Business Plan For A Cd Shop

Contact Information:

95 Jackson Avenue
Dallas, TX 63453
(325) 555-2642
jw325@myisp.com

This document contains confidential information. It is disclosed to you for informational

purposes only. Its contents shall remain the property of Business Plan For A Cd Shop and shall
be returned to Business Plan For A Cd Shop when requested.

This is a business plan and does not imply an offering of securities.

 Table of Contents

1. Executive Summary 1
Business Opportunity
Product/Service Description

2. Company Background 3
Business Description
Company History

3. Business Plan For A CD Shop 5

4. Services 6

5. The Industry, Competition, and Market 7

Market Definition
Primary Competitors
Customer Profile

6. Marketing Plan 10

7. Financial Plan 11
Investment Plan
Break-even Analysis
Liquidity Plan
Earnings Plan
Risk Analysis

8. Conclusion 19
Business Plan For A Cd Shop 1

1. Executive Summary
The retail industry shows a constant positive demand especially for CDs and music
equipment. Compared to other business activities, the retail business has low risks because of
low required investments. New forms of cost cutting and store optimization will help to set
up a successful business. The return on this kind of retail business has a growth rate of about
5% to 7% per year. A company that provides additional service activities for the customers
can be sure to have a high demand and a strong competitive advantage.

The goal of this start-up is the operation of a shop for CDs and music equipment with one
location that offers a comprehensive range of products and additional services, depending on
customer demand. New forms of marketing and distribution will increase sales revenues and
utilize personnel capacity.

1.1 Business Opportunity

The development of new business strategies and solutions seems critical for industry
players to survive the problems in the music industry and regain a market share in this
highly competitive industry. The choice of new products, as well as the architecture of
the store and additional services, can be one strategy in this development. Additionally,
sound cost management is of critical importance for a solid stream of revenues. Big
industry players have shown that even in a stagnating market, growth rates of more than
5% can be sustained.

The operation of a retail business that offers the following entertainment products and
customer services is the core of this start-up:

CD
DVD
electronic games
music equipment
DVD player

A strong focus of this business will be placed on the development of new and innovative
strategies for the customers that deliver a significant value. As an add-on, a broad range
of service activities will be offered, which will help utilize company and employee
capacity. The range of products is selected to provide solid growth potentials. This can
lead to a fast change of items or whole item groups, as well as services.

The operation of this business requires a good knowledge of the market to select a
competitive service concept to increase customer satisfaction. However, it is critical that
this service is offered with a strong focus on cost management.

One central goal of the proposed business strategy is the development of a unique
corporate identity. Such identity will create customer loyalty and help gain a competitive
advantage. Therefore, it is planned that additional to the selection of new and interesting
services, a company design is developed. For this reason, the service around the offered
Business Plan For A Cd Shop 2

applications and the additional businesses is very extensive.

The required investment for the proposed business is moderate compared to other
companies in the industry. Labor and the costs for goods are expected to be the main cost
driver, whereas no other substantial investment in fixed assets is required. Depending
upon the location, the minimum required investment amount ranges between $50,000 and
$55,000 in the start-up phase, based on a 15-18% average revenue margin. This amount
is well within the financial requirements observed for other comparable companies.

1.2 Product/Service Description

The business will operate in the retail industry segment with a variety of entertainment
products. Additional sources of revenues, beside the sale of products, is the development
of customized CD packages and Mp3 products. Cross selling is planned to be one of the
prime strategies in this business since all products are targeted to serve a similar need and
can easily be combined. Synergy in selling product across business segments is likely to
boost earning further. Net earning are expected to be at least 2.5% above traditional retail
businesses with only one or two sales segments.

Figure 1.1 shows the revenue mix across segments in the start-up phase. This projection
is based on the expected strategic direction, investment amount and business
environment. Being the core business, the sales segment is expected to generate the
largest share in revenues. The sale of individual services is expected to be another
important generator of revenues, which also helps utilize invested capacity. The selection
of products that shows the highest revenues will be another task that will be performed
during the business phase.
Business Plan For A Cd Shop 3

2. Company Background
The goal of this start-up is the operation of a shop for CDs and DVDs. The focus of this
business will be on the product segment for individuals which shows the highest profits.
Additionally, the sale of service activities is planned to reach an optimal utilization of
personnel and company capacity. An initial investment amount of at least $50,000 to $55,000
is required, which will allow the operation of a typical store business with 2 to 5 employees.
Sales revenues are expected to range between $150,000 and $200,000 in the start-up phase
and the operation is expected to generate profits starting at least in the second or third
business year.

2.1 Business Description

Management is expected to have a solid knowledge of the offered entertainment products
and services to influence the customers. The goal is to create an innovative business in
which the customer experiences competent service. A well chosen and targeted selection
of offerings will complement this strategy. Both aspects are core requirements to build
customer loyalty. Repeat customers are expected to generate revenues of 40% and more.
Although this strategy is likely to require additional investments, it is expected that
revenues per customer will increase significantly and range above industry average.
Furthermore, this strategy will provide a clear entrance barrier for prospective
competitors.

The development and promotion of a corporate identity is another central task for
management. Given the homogeneity of businesses in this industry, the development of a
corporate identity will markedly increase sales revenues and build a customer base.
Furthermore, a corporate identity will support expanding the business to a larger
international target market.

2.2 Company History

In the start-up phase, the business is operated as a one-person-business. This set up
carries a certain risk potential because of the high equity stake the manager bears and the
personal and statutory liability assumed. However, this set-up preserves a high degree of
flexibility in managerial decision making.

The number of personnel to be employed depends on the structural complexity of the

operations and the desired size. Figure 2.1 shows a break up of costs in the industry. It is
expected that the target employee earns a monthly salary of $2,000 to $3,000 based on 40
hours per week. The sales and service area requires 1 to 2 employees on average working
in 2 shifts. Due to illness and vacation times in the long run, an average of 4 permanent
employees will be required after the start-up phase. With increasing sales and better
utilization of employee work time, revenue margins will increase and thus costs per
employee will decrease on average. With revenues ranging around $500,000, capacity
utilization is expected to be around 85%.
Business Plan For A Cd Shop 4

During the start-up phase, a single person will attend to all necessary management task,
coordinate employees and provide strategic direction to the developing business.
Accounting, administrative and machine maintenance will be outsourced to an external
partner since those tasks can typically be provided at better rates externally. Sourcing and
marketing will require one employee.

Finding the optimal location for a business is one of the success factors in the short and
long run. This is also important for virtual businesses because taxes, employees and
additional costs are crucial for all businesses. The following analysis is based on 10
businesses in the trading and retail industry. Since a small company is recruiting its
customers typically from the home country and later from a worldwide area, a national
location is considered as the core market.

For the location with a core market in the selected region following factors are relevant:

Rent is low.
Administration cost are low.
Customer demand has growth potential.
A young clientele is required.
Competition should be low.
The possibility to recruit additional personnel is favorable.
Public institutions are expected to provide additional sponsoring.
Business Plan For A Cd Shop 5

3. Business Plan For A CD Shop

One of the key elements of a successful business in the retail industry is the selection of
products and services that are currently as profitable as possible. The shop will provide the
following product groups:

CD products
DVD products
CD and DVD player
electronic equipment like Mp3 player
computer software
electronic games

The specific selection of products, services and applications offered will be monitored
constantly and vary according to business needs. This strategy provides a competitive edge
against other regional retail companies in the environment and is expected to generate an
additional demand and the possibility for a price mark-up. The selection of products is based
on the following financial figures:

profitability
absolute price
absolute demand
handling costs
additional service capacity

It is expected that the shop covers about 10000 products.

Business Plan For A Cd Shop 6

4. Services
Additional service offerings independent from the core sales business provide additional
fields of business. The available competence will be used for further business activities that
will generate additional revenues. While this is not a core business segment, this concept has
growth potential because the demand for services is rising. Initially, the investment in
inventory, technical equipment and personnel capacity of this segment is limited.

Especially the supply of the following services is expected:

Business Plan For A Cd Shop 7

5. The Industry, Competition, and Market

A careful analysis of the market and competitive forces in this industry is a key element in
assessing the business potential of our project. This analysis will provide marketing and sales
data that are indispensable to develop the business potential optimally. The main competitors
are comparably-sized retail companies in the regional environment with a similar selection of
products and services. Since the planned project is of national scope, the competitive analysis
will only have to focus on the local market. The market and competition analysis will be
based on the entire market.

5.1 Market Definition

Figure 5.1 shows average growth figures in revenues of typical retail companies during
the past 10 years. Despite slowing global economic growth in genera,l and in the retail
and service industry in particular, a lot of companies have experienced constant growth
rates of more than 5% to 10% since 1999. For 2004, a growth of 6% is expected with a
strong development in the third and last quarter.

Despite slowing economic growth and decreasing customer demand, the retail industry
underwent a relatively favorable development. New and innovative business concepts in
the retail sector still show high growth potentials, while growth rates of traditional
businesses in that industry were below average. The significant growth of new business
concepts is primarily due to sharp cost control and more efficient business strategies that
accounted for higher revenue and earning figures. According to industry estimates, 35%
of such innovative businesses gained from cross-selling activities between their business
segments. Sinking prices of input products and service costs have allowed the industry to
partially compensate for slowing demand. Savings in input costs were also due to
decreased labor costs. However, starting in 2005, this trend is expected to reverse and
growth rates will pick up markedly, despite the uncertainty in the development of input
prices and worldwide economic developments.

5.2 Primary Competitors

The competitive environment is primarily determined by the choice of item groups and
the regional location. But regardless of the selection of items, high mark-ups are not
Business Plan For A Cd Shop 8

feasible in the long run since this will attract competitors who compete away any rents.
With a high density of businesses in one location, businesses with the highest marginal
cost will be driven out of the market. Such locations will yield a return of 12-15% on
average. This is the expected equilibrium return in a saturated market. To further analyze
the competitive environment, it is necessary to define the players in that environment. A
firm that generates $300,000 to $1,000,000 in revenues and employs 5 to 10 people
should regard a firm with revenues and personnel 3 times this figures as a viable
competitor. On the product and service side, businesses with a comparable selection of
offers are regarded as competing in the same market segment. Figure 5.2 shows the size
of businesses in this market segment, which also includes different products and services
that will be sold worldwide. The numbers are based on average revenues of companies
that run their business more than five years.

5.3 Customer Profile

The specialized product and service offerings are primarily targeting a young and
financially strong clientele. A possible segmentation to identify this group is income as
well social groups, which determines revenue and earnings per customer or total
revenues and earnings. Segmenting the target market is a key element for the design of an
appropriate marketing strategy.

Figure 5.3 shows revenues by social group. Numbers are based on average sales per
customer of a particular group multiplied by the member of individuals in the respective
group. This gives total revenues per group. As can be seen, business people, pupils and
students generate high revenue streams. Members of these groups are frequent customers.
Although the total visits of random visitors are relatively higher, total revenues from this
segment are smaller because members in this group are less frequent visitors.

Figure 5.4 shows revenues by yearly income. The figure shows revenues generated per
income group. Numbers are based on the average income per customer and the number of
customers per income group. As can be seen, customers in the middle income bracket
generate the highest revenues. High frequented low income groups, such as students and
pupils, also generate relatively high revenue streams, although revenues per customer are
relatively lower.
Business Plan For A Cd Shop 9
Business Plan For A Cd Shop 10

6. Marketing Plan
In the start-up phase, it is a central task of the marketing concept to establish a name
recognition and a unique trade mark. Later on, the strategy will primarily be targeted to gain
new customers and create customer loyalty of repeat customers. Several marketing and sales
promotion strategies are available in the retail industry. Figure 6.1 shows different marketing
elements and their use in marketing strategies, as well as their estimated potential success
factor. The figure can serve as a direction for the planning of a marketing and sales
promotion strategy. The numbers are based on typical businesses in the retail industry. As
can be seen, printed advertisements target a large potential customer group, but at a relatively
high cost. Printed advertisements in regional newspapers and magazines are regarded as very
beneficial in the start-up phase to attract a large group of potential customers and draw
attention to the range of articles offered. 49% of businesses in the retail industry use printed
advertisements and about 60% of this group regard this as the most beneficial form of
marketing. Sales promotion strategies have temporary effects only. They are used at business
openings primarily and offer special discounts. 49% of businesses use sales promotion
strategies frequently and 81% of the users responded that this instrument is successful.
Marketing alliances with other online businesses to generate cost savings and increase
efficiency are used rarely. Such strategies include mutual use of marketing and web
promotion events and joint promotion arrangements. Only 45% of businesses have used these
elements and 55% of these regard this instrument as beneficial. Web and e-mail marketing is
used frequently in the retail industry, although this would be a relatively inexpensive
additional effort. Direct mailings are a very efficient strategy that sends mailing to selected
customers or businessmen groups. Since spreading costs of such mailing are very low, this
marketing element provides a useful tool for special offer promotions.

The use of marketing and sales promotions proceeds as follows: as a broad base to attract
new customers, the strategy will include a combination of printed advertisements and special
offers with opening discounts. Furthermore, a group of customers will be selected for direct
mailings. This strategy is expected to continue for 3-4 months, after which the effort will turn
towards creating customer loyalty for regular customers. This strategy is supplemented by a
regular marketing strategy and direct mailings to regular customers. A marketing alliance
and online advertisements will also come to use.
Business Plan For A Cd Shop 11

7. Financial Plan
A sound financial plan is the key factor for the success of a business start-up. Investors and
banks will base their funding decision on the information given in this plan. Besides a plan of
the financial needs, this plan must insure that the business is always liquid and ultimately
profitable. Since the sales and earnings projections in the business plan are based on
expectations, the financial plan has to be revised and refined on a constant basis so that
discrepancies can be uncovered and solved instantly. The inputs for this financial plan are
based on 40 businesses of different size and market segments in the retail industry, which
serve as a group of comparable firms, as well as own estimates based on the planned business
environment. Revenue estimates are conservative and expense projections include a cushion
for unforeseen contingencies.

The initial capital requirement is estimated to be $50,000 to $55,000. The sales margin is
expected to be 12-15%, whereby each business segment contributes differently to sales and
earnings. The classical product sales segment will, of all segments have the smallest
contribution to sales in relative terms (11%), but given the high sales volume, the largest in
absolute terms. The sale of goods is expected to generate a 10% sales margin, while the
margin from sales of services is expected to be closer to 15%. Since the sales revenue of
lower priced consumer products is expected to be larger, this segment will generate a
significantly higher profit. Figure 7.1 shows the source of revenues by segment during the
start-up phase.

Depending on the initial investment, sum cost and revenue estimates vary. Figure 7.2 shows
the expected relationship of cost and revenues. As can be seen, the relationship is not linear
everywhere but costs decrease relative to sales at an initial investment of $50,000. This effect
is due to the better utilization of capacities in personnel at rising revenues at constant cost. If
capacity is fully utilized, additional personnel must be recruited. At an investment sum of
$100,000, administrative costs are expected to return to a linear relationship of sales. At sales
levels between $1,000,000 to $2,000,000, costs increase by the factor 1.85. The cost revenue
relationship is important not only during the start-up phase, but also for planned further
expansion. Often such expansion strategies are based on this relationship. Other industries
are able to generate cost savings of 30-50% during expansion periods, while for the retail
industry this factor is close to 15%. At a specific size, this relationship reverses because
administrative costs rise sharply. This affects small businesses between 10 and 20 employees
most severely.

The details of the financial plan are laid out in more detail as follows:

Section 7.1 gives an investments schedule. This includes all investments necessary during the
start-up phase.

Section 7.2 gives a break-even analysis that shows revenues at the break-even point. Every
additional sales revenue adds to profit and vice versa.

Section 7.3 gives a liquidity plan. This plan is based on current cost and revenue estimates
Business Plan For A Cd Shop 12

from Section 7.2. Liquidity must always be positive.

Section 7.4 contains a long-term profit projection for the first 4 years of business. The
projection shows the critical amount of revenues at which the business is profitable and how
profit develops over time.

Section 7.5 provides a risk analysis. The risk analysis contains critical factors that may
impact the financial numbers presented in this plan.

7.1 Investment Plan

The investment plan comprises primary capital needs for the foundation and operation of
a retail company with different CD and DVD products and services for sale. The plan
also includes initial marketing and sales promotion expenses.

The figures are based on a business with 3-5 employees and expected revenues of
Business Plan For A Cd Shop 13

$350,000 in year 2-3.

7.2 Break-even Analysis

The break-even analysis shows how earnings rise as a function of sales. The break-even
point is the point at which revenues from sales cover total costs (fix costs and costs rising
with sales). This analysis is important for the development of the liquidity plan. If the
break-even point is not achieved, in the long run the business loses liquidity and may
become insolvent. This requires that a critical amount of revenues must be generated.

At a sale revenue of $200,000 and given fixed costs, the business will generate a profit.
Fixed costs are estimated at $90,000 to $100,000 and variable costs at $100,000.

At a realizable revenue of $500,000, after 2-3 years profits will rise to $125,000 pre-tax.
This represents an earnings margin of 25% pre-tax and 14% after-tax. These estimates
are realistic in this market segment. Increasing sales volume will increase pre-tax
Business Plan For A Cd Shop 14

earnings margins, but this development reverses when administrative costs begin to rise
sharply. Up to a sales volume of $1,000,000, earnings margins rise to 27.5%, after which
the margin decreases to constant 25.5%.

Figure 7.3 shows at which critical sales volume the business generates a profit. This
serves as a base for a pricing strategy. Additionally, the graph shows the amount of sales
at which a marketing campaign can be run profitably.

7.3 Liquidity Plan

The liquidity plan shows the amount of finances necessary to assure permanent liquidity
of the business. The plan is based on 4 representative months of a typical business with 3
to 5 employees and annual sales of $300,000. Revenue estimates are drawn from a
standard normal distribution.
Business Plan For A Cd Shop 15

7.4 Earnings Plan

The earnings plan shows the results from ordinary operations. The plan is based on the
first 4 years of business. Revenue estimates are drawn from a normal distribution with an
estimated growth rate of 20 to 30%. Figure 7.4 shows profit over time.
Business Plan For A Cd Shop 16

7.5 Risk Analysis

The risk analysis considers critical factors that may lead to a failure of the business
concept. Such factors can involve failures during the implementation phase, as well as
during operations. Such potential factors are ordered according to the probability at
which they can arise. Shown is the key factor that led to the failure only. Data are drawn
from questionnaires of 25 retail businesses with comparable product offerings and
revenue- and cost structures that went bankrupt during the last 3 years, as well as
Business Plan For A Cd Shop 17

analyses of different research institutes.

1. Insufficient demand: This is the most frequent reason that leads to business
failure. This includes permanently low demand as well as a temporary collapse in
demand. Often demand estimates were too optimistic at the outset. Such failures might
also come from external shocks instead of operating deficiencies. 19% of businesses with
insufficient demand go bankrupt. 50% of these businesses report that once demand
slacked they did not react accordingly, because they believed that this phenomenon was
only temporary. Since the expected frequency of customers during the start-up phase is
still low, a critical success factor is to focus promotional effort so as to generate customer
loyalty early on, which will help minimize the effects of demand fluctuations. This is also
important for the future development of the business.

2. Behavior of Competition: Due to low entry barriers, additional businesses can

enter the market at low cost. Approximately 16% of insolvent businesses were driven out
of the market by that competition. A better service concept, innovative ideas and
concentration on core businesses are an easy means for an entrant to gain a competitive
edge.

3. Personnel and capacity utilization: Often personnel capacity cannot be adjusted

easily when demand slows down. Currently retail businesses have a capacity utilization
rate of personnel of 70% to 75%, i.e. 70% of employee working hours can be directly
credited to sales. At small businesses, this value is often lower, which means that 30% of
working hours arise without generating any further revenue. 13% of such businesses go
bankrupt for this reason.

4. Liquidity constraints: Another frequent reasons for bankruptcy is insufficient

liquidity. In that case, it is possible that all liquid funds are used to cover losses or that
liquidity needs were planned too tight. To be able to flexibly react to changing liquidity
needs, it is important that sufficient funds be planned even during the start-up phase.
Thus, 5-10% of the investment sum should be held as liquidity reserve permanently. 13%
of insolvent businesses reported liquidity as the reason for bankruptcy.

5. Over-indebtedness: Many business are run on a small equity base. The majority of
investments are funded by debt. If the business becomes unprofitable, debt obligations
cannot be covered. Little more over 10% of insolvent firms reported over-indebtedness as
the reason for going bankrupt. It is therefore important that a share of earnings is retained
for debt service.

6. Macroeconomic Conditions: In a cyclical downturn, revenue expectations my not

come in according to expectation. Although this factor does not affect the business in
itself, it does have an impact on profitability, liquidity and leverage. Costs remain
constant during such period, but revenues typically decrease, which affects overall
profitability. 10% of all insolvent businesses report that they went bankrupt due to
macroeconomic conditions, although the relevant indicators of the business looked
healthy.
Business Plan For A Cd Shop 18

7. Location and market: The market of the business and the selection of the right
potential customers is an important success factor and one of the fundamental decisions
that have an impact on the future prosperity of a retail company. Therefore, a careful
analysis is necessary. More than 10% of insolvent businesses reported that they went
bankrupt because of the wrong market selection. Often start-ups did not consider that
even when the choice of market may not be wrong at the outset, it may later become so
when economic conditions worsen. This may be due to structural changes or different
interest of customers.

8. Wrong Business Decisions: Often wrong business decisions and difficult situations go
unnoticed for some period, which can lead to a failure of the business. A critical and
independent reflection of a decision are critical factors to determine the value of a
management decision and evaluate the business' profitability. Studies have shown that
many businesses fail in their start-up phase because of management’s inability to make
sound business decisions, while once a business is settled such mistakes are very rare. A
critical management instrument is the ability to detect potential failures and problems.
Certain key figures can help measure this ability and allow to objectively determine a
decision's chance for success. Small businesses should use such indicator ratios to assess
their business outlooks.

Figure 7.5 shows the relative importance of each factor for businesses that went bankrupt.
The numbers are based on the most relevant reason that triggered bankruptcy, but not the
reason responsible for bankruptcy. As can be seen, external factors that changed the
competitive environment and changing macroeconomic conditions were the most
important reasons relative to internal factors.
Business Plan For A Cd Shop 19

8. Conclusion
The retail business with different products and additional service elements is a very
profitable business, while almost any other segment in the market currently lives through a
difficult time. This situation is mostly driven by the competition of larger companies. A
business that successfully survives the current temporary slow down can be certain of
increased profitability once the situation rebounds.

The relatively modest investment requirements and running costs compared to other
businesses are a favorable argument, since external funds from banks becomes more difficult
given that the risk aversion to finance such ventures has risen. A company with specific
knowledge and innovative ideas has good chances to move into profitable market niches and
run a successful business. Market conditions change constantly, as do customer demands.
This is the chance for businesses with innovative ideas and new offerings to secure a
dependable customer basis. Service is a critical factor that can earn a competitive edge. This
is also true for new trends in the retail industry to better control costs and increase efficiency.

For a successful operation of a retail company, five factors are critical and central for the
business strategy:

- Employees should have a good knowledge of the CD and DVD products. This increases
customer loyalty.

- The utilization of personnel capacity is critical for the long-term profitability, because of
changing margins and the constraints to flexibly reduce personnel. Therefore, the additional
selling of service elements, like the development of customized products, is a further
segment of the business that is integrated in the sale of the whole business process.

- A carefully selected assortment of interesting and profitable products, as well as the selected
choice of new technologies, provides the potential to gain a competitive edge against
competitors. Furthermore, a service that aims to give the customer an added value through
new services can justify price mark-ups.

- A critical factor in the retail industry is quality management. Better quality of products and
services at lower cost increases customer satisfaction. Deficiencies in service quality can
lower demand, while good service quality can help create customer loyalty.

- Cost management is a critical success factor for businesses in industries where margins are
low. Computer aided planning for the store is an integral part of cost management.