Second Cup – Markham
Business Proposal
Prepared for: Ken and Mary Hatch
Prepared by:
Amlani, Tahir; Boese, Kristen; Capjack, Adele
Luchkovich, Amy; Marofke, Lindsey; Paulhus, Casey
Second Cup – Markham
Ken and Mary Hatch
Table of Contents
1.0 Executive Summary ................................................................................................ 4
1.1 Introduction ............................................................................................................. 8
2.0 Operations Plan ....................................................................................................... 9
2.1 Description of Operations .................................................................................... 9
2.2 Franchising Process .......................................................................................... 10
2.3 Hours of Operations ......................................................................................... 10
2.4 Daily Activities ................................................................................................. 11
2.5 Weekly Activities.............................................................................................. 14
2.6 Quality Control ................................................................................................ 14
2.7 Suppliers ........................................................................................................ 15
2.8 Service Providers ............................................................................................. 15
2.9 Environmental Issues ....................................................................................... 16
2.10 Location ........................................................................................................ 16
2.11 Site Plan ....................................................................................................... 17
2.12 5 Year Development Plan ................................................................................ 17
3.0 Human Resources ................................................................................................. 19
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Management Team .......................................................................................... 19
Organizational Structure ................................................................................... 22
Recruitment and Retention ................................................................................ 23
Job descriptions ............................................................................................... 24
Training Programs ............................................................................................ 24
Store timings .................................................................................................. 24
Total Salaries, Wages and Benefits Costs ............................................................ 25
4.0 Marketing Plan ....................................................................................................... 26
4.1 Products ......................................................................................................... 26
4.2 Pricing ............................................................................................................ 27
4.3 Promotion ....................................................................................................... 27
4.4 Place .............................................................................................................. 28
4.5 Segmentation .................................................................................................. 29
4.6 Targeting ........................................................................................................ 29
4.7 Positioning ...................................................................................................... 30
4.8 Competitive Analysis ........................................................................................ 30
4.9 Franchising Restrictions .................................................................................... 32
4.10 Opportunities ................................................................................................. 32
5.0 Financial Plan ........................................................................................................ 33
5.1 Sources of Financing ........................................................................................ 33
5.2 Base Case Results ............................................................................................ 33
5.3 Contingency Plans ............................................................................................ 38
The Second Cup Business Plan Group
2
Second Cup – Markham
Ken and Mary Hatch
List of Appendices
Appendix 1 – Organizational Chart ............................................................................ 42
Appendix 2 – Product List .......................................................................................... 43
Appendix 3 – Anticipated Look .................................................................................. 46
Appendix 4 – Floor Plan ............................................................................................. 49
Appendix 5 – Markham Demographics ..................................................................... 51
Appendix 6 – Detailed Financial Model ..................................................................... 52
Appendix 7 – Financial Plan ....................................................................................... 53
The Second Cup Business Plan Group
3
Second Cup – Markham
Ken and Mary Hatch
1.0 Executive Summary
“Second Cup has become the largest Canadian-owned specialty coffee retailer. And since its
inception, Second Cup has grown to more than 360 cafés across Canada and over 15 cafés
internationally, making Second Cup a second home to hundreds of guests every day.” (Second
Cup, 2008a)
Operations
Hand selected by the Second Cup Real Estate Department, Second Cup – Markham is the
potential next location for this fast growing enterprise. Situated in Markham, Ontario, the
proposed location is located in a power centre intersecting two major roads and is embedded in
a business community and an affluent residential neighbourhood, a prime location to capture
the future growth of the Toronto suburb. The proposed franchise will continue to sell the
favorites of Second Cup: premium coffee, pastries, whole beans, non-coffee beverages, and a
variety of merchandise while providing the highest levels of customer service.
The business will maximize business traffic by opening early each day to attract the morning
traffic and remaining open later on weekends to take advantage of the social weekend groups.
Each day the staff will perform a number of duties to ensure that customers are provided with
high quality products and a high level of customer service. Daily activities will include opening
procedures, beverage preparation, order-taking, payment acceptance, and closing procedures.
On a weekly basis, other activities such as product ordering, staff scheduling and facility
cleaning will be performed to keep the store running at optimal levels. Local suppliers will be
used to promote community support and will include various service providers for barista
cleaning, internet service, accountancy services, and legal services.
The future Second Cup site will be able to seat 40 customers and will promote neighbourhood
oasis atmosphere and will include couches, a fireplace and additional patio seating. Although
there are no immediate expansion plans, the site can be upgraded to support higher drive thru
traffic levels and increased seating.
Human Resources
The proposed owners for the site are Mary and Ken Hatch. As local residents of Markham, they
have the knowledge and understanding of the local coffee market and are familiar with the local
The Second Cup Business Plan Group
4
Second Cup – Markham
Ken and Mary Hatch
competition. Their direct coffee industry knowledge and experienced managerial skills will not
only result in an efficient store, but will contribute to their successful ownership. Ken will be
responsible for the administration, finances and marketing of the company while Mary will
oversee the operations of the business.
Ken and Mary have been approved by Second Cup Head Office and will undergo an intensive
3-week training program called ‘Coffee College’ provided by Second Cup. The program will
empower the owners with the business tools and product knowledge to be successful.
Additional training will be taken through online e-learning training modules.
The company will setup as a corporation to take advantage of tax deferral opportunities. The
organization will consist of the management team (Ken and Mary) and the support staff. Second
Cup – Markham will use an attractive compensation package including unique benefits to attract
and retain staff, with a focus on recruiting students. Managers will be responsible for overseeing
staff and performing operational duties. Sales Associates/Baristas will be the front line workers
who will be responsible for serving customers effectively and efficiently. Training at each level
has been customized for each level and will require the successful completion of certificate
programs.
Marketing
Second Cup – Markham will sell five categories of products: a) coffee/teas/ciders b) specialty
coffees/hot chocolate c) blended drinks d) beans/merchandise and e) pastries. All drinks will be
made to order and the beans and merchandise will be obtained from Second Cup Head Office.
The prices of the products are pre-set by Head Office to ensure consistency between stores.
Although Head Office will conduct advertising and promotion on behalf of Second Cup –
Markham, the owners will promote their store by: giving free drinks for the grand opening of the
store, sponsorship of local children’s sports teams, donating leftover pastries to local community
charities, and developing customer relationships. Promotion of the store will also occur due to
its store front location of a busy intersection in Markham.
Markham is a fast growing municipally with a population of over 287,000. With above average
income levels compared to Ontario and Canada, the location will be exposed to higher levels of
disposable income. As such, the focus will be to draw open business workers and the local
The Second Cup Business Plan Group
5
Second Cup – Markham
Ken and Mary Hatch
community, specifically women and students. Although Markham has a number of competitors
including Starbucks, Tim Hortons, independent coffee houses, McDonalds and other
restaurants and convenience stores, Second Cup has a unique and growing product and image.
Second Cup – Markham will position itself to focus on three main areas by promoting: a) the
‘good for you’ image b) the neighbourhood oasis image and c) a community-oriented business.
This strategy will appeal to the target market and will result in capturing the maximum future
growth of the city which is expected to grow to 386,000 people by the year 2021.
Financial
Second Cup – Markham will require $301,000 in financing to start the business which will be
financed from debt and equity. Debt will account for 66% or $200,000 of the financing while the
remaining 33% or $100,000 will be financed from equity. Ken and Mary Hatch will receive Class
A common shares for a nominal value of $1,000. Preferred shares worth $100,000 will be
issued and will entitle holders to dividends of 15% of positive retained earnings. These shares
will be callable in the 5th year for a lump sum amount.
Analysis has shown that Second Cup – Markham expects to have higher gross profit margins
than the industry average beginning in the second year of operations and higher net profit
margin after the third year. The company will have a higher current ratio than compared to the
industry starting in year 1 which will allow to company to meet its obligations in a timely manner.
Net income is expected to be ($104,371) in the first year and growing to $129,075 in year 5.
The NPV (net present value) of the business plan is $180,447, which indicates that the plan is
viable using a 20% required return on capital for the equity investors. Due to low capital start up
costs and strong gross margin percentages on each of the product categories, as well as low
operating costs, Second Cup – Markham will produce positive cash flows, positive net income
and a strong internal rate of return for the investors and for Ken and Mary.
The Second Cup Business Plan Group
6
Second Cup – Markham
Ken and Mary Hatch
The Second Cup Business Plan Group
7
Second Cup – Markham
Ken and Mary Hatch
1.1 Introduction
Second Cup is a well-established coffee shop franchise in Canada that sells coffees, pastries
and merchandise to its customers.
Ken and Mary Hatch have decided that they are going to invest in a franchise of Second Cup in
the city of Markham Ontario. They have already gone through the process Second Cup has of
choosing the franchise owners and they are ready to start up their own coffee shop.
Mission statement
Second Cup strives to be the model for the quintessential, convenient “Neighbourhood Coffee
Shop” by supporting and promoting positive social interaction in the community. In doing so we
open our doors to invite people from the surrounding area to meet, organize, and get to know
one another as a community.
Short term goals

Acquire the necessary financing

Achieve a 2% market share by year 3

Build our reputation in the community as a neighbourhood coffee shop

Become profitable within the first 2 years of operations

Become knowledgeable about Second Cup operations and procedures

Create community awareness of the new franchise location to obtain
50% of potential customers in year 1.

Appropriately obtain quality staff and train them on Second Cup
operations and products
Long term goals

Build a sustainable business that can support Ken and Mary

Maintain healthy positive economic profits and cash flows

Increase community awareness of the new franchise location to obtain
100% of potential customers by year 3.

Obtain a loyal customer base

Enjoy work and building relationships with people in the community
The Second Cup Business Plan Group
8
Second Cup – Markham
Ken and Mary Hatch
2.0 Operations Plan
2.1 Description of Operations
Second Cup purchases high-quality whole bean coffees and sells them along with fresh, richbrewed espresso beverages, a variety of pastries, and coffee-related accessories. Therefore,
there are three main components to the business: selling purchased beans, pastries and
merchandise, preparing and selling beverages and offering great service.
2.1.1 Sale of whole beans, merchandise and pastries
Whole beans are purchased and stored behind the “bean counter” for customers to then
purchase to use at home when making coffee. A variety of different roasts ranging from 1 – 5, 1
being the lightest roast and 5 being the darkest roast, as well as a variety of flavors are kept on
stock to ensure customer needs can be met. The beans are weighed and sold in either ½ pound
or 1 pound bags, either grinded or non-grinded, according to customer needs.
Second Cup franchisees order merchandise from head office to sell in the individual stores.
Although a variety of accessories can be ordered from the parent store, common merchandise
sold includes travel coffee mugs, tea pots and ceramic coffee mugs.
Pastries are also purchased from suppliers and sold to customers. The assortment of pastries
available depends on the time of day. In the mornings, a variety of muffins, croissants and
danishes are offered. As the day progresses, many of the breakfast pastries are sold and the
display case gets refilled with squares, cookies, and coffee cakes to accommodate the changing
desires of customers throughout the day.
2.1.2 Sale of beverages produced
Second Cup prepares both coffee and non-coffee beverages. The main categories of drinks
made and sold are:

Coffee/teas/ciders

Specialty coffees/hot chocolate

Blended drinks
The Second Cup Business Plan Group
9
Second Cup – Markham
Ken and Mary Hatch
2.1.3 Customer service
Second Cup prepares drinks fresh and quickly made to order, thereby allowing them to
accommodate customer requests. This personalized service coupled with an atmosphere that
has a friendly neighbourhood feel is what customers expect of Second Cup. In addition, the
potential owners, Ken and Mary Hatch, of Second Cup – Markham will offer wireless internet
which will be provided by a contract internet provider.
2.2 Franchising Process
The franchising process started with a seminar held by Second Cup where they discussed the
business opportunity of opening a new franchise store. An application was then submitted by
Ken and Mary and after a pre-screening of qualifications and numerous interviews they were
approved for a Second Cup. The location was agreed upon in Markham, Ontario, as the
application is for a Second Cup franchise, not a particular location, wherever the location may
be. Currently Ken and Mary reside in Markham and are considering the opportunity.
There are many benefits to opening a franchise such as the large support it provides and the
assurance that the business model is successful. The franchisor provides product knowledge
and business advice and in addition offers guidance. Second Cup already has established
supplier relationships, product reputation and a loyal customer base. However, there are
standards franchisees must adhere too and therefore these rules must be followed in order to
own a Second Cup franchise. In addition to not having complete independence in decision
making, new franchisees typically work many hours to successfully establish the business.
2.3 Hours of Operations
Although Second Cup is a franchise, the stores set their individual hours. The hours of operation
for Second Cup – Markham will be:

Monday – Thursday: 6 am – 11 pm

Friday: 6 am – 12 pm

Saturday: 7 am – 12 pm

Sunday 7 am – 11 pm
The hours set attempt to accommodate target markets. The store must be open early in the
morning during the week to service the customers on their way to work, however it can open
later during the weekend as less people desire coffee at early hours. Second Cup – Markham
The Second Cup Business Plan Group
10
Second Cup – Markham
Ken and Mary Hatch
will be open until 11 o’clock at night during the week as many people go for coffee as a social
event and students sit and study. The hours are extended on Friday and Saturday nights as
even more customers are looking for an activity for weekend enjoyment.
2.4 Daily Activities
2.4.1 Opening activities
One staff member will be required to come into the store 30 minutes before opening to prepare
for the day. This person will be one of the few key holders and will be a responsible, trusted
employee. The duties to be performed by this employee will include:
1. Opening the safe where the float is stored, re-counting the money and placing it into the
tills
2. Measuring the required beans for the day. This requires weighing the whole beans in a
coffee filter and transferring this filter containing the beans to a “coffee drawer” where
the days worth of coffee is stored and ready to be brewed
3. Grinding coffee beans and brewing coffee
4. Taking the muffins out of the supplier containers and transferring to the display case
5. Setting the patio furniture outside
6. Ensuring behind the counter is stocked and tidy
7. Ensuring the seating area is tidy
2.4.2 Preparation of beverages
The most important activity of all employees is to service the customer which primarily includes
making the requested beverage and taking payment. Projections indicate 1 customer will be
served every 2 minutes in the average business day. As discussed above the main categories
of drinks sold are:
1. Coffee/teas/ciders – These drinks are relatively quick to prepare. There should be a
constant supply of fresh coffee and once a pot becomes empty the employee needs to
brew another. Tea and cider only require hot water to be served.
2. Specialty coffee/hot chocolate – These drinks take more time and expertise as they are
made on the barista machine and therefore employees must be trained on how to use
the machine. The barista machine is used to heat milk and make espresso shots which
are used in the beverages. There will be a visible chart illustrating the amounts and
types of syrup required for each drink to ensure the beverages are prepared consistently
and accurately.
The Second Cup Business Plan Group
11
Second Cup – Markham
Ken and Mary Hatch
3. Blended drinks - There will be a chart detailing the required ingredients and amounts to
prepare the blended drinks.
See Appendix 2 – Product List for a complete list of all beverages to be sold.
2.4.3 Taking payment
Once a customer places an order it will be entered into the till and payment will be collected.
Second Cup will accept cash, credit cards and debit. They will also have a gift card program
whereby money can be loaded onto a card in a prepaid manner and this card can be used for
payment, thereby decreasing its balance.
2.4.4 Drive thru
The store will have a drive thru window. All employees working will have a head set that notifies
them, with a beep, when a car is present and waiting to order. Any available employee will be
able to answer the drive thru with the press of a button on their headset which will transmit their
voice to an outside speaker allowing them to take the order. There will not be a separate barista
machine or coffee pots beside the window, but instead the beverages will be prepared with the
same equipment as used for walk in customers, but the drinks will then be carried to the
window. There will be however, a separate till beside the drive thru window. Please note that
facilities are available for expansion of the drive thru window to house a separate barista
machine or coffee pots beside the window.
2.4.5 Flow of work
Assuming there are 2 employees working, as this is typically the case, the flow of production
would operate as follows:
One employee will be stationed at the till. As a customer approaches and orders a drink this
employee will enter the order into the till and take payment. If the customer orders a
coffee/tea/cider or a pastry this employee will prepare the beverage and/or take out the food
from the display case. If the customer orders a specialty coffee/hot chocolate or a blended drink
the employee will add the syrup required into the cup and place the cup on top of the barista for
the second employee to make.
The Second Cup Business Plan Group
12
Second Cup – Markham
Ken and Mary Hatch
The second employee stationed at the Barista machine will be responsible for making all
specialty coffees/hot chocolates and blended drinks started by the other employee who poured
the syrup into the cup. The second employee will also be responsible for answering the drive
thru when a car is present and taking the order.
The employee that is not busy will be responsible for going to the drive thru window, entering
the sale into the drive thru till and taking payment. Additional duties that need to be done during
the day such as stocking, preparing syrups and weighing beans for customers wanting to
purchase, will be done by both employees when they are not busy serving customers.
2.4.6 Preparing syrups, stocking and cleaning
During non-busy times, employees will be expected to prepare the syrups required for the
beverages, stock the cups, gather dishes from the tables and clean the used mugs and
counters.
2.4.7 Closing procedures
One staff member will be required to stay 30 minutes after closing to shut down the store. This
person also will be one of the few key holders and a responsible, trusted employee. The duties
to be performed by this employee will include:
1. Cashing out the tills – This requires the employee to count the money in all tills and
prepare a bank deposit for amounts in excess of the float amount. The bank deposit
should be kept on the safe along with the floats. The bank deposit should be reviewed
and only deposited into the bank by Ken or Mary.
2. Cleaning the coffee pots and barista machine
3. Taking excess food out of the display case and organizing for pick up by charitable
organizations
4. Taking in the patio furniture
5. Moping the floors
6. Tidying the bathrooms and entire store
2.4.8 Entering financial data
Second Cup – Markham will have a computer equipped with accounting software, such as
Simply Accounting and Monday through Friday, Ken will enter financial information from the
The Second Cup Business Plan Group
13
Second Cup – Markham
Ken and Mary Hatch
previous day into the system. On Mondays he will have to enter both Saturday and Sunday’s
transactions.
2.5 Weekly Activities
2.5.1 Ordering
Breakfast, food and milk will be ordered once a week by Mary. Roughly the same orders will be
placed week to week unless large variances are noted. Weekly orders will be placed, however
breakfast pastries and food will be delivered daily and milk will be delivered once a week.
Supplies will be ordered as needed.
2.5.2 Scheduling
A staff schedule will be prepared by Mary every week for the following week. The schedule will
be posted in advance (i.e. Wednesday for the week starting the following Sunday) to allow the
employees time to plan personal schedules.
2.5.3 Bathroom cleaning and general maintenance
Ken will be responsible for cleaning the bathrooms once a week. Second Cup employees will be
responsible for ensuring daily cleanliness, however the Ken will be responsible for cleaning the
toilets and sinks. He will also use his past experience as a caretaker to perform general
maintenance around the store.
2.6 Quality Control
Maintaining consistent and high quality products and service is especially important in a
franchise business, such as Second Cup, as customers expect the products and service to be
consistent regardless of the location. In order to control this, Second Cup has standard
operating procedures that must be followed. These standards will be reviewed by Ken and Mary
and monitored for compliance.
At the store level, in order to ensure quality and consistency all employees will be trained on
how to make the beverages according to standards and reference charts will be posted for
guidance. Ken and Mary will need to monitor such things as customer complaints and excess
customer wait times in order to improve the service being provided.
The Second Cup Business Plan Group
14
Second Cup – Markham
Ken and Mary Hatch
2.7 Suppliers
Second Cup has a list of approved suppliers, which must be used in order to maintain the
quality behind the Second Cup name. The list was provided to Ken and Mary and they have
chosen the following suppliers:

Breakfast pastries – Beebell Bakery

Other food products (squares, cookies cakes) – Carols Sweets

Milk – Dairyland

Other supplies such as: cups, lids, straws, coffee sleeves, coffee, syrups, and
merchandise - Head office
The breakfast pastries and other food products (squares, cookies cakes) will be delivered every
morning at the same time the opening employee gets into the store. In order to ensure
freshness, only enough for 1 day will be delivered at a time, however orders will be placed
weekly for the same quantity every day, and any left over’s will be given to charity.
Milk will be delivered every week and kept in the storage room cooler. Expiry dates will be
checked by every employee prior to opening a new jug to ensure only fresh milk is being used.
Other supplies will be ordered and delivered as needed. As these items are not perishable, and
storage space is available, stock will be kept on hand in order to avoid running out.
2.8 Service Providers
Second Cup will need to hire service providers to fulfill certain needs. The following services are
needed:
1. Barista cleaner and repairer – A professional will be hired to completely clean the Barista
machine every month. This will need to be done after hours as they will need to
disassemble to the machine to properly clean it. They will also be responsible for
performing required maintenance and be available for emergency repairs needed.
Second Cup staff will be responsible for ensuring daily cleanliness, such as wiping off
the steam arm and empting the espresso trays. This service will be provided by a local
Barista Service such as Peggy’s Barista Services.
2. Internet Service Provider – A local service provider such as Josh’s Computers Inc, will
be used to provide the routers and internet service.
The Second Cup Business Plan Group
15
Second Cup – Markham
Ken and Mary Hatch
3. Accountant – An accountant will be needed to file the annual tax return and prepare
financial statements to send to the franchisor. Since advertising royalties are based on
sales, a review of the financial information may be required for assurance over the sales
stated. This service will be provided by an accounting firm such as Grant Thornton LLP.
4. Legal Service - The law firm McGee & Fryer LLP will be employed to assist in legalizing
incorporation documentation and other start up business matters. They will be retained
for the year to help with general legal questions that may arise during the year.
2.9 Environmental Issues
As environmental issues are becoming increasingly important to consumers, it is imperative
Second Cup works in harmony with both the environment and people who provide the coffee
beans. Second Cup - Markham will not have a choice in the beans they use however, Second
Cup head office states:
“We pledge that our coffee growing environment is treated with the utmost respect and
dignity. We pledge that no coffee purchased from Second Cup is harvested from child or
forced labour. All of our coffee producers provide a safe and healthy work environment
and employees are compensated in a fair and equitable manner. As well, Second Cup
continues to provide financial remuneration for quality beans to directly benefit the
farmers, workers and mills. This is our promise.” (Second Cup, 2008c).
In addition to caring for the environment and people who provide the beans, Second Cup also
uses 100% recycled paper cups and coffee sleeves. These initiatives by Second Cup
demonstrate the desire of corporate office to work in harmony with the environment, an
increasingly important issue in today’s economy.
2.10 Location
The location for the store has been chosen by the Second Cup Real Estate Department. Below
is some important information regarding the location:

Demographic and other studies were carried out to determine the suitability of the site

Second Cup handled the location negotiation and entered into a tenancy agreement with
the landlord
The Second Cup Business Plan Group
16
Second Cup – Markham
Ken and Mary Hatch

Second Cup will sub-let the property to Ken and Mary under the same terms and
conditions

Second Cup does not mark-up the leases

The franchise agreement is for 10 years with an expiry date related to the current term of
the premises lease.
The location chosen and agreed upon by Ken and Mary is in Markham, Ontario. The store will
be a free standing store in a power center intersecting two major roads in the city, situated
between the business community and an affluent residential area. This location attracts many
commuters as well as local residents. The power center is currently home to many large anchor
stores which will draw traffic into the complex. The store also has ample free parking in front of
the building and large advertising sign so it can be seen from the distance.
2.11 Site Plan
The store will have capacity for 40 customers inside with options to sit on chairs, benches or
large armchairs in front of the gas fireplace. In addition, the patio will seat 8 customers. The
patio will be surrounded by flowers and umbrellas will shade the customers from the direct
sunlight. In the coffee industry, many customers take beverages to go, and therefore a large
seating area is not needed. Having a smaller store gives a cozy, friendly relaxing feel.
The design of the furniture, paint colours and décor, is monitored by the franchisor. Second Cup
has already chosen the colours beige and blue, sleek metal chairs and tables, brown leather
armchairs and couches and a stone floor. The overall atmosphere is trendy, yet not overly
modern.
See Appendix 4 – Floor plan for the proposed floor plan and Appendix 3 – Anticipated look for
an example of the look and feel of the inside of the Hatches future Second Cup.
2.12 5 Year Development Plan
No capital upgrades will be required within 5 years as all equipment has a useful life that
extends that period. Although Second Cup has the ability to require store owners to upgrade
furniture and décor, this would not be required of a new store within its first 5 years of operation.
The Second Cup Business Plan Group
17
Second Cup – Markham
Ken and Mary Hatch
A potential upgrade would be the addition of a barista machine and coffee brewers beside the
drive thru window. An employee could be stationed at the drive thru all day to satisfy increased
demand of drive thru customers. This would only be a consideration if sales increased rapidly
and the current employees could not handle the volume. This was not built into the capital
budget as projections do not indicate this would be necessary, however the estimated capital
cost would be $16,000 ($11,000 for the barista machine and $5,000 for 2 coffee brewers) for the
expansion.
The Second Cup Business Plan Group
18
Second Cup – Markham
Ken and Mary Hatch
3.0 Human Resources
3.1 Management Team
The Second Cup franchise located in Markham will be operated and managed by Ken and Mary
Hatch, with assistance from the franchisor. As local residents of the Markham, both Ken and
Mary Hatch have the knowledge and understanding of the local coffee market and are familiar
with the local competition. Additionally, Ken and Mary have built well-established relationships
with both individuals and businesses in the community which will add in the promotion of the
business.
3.1.1 Ken Hatch
Ken has most recently worked in a supervisory position with a local high school in Markham. His
20 years of experience in the school caretaker field has allowed Ken to develop numerous
transferable skills applicable to the coffee industry. In his supervisory role, Ken has developed
managerial skills to manage and motivate employees. Ken’s extensive knowledge of facility
caretaking will be beneficial by ensuring prompt and efficient responses to any maintenance
problems that arise so as to minimize any disruptions to customers. Additionally, Ken possess
an understanding of the importance of cleanliness and can ensure effective cleaning duties are
performed to provide customers with a welcoming and clean environment.
Ken will be responsible for administration, marketing and promotions, finances, repairs and
maintenance, general day to day management of the store and will communicate with the
franchisor. As such Ken will be in charge of banking and payroll functions and will perform other
financial duties including royalty submissions to Head Office, financial statement analysis and
business planning. Ken will be responsible for ensuring financial stability which will include the
timely payment of suppliers and staff. The growth of the company is important to its success
and Ken will be responsible for growing the business through marketing and promotion
campaigns and sound business practices. Finally, Ken will be responsible for general
maintenance issues that arise.
3.1.2 Mary Hatch
Mary has worked in the coffee industry for the last 8 years. During this time, Mary has gained
invaluable knowledge of the various duties and tasks required to operate a coffee shop
including coffee equipment use, opening and closing procedures and appropriate cash handling
The Second Cup Business Plan Group
19
Second Cup – Markham
Ken and Mary Hatch
procedures. She will be able to pass on her specialized industry knowledge to the staff and will
use her existing customer base in the new franchise location. Since Second Cup is a key
ingredient to any community, it is the people and relationship building skills that will help to
establish this location and Mary will be able to provide that for this team.
Due to Mary’s background and understanding, she will be responsible for the operations of the
company. This will include staff scheduling, ordering of supplies, customer service, and training
of staff. She will focus her time on hiring, motivating, training and evaluating employees and
ensure proper execution of Second Cup procedures and policies. She will be responsible for
updating the standard operating procedures to provide for increased efficiencies and better
customer service by responding to customer suggestions and drawing on her previous work
experience. With Mary’s firsthand experience as a coffee shop employee, Mary will be able to
coach employees and help them become familiar with the job should they require it.
Since Ken and Mary will both be highly involved in the business (i.e. they will not be working at
any other job), it is unnecessary to hire another manager for the first couple of years. There will
be senior staff members who will assist with tasks such as opening and closing the store, but
there will not be any additional managers on staff until after Year 5.
3.1.3 Current investment
Ken and Mary Hatch will contribute $20,000 of their own funds to pay for the initial franchise fee.
It is expected that there will be the need to provide a personal guarantee for a portion of the
debt once the agreement is reached with the sources of financing.
3.1.4 Current acceptance by Second Cup
To date, Ken and Mary have been approved by the franchisor to open this location in Markham.
In order to get to this level of acceptance, the Hatch’s have already been through three long and
intensive telephone interviews to ensure that they are ready and capable to uphold the Second
Cup brand in their new store. The fact that they have been accepted and approved is a
testament to the franchisor’s belief in their ability. And since the franchisor has been very
successful at picking owners in the past, their acceptance of the Hatch’s provides comfort to
lenders and potential investors that this is a recipe for success.
The Second Cup Business Plan Group
20
Second Cup – Markham
Ken and Mary Hatch
3.1.5 Relevant training
Both Ken and Mary will rely on the 3-week training course (also known as Coffee College)
provided by the franchisor to bring them up-to-date with the knowledge required to run the
business once it is ready for the public. This course is meant to provide not only the
fundamentals of coffee and retail, but to understand and live the Second Cup brand. While it
could be argued that the course is not long enough, there is evidence to suggest that the course
will be intensive and will in fact provide the necessary training to run the location. It is assumed
that since each location has the potential to affect the overall Second Cup brand reputation, the
franchisor will ensure that new owners are ready to represent their company in the best way
possible.
The 3-week training session is split into two parts: product knowledge and business. The first
half includes learning about Second Cup’s history, the products, how to make the products and
how to use the machines. The second part provides training on the business plan, accounting,
paperwork, projections, inventory and financial statements. This rounded approach to training
has been successful in getting many new owners ready for business. A trip to Costa Rica is
mandatory for all new franchise owners to obtain firsthand knowledge and experience of the
complete coffee process. The cost of the trip is included in the $20,000 initial fee.
Second Cup will provide online e-learning training modules to keep the owners (and the
employees) up to date with the company’s products, their policies and the overall branding
strategy. Ken and Mary will participate in these training modules to keep up-to-date with
franchise operations.
3.1.6 Support team
In addition to the experience and training that will be contributed by Ken and Mary, the
management team will also rely on their outside support team for guidance. This will include the
Franchisor, accounting and legal professionals and the team of investors (which may include
the bank and other potential private investors). These knowledgeable third parties will provide
additional expertise for running the business and making important decisions.
3.1.7 Salary and compensation
Ken and Mary will each receive a salary of $30,000 (before benefits) in the first year and it will
grow by $2,500 every two years after. In many start up businesses, it is customary for the
The Second Cup Business Plan Group
21
Second Cup – Markham
Ken and Mary Hatch
owners to take a smaller salary in the first few years to allow for reinvestment and growth.
However, due to the fact that both Ken and Mary will be quitting their full time jobs and expect to
work full time hours in the Second Cup, it is reasonable to pay them this amount of salary. This
will allow them to maintain their current lifestyle while fully taking on the challenges of running
their own business.
3.1.8 Management expectations
One of the driving motivations behind the potential purchase of the franchise is that Ken and
Mary want to be their own bosses. While it is true that they will be the managers of their own
location, the fact that they will be purchasing a franchise must be completely and clearly
understood. The franchisor has the ability to uphold strict guidelines that must be followed;
these will be outlined in the franchise agreement and there could be severe penalties for not
adhering to the rules in that agreement. As such, Ken and Mary should be advised to
completely understand the clauses in the franchise agreement to ensure compliance with the
rules of the franchisor and avoid any repercussions.
3.1.9 Summary: Why to invest in this management team
Due to Ken and Mary’s previous experience, the extensive training and support that they will
receive from the Second Cup franchisor and the investment they have made personally in
making this business successful, the store will have a strong management team with a recipe
for success. Ken and Mary have the motivation, the knowledge and the dedication to make their
dream of a profitable small business into a reality.
3.2 Organizational Structure
Second Cup - Markham will be operated and managed by Ken and Mary Hatch, who will work
full time hours for the location. To assist with customer service operations, 6 part time
employees will be hired and trained prior to the store opening.
The organizational structure will be setup in a hierarchal manner with Second Cup Head Office
as the top level in the structure. Both Ken and Mary Hatch will act initially as hands on
Managers and provide ongoing direction to Sales Associates/Baristas (please see Appendix 1 –
Organizational Chart). It is anticipated that due to growth in sales, the organization will need to
hire an additional Sales Associate/Barista in year 4.
The Second Cup Business Plan Group
22
Second Cup – Markham
Ken and Mary Hatch
Legally, the organization will be setup as a corporation. This is more advantageous than a sole
proprietor, co-op or partnership. A corporation will allow the owners to take advantage of tax
deferral opportunities as well provide the owners with limited liability unlike a sole proprietorship.
Although the corporate structure does have more administration and costs associated with it,
the limited liability will allow the owners to separate their personal assets from the business
ensuring their personal financial protection. The business will also be eligible for the small
business deduction which allows for a reduced tax rate on the first $400,000 of business
income. Additionally, the owners will hold shares in the corporation and on disposal of the
shares the owners will be able to take advantage of the lifetime capital gains exemption that
allows for tax savings on any gains realized from the sale of shares.
3.3 Recruitment and Retention
One of the key success factors in operating the coffee shop will be ensuring adequate staff
levels to provide service to customers. As with many coffee shops, employee turnover is
expected to be high. To mitigate this, Second Cup - Markham plans on attracting and retaining
employees through unique benefits and a friendly culture. Focus will be on attracting students at
the beginning of their post-secondary education. These individuals are typically interested in
earning additional spending money part time while going to school and will likely move onto their
studied fields after completing their education. This is an advantage as benefits will not be
required to be paid as is required for full-time staff. Job ads will be posted through online
advertising sites such as Monster.ca and in local universities and colleges.
The store’s culture will be unique as Second Cup itself and will be focused not only on
customers but also on employees. As such, employees will be provided with a number of
benefits including:

Free coffee

Weekly expense account for non-coffee products with a yearly account increase

Scholarship opportunities for students

Paid training programs

Holiday pay
The Second Cup Business Plan Group
23
Second Cup – Markham
Ken and Mary Hatch
3.4 Job descriptions
See the 3.1 Management Team section for details on the responsibilities of Ken and Mary
Hatch.
Sales Associates/Barista

Serve the "World's Greatest Coffee" and all other Second Cup products to guests
(Monster.ca, 2008)

Handle and be responsible for cash received for Second Cup products

Daily cleaning duties, including maintenance of guest service areas

Preparation of The Europeans, Second Cup's trademark espresso beverages

Entertainment of guests with Barista Flair and positive energy

Must achieve a passing grade (85%) on the Certified Sales Associate Exam

Must meet all Barista Qualifications - Barista Oral Exam - Barista Practical Exam
After a 3 month probation period, Sales Associates/Baristas will be eligible to performing
opening and closing procedures, including equipment maintenance and merchandising. With
this new level of responsibility there will be an increase in wages of $1.50 per hour.
3.5 Training Programs
Sales Associate/Barista
All sales associates/Baristas will be required to take and pass the Certified Sales Associate
Exam as well as meet all Barista Qualifications. Additionally, Mary will develop a unique training
program to focus on customer care and quality service. This on-the-job training will also include
training on coffee equipment usage, cash register procedures and opening / closing procedures.
Additional training will be performed through Second Cup’s online e-learning training modules.
The complete training process is expected to last two days. The cost of training will be minimal
due to the online testing and in-house training by Mary Hatch
3.6 Store timings
3.6.1 Monday to Thursday
The store will open at 6 am and close at 11 pm during the week. One employee will be required
to arrive 30 minutes before the store opens to stock shelves and prepare the store for the day’s
operations. From 6:30 am to 9:00 am, there will be 2 part time employees to serve customers,
The Second Cup Business Plan Group
24
Second Cup – Markham
Ken and Mary Hatch
as this will be a relatively busy rush for the store. From 9 am until 5 pm, Ken and Mary will work
together to serve customers in the store in addition to the 1 scheduled staff member. When it is
not busy, they will perform tasks such as ordering products, general cleaning, administrative
duties, etc. From 5 pm until 10 pm, there will be 2 part time employees to serve customers.
From 10 pm until close, one of the part time employees will be required to clean and lock up the
store for the night.
3.6.2 Fridays
The store will be open at 6 am and close at 12 pm
3.6.3 Saturdays and Sundays
The store will not open until 7 am and will remain open until 12pm on Saturday, but close at
11pm on Sunday. Ken and Mary will not work in the store on the weekends, and as such the
entire day will be staffed with at least 2 part time employees. The same responsibilities for
opening and closing the store will still apply.
3.7 Total Salaries, Wages and Benefits Costs
Due to premium wage that must be paid to ensure quality employees are attracted and
maintained, as well as the cost of benefits for the salaried and part time employees, the total
cost for the first year will be approximately $173,000 (please see Appendix 6 – Detailed
Financial Plan). The total cost increases over the next 5 years by taking into consideration a 3%
inflation increase in wages per year, increases in management salary and the addition of 1 extra
employee in Year 4.
The Second Cup Business Plan Group
25
Second Cup – Markham
Ken and Mary Hatch
4.0 Marketing Plan
4.1 Products
The products to be sold in Second Cup stores is determined by the franchisor, and therefore
head office has control over what products Ken and Mary will be required to offer. In addition,
the franchisor also has the ability to discontinue or introduce beverages.
Second Cup offers a large variety of products in order to try to satisfy the tastes and demands of
a wide array of customers. As such, hot or cold beverages, non-coffee alternatives, low fat
options and personal customization alternatives are available. As previously mentioned the
products to be offered have been grouped into five main categories, as follows:

Coffee/teas/ciders

Specialty coffees/hot chocolate

Blended drinks

Beans/merchandise

Pastries
For a complete listing of the specific drinks in each category, please see Appendix 2 – Product
List.
The beans and merchandise will be ordered from head office and sold directly to customers.
Beans will be sold in both ½ and 1 pound bags and various roasts and flavors will be available.
Selling Second Cup roast beans for customers to use at home is a great way to build brand
loyalty in customers as they quickly become accustomed to the unique taste of Second Cup
coffee beans and are likely to continue drinking Second Cup beverages. The pastries will also
be ordered and sold to customers. These act as great compliment to a cup of coffee any time of
day, and also make it possible for commuters to pick up breakfast at the same time as a
beverage on the way to work in the morning.
The beverages including, coffees, teas, ciders, specialty coffees, hot chocolates and blended
drinks, will be made to order. All drinks are easily customizable to customer preferences and
this creates the element of customer service consumers are looking for. In addition, the
The Second Cup Business Plan Group
26
Second Cup – Markham
Ken and Mary Hatch
ambiance and the neighborhood coffee shop feel of the Hatches Second Cup will enhance the
service component of the café.
4.2 Pricing
Prices are set by head office and standardized by geographic location. Any price adjustments
will be pushed down from head office in order to account for factors such as inflation or changes
in market conditions. As such, the Hatches have no control over pricing, including the ability to
make changes on a go forward basis. The general pricing categories for the products available
at Second Cup mirror the categories of products as noted above.
See Appendix 2 – Product List for the prices assigned to each category.
4.3 Promotion
Advertising and promotion for Second Cup is carried out by head office and franchisees are
charged a royalty fee in order to cover these costs. For example, when a new drink is released,
there is a national promotion that goes along with it. Ken and Mary will participate in these
promotions which include giving away free samples of the new beverage, as well as new
uniforms for the staff to promote the product. In addition, the franchisor maintains a Second Cup
website that provides information on all beverages, nutritional data and general information
about Second Cup.
In addition to advertising done by head office, the Hatches will engage in the following efforts to
promote their individual Second Cup.
Ken and Mary will hold a grand opening for their store, in which they will give away free drinks to
the first 100 customers. They will advertise the store opening in the community newsletter and
local flyer. This will ensure customers are aware of a new Second Cup to be opened their
neighborhood and will also spark interest in the beverages sold.
They will also promote the business through sponsorship of local children’s sporting teams. This
will allow Second Cup – Markham to get its name into the community and to bring the parents
and participants of the local sports teams into the store.
The Second Cup Business Plan Group
27
Second Cup – Markham
Ken and Mary Hatch
Ken and Mary will promote their store as community friendly. They will arrange for all of the
leftover pastries to be donated to a local community charity to help out those in need at the end
of every day. This will help Ken and Mary to help out the community where they can and it will
allow for positive relationship building with the neighborhood. Ken and Mary will also be willing
to make donations to other organizations in the community should they be approached for such
donations.
Lastly, Ken and Mary will also put in a lot of face time at the coffee shop which will help build
relationships with the customers. Recently a new branding initiative was introduced, with a
greater focus placed on emotional drivers and the experience a customer has in a Second Cup
location. Second Cup wants to come across as a “neighborhood oasis”, a place for escape and
where the customer is valued (Mazurkewich, 2007).
Building relationships with customers,
training staff to ensure they are providing customers with a quality experience and the design
and feel of the store are all essential elements of this strategy.
4.4 Place
Second Cup is a franchise and therefore, the Second Cup Real Estate division has already
performed market research for the new location of Ken and Mary’s franchise. The shop will be
located in Markham, a suburb of the city of Toronto, between the business community and an
affluent residential neighborhood. The benefits of being situated between the two, is that the
business community as well as the local residents with high disposable income can be targeted.
Based on the convenience of the location it is expected to attract commuters on their way to
work in the morning and business people working in Markham even if they are tight on time. In
addition, the décor and ambience of the café is expected to draw local residents as a place to
meet up with friends and family and relax.
The café will be free standing store in a new shopping development, and will have a drive thru
as well as ample complimentary parking available for customers. Being situated in a shopping
development means there are large anchor stores to draw traffic into the area which will
generate traffic flow into Second Cup.
The Second Cup Business Plan Group
28
Second Cup – Markham
Ken and Mary Hatch
4.5 Segmentation
Markham is located in the Greater Toronto Area and is Canada’s high tech capital. Markham is
a fast growing municipally in Ontario with over 287,000 people (Economic, 2007). Markham’s
population is fairly evenly spread between males and females for most age categories and is
also fairly evenly spread between ages, as can be seen in the exhibit (See Appendix 5 –
Markham demographics). The average income level in Markham is above that of the average
Ontario income as well as the average Canadian income. Therefore the residents of Markham
have more disposable income to put towards indulgences, such as coffee.
As per the Coffee Association of Canada, 60% of adults in Ontario drink coffee on a daily basis
and 16% of coffee is consumed or purchased in eating places. The target market and related
expected number of annual customer transactions of the franchise was determined using this
information in (Coffee Association of Canada).
4.6 Targeting
From the segment information above, we can derive our main target markets, which include
business people and the local community, specifically women, students and all others that want
to indulge on a beverage, coffee or non coffee.
The business community is specifically important because there are many commuters in and
out of Markham daily. The location of the Hatches Second Cup attracts people on their way to
work in the morning and on their way home from work in the evening. The drive thru is
especially important to these consumers, as this option saves them time. In addition, Ken and
Mary will also expand their target to include people working in the nearby businesses as coffee
at work is an all day drink. The people who work at the local businesses will be looking for a
place to get their coffee. They will concentrate on building relationships in the business
community that surrounds their location.
Second Cup – Markham will also focus its efforts on targeting the local residents by building
relationships and designing a desirable atmosphere. This will help to gain repeat customers and
entice those locals into the café. There will be ample parking to make the establishment more
attractive for local residents. They will specifically target students, who will study at Second Cup,
by staying open late hours and women by promoting the idea of “me time”. This is a national
marketing campaign designed by head office to target working women and mothers who
The Second Cup Business Plan Group
29
Second Cup – Markham
Ken and Mary Hatch
deserve a break (Mazurkewich, 2007). The Hatches will support this campaign by having a cozy
fireplace and comfortable chairs where women can relax and enjoy a cup of coffee.
4.7 Positioning
“Second Cup is Canada's largest specialty café franchisor and the second largest retailer of
specialty coffee.” (Douglas) Second Cup has also begun to change their brand to be a ‘good for
you’ brand. They have started to take all of the trans-fats out of their products to show this ‘good
for you’ image (Mazurkewich, 2007).
Ken and Mary would be wise to build the atmosphere to go along with the branding that head
office is doing. They will build the atmosphere to be cozy and relaxing to go with the “me time”
branding being done by head office. Second Cup also wants to make their coffee cafés the
second home of the customers. This will also fall in line with the cozy atmosphere. The shop will
become known as a “neighbourhood oasis”.
As previously mentioned, Second Cup uses local suppliers for baked goods and pastries
available for purchase. This re-investment in the local community creates a positive image with
customers and reinforces the fact that each Second Cup location is committed to the community
it operates in. In addition, Second Cup is a Canadian owned and operated business which may
draw in some customers who prefer to support Canadian entities over international chains such
as Starbucks.
4.8 Competitive Analysis
Currently in Markham, there are five other Second Cup cafes, three Starbucks coffee houses,
several independent coffee shops and numerous fast food retailers, convenience stores, gas
stations and restaurants which sell coffee. Each of the Second Cup cafes are located sufficient
distances from one another that they are not expected to cannibalize each other’s sales. Head
office has performed extensive market research in order to ensure there is a sufficient market to
support each location. Competition can be divided into two groups: specialty coffee retailers and
basic coffee retailers. The basic coffee retailers such as Tim Horton’s, McDonalds, convenience
stores and restaurants, do not offer as wide of selection of beverages, as high quality of a
product, or the same type of experience and atmosphere as Second Cup. Considering the
differences in the products and service offered, the basic coffee retailers are not considered to
The Second Cup Business Plan Group
30
Second Cup – Markham
Ken and Mary Hatch
be a close substitute and therefore do not pose a major threat of rivalry to Second Cup. The
specialty coffee competitors on the other hand, including Starbucks and independently run
coffeehouses, offer a similar selection of products, similar product quality and aim to provide
customers with a certain experience when visiting their coffee house. As such, these retailers
are considered to be close substitutes to Second Cup and pose a significant threat of rivalry.
Aside from other factors, personal taste and brand recognition play a role in developing
customer loyalty which may work to the advantage of Starbucks in particular, in attracting and
retaining customers.
Competitor
Number of Locations
in Markham
Features
Price
Pleasant atmosphere, Comparable
Starbucks
3
similar
selection
of
products, brand loyalty
Cheaper
Tim Horton’s
6
price,
fast Lower Prices
service, more products
than other fast food
retailers
Pleasant atmosphere, Comparable
Independent coffee
houses
8
similar
product
selection, relationship
with owners
McDonalds
5
Convenience
Stores/Gas
Cheaper
price,
fast Low Prices
service
Convenience, cheaper Low Prices
15
price
Stations
Restaurants
18
Wide range of other Lower Prices
products offered (food)
Of the competitors noted above, one Starbucks, one independent coffee house and a few
convenience stores and restaurants are in close range of the Second Cup - Markham location.
The Starbucks is located in a shopping mall and while it has a sizeable lounge area there is no
drive thru, a lack of outside seating and it can be difficult to find nearby parking. The
The Second Cup Business Plan Group
31
Second Cup – Markham
Ken and Mary Hatch
independent coffee house, Beans, has a more limited menu than Second Cup or Starbucks, but
has a large seating area including some outside seating and an inviting décor. Drive thru service
is not available.
4.9 Franchising Restrictions
As part of the franchise agreement, owners are restricted to adhere to standards of the
franchise. In particular, coffeehouse locations, the Second Cup logo, and general branding are
determined by head office. Owners have the flexibility to decorate and furnish their location as
they wish, subject to some standards such as televisions are not permitted in the cafes. In
conjunction with a new branding initiative currently underway, head office is trying to make the
cafes approximately 80% consistent and 20% different from one another (Mazurkewich, 2007).
As a result, some of the flexibility previously available to owners in the design of their cafes has
been reduced and they are now required to have certain items such as fireplaces and standard
countertops in every location.
4.10 Opportunities
Markham is a growing community, with a current population of 287,000 that is expected to grow
to 386,000 by the year 2021. In addition, more and more businesses are continuing to locate
offices in Markham. This growth in the residential and business community translates into a
larger target market for Second Cup and therefore should result in increased sales in the future.
Gourmet coffee drinkers in general as well as the target markets of the new Markham location
span a wide range of ages. Demographics of Markham indicate a wide range of ages of
residents, with the majority of the population being fairly evenly distributed among the age
brackets starting at 10-19 year old bracket up to the 50-59 year old bracket. In addition, the
average annual income of a resident of Markham is higher than both the Canadian and Ontario
average annual income levels thereby indicating that the a large portion of target market likely
has more disposable income than the average person.
The Second Cup Business Plan Group
32
Second Cup – Markham
Ken and Mary Hatch
5.0 Financial Plan
5.1 Sources of Financing
Second Cup – Markham will be financed by a combination of debt and equity financing:
5.1.1 Debt Financing
Debt financing of $200,000 is to be obtained by the franchise with repayment terms of 5 years
and an interest rate of 10%.
5.1.2 Equity Financing
Beginning Share Capital will be for Class A common shares purchased at a nominal value of
$1,000 by the Hatches. This is to provide a class of shares for the Hatches to which growth of
the business will accumulate and, when possible, dividends can be paid out. In addition, the
base case projection includes 33% or $100,000 financing from family and friends (angel
investors) for preferred shares. The shares will entitle shareholders to dividends equivalent to
15% of positive retained earnings. The preferred shareholder agreement will state that the
shares are callable as of the 5th year of operations for a lump payment of $195,000. From our
analysis, this lump payout as well as dividends paid will result in an external return on equity
equivalent to 20%. In a worst case scenario, if no dividends are paid in year 1 through 5 the
external rate of return will be equivalent to 14%.
5.1.3 Financial Leverage
If the business would have financed completely by equity, the internal rate of return would have
been 34%, indicating that a healthy return is being generated from the assets of the business
alone. While leveraging the business with some debt financing increases the risk to investors
and creates a yearly required payment, it also increases the return to investors.
5.2 Base Case Results
Please see Appendix 6 – Detailed Financial Plan for the Base Case Financial Schedules 1
through 13, as well as Appendix 7 – Financial Plan for a detailed explanation of how the values
were derived.
The Second Cup Business Plan Group
33
Second Cup – Markham
Ken and Mary Hatch
Based on the base case financial projections some key financial ratios were calculated and
compared to the industry average for similar retail businesses as follows:
5.2.1 Gross Profit Margin %
Industry
2009
2010
2011
2012
2013
46.0%
33.9%
48.9%
54.6%
52.8%
53.5%
Second Cup – Markham expects to have higher gross profit margins than the industry average
beginning in the second year of operations. These strong margins are due to relatively low input
costs required to prepare the beverages offered by Second Cup. Strong gross margins are
required in order to cover additional operating costs associated with servicing customers and
running the business as a very limited amount of fixed costs have been allocated to cost of
sales.
5.2.2 Net Profit Margin %
Industry
2009
2010
2011
2012
2013
11.9%
-37.0%
1.5%
17.2%
15.4%
17.2%
After the third year of operations, the franchise’s net profit margins will be higher than the
industry average as a result of Ken and Mary effectively managing their operating costs. For
example, Ken will be taking care of the repairs and maintenance costs and they are paying
themselves modest management salaries.
5.2.3 Current Ratio
Industry
1.0
2009
2010
2011
2012
2013
1.27
1.11
2.45
3.34
4.94
Through all years of operations Second Cup – Markham will have a current ratio higher than the
industry standard as a result of keeping excessive cash on hand in order to ensure they can
cover loan payments, payables and any unforeseen circumstances.
The Second Cup Business Plan Group
34
Second Cup – Markham
Ken and Mary Hatch
5.2.4 Financial Results
Revenues
Cost of Sales
Direct Labour Costs
Gross Margin
Gross Margin %
Operating Expenses
Interest Expense
Tax Expense
Net Income
Net Profit %
2009
282,021
78,821
107,561
95,639
2010
475,334
132,850
110,268
232,216
2011
652,792
182,447
113,726
356,618
2012
699,271
195,437
134,269
369,564
2013
749,059
209,352
138,663
401,044
34%
49%
55%
53%
54%
181,471
18,539
0
210,021
15,141
0
230,033
11,387
2,950
233,666
7,240
21,229
243,805
2,658
25,506
(104,371)
7,054
112,248
107,430
129,075
-37%
1%
17%
15%
17%
2009 - The Second Cup in Markham opens in January 2009 and experiences healthy sales in
that year, but due to a slow start up period the income statement shows a loss of over
$100,000. However, there is a healthy gross margin of 34% and there is cash to pay down the
$200,000 of bank debt.
2010 – In 2010, the company will break even and earn a small net income profit of $7,000. This
results from increased sales (reaching 75% of the target market in that year) and a strong
reputation in the community. The gross margin is strong at 49% and increasing due to the fact
that wage expenses for the part time employees which are allocated into gross margin vary with
changes in wage rates.
2011 – In 2011 the company has a strong net income figure of $112,000. The gross margin
reaches a relatively steady level of 55% and the net profit percentage also reaches a steady
level of 17%. In this year, the company uses up the remaining tax loss carry forward and owes
a small amount of taxes on their earnings, but is able to decrease the amount of interest
payable. As well, in this year, Ken and Mary earn an increased salary of $32,500 each.
2012 – In this year, the company sees a small decrease in the gross margin due to the addition
of 1 more part time employee to assist with the increased business and quantity of sales.
However, the location maintains 100% of target market and follows the growth of the Markham
area at 6% per year.
The Second Cup Business Plan Group
35
Second Cup – Markham
Ken and Mary Hatch
2013 – The final year of the projection is a strong indicator of the income that the company can
expect to earn in the future. The resulting net income is $129,000 and the profit percentage is
17%, which is sustainable given the conservative estimates used in the analysis.
Cash, End of Period
250,000
200,000
150,000
100,000
50,000
2009
2010
2011
2012
2013
The initial total investment of $300,000 (2/3 debt and 1/3 equity) allows Second Cup to maintain
a healthy cash balance for each of the 5 years. In 2012, there is a large ending cash balance
(over $200,000) but it is required to facilitate the equity payout in 2013. Otherwise, there are no
cash flow concerns for this company.
As such, the plan IS financially feasible with positive cash flow for short term survival and
positive net income to indicate strong potential for long term success.
Net Income Break-Even Quantity of Sales
220,000
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
2009
2010
2011
Net Income Break-Even Quantity of Sales (units)
The Second Cup Business Plan Group
2012
2013
Quantity Sold in Base Case
36
Second Cup – Markham
Ken and Mary Hatch
The weighted average gross margin for the Second Cup product mix is $1.75 per unit, which
includes the base inputs, added inputs, cups and lids as well as $0.55 per unit for direct labour.
The company has a net income break even in 2010, at which time it has enough business and a
large enough percentage of the target market (75%) to cover all of the fixed costs.
Projected sales (units)
Customers/month
Customers/day
Customers/hour
2009
88,222
2010
144,363
2011
192,484
2012
200,184
2013
208,191
8,625
308
26
9,982
329
27
10,933
360
30
11,106
366
31
11,588
382
32
In order to reach the breakeven point in 2011, the company expects to sell 88,000 units in 2009
and grow to 208,000 units in 2013.
However, due to the addition of one employee, the
company will still be able to provide customer service for 32 customers per hour, or
approximately 1 customer every 2 minutes. This level of service is completely attainable and
within the location’s capacity in each of the 5 years.
Economic Break-Even Quantity of Sales (units)
220,000
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
2009
2010
2011
Economic Break-Even Quantity of Sales (units)
2012
2013
Quantity Sold in Base Case
The company also has an economic break even in 2010, at which time they will also be earning
enough of a return to provide the equity investors with their 20% return.
The Second Cup Business Plan Group
37
Second Cup – Markham
Ken and Mary Hatch
Net Present Value of Equity Investment
Internal Rate of Return on Equity Investment
180,477
64%
The NPV (net present value) of the business plan is $180,447, which indicates that the plan is
viable using a 20% required return on capital for the equity investors. Not only does the 5 year
projection forecast positive cash flows for the entire term of the plan, it also provides investors
with much greater than their 20% required rate of return. This makes the investment attractive
and worthwhile to both the debt and equity investors since there will be enough economic profits
to satisfy all sources of financing.
The internal rate of return (IRR) of the plan with 66% debt and 33% equity is 64% overall. The
fact that the equity investors are providing $100,000 (or 1/3) of the financing to run the business,
the income levels reached by Year 5 provide a strong return for them. The company will be
earning normalized net income of $129,000 after tax in Year 5 and there is additional expected
growth in the future. While this investment does carry additional risk, the projections show
dividends starting in 2012 (Year 4) and since investors would only be able to earn 10% on the
stock market, this is an attractive rate of return.
Due to low capital start up costs and strong gross margin percentages on each of the 5 product
categories, as well as low operating costs, Second Cup – Markham will produce positive cash
flows, positive net income and a strong internal rate of return for the investors and for Ken and
Mary.
5.3 Contingency Plans
5.3.1 Risk Analysis
To address the elements of risk involved in our projections, we have prepared a best case, base
case and worst case scenario for Second Cup Markham to determine the effect on NI, and IRR
(see Appendix 6 – Detailed Financial plan) based on changes in the critical variables. The
results are as follows:
The Second Cup Business Plan Group
38
Second Cup – Markham
Ken and Mary Hatch
Variable
Quantity of Sales
Input Prices
Interest Rate
Employee Wages
IRR
Net Income
2009
2010
2011
2012
2013
Worst Case
85%
115%
12%
110%
Base Case
100%
100%
10%
100%
Best Case
105%
90%
8%
100%
-12.8%
64.1%
86.0%
Worst Case
(141,035)
(20,039)
27,633
30,097
43,048
Base Case
(104,371)
7,054
112,248
107,430
129,075
Best Case
(83,440)
39,167
138,738
144,327
167,660
As can be seen, even in our worst case scenario net income is positive by year 3 which shows
the business Model for Second Cup bears little risk and can be profitable even in economic
downturns.
5.3.2 Contingency Plans
Best case scenario
In the best case scenario, sales would be higher than anticipated and problems may arise with
capacity limitations. If the volume of customers is higher than expected, employees will have a
difficult time serving the customers in a reasonable time period. We foresee this being an issue
only during peak hours. These customers will either see the long lines, or get tired of waiting in
the lines and leave. This loss in sales to Second Cup Markham may be significant.
To handle this problem, capacity could be increased by adding additional facilities to the drive
thru window. If an additional barista machine and coffee pots where added beside the window,
additional customers could be served faster through the drive thru. When not being used to
service drive thru customers, the additional equipment could increase the number of customers
served per minute in the store. This will require an additional person to be stationed at the drive
thru window at all times.
The capacity for seating is relatively fixed at Second Cup – Markham, unless renovations were
undertaken to increase the square footage of the building. Since the limited seating adds to the
The Second Cup Business Plan Group
39
Second Cup – Markham
Ken and Mary Hatch
atmosphere and feel of the store, renovations will not be done to increase inside seating even if
volume of sales is greater than expected. This would be a deviation from the fundamental
values of the Hatches Second Cup which is to create a cozy neighbourhood feel to their store.
Worst case scenario
The worst case scenario would be sales less than expected and costs significantly higher than
expected, resulting in losses to the Hatches. Since products cannot be discontinued, in the case
of rising input costs, the Hatches have little few options available to reduce input prices. Instead,
the following actions will be taken by the Hatches:

Elimination of staff – The Hatches will work additional hours to save on labour costs

Increased marketing – The Hatches will temporally increase marketing efforts to
advertise the existence of the store in hopes to increase the volume of sales. This will
only be done for a few months if the increase costs appear to have no affect on
increasing revenues

Pressure head office to increase prices – The Hatches cannot increase prices at will,
however they can pressure head office to increase prices uniformly across Canada. It is
likely that head office will be responsive to significant changes in input prices and do this
automatically.
In the case where the Hatches have losses for two consecutive years (not including the losses
in the beginning from start up) and are not able to pay themselves a salary for these two years,
they will shut down. They will look for a buyer interested in purchasing the Second Cup who will
take over the business.
The Second Cup Business Plan Group
40
Second Cup – Markham
Ken and Mary Hatch
References
Coffee Association of Canada (n.d.). Highlights 2003 Canadian Coffee Drinking Study.
Retrieved July 4, 2008 from <http://www.coffeeassoc.com/coffeeincanada.htm>
Douglas, Melanie Joy (n.d.). Having a Second Cup Makes Cents. Retrieved July 3, 2008 from
<http://content.monster.ca/10173_en-CA_p1.asp>
Economic/Demographic Profile, Year End 2007 (n.d.). Retrieved July 2, 2008 from
<http://www.markham.ca/Markham/Departments/EDO/Stats.htm>
Mazurkewich, Karen (April 2007). Second Cup's new ingredient: escapism - it's working.
Retrieved July 3, 2008 from
<http://www.strategymag.com/articles/magazine/20070401/biz.html>
Monster.ca 2008. “Sales Associates/Baristas” Monster.ca Website. Retrieved 3 July 2008, from
<http://jobview.monster.ca/GetJob.aspx?JobID=73202982>
Second Cup 2008a. “Second Cup: About Us” Second Cup Website. Retrieved 14 July 2008,
from <http://www.secondcup.com/eng/about_us.php>
Second Cup 2008b. “Second Cup: Our Menu” Second Cup Website. Retrieved 14 July 2008,
from < http://www.secondcup.com/eng/menu.php>
Second Cup 2008c. “Second Cup: Coffee” Second Cup Website. Retrieved 14 July 2008, from
< http://www.secondcup.com/eng/coffee.php>
The Second Cup Business Plan Group
41
Second Cup – Markham
Ken and Mary Hatch
Appendix 1 – Organizational Chart
Second Cup
Mary Hatch
Manager/Owner
Sales
associate /
Barista
Sales
associate /
Barista
Sales
associate /
Barista
The Second Cup Business Plan Group
Ken Hatch
Manager/Owner
Sales
associate /
Barista
Sales
associate /
Barista
Sales
associate
/ Barista
42
Second Cup – Markham
Ken and Mary Hatch
Appendix 2 – Product List
Coffee/Cider/Tea
Prices: Small $ 1.50, Medium $2.00, Large $2.50
HOT APPLE CIDER:
HOT SPICED APPLE CIDER SERVED WITH A CINNAMON STICK
TEA:
CHOOSE FROM OUR WIDE SELECTION OF PREMIUM TEA BY THE BAG
AMERICANO:
ESPRESSO WITH HOT WATER ADDED TO EQUAL A CUP OF COFFEE
ESPRESSO:
ESPRESSO WITH A THICK CARAMEL CREMA ON THE SURFACE.
MACCHIATO:
ESPRESSO TOPPED WITH A DOLLOP OF FOAM
CON PANNA:
ESPRESSO TOPPED WITH A GENEROUS DOLLOP OF REAL WHIPPED CREAM
BREWED COFFEE:
CHOOSE FROM OUR WIDE SELECTION OF PREMIUM COFFEES
ITALIAN SODA:
A REFRESHING COMBINATION OF SODA WATER AND YOUR CHOICE OF FLAVOUR
Specialty Coffees/Hot Chocolate
Prices: Small $ 3.25, Medium $4.00, Large $4.50
VANILLA BEAN LATTE:
CREAMY AND SMOOTH, WITH THE AROMATIC TASTE OF PURE MADAGASCAR VANILLA
SKINNY VANILLA BEAN LATTE:
CREAMY AND SMOOTH, WITH THE TASTE OF PURE VANILLA.
CARAMEL CORRETTO:
A TEMPTING BLEND OF CREAMY CARAMEL AND MELLOW VANILLA, TOPPED WITH CARAMEL DRIZZLE OVER FOAM
MOCCACCINO:
THE DEEP RICH FLAVOURS OF CHOCOLATE AND ESPRESSO.
WHITE MOCHA:
VELVETY WHITE CHOCOLATE BLENDED WITH ESPRESSO.
CAPPUCCINO:
THE CAPPUCCINO COMBINES EQUAL PORTIONS OF ESPRESSO, STEAMED MILK AND FOAM
CAFFÈ LATTE:
THE PERFECT BALANCE OF RICH ESPRESSO COMBINED WITH SMOOTH, CREAMY STEAMED MILK AND VELVETY FOAM
BUTTER PECAN LATTE:
THE COMFORTING TASTE OF BUTTERED RUM AND TOASTED PECANS
HAZELNUT LATTE:
THE AROMATIC TASTE OF HAZELNUT COMBINED WITH RICH ESPRESSO
MAPLE LATTE:
RICH ESPRESSO COMBINED WITH THE TASTE OF REAL MAPLE SYRUP
PUMPKIN SPICE LATTE:
THE AROMATIC TASTE OF PUMPKIN SPICE AND GINGER SPICE
The Second Cup Business Plan Group
43
Second Cup – Markham
Ken and Mary Hatch
HOT CHOCOLATE:
A CREAMY BLEND OF STEAMED MILK AND RICH CHOCOLATE
WHITE HOT CHOCOLATE:
RICH WHITE CHOCOLATE BLENDED WITH CREAMY STEAMED MILK
VANILLA BEAN HOT CHOCOLATE:
PURE MADAGASCAR VANILLA AND CREAMY STEAMED MILK
MILK STEAMER:
VELVETY STEAMED MILK WITH YOUR CHOICE OF FLAVOUR
CHAI LATTE:
A SOOTHING, MELLOW BLEND OF STEAMED MILK AND AUTHENTIC CHAI SPICES
GREEN TEA LATTE:
THE SUBTLE, CREAMY BLEND OF STEAMED MILK AND REAL GREEN TEA
Blended Drinks
Prices: Small $ 3.50, Medium $4.00, Large $4.75
MIXED BERRY SMOOTHIE:
A REFRESHING ICY BLEND OF BLUEBERRIES, RASPBERRIES, AND STRAWBERRIES
TROPICAL FRUIT SMOOTHIE:
A COOL AND REFRESHING BLEND OF PEACHES AND MANGOS
STRAWBERRY LEMONADE SMOOTHIE:
AN IRRESISTABLE ICY SMOOTHIE WITH SWEET STRAWBERRIES AND TANGY LEMONADE.
PEACH SMOOTHIE - NEW:
A DELICIOUS AND REFRESHING PEACH SMOOTHIE.
HONEY DEW PEACH SMOOTHIE - NEW:
A COOL AND REFRESHING SMOOTHIE WITH HONEY DEW AND PEACHES.
BERRY BOOST (ENERGY & VITALITY):
A SMOOTH AND REFRESHING BERRY DRINK MADE WITH VITAMIN B, GINSENG, TAURINE AND GUARANA FOR A
REVITALIZING ENERGY BOOST
STRAWBERRIES & CREAM:
A PUREÉ OF STRAWBERRIES AND CREAM
PEACHES & CREAM:
A CREAMY BLEND OF PEACHES AND CREAM
BANANA BERRY:
A CREAMY BLEND OF BANANAS AND MIXED BERRIES
Pastries
Muffins/Danishes and croissants, cookies, squares,
cakes $1.50 - $2.50
Merchandise/Beans
Bean Prices: ½ pound bags $11.00, 1 pound bags $ 19.00
Merchandise prices: Average = $15.00
Ethiopian Limu | Roast: Medium
Rwandan Cup of Hope | Roast: Medium
Sumatra Mandheling | Roast: Medium-Dark
The Second Cup Business Plan Group
44
Second Cup – Markham
Ken and Mary Hatch
El Toucan (El – Too-can) | Roast: Medium Dark
Fazenda Vista Alegre | Roast: Medium Dark
San Agustin| Roast: Medium
Colombian Supremo| Roast: Medium
Colombian Supremo Swiss Water Decaf| Roast: Medium
Continental Dark| Roast: Dark
Caffé Venice | Roast: Dark
Paradiso | Roast: Medium
Paradiso Dark | Roast: Dark
Paradiso Dark Swiss Water Decaf | Roast: Dark
Royal Blend | Roast: Medium
Royal Blend Dark | Roast: Medium Dark
Holiday Blend | Roast: Medium
Butter Pecan | Roast: Flavor
Caramelo | Roast: Flavor
French Vanilla | Roast: Flavor
Hazelnut Crème | Roast: Flavor
Hazelnut Crème Swiss Water Decaffeinated | Roast: Flavor
Irish Crème | Roast: Flavor
Spiced Eggnog | Roast: Flavor
Stainless Tumbler by Second Cup, $15.00
Black Tumbler by Second Cup, $15.00
Second Cup mug, $7.50
Coffee Press by Second Cup, $7.50
Second Cup tea pot and mugs, $30.00
Reference: (Second
Cup, 2008b)
The Second Cup Business Plan Group
45
Second Cup – Markham
Ken and Mary Hatch
Appendix 3 – Anticipated Look
The Second Cup Business Plan Group
46
Second Cup – Markham
Ken and Mary Hatch
The Second Cup Business Plan Group
47
Second Cup – Markham
Ken and Mary Hatch
The Second Cup Business Plan Group
48
Second Cup – Markham
Ken and Mary Hatch
Appendix 4 – Floor Plan
1. When customers walk into the store, the food display is the first thing they notice which will
increase the likelihood they will purchase food items.
2. The Second Cup merchandise will be on display in the front of the store, where it can be
easily seen. Having it close to the tills will increase impulse buys.
3. The condiment stand will be close to the door so customers taking their beverage “to go” can
use it on the way out.
4. The barista machine is close to the drive thru window. This is done so there will not be a long
walk required to take the drinks from the main store to the window.
5. There is plenty of space by the drive thru window for future expansion of the drive thru
facilities if desired
6. There is plenty of space behind the counter for 3 workers to comfortably stand and not get in
each other’s way
7. There are many seating options: chairs, booths, armchairs and couches to serve customers
needs
8. The space in front of the tills is open to allow room for people to line up if the store gets busy
The Second Cup Business Plan Group
49
Second Cup – Markham
Ken and Mary Hatch
The Second Cup Business Plan Group
50
Second Cup – Markham
Ken and Mary Hatch
Appendix 5 – Markham Demographics
Markham Demographics
50,000
45,000
Population
40,000
35,000
30,000
Male
25,000
20,000
Female
15,000
10,000
5,000
0-9
10-19 20-29 30-39 40-49 50-59 60-69 70-79
80+
Age
Reference (Economic/Demographic Profile, 2007)
The Second Cup Business Plan Group
51
Second Cup – Markham
Ken and Mary Hatch
Appendix 6 – Detailed Financial Model
Please see Excel file for details of financial model
The Second Cup Business Plan Group
52
Second Cup – Markham
Ken and Mary Hatch
Appendix 7 – Financial Plan
Schedule 1 – Base Case
In order to provide an appropriate level of detail for the plan, a 5 year projection of the Second
Cup balance sheet, income statement and cash flow has been prepared. The first year of the
franchise, 2009, has been prepared on a monthly basis.
Key Assumptions:
Inflation = 3% per year
Real growth in sales and expenses = 6%
Real growth in wages = 3% (in line with inflation)
Accounts Receivable: Due to the fact that Second Cup accepts only cash, debit and credit card
payments from customer, there will be no Accounts Receivable balance for this franchise. This
will minimize collection issues, bad debt estimates and complexity of accounting for receivables.
Accounts Payable: Upon creating a history with their suppliers, the company will take advantage
of any opportunities to use a supplier’s net 30 policy and will pay for supply orders at the end of
the 30 day period. As such, at any balance sheet date, the company will have one month’s
supply of inputs (or cost of goods sold) as a payable. In addition, the Accounts Payable balance
will include wages and salaries for the following 2 week period. This will include wages owing
the hourly employees, salaries owning to the owners and the associated benefits and
remittance payments due to Canada Revenue Agency.
Schedule 2 - Revenue
Revenue was calculated based on expected sales of the following five product categories:
specialty coffees and hot chocolate; brewed coffee, ciders, and tea; blended drinks; pastries;
whole beans and merchandise available for sale. The grouping of products into these categories
was determined based on the similarity of inputs (cost of sales) and retail prices of each
product.
In order to determine the number of customers expected to be served by the franchise on a
daily basis, a target market analysis was performed. According to the Coffee Association of
The Second Cup Business Plan Group
53
Second Cup – Markham
Ken and Mary Hatch
Canada, approximately 60% of adults in Ontario drink coffee on a daily basis and 16% of coffee
is consumed or purchased in eating places. Based on this information, approximately 9.6% of
adults in Ontario are expected to purchase coffee on a daily basis. Considering the adult
population of Markham was equivalent to approximately 227,000 in 2008, it is expected that
21,792 of Markham’s residents will purchase coffee on a daily basis. There are a large number
of establishments in Markham which sell coffee and as such, the target population is split
among numerous competitors. Based on our competitive analysis, there are 50 coffee houses,
restaurants, fast food establishments, convenience stores and gas stations which sell coffee in
Markham, resulting in, on average, 436 customers per establishment per day. As such, based
on the franchise being open 362 days a year, annual expected customer transactions are
157,774.
Due to the fact it takes time to build awareness of a new establishment as well as customer
loyalty, it is not realistic that the all of the potential market will captured in the first year of
operations. Therefore, forecasted sales quantities in the first year of operations are based on
attaining 45% of customers in the first month with the grand opening, 40% in the subsequent
two months, 45% for the following five months, and 50% for the remaining four months. In 2010,
approximately 75% of potential customers will be captured and then in 2011, 100% of expected
annual transactions will be achieved. Based on historical growth rates in the industry, sales are
forecasted to grow by 6% per year subsequent to 2011.
The selling prices per item utilized in the calculations, are based on the average retail price of
the various products included in each category. These prices were then multiplied by the
expected sales quantity, for each category, in order to arrive at expected sales revenue. In
terms of beverage sales, quantities per category were determined based on what portion of total
sales is predicted to relate to each group. In the forecast, 35% of sales were allocated to
specialty coffee and hot chocolate, 40% to brewed coffee, ciders and tea, and 25% to blended
drinks. Of customers purchasing beverages, it is expected that 20% will also purchase a pastry
and 2% will purchase whole beans or merchandise.
Schedule 3 – Cost of Goods Sold and Inventory
Cost of Goods Sold: The cost for each of the 5 categories of products in broken down into
sections, including base inputs (the coffee beans, tea bag or drink powder), added inputs
(whipped cream, syrup, milk) and finally lids, cups and coffee jackets. The costs used are
The Second Cup Business Plan Group
54
Second Cup – Markham
Ken and Mary Hatch
based on bulk buys from Second Cup head office (since we must serve in the same cups as all
other franchise locations) and have been provided by the franchisor.

Base inputs – the base input for a specialty coffee and for a regular coffee are the same
and cost $0.15 to produce. The blended drinks are prepared from a thicker cream mix
and as such, cost $0.20 in comparison while the pastries are purchased from the local
supplier at $1 each. The additional merchandise has an average cost of $9.75, which
includes the profit that Second Cup head office retains for the products.

Added inputs – only specialty coffees and blended drinks include the syrup, whipped
cream and milk products.

Lids, cups and coffee sleeves – paper cups are used for the specialty and regular
coffee drinks and cost $0.25 per cup. The blended drinks are served in plastic to-go
cups and these are more expensive at $0.30 per cup. While some of the drinks may be
served in glass mugs at the store, this will be a rare case and has not been factored into
the cost of the drinks. In these instances, we will simply benefit from a higher gross
margin.
In order to ensure that the direct labour of the part-time employees was factored into the Gross
Margin calculation, the entire costs of wage-earning employees was included to arrive at the
Gross Margin as presented on the Income Statement. In the end, it resulted in approximately
$0.55 per unit sold of direct labour costs. The salaries for Ken and Mary are still included in
Operating Expenses.
Inventory Policy: Due to the fact that most of the inputs for the preparation of Second Cup
products are perishable, the policy is to maintain an inventory of one week on hand. This
means that for each month, the inventory will include one week’s cost of inputs for drinks which
includes base inputs (coffee, tea and powders), additional inputs (milk, syrups, whipping cream)
and cups, lids and sleeves. In terms of pastries, these will be delivered fresh daily and will be
ordered in approximate amount for expected business (in other words, a just in time inventory
system) in which case there will be no inventory of pastries on the balance sheet.
Schedule 4 – Operating Expenses
Marketing Expenses: Per the information provided by Second Cup, there is a 9% royalty fee due
to the franchisor each year. This amount will be determined based on recorded sales in the
year and comprises of 6% to add to Second Cup revenues and 3% to contribute to the national
The Second Cup Business Plan Group
55
Second Cup – Markham
Ken and Mary Hatch
marketing campaign. For the additional local marketing, there is also approximately $1,000 per
month for sampling, giveaways, print ads and local community sponsorships.
Operating Expenses: The building will be owned by Second Cup (the franchisor) and they have
agreed to charge a very low rental rate for the space. Amounts for insurance, repairs and
maintenance and telephones have been estimated using comparable sized coffee shops in the
Markham area and based on Second Cup statistics. Transaction costs are based on 2% of
credit card sales in the period. All of the costs have factored in inflation at 3%.
Schedule 5 – Human Resource Costs
As indicated in the Management Team summary, Ken and Mary will each earn a yearly salary of
$30,000 in Years 1 and 2, $32,500 in Years 3 and 4 and $35,000 in Year 5 for their contribution
to their Second Cup franchise location.
A regular part time employee will earn $9.50 per hour, which is competitive in the Markham area
and will help to attract and retain quality employees. A key-holding employee (who will have
added responsibilities such as opening and closing the store) will earn a premium of $1.50 per
hour, resulting in total wage of $11 per hour.
All employees will earn 2.42% Employment Insurance, 4.95% Canada Pension Plan and 4.5%
holiday pay as well as the 2.26% required Workers Compensation amounts. The owners will
not be eligible for the CPP or holiday pay.
Part time employees will also be eligible for a weekly coffee allowance of $15. This allowance
will entitle the employees to approximately 3 free products (retail value = $5 each) per week of
employment with the store. As an added incentive, the allowance will grow by $5 per week (or
30%) for each additional year of service.
In the future, once the location is making strong profits, there will also be a scholarship fund.
Part time employees will be eligible for the scholarship based on specifically outlined criteria
(such as a certain GPA, weekly hours of employment, community service) and it will range from
$500 to a potential maximum of $1,000.
The Second Cup Business Plan Group
56
Second Cup – Markham
Ken and Mary Hatch
The Human Resource costs are included in the Marketing & Operating Expenses (Schedule 4)
to be included in the income statement.
Schedule 6 – Capital Budget
Capital Budget: The initial capital outlay to furnish and decorate the store will be substantial, but
it is expected that there will be no added capital outlays in the first 5 years. The furniture and
equipment are expected to last at least 5 years except for any which need to be replaced due to
breakage or unforeseen circumstances.
Capitalization Policy: It will be the company policy to depreciate any asset purchases for
amounts greater than $500. For purchases of capital assets that are less than this amount, the
cost will be expensed in the year and included on the income statement.
Schedule 7 – Financing Budget
For the current base case projection, the plan includes 67% or $200,000 financing from the
bank, to be classified as long term debt. The projections show that the company will be able to
fund operations with internal financing (i.e. earnings in the first 5 years) and since there are no
plans for expansion in the near future, no additional sources of financing were considered.
The bank loan will include a personal guarantee of the debt amount, which means that Ken and
Mary Hatch will have to put their personal assets at risk to secure the bank. This is especially
important in this case since the resale value of the equipment will not cover the value of the
loan. This personal guarantee will be in place for at least the first 5 years of operations and until
the company has paid off the debt.
The beginning Share Capital from Ken and Mary will be for Class A common shares and a
nominal value at $1,000. This is to provide a class of shares for the Hatch’s to accumulate
earnings in the company and, when possible, pay out dividends to themselves. Dividends will be
paid out on the common shares subsequent to the preferred shares being redeemed in Year 5.
In addition, the base case projection includes 33% or $100,000 financing from family and friends
(angel investors) for preferred shares. The shares will be subject to the dividend policy
discussed below. The preferred shareholder agreement will state that the shares are callable in
the 5th year of operations for a lump payment of $195,000. From our analysis, this lump payout
The Second Cup Business Plan Group
57
Second Cup – Markham
Ken and Mary Hatch
as well as dividends paid will result in an external return on equity equivalent to 20%. In a worst
case scenario, if no dividends are paid in year 1 through 5 the external rate of return will be
equivalent to 14%.
Schedule 8 – Debt Amortization Schedule
Due to the fact that the franchise will be financed 100% with long term debt, each year will
include both principal and interest payments on the initial $200,000. In accordance with the
competitive rates at local Canadian banks, an interest rate (or cost of debt) of 10% was used for
the calculations.
The bank will be concerned with the speed at which the loan can be repaid and the assurance
that the fixed loan payments will be paid regardless of how well the business performs.
Schedule 9 – Capital Cost Allowance
The Capital Cost Allowance (CCA) rates included in the calculation are in line with the
government’s approved rates for tax purposes.
Schedule 10 – Income Taxes
The franchise will be incorporated and as such, it will be assessed corporate taxes on both the
federal and provincial level. As a Canadian controlled private corporation it will qualify for the
small business deduction and therefore eligible for a federal rate reduction of 17% and
provincial rate reduction of 14%.
The franchise is projected to incur a net loss in the first year of operations, resulting in a tax loss
carry-forward which will be utilized as a reduction in taxes payable in the 2nd and 3rd year of
operations.
Schedule 11 – Ratio Analysis
Current Ratio: Due to the losses and tight cash situation, the company will not reach a current
ratio of greater than 1 until 2011. However, there is healthy growth after that and the company
is in a healthy position for liquidity and cash flow.
The Second Cup Business Plan Group
58
Second Cup – Markham
Ken and Mary Hatch
Debt Ratio: Since Ken and Mary do not plan to obtain additional financing in the first 5 years,
the debt to equity ratio decreases steadily and in the final year (2013), the only debt results from
the one month’s payables on the statements.
Net Profit Margin: By 2011, the company will be reaching a steady net profit margin of between
15 to 17%.
Schedule 12 – Investment Analysis
Dividend Policy: For the private investors, there is a plan to provide dividend payments as a
method to pay returns. In years when the company will have positive ending retained earnings
before dividends (Opening RE + Net Income), the company will provide 15% of those positive
retained earnings to the shareholders. These payments will begin in 2012 at approximately
$18,000 and almost $35,000 in 2013.
Required Rate of Return: Since the company is a franchise, it does not carry as much risk as a
brand new company with no history.
As such, we have assumed that a 20% return is
reasonable and acceptable for investments from family and friends.
NPV and IRR: The NPV (net present value) of the business plan is $180,447, which indicates
that the plan is viable. Not only does the 5 year projection forecast positive cash flows for the
entire term of the plan, it also provides investors with much greater than their 20% required rate
of return. The internal rate of return (IRR) of the plan with 66% debt and 33% equity is 64%
overall. The fact that the equity investors are providing $100,000 (or 1/3) of the financing to run
the business, the income levels reached by Year 5 provide a strong return for them. The
company will be earning normalized net income of $129,000 after tax in Year 5 and there is
additional expected growth in the future.
Schedule 13 – Break Even Analysis
The product mix delivers a weighted average gross margin of $1.75 overall. Based on these
values, and the base case statements, the company will break even during 2010. To attain this
net income breakeven point, it will require 10,000 units per month, which equates to 2,300 units
per week and only 382 units per day. This is more than attainable with the level of staff and the
expected level of sales.
The Second Cup Business Plan Group
59
Second Cup – Markham
Ken and Mary Hatch
Accounting Information System
The Coffee College that is provided by the franchisor provides training for Ken and Mary
regarding the use of an accounting system.
The franchisor also provides the appropriate
system to be included on the site’s computer and as such, the cost is included in the initial
$20,000 fee.
As indicated in the Human Resource Plan, Ken will be responsible for the
bookkeeping function at this location.
Each week, Ken will compile a report to review the location’s performance and provide him with
a good idea of how business is going. He will prepare and send a report each month to Head
Office, as well as financial statements for the bank and for investors at year end.
The Second Cup Business Plan Group
60
Download

Note: The MPAcc 809 Manual (p