Date: March 10th 2010
______________________________________________________________________________ As you know your business Westlake Lanes is currently not performing up to the mark. I think there are a lot of steps we can take for the betterment of the business. There are many problematic issues with the business and I have identified some of the core ones-: •It feels old, no major renovation done in a long time
•More machines need to be replaced, maintenance expense is on the rise •Since 2004, Revenues have fallen by 50% and healthy profit five years ago has turned into a loss •Not targeting the right demographics of people aged 21-44 During my analysis, I looked at several scenarios, which included renovating the bowling alley into an urban bowling lounge, converting it into a kid friendly place, keeping the business as it is, or selling the business. In the appendix attached you would see that I have taken 3 cases into consideration for urban bowling lounge and kid friendly bowling alley. •Worst Case Scenario (Low Revenue)
•Moderate Scenario (Average Revenue)
•Best Case Scenario (High Revenue)
All the assumptions are mentioned in the appendix
Option 1: Urban Lounge/ Bowling Alley
The Bowling alley already has a liquor license, which is very expensive to attain. Alcohol sales also have a very high gross profit margin as compared to food and beverage. In this alternative our target group will be young professionals in the age group if 21-34, who spend more per person thereby generating higher revenue even with less footfall. By combining a bowling alley and a lounge we are creating a new market, which is currently not present nearby, thereby creating a competitive advantage. This also reduces the threat of new entrants, as investment is very high. Buying power in Raleigh is also on the rise, which further supports this option. Cons
By taking this option we risk losing our loyal customers (league bowlers) who have been coming here for years and provide continuous revenue during weekdays. The investment needed is very high, contributing to a high risk factor. We will also have to hire more trained professionals (ex professional chef) for smooth functioning of the lounge and risk of damages because of liquor is also high. There are also a lot of already successful established high-end lounges in the downtown area, which can be tough competition. My analysis shows that you can attain dividends of $21,043, $238,468, and $513,743 for worst, moderate and best case scenarios respectively. (Appendix A attached). Option 2: Kids Friendly Bowling Alley
The other option is to convert the bowling alley into a kid friendly zone by adding arcade games. Your investment is minimal and shall be easy to attain. My analysis shows (Appendix A), that this is a relatively safe option. Even in the worst-case scenario, the business is able to churn out dividends of 36,311, which is higher than the lounge option. For medium and best case scenarios the dividends are $79,536 and $128,936. The scope here is limited as the returns are not very high even in the best-case scenario. Option 3: Continue with the same strategy
After working continuously for 9 months, you have been able to make the business profitable for the first time in years. This decision doesn’t require any additional capital investment, and can bank upon the image of the Bowling Alley. The league players will continue to be loyal customers, and offering discounts and starting shorter leagues can add more league bowlers. As estimated by you, if the business were to continue as it is, net income of 60k can be achieved by the end of the year.
In a few years of managing the business by scrutinizing every expense you can accumulate enough savings to go for a bigger renovation in the future without depending on the loan from shareholders or banks. The disadvantage to take this option is, even though business is profitable, it is not aiming high, which is different from you vision and your entrepreneurial goals, and this can lead to dissatisfaction, and in turn prove frustrating thereby hampering the business. This option still doesn’t take advantage of the growing population of the youth either. Option 4: Sell the business
In this case the business can be sold without taking a loss. At the end of 2009 as per the data provided total liabilities are $154,208, assets constitute $191,303 and owner’s equity is $37,095. If we sell the business now, the shareholders can still make some money out of the venture and get out of the business before the situation exacerbates. The disadvantage of this option is a lost opportunity. The main threat of entering in the bowling business is the huge investment in the construction of the building and the lanes, which in this case is already there. The business is on a long-term lease and is paying relatively low rent. You will also be letting go of a 30-year-old brand that people recognize. Recommendation:
My analysis shows that going for the Lounge option will yield the highest benefit. As per appendix A, we can attain dividends of $ 238,468 within one year of reopening of the lounge even by having average sales. The figure obtained here is the most realistic out of the three cases and yields a healthy return on investment. Raleigh North Carolina, which has grown at a very high rate in the last ten years, also has a huge youth population, which is our target market.
The location of the bowling alley is in downtown, which is a big plus. Considering these factors along with your ambitious entrepreneur nature and your hesitance to work with kids, I recommend to take a calculated risk and go for the High End Lounge Option. By going for this option we will also take care of all the issues stated above.
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Exhibit 1 – Projected Income Statement of Westlake Bowling Lanes for Kid-Friendly v/s Upscale Bowling Lounge for Low Revenue, Medium Revenue & High Revenue
1)Full Time Salary break up: Chef’s Salary – $60k, Shelby Given’s Salary – $80k, Gary Spalding’s Salary – $45k. 2)Part Time Salary: $9 per employee.
3)For lounge, the lane rental, food and alcohol sales would contribute 30%, 30% & 40% towards revenue respectively. 4)For kid friendly, the lane rental, food, alcohol and arcade games sales would contribute 55%, 20%, 5% & 20% towards revenue respectively
Exhibit 2 – Projected Average Footfall and Revenues in Lounge v/s Kid-Friendly for the 3 scenario
Exhibit 3 – Comparison of dividends for Lounge, Kid-Friendly & Current Situation for the 3 scenarios.