds, the sophisticated investors of today are generally reluctant to invest in a one-man show. Typically, every key management function marketing/sales, manufacturing, engineering, and finance must be covered by a man who has demonstrated exceptional capability in his previous business experiences and who has suitable academic credentials. (1974, p. 138) Once again competing on quality of service is the focus; competent individuals are required to properly execute this function. This may not be an ideal area to cut costs. Salary expense for experienced managers will be high; however, I believe it to be worth the investment. However, a small business must set reasonable expectations to the level of experience they are able to obtain. Not only do they compete with competitors for customers, but they are also competing for the same experienced workforce. It may not be possible to obtain the most qualified individuals in the industry. Baumback sites three difficulties a small business faces when hiring personnel. Three conditions appear to be primarily responsible for the small businessmans difficulty in acquiring satisfactory personnel: (1) the general decline by most employees in a willingness to do a fair days work when jobs are plentiful; (2) big business attracting the more energetic and ambitious employees; and (3) others willing and able to work hard choosing self-employment. During a tight labor market normal competition between big and little business for competent employees is intensified particularly for college graduates and certain types of skilled workers. (1973, p. 24) One method of appealing to potential employees is by showing a commitment to their personal growth and career advancement. The implementation of training programs

Grocery Store Business Plan 29 is key in this regard. The company will be showing a true interest in employees careers and making an additional financial commitment towards them. On the other hand, the company will benefit by increasing specialized skills of the workforce. One training program used by PK Hoover and Kennies Markets is a half-day orientation upon hire describing the company and where the employee fits within the company, a long with continual monthly sessions. Training is an integral cost of an independent grocery store (PK Hoover, August 13, 2006). Additional financial perks will also entice individuals to work for ones company as compared to competitors. Two examples may be the institution of a profit sharing program and discount shopping. Due to financial restraints during the first several years of operation, a profit sharing program may be impossible. However, such programs can be included in the contracts of key managers with set start dates. As the company grows, hopefully, similar programs can be implemented to include all employees. A less expensive financial perk could be offering a discount on shopping. Any potential discount will appeal to the employee and act as an incentive for working for the company. Keep in mind the grocery industry is unique as it pertains to the workforce. A grocery store relies on all age groups from retirees during the day to high school students during the evenings and weekends. Each age group is motivated differently. Finding this balance and adopting policies that appeal to all groups is difficult. However, it is necessary. A Bolman and Deal assumption within the human resource frame is when the fit between individual and system is poor, one or both suffer.both become victims (2004, p. 115). The development of well-balanced policies that offer favorable incentives

Grocery Store Business Plan 30 for both the employee and business is vital. Therefore, the pay-scale will be varied based on position and experience. The proposed pay scale and headcount is based on 2006 competitive rates found on www.referenceforbusiness.com (June 25, 2006), and is as follows: Position: Department Managers - 4 @ $18/hr Full-time Cashiers - 6 @ $9/hr Full-time Administrative Worker - 2 @ $9/hr Full-time Laborers/Stockers - 8 @ $8/hr Part-time Cashiers - 5 @ $7/hr Part-time Laborers/Stockers - 6 @ $6.50/hr Total Salary Expense Headcount: Year 1 $ 149,760 112,320 37,440 133,120 36,400 40,560 509,600 31 Year 2 $ 154,253 115,690 38,563 137,114 37,492 41,777 524,888 31 Year 3 $ 158,880 119,160 39,720 141,227 38,617 43,030 540,635 31

Full-time employees are expected to work forty hours a week (2,080 hours a year) and part-time employees are estimated to work twenty hours a week (1,040 hours a year). The managerial and part-time pay rates were also considered reasonable by PK Hoover (personal interview, August 13, 2006). We will rely heavily upon a part-time workforce to cover evenings and weekends. In order to attract qualified individuals we will pay greater than minimum wage for these positions. The use of part-time employees will decrease our payroll burden. This is an important cost savings area for an independent grocery store. However, part-time high school employees will require good supervision and additional training (PK Hoover, August 13, 2006). Our financial projection for the first three years of operation notes our commitment to employee benefits and training. According to the Food Marketing Institute the industry average of benefits cost is 3.8% of sales (www.fmi.org). Our estimate of 2.5% is less due to one-third of the workforce being part-time. Part-time

Grocery Store Business Plan 31 employees do not require health insurance. Budgeting for training sessions is important to proper execution of our emphasis on quality service. Inventory Costs Second to the initial purchase price, the largest investment and cash flow funnel for a grocery store is inventory. The majority of a grocery store is devoted to selling area and inventory is required to fill that area. In many instances the initial stock of inventory is included in the purchase price of an existing store. Regardless of the initial inventory source, there is a need to select a grocery distributor to maintain supply of inventory. Selecting a distributor is important as the quality of your product depends upon their stock. Ones cost of goods sold will also depend upon the distributor. Two questions one may want to ask about a distributor are: How long have they been in business? Who are some of the major stores they distribute to currently? Answering these questions will enable one to view their available merchandise and interview their customers. Not only do they provide merchandise, but distributors also assist in the financing of a grocery store. Once selected, a distributor typically helps finance the inventory at no charge for the first 6 months, as most banks will not finance the cost of inventory during the start-up of a business. This is a nice additional source of financing. However, it would be better to have enough cash flow to limit this borrowing to a minimum. They usually have no ties to time repayment, as one is required to buy into the Co-Op. Jeremy Rodriguez expands on this concept: AWI is one of the better ones around here. They service a wide array of stores in this area. They operate as a Co-Op and share approximately 1.65% at cost of your annual purchases back to you as a loyalty rebate, which significantly impacts your bottom line in a penny on the dollar business. This amounts to big dollars in the long run. The catch is that you are required to buy into the COOP to begin receiving groceries from

Grocery Store Business Plan 32 them or any COOP for that matter. For a store doing $150,000 in volume with a one-store operation I would estimate a $250,000 stock investment to be about the norm. (June 1, 2006) The benefit of purchasing an existing business is the inventory currently on-hand is typically included in the purchase price. Therefore, no additional financing is required. However, the cost of inventory (Cost of Goods Sold) is the greatest cost to a grocery store. This will generally represent 75% of sales (PK Hoover, August 13, 2006). Technology Costs Another cost is the purchase of equipment incorporating new technology. As mentioned earlier, self-service systems cost approximately $125,000 for four units. These may be considered an unnecessary expense, however, consumer trends are dictating otherwise. Consumers enjoy the convenience and potential application of this new technology. In fact, Pollack Associates discovered: 73% would use self-service computer screens providing product locations; 69% would use computer screens providing special promotions and discounts; 68% would use self-service computer screens with product information; 65% would use self-checkout at different departments in the store; 63% would use self-checkout in the main bank of registers; and 63% would use in-store computers to order products not available in the store. (2004, p. 3) This means the majority of consumers are willing to use self-service systems. This equals expense savings for the grocery store. One employee is required to attend each cash register, whereas one employee can attend four self-service systems. The initial purchase costs of this system can be recouped in labor savings over the course of two years. The total expense savings offers a competitive advantage on pricing. As a result, the presence of self-checkout [currently] in 25% of stores is expected to rise to 95% in the next two years (Pollack Associates, 2004, p. 6). However, keep in mind they tend to do

Grocery Store Business Plan 33 much better in more affluent areas where there are more technical people. In higher income areas they tend to bring in as much as 30% of all your transactions (not to be confused with percentage of sales). A good overall investment if your store layout has the room to integrate as they do take up a good deal of room (Jeremy Rodriguez, June 1, 2006). This cost will be included in the financial projection. Financial Projection We now have a general idea of the primary cost areas and how to estimate the total costs of each area we will need assistance in financing. A financial projection must be completed in order to obtain an accurate total on both amount and time. Since cash pays the bills, the projection will center on cash activity. Fallek discusses the importance of constructing a financial projection. Heres how to do it: to calculate how much you will need, you must construct a cash flow projection, sometimes referred to as a pro forma by your banker. This tool is better than a crystal ball! It is a wonderful planning tool because it can help you imagine the future. By imaging, or projecting, what you think you are going to sell and spend during the upcoming months, you can see problems coming while there is still enough time to do something about them. Losing money on paper is a lot easier to take than losing real money especially when its your own! Before you start looking for ways to cut corners or start operating on less than you should, find out how much it would realistically cost to run your business the right way. Remember multiply the lowest point in your cash flow by 150% or even 200% and you will be very near the actual amount you will end up spending. If you follow this rule, and you have carefully thought through all of the expenses to include on your cash flow projections, you will not suffer from undercapitalization. (1991, p. 5-6 - 510) Requesting more than one needs is important since crisis situations are bound to arise. Thorough planning is extremely important, however, any business owner will tell you things rarely go to plan. Having the flexibility to deal with those issues is key to survival. This is especially true in such a capital-intensive industry such as the grocery

Grocery Store Business Plan 34 industry. The required capital investment to enter the industry is one of the primary barriers to entry. Appendix B is a financial projection for the first three years of operation. The projection is based on industry averages and trends obtained from the Food Marketing Institute and an interview with PK Hoover. In 2005, the Food Marketing Institute reported average sales amount per square foot of selling space is $10.98 (www.fmi.org). This figure includes large chain stores and should be adjusted for the decreased volume of an independent grocery store. PK Hoover suggested the amount of $9.00 per selling square foot to be reasonable (personal interview, August 13, 2006). Currently, our target store is 19,000 square feet with approximately 17,000 square feet of selling space. Therefore, our base sales amount in Year 1 is $7,956,000. Each succeeding year increases three percent due to inflation and sales growth resulting from proper execution of our strategy on the targeted market. Salary and benefit expense is less than the industry average due to the use of part-time employees and ownership salary is not included. Two partners will act as operational managers, which will also eliminate the need for a general manager(s). We are also expecting advertising expenses to decrease from 3.5% to 2.0% after year one. The greatest investment in advertising will be during the first year due to grand opening sales, reduced prices and attracting customers (PK Hoover, August 13, 2006). Ownership will receive yearly disbursements after earnings-before-interest-taxesdepreciation-amortization based on company performance. The current estimate is $80,000 per year for the first three years per partner and investor. The grocery industry average net margin of 1.16% will be used as our benchmark (www.fmi.org). The first

Grocery Store Business Plan 35 year loss is attributed to the increased advertising costs. Year two and three are expected to be more favorable with net margins at 0.79% and 0.99%, respectively. Appendix C is a breakout of total required financing. The financing sources will be discussed momentarily. The key areas for required financing include the business for sale on www.mergernetwork.com, professional fees related to the purchase, any potential renovations, equipment upgrades including installation of four self-service registers and working capital. According to PK Hoover legal fees can be estimated at $20,000 and a market study for $10,000 is a worth-while investment (personal interview, August 13, 2006). Building renovations are estimated at a high amount to be conservative. A better estimate will be provided after store inspection. The equipment upgrades amount includes self-service registers of $125,000 plus dcor changes and replacement of shelves or display cases. Dcor changes can cost approximately $3.00 per square foot, which totals $57,000 for a 19,000 square foot store (PK Hoover, August 13, 2006). The total to be finance is $4,260,116. Sources of Financing There are two categories of financing - debt financing and equity financing. Debt financing is the simplest way to raise money. Basically, it describes any kind of loan. Equity financing is different. Selling equity means one sells a part of the business to someone else. Fallek explains you must think through beforehand how much risk you want to take yourself, how much you want to share with an outside investor, how much control of the day-to-day operations you want to share and how much of the pie you want to share, if any. Many small business people eventually conclude that sharing a

Grocery Store Business Plan 36 larger pie and sharing the risk is worth giving up part of the profits and some control (1991, p. 5-15, 5-16). As explained in the Legal Entity section, it may be in ones best interest to have at least one partner in the grocery industry. Since the time commitment is extensive one can split this responsibility, along with obtaining additional skill sets in the ownership team. Therefore, financing through equity by recruiting at least one partner is wise. Selecting an Investor One type of partner is an investor. An investor typically puts money into the business with no or limited control towards the day-to-day operations. The expectation is the money invested will generate a return at some point in the future. A full functioning business plan is important to the recruitment of investors. A business plan outlines a process for "combining your money with my brains so we can both get rich" (Dible, 1974, p. 118). As mentioned in the Recruiting Partners section, I intend to select one partner strictly as an investor. Due care must be given to the selection of an investor. A willing individual with a wad of cash is not necessarily the right investor. Donald Dible lists several prime qualities to look for in an investor (1974, p. 198): 1. Someone who can keep their cool During a down cycle it is important for a company to pull together. You don't want one of the owners to become overly stressed and place unneeded pressure on everyone else. Especially true since a grocery store averages 1.16% of net profit (www.fmi.org). Confidence in team and strategy "Two heads are better than one" is something that has been stressed thus far. Bringing together the collective ownership group to ensure individual talents are best serving the company is a challenge. Everyone needs to buy-in to the same goals and strategy. Reasonable expectations regarding appreciation on their investment -

2.

3.

Grocery Store Business Plan 37 Rarely do investments, especially in a small business, immediately show a return, especially in the grocery industry where grocers face fierce competition from value retailers. It may take several years before the investment shows a large return. Knowledge of the market to be served This item coincides with appreciation expectations. There must be knowledge of the industry so expectations for investment return are appropriate. They also may b part of the decision making process so they must make sound decisions.

4.

The largest drawback of financing through an investor is the sharing of equity. Profits are being cut into smaller pieces. However, obtaining an investor is a necessity due to the large capital investment required for start-up. Total equity financing will be $1,000,000. The ownership stake will be divided evenly among the two partners and one investor. However, the financial commitment will be adjusted for the time investment by the two operating partners. Since the investor is not required to commit their time towards the operation of the store, their financial commitment will be set at forty-six percent or $460,000. Each operating partner will then invest twenty-seven percent or $270,000 plus forty hours a week for at least the first five years. Debt Financing: How Much? The remaining amount of $3,260,116 will be obtained through debt financing. One resource to assist in debt financing is the Small Business Administration (SBA). This is a government-subsidized organization that assists entrepreneurs during the start-up process of their business. It can act as a bridge between the start-up business and financial institutions willing to offer financial assistance. Small business is the backbone of a capitalistic economy; it is in the governments best interest for one to succeed in ones venture. One banking institute that works with the Small Business Administration is

Grocery Store Business Plan 38 Wells Fargo. Wells Fargo offers a small business loan with a ceiling of $4,000,000, loan term up to twenty-five years and maximum interest rate up to NY Prime + 2.75% (www.wellsfargo.com). As of July 2006, the current NY Prime rate is 7.75% (www.wellsfargo.com). Therefore, the maximum interest rate on the loan is 10.50%. This interest rate will be assessed to a business with high risks and unfavorable financial projections. A more favorable and reasonable interest rate for a start-up independent grocery store is around 8.0% (PK Hoover, August 13, 2006). For our projections we will be conservative and estimate an interest rate of 8.5%. This rate should be obtainable due to our financial projections of earning a profit by year two and in line with the industry average of 1.0% net margin by year three. Selecting a Bank The selection of a banking institute to provide financing is just as important as the selection process of a partner and investor. Banking is a competitive industry. This is to ones benefit since one is provided with a great deal of options. Donald Dible expands on this concept, when looking for a banking firm, one of the most important considerations a small new company should bear in mind is this: Will the bank be there when you need their help? Consider that any bank can provide the routine services of maintaining accounts, clearing checks, and providing travelers checks and safe deposit boxes (1974, p. 148). Take advantage of the options available. Select a bank that can meet ones particular needs outside of the routine services. A small grocery store will need assistance with payroll services, lines of credit and retirement plans. The entrepreneur should select the most progressive banker he can find, one who can also satisfy the unique

Grocery Store Business Plan 39 requirements of his particular business (Dible, 1974, p. 149). Ones banker should assist one in dealing with the financial stress of a new business, not add to it. Due to the small business loans offered, partnership with the SBA and additional services Wells Fargo is an option for selecting a banking institution. The company is rich in history and has stood the rigors of time. This stability is favorable to a small business.

Grocery Store Business Plan 40 ADVERTISING AND PUBLIC RELATIONS The principal of advertising is to spread the word of ones company to the public in attempts to attract their business. Public relations are used to support your advertising efforts by showing the public that one truly cares about their business. Many methods are available to do both. However, based upon the industry certain methods are more effective than other. Importance Advertising and public relations are important since it is the business method of reaching out to generate and maintain a source of revenue. Costs tend to be high during the start-up process since the business must make the public aware of their existence. However, these expenses should be viewed as investments rather than costs. A small business cannot compete on the same advertising level as larger companies. Therefore, advertising efforts should be focused to the surrounding area. Being a small locally owned company appeals to area consumers and with proper advertising efforts, it is possible to attract consumers from larger competitors. Selected Methods There are two paths to advertising and marketing activities; build sales and build relationships (PK Hoover, August 13, 2006). An example of building sales is the use of a weekly flyer. Weekly flyers are widely used in the grocery industry and can be found in nearly all media circulations. The favorable factor of placing flyers in mass print media is the reach to a large number of households. However, consumers tend to be loyal and a large percentage of your flyers can end up in the bottom of a liter box (PK Hoover, August 13, 2006). It may be more beneficial to use flyers on an in-store basis only.

Grocery Store Business Plan 41 Therefore, one is not creating unnecessary costs and reaching ones returning and loyal customer base (PK Hoover, August 13, 2006). The second path of building relationships is completed at both an individual customer and community level. Individual customers can be reached through the use of a frequent shoppers program where gift cards are earned (PK Hoover, August 13, 2006). Generally people take pride in their community, and concentrating efforts on the companys local ties is important. Sponsor area events such as children sports teams, fundraisers, and holiday events for children could be beneficial advertising and public relation methods. Working with local businesses such as restaurants to extend lines of credit for grocery purchases can also be beneficial. Sitting on community boards is also beneficial (PK Hoover, August 13, 2006). The idea behind these concepts is to get the stores name out into the local area as much as possible, through both word of mouth and in print. In fact, the best advertising is word of mouth. Not only is it free advertising, but impressing one person can lead to their friends and family shopping with ones company.

Grocery Store Business Plan 42 CONCLUSION By no means is setting up a business a small task, especially the creation of an independently owned grocery store, which happens to be in a changing and challenging industry. As a result of recent changes in consumer preferences and the growing competition from value retailers, small grocery stores must compete on service and product quality. Successful execution of a strategy focused on service and product quality makes opening an independently owned grocery store feasible. The feasibility factor hinges on the key factors of (1) targeting a rural to suburban market, (2) setting and obtaining defined performance measures on a regular basis, (3) obtaining the start-up and intellectual capital, and finally (4) a dedicated owner(s). However, I personally do not consider it worth the risk. There is little room for error due to an industry average net margin of approximately one percent. Due to the required start-up capital it is expected the first three years of existence to operate below industry standards. This in combination with the high mortality rate of small businesses creates an environment where chances for success are slim. I consider the risk and time commitment, approximately 364 days a year, to be too great for an average net return of one percent.

Grocery Store Business Plan 43 REFERENCES

Baumback, C., Lawyer, K. & Kelley, P. (1973). How to Organize and Operate a Small Business. New Jersey: Prentice-Hall, Inc. Bolman, L.G., & Deal, T. E. (2003). Reframing organizations: Artistry, choice, and leadership (3rd ed.). San Francisco: John Wiley & Sons, Inc. Dible, Donald M. (1974). Up Your Own Organization! A Handbook on How to Start and Finance a New Business. Santa Clara, CA: The Entrepreneur Press Fallek, Max. (1991). How to Set Up Your Own Small Business. Minneapolis: American Institute of Small Business. Food Marketing Institute. (2006). Marketing Costs. Retrieved July 31, 2006, from http://fmi.org/facts_figs/MarketingCosts.pdf Food Marketing Institute. (2006, May 1). Supermarket Facts Industry Overview 2005. Retrieved May 11, 2006, from http://www.fmi.org/facts_figs/superfact.htm Forgang, William G. (2004). Strategy-Specific Decision Making: A Guide for Executing Competitive Strategy. New York: M.E. Sharpe, Inc. Leed, T. and German, G. (1973). Food Merchandising Principles and Practices. New York: Chain Store Publishing. Mann, R. and Roberts, B. (2000). Smith & Robersons Business Law. Eleventh Edition. Cincinnati, OH: West Thomson Learning. Merger Network. (2006, May 22). Business for Sale Listing Supermarket. Retrieved May 22, 2006, from http://www.mergernetwork.com/static/details/64478.htm Pollack Associates (2004). Supermarket Shoppers Supermarket Strategic Alert Special Report 2004. Retrieved May 11, 2006, from http://www.supermarketalert.com Reference for Business. (2006). Grocery Store: Business Plan Viking Grocery Stores. Retrieved July 25, 2006, from http://www.referenceforbusiness.com/businessplans/Business-Plans-Volume-09/Grocery-Store.html Research and Markets. (n.d.). Grocery Stores and Supermarkets Industry Profile. Abstract retrieved May 11, 2006, from http://www.researchandmarkets.com/reportinfo.asp?report_id=302371&t=e&cat_ id=19

Grocery Store Business Plan 44 Small Business Administration. 2006 Credit Factors and Applying for a Loan. Retrieved May 20, 2006, from http://www.sba.gov Wells Fargo. (n.d.). SBA Loans Product Comparison Chart. Retrieved July 31, 2006, from https://www.wellsfargo.com/biz/products/credit/sba/compchart/compchart White Paper Writing a Business Plan. (n.d.). Retrieved May 9, 2006, from http://www.planware.org/bizplan.htm

Grocery Store Business Plan 45 APPENDIX A Grocery Shopper Consumer Survey 1. Do you have a preferred grocery store to conduct your grocery shopping? a. If yes, what is the name of the store? b. If yes, where is the store located in terms of distance from your home? c. If a new store opened up in your area, would you visit it?

2. Do you regularly purchase grocery items from value retailers such as Wal-Mart, Sams Club, or CostCo?

3. Please rank the following items with 1 being the most important: Price Product quality (freshness of produce & meats) Customer service Convenience (store location and variety of products)

4. How many individuals in your household do you grocery shop for? a. On average, how many trips per week to you take to the store?

5. Do you prefer checking out with a cashier or automated self check-out register?

6. Have you ever had an extremely poor experience during grocery shopping and/or after purchasing products that caused you to change your choice of store (i.e. poor customer service, store layout, quality of food)? a. If yes, what was the root of the problem?

Grocery Store Business Plan 46 APPENDIX B Financial Projection

Year 1 7,956,000 5,967,000 1,989,000 509,600 278,460 198,900 87,516 71,604 47,736 23,868 15,912 246,636 1,480,232 $ 508,768 $ Year 2 8,194,680 6,146,010 2,048,670 524,888 163,894 204,867 90,141 73,752 49,168 24,584 16,389 254,035 1,401,719 646,951 $ Year 3 8,440,520 6,330,390 2,110,130 540,635 168,810 211,013 92,846 75,965 50,643 25,322 16,881 261,656 1,443,770 666,360 % of Sales (Year 1) 100.0% 75.0% 25.0% 6.4% 3.5% 2.5% 1.1% 0.9% 0.6% 0.3% 0.2% 3.1% 18.6% 6.4%

Sales Cost of Goods Sold Gross Profit Salary Expense Advertising Employee Benefits Utilities Supplies Maintenance Training Expense Insurance Other Total Expenses EBITDA

Loan Payment Owners' Draws Taxes Net Income $

317,328 240,000 23,868 (72,428) $

317,328 240,000 24,584 65,039 $

317,328 240,000 25,322 83,710

4.0% 3.0% 0.3% -0.9%

Grocery Store Business Plan 47 APPENDIX C Required Financing

Purchase of Business Accounting Fees Legal Fees Market Study Building Renovations Equipment Upgrades & Supplies Working Capital / 6 mos Expenses Total Start-up Costs Equity Financing Required Debt Financing

$ 2,750,000 15,000 20,000 10,000 500,000 225,000 740,116 $ 4,260,116 (1,000,000) $ 3,260,116