Ⅰ. problem identification Ⅱ. analysis and recommendations

Ⅰ. Problem identification

Ⅱ. Analysis and recommendations

Ⅲ. Summary of action plan

Ⅳ.Other issues

Content

西安交通大学

skywalker

Ⅰ. Problem Identification– Case overview

Li Wang, manager of the shop

Shortly after FY2009

Pudong，Shanghai

When

Who

Problem

Loss in 2009Profitability problem

Where

•China—

Prosperous future for coffee shop industry

•Shanghai—

Financial and commercial hub of China

Competitors

Private business school

Office buildings

Residential department

Ⅰ. Problem Identification– SWOT Analysis

strength

weakness

threats

opportunities•Good customer experience: non-smoking ample magazines provided free fruit and biscuit in the afternoon•Customer loyalty

• Loss in 2009• Not attractive to new customers• negligible take-away business • Price limited by nearby competitors

•Growing coffee-drinking culture•Two-digit growth in domestic• market •Customers requiring high qulity •service and product•Take-away business•Offer growth potential

• Liquidity problems if not performing well • Rent costs expected to grow after 2015 • Potential new entry for high growth & Low entry barrier

Ⅰ. Problem Identification– Financial Analysis

2008 2009

ROCE 0.079 0.017

ROE 0.075 -0.033

2008 2009BMK

(Average)

Net Profit Margin 0.035 -0.015 0.050Profits dropped significantly from last year. And this coffee shop’s profits are generally lower than the average.

If the coffee shop’s profitability remains constant, it will take tens of years for the owner to recover his investment. Unfortunately, the case is the profitability is actually deteriorating!!

2008 2009 BMK(empirical value)

Ratio of cash to current liabilities 0.715 0.717 1.00 or higher

The cash balances at both year ends are too slim to cover the payables, indicating some liquidity problems. Therefore, it is urgent to generate more cash to mitigate the situation. Liquidity

2008 2009 BMK(empirical value)

Interest cover 2.215 0.422 1.00 or higher

Solvency

The interest cover drops substantially from the last year. The slim profit renders the company extremely difficult to pay the due interest.


11

5. 62

29. 2

0

5

10

15

20

25

30

average 2008 2009

operating leverage

The operating leverage rocketed to 29.2 this year, indicating some potentially high operating risks.

3 strategic objectives3 strategic objectives

To reverse this trend, we should …

% change in operating income

% change in sales


% change in sales


Due to the high DOL (degree of operating leverage), a minor change in sales can bring a significant one in operating income.

Thus we can boost the operating income by way of increasing sales volume.

Sales Volume


Sales Volume

Demand curve and price elasticity analysis

P(RMB)

Q (Demand)

50

47.6

19215(Y2008)

18600(Y2009)

Based on data of 2008 and 2009, the price elasticity is calculated to be -0.66, indicating a rigid demand. So, increasing price will lead to a rise in total revenue.

Further calculation shows revenue will continue to rise until the increase in price reaches 25.8%.

So increasing sales price is acceptable.Price



Operating Costs as % of Total Revenue in Coffee Shops

2008 2009BMK

(average)

Food & beverages

42 45 40

Wages & remuneratio

n12 14 20

Rental 22 22 20

Utilities 4 5 5

Depreciation 9 9 5

Advertising &

promotions3 3 5

>>

Therefore, we should promote the efficient, effective and economic use of resources, including fixed assets & intangible ones, by refining the internal process.

Value for Money

>>

Sales Volume

Price


Long-term

Short-term

Ⅰ.Strategic Goals

Maximize value for equity

Profitability

Revenue increase

Value formoney

Differentiation

Market development

Price

Salesvolume

Efficiency

Economy

Effectiveness

Ⅱ. Analysis and recommendations—CSF&KPI

Perspective CSF KPI

Financial SalesProfitabilityLiquidity

Sales increaseROE , Net profit margin Gearing

Customer Customer loyaltyHigh quality service

Market shareCustomer satisfaction rateNumber of new customersAmbience and facilities

Internal process

Value for moneyBrand management

Waste, expenseInventory turnoverAdvertisements, surveys

Learning& Growth

Staff trainingStaff competenceEmployee satisfaction

Training cost Average order processing timeEmployee turnover, reward

KKey

PPerformance

IIndicator

Customer loyalty high sustain

Number of new customer small To be decided

Customer complaint rate low sustain

Customer waiting time unknown To be decided

Seat occupation rate 17/50* Over 35/50

* customer number per day ×sales percentage at lunch time.

Current Expectation

Ⅱ. Analysis and recommendations—Customer

We should focus on breakfast supply

We should attract campus students under 20 years

Ⅱ. Analysis and recommendations—Customer

Local proffesionals Expats

•Make signpost to maitain nonsmoking environment•Issue vip card•Individual cup•Customer satisifaction

People-oriented service to maintain existing customers

White-collar Students

•Reduce waiting time•Issue discount card•Price discrimination at different time period•Theme day activity

new customer attraction to enlargemarket share

Ⅱ. Analysis and recommendations—Internal Process

Variance Analysis Material cost: unfavorableLabour cost: favorableUtilities expense: unfavorableAdvertising: favorable

Need to improve cost control and emphasize promotion

And according to surveys online, food profit margin >drinks profit margin.

Need to boos

t food sale

s


*Assumptions: After implementing the strategies, price of food and drinks will increase by 5% and 7%respectively.Also, the sales volume of food and drinks will rise by 40% and 10% seperately.

KKey

PPerformance

IIndicator

Percentage of revenue from food 47.8% 53.4%*

Types of food available abundant sustain

Advertising expense (as a % of sales) 3.2% 5%

Utilities expense (as a % of sales) 5.2% <5%

Ingredient waste rate unknown low

Inventory turnover period 38 days shortened

Current Expected


Action plan

DifferentiationDifferentiationPlay soft music at certain time

Improve food presentation

Picturesque menu

Design a new decoration style (in the near future)

Update reading material

Market developmenMarket developmentt

Advertise in office buildings

Start from7am to increase breakfast supply

Open a take-away window

Boost food sales

Value for moneyValue for moneyEfficient use of facilities

and ingredients

Keep a clean and cozy

environment

Provide high quality

food and drinks

Set reward and incentive schemeTrain employees Leader takes management coursesCompetence and courtesy contestEnroll university student as part time workers

*according to financial expectation figureAction plan

KKey

PPerformance

IIndicator

Employee turnover low sustain

Employee satisfaction unknown high

Training cost (as a % of sales) unknown To be decided

Reward expense unknown To be decided

Customers processed per full-time employee hour

1.31 1.52*

Current Expected

Ⅱ. Analysis and recommendations—Leaning & Growth

long term objective

• Customer loyalty• Attract new customer• Customer satisfaction

Customer

• Create brand image• Boost food sales• Cost reduction and quality control

InternalProcess

• Manager and employee training• Employee satisfaction• Incentive scheme

Learning and

Growth

• Cost of sales• Operating expenses• Price• Sales volume

Financial

Ⅱ. Analysis and recommendations—Strategy Map

Forecasted Financial Statements Forecasted Financial Statements for the Year ended 2010for the Year ended 2010

Income Statement for the Year ended 31st December 2010 (forecasted)

Revenue (beverages/drinks) 524,527.50

Revenue (food sales ) 481,267.50

Total revenue (food and beverages) 1,005,795.00

Cost of sales (458,640.00)

Gross profit 547,155.00

Less Operating expenses:

Depreciation of tangible assets (82,000.00)

Wages and remuneration (135,200.00)

Rental (200,000.00)

Utilities (lighting and heating etc.) (49,920.00)

Garbage collection (10,400.00)

Advertising and promotions (31,200.00)

Total operating expenses (508,720.00)

Operating profit for year 38,435.00Interest payable on loans (18,368.00)

Profit (loss) for year 20,067.00

Statement of Financial Position as at 31st December 2010 (forecasted)

Goodwill 400,000

Furniture and fittings (net) 164,000

Inventories 47,586

Cash at bank 232,189

Total assets 843,775

Owner’s equity 438,657

Bank loan payable 180,778

Trade payables 224,340

Total liabilities and owner’s equity 843,775

Statement of Cash Flow for the Year ended 31st December 2010 (forecasted)

Operating cash flow:

Operating profit (loss) for year 38,435

Add: depreciation 82,000

120,435

Changes in working capital:

Less: Increase in inventories (3,586)

Add: Increase in trade payables 17,340

134,189

Investing activities: Nil

Financing activities:

Repayment of loan including interest (100,000)Overall cash flow (deficit) for year 34,189

Add: Opening bank balance 198,000

Equals: Closing bank balance 232,189

Other issues

year as customer No. as revenue current/forecast safety margin

2009 17,963 ¥898,151 ¥930,000 3.5%

2010 15,936 ¥820,713 ¥1,005,795 22.6%

breakeven point analysis

*Assume only rental & depreciation are fixed cost.

• Safety margin is enlarged and business risk is remarkably lower in 2010.

• So, consider efficient use of net cash flow in near future

Wears out in about 5 yearsSo new investment in replacing non-current asset will be needed

Furnitures & equipment

Need additional fund to redecorate and change the image

Decoration style

After 2015, rental may increase since generous terms will expire Negotiate again; or look for a new site

Rent terms

西安交通大学

skywalker

Ⅰ. problem identification Ⅱ. analysis and recommendations

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