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The Pudong coffee shop

The Pudong coffee shop. -----analysis report. brilliant. Li Hao Wang Hui Wang Xuejuan Qin Xinren Wei Yingying. “Better to be deprived of food for three days, than tea for one.” —— Ancient Chinese Proverb

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The Pudong coffee shop

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  1. The Pudong coffee shop -----analysis report brilliant Li Hao Wang Hui Wang Xuejuan Qin Xinren Wei Yingying

  2. “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

  3. Outline Background Caseanalysis Strategy and actions Budget Risk response and valuation

  4. Background ? Industry life cycle • Global: • Coffee consumption is growing at a slightly over two percent per year • A typical American person drinks between 500 to 700 cups a year • China: • Coffee consumption is growing at a double-digit rate per year • Each Chinese person drinks about 3 cups of coffee a year A big potential market of coffee in China. Embryonic Growing Mature Decline

  5. 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

  6. Structure of product Comparison Gap：7.85% • Pudong coffee shop： • Limited product range • Inflexible time supply

  7. 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. students White-collars students • 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.

  8. Employee analysis Pudong coffee shop: Employees’ attitude is not good towards customers. To some extent, they are not satisfied with the work. Gap: 6% Low wages and stimulation may make employees feel upset and it affects service quality. 14%=Wages/Revenue

  9. Cost structure analysis 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.

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

  11. SWOT analysis threats opportunities weakness strengths • Students and office staffs nearby • International activities and expats Good location Customers’ loyalty Generous rent terms Low market share and sales Negligible “take-away” Insufficient food supply Fierce competition from an Italian restaurant and an Ice-cream coffee nearby

  12. Structure of Strategy Target customers: students, white-collars, 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

  13. Actions---target customers 21-30:high consumption but low purchasing power, sensitive to price. Promote strategy by adjusting price and keeping loyalty Purchasing power Above 50 31-50 31-50：high consumption and purchasing power, insensitive to price. Keep strategy, maintain high quality 21-30 and 31-50 are set to be target customers of Pudong coffee shop Above 50：high purchasing power but low consumption, insensitive to price. Develop this market by quality and culture Below20 21-30 Below 20: low consumption and purchasing power, sensitive to price. Promote strategy using discount activities Customers’ bargain

  14. Translating strategy into action --- on the basis of BSC Employees & Facilities Text in here Internal activities Financial impact Customer response

  15. Actions --- Facilities & Employees Action: Financial impact: • Cost 1500 Yuan and without depreciation Provide Wi-Fi Fashion magazines& newspapers • No obvious impact Peaceful environment with soft music and piano performance in the evening • 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. Improve employees' satisfaction

  16. Actions --- Internal activities Develop “take-away” service Cleanliness and overall hygiene Action: Extend the opening time to 10 P.M. Update the menu according to customers’ need • 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 Financial impact:

  17. Actions --- Customer response Action: Financial impact: Measures above can improve the satisfaction of customers and as a result increase the sales. VIP card and Student card at 20% discount. 5% discount above 10 people. 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. Questionnaire to communicate with customers Sponsor students’ activity

  18. KPI based on strategy to measure performance Internal activities Employees & facilities • Fake percentage of materials • Sales of “take-away” • Food sales in total revenue • Utilizing rate of Wi-Fi • Frequency of cleaning • Updated magazines and newspapers cost • Turnover of employees • Gross profit margin • Growth of sales • Net profit margin • Growth of net profit • Sales per Square Feet • Sales of new and existing customers • Time for queuing • Times of complain from customers Customers Financial impact

  19. 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 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.

  20. 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=900 Furniture 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 2009 Trade payables turnover of 2010 is the same with 2009 We calculate the financial statement following these assumptions.

  21. Budget after actions---Cash Flow Statement Cash flow goes down since we suggest purchasing a second-hand piano 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

  22. Risk analysis--Operating and Financial Risk DOL: degree of operating leverage DFL: degree of financial leverage DTL: degree of total leverage DTL = DOL×DFL DTL represents the total risk of a company, the figure decreases, which reflects a low risk in all. 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) 35,75 9.4

  23. Handle risk---if the strategy fails… If the strategy we suggest fails, then what can we do… Operating risk If 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 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 help about the re-finance. 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.

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

  25. The end thank you all brilliant

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