Sun after storm

1. Sun after storm A Case Study on Pudong Coffee Shop Dream Chasers Sun Yat-sen University Manager: LIU Mengning Consultants: ZHANG Wei HUANG Peilong PENG Weijian

2. Outline • A1 Storm before Sun A. Case Overview • B1 A STORM Framework B. Current Situation Analysis • C1 Strategy Positioning • C2 Strategy Map C. Strategy Analysis • D1 Learning & Growth B S C • D2 Internal Process Perspective • D3 Customer Perspective D. Utilization & Implementation • D4 Financial Perspective • E1 Income and Cash Flow Forecast E. Net Cash Flow Forecast • E2 Break-even Point • E3 Overall Valuation Goal: To help Pudong Coffee Shop weather the STORM.

3. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast A1 Case overview Social Conditions Technical Conditions Organizational Conditions Revenue Conditions Market Conditions A STORM Framework Analysis Strategy Analysis Utilization &Implementation Net Income Forecast A SUN Solution

4. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Social Conditions • Industry Retrospect: • Growing Coffee Consuming in China • Broad Prospect: • Coffee: A symbol of fashion, elegance and noble • Huge gap in the market: • Chinese: 3 cups per year • American: 500 to 700 cups per year Coffee has a blooming future in China.

5. 6 Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Technical Conditions Positive feelings 11.Relax and watch the world go by Joyful 11 5.Little waiting time 1.Wonderful environment 12.magazines Comfortable 5 10 12 7 1 10.Taste and appearance 3 Satisfied 2 7. A variety of coffee 3.Decoration 2.Warm welcome Common 9 13 4 Higher price 9.Long time waiting for coffee Invalid 8 4.Less flavor and background music Bad 8. Employees, who are friendly , familiar with coffee and professional in service Awful Negative feelings Customer Experience Flow- Process of Pudong Coffee Shop

6. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Organizational Conditions • Company Structure • Current situation • Owned the coffee shop Father • Managed the shop without salary and bonus from it Son • No training for the employees. • No adequate performance evaluation. Full-time Employees Part-time Employees 2 Persons Training and development of employee are urgent.

7. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Market Conditions – Customer Characters Occupations Age Time of Consumption 1.Professionals 2.International students 3.Residents Accessible Young customers are the majority Lunch-time is the busiest period. Target Market Average expense of each customer RMB 50 Average quantity of customers every day About 50

8. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework GE Matrix of Judging Criteria B1 Market Conditions – Service Evaluation Judging Criteria for Coffee Shops (not listed in order of importance) 1. Beverages/food provided must be of good quality 2. Décor, temperature and noise levels 3. Free WiFi 4. Friendly staff 5. Excellent customer service 6. Presentation of food and food offering 7. Cleanliness and overall hygiene 8. Availability of space 9. Overall value for money Needed improvement Region Sustained advantages Region high 3 1 4 5 8 Importance of the criteria 9 2 7 low 6 low high Customers’ satisfaction Of Pudong Coffee Shop Certain attention should be paid to Free Wifi, Cleanliness and overall hygiene, & Presentation of food offering.

9. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Market Conditions – Competitors Wages , Advertising and Food sales is weak compared with average of Local Region Wages and remuneration LOW Depreciation of tangible assets HIGH Advertising and promotions LOW Beverage/drinks HIGH Food sales LOW

10. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Revenue Conditions Ratio Year 2008 Year 2009 Analysis Good • Current ratio • Quick ratio • Net working capital • 1.225 • 1.026 • 43000 • 1.169 • 0.957 • 35000 Liquidity • Current ration and quick ratio are near 1 • Has adequate net working capital • Inventory turnover • Asset turnover • 20.464 • 0.951 • 10.244 • 1.047 Good Activity • Inventory turns over at fairly high rate • Net profit margin • Gross margin • ROA • ROE • 0.035 • 0.575 • 0.034 • 0.075 • -0.015 • 0.548 • -0.015 • -0.033 • Made small profit in 2008, but net loss in 2009 • Decreased profitability Poor Profitability • Times interest earned • Debt service coverage • 2.125 • 0.61 • 0.422 • 0.1 Solvency Poor • Interest payment was quite large compared with net income Financial Situation: Poor profitability but good liquidity.

11. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast C1 Strategy Positioning Intertype Starbucks UCC Intratype Pudong Coffee Ice-cream Café Italian-style restaurant Others In the intertype, Pudong Coffee Shop has to compete with various coffee shop. Thus, Pudong Coffee Shop should cut down its cost to jostle for the similar demanders. In the intratype, Pudong Coffee Shop has to satisfy the local customers. Thus, to compete with other local family-owned cafes, Pudong must find its own features FOCUS STRATEGY Cost Leadership Differentiation Enhance Profitability

12. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast C2 Strategy Map Use Balance Scorecard to Implement the strategy Enhance Profitability Differentiation Cost Leadership Financial Perspective Balance Gross Margin Rate Boost Sales Growth Enhance Asset Utilization Customer Perspective Boost Market Shares Enhance Customer Satisfaction Retain Customer Loyalty Enhance Service Level Wider Product Range Budgeting Control Internal Perspective Continuous Improvement of Internal Process Increase Labor Productivity Learning & Growth Perspective Adjust Employee Structure Improve Employee Competence Enhance Employee Satisfaction

13. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast Utilization & Implementation To transfer KSF into targets using Benchmarking Approach

14. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast D1 Learning and Growth Perspective – Action Plan Enhance Employee Satisfaction • 1.Salary • Basic Wage:2700 • Use the Proportionate Commission related to • every customer serviced (3%) • 2.Work Hours • Full-time employees: 8h is required. • Arrange them to 2 shifts: • Part-time employees: 6.5h is required. • Arrange them to 4 shifts: Improve Employee Competence • Employee training plan • Train employees for at least 10 hours per month and invest ￥300 per month. • Performances recording • Rank the performance results and give the best one 10% bonus Adjust Employee Structure • To employ one more full-time employee • Keep the current structure

15. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast D2 Internal Process Perspective - Action Plan Purpose Targets Action • Redesign layouts • additional expense of ￥3000 • Bio-material and lower-wattage bulbs Utilities as % of Total Revenue: Utilities change from prior year: 5.2% Service required Save Utility 5.0% • Energy-saving idea • Personal responsibility system 23.1% 15% • Encourage Take-away Service • Reduce Customers’ Waiting Time • Check the waiting time though observing • Provide Take-away Service to Passers-by • Set an employee particularly • In the morning (8:00-9:00) Boost Take- away Rates Take-away Rate: Budgeting Control >10% <1%

16. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast D3 Customer Perspective - Action Plan Enhance Customer Satisfaction Customer retention and absorption Boost Market Shares Enhance Profitability • Provide light music • Do customer satisfaction survey of 200 samples every 3 month • Decorate the walls and bar counter with ￥2000 to￥3000 • Found a member club • Develop campus agent at the cost of ￥300 per month • Set ￥1000 to hold coffee culture competition once a year • 5% off for old patrons’ bringing new customer. • Develop 3 new types of coffee flavor every 6 month • Provide 3 special offers every week

17. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast D4 Financial Perspective Enhance Profitability

18. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E1 Forecast Income Statement for year ended: E1 Forecast Balance Sheet E1 Forecast Cash Flow statement for year ended: The forecast of these accounts is based on the assumption Li has made for 2010, and other accounts are predicted based on the set targets mentioned before. The forecast of these accounts is based on the assumption Li has made for 2010. The forecast of these accounts is based on the forecast income statement and forecast balance sheet. Keeping positive net working capital is of importance, which guarantees the healthy operation of the company With all the implementation mentioned above, Pudong Coffee Shop will have promising net income in 2010 With the increasing profitability, total assets and owners’ equity will enlarge fast, especially after 2012 when depreciation of tangible asserts finished

19. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E2 Break-even Point Analysis • BEx= TFC/(p-VC) • Based on the assumption and the analysis above ,we can calculate:Total Fix cost(TFC)=82,000+65,000+200,000+48,000+30,000=￥425,000 Break-even Sales Volume(BEx)=425,000.00/(50-35)= ￥ 28,333Total Fix Cost(TFC)= • 82,000+65,000×1.2+20,000+53,475+51,336+14,400=￥479,211 • Break-even Sales Volume(BEx)=479,211/(50×1.05-35)=27,383 Cost Behavior Analysis Fixed cost: Depreciation, Rental, Utilities and Ad & Promotions Variable cost: Cost of sales, Garbage collection Mix cost: Wages and remuneration, Year 2009 Assumption: Unit cost 35 yuan (According to the case, The average cost of a cup of coffee in these international chains amounts to between Yuan 30 and 40.) Thus, sales volume should be counted as : The Year 2008: Sales Volume=￥915,000÷35=￥11,114.27 The Year 2009: Sales Volume=￥930,000÷35=￥12,000.00 Year 2010 • Assumption: • Labor Equivalent : 1 part-time = 0.5 full-time • In the year 2009, half of the sales volume comes from part-time employees, and the other half comes from part-time ones. • Half of the wages and remuneration is fixed cost. The graph of cost behavior of wages and remuneration is shown below: The formula of wages and remuneration :

20. Period Net Cash Flow Discounted Rate Assumption: 1. Free from going concern; 2. Run at the same growth rate of 2010 in the next five years. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E3 Overall Valuation of Pudong Coffee Shop Choose the interest rate of long-term bank loan 7% as the discounted rate. Make forecast cash flow statement in the next five years. • n=5

21. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E3 Forecast Income Statement for the Next Five Years E3 Forecast Cash Flow Statement for the Next Five Years E3 Forecast Balance Sheet for the Next Five Years Increasing total revenue and profit. Satisfying cash flow for the next five years. Total assets rapidly increase as well as the owner’s equity.

22. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E3 Overall Valuation of Pudong Coffee Shop 2011 ￥134298 2013 ￥476569 2009 ￥ 2010 ￥29700 2012 ￥243277 2014 ￥612014 1/(1+7%)-1 ￥27,757 1/(1+7%)-2 ￥117,301 1/(1+7%)-3 ￥198,586 1/(1+7%)-4 ￥363,572 1/(1+7%)-5 ￥436,357 Total PV: ￥1,143,574 NPV=￥1143574 Though the shop experience a financial storm this year, it has a profitable future.

23. Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast Uncertainty New Entrants in the local region Mitigation: Use CRM system to enhance customer loyalty Increasing Price of the Materials Mitigation: Develop new non-coco products Rapid Inflation Mitigation: Increase the price

24. Summary A STORM framework Analysis Social Conditions Technical Conditions Organizational Conditions Revenue Conditions Market Conditions A. Case Overview B. Current Situation Analysis C. Strategy Analysis Learning &Growth Perspective Internal Process Perspective Customer Perspective Financial Perspective D. Utilization & Implementation A SUN Solution E. Net Cash Flow Forecast Management Accounting Approaches such as Benchmarking and Balance Scorecard are applied to help Pudong Coffee Shop go from storm to sun.

25. Thank You for Your Time! Dream Chasers Sun Yat-sen University