Question

Suppose you have to evaluate microfinance ventures. One of the proposals is for opening a hairdresser's shop in Guatemala city. The proposal argues that there must be significant demand for hairdressing and cosmetic services because the city has a lot of shops already and several others open each month. It predicts that the demand for such services will continue to increase, given the increasing number of convenience stores in Guatemala that sell hair coloring dyes and hair straightening solutions. What are the risks involved in the proposal. Would you advise investing in this venture?

Answer 1

It has been mentioned in the brief that the place has a lot of shops already and several others open each month. These types of situations give rise to a competitive market, nearing perfect competition, where there are many shops or businesses of the same kind.

This leads to taking up the price(for a business) rather than creating a price. When there a lot of the same type, high competition leads to reduced prices for the customers. It would affect the overall earnings of a shop. Ads and promotions should also be impressive enough, to stand out in the competition. This would incur an extra cost.

Hence, the risk here is non-profitability of the business due to intense competition

Other than that, a lot of convenience stores are selling hair coloring dyes and straightening solutions, it further dilutes the business as people may now opt for DIY(Do It Yourself) instead of going to hairdresser's shop. A few services that can be done at home, would be cheaper for a customer than visiting a shop to get that done. Also, the number of convenience stores is increasing which further poses a danger to the profitability of the shop. Plus, the demand for such service and opening of convenience stores are not related as a lot of products there, actually diminishes the need of the service shop. Products are being positioned in a manner, that makes people use it in their homes.

Here, the risk involved is the dilution of sales.

Investing in this venture is not advisable, due to the size of the city, plus intense competition that it has in the particular industry. Although, cosmetics services are becoming a desire for many to stay trendy but due to varied options, a customer may have, it is not advisable to invest as it will reduce the per-unit profits and lesser units as well. The market is almost saturated and with new players coming-in frequently there would not be much scope left. Hence, investing in the venture is not advisable