UK Footwear Market Growth Analysis

Introduction

The global footwear market is a highly competitive market divided among a few major companies and supplemented by a wide range of small players who include designers, manufacturers, marketers as well as retailers. As a result, entry into the market presents a major challenge and requires effective planning and strategies both in the design of the shoes to satisfy consumer needs as well as in the budgeting and capital investment. However the footwear market within the UK according to Clare (2017) is forecasted to grow by 13.7% over the next 5 years and reach 9.5 billion Euros by 2022. This presents a favorable statistic and is among the driving factors of new entrants into the market as well as the development and expansion of the already existing companies in the market (Baram, 2019). One such company is the Sportech Limited in Scotland which having established a wide range of favorable statistic with regards to the production and sales of Hybrid shoes , have developed a plan for expansion in both the brand and the physical companies. This report highlights an analysis of the company’s expansion strategy highlighting the budget and various financial accounts and reports as well as a developed budgetary control system.

Analysis of the Case Study

Sportech Ltd. is a footwear company in Scotland specializing in special design quality sport shoes which retail in various specialists outlets across the UK. The company has been able to build their reputation, especially in the sports footwear market for price, quality and delivery managing production of up to 55, 000 pairs of sport footwear in 2018, this, despite the company being small with only 20 employees currently 15 of who are in production. This highlights that the production process is labor intensive and as such Human Resource is one of the key resources in this industry. Despite the high competition in the Hybrid shoe industry based on the high quality and market prices offered by other competitors who have already established themselves in the industry, Sportech having secured favorable premises are looking to invest in the market through the production of a training hybrid shoe, the Sportech Hybrid. Given the brand name of the company already established based on the quality and reputation of their products among their customers, entry to the market should be successful

The company’s initial pricing techniques before standardization included 65 Euros for Each pair of these hybrid shoes so as to be able to recover the initial design and development costs as well as be able to establish an early market share. The premises are effective for production and storage processes, however retrofitting for the new special design shoes as well as investment in specialist equipment and machinery will be crucial for efficient production processes. Factoring in the production of only one design within the first year, a production period is set for 48 weeks at 35 hours a week to enable closure for essential maintenance of the machinery. With this production should be able to hit 110 pairs of shoes a week which is sufficient quantity for the 20 retailers spread across the UK. However an increase in the demand is expected for the next 2 years before a level off. The expansion will need 2 additional workers in the associated cutting, assembling and finishing works so as to be able to achieve sales of 410 pairs of shoes a month. This as well as the initial design process and the initial material requirement for improved designs will require additional capital. However for the persuasion of the board a full financial review is necessary as well as a guarantee of 30% profit within the first year of production.

Financial Analysis

In the analysis of the company’s finances and the development of a working budget a wide range of financial sources and information will be considered. This primarily involves the preparation of various financial documents which range from a full production cost for a pair of hybrid shoes to enable the determination of suitable selling prices. Preparation of financial accounting statements for the new product which include: income statement and financial position statement as well as the preparation of the cash budgets for the first year and a capital investment appraisal on the validity of the strategy taken up.

Capital

Among the major requirements include: A specialized Industrial digital die-cutting machine priced at 80,000 Euros, with a regular maintenance priced at 5% of the capital cost per annum, the machine will depreciate over a period of 10 years, after which it will require replacement. While other cheaper machines exist, this particular one is preferred as it will enable the reduction of tooling cost and therefore overall cost given its ability to digitally program the machine and retrieve designs when needed. Other general equipment and retrofits sum up to 20,000 Euros with depreciation and maintenance costs being incurred on the same basis as the machinery. The new company premises on the other hand costs 200,000 Euros and the company is set to finance this using a mortgage on the existing company. Other associated costs include

Cost of Capital = 10% on new investment

Materials

Polyurethane and Silicon = 65 Euros per sheet measuring 1.5m x 1200mm each sheet making 16 individual shoes

Carbon Rubber = 90Euros per sheet measuring 1.5m x 1200mm, each sheet making 16 individual shoes

Ethylene Vinyl Acetate (EVA) = 1200 Euros per roll, each roll making 2500 individual shoes

Nylon Weave and Overlay = 1800 Euros per roll, each roll making 1600 individual shoes

Indirect trimming materials = 1.20 Euros per set, each set making 1 shoe

Human Resource

Each production worker takes half an hour to make one shoe

Labor and machining time = 3:1

This highlights that machines take 10 minutes to make one shoe and therefore the total time taken to make one shoe is 40 minutes

Labor cost per worker = 10 Euros per hour

Inspection

Every 5th batch will be inspected in the first year with the costs at 25 Euros per batch

Tooling cost

One tooling cost is incurred at each set up and one set up is required at the end of each day.

Tooling costs for a set up are estimated at 40 Euros

Fixed Overheads

Production Activities

Staffing 200,000 Euros

Procurement 16,800 Euros

Estate Management 25,000 Euros

Utilities 30,000

Other production fixed overheads 14,200 Euros

Administration, selling and Distribution

Staffing 180,000

Utilities 15,000

Transport 60,000

Property Costs 24,200

Other general fixed overheads 10,950

Deliverables

Product Cost Statement

Bragg (2019) describes product cost as the cost incurred in creating a product. It includes direct labor, direct materials, consumable production supplies and factory overheads. Often the cost of production on a unit basis is derived by the compilation of all costs associated with a batch of units that were produced as a group and dividing by the number of units manufactured. As such the calculation is

(Total direct labor + Total Direct Materials + Consumable supplies + Total Allocated overheads)/total number of units

Alternatively the value of each component required for making one single unit can be calculated and then added up to give the unit product cost. That is:

(Direct labor for a unit + Direct materials for a unit + consumable supplies for a unit + Allocated overheads for a unit)

Based on the calculations highlighted in Appendix I the product cost is 80.47 Euros

And as such the suggested price per pare is 161 Euros.

Break Even Analysis

Break even analysis refers to the point in which total cost and total revenue of the production and sales of a product are equal (CFI Inc., 2018).

The formula for calculation of the break even analysis includes:

Break Even Quantity = Fixed Costs/ (Sales Price per Unit – Variable Cost per Unit)

The fixed costs = the capital investment + Fixed overhead cost

Sales price per Unit = Product Cost

Variable Costs per Unit = Cost of maintenance per unit.

The calculation based on Appendix II highlight this figure to be 11,209.99 Euros.

Income statement

The income statement is among the major financial statements used by accountants in businesses. It is sometimes referred to as the Profit and loss statement, statement of operations or the statement of income as highlighted by Chen (2019). The income statement records and reports the income of a company or business over a particular period of time and therefore indicating the profitability of the business. It focuses primarily on four different key items including: Revenue, Expenses, Gains and Losses. Essentially Chen (2019) premises that, this statement is responsible in giving an account of how the net revenue realized by the company gets transformed into net earnings of the company giving either a profit or a loss and indicating the profitability of the company. It therefore lists the revenue earned and the deductions made for investment, expenses, and taxes before the actual profit or loss of the company is highlighted. The table below shows an illustration of an income statement

Statement of Financial Position

Statement of financial position often refers to as the balance sheet is a financial statement that reports the assets, liabilities and Equity of a company or organization as at a given specific date. Wohlner (2019) points out that the importance of this statement is to enable the assessment of the financial health of an entity. It majorly comprises of three elements including: Assets Liability and Share Holders Equity. Appendix III highlights the statement of financial position for the new product in Sportech Ltd.

Cash Budget

In being able to implement the strategy however based on the information highlighted, a suitable and viable budget is required. Appendix IV highlights the functional Cash Budget prepared for the first year of production of Hybrid Shoes by the company.

Budgetary Control System

Budget Control refers to the process of determining various actual results with budgeted figures for the process of production and development of a product after which they are effectively compared to the actual performance through calculation of any variances that may occur (Venkatesh, 2018). This project will take up monthly appraisals and evaluation of the production and sales process of the new Sportech Hybrid Shoe in order to determine its effective progression and ensure eventual profitability from the expansion process. Monthly revenue and expenditure will be used in comparison with the budget amounts to determine the achievement or lack of achievement of the set variables.

Conclusion

The shoe industry within the entire globe is quite competitive and innovation as well as creativity in the design and comfort of the shoes is some of the major competitive advantages that companies may have over its competitors and therefore influence its overall profitability. Developing Hybrid shoes is certainly a technological innovation that the company stands to greatly benefit from especially given the robust planning and budgeting that is guaranteed to be viable and profitable eventually.

Recommendations

Based on the financial analysis highlighted in the report the following recommendations were highlighted:

The investment in Hybrid shoe production and sale should be effectively implemented in a step by step basis according to the laid out plan

Keen interest in production processes and expenditure going into production should be noted and appraised to avoid any extra expenditure and impact on the revenue flow and productivity of the whole process of innovation.