Should I Start a Specialty Wine Store? A Managerial Economics Analysis

Introduction

In today's world, more and more employees are becoming emancipated and are being granted greater rights and responsibilities. However, at the end of the day, they still must answer to a hierarchical superior. Several forces of the micro- and macroenvironments have motivated employees to become their own bosses, which has materialized in the opening of numerous small enterprises across a variety of fields. Stories of entrepreneurial success have in turn stimulated other individuals to consider opening their own businesses, expanding their existing ventures, or launching new operations in other sectors.

The question posed and explored in this paper is whether I myself should open a new business. I am currently employed at a multinational corporation in the position of managerial assistant. That experience would help in a new venture, but there are also a number of additional elements that must be considered. The business idea in question is opening a small specialty wine store.

In deciding for or against this idea, one must consider numerous forces in the environment. Ten such forces are presented here — seven relevant to the matter and three not relevant. The relevant forces include the demand for specialty wines, the supply, the implied opportunity cost, the expected return on investment, the established retail price and adjacent pricing strategies, the break-even analysis, and finally the industry features. The irrelevant forces are competition, funding opportunities, and inflation rates. After a detailed study of these forces, the conclusion is that, at least at this point in time, it may not be in my best interest to open a new business.

Definition of Key Concepts

Before proceeding, the question should be examined from the standpoint of defining key concepts. The first step is identifying the managerial reasoning behind the question. Should I Start a New Business? is a complex question that cannot be answered with a simple yes or no. More data must be gathered in order to make the best-informed decision regarding expected rate of return, chances of success, and the micro- and macro-level forces that might affect the new venture.

Attention must also be given to the forces most likely to affect the success and outcome of the specialty wine store. These include the following:

Competition: In its most basic formulation, competition can be defined as a rivalry between two or more players who share similar interests and pursue similar goals.

Demand: "An economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa" (Investopedia, 2008).

Supply: Supply refers to the totality of products or services available in a market that can be sold to the customer.

Opportunity Cost: "What the firm's owners give up to use resources to produce goods and services" (Thomas and Maurice, 2008, p. 6).

Funding: The money required to finance an investment and the possible means of obtaining it.

Return on Investment: The time it takes for a venture to amortize all costs and begin generating a profit.

Price: The amount of money the customer must pay for a purchased good or service; the cost incurred by the client.

Break-Even Analysis: A financial analysis that tells the investor how many units must be sold in order to break even — that is, to cover expenses and begin earning profits.

Industry Features: A variety of influential forces present in the industry, typically driven by competition, customers, or regulatory institutions.

Inflation: "The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling" (Investopedia, 2008).

Relevant Factors and Costs

Numerous elements could affect the outcome of the specialty wine store. They arise from both micro- and macroenvironments; the ten most important are summarized below.

Competition: The new store would not encounter direct competition from another specialty wine retailer, but would face competition from regular stores that sell wine. A notable player would be Walmart, which operates a supermarket on the same street, offering a long aisle of wines at reduced prices. The decision to open a specialty store, however, would be based on the belief that wine drinkers would prefer specialty products over standard product-line wines. This makes competition a relatively irrelevant force for this particular venture.

Demand: In recent years, economic growth and rising living standards have created a wealthier consumer base and increased demand for specialty wines. This trend can be explained by people's desire to belong to elite social groups that consume premium wines from around the world.

Supply: The supply of specialty wines would be deliberately limited. Products would be sourced from numerous global destinations, such as Chile and France. The limited selection would serve both as a marketing strategy — scarcity makes customers want something that feels almost unique — and as a means of reducing financial risk.

Opportunity Cost: The primary opportunity cost of launching the new venture is giving up my current job, which is stable and provides a guaranteed paycheck. In other words, the opportunity cost is a reliable income stream. Additionally, the extra time required to establish the business would come at the expense of leisure activities.

Funding: Over the years I have managed to save enough money to finance part of the investment. Had I lacked sufficient funds, I could have taken out a bank loan or considered issuing stock. Since personal savings are sufficient, however, external funding is an irrelevant factor for this analysis.

Return on Investment: The expectation is that the specialty wine store would achieve an efficient return on investment — that is, begin operating at a profit — after the first full year of operations.

Price: The retail prices of the specialty wines would be significantly higher than those of standard product-line wines. This would not be a major concern, however, as the store would serve a niche market that prioritizes quality over price.

Break-Even Analysis: The store would break even after selling 8 units of specialty wine. This calculation assumes a cost per unit of $50, fixed costs of $400,000 (covering facility purchase, logistics, human resources, and similar expenses), an expected sales volume of 150 units, and an average retail price of $100 per bottle.

Industry Features: Globalization and market liberalization have allowed the wine industry to expand internationally. Regulatory bodies, however, impose compliance challenges through extensive standards and norms. Retailers have generally responded well to these challenges as demand has continued to grow. More recently, however, the industry has begun to feel the effects of broader economic instability.

Inflation: The United States has historically maintained one of the more stable and controlled inflation rates in the world, though it has been increasing more recently and generating concern. For the purposes of this specialty wine store, however, inflation would not generate massive effects, since it affects all players in the industry equally — making it a relatively irrelevant factor to this specific business decision.

References

Thomas, C. R., & Maurice, C. (2008). Managerial Economics (9th ed.). McGraw-Hill/Irwin.

Investopedia. (2008). Financial definitions and concepts. Retrieved November 24, 2008, from http://www.investopedia.com

DinkyTown. (2008). Financial calculators — Breakeven analysis. Retrieved November 24, 2008, from http://www.dinkytown.net/java/BreakEven.html