Research and Market Entry Report for Austria Krystian Raymond
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- Supply Chain and Distribution
- Financing and Risk Mitigation
- Decision and Next Steps
Expansion RisksRONA has developed an overview of four key risks when developing an expansion that applies both domestically and internationally. This list provides some of the main factors to consider when developing a risk management strategy. RONA would be well-served to develop an extensive risk management strategy in order to tackle the European expansion in an effective and well-though out manner. A good risk management strategy is necessary for a company as it aims to predict future obstacles and develop methods of dealing with those impediments before the issues arises. Merchandising Risk“There is a risk that the Corporation could offer products or services that customers or dealer-owners do not want and that do not fit with current consumer trends or behaviours, or regional preferences, or that prices are higher than customers or dealer-owners are willing to pay, or that are outperformed in the marketplace by competing products. If merchandising does not have the requisite effectiveness, the Corporation’s profitability could be affected. It is vital that the Corporation provide quality products in order to protect customer safety and reduce the risk of recalls that could harm the Corporation’s reputation.”[RON14] Supply Chain and DistributionRONA must ensure that retail outlet’s need for merchandise remains satisfied through effective supply-chain management and solid supply chain knowledge and relationships. RONA requires timely delivery, reasonable pricing and product quality that meets the company’s standards. “Furthermore, it is important for RONA to establish solid and lasting relationships with its suppliers in order to avoid stock-outs or unexpected changes in the price of merchandise. Because of the Corporation’s particular business model and historical growth through acquisitions, its information technology structure is particularly complex. Supply management is a key component of proper inventory management and is a priority for the Corporation. Inability to detect, correct and prevent obsolescence and to maintain an adequate level of inventory could lead to losses and operational inefficiencies including the inability to effectively deploy the appropriate stocks across the network.”[RON14] Liquidity RiskLiquidity risk is the risk that the Corporation will be unable to fulfill its obligations on a timely basis or at a reasonable cost. Liquidity risk refers to a company’s inability to fulfill its obligations in a timely or reasonable manner. [FIT134] “The Corporation manages its liquidity risk by monitoring its operating requirements and using various funding sources to ensure its financial flexibility. The Corporation prepares budget and cash forecasts to ensure that it has sufficient funds to fulfill its obligations. In recent years, the Corporation financed the growth of its capacity, increase in sales, working capital requirements and acquisitions primarily through cash flows from operations, a debenture issue and the use of its revolving credit on a regular basis.”[RON14] Credit riskCredit risk refers to the possibility that parties to a financial instrument may not fulfill their obligations, thereby negatively affecting RONA’s financial condition.[FIT134] “The main risks relate to trade and other receivables and the Corporation’s loans and advances. The Corporation may also be exposed to credit risk from its cash and its foreign exchange forward contracts, which is managed by only dealing with reputable financial institutions. To manage credit risk from trade and other receivables and loans and advances, the Corporation examines their financial stability on a regular basis. The Corporation records allowances for doubtful accounts, determined on a client-per-client basis, at the end of the reporting date to account for potential losses.” [RON14] Financing and Risk MitigationProject FinancingIt is necessary to acquire adequate funding for an expansion project to prevent a severe constriction on cash flow and to allow the organization to grow in a way that is healthy for all segments of the business. “Limited availability of financing may affect…RONA’s ability to pursue its growth objectives or prevent it from acquiring other stores or delay investment in existing stores.”[RON14] RONA will receive financing through its banking institution for a term loan of $20 million over 10-year period (interest compounded quarterly, principal and interest payments annually). This is in line with the institution’s requirements as well as RONA’s financial capabilities. The remaining $19 million and all other overages and expansion-related costs will be covered by RONA as it moves forward. The loan will be used for the acquisition and rebranding phase of the expansion project in conjunction with the independent financing provided by RONA Inc. The organization will utilize its free cash flow and growing cash reserves to finance the expansion as it moves towards operational status. Risk Mitigation“The Corporation must be able to react quickly in order to resume essential operations and not affect profitability adversely. Information system continuity and other contingency plans have been put in place to mitigate this risk. Furthermore, the Corporation has insurance programs which provide coverage for this risk.”[RON14] Risk insurance for an international expansion is absolutely critical to ensure the safety and well-being of the company moving forward. Export Development Canada, one of Canada’s leading providers of international risk insurance, offers several different types of insurance based on need such as: political risk insurance, accounts receivable insurance or single buyer insurance. These cover different types of business situations and typically provide up to 90% of the value of losses incurred.[Exp14] RONA may be well-served to purchase contract frustration insurance, which is a multi-faceted coverage program offered by EDC for companies entering new foreign markets. This type of insurance provides companies with protection against contract cancellation, customer bankruptcy and default, permit cancellation and market hostility, among other things. This provides well-rounded coverage to companies like RONA who aim to successfully expand abroad. [Exp14]As a safe and stable country, RONA can be less concerned with major political risks, therefore it may wish to delay the purchase of political risk insurance plans until conditions begin to change or if they wish to enter new, less stabilized markets in the future. Decision and Next StepsAfter analysis of all the market and company data, it is concluded that RONA would be well-served by undertaking the expansion opportunity presented and would likely see positive benefits that it would not otherwise see by continuing operations in the domestic market. Austria presents a market that is economically stable and financially wealthy. Austria’s overall infrastructure is very good and offers a good business environment for foreign companies. The Vienna region offers RONA a densely populated target market on which to build its operations and provides a sufficient number of target consumers to support future growth over the long-term. The climate and seasonal nature of operations is very similar to Canada, allowing RONA to utilize key elements of its product planning in the new market. This gives RONA the ability to conduct operations in a familiar and predictable way. Expanding into an EU member state offers the advantages of a standardized regulatory system and facilitates access to other markets in the future. Currency risks are minimized as the Euro presents a stable and consistent currency on which to build the business. Austria has remained relatively stable throughout the economic crisis and is forecasted to remain stable over the long-term. Distribution channels within the market are strong and offer RONA the ability to offer a complete product mix for Austrian consumers, with shipping and transport costs lower than the domestic market in some cases. RONA is financially healthy and will be able to undertake the expansion with no adverse effects on current operations or company value. Moving forward, RONA Inc. should begin its expansion process by restructuring and expanding its corporate divisions to outline the tasks, responsibilities and corporate direction for management and executives. The newly-formed international market development team will then be tasked with identifying six suitable expansion locations and commencing the acquisition and rebranding phase within the Vienna region. The promotional strategy will then commence to inform and engage the target market over the course of rebranding and opening the outlets. Once operational, another report is to be submitted, reviewing the expansion process and revising and addressing operational goals and concerns. Appendix 1.1Members of the RONA Inc. Board of Directors ‘Robert Chevrier, FCA Executive Chairman of the Board of Directors of RONA, Chairman of the Board of Directors of Uni-Sélect (independently owned auto parts dealers) and former Chairman of the Board of Directors of Richelieu Hardware Ltd. (distributor, importer and manufacturer of specialty hardware and complementary products)
President and Chief Executive Officer of Cascades Tissue Group (papermaker) and Corporate Director Réal Brunet Corporate Director and former Audit Partner and Senior Advisory Partner at Ernst & Young (professional services organization) Eric Claus President and Chief Executive Officer of Red Apple Stores Inc. (value retail stores) and former President and Chief Executive Officer of the Great Atlantic and Pacific Tea Company (supermarkets chain) Bernard Dorval Corporate Director and former Group Head of Insurance and Global Development of TD Bank Financial Group and Acting President of TD Canada Trust Guy Dufresne Corporate Director and former President and Chief Executive Officer of ArcelorMittal Mines Canada Inc. (mining company) Barry Gilbertson Principal with Barry Gilbertson Consultancy (strategic business and real estate advisory firm) Jean-Guy Hébert Corporate Director and President of Maximat Inc. (holding company), Maximat Granby Inc. (holding company), Horizon Devcow Inc. (real estate) and 9060-4976 Québec Inc., (operating under the RONA L’entrepôt banner in Granby), Vice President of 9066-7403 Québec Inc. (operating a store under the RONA L’entrepôt banner in Saint-Hyacinthe) and Rocvale Inc. (concrete products)
Chairman of the Board of Directors of EnerCare Inc. (energy heating), Parkland Fuel Corporation (energy downstream) and Corporate Director Robert Paré Corporate lawyer and Partner at Fasken Martineau Dumoulin LLP (law firm) and Corporate Director Steven P. Richardson Corporate Director and former member of the Board of Directors, Chair of the Corporate Governance and Compensation Committee and member of the Audit Committee of Sterling Shoes Inc. (footwear stores) and Director, Co-Chair of Compensation Committee, Chair of Special Committee and member of the Audit Committee of easyhome Ltd. (financial services supplier) Robert Sawyer President and Chief Executive Officer of RONA and former Executive Vice President and Chief Operating Officer of Metro Inc. (Canadian food company) Wesley Voorheis Corporate Director and Partner at Voorheis & Co. LLP (law firm), Managing Director of VC & Co. Incorporated” [RON14] Appendix 1.2RONA Inc. Executive Management Structure 
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