Second Cup
Ken and Mary Hatch
Prepared for Ken and Mary Hatch
Prepared by:
Tammy Hall
Kelli Dawson
Rehan Alwani
Jill Johnson
Voilen Chu
Carmen Yau
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Ken and Mary Hatch
Table of Contents
Executive Summary ………………………………………………………………………………………………… 2
1.0 Introduction…………………………………………………………………………………………………….… 5
2.0 Industry Overview………………………………………………………………………………………………. 6
3.0 Operations Plan ……………………………..…………………………………………………………………. 7
4.0 Human Resources Plan…………………………………………………………………………………………15
5.0 Marketing Plan ………………………………………………..…………………………………………………..20
6.0 Financial Plan ……………………………………………………………………………………………………….30
7.0 Summary of the Business Plan………………………………………………………………………………35
REFERENCES………………………………………………………….………………………………………………….36
APPENDIX A – Example Work Schedule …………… …………………………………………………... 37
APPENDIX B – Second Cup Saskatoon Floor Plan …………………………………………………... 39
APPENDIX C – Second Cup Sample Menu………….. …………………………………………………... 41
APPENDIX D – Map of Competitors …………..……….. …………………………………………………... 43
APPENDIX E – Financial Projections …………..……….. …………………………………………………... 45
APPENDIX F – Sensitivity Analysis …………..……….. …………………………………………………... 46
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Executive Summary
Saskatoon is currently experiencing an exciting time due to a growing economy. One of
the results of this growing economy is the expansion of the downtown core to include
new high rises that will be home to many new condominium owners, as well as
corporate offices. The national office of The Second Cup Ltd. has recognized an exciting
business opportunity for a potential franchise location in Saskatoon, as currently the
only Second Cup café in the province is located in Regina.
The location that has been selected by the Second Cup head office is a space in the
ground floor of the King George building currently under construction on the corner of
2nd avenue and 23rd street that is expected to be complete in December 2008. Second
Cup head office has expended significant marketing resources to select this location,
and it strongly believes that having a central location, and one that is the first to be
inside a major downtown residential building in Saskatoon, any franchise owner will
experience success.
The purpose of this business plan is to outline for Ken and Mary Hatch the processes
that will be involved with opening and running a Second Cup café in downtown
Saskatoon. The information provided in the plan will help them to cope with changes in
the everyday operations, as well as changes in the coffee retail market in downtown
Saskatoon. It will also help them to avoid failures by anticipating problems before they
happen, which will in turn, assist them with decision making as well.
The first component of the business plan is the operations plan. It is understood that
Mary has several years work experience in a local coffee shop, and this experience will
be a great asset to the management team. However, the operations plan will teach both
Ken and Mary about what is required of them to run the business on a daily, weekly, biweekly, monthly, semi-annual, and annual basis. By breaking down the required
procedures into a timeline, this will help to ensure that Ken and Mary will be able to run
the business smoothly, and consistently.
The second component of the business plan is the human resources plan. The human
resources plan will outline for Ken and Mary the hours that can be expected that will be
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required of them to ensure the business is running smoothly. They should both be
cautioned that during the initial and first few subsequent years of operations, they can
expect to be spending a lot of time at the café. This will be required of them to keep
costs low by avoiding paying a manager a salary to take over some of these
responsibilities. The human resources plan will also explain to Ken and Mary the staffing
requirements, and as well how to hire and train new employees. It will also include a
discussion of employee turnover, as this is a change in operations that could most
negatively affect operations if Ken and Mary are not prepared to fill the staffing
positions in a timely manner.
The third component of the business plan is the marketing plan. Second Cup is known
nationally for providing premium and specialty coffee and other beverages at premium
prices. Therefore, the product suits the location appropriately as the customers that are
targeted are ones that have the disposable income to spend on premium priced coffee,
and that value premium quality and specialty coffee, which is assumed since these
individuals can afford to live in a new condominium unit downtown, and are
professionals employed downtown.
The final component of the business plan is the financial plan. Ken and Mary have
stated that they would like to eventually earn $105,000 from this business venture. The
financial plan will explain in detail the projected revenues and costs, as well as a
sensitivity analysis which will explain to Ken and Mary if their projected earnings are
realistic, and under what market conditions. This quantitative analysis, along with the
qualitative considerations given in the aforementioned components, will allow Ken and
Mary to make an informed decision about whether or not they would like to proceed
with this business venture.
With the help of this business plan, Ken and Mary will be able to manage and operate a
successful Second Cup franchise in Saskatoon.
1.0 Introduction
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1.1 Organization
The organization under discussion is a franchise that Ken and Mary Hatch have sought
interest in investing in. The Second Cup franchise is a well-known coffee chain that
operates across Canada, but has yet to open up a store in Saskatoon, Saskatchewan.
Second Cup has a reputation of providing creative and quality coffee and other specialty
beverages at premium prices. Ken and Mary are currently employed as a local high
school caretaker, and a coffee shop employee, respectively, and therefore, the purpose
of this business plan is to examine this investment opportunity.
1.2 Mission
We have identified the mission statement concerning the opening of the Second Cup
franchise on a two-fold basis: personal and business.
Personal goals:
-
To earn adequate profits to sustain business operations while maintaining the
desired lifestyle
Business goals:
-
Through opening a franchise of Second Cup, to be the desired location in the
downtown business community that provides a convenient and friendly place to
purchase a quality cup of coffee or desired beverage
1.3 Goals and Objectives
Short-term goals:
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-
Understanding that the first year of operations will require initial capital
investments, the goal is to break-even, or earn a modest profit ($5,000) by the
end of the first year
-
To establish a good customer base, which will be measured by the increase in
sales each month for the first year of operations
-
Hire and train a trusted customer-friendly employee to be promoted to the
supervisor role within twelve months of operations
Long-term goals:
-
By the end of year three, to earn take-home earnings of $105,000 through a
combination of salary earned, and dividends
-
To retain trustworthy and dependable employees that will allow Ken and Mary
to scroll back working hours to 45 – 50 hours each, per week, and take a 2 week
vacation simultaneously
-
To maintain an annual growth rate of 5% in quantity of sales after year 3 for our
main product: barista-prepared coffee drinks
2.0 Industry Overview
The retail coffee industry in Saskatoon experienced rapid growth at the beginning of the
decade and is now moving into the mature stage of its life cycle. Many factors
contribute to the large demand for good coffee: the business population downtown, the
cold climate in Saskatoon, and current trends in the Northwest reflect the popularity of
quality coffee and specialty drinks. Factors such as addiction and historical sales data
ensure that the high demand for coffee will remain constant over the next five years. In
Canada, the premium coffee retail market is significantly influenced by three major
players: Starbucks, Second Cup, and Blenz.
Recent challenges in the industry include volatile coffee prices, and an increased
political attention surrounding the production of coffee beans in developing countries,
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and the social responsibility associated with this that major coffee retailers are
pressured to address.
3.0 Operations Plan
3.1 Business Hours
 Weekdays 6am – 9pm
 Saturday 6am-5pm
 Sunday 6am-3pm
An explanation of the above business hours will be given in the marketing plan.
3.2 Business Activities
Daily Activities
Opening Shift:
Time: Half hour before opening.
Performed by: Ken, Mary or a Supervisor (the only individuals who will have keys)
Tasks: Grinding coffee for the expected sales for the day, starting up coffee and
espresso machines, receiving delivered food and merchandise, putting the food into the
display case, setting out milk and cream on tables.
Day Shift:
Time: Throughout the business day.
Performed by: Supervisor/Owner and one barista. During busy hours such as in the
morning (6am-10am) and lunch (11am – 1pm), the other owner can come into the shop
to help out.
Tasks: Taking orders and receiving cash payments from customers, making customer
orders, wiping counters and tables, checking that the washroom is tidy, restocking
inventory when low.
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Closing Shift:
Time: Closing time for the day, will take approximately half an hour to one hour.
Performed by: One of Ken, Mary, or Supervisor
Tasks: Restocking inventory for the next morning, cleaning machines, wiping tables,
cleaning washroom, taking out garbage, restocking milk and cream to refrigerator,
reconciling cash register, preparing bank deposit.
Weekly Activities
An inventory count will be performed by either Ken, Mary, or the supervisor to
determine how much inventory needs to be ordered, as well as reconciling to sales.
Inventory from Second Cup such as coffee beans, cups, and napkins, and Second Cup
merchandise should be ordered on a bi-weekly basis. Food should be ordered once a
week, however, the delivery of food should be done daily to ensure freshness. Other
inventory, such as milk, cream, and bottled drinks, should be purchased by either Ken or
Mary on a weekly basis.
Bi - Monthly Activity
Ensuring staff schedules are relevant and up-to-date is important so that Ken or Mary
can calculate the payroll bi-monthly and pay employees bi-monthly. At any given time,
there will be a minimum of at least one barista and one owner scheduled for each
business day. Each owner will work a minimum of 8 hours a day and two different
barista’s will work 8 hours shifts. On Staff there will be a minimum of 6 barista’s, each
who will work approximately 15 – 20 hours a week. Employee turnover is expected to
be two times a year (Zuber, 2001). As new employees need to be trained, both owners
will need to be present on those days, as one will be responsible for the training. In year
two of operations, two supervisors will be available to work; therefore the owners will
not need to be present when the supervisor is on shift. These supervisors will work
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during the weekends, with one other barista. See Appendix A for an example work
schedule.
Monthly Activities
Ken or Mary will be expected to pay the rental bills, advertisement royalty, utility bills,
and inventory suppliers. They will also need to prepare month-end statements with the
help of a local accountant. Ken or Mary will then compare month-end statements to
budget, identify any budget variances, and analyze significant variances in budget versus
actual results. They will also need to identify foreseeable risk factors and come up with
factors to mitigate these risks.
Semi-Annual Activities
Assuming a semi-annual turnover in employees, advertisements will need to be posted
to hire new employees. These new employee will then need to go through the hiring
process, and trained.
Annual Activity
Year-end financial statements will be prepared with the help of a local accountant.
These statements will be compared to budgeted figures, to identify and variances from
budget, and to analyze significant variances in budget versus actual results. A forecasted
budget for the next year and forecasted monthly budgets for the next year are also to
be prepared. Income taxes will be prepared by a local accountant, however, Ken and
Mary will need to prepare documents for the local accountant. They will also need to
identify foreseeable risk factors and come up with factors to mitigate these risks.
3.3 Suppliers
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Supplier: Second Cup Parent Company
Supplies: Coffee and Espresso Beans, Cups, Lids, Sleeves, Napkins, Second Cup
Merchandise, Syrups
There is a very low risk in purchasing from the Second Cup parent company as quality
and delivery of products is ensured. A contract will be in place to ensure that we will be
able to order and receive inventory from the parent company every two weeks. The
biggest risk will be the fluctuating price of coffee beans. A fixed price contract will need
to be set with Second Cup to ensure that price per unit will be set for the year and will
not vary. All other purchased inventory prices will be set within the contract as well.
Orders will be placed one week before delivery to ensure that we can estimate the
quantity of inventory that we will require for the next shipment.
Supplier: Christie’s Bakery
Supplies: Food and other bakery items
A contract will be made with Christie’s Bakery for delivery of sandwiches and baked
items every day. We chose Christie’s Bakery because it is a locally well-known
establishment known for its quality of fresh food and baked items. They are able to
deliver daily to Second Cup.
The major risk in purchasing our baked goods and food items from a third party is that
we cannot guarantee the quality of the purchased items. As well, we cannot control any
increase in price. To mitigate the following risk, we will sign a contract with Christie’s
Bakery to ensure a set price per unit; in return, we will order a minimum quantity from
them per day. As quality control is hard to mitigate, research was performed on
Christie’s Bakery to ensure that they are a reputable company and that they consistently
produce high quality products.
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Supplier: Costco
Supplies: Cream, Milk, Stir-sticks, Sugar, Honey, Syrup, Bottled Drinks
Milk and cream will be purchased by Ken or Mary at Costco every week to ensure
freshness. Other inventory will be purchased as items are running low.
3.4 Service Providers:
Machine Maintenance: Saskatoon Maintenance Service Experts
- will perform all maintenance required for coffee and espresso machines
Legal: Saskatoon Law Group
- will help with the franchising of the business and any other legal advice required
throughout the year
Accounting/Tax: Saskatoon Local Accountant
- to perform the majority of the bookkeeping and accounting for Ken and Mary. Ken
and Mary will only perform simple reconciliations every night during “cash-out” and
record the sales and expenses for the day so that Saskatoon Local Accountant can
help them prepare the other bookkeeping and accounting that is required.
- also to perform yearly income tax return for the business
3.5 Working Capital
Cash:
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- $10,000 will be required to ensure that there is sufficient cash on hand at any point
in time to pay for bills and any extraordinary items that may occur throughout the
year.
- as business is assumed to be consistent throughout the year, cash requirement will
consistent throughout the year
Accounts Receivable:
- As this is a cash business where customers pay at the point of purchase, there will
not be any accounts receivable.
Inventory:
- Inventory turnover: average 30 days. Most inventory items, except for perishable
items such as food and milk, will be consumed every 30 days.
Accounts Payable:
- Accounts payable turnover: average 30 days. All of Second Cup’s utility bills, supplier
bills, rental and advertising royalty bills will be paid every 30 days.
Per Schedule 15 in Appendix E, the total net working capital required will be -$8,965.
3.6 Capital Expenses
Approximately $200,000 will be spent on capital expenditure. Please refer to Appendix E
for a detailed listing of all of the capital outlays required. Details of capital requirements
are as follows:
-
two espresso machines and three coffee brewing machines to ensure that we
can meet the demands of our customers
-
two chiller machines will be used to make cold mixed-coffee drinks
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-
a large fridge will be placed in the storage room to keep all inventories that
needs to be kept refrigerated
-
a smaller fridge will be kept in the front of the store to keep all refrigerated
items required for the day.
-
a microwave for customers who want to heat up their purchased food items
-
a cash register to take payments and orders from customers
-
a security camera will be in place to mitigate thefts from customers and
employees
-
food items will be kept in glass display shelves so that customers can see them
immediately; display shelves are situated along the wall of the store to sell
Second Cup Merchandise
-
a long counter table will be placed by the window with high counter chairs for
customers to sit
-
three small tables with two chairs per table inside the coffee shop for customers
to sit
-
for the office: a computer, desk, chair, shelf, and a heavy duty locked safe to
keep any confidential documents and cash floats for the day.
See Appendix A for the floor plan of the store.
3.7 Capital Budgeting
As detailed in Schedule 14 of Appendix E the total capital required for Second Cup will
be $230,300.
3.8 Cost of Goods Sold
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Barista-prepared coffee and drinks: An average cup of barista-prepared coffee and drink
will contain $0.50 of coffee beans, $0.30 milk and creamer, $0.25 of other such as syrup,
sugary, honey, etc, and $0.10 cups lids and sleeves giving a gross margin percentage of
approximately 183%.
Pre-packaged coffee and drinks: These will be bought from Second Cup head office and
will cost an average of $2.10 per drink giving a gross margin percentage of
approximately 7%.
Food: Food will be bought directly from Christie’s Bakery and will cost an average of
$1.20 per item, giving a gross margin percentage of approximately 25%.
Merchandise: Merchandise will be bought directly from Second Cup head office and will
cost approximately $6.25 per unit, giving a gross margin percentage of approximately
12%.
3.9 Operating Expenses
The operating expense is based on the average price for Saskatoon. The expenses are
less than the sample income statement that corporate head office provided to us, as
cost in Saskatoon are lower than cost in Toronto, which is the location in which Head
Office had provided to us.
Rent:
This franchise will be renting a space owned and renovated by Second Cup Parent
Company. Second Cup Parent Company will be leasing the 1,000sq foot area at a cost of
$20.00 per square feet per year, for a total yearly rent expense of $20,000. The rent
expense is based on the average rent per square foot of renting a premise in downtown
Saskatoon (CanWest MediaWorks Publications, Inc., 2008).
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Insurance:
- Coverage over leased property and assets within the leased property for $4,000 per
year
Repairs and Maintenance:
- This will include cost of $2,000 per year to maintain the espresso and coffee machines,
$2,000 per year to re-paint the coffee shop, and $1,000 of miscellaneous expenses, for a
total of $5,000
Telephone and Utilities:
- Telephone expense will average around $1,200 per year and utilities expense will
average around $9,600 per year for a total of $10,800
Accounting Expenses:
- These will average around $5,000 per year for bookkeeping service once a month,
month end statements, year-end statements, and income tax returns
Miscellaneous Expense:
- These are expected to be around $5,000 per year
4.0 Human Resource Plan
4.1 Job Descriptions
Barista
Responsibilities:

address customer needs and appropriately suggest products for every customer
to enhance service

prepare beverages to quality standards
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
performs cleaning tasks in accordance with the duty rosters and cleaning
standards, follows cash handling procedures and cash register policies
Skills and Requirements:

no previous work experience necessary

customer service oriented, friendly, positive attitude, organized

able to communicate well with co-workers and the management team

able to accurately communicate orders
Compensation and Benefits Overview:

$9.25/hour, minimum wage in Saskatchewan by 2009 (Government of Canada,
2006), with a $0.20 raise every year
Supervisor
Responsibilities:

address customer needs and appropriately suggest products with every
customer to enhance service

prepare beverages to quality standards

performs cleaning tasks in accordance with the duty rosters and cleaning
standards, follows cash handling procedures and cash register policies

opening and closing the store

reconciling daily cash receipts and preparing the bank deposit
Skills and Requirements:

three months barista work experience

customer service oriented, friendly, positive attitude, organized

able to communicate well with co-workers and the management team

able to accurately communicate orders
Compensation and Benefits Overview

$11 .00/hour, with a $0.30 raise every year
Owner
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Responsibilities:

address customer needs and appropriately suggest products with every
customer to enhance service

prepares beverages to quality standards

hires and trains new employees

manage and keep track of finances

opening and closing the store

reconcile daily cash receipts and prepares bank deposit

creating and maintaining the employee work schedule

ordering and purchasing inventory and supplies

paying suppliers and franchise fees, compiling information for the accountant
Skills and Requirements:

customer service oriented

friendly, positive attitude, organized

able to communicate well with staff

able to accurately communicate orders

managerial abilities to organize staff

knowledge and skills of Second Cup franchise regulations
Compensation and Benefits Overview:

$25,000/year, plus health and dental benefits: $1,250/year
4.2 Staffing Considerations over the Projection Period
There is no seasonality to Second Cup’s business as their lines of products have both hot
and cold beverages for the varying seasons. Also, there are no particularly busier
seasons or months, since our target market includes customers that reside and work in
that area. The month of December could see an increase in merchandise sales due to
the Christmas season, however, this will not necessarily increase the volume of
customers, rather only an increase in the amount of merchandise sales, and will not
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require additional staff. Overall, fluctuations in staffing requirements over the period of
one year will remain consistent throughout the year.
There is planned growth in sales revenue over the next five years, and in response to
this, we recommend having the owners both work during busier times of the day to
alleviate the workload. This will not affect labour costs as the owner’s salaries are fixed.
As this is a new business, for the first year of operations we recommend that no
supervisor be hired. The new owners of a business should expect to work as much as
possible to keep a control over operations and become familiar with the processes of
running the company, before delegating control to others. After year one, we
recommend that a supervisor position be opened; ideally a trusted barista, with at least
three months of work experience at Second Cup. This supervisor will be trained to
handle the daily cash reconciliations, bank deposit procedures, make inventory
purchases, and perform opening and closing shift duties. The trained supervisor can
therefore perform the duties of the owners if both owners are not working on a day or
are both on vacation.
4.3 Training Programs
Owners
The owners will participate in a vigorous three week training program for new franchise
owners provided by Second Cup. The training covers all the processes and procedures of
running a Second Cup franchise. This includes knowledge of all products, merchandise,
coffee/espresso beans, managing finances, financial profitability analysis etc.
New Employees
New employee training will be done by the owners. This will take approximately eight
hours to cover basic operating procedures such as how to use the cash register, make
drinks, cleaning and stocking duties. After the initial day of training, the new trainee will
shadow an experienced employee for three shifts until they are familiar with all the
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drinks and procedures. The cost of the training will solely be the owner’s time, which is
the fixed salary. Second Cup will provide a training binder which will be re-used for each
subsequent trainee. On training days both owners will be present, and therefore no
additional staffing costs will be incurred.
4.4 Hiring Process
Both owners will be responsible for hiring employees. Either owner will need to place an
ad in the local newspaper, or on-line on a site such as Monster or Workopolis stating the
responsibilities and skill requirements, starting wage and information for submitting a
resume. Either owner can review the resumes and choose a sample of applicants to
interview. As Ken has experience as a supervisor, he should be responsible for
interviewing the applicant, looking for specific characteristics such as friendliness and
willingness to learn. Once a successful applicant is chosen Mary who has more
experience with the actual processes of the coffee shop will train the employee.
4.5 Employee Turnover
Employee turnover is projected to be two times per year, as this is typical for the service
industry (Zuber, 2001). For example if there are 6-8 employees at any given time, an
expected 12-16 workers will pass throughout the year. As training costs are minimal and
solely require the owner’s time, this should not have a huge impact on labour costs.
There are wage rate increases every year of service, but with every new employee, their
wage rate starts at the minimum. One cost of employee turnover will be for job
postings, and that is estimated to be $100/year, which has been included in
miscellaneous expenses.
4.6 Human Resource Strategy
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The strategy is to hire inexperienced employees, as there is no previous experience
required to be a barista. All the skills, knowledge and duties can be taught by the
owners. This justifies the minimum wage rate paid to minimize labour costs. When
hiring employees, it is important to look for a friendly and approachable person. This
can be a significant factor in customer loyalty, which equates to revenues for your
business. In the event that an employee consistently receives customer complaints, they
may need to be terminated as this can greatly affect Second Cup’s customer base.
4.7 Management Team
The management team consists of Ken and Mary Hatch, the owners. Ken has experience
as a supervisor which will be a great asset in managing the employees. Mary has 8 years
of experience working in a coffee shop, which is a great asset because she has
experience with the front-line service. After the extensive training program offered by
Second Cup, they will both have the knowledge required to manage their own business.
5.0 Marketing Plan
5.1 The Marketing Mix
Second Cup's marketing efforts will focus on building a loyal base of customers that will
use the services provided on an almost daily basis.
5.1.1 Product
Second Cup’s product offerings will include premium coffees, teas, mixed coffee
beverages (including cold beverages), and bottled juices and water. It will also include
complimentary products such as light food items as purchased from Christie’s Bakery, as
noted in the aforementioned listing of suppliers. See sample menu in Appendix C.
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The selection of coffee in particular will include organic and free trade coffee that will
soon be available from the Second Cup parent, in time for the store opening in
December 2008. Other merchandise for sale will also include branded coffee
paraphernalia such as coffee mugs and coffee beans.
There are also intangible products offered by Second Cup. As Second Cup is a service
business, the success of the business depends upon the quality of the service offered
and delivering that service consistently. Second Cup is dedicated to delivering this
quality service.
5.1.2 Pricing
Second Cup bases its prices for coffee and specialty drinks on the "Retail Profit Analysis"
provided by Second Cup head office. Second Cup has been in the coffee business for 22
years and has developed a solid pricing strategy. As Second Cup is positioned as a
premium coffee retailer, its prices are comparable to the other premium coffee retailers
like Starbucks. However, given the target market, pricing is not a differentiating factor in
Second Cup’s strategy. The target market values location and premium quality over
price. Please refer to Schedule 1 in Appendix E for an analysis that includes average
prices of Second Cup’s products.
5.1.3 Promotion
This business will be relying on Second Cup’s national advertising campaigns to promote
knowledge of the business and sales in Saskatoon. Therefore, minimal funds allocated to
local marketing efforts will be required. A specific initial marketing effort will include
print materials distributed to condo residents and surrounding businesses. The initial
“flyer” will highlight the new range of organic and free-trade products, the convenient
location, and friendly atmosphere. It could also be suggested that this flyer include a
free beverage upon customer’s first visit to initiate customer loyalty. To maintain
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customer loyalty/repeat business, Second Cup will offer coffee cards for regular
customers that provide a free beverage after every tenth beverage purchased.
5.1.4 Place
Second Cup head office conducts ongoing market surveys to help evaluate the business
viability prior to opening new franchise stores across North America. The surveys are a
valuable resource for establishing pricing and market needs. They will continue to
conduct a survey of customers and potential customers on an annual basis. Survey
results will be used to create new national marketing programs and monitor the
performance of current marketing programs. All research is broken down into regional
territories. Based on this marketing research, the proposed location for the Second Cup
will be in the almost complete King George building located in downtown Saskatoon.
This building will contain an architectural firm, and as well will be home to 50 +
residents. As the popularity of urban downtown living continues to grow at a significant
rate, easy and affordable access to amenities and social/lifestyle programs is becoming a
necessity of life. Second Cup will provide the local community with the ability to enjoy a
cup of coffee, and share experiences in a comfortable environment. Realizing that there
are residents dwelling in the same building, and to prevent loss of sales to nearby
competitors, Second Cup will be open early (6am) everyday and late (until 9pm) on
weekdays. These hours are comparable to the biggest competitor, Starbucks, who is
located two blocks away.
5.2 Market Segmentation, Targeting, and Positioning
5.2.1 Segmentation
Drinking coffee has become a part of the North American culture. Whether it be to get
your caffeine “fix” to get you through the day, or it be a means of social interaction,
drinking coffee has become a daily activity for many Canadians. As a result, there is a
very large potential market for Second Cup in Saskatoon. Coffee drinkers can be
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classified into three segments: homemade coffee drinkers (travel mugs); price-sensitive,
instant delivery coffee drinkers (Tim Horton’s, McDonald’s customers); and non-price
sensitive, coffee connoisseurs (Second Cup, Starbucks customer). This third market
segment, that Second Cup will be competing for includes professionals who earn higher
than average income, and desire a progressive and inviting atmosphere where they can
count on efficient service, but don’t mind waiting a few minutes for the preparation of
their customized beverage. This group is made up of professionals and business people
from nearby downtown offices and professional centers and residents from the nearby
condominiums (these later individuals will overlap with the business professionals).
5.2.2 Targeting
Second Cup intends to cater to people who live and/or work downtown. Furthermore,
Second Cup will be a magnet for local and traveling professionals who desire to work or
check their email messages in a friendly atmosphere. (To note, there is free internet
access in the downtown Saskatoon core, therefore internet service for customers will
not be an added cost). Second Cup's target market covers a wide range of ages from
members of "Generation X," who are also considered to be young professionals, and
potential buyers of the condominium units to older members of the downtown business
core. There will also be foot traffic from the weekend shoppers due to the proximity of
popular shops to the store.
The primary target markets include:
Condo Residents. The large condo developments planned for the downtown core is a
critical part of the Second Cup customer base. Currently there are 21 luxury condos
being built in the building Second Cup will be located. As well, directly across the street
there will be approximately 90 new units that have been pre-sold as well as a 60 unit
development that has already been approved by City council.
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Ken and Mary Hatch
Business people. The downtown business community is growing rapidly with the
addition of a Cameco office and three new office towers as well as a flurry of new
professional centers. Second Cup will provide a perfect setting for casual business
meetings and coffee breaks. It will also give traveling business people an opportunity to
plug in their laptops into the Second Cup network to check email communications, or
simply kill some time in between meetings.
5.2.3 Positioning
Second Cup will position itself as a coffee retailer that can provide customized, premium
quality coffee specialty drinks in an efficient manner, in a clean and friendly
environment. Although direct competition with Starbucks may be perceived, Second
Cup’s image is one that involves a simplified approach and ordering process of fulfilling
the needs of specialty/premium coffee drinkers. Business people of all types can use
Second Cup as a place to hold casual meetings or catch-up with other professionals. Our
extended hours are designed to help build customer loyalty as there are currently very
few establishments open during the evening hours in the downtown area.
5.3 Competitive Analysis
It should be identified here that generally customers are not willing to travel/go out of
their way to get their daily coffee. As a result, location is a key success factor in this
industry. Therefore, considering proximity to the Second Cup location, the main
competitor is considered to be the Starbucks on 2nd Ave and 22nd Street.
Some customers may perceive Starbucks to be a direct competitor, however we feel
that Starbucks has positioned itself by giving its customers a coffee-savvy identity, or as
being part of a “coffee club” with its own language, payment systems, and rewards
program. Although pricing is similar between these two retailers of premium coffees,
Second Cup is taking a much more simplified approach to purchasing coffee, and as well
has differentiated itself by emphasizing its focus on supporting organic and free-trade
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products as it is keeping in mind that its customers are educated, and aware of these
global social issues.
Other competitors in the downtown area include McDonalds, Strongfields, and
Grandma Lee’s, but are not in direct competition because these businesses target the
other identified market segments (price-sensitive, less quality-conscious customers).
By differentiating Second Cup from the other downtown establishments, it will have the
ability to effectively compete in the beverage and pastry side of the business with the
already entrenched competition.
Second Cup is also faced with the exciting opportunity of being the “first-mover” in the
downtown residential condo market. The consistent popularity of coffee, combined
with the growing residential dwellers in the downtown core, and the continued
expansion of downtown commercial area has proven to be a winning concept in other
markets and will produce the same results here.
Heavy competition between coffee retailers creates an industry where all firms face the
same costs. There is a positive relationship between price and quality of coffee. Some
coffees retail at $8/pound, while other more exotic beans may sell for as high as
$16/pound. Wholesalers sell beans to retailers at an average of a 50% discount. For
example, a pound of Sumatran beans wholesales for $6.95 and retails for $13.95. And as
in most industries, price decreases as volume increases. Second Cup head office hedges
this risk, therefore we are better able to mitigate this risk.
The growth of the downtown residential area that has been occurring in Saskatoon is
only the beginning of a long-lived trend towards an economy built on the downtown
core. The potential growth of the downtown is significant. By establishing itself as the
first condo-cafe in the area, Second Cup will enjoy the first-mover advantages of name
recognition and customer loyalty.
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5.4 Marketing Strategy
Second Cup’s marketing objectives for the first three years of operation include:

Building customer loyalty through retention programs such as personalized
drinks and coffee cards

Employ a staff of enthusiastic employees who can remember customers’
customized orders

Build the Second Cup brand to the point where it becomes a household name in
the area
To meet the above objectives, Second Cup has two main strategies. The first strategy
focuses on attracting business from new downtown condo residents. By providing a
convenient, friendly, environment, Second Cup hopes to gain a loyal customer base.
The second strategy focuses on building a social environment for Second Cup
customers. An efficient, yet relaxed social environment will serve to meet the needs of
business-oriented customers as well as residents in the nearby area.
5.5 Projections of Revenues and Marketing Expenses
Please see Schedule 1 for Revenues and Schedule 4 in Appendix E for projections of
revenues and marketing/advertising expenses. The $5,000 advertising expense is for
print materials such as informational flyers, and other branded items around the store
such as signage, and umbrella.
5.6 SWOT Analysis
The SWOT analysis provides us with an opportunity to examine the internal strengths
and weaknesses Second Cup must address, as well as allows for the examination of the
opportunities presented and potential threats.
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Second Cup has a valuable inventory of strengths that will help it succeed. These
strengths include: a knowledgeable and friendly staff, high quality product, and a clear
vision of the market need. Strengths are valuable, but it is also important to realize the
weaknesses Second Cup must address. These weaknesses include: a dependence on
downtown clientele, and the cost factor associated with spoilage and labour in the bull
market.
Second Cup's strengths will help it capitalize on emerging opportunities. These
opportunities include, but are not limited to, a growing population of the downtown
core, and the growing social bonds fostered by the condo communities. Threats that
Second Cup should be aware of include emerging local competitors as well rising food
costs.
5.6.1 Strengths
1. Knowledgeable and friendly staff. The management team will go to great
lengths at Second Cup to find people with a passion for coffee. Our staff will be
both knowledgeable and eager to please.
2. Ambiance. When you walk into Second Cup, you'll feel the community.
Comfortable mahogany loungers with large windows to view the street provide a
cozy hideaway for meetings and small friendly gatherings. Large round tables
with displays provide a forum for larger gatherings. Last, but not least, quality
espresso machines and a glass pastry display case provide enticing refreshments.
3. Clear vision of the market need. Second Cup knows what it takes to build an
upscale downtown cafe. We know the customers, we know quality coffee, and
we know how to build the service that will bring the two together.
5.6.2 Weaknesses
1. Inability to meet staffing expectations. The increased shortage of labour in
Saskatoon may challenge the owner’s ability to fulfill the required staffing
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Ken and Mary Hatch
requirements. Also, due to the nature of work, it may be difficult to find high
quality, loyal employees who can be relied on to provide adequate notice before
leaving the job.
2. Inexperience of owners in managing operations and finances of business.
Although Ken and Mary will both attend the training provided by Second Cup
Head office, the monitoring of the daily operations and key success factors will
be a challenge as they lack experience and knowledge in these areas, and each
day will be a learning process for them.
5.6.3 Opportunities
1. Taking advantage of opportunities. The importance of a convenient cup of
coffee almost equals that of a bathroom. As the population of condo dwellers
increases and downtown continues to expand, so will the need for the services
Second Cup offers.
2. Social bonds fostered by intimate cafes. Cafes are bringing people from the
downtown core together unlike any other social medium. Second Cup will
capitalize on this social trend by providing a place for smaller and local
communities to meet in person. Second Cup will grow some of these
communities by establishing its own community programs. These programs will
be designed to build customer loyalty.
3. Target Market Growth:
The Saskatoon Partnership has indicated that Condo developments will continue to
grow at a steady pace, at nearly 4%.
Office workers in the downtown area and nearby professional buildings continue to
add value, growing at 3% (2 new office towers by 2009).
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Ken and Mary Hatch
Market Analysis
2009
2010
2011
2012
2013
Potential
Customers Growth
Condo
Dwellers
4% 10,000 10,400 10,816 11,249 11,699
Office
Workers
Total
3% 20,000 20,600 21,218 21,855 22,510
11% 30,000 31,000 32,034 33,104 34,209
This growth is a clear opportunity to capture retail coffee sales of the
growing market.
5.6.4 Threats
1. Emerging local competitors. Currently, Second Cup is enjoying a first-mover
advantage in the condo cafe market. However, additional competitors are a
threat because there are low barriers to entry in this market, and we need to be
prepared for their entry. Many of our programs will be designed to build
customer loyalty, and it is our intention that our quality service and up-scale
ambiance won't be easily duplicated.
2. Continued growth. Will there be a continuing demand for the services offered by
Second Cup? Given that our targeted customers value proximity and
convenience, growth in sales may be difficult to achieve as our customer base is
somewhat limited to those who live/dwell in the immediate surrounding area.
Accordingly, with continued growth of the downtown core, also comes the
attraction of new competitors to these developing locations, who will want to
capture the expanding market. It can be assumed however, that with increased
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Ken and Mary Hatch
activity downtown, this will also increase the volume of foot traffic around the
café, which will contribute to a growth in sales.
3. Increasing costs of living. With the increasing costs of living in Saskatoon
associated with the increasing price of oil, and other commodities, will
individuals be willing to pay for the premium coffee that Second Cup offers?
With rising costs of living, new homeowners in the condo building and others
may be forced to budget their finances and as a result may switch to coffee
establishments with lower prices, or simply opt to have their coffee at home.
However, there has been evidence that the price of coffee is inelastic in the
market, and therefore this is not considered to be an immediate risk (Forbes,
2008).
6.0 Financial Plan
6.1 Marketing, Operational and Human Resource Considerations
Please refer to Appendix E to see the five year projected income statement, balance
sheet and statement of cash flow. Based on the nature of the business, the coffee
industry is protected from seasonal fluctuations since the demand for coffee is
considered to be stable year round, and the decrease in sales of cold beverages during
the winter will be mitigated with an increase in sales of other hot beverages (such as hot
chocolate and cider), and vice versa in the summer.
6.1.1 Estimated Revenues
The annual estimated revenues are the following (examined in detail by quantity and
selling price in Schedule 1)
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Ken and Mary Hatch
We have examined the sales revenue in both selling price and quantity. We expect a
growth rate in sales price of 5% after the first year of operations and then a growth in
inflation of 3%.
The growth in quantity of sales has been divided by coffee, pre-packaged drinks, food
and merchandise. The growth rates of these will be as follows:
6.1.2 Cost of Goods Sold
The associated Cost of Goods Sold (examined in detail in Schedule 2)
These expenses include direct input costs of coffee beans, milk, cups, and other
complementary products to make the drinks. The most important cost will be the cost
of coffee beans as this is the most volatile cost that is based on market supply and
demand.
6.1.3 Operating Expenses
The Operating Expenses (examined in detail in Schedules 3-10)
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The above expenses are explained as follows:










Advertising royalty – 9% of gross sales, as required by the Second Cup head
office.
Marketing - $5,000 each year for various print materials and branded
promotional products, growing at the rates stated in Schedule 4
Rent – 1,000 square feet, at $2.50 per square foot
Insurance - $5,000 per year, growing at the rates stated in Schedule 6
Repairs and Maintenance – general maintenance of coffee machines and store
front, $5,000 per year, growing at the rates stated n Schedule 7
Telephone and Utilities – basic expenses, broken down between telephone and
utilities in Schedule 8
Salaries and Benefits – refer to breakdown in Schedule 9
Miscellaneous expenses – estimated at $10,000 per year, growing at the rates in
Schedule 10
Depreciation and amortization – includes depreciation of the store equipment
and the franchising fee – breakdown in Schedule 11
Interest – interest on 10 year loan, refer to Schedule 17
6.1.4 Working Capital Estimates
6.1.4.1 Inventories
Inventories will primarily be composed of the direct materials that generate specialty
coffee drinks. The main cost of inventory will be from the coffee beans. We will have an
average of 30 days of inventory and have regular orders placed every two weeks.
6.1.4.2 Accounts Receivable
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Ken and Mary Hatch
Since the nature of the business is primarily cash or cash equivalent since all
transactions generating sales of small value (usually less than $20.00) we have no
accounts receivable balance.
6.1.4.3 Accounts Payable
We are assuming that all suppliers will allow purchases on credit as the regular suppliers
will be either Second Cup for all equipment and coffee supplies or Costco which will
allow credit terms of 30 days for small businesses.
6.1.4.4 Operating Line of Credit
Through the franchise, the bank will provide $210,300 of money loaned for start up
costs of the business, and as well, Ken and Mary Hatch will be required to provide
$20,000 in equity. This will be sufficient to cover start up costs.
6.1.5 Capital Budget and Depreciation
In the upcoming forecast the main capital replacement cost will be the replacement of
the espresso machine, chiller, brewing machine, coffee grinder, blender, scale computer
and computer software for $50,000 in year four, and then general annual replacement
will be $18,300 per year in year five and subsequent years of operations. These
operations tools are Class 8, miscellaneous equipment, with a CCA rate of 20% declining
balance per year.
6.2 Projected Financial Statements
In Appendix E it has been projected that within the first year of operations Second Cup
will generate sufficient income to cover its initial start up costs and operations for the
first twelve months. By year three the investor’s goal of earning $105,000 will be
achieved, with increasing cash from operations up to year five.
6.2.1 Cash Flow Analysis
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As seen in Appendix E the cash flow projection shows a positive cash flow with the
financing of start up costs primarily funded through debt financing provided by the
bank.
6.2.2 Risk Analysis
As noted in Appendix F we have performed a sensitivity analysis which examines
significant factors that management has a degree of control over and significantly
impact the earnings of the company. This analysis shows the vulnerability of the
earnings of the operations and the range of expected scenarios that might occur.
6.3 Assessment of Feasibility of Second Cup
Upon consolidating the assumptions from operating, human resource, marketing, and
other considerations in the ongoing establishment of your franchise with Second Cup, it
has been projected that you will be able to earn your expected $105,000, through salary
and dividends by year 3. The franchise will expect minimal profits for the first year of
$15,840 and is projected to increase steadily over the next five years. There are tax
advantages of being able to use the active business losses against your personal
earnings through the salaries earned at Second Cup. This is why it is suggested not to
incorporate the business until the franchise starts earning income. It has been estimated
that Ken and Mary’s required rate of return would be approximately 20% since they are
giving up their secured current employment for the opportunity to earn increasing
growth through Second Cup. Based solely on a quantitative analysis we would
recommend this business venture as the two of you will be able to achieve your
financial objectives and earn increasing revenues as operations continue. The
quantitative factors will be discussed further below.
6.3.1 Quantitative Factors
6.3.1.1 Investment
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Ken and Mary have communicated that only $20,000 will be required by them to start
up the business. This is a very reasonable and favorable start up cost as most small
businesses require a larger initial capital cost to enter into a franchise. As well, the bank
is able to offer a favorable interest rate through the Second Cup brand, on the available
funds. Not only would it be unlikely that they would not be able to achieve the same
lending rate at a bank (due to the higher risk of lending to a start up small business) they
do not have to spend the resources in looking for this additional capital.
6.3.1.2 Economies of Scale
There is a large benefit with starting a coffee shop under a franchise since they are able
to obtain the benefit of the economies of scale, (lower prices for equipment, financing
and inventory).
The majority of inventory costs will comprise of coffee beans. There are several
advantages to the coffee industry, as the inventory tends to have a longer shelf life, but
the beans are subjected to the volatile price of the market as coffee is a commodity.
7.0 Summary of the Business Plan
There is an exciting opportunity to open a Second Cup in Saskatoon. This will be the first
Second Cup, which is a National Franchise company, in Saskatoon. Second Cup will be
faced with the exciting opportunity of being the first mover in the downtown residential
condo market, and therefore has the first-mover advantage of name recognition and
customer loyalty. There is consistent popularity of coffee, growing residential dwellers
in the downtown core, and continued expansion of downtown commercial area. Our
customers will be downtown condo residents and downtown office workers who are
non-price sensitive and coffee connoisseurs. Our customers value high quality coffee,
proximity, and convenience.
Second Cup’s sustainable competitive advantage is their location, simplified approach
and ordering process of fulfilling the needs of specialty/premium coffee drinkers, their
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Ken and Mary Hatch
programs to develop customer loyalty through their quality service and up-scale
ambiance that will not be easily duplicated.
The main people in the organization will be the two owners, Ken and Mary Hatch. They
will be able to succeed because Mary has 8 years of work experience in a coffee shop
and therefore is very familiar with the operations of a coffee shop. Second Cup head
office will also be providing and intensive 3-week training for Ken and Mary on how to
run and operate Second Cup.
The critical variables in the business are sales unit, cost, and quality of food. They will
mitigate the risk of sales unit by being situated in a prime location in Saskatoon and
marketing efforts from Head office. They will mitigate the risk of cost by setting fixed
contract prices with all of our main suppliers. They will mitigate the risk of quality of
food by purchasing their inventory from Second Cup head office and purchasing from a
reputable local bakery in Saskatoon.
Their expected return on investment is 190%. This is more than enough to
commensurate for the risk of this business. The initial capital investment is low, and
there are great opportunities for profitability in the future.
References
CanWest MediaWorks Publications, Inc. (2008, Feb 02). Saskatoon Office Space: A Deal. July
15, 2008. Canada Dot Com website;
http://www.canada.com/components/print.aspx?id=60104991-d972-44a2-9b51-61ebc313b
Forbes, (2008). Economics Basics: Elasticity. July 13, 2008.
Investopedia, A Forbes Media Company Web site:
http://www.investopedia.com/university/economics/economics4.asp
Government of Canada, (2006, October 3). “Current And Forthcoming
Minimum Hourly Wage Rates For Experienced Adult Workers in Canada.
July 13, 2008. Human Resources and Human Development
Canada Web site:
http://srv116.services.gc.ca/wid-dimt/mwa/index.aspx?report=report1
Zuber, A (2001, May 21). A career in foodservice: High turnover.
July 13, 2008. BNet Business Network Web site:
http://findarticles.com/p/articles/mi_m3190/is_21_35/ai_75100597
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Appendix A
Example Work Schedule
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Example Work Schedule
Year 1
Monday
Hours of Operations
5:30am - 1:30pm
1:30pm - 9:30pm
Tuesday
Wednesday
Thursday
Weekdays open 5:30am - 9:30 pm
Owner 1
Barista
1
Owner 1
Owner 1
Owner 1
Barista 1
Barista 1
Barista 1
Owner 2
Barista
2
Owner 2
Owner 2
Owner 2
Barista 2
Barista 2
Barista 2
Friday
Owner
1
Barista
1
Owner
2
Barista
2
Saturday
5:30am 5:30pm
Sunday
5:30am 3:30pm
Owner 1
Owner 1
Barista 1
Barista 1
Saturday
5:30am 5:30pm
Sunday
5:30am 3:30pm
Supervisor 1
Supervisor 1
Barista 1
Barista 1
Year 2
Monday
Hours of Operations
5:30am - 1:30pm
1:30pm - 9:30pm
Tuesday
Wednesday
Thursday
Weekdays open 5:30am - 9:30 pm
Owner 1
Barista
1
Owner 1
Owner 1
Owner 1
Barista 1
Barista 1
Barista 1
Owner 2
Barista
2
Owner 2
Owner 2
Owner 2
Barista 2
Barista 2
Barista 2
Friday
Owner
1
Barista
1
Owner
2
Barista
2
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Ken and Mary Hatch
Appendix B
Second Cup Saskatoon Floor Plan
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Second Cup Floor Plan
S
i
t
t
i
n
g
C
o
u
n
t
e
r
Washroom
Stock Room
X
X
X
X
COUNTER
X
E
D
I
S
P
L
A
Y
Pick Up Counter
A
A
Fridge
B
C
C
C
C Cash
Register
A
S
E
Sink
D
D
O
O
R
Office
A = Espresso Machines
B = Chiller Machine
C = Coffee Machines
D = Dishwasher
X = Counter Chairs
E = Display shelves
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Appendix C
Sample Second Cup Menu
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Sample Menu
Hot Drinks
Coffee
Espresso (Single, or Double Shot)
Café au Lait
Cappucino
Café Latté
Caramel Macchiato
Café Mocha
Hot Tea
Chai Latté
Hot Chocolate
Mexican Cocoa
Try ANY of our hot drinks ICED!
Cold Drinks
Iced Tea
Boylan soda
Jones Soda
Orange Juice
Tropicana Fruit Juice
Pepsi/Diet Pepsi
Bottled Water
Frozen Drinks
Frozen Coffee Drinks
Mocha Frappé
Vanilla Latté
Chocolate Decadence
Caramel de Leche
Sweet Treats
Cheesecake
Brownies
Biscotti
Assorted Cookies
English Muffins
Bagels
Assorted Muffins
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Appendix D
Map of Competitors – Downtown Saskatoon
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Legend
A – Starbucks
B – McDonald’s
C – Strongfields Coffee
D – Timothy’s World Coffee
E – Parlour Treats
F – Grandma Lee’s
G – Second Cup
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Appendix E
Financial Projections
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Appendix F
Sensitivity Analysis
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