WOOL'UNS QUALITY WOOLCRAFTS & GARMENTS

Ms. Sherry Seeton-Richardson of Pictou County, Nova Scotia had found a way to productively use the fleece derived from the market-lamb operation run by her husband. In the spring of 1994 she had the business plan for her new venture, WOOL'UNS Quality Woolcrafts & Garments, nearly completed with the marketing, production and management components prepared. She had to finish the financial section of her business plan in order to secure the financing for her business.

Background of the Business

Sherry's husband, Trevor Richardson, ran a full-time market-lamb operation which yielded, as a by-product, 1200 to 1500 lbs. of unprocessed wool annually. The unprocessed fleece was sold to local wool processing mills. However, only $600 to $700 a year, total, was obtained from these sales. By comparison, a sweater knitted from approximately 1.5 to 2 lbs. of 100% wool yarn could have been sold in a retail outlet for prices ranging from $60 to $200, depending on the design and quality of the product.

Sherry had, for some time, wanted to find a more profitable use for the unprocessed wool. Two years ago she met a person who had a used knitting machine for sale. Although it can be very intimidating to learn how to operate a knitting machine, she purchased it. Sherry's previous experience with handknitting, crocheting and sewing, her persistence and some basic instruction enabled her to learn how to use the machine. After twelve months of learning how to use the machine by designing sweaters and making samples, Sherry realized that the knitting machine could be a way to productively utilize the wool by-product generated by her husband's business. The knitting machine meant that she could produce sweaters quickly and with the consistency offered by


This case was prepared by Professor Wendy Doyle of Mount Saint Vincent University for the Acadia Institute of Case Studies as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright 1995, the Acadia School of Business Administration, Acadia University. 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 machine she could ensure quality control. With the knitting machine, the business could provide a livelihood instead of merely supplementing income. Her enjoyment of sewing, knitting, and crocheting, along with her lifetime enthusiasm for the beauty and quality of handcrafted products, meant that this business opportunity would be a dream come true, if it could be run profitably.

A year ago, Sherry began the preparations for the start of her own part-time business. She continued to experiment with designs and production techniques. She completed a Small Business Management course offered by St. Francis Xavier University. Interested in diversifying her product line, Sherry also completed an introductory weaving course at the Nova Scotia Centre for Craft and Design.

Initially, Sherry anticipated operating the business on a part-time basis. However, a major downsizing by the Michelin plant at Granton resulted in the loss of her full-time position. During her seven years with Michelin, Sherry acquired computer and time management skills that would help her in establishing a business. She had come to appreciate the importance of quality control and a good reputation based on quality, fair price and consistency. She knew that a customer oriented approach was crucial in order to produce the right product, at the right price and at the right time. Viewing the loss of her own job as an opportunity, Sherry accelerated the preparations for her own business which was to be operated on full-time basis.

She registered the business as a partnership with herself as the principal partner/manager and her husband as a partner. It was operated as a home-based, production craft business in a rural community in Pictou County, Nova Scotia. Sherry anticipated working a minimum of 50 hours per week on her business.

The Craft Industry

When Sherry investigated the craft industry, she found that its economic performance was largely undocumented. Until recently, craftspeople did not seem to be regarded as members of a business sector. Statistics Canada did not collect data on the industry. The data that was available had been collected by specific studies conducted by craft associations or the government. As the participants in such surveys provided the financial information, most studies contained a warning that the information might not be accurate and/or complete. Often the participants declined to respond to questions regarding sales and profits.

The 1988 Nova Scotia Production Craft Review provided the results of a consumer survey. According to this survey, craft consumers were more often female than male, mainly in the 30 to 59 year old age category, spread over 21 employment categories with professionals/teachers composing the largest group (27% of the respondents). Shopping frequency was not high--49% shopped 1 to 2 times per year and 28% shopped 3 to 5 times per year. The most important characteristic, to purchasers of crafts, was "good quality" (49%) followed by "handmade" (26%) and then by "unique" (25%). Although two-thirds of the participants preferred to purchase at a craft market, this result may be biased because the surveys were conducted at major craft shows. Handcrafted items were perceived as luxury items. Although the usual price range for such hand crafted items (in 1988) indicated that over half of the respondents purchased items in a price range of under $35 and only 11% usually purchased craft items at a price of $76 or more.

A survey of craft retailers in the Nova Scotia Production Craft Review indicated seasonal emphasis on sales in the summer and fall. This result could be due to the sales made to tourists as well as to the numerous fall craft shows. The factors which affected past market growth included: (1) quality of products, (2) availability of financial assistance to craft businesses (which tended to be very small and run more by women than men, both of which were often barriers to obtaining funding from traditional lending institutions), (3) business skills by producers, (4) promotion/marketing, and (5) availability of distribution channels and sales outlets.

While conducting research on the craft industry, Sherry made a visit to the Nova Scotia Department of Culture and Tourism. An "unofficial" estimate for 1993 of $100,000,000 of total retail sales in the craft industry was provided. The 1988 Nova Scotia Production Craft Review indicated a 140% growth in sales from 1973 to 1983. In spite of a very poor economic climate, there was a 5.3% increase in 1994 over 1993 of on-site sales by Nova Scotia exhibitors in the Atlantic Craft Trade Show.

Product Line

WOOL'UNS would have offered both original and custom designs in garments, fashion accessories and items for home decor. All products would have been made from 100% wool. The custom product service line would have been available to individuals as well as to clubs and organizations. It would have also be available to specialty outlets that may have preferred to carry items reflecting a particular theme.

The main item in the product line would have been sweaters designed by Sherry and produced on the knitting machine. The machine would have ensured uniformity of sizing and quality control. Other products would have included smaller knit items such as socks and hats. Sherry was investigating the possibility of using a loom to produce woven items. All items would have been finished by hand with quality being a top priority.

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It was Sherry's intention to submit product samples to the Nova Scotia Designer Crafts Council (NSDCC) to be juried. The NSDCC was a nonprofit organization that elected a Standards Committee yearly from its membership. When requested by a craftsperson, this committee evaluated crafts and provided a written critique of the design and production quality according to established guidelines. If the craft items were accepted by the committee, the craftsperson was listed in the NSDCC's Market Registry. Being a member of the NSDCC added a "stamp of approval" and allowed for participation in the NSDCC retail craft markets and permitted the NSDCC logo to be used on business cards. If that person's work has been evaluated and accepted, a craftsperson could have participated in the Atlantic Craft Trade Show which was the largest wholesale show for craftspeople in Atlantic Canada. In addition, Market Registry members were also listed in the Buyers' Guide to Arts and Crafts in Nova Scotia which was produced by the provincial government and distributed through tourist information points across the province.

Having craft work accepted by the Standards Committee was not automatic. In 1992-93, only 38 of 68 new applicants were accepted. Sherry was not anticipating a problem having her sweaters accepted by the committee. Their standards were the same as those that Sherry set for herself. She found their guidelines clear and easy to understand. Informal feedback from experienced NSDCC members indicated that her work was "consistent with NSDCC standards".

The selling features of Sherry's product line would have been top-quality craftspersonship, as well as unique and beautiful designs. Sherry intended for her custom designs to fill market gaps for specific items not available locally.

Production and Management Plan

Ideally, Sherry would have preferred to use the unprocessed wool from her husband's farm. This would have entailed sending the raw fleece to a mill to be washed, carded and spun. Two processing mills existed in the Maritimes but neither one did custom orders. After investigating Canadian woollen mills, she found one in Ontario that did custom work. If this arrangement did not work or if the supply of processed wool from the farm was inadequate, she had made arrangements with a reputable supplier to sell her 100% wool yarn at a wholesale price and delivered within a week to 10 days.

The knitting machine Sherry owed was a manual machine. She planned to purchase an electric version in order to increase her production capacity. Sherry estimated that, with the new machine, she would have been able to produce 2.5 sweaters per day, at peak production.

Schedule 1 is a list of equipment that was needed to start the business. This equipment was to be paid for September 1, 1994.

Schedule 1

List of Equipment Requirements

Electronic Knitting Machine

$ 2,650

Serger

600

Accessories for Knitting Machines

575

Production Steamer

230

Loom

3,000

Personal computer/printer/software

2,500

TOTAL

$ 9,555

 

Initially, Sherry would have handled all of the production and marketing. As the business grew, she planned to hire employees to assist with production and marketing.

The business would have operated out of the family home which was situated on the sheep farm. One room in the home was set aside for production and office space with separate areas for storage. Expansion of the house may have been necessary and plans have been made for a studio/sales outlet on the premises. This plan was for the future and did not form part of Sherry's present business plan. An expansion of the production area may have proceeded in the fall of 1994. If so, it would have been financed by the owners.

The rural setting added an air of "authenticity" to the handcrafted character of the products and this was reflected in the advertising.

As the farm was less than 2 miles off the Sunrise Trail, a main tourist traffic route, a reasonable amount of customer traffic was attracted.

Marketing Plan

The principal market for WOOL'UNS products would have been individual consumers, many of whom would have been tourists. Sherry had identified her major market segments as handcraft purchasers, sports and outdoor enthusiasts and consumers who prefer to purchase environmentally friendly/natural products.

Selling was to be done through craft markets, wholesale to retail outlets, consignment and direct to the consumer through custom orders.

Sherry conducted a telephone survey of 10 buyers for retail outlets in the Halifax area to determine if this type of outlet would be appropriate for her products and if her price range was acceptable. Of the businesses contacted, 3 expressed an interest in buying the product and specified items for which they did not have a supplier. They also provided her with information on acceptable price ranges. In addition, two outlets were willing to carry her products on a consignment basis.

The possibilities of selling through the Atlantic Craft Trade Show and through an on-site studio/sales outlet was to be investigated. These possibilities would likely have occurred in conjunction with the addition of employees and/or more partners.

Advertising and promotion utilized business cards, brochures, newspapers, and magazines. As well, Sherry intended to be listed in the next annual Buyers' Guide to Arts and Crafts in Nova Scotia published by the Nova Scotia government.

Materials and work were guaranteed, providing that the care instructions on the garment tag were properly followed. If a sweater was found to have a significant flaw, the purchasing customer was to be offered a cash refund or a new sweater. As quality control was very important to Sherry, she did not anticipate that such refunds or replacements would be necessary.

Financing Requirements

In addition to the equipment listed in Schedule 1, Sherry planned to purchase sales tags, business cards, brochures, and stationery, all of which a local printer would supply at a cost of $675. Also, investment in inventory and accounts receivable would have been necessary as collection of sales lagged production. Sherry had estimated that the raw materials for the first year's production would have been $13.90 per sweater. She felt that equipment, promotional/office supplies and inventory would constitute her financing requirements for the first year. If her cash flow was not adequate, a line of credit may be needed.

Financing Options

Sherry had investigated a number of financing options. Under the Self-Employment Assistance Program of the Department of Human Resources, she was able to obtain 42 weeks of Unemployment Benefits while she worked full-time on starting her business. It was estimated that this program would provide her with $1,136 a month beginning in September, 1994.

An equity contribution by Sherry consisted of equipment of $2,150 and cash of $5,000. Equipment and furnishings were owned by Sherry and were not part of the additional equipment needed as presented in Schedule 1.

Sherry planned to apply for a "First Step" loan from the Economic Renewal Agency for $10,000 which would have been received September 1, 1994. This loan was for a 5 year term with interest at 9% paid monthly on the unpaid balance. The principal would be repaid in 60 equal monthly payments beginning six months from receipt of the loan. The first payment would have been due March 1, 1995.

In addition, Sherry hoped to obtain a grant from ACOA for 40% of pre-approved equipment purchases (see Schedule 1) plus PST under the ACOA Action Program. This would have been received in September, 1994.

Preliminary discussions with a local bank for a line of credit, if needed, had also been encouraging. It was assumed that if such a loan were needed, interest would be charged at the rate of prime plus 2.5%.

Production, Sales and Cash Flow

Sales projections have been made keeping in mind production capability and skill. For the first year Sherry estimated she would produce 1.25 sweaters per day for the first six months of the year and 1.75 per day for the second half of the year. In the second year, she estimated that this production would increase to 2 sweaters for the first half of the year and 2.5 sweaters for the remainder of the year. In the third year of production, Sherry estimated that production would remain at 2.5 sweaters per day. She was presuming a 5 day production week for 4 weeks per month. As the selling price of sweaters sold to a shop differed from that of sweaters sold at a craft show, she presumed that her average selling price would be $100 per sweater. Other smaller items will be produced; however, sales projections had not been made for these items.

Although it was extremely difficult to forecast the exact time of the sales, the following assumptions have been made regarding the timing of the sales and the collection of the cash from the sales:

Production from September and October would have been sold in November with cash collected in November.

Production from November and December would have been sold in December with 50% of the cash collected in December and 50% in January.

20% of the production from January, February and March would have been sold in the month the sweaters were produced with the cash received the subsequent month and the remaining 80% would have sold in April with the cash collected in April.

The production from April, May, June and July would have been sold 60% in July and 40% in August. The sweaters produced in August would have been sold in August. The cash collected from the July and August sales would have been received one month after the sales were made. There would have been no ending inventory of finished sweaters and as the owner carefully scheduled wool purchases, there would also have been no inventory of raw material on August 31, 1995.

Cost/Expense Estimates

The raw material cost per sweater was estimated at $13.90. This cost included the cost of the yarn as well as shipping costs for the yarn.

Sherry would not have been taking a salary from the business as it operated as a unincorporated partnership. However, between the Self-Employment Assistance Program and the business, it was anticipated that her personal cash needs of $1,080 a month for the first year would have covered. She estimated that her personal cash needs would rise to $1,666 per month in subsequent years.

As with any new business, expenses were difficult to estimate. However, as Sherry would have been using part of the family home for her business, a proportion of present utilities expenses plus additional estimated expenses would seem appropriate. Additional details on these expenses follow:

Heat & Electricity

$35 per month plus an extra $100 for Sept. 1994 when wood was purchased (wood was used as a source of heat). This estimate was based on the proportion of the family home which would have been occupied by the business and the cost incurred in the previous year for heat and electricity.

Telephone

$13.50 per month (portion of average current bill, including long-distance, related to pre-start up activities for the business--not expected to increase)

Supplies

Stationery, business cards and tags totalling $375 purchased and paid for in Sept. 1994.

Advertising and Promotion

$300 paid for in April, 1995 for brochures

Auto Expenses

$375 per month was estimated; however, only 90% of the use of the car will be for business purposes

Interest

Interest was on the 9% ERA $10,000 loan which was assumed to have been received at the beginning of September, 1994

Depreciation

Assume that equipment depreciated on a straight-line basis over 5 years with no salvage value.

Insurance

Extra insurance on the furnishings and inventory was estimated to be $78 per year. The insurance company required 2 months of insurance or $13 to be paid in September, 1994 and a full year's premium due in November, 1994.

Legal and Accounting

No legal costs were anticipated and accounting assistance with the year-end was estimated to be $300 payable in September, 1995

Craft Show Registration Fees

These fees have been estimated at $600 a year with $200 payable in each of the months of October and November, 1994 and April, 1995.

Postage

An estimate of $10 per month has been made.

Patterns

Although many sweaters will be designed by the owner, some patterns will be purchased. This cost has been estimated at $10 per month.

Conclusion

Sherry was determined that WOOL'UNS succeed and was well aware of the time required to operate her own business. She was hopeful that the financing would be approved so that she could purchase equipment and start production in September of 1994. However, she first had to complete the financial section of her business plan for the Economic Renewal Agency and ACOA.