Identification of the Main Problem
Brandon Miller aims to establish a business that is the distribution of Fiji water for Monroe and Wayne market areas. However, before making a decision, he intended to conduct a quantitative and qualitative analysis to ensure that this opportunity is an affordable and profitable one. He made a set of researches and identified all the significant data necessary to conduct calculations. It is vital to estimate the market size and share Brandon can count on to ensure the demand is stuffiest to cover his business’s expenses. Then, it is necessary to determine the price at which water will be sold and calculate fixed and variable costs. Finally, calculations and comparisons of breaking sales and expected volumes shall be conducted to define the volume that shall be sold to cover expenses and discover if there is potential profit. In addition, qualitative factors shall be considered to determine beneficial and deteriorative ones and make a decision.
Quantitative Analysis
Market size and market share estimation
It is possible to begin conducting the quantitative analysis with market size estimation, as this indicator allows to determine the potential opportunity of the market to buy a product. It is vital for understanding if there is an opportunity for a company to grow further. As it is known, the annual consumption of water per capita from 2008 to 1012 varies from 27.6 to 29.7 gallons, with an average of 28.6 gallons approximately. Simultaneously, the total population for the two-county market area together equals 823 thousand people approximately. It implies that the annual consumption of bottled water is 28.6 gallons multiply 823 thousand people, which equals 23,537,800 gallons. Market share is part of the market a company owns, or how many units of the product of a company comprises a total volume of all the units sold. It is known that the Fiji water market share was 3.4$ in 2013, with a tendency to grow by 0.2% per year. Therefore, the next year this rate is expected to be equal to 3.6% which is 847360.8 gallons of bottled water. It is possible to state that the volume of water sold Brandon can count on equals 847361 gallons approximately.
Price discussion
With respect to price, it is possible to determine the wholesale price that will be competitive in the current market, based on retailer survey results and the price for one case of water produced by different brands. It is known that brands “Aquafina” and “Dasani” have the highest rates of % retail sales by value and % of a retailer who carries each brand, equals 22.7% and 23.6%, and 47.9 and 46.2%, respectively. Therefore, for a new distributor, it is advisable to try to maintain a similar price. Wholesale prices for the mentioned brands equal 3.87$ and 4.20$ respectively, which means that the price of around 4.00 is an appropriate one, considering that 88.7 % are interested in stoking Fiji water. Therefore, as one case is 12 1-liter bottles or equivalent, one 1-liter bottle’s cost is 0,33$. According to the ratio is 2.0: 1.8: 1.3: 1.0, the costs of other sizes of bottles per liter are 0.254$, 0.457$, 0.508$, with the average price per liter of 0.438 approximately, or 1.658$ per gallon. The average price was calculated considering that 80% of sales are 0.5-liters bottles, and the other three sizes have equal amounts of sales.
Fixed and variable costs
Calculations of fixed and variable costs are also vital for the analysis to determine if the expected revenue exceeds expenses. It is known that total investments equal 1,600,000$, considering a 3,2% annual rate of interest is 51,200$ annually. Salaries equal 200,000$ annually, and other expenses equal 180,000$ annually. Therefore, fixed costs equal 431,200$ annually. With respect to variable costs, 2% of sales are expected to be spent on commissions for Brandon’s salespeople. Simultaneously, taxes are 0,06$ per gallon.
Breaking sales volume. Comparison of volumes
Summarizing all the findings together, 847361 gallons Brandon expects to sell, with an average price per gallon equals 1.658$. Therefore, 1,404,924.54$ is expected revenue. Considering variable costs, mentioned above, taxes equals 50,841.66$, and commissions equals 27,081.66$. Therefore, the net expected annual revenue with all expenses considered equals 895,801.22$. B/E volume that would cover the fixed annual costs also shall be calculated as fixed costs divided by selling price per unit minus variable cost per unit, and it equals 275,556 gallons. Thus, breaking sales volume is about three times less than the expected volume of sales.
Qualitative Issues
There are some unmeasurable factors that shall be considered during decision-making to support the quantitative analysis. What is beneficial for Brandon’s potential business is that it is not expected that customers will have an impression that Fiji water is of bad quality because of the affordable price, as it is quite competitive, based on the main competitors’ products. Moreover, most retailers are willing to stock the water which shows a positive attitude toward this brand, and it is known that Fiji has high-quality standards. Therefore, the reputation of the brand and the quality of the product are sufficient. What might deteriorate the results of selling is that customers might tend to buy sparkling water, while Fiji does not provide this type. Therefore, industry growth trends might not be considered appropriately.