Harbour Books: Roadworks, Staffing and Online Competition
Harbour Books is an independent bookshop in a small North Island town. Monthly sales are $48,000, with a gross margin of 35%. Fixed costs are $14,500 per month, covering rent, wages, power and insurance. The shop currently makes a small profit. A six-month roadworks project will start next month and is expected to cut foot traffic by 30%. The owner has three options. First, reduce staff hours and save $2,800 per month. Second, launch a click-and-collect service: $1,200 for a website upgrade plus $400 per month for hosting and promotion, which is expected to recover 15% of the lost sales. Third, relocate to a nearby site with better parking: fit-out $8,000 and rent $1,500 per month higher. The owner has $12,000 cash and does not want to borrow. Online competitors already discount bestsellers by 20%.
1. Calculate current monthly profit and the profit or loss if sales fall 30% with no action.
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Current: gross profit = $48,000 x 35% = $16,800. Profit = $16,800 - $14,500 = $2,300 per month.
30% sales fall: sales = $48,000 x 0.70 = $33,600. Gross profit = $33,600 x 35% = $11,760. Loss = $11,760 - $14,500 = -$2,740 per month.
The business moves from a $2,300 profit to a $2,740 loss, a swing of $5,040 per month. The fixed cost base is too high for the reduced sales level. Any response must close a gap of at least $2,740 per month, or the shop will use cash reserves. With $12,000 cash, the shop could survive about four months at that loss, but not the full six-month roadworks period without action.
2. Evaluate the staff reduction and click-and-collect options using calculations.
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Staff reduction: saves $2,800 per month. New result = -$2,740 + $2,800 = $60 profit per month. This closes the gap and protects cash, but it is a blunt solution: fewer staff may reduce service, and the saving is close to the loss, leaving almost no buffer.
Click-and-collect: lost sales = $48,000 x 30% = $14,400. Recovering 15% gives $14,400 x 0.15 = $2,160 extra sales per month. Gross profit on that = $2,160 x 35% = $756. Less $400 monthly cost = $356 net benefit. The $1,200 setup cost means the first month is -$844 net, and it takes 3.4 months to recover the setup ($1,200 / $356).
Combined: loss of -$2,740 + $2,800 staff saving + $356 click-and-collect = $416 profit per month after the setup month. This is better than either option alone and gives a small buffer. But the staff cut and the online offer must not undermine each other: if staffing is too thin, click-and-collect orders may be late, damaging the shop's reputation.
Judgement: the combined option is financially stronger than either single action, provided the owner monitors service quality and online order accuracy.
3. Recommend whether Harbour Books should relocate, and justify your answer using cash, break-even and risk.
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Do not relocate now. The relocation costs $8,000 fit-out and raises rent by $1,500 per month. With $12,000 cash, the fit-out leaves $4,000, which is less than three months of the increased rent and provides almost no buffer for a slow launch.
Break-even on the extra rent: the shop needs extra gross profit of $1,500 per month. At a 35% gross margin, that requires extra sales of $1,500 / 0.35 = $4,286 per month. That is 8.9% of current sales, on top of recovering the roadworks loss. The fit-out adds a further $8,000 that must be recovered. If the roadworks end in six months, the shop would carry the higher rent permanently for a temporary problem.
Risk: online competitors already discount bestsellers by 20%, so sales growth is not guaranteed. Moving also risks losing loyal customers who walk to the current site.
Recommendation: stay, use the staff saving and click-and-collect to trade through the six months, and ask the landlord for a temporary rent reduction. Revisit relocation only if the shop can negotiate a rent-free period, keep at least $10,000 cash after fit-out, and has evidence that foot traffic will recover.