Ollivander's Wand shop is a failing business

My buddy and I are a couple of MBAs, and we have a podcast (Imaginary Capital Partners) where we break down fictional businesses with real financial analysis. A few weeks ago, we did Ollivanders, and found that it is a business in dire straits.

Let me walk you through the math on how much money Ollivander's makes each year.

Hogwarts is the only wizarding school in the United Kingdom. J.K. Rowling has indicated there are about 1,000 students at Hogwarts at any time, or 143 students in each year across the seven classes (1000 / 7 = 143). The total number of new wizards each year requiring wands, then, would be 143.

Harry's wand cost him 7 Galleons, which we'll take as the average cost of a wand. Someone on the internet figured out that the exchange rate of dollars-to-Galleons is about $25-to-1, so the average wand costs $175. $175 per wand x 143 new students requiring wands = $25,000 annual revenue, assuming Ollivander's sells 100% of new wands in the U.K.

That's the new wand market. We'd also hypothesize that there's a replacement wand market, if you lose your wand in a duel, Death Eaters confiscate it, or you... leave it on a train? Drop it on the sidewalk and hadn't purchased a wand case for some reason? We're making a LOT more assumptions here, as so few characters in the book need new wands, so bear with us.

In one of the movies, the Daily Prophet reports that average wizard life expectancy has reached 137 years old. Let's say the average wizard gets a new wand every 30 years (that figure is a TOTAL shot in the dark). If every U.K. wizard gets their first wand at age 11, then (137 - 11)/(30) = 4.2 replacement wands in a lifetime (or to think of it a different way, an average of 4.2 "years" worth of wizards will be looking to replace their wands in a given year - e.g., everyone at the age of 41, 71, etc.) 4.2 years' worth of wizards x 143 wizards per year = market of 600 replacement wands each year. Let's say 50% of those wands are purchased new from Ollivander's, as opposed to on the secondary market, won in duels, etc. 600 x 50% = 300 replacement wands purchased from Ollivander's each year, and 300 x $175 = $52,500 revenue for replacement wands.

We've got $25,000 + $52,500 = $77,500 for Ollivander's in wand revenue. Let's assume he also offers value-added services: custom wand orders, wand repairs, cleanings, consultations (e.g., he inspects the wands at the Triwizard Tournament). We'll just tack on an additional 50% of his total revenue, so $77,500 x 150% = $116,250 in total Ollivander's revenue each year.

(By the way, you could easily argue that Ollivander's only generates revenue from the new wand market, and all the rest of this is just pure conjecture. We totally agree - he can only count on that $25,000 each year. But we wanted to be pretty generous in our assumptions for Mr. Ollivander, in part because...)

Up till this point, we've only been talking about REVENUE, not profit. We have no idea how profitable the wands are. Let's say your average healthy small retail business can generate 30% in gross margins, per this random internet source. And let's say the physical store was long ago paid off, and Ollivander keeps other operating expenses to a minimum, and his profits aren't taxed by the Ministry of Magic. Then that 30% gross margin can be our proxy for net profit, which would be $116,250 x 30% = $34,875 per year in net profits (the amount that Mr. Ollivander can actually take home).

Assuming he wants this to be a lifestyle business where he works just enough to sustain whatever outside interests he has, as we posit in the episode, it's possible this $35,000 represents enough money for him to fund his snowbird winters. The amount of capital tied up in inventory is still absolutely horrendous, though. Having visited the Wand Shop at Universal Studios, I'd estimate that Ollivander's carries 50,000 wands on-hand in the store at any given time. The business only sells 443 wands each year (143 new wands + 300 replacement wands, per the above) That works out to an annual inventory turnover of 443 / 50,000 = 0.009. As a point of reference, Tiffany & Co, the jewelry company and a business that should have very low inventory turnover, has a turnover of 0.7. Put another way, it takes Ollivander's 113 YEARS to sell any given wand in the store. It's an extraordinarily bad use of capital, to have it just sitting there as inventory that's taking up space and not generating interest.

Ollivander's would be a perfect candidate to be bought out by a small-cap PE investor or search fund. The recipe for turnaround is clear: move from cost-based pricing to value-based pricing and raise prices DRAMATICALLY; roll-up with wand shops from other countries (i.e., buy a bunch of other wand shops and share administrative back-office) and pool wand inventory; and make a big push into other product categories under the Ollivander's brand name.