Pre-Feasibility Study

(Whole Sale / Distribution Agency)

Small and Medium Enterprises Development Authority Ministry of Industries & Production
Government of Pakistan
www.smeda.org.pk
HEAD OFFICE
4th Floor, Building No. 3, Aiwan-e-Iqbal Complex, Egerton Road, Lahore Tel: (92 42) 111 111 456, Fax: (92 42) 36304926-7

[email protected]
REGIONAL OFFICE Punjab 3rd Floor, Building No. 3, Aiwan-e-Iqbal Complex, Egerton Road Lahore, Tel: (042) 111-111-456 Fax: (042) 36304926-7 [email protected] REGIONAL OFFICE Sindh 5TH Floor, Bahria Complex II, M.T. Khan Road, Karachi. Tel: (021) 111-111-456 Fax: (021) 35610572 [email protected] REGIONAL OFFICE Khyber Pakhtunkhwa Ground Floor State Life Building The Mall, Peshawar. Tel: (091) 111-111-456 Fax: (091) 5286908 [email protected] REGIONAL OFFICE Balochistan Bungalow No. 15-A Chaman Housing Scheme Airport Road, Quetta. Tel: (081) 2831623, 2831702 Fax: (081) 2831922 [email protected]

Note: All SMEDA Services / information related to PM's Youth Business Loan are Free of Cost December, 2013

Table of Contents
1. DISCLAIMER ......................................................................................................................... 2 2. PURPOSE OF THE DOCUMENT ......................................................................................... 3 3. INTRODUCTION TO SMEDA.............................................................................................. 3 4. INTRODUCTION TO SCHEME ........................................................................................... 4 5. EXECUTIVE SUMMARY ..................................................................................................... 4 6. BRIEF DESCRIPTION OF PROJECT ................................................................................... 5 7. CRITICAL FACTORS ............................................................................................................ 5 8. INSTALLED AND OPERATIONAL CAPACITIES ............................................................ 6 9. GEOGRAPHICAL POTENTIAL FOR INVESTMENT ........................................................ 7 10. POTENTIAL TARGET MARKETS................................................................................... 7 11. DISTRIBUTION PROCESS FLOW ................................................................................... 7 12. PROJECT COST SUMMARY ............................................................................................ 8 12.1 Project Economics ..................................................................................................... 8 12.2 Project Financing ....................................................................................................... 9 12.3 Project Cost ................................................................................................................ 9 12.4 Space Requirement ................................................................................................... 9 12.5 Human Resource Requirement ............................................................................. 10 12.6 Revenue Generation ............................................................................................... 10 12.7 Other Costs ............................................................................................................... 11 13. CONTACT DETAILS OF CONSULTANS / EXPERTS ................................................. 12 14. ANNEXURES ................................................................................................................... 13 14.1 Income Statement................................................................................................... 13 14.2 Balance Sheet ......................................................................................................... 14 14.3 Cash Flow Statement ............................................................................................. 15 14.4 Useful Project Management Tips ......................................................................... 16 14.5 Useful Links ............................................................................................................. 17 15. KEY ASSUMPTIONS....................................................................................................... 19

1.

DISCLAIMER

This information memorandum is to introduce the subject matter and provide a general idea and information on the subject. Although, the material included in this document is based on data / information gathered from various reliable sources; however, it is based upon certain assumptions which may differ from case to case. The information has been provided on as is where is basis without any warranties or assertions as to the correctness or soundness thereof. Although, due care and diligence has been taken to compile this document, the contained information may vary due to any change in any of the concerned factors, and the actual results may differ substantially from the presented information. SMEDA, its employees or agents do not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. The contained information does not preclude any further professional advice. The prospective user of this memorandum is encouraged to carry out additional diligence and gather any information which is necessary for making an informed decision, including taking professional advice from a qualified consultant / technical expert before taking any decision to act upon the information. For more information on services offered by SMEDA, please contact our website: www.smeda.org.pk

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2.

PURPOSE OF THE DOCUMENT

The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs in project identification for investment. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document / study covers various aspects of project concept development, start-up, production, marketing, finance and business management. The purpose of this document is to facilitate potential investors in Distribution Agency by providing them with a general understanding of the business with the intention of supporting potential investors in crucial investment decisions. The need to come up with pre-feasibility reports for undocumented or minimally documented sectors attains greater imminence as the research that precedes such reports reveal certain thumb rules; best practices developed by existing enterprises by trial and error, and certain industrial norms that become a guiding source regarding various aspects of business set-up and its successful management. Apart from carefully studying the whole document, one must consider critical aspects provided later on, which form basis of any investment decision.

3.

INTRODUCTION TO SMEDA

The Small and Medium Enterprises Development Authority (SMEDA) was established in October 1998 with an objective to provide fresh impetus to the economy through development of Small and Medium Enterprises (SMEs). With a mission "to assist in employment generation and value addition to the national income, through development of the SME sector, by helping increase the number, scale and competitiveness of SMEs" , SMEDA has carried out sectoral research to identify policy, access to finance, business development services, strategic initiatives and institutional collaboration and networking initiatives. Preparation and dissemination of prefeasibility studies in key areas of investment has been a hallmark of SME facilitation by SMEDA. Concurrent to the prefeasibility studies, a broad spectrum of business development services is also offered to the SMEs by SMEDA. These services include identification of experts and consultants and delivery of need based capacity building programs of different types in addition to business guidance through help desk services.

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4.

INTRODUCTION TO SCHEME

Prime Ministers Youth Business Loan, for young entrepreneurs, with an allocated budget of Rs. 5 Billion for the year 2013-14, is designed to provide subsidised financing at 8% mark-up per annum for one hundred thousand (100,000) beneficiaries, by designated financial institutions, initially through The National Bank of Pakistan (NBP) and The First Women Bank Ltd. (FWBL). Loans from Rs. 0.1 million to Rs. 2.0 million with tenure up to 8 years inclusive of 1 year grace period, and a debt: equity of 90: 10 will be disbursed to SME beneficiaries+ across Pakistan, covering; Punjab, Sindh, Khyber Pakhtunkhwa, Balochistan, Gilgit Baltistan, Azad Jammu & Kashmir and Federally Administered Tribal Areas (FATA).

5.

EXECUTIVE SUMMARY

Distribution Agency is proposed to be located at any densely populated city such as Karachi, Lahore, Rawalpindi, Peshawar or Quetta to distribute Fast Moving Consumer Goods (FMCG) such as Branded Tea, Powdered Milk and Confectionary Items to the Local market. This business can also be undertaken in all small 2nd tier towns, in addition to suburban towns of large cities. This proposed distribution agency will distribute around 10 tonnes each of tea, powdered milk, biscuits and chocolate / toffees etc per month to the retailers. The assumed sales force has the capacity to distribute around 60 tonnes of product and initially they will be utilizing 67% of proposed capacity. Total Cost Estimate of the project is Rs. 2.17 million with Fixed Investment of Rs. 0.83 million and Working Capital of Rs. 1.33 million Given the cost assumptions IRR and payback are 40 % and 3.5 years respectively. The most critical considerations or factors for success of the project are 1. Product and Brands to be distributed 2. Negotiation and Marketing Skills 3. Credit Recovery

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6.

BRIEF DESCRIPTION OF PROJECT

Product: It has been suggested that for the proposed distribution business, the company would act as a main institutional distributor for Fast Moving Consumer Goods (FMCG) products. The business would distribute; one established tea brand, any one of packaged Milk, as new brands are growing in the market and any two of confectionery products i.e. biscuits & toffees etc. Location: Distribution Agency can be set-up in any major city with significant population such as Karachi, Lahore, Rawalpindi, Peshawar and Quetta. This business can also be done in all small second tier towns in addition to suburban towns of large cities. Target Market: The demand of distribution service providers is increasing which is directly proportionate to the increase in FMCG manufacturing companies which are expanding substantially with the current economic growth and consumerism. Therefore the potential target market for the proposed distribution agency setup is retail stores in densely populated cities such as Karachi, Lahore, Peshawar, Quetta, Rawalpindi, Islamabad and all second and third tier cities / towns of Pakistan. Employment Generation: The proposed project will provide direct employment to 15 people. Financial analysis shows the unit shall be profitable from the very first year of operation

7.

CRITICAL FACTORS

Critical success factors that affect the decision to invest in the proposed business are: i) Products and Brand Product and Brands to be distributed would act as a key success factor for the proposed distribution business. Greater the brand awareness in the market, higher would be the chances of business success. It is suggested that prospective entrepreneur should obtain distribution agreement for at least one successful brand. ii) Background Experience Background experience plays an important role in operating a small to medium scale Distribution Agency, specially when dealing with customers, deciding the business development activities to be carried out and negotiating on commercial terms and conditions, etc.

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iii) Marketing Skill The entrepreneur must have effective PR & marketing skills. These marketing skills should enable the entrepreneur to carryout business development activities to target potential customers and also to maintain existing client base. iv) Strong Sub-distributor A strong sub-distributor network also plays an important role in generating additional business. Such a network is imperative in developing a strong customer base which might remain restricted if operated alone. v) Skilled & Experienced Manpower The knowledge and experience of the entrepreneur is not sufficient to run the business smoothly. A major proportion of business development activities and accounts receivables are managed by sales personnel employed by the agency. Therefore, it is crucial for the distribution agency to hire experienced and skilled sales staff that can bring in new business and retain existing customer base.

8.

INSTALLED AND OPERATIONAL CAPACITIES

For the proposed project it is assumed that 480 tonnes / annum of various consumer goods will be distributed across the city where the distribution company is set-up with 7% sales volume growth assumption. For this purpose a staff of total 15 persons will be justifying their job description in various capacities. It has been suggested that for the proposed distribution business, the company would act as a main institutional distributor for Fast Moving Consumer Goods (FMCG) products. The business would distribute; one established tea brand, any one of packaged Milk, as new brands are growing in the market and any two of confectionery products i.e. biscuits & toffees etc. Products for distribution have been selected for the proposed business by foreseeing their high potential and anticipated expansion in the manufacturing of these products. However, as these products are perishable, efficient distribution operations would be necessary. In order to leverage the opportunity for further business expansion, intensive distribution practice would be followed which means that the business would place its products and services in as many outlets as possible, employing the First in First Out method. It is proposed that Milk should not be stored in the warehouse for more than 03 days, whereas, tea and confectionery may remain in stock for 07 days at most. However, it is
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suggested that time for a product to leave the warehouse and be distributed should be as minimum as possible.

9.

GEOGRAPHICAL POTENTIAL FOR INVESTMENT

The growing trend of consumerism and increase in population has increased opportunities for the FMCG distribution business in Pakistan. The influx of rural population into urban areas has also increased the demand of consumer goods, therefore, proposed Distribution Agency can be set-up in any major city with significant population such as Karachi, Lahore, Rawalpindi, Peshawar and Quetta. This business can also be done in all small second tier towns, in addition to suburban towns of large cities.

10.

POTENTIAL TARGET MARKETS

Pakistan has a domestic market of above 185 million consumers with growing incomes & changing consumption habits. Population growth, increase in per capita income, and urbanization have led to demand of distribution agencies. Consumerism and introduction of new products have fuelled demand. The target market for the proposed set-up is retail stores in densely populated cities such as Karachi, Lahore, Peshawar, Quetta, Rawalpindi, Islamabad & all second and third tier cities / towns of Pakistan.

11.

DISTRIBUTION PROCESS FLOW

Manufacturing or trading companies dealing in consumer goods when interested in appointing a distributor for their products, advertise in newspapers and call for expression of interest from local companies interested in the distribution. Companies evaluate following capabilities of the interested distributors: Location of distributors business premises. Financial position and credit standing of the distributor. Knowledge and experience of the distributor. Storage and showroom facilities of the distributor. Ability of the distributor to secure adequate business and to cover the market. Capacity of the distributor to provide after sale service. General reputation of the distributor and his sales force. Willingness of the distributor to handle the entrepreneurs products. Degree of co-operation and promotion service he is willing to provide.
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Nature of other products, if any handled by the distributor.

In a country like Pakistan one needs an effective distribution system that provides market coverage and is economical. The choice of a channel by traders or manufacturers depends upon the nature of the product e.g. for low priced consumer products like soap, a vast network is needed and manufacturers prefer to hire the services of a independent distributor rather than having their own distribution set-up, which is a high cost option. For industrial goods, a direct channel or a very short channel is considered to be appropriate. The nature of the product- whether it is bulky or perishable, and the cost and efficiency of the distributors are some other factors that manufacturers and traders consider while selecting a distributor.

12.

PROJECT COST SUMMARY

A detailed financial model has been developed to analyze the commercial viability of Distribution Agency under the Prime Ministers Youth Business Loan. Various cost and revenue related assumptions along with results of the analysis are outlined in this section. The projected Income Statement, Cash Flow Statement and Balance Sheet are attached as appendix 12.1 Project Economics All the figures in this financial model have been calculated for distribution of 40 Tons / Month of Packed Tea, Powdered Milk, Biscuits and Confectionary Items. Monthly Sales of these items based on certain assumptions such as Distributors price and quantity of sales are calculated to be Rs. 12.9 million.

Following table shows Internal Rate of Return, Net Present Value and Payback Period.
Table 1 - Project Economics Description Internal Rate of Return (IRR) Payback Period (yrs) Net Present Value (NPV) Details 40% 3.5 6,359,805

Returns on the scheme and its profitability are highly dependent on effective management of logistics, general reputation of distributor and its sales force.
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12.2 Project Financing Following table provides details of the equity required and variables related to bank loan:
Table 2 - Project Financing Description Total Equity (10%) Bank Loan (90%) Markup to the Borrower (%age/annum) Tenure of the Loan (Years) Grace period (Year) Details Rs.217,020 Rs.1,953,180 8% 08 01

12.3 Project Cost Following requirements have been identified for operations of the proposed business:
Table 3: Capital Investment for the Project

Capital Investment Furniture Delivery Vehicles 02 Nos. (Used) Office Equipment Total Capital Costs Working Capital Total Project Cost 12.4 Space Requirement

Amount (Rs.) 50,000 700,000 82,000 832,000 1,338,200 2,170,200

Space required for Distribution Agency is 2,000 Sq. ft. where 200 Sq. ft. will be used for Management Office and 1,800 Sq. ft. will be used as Godown.
Table 4: Space Requirement

Description

Area Sq. Ft. 2,000

Monthly Rent Charges (Rs.) 20,000 20,000

Yearly Rent(Rs.)

For Office & Godown Total Rent

240,000 240,000

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Table 5: Office Equipment & Furniture Costs

Description Computer & UPS Printer Fax & Telephone UPS & Battery Furniture Total

Quantity 1 1 1 1 1

Cost 40,000 10,000 12,000 20,000 50,000

Amount 40,000 10,000 12,000 20,000 50,000 132,000

12.5 Human Resource Requirement

Table 6: Human Resource Requirement

Description Owner Manager Sales Staff / Outdoor Booking Store Keeper Billing Staff Cashier Deliveryman Driver / Loader Security Guard Total Staff

Nos. 1 4 1 1 1 2 3 2 15

Salary per month 25,000 12,000 12,000 12,000 15,000 10,000 10,000 10,000 106,000

Total Salary 25,000 48,000 12,000 12,000 15,000 20,000 30,000 20,000 182,000

The table above provides details of human resource required to run a Distribution Agency of Small and Medium Scale. Salaries of all employees are estimated to increase at 10% annually. 12.6 Revenue Generation The revenues are based on assumption of monthly Sales Proceeds of Rs. 12.9 Million of Branded Tea, Powdered Milk, Biscuits and Confectionary items with an annual sales volume growth rate of 5% and price growth rate of 10%. On an average distribution margin is 2% of total sales proceeds.

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Table 7 - Project Economics

Distribution of Items Branded Tea Powdered Milk Biscuits / Cookies Candy / Toffee / Chocolates Sub-Total Total Sales 12.7 Other Costs

Monthly Sales 5,000,000 5,000,000 1,300,000 1,600,000 12,900,000

Commission on Sales (2%) 100,000 100,000 26,000 32,000 258,000

Incentives on Sales-Monthly 40,000 80,000 28,600 28,800 177,400 435,400

An essential cost to be borne by the company is maintenance of vehicles as delivery vans have to cover a number of remote areas in different part of the city. On an average Rs. 15,000 is assumed to be monthly vehicle maintenance expense.
Working Capital Requirements: It is estimated that an additional amount of approximately Rs. 688,200 will be required as cash in hand to meet the initial working capital requirements during operations. The requirement is based on the utilities, salaries, fuel, office rent, insurance expense, maintenance and miscellaneous expense for at least three months. The following table gives the break up.
Table 8 Working Capital Requirement

Salaries Rent Utilities Fuel for Vehicle Office Expenses Life Insurance Expense Pre-Operating Expense Maintenance for Vehicle Total

Months 02 02 02 02 02 02 02 02

Charges (Rs.) 364,000 40,000 20,000 109,200 15,000 15,000 60,000 15,000 638,200

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13.

CONTACT DETAILS OF CONSULTANS / EXPERTS

Following are a few significant distributors with sub-distribution options: Universal Distributors Limited (UDL), www.universaldistribution.org/ International Brands Limited (IBL), www.iblgrp.com/ Burque Corporation, Premier Distributor, www.burque.com.pk/ Muller & Phipps (M & P), www.mulphico.pk/

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14. ANNEXURES
14.1 Income Statement

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14.2

Balance Sheet

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14.3

Cash Flow Statement

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14.4

Useful Project Management Tips

Technology List of Machinery & Equipment Computer & UPS Printer Fax & Telephone UPS & Battery Furniture

Energy Requirement: Should not be overlooked and alternate source of energy for critical operations be arranged in advance

Marketing Sales & Distribution Network: Expert's advice and distribution agreements are required with distributors & retailers. Price - Bulk Discounts, Cost plus Introductory Discounts: Price should never be allowed to compromise quality. Price during introductory phase may be lower and used as a promotional tool. Service cost estimates should be carefully documented before price setting. Government controlled prices should be displayed, where applicable.

Human Resources List of Human Resource Owner Sales Staff / Outdoor Booking Store Keeper Billing Staff Cashier Deliveryman Driver / Loader Security Guard

Adequacy & Competencies: Recruitment of skilled and experienced staff should be considered an investment.
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Performance Based Remuneration: Attempt to manage human resource cost should be focused through performance measurement and performance based compensation. Training & Skill Development: Encouraging training and skill of self & employees through experts and exposure to best practices is a route to success. Least cost options for Training and Skill Development (T&SD) may be linked with compensation benefits and awards. Useful Links

14.5

Prime Ministers Office www.pmo.gov.pk Small & Medium Enterprises Development Authority (SMEDA) www.smeda.org.pk National Bank of Pakistan (NBP) www.nbp.com.pk First Women Bank Limited (FWBL) www.fwbl.com.pk Government of Pakistan www.pakistan.gov.pk Ministry of Industries & Production www.moip.gov.pk Ministry of Education, Training & Standards in Higher Education http://moptt.gov.pk Government of Punjab www.punjab.gov.pk Government of Sindh www.sindh.gov.pk Government of Khyber Pakhtunkhwa www.khyberpakhtunkhwa.gov.pk Government of Balochistan www.balochistan.gov.pk
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Government of Gilgit Baltistan www.gilgitbaltistan.gov.pk Government of Azad Jammu & Kashmir www.ajk.gov.pk Trade Development Authority of Pakistan (TDAP) www.tdap.gov.pk Securities & Exchange Commission of Pakistan (SECP) www.secp.gov.pk Federation of Pakistan Chambers of Commerce and Industry (FPCCI) www.fpcci.com.pk State Bank of Pakistan (SBP) www.sbp.org.pk

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15. KEY ASSUMPTIONS

Item Sales Volume Increase Sales Price Increase Increase in Cost of Sales Increase in Staff Salaries Increase in Utilities Increase in Rent Increase in Office Expenses Debt / Equity Ratio Depreciation: Premises Renovation Furniture Loa Period Loan Installments Financial Charges (Lease Rate) Bad Debts Assumption(s) 5% 10% 10 % 10 % per year 10 % per year 10 % per year 10 % per year 90 : 10 10 % per annum (Diminishing Balance) 10 % per annum (Diminishing Balance) 8 Years, inclusive of 1 year grace period Monthly 8 % per annum 3% of Sales

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