Reference no: EM133032970

The Poe Ranch Gift Shop

Charles Poe grew up on the 12,000-acre Poe Ranch in Montana that his great grandfather established with an initial 1,000 acres in 1929. Growing up on the ranch, Charles acquired a lot of practical skills through hard work and a lot of what he thought of as needless tasks. When he was 14 he could not figure out why his father (David) had him work for a year as a clerk in the small family business office that handled all of the payments the ranch made to various suppliers and vendors and also the payroll of 14 ranch employees. Of course, although he found the work boring, it was a good break from the hard physical labor he was used to doing on the ranch.

When Charles was twenty and attending college, his mother (Heather) decided it would be good for the family to turn part of the ranch into a tourist destination. Increasingly people were looking for unusual vacations that also connected them to nature and perhaps a way of life they had only read about or seen in the movies. Several of the ranches in Montana and Wyoming had built small lodges for guests and offered 3-7 day vacations where the guests worked on the ranch and experienced many facets of ranch life. Heather and David decided to capitalize on this trend and in 2009 and constructed the 9,000-square-foot Poe Ranch Lodge with eight bedrooms and a large dining hall that allowed them to accommodate from 8 to 30 guests at the ranch. The lodge was open for guests from May 1 through September 15. After the first season (2010), which had a total of 378 guests and generated gross revenue of $412,000, Heather began to talk to David about the possibility of opening a small gift shop. She had found that many of the visitors wanted to purchase something during their visits as a gift for someone or for themselves, but that was not an option. What captured Heather's imagination at the same time was a small house, dating back to 1942, that was one of the early buildings on the ranch. This structure was not being used and was falling into disrepair, and she felt it was important to preserve it before it was too late. Luckily, it was only 600 feet up a dirt road from the new Lodge. During the 2010 Christmas holiday, David and Heather decided to remodel this simple rustic structure and establish the Poe Ranch Gift Shop. The gift shop would open in May 2012, which gave them 18 months to remodel, plan, and acquire inventory.

During the summer of 2011, Charles was home for the summer after completing his junior year studying business at Colorado State University. Heather asked Charles to help her plan the business. Together Heather and Charles were able to look at past guest records and found that 25 percent of the visitors were from Western and Northern Europe, 12 percent from Asia, 48 percent from the United States and primarily from the East Coast, and the remaining 15 percent from various other countries. Also, even though they did not have information on age, Heather, who had gotten to know the guests quite well during their short stays at the ranch, estimated that 70 percent were between 40 and 60 years and very seldom were children included among the visitors. Charles had recommended that for the U.S. visitors, they look at their zip codes and/or home addresses (which they often had on file). Using U.S. census data and Google Earth, he was able to determine that the U.S. visitors were high-income households (probably mostly with incomes over $200,000 per year). Heather generally felt that the foreign visitors were also high-income households.

Heather and David had earlier projected that the ranch lodge would most likely peak at 630 guests per year and reach this level by 2012. Heather, with assistance from Charles, estimated 75 percent of the guests would purchase something at the Poe Ranch Gift Shop and that the average purchase would be $200. In addition, they would ask all shoppers and guests to register for their e-tailing version of the Poe Ranch Gift Shop. Although trying to project e-tailing sales is very difficult, they nonetheless projected that sales would be $12,000 in year one and then double to $24,000 the second year and to $36,000 the third year. The e-tailing business would also be used to discount the merchandise that did not sell at the ranch store. The merchandising philosophy for the store was to not discount any merchandise at the gift shop but to sell it at full retail price that would allow a 60 percent gross margin. On the other hand, the e-tailing venue had a planned gross margin of 30 percent. Heather felt strongly that part of the vacation experience included the desire to take home something special to remember the vacation. Of course, on the 12,000-acre ranch, the gift shop was the only shopping venue and the nearest town was 38 miles away and it had poor shopping options, especially for gift items.

The overall budget for opening of the Poe Ranch Gift Shop was $125,000. This included $66,000 for remodeling, $20,000 for shelving and fixtures, $3,000 for website development and the remainder for inventory and other working capital needs. David also felt they should add $15,000 for contingencies, so they finally decided on a total project cost of $140,000.

As they were ready to finalize the project, Charles brought up the idea one evening over dinner that perhaps the Poe Ranch Gift Shop should be an extension of The Poe Ranch Lodge. When he mentioned this, both Heather and David were a bit confused at what was meant. Charles went on to explain that the inventory investment of approximately $30,000 may not be enough for an optimal merchandise mix and also that some of his financial modeling suggested the venture may not be able to break-even. He then mentioned that perhaps the furniture, bedding, art, and room accessories at the Poe Ranch Lodge could be for-sale. Enthusiastically, he argued these items were already marvelously merchandised in each of the eight bedrooms in the Lodge. In the case of the art, if a guest wanted to purchase an item, it could be taken with them or they could have it shipped. However, in the case of furniture, bedding, and room accessories the guest would be shipped a new identical item. Heather got really excited about this idea. She already had planned to offer tableware at the Poe Ranch Gift Shop since she had a small local potter who she had used to make plates, bowls, and cups for the Poe Ranch. As she got more excited about almost everything being for-sale at the Poe Ranch Lodge, David suggested that both Charles and Heather were getting a bit too creative and moving away from what Heather had initially planned.

Questions

What type of merchandise should the Poe Ranch Gift Shop offer? Explain your rationale.

What should be the initial inventory investment? Explain how you arrived at this amount.

Evaluate the idea that Charles developed of using the Poe Ranch Lodge as an extension of the Poe Ranch Gift Shop.