The Pudong
coffee shop
-----analysis report
Li Hao
Wang Hui
Wang Xuejuan
Qin Xinren
Wei Yingying
1
“Better to be deprived of food for three days, than tea for one.”
—— Ancient Chinese Proverb
“Make every one’s coffee dream come true.”
—— New mission of Pudong coffee shop
2
Outline
Background
Case analysis
Strategy and actions
Budget
Risk response and valuation
3
Background
Industry life cycle
?
Global:
China:
A big potential market of
Coffee
is growing at a
coffee inconsumption
China.
slightly
double-digit
over two
rate percent
per yearper year
A
Each
typical
Chinese
American
person
person
drinksdrinks
about 3
between
cups of coffee
500 toa 700
yearcups a year
Embryonic Growing
Mature
profit
cash flow
2008
2009
Decline
4
Operating analysis
Pudong coffee shop：
Insufficient training：
Such as unskilled
part-time staffs
No facilities like Wi-Fi
what customers often
need
Large amount of
customers in lunch-time
may lead to a crowd
space
Short operating time
limits the number of
customers in evening
5
Structure of product
Comparison
Steps to Improve Business in Local Region
70%
60%
50%
40%
40%
35%
30%
Rufurishment of outlets
Staff training
Additional opening hours
Loyalty programmes
WiFi facilities
Wider product range
Increased ads
0%
20%
40%
60%
Gap：
7.85%
80%
Types of served in coffee shops
100%
Sandwiches and Wraps
Pudong coffee shop：
•Limited product range
•Inflexible time supply
90%
Cakes and Desserts
70%
Biscuits,Muffins etc.
50%
Toasts e.g. Bread
30%
Salads
0%
20%
40%
60%
80%
100%
6
Customer analysis
10%
As for Pudong coffee shop:
With office and schools nearby,
students and white-collars can be
targeted customers. People in park
can also be welcome.
20%
25%
45%
students
Office
Whitecollars
Customers structure by age
under 20
21-30
31-50
over 50
International
school
21-30 ranked 1st who are easier
to accept coffee culture.
31-50 focus on the quality,
service and surroundings, which
in all take up 70% of customers.
Pudong
Coffee
Private
school
students
Park
7
Employee analysis
Pudong coffee shop:
Dissatisfied
customers
rarely
complain
A rude or
incompetent
barista
Employees’ attitude is not
good towards customers.
To some extent, they are
not satisfied with the work.
wages as % of revenue
Gap: 6%
20%
14%
Pudong
Average
Low wages and stimulation
may make employees feel
upset and it affects service
quality.
14%=Wages/Revenue
8
Cost structure analysis
Average
Pudong coffee
100%
5%
5%
5%
40%
20% 20%
45.16%
13.98%19.88%
5.16% 8.15% 3.23%
As
As
This
As
for
forfor
graph
AD
wages,
cost
depreciation,
expenditure,
of
shows
sales,
the lower
the
Pudong
Pudong
cost
Pudong
wages
discrepancy
coffee
coffee
coffee
saveshop
money,
shop
shop
between
ishas
is
much
and
lower
a higher
itthe
higher
also
than
average
number,
shows
the
thanaverage,
and
the
a which
room
average,
Pudong
and
to
makes
go
itcoffee
which
refers
upain
that
shop.
more
It AD
is referred
is needed,
means
that
order
material
which
bigtodifference
improve
also
huge
cost
comply
tax
control
employees’
exists
shield.
with
did
which
the
notloyalty.
measures
can
worklead
well.
totaken
a cost-saving.
to improve.
9
CVP analysis
Assumption：cost of sales as variable,and all the operating expenses are supposed
to be fixed.
CVP analysis
Total revenue
Fixed cost
Variable cost
Sales per customer
Variable cost per customer
Fixed cost per customer
Operating profit per customer
2009
930,000
500,000
420,000
50
22.59
26.88
0.54
2009 financial data analysis:
Revenue =930,000
The average spend per customer =50
Total number of
customers=930,000/50=18,600
The fixed cost per customer will go down
as the number of customers increasing,
which is the key to improve the revenue.
The Pudong coffee shop has to attract as many customers
as possible.
10
SWOT analysis
threats
weakness
opportunities
strengths
Students and office staffs
Good location
nearby
Low
Fierce
market
competition
share
from
sales
an
Customers’
loyaltyand
International
activities
and
Negligible
Italian
restaurant
“take-away”
and an
Generous
rent
terms
expats coffee
Insufficient
Ice-cream
food nearby
supply
11
Structure of Strategy
Target customers: students, whitecollars, expats who emphasis quality
Strategy: market focus strategy
Vision: to be popular with
every one in region
Mission: make every one’s
coffee dream come true
Mission
Vision
Strategy
Target customers
12
Actions---target customers
Purchasing
power
Above 50
Below 20
31-50
21-30
Customers’
bargain
21-30:high
Above
31-50：high
50：high
consumption
but
Below
20:
low
21-30
and
31-50
purchasing
consumption
power
and
low
purchasing
consumption
and
are
set to bepower,
but
purchasing
low
power,
sensitive
to
purchasing
power,
target customers
consumption,
insensitive
to price.
price.
sensitive
to
of Pudong
insensitive
to price.
price.
coffeestrategy,
shop
Keep
Promote
strategy
Promote
strategy
Develop
maintain
this
high
market
byusing
adjusting
price
discount
by
quality
quality
and
and
keeping
loyalty
activities
culture
13
Translating strategy into action
--- on the basis of BSC
Customer
Text
Employees
Internal
response
&
Facilities
activities
in
here
Financial
impact
14
Actions --- Facilities & Employees
Action:
Provide Wi-Fi
Fashion magazines&
newspapers
Peaceful environment with
soft music and piano
performance in the evening
Improve employees'
satisfaction
Financial impact:
 Cost 1500 Yuan and without depreciation
 No obvious impact
 Piano cost: 5000 Yuan, net salvage value: 500
Yuan, 5 years depreciation
 Employ a part-time pianist to play piano from
19:30-21:30 with a payment of 200 Yuan
 Sharing the profit with employees by 3% of
revenue as a bonus
 Measures such as employees birthday
present are also needed.
15
Actions --- Internal activities
Develop “takeaway” service
Cleanliness and
overall hygiene
Action:
Update the menu
according to
customers’ need
Financial
impact:
No obvious
impact
Lead to an
increment
in sales
Extend the
opening time
to 10 P.M.
Increases
the AD and
promotion
expenses,
with
revenue
improved
More
operating
cost needed
more sales
generated
16
Actions --- Customer response
Action:
VIP card
and Student
card at 20%
discount.
Sponsor
students’
activity
Financial impact:
5% discount
above 10
people.
Questionnaire
to
communicate
with customers
Measures above can improve
the satisfaction of customers
and as a result increase the
sales.
Grow rate of revenue in
Chinese catering industry
is about 17% in 2010,
especially for Shanghai.
We suppose the grow rate
of Pudong coffee shop
reaches 30% on the basis
that our new strategy is
effective.
17
KPI based on strategy to
measure performance
Internal
activities
Employees
& facilities
•Utilizing rate of Wi-Fi
•Frequency of
cleaning
• Updated magazines
and newspapers cost
•Turnover of
employees
•Sales of new and
existing customers
•Time for queuing
•Times of complain
from customers
Customers
•Fake percentage of
materials
•Sales of “take-away”
•Food sales in total
revenue
•Gross profit margin
•Growth of sales
•Net profit margin
•Growth of net profit
•Sales per Square Feet
Financial
impact 18
Budget after actions---Income Statement
Income Statement
2009
2010(before)
2010 (after)
￥1,005,795 ￥1,307,534
Total revenue
￥930,000
Cost of sales
420,000
454,230
523,013
Gross profit
510,000
551,565
784,520
82,000
82,000
82,900
Wages and remuneration
130,000
140,595
252,821
Rental
200,000
200,000
200,000
Utilities
48,000
51,912
67,486
Garbage collection
10,000
10,815
14,060
Advertising and promotions
30,000
32,445
65,377
-
-
500,000
517,767
682,643
Operating profit
10,000
33,798
101,877
Interest payable on loans
23,710
18,369
18,369
￥-13,710
￥15,429
￥83,508
Operating expense
Depreciation of tangible assets
others
Total operating expense
Profit(loss) for the year
-
Thanks for these
measures we have
taken, the revenue
will increase by
30%
Depreciation
Wages go up since
increases
900 a
we implement
Yuan
because
3% bonus
and of
hire
the
purchase
of a
a part-time
pianist
second-hand piano
More AD and
promotion are
used for
development of
student market
The profit has risen from ￥15,429 to￥ 83,508, and
it is obvious that the measures are effective.
19
Budget after actions---Balance Sheet
Balance sheet
2009
2010(before)
2010(after)
￥400,000
￥400,000
￥400,000
246,000
164,000
168,100
44,000
47,586
61,851
Cash at bank
198,000
227,083
343,958
Total assets
888,000
838,669
973,909
Owner’s equity
418,590
434,019
502,098
Bank loan payable
262,410
180,779
180,779
Trade payables
207,000
223,871
291,032
￥888,000
￥838,669
￥973,909
Goodwill
Furniture and fittings (net)
Inventories
Total liabilities and owner’s equity
According
Piano
purchased
to the assumptions
with 5,000 Yuan,
givenand
in the
netcase:
salvage value of 500 Yuan, 5 years
depreciation.
Deprecation
Inventory
turnover
= (asset
of 2010
price is
– net
the salvage
same with
value)
2009/ years of depreciation
Trade payables
=(5,000-500)/5=900
turnover of 2010 is the same with 2009
Furniture and fittings(after) = 164,000 + 5,000 – 900 = 168,100
We calculate the financial statement following these assumptions.
20
Budget after actions---Cash Flow Statement
Cash flow statement
2009
2010(before)
2010(after)
Operating cash flow：
Operating profit (loss) for year
Add: depreciation
￥10,000
￥33,798
￥101,877
82,000
82,000
82,900
92,000
115,798
184,777
6,000
3,586
17,851
16,000
16,871
84,032
102,000
129,083
250,958
Nil
Nil
-5,000
-100,000
-100,000
-100,000
2,000
29,083
145,958
196,000
198,000
198,000
￥198,000
￥227,083
￥343,958
Changes in working capital:
Less: Increase in inventories
Add: Increase in trade payables
Investing activities
Capital expenditure
Cash flow goes down
since we suggest
purchasing a secondhand piano
Financing activities:
Repayment of loan including
interest
Overall cash flow
Add: Opening bank balance
Equals: Closing bank balance
After actions, the cash
flow of Pudong coffee
shop has greatly
improved
Since depreciation does not need to pay, that is why the profit shows a
negative with a cash flow positive
21
Risk analysis--Operating and Financial Risk
Break-even analysis
2009
Fixed cost
500,000
517,767
682,643
Variable cost
420,000
454,230
523,013
Total revenue
930,000
1,005,795
1,307,534
Break-even point
911,765
944,163
1,137,738
EBIT
10,000
33,798
101,877
DOL
51
16.32
7.70
DFL
-0.73
2.19
1.22
DTL
-37
35.75
9.40
2010(before)
2010(after)
DOL: degree of
operating leverage
DFL: degree of
financial leverage
DTL: degree of total
leverage
DTL = DOL×DFL
represents
the
We assume the whole of period expenditure is fixed cost, cost ofDTL
sales
as
Risk analysis
total risk of a
variable cost.
company,
100
Break-even
point(in revenue)= fixed cost / (1- rate of cost of good
sold in the figure
decreases, which
revenue)
35,75
9.4
DOL reflects a low risk in
50
DFL all.
0
DTL
2009
2010(B)
2010(A)
-50
22
Handle risk---if the strategy fails…
If the strategy we suggest fails, then what can we do…
Strategy
Analysis
Action
Risk
response
We have to keep an eye on the
actions and situation. If the
strategy we suggest could fail, we
should adjust our strategy at once.
Operating risk
If the increase rate of sales could not
reach 30% then…
We should analysis the discrepancy
between the sales of students and whitecollars, and the variation of sales after
new strategy, and then adjust the strategy
of promotion and the structure of
products we could offer.
Financial risk
If the cash flow breaks then…
Li Wang could discuss with the suppliers
about the delay of payment and get
more loans even turn to his father for
23
help about the re-finance.
Overall valuation---FCFF method
Assumptions:
According
to inflation of 4%,and 7% interest rate of long-term loan, we assume the WACC as 15%
1. The
with annual
risks taken
revenue
into consideration.
grows at 10% in the first 3 year(2011-2013), from 2014, the rate is keeping
5%.
Valuation=discount
2.
Renew the Furniture
of every
andyear’s
fittings
cash
at 2012
flow for
at 15%
40,000 Yuan.
2+761,550/(1+15%)3+780,242/(15%3. There=is145,958
no bank+268,965/(1+15%)+399,654/(1+15%)
loan after 2012.
4
Income
5%)/(1+15%)
statement
and balance sheet prepared for the forecast of the valuation is omitted.
=1,695,790
Forecast cash Flow statement
Operating cash flow
Operating profit (loss) for year
Add: depreciation
Changes in working capital:
Less: Increase in inventories
Add: Increase in trade payables
Investing activities
Financing activities:
Repayment of loan including interest
Overall cash flow (deficit) for year
2011
2012
2013
2014
217,311
82,900
300,211
367,374
82,900
450,274
634,456
10,900
645,356
718,991
10,900
729,891
18,555
87,309
368,965
24,122
113,502
539,654
31,359
147,553
761,550
13,589
63,940
780,242
0
-40,000
0
0
-100,000
268,965
-100,000
399,654
0
761,550
0
780,242
24
The end
thank you all
25