the pudong coffee shop
DESCRIPTION
The Pudong Coffee Shop. 3Z -- from SHUFE. Case Overview. Financial Forecast. Tactics. Conclusion. Outlines. Balanced Scorecard. Background Current Situation. Case overview. 1. - PowerPoint PPT PresentationTRANSCRIPT
1
The Pudong Coffee Shop
3Z --from SHUFE
2
Outlines
Case Overview
Tactics
FinancialForecast
Background
Current Situation
Balanced Scorecard
Conclusion
3
Case overview
1The Pudong coffee shop is located in Pudong area which is surrounded by several large office buildings and a business school.
2Li, the owner of the coffee shop, puts much attention on the quality of food and service, which he believes will lead to the consumers’ loyalty.
3The coffee shop suffered a loss in 2009 even though it had a net cash inflow. And Li wants to find someone to help him to improve his coffee shop.
4
Current situation
1. The coffee shop’s revenue is 915,000 in 2008,and 930,000 in 2009, which is a slight increase.2. But the net profit is totally different. It’s 32,300 in 2008 and -13710 in 2009.Conclusion: The revenue is not the only reason that affects the loss.
32300
915000
-13710
930000
-200000
0
200000
400000
600000
800000
1000000
revenue net profi t
20082009
The revenue and net profit
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cost ofsal es,389000,
43%
operati ngprofi t,
61000, 7%
operati ngexpenses,465000,
50%
cost of sal es
operati ngexpensesoperati ngprofi t
cost ofsal es,
420000, 45%
operati ngprofi t,
10000, 1%
operati ngexpenses,
500000, 54%
cost ofsal esoperati ngexpensesoperati ngprofi t
2008
2009
After a detailed analysis, we find that cost of sales increased a lot from 2008 to 2009, which caused a loss in the end.
6
problemsText
The customer’s growth rate
is below the
average
The large part of
employees are part-
time
The inventories is in a
high level
The coffee shop’s customer’s growth rate is 1.64% which is lower than average rate of approximately 10% in China.
There are only two full-time employees, others are part-time unskilled employees. This would impose a negative impact on the quality of service, which would eventually increase the customer attrition rate.
It has a inventories of 44000 in 2009,higher than that of 2008, which is too much as a coffee shop and causes a higher fee of garbage collection
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Problem 1 customer’s growth rate is low
The text tells us that the average spend per customer is 50, thanks to the revenue, we can calculate the number of the customers in the whole year.
18,600
18,300
18,15018,20018,25018,30018,35018,40018,45018,50018,55018,60018,650
2008 2009
the number ofcustomers
It can be seen that only 300 more customers in 2009, the growth rate is 1.64%. However, the coffee consumption in China is growing at a double-digital rate.
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Compare the promotion costs as a % of the revenue between the local coffee shops and the Pudong coffee shop
3.23%
2.73%
5%
0 2 4 6
Pudong coff eeshop 2008
Pudong coff eeshop 2009
Local coff eeshop
promoti oncosts as % ofthe revenue
Conclusion:
This indicates that comparing with other coffee shops, the Pudong coffee shop spend less in promotion. And this may explain why its customer’s expanding rate remains low.
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Problem 2 The service
Low wages and
remuneration
The system of the
recruitment
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Problem 2 The service
EMPLOYMENT SYSTEM: Two full-time employees and several part-time employees would probably influence the quality of service.
Bad service will cause customer dissatisfaction and reduce the amount of the customers as well as destroying the reputation of the shop.
The increasing rate of losing customers would result a decline in revenue as well as profit.
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Problem 3 Too much inventory
44000
38000
3500036000370003800039000400004100042000430004400045000
2008 2009
i nventori es
Conclusion:As is shown in the chart ,the inventory increases in 2009, it’s unwise to keep such a high level of inventory, for as a coffee shop, the drink and the food need to stay fresh to ensure the quality.
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Bad service
High level of inventor
y
Low customer expanding
rate
Relationship among the 3 problems
Low quality of the food
and drink
13
Strategic Objectives
Customer Loyalty
Let’s see how to solve these problems.
High Profitability
To provide excellent service and achieve high customer satisfaction
To attain high profits, by increasing sales revenue and controlling costs
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Strategic Objectives
· Gross/Net profit Margin· Operating expenses ratio· Increase in sales, COS etc· Inventory turnover period
Balanced Scorecard —From strategy to actions
· Customer expanding rate· COS/Gross profit per customer· Customer satisfaction
· Employee satisfaction· Employee turnover· Training times
· Customer waiting time· Wastage· Customer complaining times
Financial Perspective
Innovation and Leaning
Perspective
Internal Operations Perspective
Customer Perspective
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Financial perspective
Compared to the previous year
y/e 31 Dec 2009 y/e 31 Dec 2008 Increase (decrease)
ROCE 1.47% 4.19% -2.72%
Gross Profit margin
5.48% 5.75% -0.27%
Operating Expenses ratio
53.8% 50.8% 3%
Net Profit margin
-1.47% 3.53% -5%
Low Profitability
Why did the coffee shop generate cash inflow, but also suffered a loss?
For the year ended 31 Dec 2009
· 2,000 cash inflow from Cash Flow Statement
· 13,710 loss from Income Statement
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Financial perspectiveWhy did the coffee shop generate cash inflow, but also suffered a loss?
-200,000
0
200,000
400,000
600,000
800,000
1,000,000
2008 2009
370,000
375,000
380,000
385,000
390,000
395,000
400,000
405,000
410,000
415,000
420,000
425,000
Sal es
Operat i ngexpenses
Gross margi n
Net Profi t
Cost ofsal es
Reason
Sales increase by 1.64%, COS (paid on credit) increase by 8%, operating expenses increase by 7.5%
IS- Accrual basis CFS- Cash basis
ATTENTION:Control costs
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Financial perspective Cost Analysis
As a % of sales 2008 2009 Increase (decrease)
Average in local regions
GAP (2009 vs. Average)
Cost of sales 42.5% 45.2% 2.7% 40% 5.2%
Utilities 4.3% 5.2% 0.9% 5% 0.2%
Depreciation 9.0% 8.8% -0.2% 5% 3.8%
Advertising and promotion
2.7% 3.2% 0.5% 5% -1.8%
Purchasing price increases and excess the average level.
Be way above the average level. Need to better utilize the furniture and fittings.
Need more promotion to attract more customers.
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PROBLEM: Inventory turnover period(2009)=36 days
SOLUTIONS
· Too long for a food service industry· Inventory may get obsolescence and go bad easily
· Better relationship with suppliers - Obtain trade discount - Deliver in time· EOQ and JIT - Keep safety stock and order in time when the stock is down to that level - JIT purchase
Financial perspective
Cost control—Inventory Management
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Customer satisfactio
n
Customer expanding rate
COS/Gross profit per customer
Increase of 1.3%/Decrease of 1.1% compared to
2008
1.6% compared to the estimated expanding rate in China of 10%
Customer perspective
Customer return rate
Five-star serviceat
fair price
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Market segmentation
Take-away service
· Businessman— espresso· Office lady— non-fat coffee· Student— blended coffee
· Call order· Mail order
Customer perspectiveHow to explore new customers?
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Customer perspectiveHow to improve customer return rate?
Quality of food1
Quality of service2
Various choices of food3
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Customer perspectiveHow to improve customer return rate?
Quality of food
Shorten purchasing period to make food more fresh
Develop featured Coffee
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Customer perspectiveHow to improve customer return rate?
Quality of service
Stafftraining
Provide intensivies
More full-time staff
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Customer perspectiveHow to improve customer return rate?
Promotion for particular food
everyday
Various kinds of coffee to
satisfy different customers‘
requirements
Special Coffee of the day
Variety of food
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Customer waiting time
Wastage
Customer complaining times
Internal operation perspective
1
2
3
Staff Training-Economy-Efficiency-Effectiveness
Also via training
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Innovation and learning perspective
Employee satisfaction · Provide bonus for good performance
· Offer rewards to “star of the month”
· Issue employee satisfaction
survey
Employee turnover
· More full-time employees · Treat employees equally and equally
Training times
· Orientation Training · Frequent training per quarter · Depth of training
Employees
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Income statement
Cash flow statement
Balance sheet
Financial forecastPudong Coffee Shop
1
2
3
28
Assumptions
Financial forecastPudong Coffee Shop
Sales prices will increase by 3% 1
Sales volume will increase by 5% 2
Discretionary cash expenses increase by 4%3
Suppliers will extend trade credit by 4%4
Inventory turnover rate will be unchanged 5
6 No investing or additional financing activities
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Income Statement for year ended: 31st December 2010 31st December 2009
¥ ¥
Revenue (beverages/drinks) 524,527.5 485,000
Revenue (food sales ) 481,267.5 445,000
Total revenue (food and beverages) 1,005,795 930,000
Cost of sales (458,640) (420,000)
Gross profit 547,155 510,000
Less Operating expenses: Depreciation of tangible assets (82,000) (82,000)
Wages and remuneration (135200) (130,000)
Rental (200,000) (200,000)
Utilities (lighting and heating etc.) (49,920) (48,000)
Garbage collection (10,400) (10,000)
Advertising and promotions (31,200) (30,000)
Total operating expenses (508,720) (500,000)
Operating profit for year 38,435 10,000
Interest payable on loans (18,370) (23,710)
Profit (loss) for year 20,065 (13,710)
Income statement for 2010 524,527.5=485,000*(1+5%)*(1+3%)481,267.5=445000*(1+5%)*(1+3%)1,005,795=930,000*(1+5%)*(1+3%)
458,640=420000*(1+5%)*(1+4%)
These 4 numbers are ( 1+4% ) times of the numbers in
2009
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Financial forecastPudong Coffee Shop
YearInterest
rateInterest payable
Bank loan payable
Repayment of loan including
interest
2008.01.01 7% 410,000
2008.12.31 7% 28,700 338,700 100,000
2009.12.31 7% 23,710 262,410 100,000
2010.12.31 7% 18,370 180,780 100,000
2011.12.31 7% 12,650 93,430 100,000
2012.12.31 7% 6,570 0﹡ 100,000
Note:
In order to rationalize the computational process, we assume that at the end of 2012, the balance of the bank loan payable is exactly 0.
Bank loan’s computation process
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Summarised cash Flow statement for year ended:
31st December 2010 31st December 2009
¥ ¥
Operating cash flow
Operating profit (loss) for year 38,435 10,000
Add: depreciation 82,000 82,000
120,435 92,000
Changes in working capital: Less: Increase in inventories (1,544) (6,000)
Add: Increase in trade payables 19,044 16,000
137,935 102,000
Investing activities: NIL NIL
Financing activities: Repayment of loan including interest (100,000) (100,000)
= Overall cash flow (deficit) for year 37,935 2,000
Add: Opening bank balance 198,000 196,000
Equals: Closing bank balance 235,935 198,000
Cash flow statement for 2010
No investment
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Summarised Balance Sheet at: 31st December 2010 31st December 2009
¥ ¥
Goodwill 400,000 400,000
Furniture and fittings (net) 164,000 246,000
Inventories 45,544 44,000
Cash at bank 235,935 198,000
Total assets 845,479 888,000
Owner’s equity 438,655 418,590
Bank loan payable 180,780 262,410
Trade payables 226,044 207,000
Total liabilities and owner’s equity 845,479 888,000
Balance sheet for 2010
226,044=207,000*(1+5%)*(1+4%)
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Financial forecastPudong Coffee Shop
Take the inventory in 2010’s Balance sheet for example
Formula:
Inventory Turnover Rate = Cost of sales / Average inventory
Year 2010 2009
Cost of sales 458,640 420,000
Opening inventory 44,000 38,000
Closing inventory X 44,000
Average (44,000+X)/2 41,000
458,640 / [( 44,000 + X ) / 2] = 420,000 / 41,000
X = 45,544
Inventory’s computation process
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Break-even point Pudong Coffee Shop
YearTotal
revenue
The averagespend percustomer
The quantityOf customers
Cost of sales
The average cost percustomer
Totalexpense
sBreak-even
point
2009 930,000 50 18,600 420,000 22.58 523,710 19,100
2010 1,005,795 51.5 19,530 458,640 23.48 527,090 18,814
51.5=50*(1+3%) 23.48=22.58*(1+4%)=458640/19530
Analysis:
In year 2009,The Pudong coffee shop had not reached the break-even point, so it had a loss.
According to the forecast, in year 2010, the Pudong coffee shop will reach the break-even point, and finally gets a profit.
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Break-even point Pudong Coffee Shop
the quantity of customers
cost
loss
profit
0 18,814 19,530
FC
2010 break-even pointthe quantity of customers
cost
loss
profit
0 18,600 19,100
FC
2009 break-even point
Cost-volume-profit chart
2009 and 2010
However, still low profitability
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Overall evaluationPudong Coffee Shop
۩ 1 、 We use the Enterprise's valuation model.
۩ 2 、 We use six assumptions in the financial forecast.
۩ 3 、 We use the loan interest rate 7% as the discount rate.
۩ 4 、 Because of the depreciation and bank loan payables, we can only get the data of year 2008 to 2012, so the
period for evaluation is from 2010 to 2012.
Assumptions
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Overall evaluationPudong Coffee Shop
Year 2010 2011 2012
Goodwill 400000 400000 400000
Furniture and fittings (net) 164000 82000 0
Inventories 45544 51300 53435
Cash at bank 235935 306934 422263
Total assets 845479 840234 875698
Owner’s equity 438655 499964 606149
Bank loan payable 180780 93430 0
Trade payables 226044 246840 269549
Total liabilities and owner’s equity 845479 840234 875698
Balance sheet of three years’ forecast
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Overall evaluationPudong Coffee Shop
Year 2010 2011 2012
Revenue (beverages/drinks) 524,527.5 567,276 613,510
Revenue (food sales ) 481,267.5 520,491 562,911
Total revenue (food and beverages) 1,005,795 1,087,767 1,176,420
Cost of sales (458,640) (496,019) (536,445)
Gross profit 547,155 591,748 639,976
Less Operating expenses:
Depreciation of tangible assets (82,000) (82,000) (82,000)
Wages and remuneration (135,200) (140,608 ) (146,232)
Rental (200,000) (200,000) (20,0000)
Utilities (lighting and heating etc.) (49,920) (51,917) (53,993)
Garbage collection (10,400) (10,816) (11,249)
Advertising and promotions (31,200) (32,448) (33,746)
Total operating expenses (508,720) (517,789) (527,220)
Operating profit for year 38,435 73,959 112,755
Interest payable on loans (18,370) (12,650) (6,570)
Profit (loss) for year 20,065 61,309 106,185
Income statements of three years’ forecast
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Overall evaluationPudong Coffee Shop
Year 2010 2011 2012
Operating cash flow
Operating profit (loss) for year 38,435 73,959 112,755
Add: depreciation 82,000 82,000 82,000
120,435 155,959 194,755
Changes in working capital:
Less: Increase in inventories (1,544) (5,756) (2,135)
Add: Increase in trade payables 19,044 20,796 22,709
137,935 170,999 215,329
Investing activities Nil Nil Nil
Financing activities:
Repayment of loan including interest (100,000) (100,000) (100,000)
= Overall cash flow (deficit) for year 37,935 70,999 115,329
Add: Opening bank balance 198,000 235,935 306,934
Equals: Closing bank balance 235,935 306,934 422,263
Cash flow statements of three years’ forecast
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Enterprise's valuation model
Year Base period 2010 2011 2012
Total cash flow 37,935 70,999 115,329
Discount rate 7%
Discount factor 0.9346 0.8734 0.8163
Expected present value 191,608 35,454 62,011 94,143
Perpetual growth rate 4.15%﹡
Present value for year ended 3,303,266﹡ 4,046,632﹡
Overall value 3,494,874﹡
Note:
Perpetual Growth Rate 4.15% = (1+5%)*(1+3%)-1-4%
Final value 4,046,632 = 115,329 / (7%-4.15%)
3,303,266 = 4046632 * 0.8163
3,494,874 = 3,303,266 + 191,608
From the cash flow statements of 2010, 2011 and 2012.
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One year
Three months
Three-year
Action Plans Objectives hierarchy
Reverse loss and attain profit
Achieve average customer growth rate
Expand to other areas
42
One year
Three months
Three-year
Action Plans
1. Control costs
· Better relationship with suppliers - Obtain trade discount - Deliver in time· EOQ and JIT - Keep safety stock and order in time when the stock is down to that level - JIT purchase
43
One year
Three months
Three-year
Action Plans
2. Market Segmentation&
Take-away service
Market segmentation· Businessman— Espresso for most successful businessmen.· Office lady— Non-fat coffee for office ladies who care more about their slimness.· Student— Blended coffee for the students who love multiplied tastes.Take-away service· Call order· Mail order Provide discounts for both.
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One year
Three months
Three-year
Action Plans
3. Improve qualityof food
· Shorten purchasing period to make food more fresh· Develop featured coffee and special coffee of the day· Provide various kinds of coffee to satisfy different customers‘ requirements
45
One year
Three months
Three-year
Action Plans
4. Improve qualityof service
· More staff training, including orientation training and frequent training per quarter.· Offer rewards to the “star of the month”.· Employee more full-time employees to enhance loyalty and decrease employee turnover rate.
46
Thank you !