Taj a Jac Ltd9
History and background
Taj a Jac Ltd is a UK based hand crafted furniture manufacturer, launched in the mid 1980s by Charles Wood. The business started its operations from one shop in York and has grown substantially so that by 2002 it had 48 shops located around the UK. In addition, in 1999, a seven year contract with a national chain of leading department stores was signed which gave Taj a Jac Ltd wider market access in return for a flat fee and a precentage share of profits.
Originally, Charles Wood was the only full time employee of Taj a Jac Ltd. He was responsible for the design, construction and marketing of the business’s products as well as the day to day management of the firm. The business, which required £190,000 to start, was a partnership and in addition to his own investment, 50% of the required capital, was provided by Charles’ brotherin law, Thomas Heath. Thomas was an accountant by profession and acted in a part time capacity as the company accountant and assisted Charles in certain aspects of management.
The company quickly expanded and problems emerged as supply could not keep pace with demand. It became necessary, therefore, to employ someone else to assist Charles in the construction of the furniture. As the business continued to grow, more people joined the company, so that by 1987, 21 people were employed by the firm. At the same time, further shops were opened and a separate workshop/warehouse was established. Taj a Jac Ltd’s expansion was funded by a combination of reinvesting profits and medium term bank loans. The result of all these changes was that by 1987, Charles Wood’s time was almost exclusively given over to the management of the business. The following year the decision was made that the company would become a private limited company and it was at this point that Thomas heath joined as full time finance director. One of the first changes that Thomas brought about was the direct sourcing of the core materials used in the company’s products. The pine now used is directly imported from Canada and Scandinavia.
On the 31 March 2003, after 19 years of trading, the financial statements of the company showed a turnover of £60m and a pre tax profit of £14m.
Strategic review
In 2002, external consultants were asked to identify the strategic options open to Taj a Jac Ltd. The review found that, although the middle/upper end of the furniture market was becoming increasingly competitive, there was still room for significant growth. Despite numerous store openings, the company was still very much a regional operator. Expansion of the market was predicted to continue for many years, although Taj a Jac Ltd’s product and strategic positioning left the business vulnerable to changes in the business cycle. Indeed, the company had been affected quite significantly by a fall in turnover in the mid/late 1990s.
Aware of this, the consultants suggested a number of alternatives for the company. The first was for more stores to be opened – particularly in the south of England where the company had little presence. This option had implications for the management and organisational structure of the company as at least two additional workshop, warehouse and distribution centres would be necessary to provide the required infrastructure. Such a centre was opened in the latter part of 1997, as a programme of store openings had already been an idea that the management had been considering for some time. The company had previously considered franchising as a way to achieve this growth and the company did in 1999 enter into a seven year contract that was signedwith a large UK based department store. However, subsequent market and business research regarding the UK market had suggested that franchising would not be an attractive/profitable propposition for a company like Taj a Jac Ltd and as a consequence the policy was abandoned.
A second alternative recommended was diversification. Significant experience of the import of quality pine from North America and Northern Europe was, the consultants suggested, not being exploited. The wholesale purchase of wood was therefore recommended. This had the added advantage of producing economies of scale which would have the effect of reducing unit costs. Charles and Thomas together with their senior managers had not previously considered this proposal and felt that so long as they were not supplying major competitors this was a proposition that could and should be pursued.
Thirdly, the consultants suggested the development of the ‘lifestyle concept’ store format – stores that not only sold furniture but also related accessories (such as soft furnishings) in a themed environment. Such stores had started to develop at the lower end of the market, but such a format had not yet been rolled out in the market sector that the company occupied. This proposal found immediate favour with some of the management board, although the size of each of the existing shops would not easily accommodate such a change. The movement to larger retail outlets or the opening of new additional stores that could accommodate this format would be necessary but costly.
Fourthly, the demand for English designed quality furniture had always been popular in Asia. The region as a whole was becoming potentially a more significant market and the consultants argued that a gradual move into this market would in time reduce the company’s dependence on UK demand. The consultants, concerned about the risk associated with this alternative, felt that expansion in this way should be via joint venture. This idea was one with which Charles, Thomas and their senior managers readily agreed. The proposal suggested that, in the long run, furniture should be manufactured in Asia using designs and templates from the UK. In the short and medium term, however, in order to establish the viability of the market, furniture should be exported – a practice that the consultants suggested should continue until the market was sufficiently mature – approximately five years hence.
As part of their review the consultants provided the following estimated summary costing for each of the alternatives.
Alternative 1 – additional new stores
|
Initial investment cost |
£86m |
|
Potential annual income |
£16m pa |
Alternative 2 – diversification
|
Initial investment cost |
£23m |
|
Potential annual income |
£6m pa |
Alternative 3 – lifestyle concept
|
Initial investment cost |
£57m |
|
Potential annual income |
£10m pa rising to £15m pa in four years |
Alternative 4 – move into the Asian market
|
Initial investment cost |
£46m |
|
Potential annual income |
£6m pa rising to £14m pa in six years |
Despite their caution, Charles and Thomas were keen to advance on each of the options identified by the external consultants. The question was how this growth should be financed. Financial advisors recommended a combination of possible financial strategies.
Since 1998 Taj a Jac Ltd had begun generating significant cash surpluses which, the financial advisors had suggested, should be used to partly fund the selected proposal/proposals. Another possibility, given the risks that expansion involved, was conversion to public limited company (plc) status so that a ‘listing’ might be sought. This, the consultants suggested, would raise an additional £40m.
In addition to this, the consultants suggested that debt instruments should be used to fund any remaining shortfall – given the current gearing ratio of the company. The company currently has a cost of equity of 12% and an after tax cost of debt of 16%. In addition, it limits project life cycles to a maximum of 20 years. The company believes that if additional funds were raised through borrowing then its cost of equity would rise to 16%. The following financial statements relate to Taj a Jac Ltd for the years 2001 to 2003.
|
Balance sheets at 31 March |
|
|
|
|
|
2001 |
2002 |
2003 |
|
|
£m |
£m |
£m |
|
Fixed Assets |
36 |
47 |
75 |
|
less Depreciation |
10 |
17 |
20 |
|
|
26 |
30 |
55 |
|
Current Assets |
|
|
|
|
Stocks |
16 |
16 |
20 |
|
Trade Debtors |
28 |
47 |
57 |
|
Debtors |
3 |
16 |
5 |
|
Bank |
5 |
7 |
3 |
|
|
52 |
86 |
85 |
|
Current Liabilities |
|
|
|
|
Trade Creditors |
18 |
35 |
43 |
|
Other Creditors |
15 |
7 |
15 |
|
Taxation |
6 |
9 |
4 |
|
Dividends |
3 |
4 |
3 |
|
|
42 |
55 |
65 |
|
Total Net Assets |
36 |
61 |
75 |
|
Long Term Liabilities |
|
|
|
|
Debentures |
2 |
14 |
20 |
|
|
34 |
47 |
55 |
|
Capital |
|
|
|
|
Share Capital |
20 |
32 |
40 |
|
£1 Ordinary Shares |
|
|
|
|
Accumulated Reserves |
14 |
15 |
15 |
|
|
34 |
47 |
55 |
Profit and Loss Accounts for the years ending 31 March
|
|
2001 |
2002 |
2003 |
|
|
£m |
£m |
£m |
|
Turnover |
40 |
60 |
80 |
|
Cost of Sales |
12 |
20 |
38 |
|
Gross Profit |
28 |
40 |
42 |
|
Operating Expenses |
10 |
26 |
35 |
|
Profit Before Taxation |
18 |
14 |
7 |
|
Taxation |
6 |
9 |
4 |
|
Profit After Taxation |
12 |
5 |
3 |
|
Dividends |
6 |
4 |
3 |
|
Retained Profit for the Year |
6 |
1 |
0 |
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