Customer-funded retail model – Lebogang spoke about his customer-funded retail model, meaning that his business is funded through the customers as and when they pay. Lebogang implied that his model means that Cava Sneakers cannot hold sufficient stock to fulfil orders immediately. His pitch implied that he would use the R650 000 prize money to purchase stock in order to increase the speed to supply (see below).
What Lebogang perhaps may not have considered is that more stock will result in the need for additional space to stock these intended purchases. This comes with additional costs which he may or may not have considered, for example, rent, labour, insurance and pilferage. In addition, has Lebogang thought about what would happen with potentially many lines of sneakers that become outdated and outmoded, all landing up stuck in his stockroom?
Speed to supply – Lebogang intimates that speed to supply is very important and that he loses clients as a result of a perceived waiting time to receive stock. This suggests that customers have many alternatives to choose from which may offer quicker fulfilment or instant fulfilment (retail store). This highlights the fact that he is in a highly competitive environment and that perhaps Cava Sneakers does not have the differentiator that the judges are looking for. If Cava Sneakers actually does have the desired level of differentiation, his customers would prefer to wait as they would see the value in this differentiation.
Competitive environment – Nedbank judge, Monique Chinnah, asked Lebogang about his competitive environment, and did not seem convinced that he did in fact comprehensively understand it. He focused on only one or two competitors while Monique (the “investor”) knew of others that that he did not mention. Investors understand that there is competition in all industries and what they want to know is that you, their potential investee or recipient of funding, know all your major competitors and all the emerging competitors. Not only do they want to make sure you know your direct competition, they also want you to know your potential indirect competition. Indirect competition includes products or services that compete for the share of wallet or share of attention of your target client. An example of this is Lotto tickets competing with airtime sales, not necessarily with another gambling product.
Know your numbers – Engen Petroleum judge, Zeeshaan Abbass, asked questions relating to the number of products Cava Sneakers sells. Investors want to know that you know your numbers, in particular your sales numbers. The fact that Lebogang could immediately answer that he had sold 361 pairs of the Leo range of sneakers would have given the judges confidence that he has a handle on the sales numbers.
The numbers need to stack up – The judges would have made some very quick calculations in their heads based on the information provided by Lebogang in both his pitch and during the clarifying questions. Lebogang said that he sold around 600 pairs of sneakers in the last year. He also said he has done around R1 million in revenue which equates to an average of R1 666 per pair of sneakers sold. Looking at the Cava Sneakers website, you will notice that the average shoe retails for under R1 200. The Leo sneaker – which contributed 60% of the total sales – is priced at R1 300 but it is currently retailing at R999. Something is not adding up. Either Lebogang does not know the real numbers or is he is not expressing them clearly enough. Either way, the judges (investors) would pick up on this inconsistency and it would create concern.
Cost of acquisition – Raizcorp judge, Allon Raiz, wanted to know about Lebogang’s cost of acquisition, i.e. how much does it cost him to acquire a paying client? Lebogang answered that he spent only R50 000 over the last 12 months for “marketing” and received R1 million in revenue. He did not know his actual customer-acquisition cost. Let’s do a crude calculation . . . R50 000 gives Cava Sneakers R1 million worth of sales which, according to Lebogang, equates to 600 sales. We don’t know how many of these sales are repeat sales or one person buying multiple pairs of sneakers. For the purposes of this calculation, let’s (generously) assume that 100% of his 600 sales were as a result of the R50 000 he spent on marketing. So, the R50 000 marketing spend divided by the 600 pairs of shoes works out to be a cost of acquisition of R83.33 per pair. In his pitch, Lebogang said that he has a 43.3% growth margin. If we assume R1 200 as the selling price and the GP as 43.3% then his gross profit is R519.60 which means that the cost of the shoe is R680.40. The R83.33 cost of acquisition works out as an additional cost of approximately 12.25% additional cost (R83.33 divided by R680.40). The expenses in the business were not stated during the pitch or clarifying questions so the judges are not clear about whether there is sufficient margin to justify the cost of acquisition.
Barriers to entry – Allon also asked Lebogang, if he were a potential competitor wanting to get into the same market, what would prevent him from doing so, i.e. what are the barriers to entry for this particular business? Lebogang’s response is that he has direct relationships with his suppliers and does not go through middlemen. Although this might be a perceived barrier to entry, the judges (investors) would not view it as a strong one as other potential competitors with more buying power could probably build a direct relationship with the same or other suppliers. Lebogang needs to work on evolving this barrier to entry. The most effective way for him to do this would be to build the Cava Sneakers brand and ensure that there is definite exclusivity in the lines that Cava is purchasing in the South African market.
Click here to download a printable version of the worksheet.