Case study july 2012 illustrative script 1 ICAEW

FIRST ILLUSTRATIVE SCRIPT AND EXAMINERS’ COMMENTS The commentary below follows the order and numbering of the script, with reference to the topics in the marking key It should be read in conjunction with the review of the Second Illustrative Script and full Examiners’ Report for this session Examiners’ comments – overview This script was well within the top 25% of all assessed scripts It is a clearly-presented report dealing with many of the key issues, offering sound commercial advice where applicable, and of about average length The content is highly focused, addressing the case requirements as presented There is some irrelevant material and also the language is slightly clumsy in places Good grades were earned for the executive summary and for all three main topics, as well as across the four areas of Professional Skills, with AJ being the weakest In essence, this was a well-balanced script The candidate went a long way towards success by the simple technique of dealing with all the main components of Requirement (including KPD and the incentive scheme) and Requirement (including ethical issues) Most areas of Requirement were also tackled but coverage of some, such as practical considerations, was relatively brief Terms of reference and executive summary The summary begins with a neat introductory paragraph encapsulating the headline financial performance It goes on to identify in a series of succinct sentences the main features of each salon’s performance for the year – albeit without any illustrative numbers or any mention of KPD, despite the impressive coverage under Requirement itself (see below) The last part of this section comprises a clear conclusion on the Newcastle bonus issue In respect of the Wallsend fire, the candidate starts by giving his/her calculated lost profit but makes no comment on the assumptions used in arriving at this figure Instead, (s)he goes straight on to discuss the staffing and related issues, making good use of information about Newcastle waiting times (AI, foot of p20) As in the main body of the report, there are some tangential points here about the incentive scheme and LL’s refurbishment plans For Requirement 3, the primary issues are again concisely captured, with appropriate focus on the main ethical aspects (tanning; Marie) The last phrase (“ despite being a cheap way to finance a fitting of the salon may pose risks to quality and reputation of LL”) is a good example of the high-level commercial approach evident through much of this script The executive summary ends with a set of conclusions and recommendations embracing all three parts of the case This is a strong close Overall, the executive summary was good, addressing the main points covered in the body of the report under all three requirements It could have achieved even better grades by providing the key figures for each salon and referring to the KPD at Requirement 1; highlighting the assumptions underlying the insurance claim at Requirement 2; and providing a definitive conclusion at Requirement in respect of both the York opportunity and the Indigo contract, rather than appearing to “sit on the fence” Comparison of salon performance [Requirement 1] This part of the report achieved a large number of passing grades It is set out clearly with an introduction and then a section dealing in turn with each of the main captions from the exam requirements Unlike many scripts, it compares the salons, rather than looking at them in turn without deriving any overall observations It could have done better still by including more about gross profit and by reviewing the bonus scheme arguments in more depth Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page of 13 The section begins with an overview of LL’s financial performance, followed by a ‘scene-setting’ paragraph The candidate has used own research (Mary Portas) here, but could perhaps have linked it more directly to LL’s situation After this opening, the script goes on to explain the changes in revenue at each salon, referring effectively to pointers provided in the AI, skilfully weaving KPD into the narrative and generally integrating material from throughout the case in an eye-catching way For example, in the passage “The increase in revenue in services is largely attributed to increase in appointments by 4.9%; this is likely to be an effect of better services offered as reflected by an increase in recurring clients of 100, up from 4,400 increased revenue per appointment from £39.10 to £39.69 which is a small indication of better cross-selling ”, the candidate has drawn together (i) the basic fact that appointment numbers have gone up (Exhibit 13); (ii) a reference to recurring client numbers (Exhibit 14); (iii) a calculation based on the KPD; and (iv) a reference back to Newcastle’s previous cross-selling problems (Exhibit 6) Other KPD-based calculations have also been brought forward appropriately from the appendix (eg product sales per appointment) to enhance the discussion Under ‘gross profit’, the script begins by benchmarking LL’s overall result against the industry norms provided in the AI It then considers features of Newcastle and Gateshead but makes no mention of Wallsend The section on Newcastle again assimilates a range of case data into a seamless commentary, connecting the rise in staff costs with the percentage of senior stylists (AI, p19 / p23) and industry wage norms (AI, p14 plus some own research) The weakest part of Requirement is that relating to the Newcastle bonus The candidate does refer to each of Irina’s three issues but the coverage is rather superficial and does not seek to challenge Irina’s assertions (S)he does, however, go on to calculate the overall impact of the adjustments and hence to conclude that Newcastle should have qualified for the bonus The section ends with a strong and focused list of conclusions and recommendations These summarise the key findings from the financial statement analysis and bonus discussion, and go on to offer advice on how LL can spread some of its best practice across the salons and on reevaluating the bonus scheme The recommendation to “work to improve occupancy rates which currently stand at 50% [AI, p19]” gives a further indication of how well the candidate knew the case material Evaluation of proposed discount [Requirement 2] This was also answered well, with passing grades being earned primarily for the calculation (see also commentary on Appendix below) and for the discussion of staffing issues The candidate begins by straightaway giving the calculated lost profit figure, then going on to challenge some of the underlying assumptions – more than many candidates did – in relation to seasonality, take-up rates / client numbers and product spend (S)he also queries the gross margin, but that is not necessary as the margin is clearly defined in the insurance policy (Exhibit 9) and does not offer any scope for variation The script then makes a series of pertinent comments on staffing and related issues, once more making astute use of case material: clients ‘following’ stylists (AI, p12); relationship between chair and stylist numbers (AI, p19) However, the next sentences, dealing with bonuses, are largely irrelevant since we not have any information about the proposed 2013 scheme Under ‘Other issues’, the candidate addresses some practical aspects of the insurance claim, linking the already long wait times at Newcastle with the likely impact on LL’s regular client feedback questionnaires and the company’s image, as well as rightly wondering how existing Newcastle and Gateshead clients will react if transferees from Wallsend receive preferential treatment This part of the answer could have been developed further to consider such issues as the size of the discount and the likelihood that the Wallsend salon will return to normal immediately in January 2013 Both of these points would have been readily apparent from a Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page of 13 close read of the Knightwaves article at Exhibit 11e – this seems to be the only page of the AI that has escaped the candidate’s attention! The candidate again closes with long lists of conclusions and recommendations These have earned passing grades by incorporating the key findings, but there is perhaps an overemphasis on more peripheral points such as the future of LL’s incentive scheme, refurbishment and health & safety Assessment of new salon opportunity [Requirement 3] This was another good section that gained 50% of passing grades The candidate has made many key relevant points and could have done even better by demonstrating judgement across the range of issues The candidate makes sure to cover all the elements of the requirement by using the headings ‘Strategic aspects of new salon’, ‘Operational aspects’, ‘Ethical aspects’, ‘Product supply’, ‘Conclusions’ and ‘Recommendations’, and the respective sections are broadly equal in length In dealing with strategy, the script covers a range of issues, including beauty and tanning, as well as the risks of opening in an unfamiliar region It cleverly links the developer’s claims of visitor numbers and profile with LL’s own ambitions – but fails to recognise that these claims might contain an inherent bias With regard to operations, the candidate has incorporated several relevant items from the AI in addressing some of the important issues, notably the ‘Jobs Weekly’ article (p36), the exclusion of tanning from LL’s current insurance policy (p31) and – in reference to Sullivan’s plans – LL’s previous experience of local competition (p19 / p24) The section on ethics addresses the two main issues arising – proximity to Marie’s salon and the risks of tanning In the first of these, the candidate could have referred to the legalities of restrictive covenants (AI, p12); and in the second (s)he could have been more explicit about the potential damage to LL’s reputation The script also contains a good section on Indigo, packed with pros and cons of the proposed supply arrangement and referring to most of the key issues – financing, margins, suppliers, online sales The passage “Existing LL clients may be unhappy if existing brands are not stocked at the branch The online system appears also to stock Indigo products; there may be terms restricting its use to sell other products” in particular demonstrates some really welldeveloped commercial thinking on the Indigo plans The candidate could also have gone on to consider some of the practical aspects, such as the detail of how the salon would be fitted out As with Requirements and 2, the last part of the section presents the candidate’s key conclusions and recommendations Although not concluding decisively on York, the candidate does so in relation to the specific topics of tanning; proximity to Marie; and Indigo Recommendations include the need for more market research but overlook some other areas where information is lacking, such as in relation to Sullivan’s intentions and the Indigo contract Overall paper: Appendices The candidate has included two Appendices, one each relating to Requirements and Unusually, these appear at the end of the sections to which they relate rather than right at the back of the report Appendix tabulates the key figures used for Requirement 1, covering all three salons and both revenue streams, indicating changes both in absolute terms and as percentages It also provides some good analysis of the KPD, extending the case data to produce useful ratios such as average number of products per appointment and average revenue per appointment (which can then easily be incorporated at Requirement 2) This is followed by a clear calculation of the Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page of 13 impact of Irina Yu’s issues on Newcastle’s bonus computation (albeit that this adjusts the staff numbers by for a full year each rather than for a half year) Appendix sets out clearly the calculation for the loss of gross profit This would have been almost perfect were it not marred by two careless errors: use of 25% rather than 75% (ie 100% – 25%) and an incorrect decimal place (31.8 rather than 318) The candidate has split the fivemonth period into two and three months, in the process making sure to apply the right seasonality factors Overall paper: Report The script is generally well written although characterised by some clumsy wording and spelling (eg “gross demotivation”, “recouperate”) Overall, it has met the requirements, is balanced across the main topics and demonstrates a strong commercial understanding of the case scenario Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page of 13 ILLUSTRATIVE SCRIPT To The Board of Luvlox Limited Review of 2012 performance and strategic developments 25 July 2012 Prepared by Baron Young LLP Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page of 13 Terms of Reference This report has been prepared for the directors of Luvlox (“LL”) and deals with the following issues:    A review of the performance of the three salons for the year ended 30 June 2012 An evaluation of the shortfall in revenue and discount policy related to the Wallsend fire An assessment of the strategic, operational and ethical aspects of the new salon proposal and related product supply arrangement This report is based solely on the unaudited information provided by the directors of LL It has been prepared solely for the use of the directors of LL and should not be disclosed to other parties without our written consent No liability can be accepted in such an event Executive Summary Overall LL has had an outstanding year Revenue grew by £297k, up 5.4% from £5,481k, defying industry expectations of 2.2% The salons have had varying performances 2.1 Performance for June 2012 Gateshead and Newcastle both achieved good growth in both revenue of services and products For Newcastle this reflected better cross-selling and reduced discounts on products Gateshead continued to produce strong revenue growth in services as a reflection of the successful colouring campaign; and parents attending salons with their children Wallsend has seen a fall in revenue as a result of reduced appointments and continued heavy discounting Gross margins have increased from 56.2% to 58.9% demonstrating revenue growth as a result of better margins as well as volume An adjustment should be made to Newcastle bonus assessment which resulted in an increase of 23.1% of gross profit to salon numbers – therefore the salon should be awarded the bonus for the year 2.2 Wallsend fire Based on the assumptions provided to us: the insurance claim for the loss is expected to be £437k for the months to December 2012 There will be a series of staffing issues associated with the transfer as a result of the fire; these include potential loss of key staff due to unwillingness to commute; overcrowded working conditions etc Capacity to fulfil additional clients at the other two salons will be difficult especially with existing long waiting times at Newcastle The incentive scheme regarding Wallsend staff is likely to cause gross demotivation as they are unlikely to receive the bonus for the year due to the fire – however, this will almost automatically enable them to meet the criteria for the following year due to current low gross margins Retention of clients will be key during the closure of the salon However, consideration also needs to be taken of the view of other clients paying full prices Consideration should be given to disclosure plans for refurbishment to the insurance company to avoid any instance where this could render the claim void due to non-disclosure 2.3 New salon and product agreement The plan for a new salon in the new mall appears to be a good opportunity to expand and also diversity into beauty services However, consideration needs to be given to the lack of experience it has with the geographical area and also beauty services Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page of 13 Tanning services are also mentioned which opposes LL’s current reputation and stance Most salons not offer sunbeds due to its risky nature and harmful UV rays The mall is 1km away from Marie Duval and may constitute as direct competition The product agreement requires exclusivity of LL’s salon and despite being a cheap way to finance a fitting of the salon may pose risks to quality and reputation of LL 2.4 Conclusions and recommendations Performance overall has been promising and good; consideration should be given to emulate results at Gateshead eg roll out colouring Discounting should be standardised to avoid inconsistency The incentive scheme should be adjusted to reflect one off items and use average employees during the year LL should continue to offer incentives to retain clients following the fire as this is key to Wallsend’s performance after it reopens Incentives should continue to be offered until full reopening Incentives should be introduced to offer off-peak services to reduce burden of other two salons during this time The new salon is a good opportunity and should be considered seriously but contact with Marie is key to ensure that she accepts the distance Tanning beds should be negotiated out of the proposal due to health risks it proposes and also reputational damage to LL The product supplier appears good but research into the quality needs to be assessed Performance for the year ended June 2012 3.1 Revenue Overall results have been promising for the year for LL with an excellent growth of 5.4% (Appendix 1) in revenue defying industry expectations of 2.2%, up to £5,778k from £5,481k LL has shown positive growth despite the continued economic downturn which has seen a reduced spend on non-essentials: this is particularly positive in a week where Mary Porter (dubbed “Queen of the High Street”) was quoted noting that 11% of high street shops are empty due to high rents LL’s reputation for quality has seen it persevere as noted by its improved client feedback Newcastle has shown growth in both services and revenue Service revenue has grown as a result in increased revenue per appointment from £39.10 to £39.69 which is a small indication of better crossselling by its staff of other services The increase in revenue in services is largely attributed to increase in appointments by 4.9%; this is likely to be an effect of better services offered as reflected by an increase in recurring clients of 100, up from 4,400 Product revenue in Newcastle has soared by 47.5% by £75k from £158k in 2011 This is also an effect of improved cross-selling with the average number of products sold per appointment up to 0.42 from 0.32 Less discounts are also being offered per product pushing up product revenue (2011: £15.96) averaging £17.26 per product Gateshead has demonstrated equally strong results Services increased by 12.5% with colouring package helping to achieve better gross margins The inclusion of a child’s play area may also have induced more appointments with parents coming along as appointments are up 8.7% reflecting the highest feedback satisfaction Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page of 13 Product revenue at Gateshead remains consistently good, although cross-selling has fallen to 0.46 products per appointment from 0.49 in 2011 However, higher priced products or less discounts have improved the revenue per product to £20.34 towards the higher end of product pricing Wallsend unfortunately has seen a fall in both service and product revenue Revenue has fallen to £1,679k, down £82k (4.7%) as a reflection of both falling appointment numbers (1.2% decrease) and average revenue per appointment down to £39.79 from £41.24 in 2011 This could be a result of more discounts given and male clients who typically generate less revenue than full price female customers Wallsend is also the only salon to reveal a fall in recurring clients to 6,200 from 6300 in 2011 This could be a result of more clients transferring to the rival salon nearby and also lower quality products as Wallsend has the lowest percentage of senior stylists Products at Wallsend also suffered a £271k fall in revenue down 4.1% – this appears to be a continued pattern of excessive product discount with Wallsend’s average product price at £14.13 (the lowest of all salons) and with less appointments: there has been a reduced cross-selling opportunity reflected in fall in product numbers 3.2 Gross Profit Gross profit margins have been positive with an increase from 56.2% edging towards the top end of the industry expectation of 50-60% margins Newcastle has achieved the lowest gross margins for services marginally due to higher staff salary costs as an indicator of hiring the largest percentage of senior stylists Salaries as a percentage of revenue currently contribute to 30.8%; less than 2011 of 32.8% – this is significantly lower than the industry expected of 40% This reduction in staff costs protects margins; and although the average staff salary across all salons are higher than the industry average of £10k – it is important to retain key staff who are unlikely to be motivated by wage freezes Margins for services are the best at Gateshead reflecting more ‘technical’ services such as colouring which has higher margins than typical blow and cut 3.3 Irina Yu & Bonus Incentive Issues Upon inspection of the gross profit to salon numbers ratio it appears Newcastle achieves a rate of 7.3% increase missing the bonus Taking into account Irina’s email, it appears that salon staff numbers should be adjusted to 19 stylists This is because numbers at year end should reflect the number of staff “working” – it appears reasonable that these staff are not included There should be an adjustment for the products but only the net of supplier credit as there are no adjustments made for one-off items Adjustment for the old people’s home experiment should be made so that figures are comparable to prior year Taking into account these figures, Newcastle achieves an increase of 23.1% in the return and should be awarded a bonus 3.4 Conclusion Overall LL is performing well with improvement in the Newcastle salon; and overall revenue growth exceeding expectations and economic turmoil Revenue has improved largely due to better cross-selling and reduced discounts although Wallsend is the only salon to have shown a contraction due to heavy product discounting and reduced appointments Gross profit margins are higher than industry averages of 50-60%, which is an indicator of LL’s strong reputation and differentiator as a “luxury” supplier Margins have also been protected by lower staff costs (less than 40%) Taking into account Irina Yu’s email, it appears reasonable to account for the necessary adjustments as proposed by her and so Newcastle should be awarded a bonus Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page of 13 3.5 Recommendations To improve revenue and margins LL should consider rolling out the “shades of season” campaign currently at Gateshead to all salons as it has proved successful Stricter policies regarding product discount will allow better margins as will rationalising suppliers to achieve higher bulk discounts LL should work to improve occupancy rates which currently stand at 50% to increase revenue – this can be done by encouraging further initiatives The bonus incentive scheme should be reconsidered to take into account any matters which are head office related and not controlled by the salon manager and adjustments for any one-off items An average number should be used for the year instead of as at year end Appendix Revenue Services Products 2012 £ 5,778 4,868 910 2011 £ 5,481 4,660 821 Change £ 297 208 89 5.4% 4.5% 10.8% Newcastle (N) Services Products 1,282 233 1,204 158 78 75 6.5% 47.5% Gateshead (G) Services Products 1,907 417 1,695 392 212 25 12.5% 6.4% Wallsend (W) Services Products 1,679 260 1,761 271 (82) (11) (4.7%) (4.1%) Revenue mix N – Services Products 84.6% 15.4% 88.4% 11.6% G - Services Products 82.1% 17.9% 81.2% 18.8% W - Services Products 86.6% 13.4% 86.7% 13.3% Average rev / app N G W £ 39.69 42.47 39.79 £ 39.10 41.04 41.24 Gross profit margin Overall 2012 58.9% 2011 56.2% N – Services Products 57.7% 60.5% 57.3% 58.0% G - Services Products 59.7% 62.8% 54.7% 58.6% W - Services Products 57.8% 57.5% 56.1% 55.4% 30.8% 32.8% Salaries % of revenue Copyright ©The Institute of Chartered Accountants in England and Wales 2012 % Page of 13 2012 2011 Change No appointments N G W (000) 32.3 44.9 42.2 (000) 30.8 41.3 42.7 (000) 1.5 3.6 (0.5) Ave no products/appointment N G W 0.42 0.46 0.44 Ave price/product sold N G W £ 17.26 20.34 14.13 £ 15.96 19.50 14.34 2012 2011 % 41.95 41.21 33.91 39.10 35.06 33.5 7.3% 17.5% 1.2% Gross profit to salon staff no N G W % 4.9 8.7 (1.2) 0.32 0.49 0.44 Adjustments per Irina Yu for Newcastle salon Gross profit per 2012 management accounts Adjustments for: old people’s home visits obsolete inventory Salon numbers per 2012 management accounts Adjusted for: two stylists on long-term sick leave Adjusted gross profit to salon staff 2012 % increase from 2011 £000 881 25 914 21 (2) 19 £48.12 23.1 Wallsend Fire Insurance Claim 4.1 Expected loss According to the insurance policy LL can expect to recouperate £437,250 from the policy based on the assumptions provided to us However, this figure is based on a series of assumptions, the use of expected seasonality figures may be incorrect and assumes seasonality is consistent year on year The take-up rate and continued number of recurring clients are based on unverified assumptions An expected £20 spend on products appears high for Wallsend considering the salon is prone to offering high discounts; it may appear an overestimation of actual spend The gross profit margin used is based on 2012 rates of 57.7%; this does not incorporate any growth which may have been expected for Wallsend in this period The numbers also not incorporate any loss of potential new clients for the period Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page 10 of 13 4.2 Staffing Issues There may be problems with the transfer of staff from Wallsend to either salon This can include a culture clash and also transporting issues as some staff may be unwilling to transfer to an alternative salon This could result in loss of key staff who are central to Wallsend’s success Customers are inclined to follow their stylists and so this could affect issues with client loyalty/retention Staff may become unmotivated due to loss and lack of work space as the number of chairs is already less than stylists in each salon, this could create overcrowding and poor working conditions There may also be lack of work in off-peak times due to overstaffing The staff of Wallsend will be concerned of their bonus assessment for the year as the scheme does not adjust for one-off items such as fires, it is unlikely the salon will make the scheme for the year – this can cause staff to be demotivated leading to poor service affecting reputation This also ensures an automatic bonus in 2014 due to low margins in 2013 4.3 Other Issues The fire caused lots of other issues for consideration This is especially concerning the retention of clients as loyalty can be easily transferred during closure LL must ensure to maintain its reputation and clients as much as possible to prevent long-term damage to the brand Transfer of clients to other branches may cause long waiting times at other branches especially as Newcastle currently has long waiting times, especially in peak time This “rush hour” may cause poor quality to be delivered and thus result in poor feedback, damaging reputation The discount also discriminates clients at Gateshead and Newcastle who may feel unhappy about paying full price for services offered at 25% to Wallsend consumers 4.4 Conclusions The financial impact of the fire will be covered/mitigated by the insurance claim but the £437k is based on assumptions as provided by you This does not incorporate any permanent loss of clients nor any growth which Wallsend would have achieved in the period Staff may become demotivated during the transfer due to changing working conditions and also need to commute may affect staff’s willingness to remain in the company There are also problems with the incentive plan due to lack of adjustments for one-off occurrences which can lead to resentment Other issues concern retaining customers especially to capacity of the other salons to accommodate them Disclosure of all issues regarding the claim should be made to the insurance company to avoid rendering it void 4.5 Recommendations Legal advice should be sought with regards to the insurance claim to ensure accuracy of the figures used Discussions with the insurance company need to take place to ensure that factors used will be accepted The plan to refurbish the salon should be disclosed to the company LL should investigate the cause of the fire to ensure health and safety is appropriate in other salons to avoid further incidents To reduce overstaffing LL should consider encouraging staff to take holiday during the closure period Incentives should be given for off-peak appointments to reduce burden of overcrowding The bonus incentive scheme should be adjusted for one-off items LL could consider opening a temporary salon instead to accommodate Wallsend clients Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page 11 of 13 Appendix Revenue affected: Aug – Sept Services 1,679 X 20% X 2/3 Products 260 X 20% X 2/3 Oct – Dec Services 1,679 X 35% Products 260 X 35% £000 223.9 34.7 587.7 91 937.3 Revenue retained (assuming average revenue / appointment = £39.79, 2012) 25% discount = 5,000 X 39.79 X 25% Other appointments = 5,000 X 80% X X 39.79 Product sales st appointment = 5,000 X 50% X £20 nd appointment = 5,000 X 80% X 50% X X £12 Revenue deemed to be lost = 937.3 – 179.5 = GPM for Wallsend 2012 Insurance claim 49.7 31.8 50 48 179.5 757.8 57.7% 437.25 Assessment of future opportunities 5.1 Strategic aspects of new salon The location of the new salon is well placed for affluent clientele which is strategically aligned with LL’s current target market of “Luxury” salons The mall will have footfall of 100,000 visitors every week, a perfect location for a new salon allowing great exposure for LL The offer is in line with LL’s plan to expand and open new salons especially for younger clients (aged 1835), which is the expected audience of the mall This will be in line with LL’s plan to reduce seasonality as the salon will have a steadier stream of business during the day and across the week The salon is also expected to include a beauty area which will be great to allow diversification of revenue streams by LL and reduce reliance on hairdressing LL lacks experience in the area and would likely need to recruit an expert to assist Use of sunbeds are not in line with Amanda’s stance as LL does not partake in tanning due to the risky nature of dangers sunbeds can cause LL also lack any local expertise in the area as hairdressing is on localised activity, trends may vary and LL will have to learn to adapt to this 5.2 Operational aspects There may be staffing concerns at the new salon Not only will LL require to staff the “beauty” experts but also employing sufficient high quality staff could be difficult as noted in Jobs Weekly there are an abundant of hairdressing vacancies making it competitive to attract quality staff LL’s current insurance will not cover the new “beauty” services in the salon and does not currently cover any use of sunbeds, a new insurance agreement will have to be negotiated likely at a higher cost The cost of refurbishment is unknown and will take away additional resources which could be used for other projects Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page 12 of 13 Sullivan supermarkets may open a competing salon in the mall which may attract the (16-35) less cash rich clients away LL has already experienced the negative effect a competing salon nearby can have, as with Wallsend, and this can cause concern as the proposal has already been rejected by another salon 5.3 Ethical aspects The new salon will be 1km away from Marie Duval’s premises, this may be inequitable because the new salon will “rival” Marie’s salon and compete directly with her salon for clients This is important as it reflects Amanda’s reputation and as a brand ambassador this could affect LL’s reputation and cause negative publicity Supplying sunbeds will cause ethical concerns due to the known harmful UV rays it emits which can cause cancer Although the Sunbeds Act prevents under 18’s and the age range of the mall is expected to be 18-35, it is unethical to promote sunbeds to any under 20s-25s as this age range is more at risk of skin cancer due to excessive UV rays exposure 5.4 Product supply The Indigo product supply arrangement allows LL to expand with little initial investment in times where financing is difficult Indigo is supporting an opportunity for LL to sell products online which they also not currently do; also by using Indigo as the sole supplier this reduces the operational burden of dealing with multiple suppliers However, LL needs to assess whether Indigo is a good strategic fit in terms of quality and also the reputation of Indigo as a company as association can harm LL’s reputation Terms of the agreement could be onerous and reduces flexibility for LL Margins are also lower than what LL currently achieves Existing LL clients may be unhappy if existing brands are not stocked at the branch The online system appears also to stock Indigo products; there may be terms restricting its use to sell other products 5.5 Conclusions The new salon is a great opportunity to expand and is strategically aligned with LL’s position However, the integration of beauty services, especially sunbeds, needs to be considered as it is against LL’s current stance and poses serious risks The salon is within 1km of Marie Duval’s and it appears inequitable to set up in close competition as Amanda’s previous employer and could result in poor PR due to damage to Amanda’s character The product supply agreement is a cheap method to finance the fitting However, it cannot be accepted without assessing the quality of the supplier and brands as it could severely damage LL’s reputation 5.6 Recommendations More market research is required of the new salon locations and suitability as have done with previous salons LL’s need to consider discussions with Marie Duval and the acceptability of the 1km range to avoid backlash Sunbeds should be rejected as part of the new salon as it stands to oppose and risk the reputation and stance of LL Research should be made of Indigo products and quality of its products LL should investigate other product companies Copyright ©The Institute of Chartered Accountants in England and Wales 2012 Page 13 of 13 ... 30.8 41. 3 42.7 (000) 1. 5 3.6 (0.5) Ave no products/appointment N G W 0.42 0.46 0.44 Ave price/product sold N G W £ 17 .26 20.34 14 .13 £ 15 .96 19 .50 14 .34 2 012 2 011 % 41. 95 41. 21 33. 91 39 .10 35.06... 417 1, 695 392 212 25 12 .5% 6.4% Wallsend (W) Services Products 1, 679 260 1, 7 61 2 71 (82) (11 ) (4.7%) (4 .1% ) Revenue mix N – Services Products 84.6% 15 .4% 88.4% 11 .6% G - Services Products 82 .1% 17 .9%... 2 012 £ 5,778 4,868 910 2 011 £ 5,4 81 4,660 8 21 Change £ 297 208 89 5.4% 4.5% 10 .8% Newcastle (N) Services Products 1, 282 233 1, 204 15 8 78 75 6.5% 47.5% Gateshead (G) Services Products 1, 907 417