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The Pudong coffee shop -----analysis report

Li HaoWang Hui

Wang XuejuanQin Xinren

Wei Yingying

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“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

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Background

Case analysis

Strategy and actions

Budget

Risk response and valuation

Outline

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China:Coffee consumption is growing at a double-digit rate per yearEach Chinese person drinks about 3 cups of coffee a year

A big potential market of coffee in China.

Global:Coffee consumption is growing at a slightly over two percent per yearA typical American person drinks between 500 to 700 cups a year

Embryonic Growing Mature Decline

Background

Industry life cycleIndustry life cycle

profi t cash fl owprofi t cash fl ow

2008 2009

?

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Insufficient training：Such as unskilled part-time staffs

Large amount of customers in lunch-time may lead to a crowd spaceShort operating time limits the number of customers in evening

No facilities like Wi-Fi what customers often need

Operating analysis

Pudong coffee shop：

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Gap ：7.85%

Pudong coffee shop：•Limited product range•Inflexible time supply

Structure of product

Comparison

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20%

45%

25%

10%

Customers structure by age

under 20 21-30 31-50 over 50

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.

Customer analysis

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.

White-collars

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Employee analysis

Gap: 6%

14%=Wages/Revenue

Pudong coffee shop:

Employees’ attitude is not good towards customers.

To some extent, they are not satisfied with the work.

Low wages and stimulation may make employees feel upset and it affects service quality.

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Cost structure analysis

5% 5% 5% 20% 20%40%

100%

45.16%

13.98%19.88%5.16% 8.15% 3.23%

Average Pudong coffee

This graph shows the cost discrepancy between the average and Pudong coffee shop. It is referred that big difference exists which can lead to a cost-saving.

As for cost of sales, Pudong coffee shop is much higher than the average, which means material cost control did not work well.

As for wages, the lower wages save money, and it also shows a room to go up in order to improve employees’ loyalty.

As for depreciation, Pudong coffee shop has a higher number, which makes a huge tax shield.

As for AD expenditure, Pudong coffee shop is lower than the average, and it refers that more AD is needed, which also comply with the measures taken to improve.

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CVP analysis

The Pudong coffee shop has to attract as many customers as possible.

The fixed cost per customer will go down as the number of customers increasing, which is the key to improve the revenue.

CVP analysis  2009

Total revenue 930,000

Fixed cost 500,000

Variable cost 420,000

Sales per customer 50

Variable cost per customer22.59

Fixed cost per customer 26.88

Operating profit per customer 0.54

2009 financial data analysis:Revenue =930,000The average spend per customer =50Total number of customers=930,000/50=18,600

Assumption ： cost of sales as variable,and all the operating expenses are supposed to be fixed.

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weaknessopportunitiesthreatsstrengths

Good locationCustomers’ loyaltyGenerous rent terms

Low market share and salesNegligible “take-away”Insufficient food supply

Students and office staffs nearbyInternational activities and expats

Fierce competition from an Italian restaurant and an Ice-cream coffee nearby

SWOT analysis

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Mission: make every one’s coffee dream come true

Strategy: market focus strategy

Target customers: students, white-collars, expats who emphasis quality

Target customersStrategyVisionMission

Vision: to be popular with every one in region

Structure of Strategy

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Above 50 31-50

Below 20 21-30

Customers’ bargain

Purchasing power

Actions---target customers

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Internal activities

Internal activities

Customer response

Customer responseText

in hereText

in hereEmployees & Facilities

Employees & Facilities

Financial impact

Translating strategy into action --- on the basis of BSC

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Actions --- Facilities & Employees

Cost 1500 Yuan and without depreciation Provide Wi-Fi

No obvious impact Fashion magazines& newspapers

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

Peaceful environment with soft music and piano

performance in the evening

Sharing the profit with employees by 3% of revenue as a bonus

Measures such as employees birthday present are also needed.

Improve employees' satisfaction

Action: Financial impact:

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Cleanliness and overall hygiene

Update the menu according to

customers’ need

Develop “take-away” service

Extend the opening time to 10 P.M.

Actions --- Internal activities

Action:

Financial impact:

No obvious impact

Lead to an increment in sales

Increases the AD and promotion expenses, with revenue improved

More operating cost needed more sales generated

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Actions --- Customer response

VIP card and Student card at 20% discount.

5% discount above 10 people.

Questionnaire to communicate with customers

Sponsor students’ activity

Action:

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.

Financial impact:

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•Utilizing rate of Wi-Fi •Frequency of cleaning• Updated magazines and newspapers cost•Turnover of employees

•Fake percentage of materials•Sales of “take-away”•Food sales in total revenue

•Sales of new and existing customers•Time for queuing•Times of complain from customers

•Gross profit margin•Growth of sales•Net profit margin•Growth of net profit•Sales per Square Feet

KPI based on strategy to measure performance

Customers

Employees & facilities

Internal activities

Financial impact

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Income Statement 2009 2010(before) 2010 (after)

Total revenue￥ 930,00

0 ￥ 1,005,795 ￥ 1,307,534

Cost of sales 420,000 454,230 523,013

Gross profit 510,000 551,565 784,520

Operating expense 

Depreciation of tangible assets 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

others - - -

Total operating expense 500,000 517,767 682,643

Operating profit 10,000 33,798 101,877

Interest payable on loans 23,710 18,369 18,369

Profit(loss) for the year ￥ -13,710 ￥ 15,429 ￥ 83,508

Budget after actions---Income Statement

Thanks for these measures we have taken, the revenue will increase by 30%

Depreciation increases 900 Yuan because of the purchase of a second-hand piano

Wages go up since we implement a 3% bonus and hire a part-time pianist

The profit has risen from ￥ 15,429 to ￥ 83,508, and it is obvious that the measures are effective.

More AD and promotion are used for development of student market

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Balance sheet 2009 2010(before) 2010(after)

Goodwill ￥ 400,000 ￥ 400,000 ￥ 400,000

Furniture and fittings (net) 246,000 164,000 168,100

Inventories 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

Total liabilities and owner’s equity ￥ 888,000 ￥ 838,669 ￥ 973,909

Budget after actions---Balance Sheet

Piano purchased with 5,000 Yuan, and net salvage value of 500 Yuan, 5 years depreciation. Deprecation = (asset price – net salvage value) / years of depreciation =(5,000-500)/5=900Furniture and fittings(after) = 164,000 + 5,000 – 900 = 168,100

According to the assumptions given in the case:

Inventory turnover of 2010 is the same with 2009Trade payables turnover of 2010 is the same with 2009

We calculate the financial statement following these assumptions.

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Cash flow statement 2009 2010(before) 2010(after)

Operating cash flow：Operating profit (loss) for year ￥ 10,000 ￥ 33,798 ￥ 101,877

Add: depreciation 82,000 82,000 82,900

92,000 115,798 184,777

Changes in working capital:

Less: Increase in inventories 6,000 3,586 17,851

Add: Increase in trade payables 16,000 16,871 84,032

102,000 129,083 250,958

Investing activities

Capital expenditure Nil Nil -5,000

Financing activities:

Repayment of loan including interest

-100,000 -100,000 -100,000

Overall cash flow 2,000 29,083 145,958

Add: Opening bank balance 196,000 198,000 198,000

Equals: Closing bank balance ￥ 198,000 ￥ 227,083 ￥ 343,958

Budget after actions---Cash Flow Statement

Cash flow goes down since we suggest purchasing a second-hand piano

Since depreciation does not need to pay, that is why the profit shows a negative with a cash flow positive

After actions, the cash flow of Pudong coffee shop has greatly improved

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Break-even analysis  2009 2010(before) 2010(after)

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

Risk analysis--Operating and Financial Risk

We assume the whole of period expenditure is fixed cost, cost of sales as variable cost. Break-even point(in revenue)= fixed cost / (1- rate of cost of good sold in revenue)

DOL: degree of operating leverage

DFL: degree of financial leverage

DTL: degree of total leverage

DTL = DOL×DFL

9.435,75

DTL represents the total risk of a company, the figure decreases, which reflects a low risk in all.

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Handle risk---if the strategy fails…

If the strategy we suggest fails, then what can we do…

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 riskIf the increase rate of sales could not reach 30% then…

We should analysis the discrepancy between the sales of students and white-collars, and the variation of sales after new strategy, and then adjust the strategy of promotion and the structure of products we could offer.

Financial riskIf 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 help about the re-finance.

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Forecast cash Flow statement 2011 2012 2013 2014

Operating cash flow

Operating profit (loss) for year 217,311 367,374 634,456 718,991

Add: depreciation 82,900 82,900 10,900 10,900 　 300,211 450,274 645,356 729,891 Changes in working capital: Less: Increase in inventories 18,555 24,122 31,359 13,589 Add: Increase in trade payables 87,309 113,502 147,553 63,940 　 368,965 539,654 761,550 780,242 Investing activities 0 -40,000 0 0 　Financing activities: Repayment of loan including interest -100,000 -100,000 0 0 Overall cash flow (deficit) for year 268,965 399,654 761,550 780,242

According to inflation of 4%,and 7% interest rate of long-term loan, we assume the WACC as 15% with risks taken into consideration.

Valuation=discount of every year’s cash flow at 15% = 145,958 +268,965/(1+15%)+399,654/(1+15%)2+761,550/(1+15%)3+780,242/(15%-

5%)/(1+15%)4

=1,695,790

Assumptions:1.The annual revenue grows at 10% in the first 3 year(2011-2013), from 2014, the rate is keeping 5%.2.Renew the Furniture and fittings at 2012 for 40,000 Yuan.3.There is no bank loan after 2012. Income statement and balance sheet prepared for the forecast of the valuation is omitted.

Overall valuation---FCFF method

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The end

thank you all