DAG Group Case Study Chris and Val are MBA students recently graduated. Upon consideration of the dry cleaning industry they realised an opportunity within the market as ‘an industry that is fragmented, undifferentiated, has low entry barriers, and is something that people use all the time’. They had a vision to create the DAG group ‘superstores of dry-cleaning’ and offer quality efficient service and consistency in an otherwise deteriorating industry that had become a price war battle between stores to gain customers. Lack of funds kicked back into poorly presented stores, unhappy employees, bad service, low customer retention rate and poorly maintained equipment. Due to the lack of substitution in the market and high demand for its convenience, especially by working population who have an 80% share of the customer base and revenues, the industry is still worth a cool 4 Billion. There has been zero innovation in the industry in regard to technology, supplies and process. The solvents used and consequent hazardous waste emissions produced by dry cleaning is expensive to dispose of and also currently faces possible future regulation changes in its disposal methods. Should this occur, it will require additional investment that majority of the 95% proprietary owned stores are not willing to pay due to the decline in recent business. Dry cleaners suppliers are few and the possibility to source from alternative suppliers possibly abroad is not explored due to lack of motivation or ability/willingness to bulk buy. With the information given, Chris and Val have identified Key success factors to having a dry cleaning business as well as implemented a strategy for DAG which are mentioned below and will be addressed in terms of ability to implement through different opportunities presented via various analysis tools in this study; Key success factors 1. Consistency in service 2. Owner operated 3. High level customer service 4. Outstanding appearance, access and visibility. Strategy for DAG 1. Build large plant “superstores” capable of supporting about $750,000 in sales. 2. Locate the stores in affluent, dense areas, freestanding buildings 3. Offer services that appeal to high-usage customers. (Opening times, speed, accessibility) 4. Price at a 10% to 15% premium to the area average

Question 1 Chris and Val have undergone extensive research and exploration of the dry cleaning industry in the US to find the best possible entry point in order to implement their DAG group strategy and vision. Through this research, 3 opportunities were revealed and evaluated accordingly. 1. Dynasty A 26 dry and 4 plant store operation in Indianapolis, not their first preference for location however investigated the opportunity none the less. Dynasty owners were once not willing to sell previously, however now business had taken a turn for the worst, the owners were trying to sell which is a red flag in itself. A random survey conducted on local residents provided negative feedback on both the service and efficiency front. Due diligence performed unveiled a 300% staff turnover showing that working conditions were poor and reflected once again in average sales per store of a very low 115,000USD per annum. According to ATO’s 2011 industry performance benchmarks, the average labor turnover is in the 14-27% vicinity for a business turning over 65-150k PA. This puts Dynasty at a shockingly high turn over rate and raises cause for concern. Dynasty is operating on a less is less policy, minimum wage, unhappy employees, poor service, less sales. Even though an opportunity does exist for a turn around, gaining customer confidence back in the chain would prove extremely difficult. At a sale value of 3.5million, an operating margin in negative at -.28% when the industry average is 6%, the risk is too high and opportunity based on reputation turn around alone is not worth the potential risk should the business continue at the same pace or decline after acquisition. Val and Chris identified the risk involved with taking on the reputation of Dynasty. The opportunity was not lost though as they had acquired possible financial backing from Rainer & Boulder in their venture. SWOT Dynasty Strength -­‐ 4 existing plants and 26 stores established (possible restructure) -­‐ Well located stores (high dense location as desired) Weakness -­‐ Old machinery -­‐ Poorly maintained plants -­‐ Business not doing well, hence reason to sell -­‐ Bad reputation (random survey conducted, loss of goods, bad service, cheap clothes only) -­‐ Short leases on shops -­‐ Pricing structure is weak, sales per store low. -­‐ Investor needed requires high return (Boulder and Rainer 25%-50%) Opportunity -­‐ To upgrade and capture high frequent use customers and cater to high end clothes -­‐ DAG desired strategies can be applied using the current framework – revamp

Threat -­‐ Possible future liability (safety rules neglected and solvent issue) -­‐ Possible rising rents at stores due to short lease weakness -­‐ 300% labour turnover (ATO guidelines indicate labour turnover at highest annual range when revenue is 600k plus is capped at 40%) 2. Superb The decline of this stand-alone dry cleaner in Northern Virginia was an apparent backlash to the death of its full time Manager. A key success factor identified in Val and Chris’ research that was the majority of successful stores were owner managed or had a highly vested Manager. Although their income statement showed that total labour was eating up 53% of their revenue and the industry standard is 40%. The location as a free stand building in a dense area is in line with the DAG group strategy however is located on the wrong side of the street for easy customer access. The plants capacity had ample room to expand and cater to additional dry stores as well. Additional upgrades of 73,000USD were identified and at a selling rate of 450,000USD the total investment needed would be 50% of this amount from their financial backers Rainer and Boulder who seek a 25% minimum return. The additional bank note would see a 10% interest rate on the remaining over a 7 year period meaning that the increased costs would require the business to have a significantly higher return than currently, just to cover costs. Without actually being able to perform due diligence on actual figures or see the books, the current situation was based on presumptions and the actual additional revenue required is not know. The option although appealing in more ways than Dynasty group is not a wise financial choice. SWOT Superb Strength -­‐ Free stand building on busy street (in line with DAG strategy) -­‐ Independently ran establishment Weak -­‐ Significant upgrades required (73,000) -­‐ Currently overstaffed in comparison to size -­‐ Lower than average rate of return -­‐ Primary manager is no longer around to handover -­‐ Poor liquidity -­‐ Not ideally located for customers -­‐ No proper due diligence allowed to be carried out (not clear info on position) -­‐ Financial estimates based on assumption not reality. -­‐ Inflexible in price Opportunity -­‐ Capacity for expansion within exiting plant -­‐ Can introduce laundry as not existing Threat -­‐ Single store can be overtaken by a larger franchise with funds 3. Start up DAG Superstore Of the three options presented, the Start up is most attractive however not the best option to opt for in totality when looking at the industry as a whole. The start up assumes almost triple the industry average revenue can be attained within 3 years and without any real revolutionary ideas or innovations to the industry and with

increased possible threats of future regulatory restrictions and decline in users for economic and environmental purposes, it does not really reflect a strong reasoning for the presumption of these estimates. It is not advisable to invest in loan on second hand equipment that may be unreliable or without service warranty, arising in additional costs and asset replacement that may need to occur within a few years if government regulation enforces environmentally friendly waste disposal methods or dry cleaning solvents requiring a different type of machinery. The Dry Cleaning Industry as a whole SWOT

Strengths -­‐ No alternatives introduced to dry cleaning, have monopoly in method -­‐ Heavy users that will always have a need for product and make up 80% of revenue -­‐ Have extensive research and knowledge in the indusry -­‐ Strip mall requirement

Weaknesses -­‐ Supplier limitation -­‐ 35-­‐40% customer loss rate -­‐ Deteriortating industry owenrs not willing to upgrade -­‐ 20 year old technology no recent innovations -­‐ High cost hazard waste expenditure -­‐ Ideal localities pose higher rent rates

Opportunities -­‐ Quality focused business -­‐ Home delivery and pick up -­‐ Economic friendly supplies and technology -­‐ Supplier focused rather than service -­‐ Consult existing businesses

Threats -­‐ Increased consumer awareness on Perc solvent issues threatening decline -­‐ EPO possible label downgrade to probable Cacinogen -­‐ Tightened regulations on solvent emmissions requiring plant upgrades and additional plant expense

SWOT Elaboration Strengths The Dry cleaning industry has a permanent need with consumers; until that is, that a home solution is provided. However, the convenience factor and time efficiency that is the driving factor for use of 80% of dry cleaning customers would be lost. The industry is secure in the convenience and ‘need’ sector. Val and Chris have performed extensive research to the point that they have spoken at events about their findings and have attained the ability to recognise the strengths and weaknesses of any business.

Weaknesses With only 3-4 suppliers in each city, there is a possibility of supplier domination on the industry. The high turn over of customers shows that loyalty is a problem and that the price war is winning as the situation stands today. The hazardous waste is expensive to dispose of and no real innovation has been carried out in the industry at any stage of supply chain or operation to find an alternative solution that is cost effective as well as environmentally friendly. Opportunities The bulk of customers (80%) are heavy users who’s primary concerns have been recognised as convenience and timing. There exists an opportunity to invest in a SUPER PLANT and offer pick up and delivery services only. The cost of a store would be replaced by additional labour and vehicles required, however through quality efficient dry cleaning and laundering of goods on a delivery basis, would capture the heavy users who would be willing to pay a premium for the service. Store Location would no longer be an issue and neither would accessibility or appearance. There would be less customer contact points for Chris and Val to audit to ensure customer satisfaction and in turn could focus more on timing and quality. Further opportunity is presented as a consultancy business for dry cleaners in specific. The research and knowledge Chris and Val have gained has given them insight on the industry and without having to invest from scratch, existing owners would benefit from consultancy using the findings they have come across. The lack of innovation in technology or economic methods is another avenue worth exploring and is well needed in order to keep dry cleaning in profit and aligned with regulation. Opportunity also exists to become a major countrywide supplier sourcing better but cheaper or environmentally friendly products on a mass scale to distribute to the existing dry cleaners. They also already have contact and connections with US largest chains and are in the industry spotlight through their events and conference contributions to easily be able to move into the supplier sector. PEST Analysis

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• Hazardous waste issues due to use of paper cartridges. Must be disposed of efficiently • Solvent issue • Key benchmarks set by government for labour to turnover ratios and income to business expenses. • Mainly sole proprietorship businesses • Estimated 4 billion dollar industry • Mainly competes through pricing competition • Average spend per customer 16 dollars per capita • 35-40% customer loss rate • Deteriorating industry, proprietors not wanting to upgrade • Possible law changes by the EPA to re-label solvent used by dry cleaners to a probable carcinogen to a possible carcinogen. • Customer segments are heavy, light and occasional dependent on frequency of use. • Outdated technology across industry awaiting innovation • 20 years with same equipment no innovation • Plants require upgrades • Percloroethyene is the core component to dry-cleaning and has been since the 19th century

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Porters 5 Forces

Competitive Rivalry -­‐ Many competitors, primarily at price war -­‐ High coupon usage industry -­‐ Zero switching cost -­‐ Low customer loyalty

Supplier Power -­‐ Only a few suppliers -­‐ Products are consistent through out supplier types -­‐ Unless by contract, is easy to interchange between suppliers

Threat of New Entry -­‐ Turnkey solutions easily attainable -­‐ No experience neccessary -­‐ Market gaps for quality/efRiciency providers

Buyer Power -­‐ Extreme price sensitivity -­‐ Heavy users willing to pay premium for efRiciency and consitency -­‐ No existing substitute for industry -­‐ Bulk agreements with hotels, hospitals etc

Threat of substitution -­‐ Possible innovation of washing machines in the home to have dry cleaning ability

Question 2 Superb is an attractive opportunity in terms of location, and capacity of plant to expand. However the financials or lack thereof as well as the return on investment required by the financiers poses too much of a risk to enter into. If Val and Chris had capital or assets to borrow against, then perhaps it could be a possible opportunity. However, other opportunities have been identified in this case study, which would prove more beneficial and lucrative.

Question 3 The advantage of acquiring a dry cleaner is that you have a customer database to turn around and access which is usually cheaper than trying to gain new customers. Plant and equipment is available and ready however the disadvantage is that the equipment may be poorly maintained. Any negative opinions customers have of the brand through its previous owners are very difficult task to overcome. Reputation will stick and unless you have the capital to entice customers initially through free offerings or low rates or guarantees, it will be costly to acquire new customers or gain back previously lost. Turnkey solutions are available for start up businesses, so not too much emphasis is on the equipment availability As a start up, you have acquire new costumers however most will be willing to try at least once then it is up to the business, service and quality, to retain those customers. This is an advantage. Question 4. There is most certainly an untapped avenue that is available for a new entrant to the industry. As aforementioned in the opportunities section of industry SWOT analysis, for an opportunity to invest in a SUPER PLANT and offer pick up and delivery services only. The cost of a store would be replaced by additional labour and vehicles required, however through quality efficient dry cleaning and laundering of goods on a delivery basis, would capture the heavy users who would be willing to pay a premium for the service. Store Location would no longer be an issue and neither would accessibility or appearance. There would be less customer contact points for Chris and Val to audit to ensure customer satisfaction and in turn could focus more on timing and quality. An App or website could also be developed to make it simple and easy to order. Chris and Val have not capitlised on this, as they have not been able to think outside the box on any level, they have not come up with anything mind-blowingly different to what already exists. To simply want to take an industry over by offering better service is not enough. The industry customers are looking for EFFICIENCY, CONSISTENCY and CONVENIENCE. We need to innovate to find a way. Delivery almost does not exist in the States and this opportunity would be well worth investigating.