XXX Paper and Packaging is a long-standing business having served the Central Coast community for over 35 years. For the last 6 years it has been owned by a husband-and-wife team who have decided that they would like to take some extended time off and possibly early retirement.

It is to all intense and purposes a ‘boring’ cashflow business distributing all manner of paper and packaging to the general public, restaurants, cafes, bakeries, schools and a range of other businesses.

The range of products sold by the business is diverse minimising the impact of any significant changes in consumer demand for any single item. The business has already adapted to change in consumer demands with regards to ‘environmentally friendly’ products and 80% of products sold are of an ‘environmentally friendly’ nature. These types of products also tend to be of higher value.

Wholesale Paper | Disposable Packaging | Eco | Retail | Domestic | Catering | Industrial | Washroom & Cleaning Products

The business has an extremely strong distribution of clients with the largest contributors being ‘walk ins’ running at about 120k so far this year (6.5%), the next biggest is $90k P (4.8%), $70k P (3.8%), $65k, $50k, $30k, $30k, $25k, $25k, $25k. $25k. Printed is deemed to be much less likely to move as all the merchandise is branded and so moving would constitute a major upheaval. The loss of any single customer would not be significant to the business.

The business is extremely well located with a lot of passing traffic on the main road through Erina. It has extremely good street frontage and is also located near Erina Fair, the main shopping centres on the central coast and the largest regional shopping centre in Australia. Erina Fair.

The business moved to this location two years ago and has seen an increase in ‘walk in’ business to more than offset the rent increase. A larger warehouse has also resulted in improved economies of scale discussed in financial summary section.

The business has grown steadily over the last few years and is on course to deliver similar growth in 2023. Data collated Appendix 1 and 2

2021 Revenue $1,835,343

2022 Revenue $1,980,033

2023 Revenue $1,851,181 (Until May 2023. Sales approx. $49k ahead of same stage last year). Also note financial year Q4 is normally strong as Schools etc look to spend remaining budgets. Est financial year end sales to be $2.02-$2.07m)

This steady growth has been achieved with minimal spend on marketing and very little to no social media spend etc. There would be an opportunity here to look at increasing sales through these avenues which I would intend to do.

While sales have grown, gross profit margins have improved. This year gross profit margin is approaching 40%. A rise from 34% last year. The increase in gross profit margins is attributable to a reduction in cost of sales. Cost of sales has decreased for three main reasons.

1) reduction in shipping costs. It is anticipated that as supply lines repair after covid these costs may continue to fall

2) Larger warehouse (discussed in background section) has allowed the company to increase minimum order size and so reduce cost per unit

3) Increased competition amongst suppliers. Points 1+3 could be expected to continue as the effects of covid on supply lines unwind.

The company has produced strong net profit and strong total owner returns. Appendix 1

2021 Owner wages and add backs $170k. Net profit 67K excluding Owner wages and add backs. This net profit is understated as stock is understated. Note stock levels in 2022 noted at $337k and 2021 $150k. This has the effect on significantly under reporting profit in 2021.

2022 Owners wages and add backs $212, 912. Net profit $321,775 excluding Owner wages and add backs. Net profit overstated as it now includes accurately valued stock and so reflected in gross profit.

It would be fair to assume that adjusted total net profits for the two years would be more like more like $194,387 (($321,775+$67,000/2)).

Total owner returns 2021 = $364.4k

Total Owner returns 2022 = $407.3k

2023 is clearly not finalised yet but looking at Appendix 2 we can make some assumptions.

Payroll expenses increased slightly although not materially suggesting Owner wages similar.

Main changes are 1) increase in turnover 2) increase in gross margin as cost of sales reduce (discussed above) 3) Large increase in borrowing expenses from $11.8k to $146.6k. This is because a loan on the business has been paid out in fall so most of this expense would be adjusted profit. Gross profit has increased $120k from last year. I would estimate total Owner returns for 2023 to be $430k-$440k.

The business is the largest paper and packaging business in the Central Coast. There is a smaller competitor in West Gosford although that business tends to focus on cheaper less environmentally friendly containers etc. There are few barriers to entry or the business, but the economies of scale and the bigger businesses tend to focus up the supply chain. The business has 2-3 suppliers for every product, so I do not think there is a great risk of a larger player going into direct retail distribution.

Changes in consumer behaviour. The most likely change here is a continual increase in demand for environmentally friendly solutions. The business has benefited from this tailwind and would likely continue too as consumers are willing to pay more for the goods.

It is also not a business that is likely to be heavily affected by technology in any meaningful way. Consumers will always need paper and packaging of all sorts. Technology is likely to be a benefit in the way of cost savings if manual jobs can be replaced.

The two largest risks are:

Economy

A recession would have an impact on sales. Our clients are all vulnerable to the economic environment. However, this risk is partly offset by the demographics discussed above. The business would also have to suffer a significant fall in demand to become unviable. Covid saw a 30% fall in sales, but the business remained profitable.

Covid or covid type event.

This would clearly have a negative effect. Would be safe to assume like the 2019-2020/2020-2021 tax years which can be seen in Appendix 1. The business successfully traded through this and flourished afterwards.

The business is successfully operating with strong gross profit and net profit margins. It has benefited from a recent move to a larger warehouse and much improved foot traffic and exposure. These tailwinds would continue. The larger warehouse has allowed more stock to be held and so cost per unit to decrease. Easing supply lines have also improved to gross profit margins. All these tail winds should continue and have put the business in a strong position.

Marketing

The lack of any real marketing spend or plan (see advertising and markets spend Appendix 2) does provide a significant opportunity to increase sales. This is something that I would intend to address.

Inventory control

The business doesn’t have any kind of automated inventory control in place. This leaves it holding too much stock and is inefficient from a time point of view with additional resources needed to manage the inventory. This is something I intend to address to bring additional efficiencies and likely reduce wage costs.

Improved efficiencies

There are two owners working in the business currently. The use of a professional bookkeeper and inventory control systems being introduced would likely cover 50% of the day-to-day activities of the wife. The husband helps manage the warehouse/deliver and performs ‘rep’ duties. ‘Reping’ consists of mainly visiting existing customers. He rarely visits new customers unless ‘he notices a new place’.

Most of his warehouse roll can be covered by increased hours to once of the delivery drivers who is taking on more warehouse responsibilities and would like more hours. I would fulfil his repping duties and once a week delivery (make sure I keep face to face contact with the clients).

With increased efficiencies and improved resource allocation there would be additional costs savings here in a reduction of owners wages.

Demographics

Australia’s immigration policy is supportive of the business. An increase in population means an increase in paper and packaging requirements. In addition, the trend for people to be able to work more remotely has attracted families to the Central Coast. Often these families move with ‘Sydney’ wages. While this is bad for house prices it is good for packaging! Increased disposable income for local residents should also continue to be a tailwind for the business.