Newfoundland and Labrador Bicycle Touring Company Ltd

Harold Earle stared blankly at the rain driving at the window of his St John's office. It was early February 1993, Harold was preparing for a meeting the following week with Enterprise Newfoundland and Labrador (ENL). ENL was a provincial development and assistance agency and Earle was hoping for financial assistance to help establish a new business venture.

The weather in recent days was forcing him to reconsider the financial projections that he was going to present to ENL. His projections showed positive cash flows and profits from the proposed venture. He had felt confident that his projections were realistic, and he still felt positive about the potential for this venture. However, he was beginning to think that perhaps he should have a contingency plan for a worst case scenario. Earle had realized, over the last few days, that his proposed bicycle touring venture could be impacted significantly by the weather, not unlike ski operations. He was wondering whether he should arrange a contingency up front with ENL for additional loan funds, should they be required. If so, he also needed to work out how much he might need.

This case was prepared by Gerry Donovan of the Fisheries and Marine Institute of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management

Copyright 1993, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.

The Company and Owner

Newfoundland and Labrador Bicycle Touring Company Ltd was the brainchild of Mr. Harold Earle. Mr. Earle was also the owner and operator of a retail bicycle shop which he had opened in 1988. This operated under the legal name of Earle Industries and catered to the recreational racing and mountain biking markets. It had gained the reputation throughout the Newfoundland cycling community as a source of high quality bicycles, bicycle components and accessories.

Through managing operations for the past five years, Earle had ginned invaluable experience in the financial and technical aspects of running a small business. He had also ginned a thorough understanding of the bicycle industry in general. He had long been aware of the opportunity offered by bicycle touring.

The idea had remained dormant for several years. Finally, in 1992 Earle had begun to consider the idea in more concrete terms. This had been partially driven by an apparent increased interest in bicycle rentals. Earle had "dabbled" in bicycle rentals in the St John's area during the 1992 season as a small sideline to his existing business. Some of the rental clients had been visitors to the city Earle felt that there was room to expand this service to offer single and multi-day tours. He also felt comfortable that his retail operation was sufficiently established to allow him to divert some of his time to this new sideline. At the same time, he had continued to monitor the bicycling media and had witnessed the growth in tour companies. Tour listings in Bicycling magazine showed an approximate 50% increase in advertisements for tours over a five-year period.

While Earle was still considering the potential for this venture, the Economic Recovery Commission (ERC) released a Sector Strategy - Discussion Paper in September 1992 highlighting adventure tourism as an opportunity area. After reading the document, Earle didn't need any more convincing. He started to plan in earnest for a June 1993, launch of his new venture.

The Market

As noted, the ERC had concluded that Newfoundland and Labrador was well positioned to take advantage of the growth in adventure tourism worldwide, in both consumptive and non-consumptive sectors. Consumptive activities encompassed such things as hunting and fishing. Non-consumptive activities included kayaking, sailing and bicycle touring. The non-consumptive adventure sector, although accounting for less than 10% of the entire tourism market, was the fastest growing sector with a 30% annual growth rate.

Earle's own research confirmed that the strongest growth market within the tourism industries was adventure tourism. Further, the strongest growth market within the bicycle industry was in high-end mountain bikes. This, combined with the widespread appeal of recreational cycling, had convinced Earle of the potentially bright future for a Newfoundland and Labrador mountain bicycle touring company offering a high quality product

The clientele for the multi-day packages could be divided into hard adventure tourists and luxury recreational tourists. Earle's own research had shown that the latter group was the largest, with the former experiencing the strongest growth. The typical profile of both groups was 35 to 55 years of age, college educated and well travelled. Most would be either business executives or professionals and the majority would travel as couples.

With the above profile, it was not surprising to find that adventure tourists typically spent mare money than the "average'' tourist. Adventure tourists looked at trip value from a different perspective. They would be less preoccupied with price and more with activity and experience.

The Product

Earle's ultimate objective was to offer fully supported, hard adventure and luxury recreational bicycle tours throughout Newfoundland and Labrador. In its fully developed stage, the bicycle tour company would offer a mix of products. Tours would be some combination of escorted or unescorted, scheduled or unscheduled, single or multi-day, luxury or hard. A summary of the tours to be offered is shown in Exhibit 1.

Escorted, luxury recreational day tours would be presented as 5 1/2 to 7 1/2 hour, fully supported bicycle tours. Most would be scheduled tours. However, the company would also accept group bookings for escorted day tours on any of the days not reserved for scheduled day tours The itinerary for the nonscheduled tours would be the clients' choosing.

Escorted, luxury recreational tours (multi-day) would be presented as fully supported, guided tours that involved a moderate level of physical activity (25 to 45 Ion/day), roofed overnight accommodation and mostly indoor catering. Escorted, hard adventure tours would be presented as fully supported, guided tours that involved a high level of physical activity and in most cases camping and outdoor catering.

Unescorted adventure packages would be designed for the self-reliant tourist. In addition to fully loaded mountain bicycles, Owe packages would feature two options: camping equipment and car roof rack systems.

Earle felt that this product offering would enable him to establish a world class bicycle touring company Archaeological tours through Red Bay and L'anse aux Meadows, wildlife tours to the seabird sanctuary at Cape St Mary's, and country back road tours to the Tablelands of Gros Morne are examples of the products Earle felt could be easily sold in the international marketplace. Earle hoped to capitalize on the attraction of tourists to these historical, cultural and natural sights. (Exhibit 2 contains additional information about the key areas where tours would be offered).

Operational Plan

Because of the requirements of training personnel, planning itineraries, proofing catering and lodging, and acquiring capital assets, Earle considered it prudent to progressively develop the operation over a five-year period. He also realized that this was realistic from a market perspective. He expected that repeat business and word-of-mouth promotion from satisfied customers would be important in the growth of the business.

The company was slated to commence operations in mid-June 1993, with the establishment of two offices. A new office would be set up in Gros Morne National Park (Rocky Harbour). The St John's office would share facilities with Earle's existing retail bicycle shop, thus eliminating many of the start-up costs associated with tooling and office equipment. The Rocky Harbour facility would need to be 600 square feet and be equipped to maintain and repair the bicycles as well as house an office. (See Exhibit 3 for the location of these sites).

In its first year, the company would schedule two escorted day tours per week per location from the middle of June to the end of August. These tours would run along fixed routes and would go regardless of the number of bookings received. The company would also accept group bookings for escorted day tours on any of the days not reserved for scheduled day tours. The itinerary for these "non-scheduled" day tours would be the clients' choosing.

In 1994, business locations similar to the one in Rocky Harbour would be established in Comer Brook and Eastport. Comer Brook, 50 km southwest of the airport at Deer Lake, was the second largest city in Newfoundland and was thought to be a good location, given its population base and tourist traffic. Eastport, a popular seaside community bordering Terra Nova National Park would enable easy access to park visitors (see Exhibit 3). At the same time, the product offering would be broadened to include the first multi-day tours. Two luxury recreational tours and two hard adventure tours would be offered. These tours would take place in July and August and would be between three and five days in length. The maximum number of reservations accepted per tour would be eight. These tours would be offered by the same personnel responsible for the day tour operations previously mentioned. The final design for these four tours would be completed in the fall of 1993.

In 1995, the company would schedule eight fully supported, three-to-five day tours. These eight tours would be comprised of one luxury recreational tour and one hard adventure tour for each of the four locations. Once again the tours would be scheduled between the beginning of July and the end of August and would be offered by day tour personnel.

The 1996 plan called for two luxury recreational tours and two hard adventure tours per location. These fully supported tours would again be three-to-five days in duration. However, 1996 would also see the introduction of the first seven-to-twelve day, escorted tours. Once again, both luxury recreational and hard adventure tours would be offered. Earle expected that by this time the modular tour package concept in the province would be well developed, giving clients several options of combining packages of different tour operators. Earle expected that the seven-to-twelve day tours would actually be some combination of two or more of the three-to-five day tours. One seven-to-twelve day tour would be scheduled per location per summer.

In 1997, the company would again schedule sixteen three-to-five day tours, as well as offer a seven-to-twelve day option.

In order to deliver this product, Earle had made tentative with a variety of personnel, including tour leaders, mechanics/clerks and caterers. Employment for the company would be seasonal and there would be both full-time and part-time employees. Full-time employment would begin in mid-June and terminate at the end of August. Part-time employment would be on a per tour basis. At full operational levels, Earle expected to employ twelve people. Exhibit 4 shows projected staffing requirements, by year and location.

Promotional Plan

In 1993, Earle planned to promote the company's products through the distribution of a good quality, three-fold, four-panel brochure. Distribution of the brochure would be effected either in-person or by mail.

Earle saw the people in the tourism industry as a key promotional element. In order to stand out in their minds and cement the relationship with them, Earle planned to offer complimentary tour passes (two per person) to those dealing directly with the tourist public.

In 1993, both the Rocky Harbour and the St John's offices would have one person designated to carry out the marketing assignments. This campaign would be designed to market the 1993 product line only. Promotion of the fully supported, multi- day tours would begin in the fall of 1993 upon completion of the first multi-day tour designs. Earle recognized that the future of the company would hinge on the success of these multi-day tours. As such, he envisaged the involvement of professional marketing agencies, both public and private, at that stage of development.

Promotion of multi-day hard adventure and luxury recreational tours would be conducted through a number of promotional vehicles, including paid advertising and publicity

Earle realized that any promotional effort could be expensive. In order to maximize promotional expenditures, efforts would be focused on the North American market. Particular attention would be paid to the Central Canadian market and the eastern seaboard of the United States. Other major population centres would also be considered. Earle was hoping to lever promotional expenditures with access to government assistance program for marketing.

Financial Considerations

Given the seasonality factor, Earle felt that the most cost effective and lowest risk way to run the business would be to keep capital purchases to a minimum. Office space and vehicles would be rented/leased for the operating season. However, there was no avoiding the major outlay that would be required for the fleet of bicycles, bicycling accessories (e.g. helmets) and camping and touring equipment.

Earle estimated that the total cost for all of this equipment would amount to $78,468. One half of this outlay would have to be made before the start of operations in June 1993. The balance would be required in May 1994, in order to stock the Eastport and Comer Brook locations. A full list of equipment and related costs is shown in Exhibit 5.

Earle had already been successful in securing a non-repayable grant from the Atlantic Canada Opportunities Agency (ACOA) to assist in the purchase of this equipment. Their grant would be for one half of the capital cost. ACOA would forward the cash based on the timing of the purchase of the assets, less a 10% holdback with each payment. Earle's contract with ACOA called for the first payment from ACOA to be made on June 1, 1993 and the second payment to be made on May 31, 1994. The contract also specified the payment dates of the two 10% holdbacks as June 1, 1995 and June 1, 1996, respectively. Given this contribution, these assets would be carried on the balance sheet at the net cost to the business.

Earle would be the sole owner of the business and had earmarked funds to be used as his shareholder's investment. He had calculated that he could inject $16,000 into the business to get it started. He would have $11,100 available to inject on June 1, 1993, but would not be in a position to inject more until some time after the 1993 retail season. To be conservative, his plans called for the balance to be available on May 31, 1994.

Earle had recognized that he would need additional funds to add to his own and those from ACOA. In fact, ACOA's contribution was contingent on Earle securing sufficient financing. Earle had met on several occasions with the staff at ENL and was quite confident that they would support his venture. He had worked with his accountant and had estimated that an additional cash injection of $26,000 would be sufficient to help get the business established and see it through its early years of operation.

Earle's financing plan called for one half of this money to be made available to him on the same date as the first ACOA payment and his own investment. The balance would be made available on the same date as his second injection and that of ACOA. The money from ENL would be in the form of a repayable, low-interest (8%) loan. As such, he also had to make allowance for the repayment schedule. The loan would have to be repaid over five years. Total first year repayments would be $2600, divided monthly. The balance of the loan would be spread evenly through years two to five with equal monthly payments.

Earle had broken his income down based on the four general types of tours, unescorted tour, escorted day tour, escorted hard adventure tour and escorted luxury adventure tour The projections for the latter dam types of tours were those with which Earle felt the greatest uncertainty, and those which he felt could be most severely impacted by weather. If the weather during a particular season was particularly poor, people might not even plan a bicycle touring vacation. At the same time, even those that planned and booked a bicycle touring vacation might cancel at the last minute, based on the long range weather outlook. It would be very unlikely that this business would be picked up at some later point. At the same time, Earle would have an obligation to run a tour, even if last minute cancellations left him with only one or two clients on any given tour There were certain fixed costs with any tour (e.g. staff, vehicle) and with low numbers, individual tours might incur a loss. The first type of tour, the unescorted tour, was the type that could be recovered on good weather days. As well, costs were lower. As a result, Earle felt more comfortable with these numbers and wanted to focus his review on the escorted day tours and multiday offerings.

Earle had researched the cost of similar tour offerings in Canada and the United States and had priced his tours to be very competitive in the first year of operation. Charges were below those of the competition. He hoped that this would help attract customers. He planned to bring his prices more in line over time.

The charge for the hard adventure tour would be $375 ($125 per day). The luxury tour fee would be $570 ($190 per day). This fee was all inclusive and covered all meals, accommodation, bike rental/repairs and entrance to side attractions. Earle would not extend credit. Payment would be made at the start of the trip. This would help avoid problems with bad debts and overdue accounts. Earle had calculated his revenue from these tours based on an average of four customers per tour. The maximum number that could be accepted on each tour was eight. Any more than this number created logistical problems with vehicle capacity and accommodation.

Earle had identified catering, accommodation and side tours as the variable costs for each tour These costs varied in direct proportion to the number of people on the tour. Earle viewed most of the rest of the costs as fixed, at least on a year-to-year basis. Earle had made a decision to run the scheduled tours, as long as there was at least one client for each tour. He felt that to do otherwise could result in dissatisfied customers and poor word of mouth publicity. As a result, such items as wages and vehicle costs would not change whether there was one person or eight people on any given tour

Earle now wanted to have another look at his annual cash flow projections. He had prepared a draft for his previous meetings with ENL and had used this to arrive at the requirement to request a $26,000 loan. However, he now wanted to recheck his figures and decided it best to start from scratch, using his income statement and balance sheet projections. The income statements had been revised to reflect interest charges and he was partially through the exercise of completing his balance sheets (see Exhibits 6 and 7). Cash flow statements had yet to be redone.

The project officer at ENL had also suggested that he prepare cash flow projections for several different scenarios, perhaps looking at the implications of a business volume from escorted day tours and multi-day tours at 75% of the projected level. It might be better to come to ENL with a range of funding in mind, with a contingency in place at the outset. There was no guarantee that Earle could inject more of his own funds at some later point, if required.

He also felt that it would be useful to look at a business volume from escorted day and multi-day tours at 125% of the projected level. As a third possibility, Earle was also interested in looking specifically at the multi-day tours and wondered what his financial picture might be like if he could increase the numbers on these tours from an average of four people to six people per tour, without any increase in day tour business. Earle estimated that for any of these possibilities, the only impact would be on revenues and variable costs. The increased volumes could be accommodated within the existing tour offerings.

Exhibit 1

Newfoundland and Labrador Bicycling
Touring Company
Product Line

Escorted, luxury recreational day tours (scheduled)

Escorted, luxury recreational day tours (unscheduled)

Escorted, hard adventure, three-to-five day tours (scheduled)

Escorted, luxury recreational, three-to-five day tours (scheduled)

Escorted, hard adventure, seven-to-twelve day tours (scheduled)

Escorted, luxury recreational, seven-to-twelve day tours (scheduled)

Unescorted, one day adventure packages

Unescorted, multi-day adventure packages

Source: Company Records

Exhibit 2

Description of Key Bicycle Tour Areas

Source: "Newfoundland National Parks and Historic Sites Vacation Planner". Canadian Parks Service

Exhibit 3

Newfoundland Map

Source: "Newfoundland National Parks and Historic Sites Vacation Planner". Canadian Parks Service

Exhibit 4

Staffing Requirements


Rocky Harbour 2 ft repair clerks, 1 pt tour leader

St John's 1 ft repair clerk, 1 ft tour leader, 1 pt tour leader

Total: 4 ft*, 2 pt*


Rocky Harbour 2 ft repair clerks, 1 ft tour leader

St John's 1 ft repair clerk, 1 ft tour leader, 1 pt tour leader

Eastport 2 ft repair clerks, 1 pt tour leader

Comer Brook 2 ft repair clerks, I pt tour leader

Total: 9 ft, 3 pt


Rocky Harbour 2 ft repair clerks, I ft tour leader

St John's 1 ft repair clerk, 2 ft tour leader

Eastport 2 ft repair clerks, 1 ft tour leader

Comer Brook 2 ft repair clerks, 1 ft tour leader

Total: 12 ft


Same as 1995


Same as 1995

*ft = full-time. Employment would begin in mid June and terminate the end of August

*pt = part-time. Employment would be on a per tour basis.

Source: Company Records

Exhibit 5

Capital Assets Required

Location Unit Total
Item Quantity Cost Required Total
Mountain Bicycles 12 $575.23 48 $27,611.04
Bicycle Accessories:
Pannier Rack 12 35.95 48 1,725.60
Panniers 12 95.87 48 4,601.76
Cyclometer 12 71.90 48 3,451.20
Helmet 12 69.51 48 3,336.48
PUMP 12 25.17 48 1,208.16
Seat Bag 12 14.98 48 719.04
Lock 12 15.58 48 747.84
Tools/Spares 12 47.34 48 2,272.32
Camping and
Tour Equipment:
Car Roof Racks 1 299.60 4 1,198.40
Sightseeing Scopes 1 958.72 4 3,834.88
Binoculars 1 599.20 4 2,396.80
Luggage Trailers 2 345.14 8 2,761.12
Baby Trailers 1 497.34 4 1,989.36
Car Trailers 1 3,115.84 4 12,463.36
Cooking Utensils 1 299.60 4 1,198.40
Tents & Other Equipment 1 539.28 4 2,157.12
First Aid Kit 1 119.84 4 479.36
Repair Tool Set:
Repair Stand 1 119.84 4 479.36
Wheel Truing Stand 1 419.44 4 1,677.76
Wrenches/Small Took 1 239.68 4 958.72
Communications Equipment 2 150.03 8 1,200.24
Total Capital Cost $ 78,468.32
Note: Unit cost includes GST & PST. Location ,refers to St John's, Comer Brook, Rocky Harbour, and Eastport.

Source. Company Records

Exhibit 6

Pro Forma Balance Sheet
As at May 31, 1994, and subsequent years

nb601.jpg (37118 bytes)

Source: Company Records

Exhibit 7

Pro Forma Income Statement
Year ending May 31, 1994, and subsequent years

nb602.jpg (68606 bytes)

Source: Company Records