A laundry chain wants to enter a new city with three stores at Rs 1.2 crore of fit-out each. Each store handles 150 orders a day at Rs 250 with a 40% contribution margin and Rs 35 lakh a year of fixed cost. Is the entry worth it, and when does it pay back?

No, not on these numbers. A mature store earns Rs 17.5 lakh a year, so Rs 1.2 crore of fit-out takes 6.9 years to recover, and with the ramp the city pays back only in year 9, against a four year test. Breakeven is 100 orders a day, so the store is safe but thin. Approve it only if stores can reach about 186 orders a day or the fit-out falls to about Rs 70 lakh.

Build one store before you build three, the way you would check one tiffin route before hiring ten delivery boys. Revenue is 150 orders x Rs 250 x 350 days, Rs 131.25 lakh; contribution at 40% is Rs 52.5 lakh; and after Rs 35 lakh of fixed cost the store earns Rs 17.5 lakh a year. Three numbers decide this, and each is a place to slip: the days in a year (350, not 365, because stores close for festivals and maintenance), the margin (contribution after variable costs, not gross margin), and the fixed cost that has to come out before anything is profit.

Each extra daily order brings in Rs 250 x 40% x 350 days, Rs 35,000 a year of contribution. Rs 35 lakh of fixed cost divided by Rs 35,000 is exactly 100 orders a day, so a store at 150 is half as busy again as breakeven, but every rupee it makes above that has to recover Rs 120 lakh. At maturity that takes 6.9 years. With the ramp it is worse: year 1 at 100 orders earns nothing, year 2 at 130 earns Rs 10.5 lakh, and the store crosses its fit-out only in year 9. The city as a whole, three identical stores and Rs 3.6 crore, follows the same curve times three.

Work backwards from the four year test. A four year payback needs Rs 30 lakh of store EBITDA, so contribution of Rs 65 lakh, which is about 186 orders a day at Rs 250; or, at 150 orders, a fit-out of no more than Rs 70 lakh. Those are the two questions for management. Can the new city support 186 orders a store, for example with more apartment density or a hotel contract? Can the fit-out shrink, for example by putting the machines in one central plant and running the three stores as collection points? The second often changes the case more than the first, because it turns three sets of boilers into one.

Then say what you have not counted. The case ignores tax, a launch marketing budget and the city manager the company will need, all of which lengthen the payback. It also ignores the option value of a fourth and fifth store if the first three work. The view: as specified, the entry fails the fund's test by a wide margin; reshaped around a central plant, it may pass, and that is the version to bring back to the investment committee.