Project: Commercial Due Diligence of Proposed Investment in Central Warehouse
Location: Kosovo, 2014/2015
Background & Objectives
The bank / investor contacted Retail Solutions in order to access the present condition and growth plans of a grocery retailer, as well as validate the necessity for construction of a distribution center facility.
Background: The retailer has been on a rapid growth path for the past 3 years with success in retailing within the hypermarket and supermarket formats, and has enjoyed much recognition in the local marketplace. The retailer would like to continue its expansion in these sectors in the coming years to double to nearly 50 locations by 2020, totaling approximately 75.000 M2 of sales area.
For the investor, the main questions to be answered were:
- Does the Supermarket/Hypermarket need a Central Warehouse and what will be the impact on the business?
- How suitable are the retailer plans for the Central Warehouse?
- Will the retailer be able to implement its plan according to proposed parameters?
To fulfill these objectives, we used tools and methodologies that encompassed the following areas:
- CENTRAL WAREHOUSE SUITABILITY ANALYSIS
- COST- BENEFIT ZERO BASED ANALYSIS
- SUPPLY CHAIN IMPACT ANALYSIS
- INVESTMENT PLAN ANALYSIS
- CENTRAL WAREHOUSE SPECIFICATIONS ANALYSIS
We assessed the strategic, operational and financial feasibility of the proposed logistics center in context of the operational and performance indicators of the company, reviewing its necessity and adequacy (of size, scope and the proposed location) in the context of the operations and development plans of the Company. Our work included benchmarks in a number of areas as well as cost-benefit feasibility, impact from supplier bonuses, operating costs. Also completed was a review of the investment plan as well as recommendations. Some of the man findings from our report were as follows:
We determined that since the Company plans to grow aggressively in the coming years and increase control over its business (to include suppliers, purchasing and inventories), it would need to move to a more centralized business model. Therefore the planned central warehouse would play a crucial role in this development:
- Decreased Inventory Losses and Errors: The Central Warehouse would give more control over physical inventory losses and errors as a result of reduced supplier shipments (i.e. reduced shrinkage)
- Financial Benefits: There would be an overall financial benefit that should be equal to or above the costs with an expected impact on EBITDA of 0,8-1,2% (increasing over time).
- Better Space Usage in the Stores: Overflowing stores (and particularly in new store design) will free up space via: reduced or eliminated stockroom size, reduced staging areas, reduced shelf space equates to more sales floor (or less rent by virtue of smaller stores), reduced inventory holding costs (e.g. no longer excessive sales floor inventory)
- Economies of Scale: The ability to make bigger buys at advantageous costs
- Employee Reduction: Fewer or reallocated merchandise receiving employees in stores (minimal or no counting necessary)
- Improved Merchandising: Stores would have ability to be better merchandised due to more manageable inventory levels
- Improved In-Stock Positions: Consistent inventory availability via safety stock, to negate the effect of unreliable suppliers, will assist in achieving sales targets
Opportunities, Developments Needed, Risks
- Further Centralization: The company needed to develop a much more sophisticated central office inventory management and purchasing department.
- Inventory Accuracy: A new warehouse will not in and of itself correct inventory inaccuracies from operational, system, and reordering failures existing today and may be carried over (the company did not have an accurate picture of inventory quantities and items in stores now).
In our overall opinion, constructing a central warehouse would have a positive impact on the supermarket / Hypermarket retailers business, and without might produce a negative impact on the business. Retail Solutions therefore recommended one to be developed noting the aforementioned opportunities.
We looked at the following main parameters of the retailers’ plans:
- CW Location: The Company would like to build the Central Warehouse 18 km South, Southwest of the central office. Reviewing proximity to the stores as well as the expected investment and operational costs, we believed this to be an optimal location.
- Facility Size: Planned size is a 10.000 M2 dry and 2.000 M2 temperature controlled warehouse. We analyzed expected good-flows and inventories and felt this size suitable for the retailer in year 2020 (the last year for which we had planned volumes for the Central Warehouse) with this assessment we agreed on proposed size. That said particularly in the first few years, actual utilization of the warehouse would be low.
- Suitability of proposed land plot layout & internal configuration: Here we noted possibilities for improvement, both in the configuration of entire area layout (exact building structure location placement and shape of the building on the land plot), as well as the proposed design of the warehouse space (e.g. usage of a mezzanine, zoning of the handling areas).
Opportunities, Developments Needed & Risks
- Land: The purchased land plot was an elongated, as well as atypical geometric shape with some risks as to cost and ease of access.
- Ramp-up: The inevitable extended time of several years to get the warehouse to optimal and full capacity.
- Design issues: There was a missing mezzanine level; entrance checkpoint and fence need to be redesigned; zoning areas redefined.
- Investment: The planned investment amount was low in comparison to benchmarks of warehouse construction costs.
The distribution facility size and location are important factors to consider at the outset. We believe proposals offered in this area by our retail client are appropriate overall. Proposed changes in the actual configuration of the central warehouse can be adjusted as part of the planning, construction and implementation phases.
Aside from the need and suitability of the Company’s plans, we estimated plan feasibility. Although we believed the Company has the right vision and direction, we also see workable risk.
We have spent a reasonable amount of time with executive management during our visit to Kosovo, as well as some correspondence, which included the Bank. However due to unforeseen circumstances, we did not spend time with others directly involved in the proposed Project. Therefore we were not able to render a clear opinion on the implementation team and capabilities. That said we clearly noted that executive management had a “can do” attitude and is involved in detailed aspects of the business.
- Proven Track Record: Executive management had a proven track record of getting things done and have built multiple stores in record time successfully.
- Connections: Top management was well connected and able to solve issues and take advantage of ongoing opportunities.
Opportunities, Developments Needed & Risks
- Investment costs: Particularly for construction of the warehouse building structure, we believe costs are under-estimated. Budgeted costs of 250 €/ M2 are substantially below European and even more developing country benchmarks. This can lead to a high risk of budget overruns during construction, or the construction of a sub-quality warehouse, which will require high maintenance and repair costs in the following years.
- Timing: The Company planned to build and go-live with the Central Warehouse in four months. This is much lower than international benchmarks from specialized warehouse construction companies, which normally require at least 9-12 months. As we were not made aware of any well-developed and detailed plans, we had serious doubts that in this short time period, that a professional warehouse and organization/processes could be constructed.
- Depth of Management Team: The Company as well as specifically the planned project was very dependent on two key individuals (which normally would focus on only the strategic and high level business) and remaining team members for this project was unclear. Ability of management to translate business skills to building a viable and efficient warehouse was also unclear. We also noted that qualified middle management and expertise was limited in general.
- Control & Monitoring: We were not aware of a dual control operational audit structure to review and monitor the project and future operations.
If your company is considering investing into a distribution center, operate one that could be more efficient, please contact Retail Solutions for a discussion of how we might assist. Using our proprietary methodology, "WeDRIL" (Warehousing, "evaluation", Inventory, Replenishment, Distribution, Logistics), our supply chain experts can provide an end-to-end audit, analysis and evaluation of the entire supply chain spectrum, with the objective to streamline costs, enhance merchandise and asset controls.
Retail Solutions Team