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The Sports guy

Key Events / Case Synopsis

The Sports Guy is an independent sporting goods store operating outside the GTA owned by Bob “Rocky” Rhodes who is a considerably high profile personality in the local sports community. He has been a star player on local teams his whole life and has always made it a priority to show support for all things related to his sports community. Most of The Sports Guy’s sales consist of equipment and uniforms to local teams. Around 70% of their sales are made up by purchases from hockey, baseball, football, soccer teams with the remaining 30% made up from walk-in retail trade. Rocky has problems with inventory management, low ratio of sales by walk in customers and his major source of sales for teams declining due to lack of registration in local teams. Despite being located in a prosperous neighborhood with little competition except a small, older Canadian tire that offers low prices but lacks in quality and customer service, The Sports Guy is having financial troubles.

Problem Statement and Objectives

The Sports Guy’s profitability has not been growing sufficiently enough to provide Rocky with the means to grow his company as the town develops. A lack of inventory system which affects his most profitable sales group: walk-ins has also increased his short term debt and interest expenses which all eat away at the already tight profit margins. Decline of popularity for kids’ leagues which was the major aspect of the local sporting scene and attributed to covering his business costs is another growing concern. In order to gain more bank credit to order higher inventories and expand Rocky’s bank manager and accountant he needs to improve the stores profitability. Rocky needs suggestions on how he can improve the financial performance of his business.

Situation Analysis

Currently Rocky’s store is suffering through difficult financial times as he is experiencing slow growth with really high expenses and a lack of business training has left Rocky unable to manage his inventory and salaries expense. His rising costs have been eating away at his already low profit margin, the only reason his business is still afloat is due to the long term connections he has with his loyal sports community customers. The Sports Guy is considered to be part of the sporting and athletic goods industry. Unfortunately in recent years, as it is considered to be a leisure product and not a necessity it has suffered negatively due to changing tastes, competition from other leisure industries and tough economic situations (Consumer Products, 2013).

SWOT

| STRENGTHS | WEAKNESSES |

Internal | * Have a solid relationship with his contacts in the sports community, this relationship is what has allowed him to conduct majority of his business so far and even though it has slowed down it will still continue to be a large chunk of his business. | * The decline of popularity of kid’s leagues was a large focus of the local sports scene. This makes up a large part of The Sports Guy’s sales and could potentially send the company into a loss if they are unable to cover business costs. | | * Marketing presence in local newspaper and local TV channel which we can assume increases brand recognition and customer loyalty. | * Employees are not the most skilled sales associates. Having good salespeople can really make a huge impact on Rocky’s profits. His current sales force may not be maximizing sales revenue. | | * Located in a growing area of town, busy road with strip malls containing other retailers in a busy neighborhood. High foot traffic allows for a higher chance of walk in business which is their profitable group. | * Inventory management is a huge issue for TSG and it is putting his business at risk with piling up inventory short term debts and interest expenses. | | | * Rocky has no business knowledge, his lack of understanding how a business runs is really hurting his store as he cannot analyze his own financial statements. | | Opportunities | Threats |

External | * According to the information provided in the case, it seems as though Rocky has focused most of his attention towards the long term residents in the area. There are plenty of new younger families and new developments he should aim marketing efforts towards as there is a huge untapped market nearby. | * Sporting and athletic goods fall under leisure merchandise. Leisure is a matter of personal choice, market trends and changing tastes. The industry faces high competition with all sorts of unrelated industries that also produce leisure products such as books, music etc. (Consumer goods, 2013). | | * If Rocky were to sell the vacant lot for a decent amount of money as his realtor friend suggested, he could use some of that money to invest in an inventory system that would help decrease his inventory turnover ratio. | * Few entry barriers to the industry. Many firms in the industry that vary in size and product specialization. (Consumer goods, 2013). As the area around his store is growing rapidly it would not be a surprise if another sports store opened in the area which would most likely make TSG go out of business as they are already struggling. |

Porter’s Five Forces

Sporting goods stores buyers include sporting league, sports fans, and athletes. In this industry the buyer has the power. The buyers include sport leagues, athletic people, and sport fans. These customers have easy of switching for the sporting goods stores, these customers are also sensitive to price changes as sports are seen as a leisure activity and unnecessary. The suppliers in this industry have the power as the suppliers have many retailers to sell to, the supplier also has the option of forward integration. New entry is high in this industry as there is low regulation for this industry. The main thing needed to enter this industry is capital. There is not many substitution for sporting goods as these goods are related to the sport itself. Due to the easy entry and large number of retailers in the industry there is high competition.

Historical Financial Analysis

When compared to industry averages, TSG’s financial numbers were not too far off. The gross, operating and net profit margins all differed very slightly from each other (less than a 2% fluctuation). However when examining the income statement for the years between 2006-2008 it showed that although sales were growing slowly as was COGS which ultimately resulted in a tiny bit of a gross profit decrease. While the numbers all varied very little from year to year one of the numbers that really stood out was the increase in interest expense, presumably due to the much higher than industry average inventory turnover rate. This was one of the main reasons that expenses stayed around the same instead of decreasing as they should have in 2008.
Identification of Alternatives 1. Invest in an Inventory system that also monitors the most popular units sold so Rocky can develop a sense of which types of products and how much stock he should carry. 2. Should increase his minimal advertising budget to attract more of the new residents who have moved to the area as he is already well established with the older ones. 3. Sell his plot of land to help with raising the funds he needs for expansion.

Analysis

Inventory management has been an ongoing struggle for TSG in the past few years. While he was catering only to teams it was much easier for Rocky to just order as much as was needed. However to appeal to the walk in clientele, he feels that he needs to have a vast amount of inventory for it to appeal to the customers, but unfortunately it seems that the sales have not been as high as he guessed and outdated merchandise had to be sold at a loss. This declining inventory rate has started to increase his interest expenses which increase the overall operating expenses which ultimately reduces his net profit. Investing in a computerized inventory control system would really help Rocky to predict the types of products that were being sold and how many he had in stock. This system would also help control his rising inventory levels as he could always have an exact picture of his stock levels and what needs to be replenished and what is not selling.
The store is located in the south of town between the new subdivisions and residents. While Rocky should always maintain good relationships with his current long term customers, he has a large growing untapped market surrounding his very store. All of his current marketing efforts mainly reach the long term residents who are already familiar with The Sports Guy. If he was able to cut other expenses such as decreasing his high cost for salaries or his other costs and increase marketing by even 1% to the industry average or 2.1% it would really benefit his store well. Already being in a popular location in town if he was able to generate some publicity through a social media campaign or local event he would definitely be able to increase the number of walk-ins he gets on a usual basis.
Another option that Rocky could explore is selling his extra plot of land to cover either his some of his mortgages payments and property taxes which would allow for a higher profit margin. He could also direct those funds into expansion by means of purchasing more inventories, creating a deeper marketing budget or even investing some towards the salary of a manager trained in business who would understand how to cut operational costs. The cash flow he would get from selling the plot would really ease some of the financial stresses on the company if he chooses to invest the money properly.

Recommendation

We recommend the second alternative to helping Rocky improve the financial performance of his business. By allocating his resources to attract further walk in clientele he can improve his business profits which would allow him to make further changes which would also help streamline the business and help improve efficiency. By marketing to the new subdivisions he could potentially improve his ratio of walk in customers which are the largest profit segment. It was a difficult decision whether or not Rocky should invest in a modern inventory system first and then focus on marketing as the inventory system would really help improve the financials as well by reducing the amount of leftover stock that gets sold at a loss and lower the interest expense. The reason we chose to market to attract more customers was because it is the safer option to market to first gauge if The Sports Guy is able to attract the customers with their advertising efforts instead of investing in an expensive inventory system. If they are unable to attract new customers and their business is still compromised largely by teams that do custom orders then a high-tech inventory system would not serve any benefits.