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The Pudong Coffee Shop

3Z --from SHUFE

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Outlines

Case Overview

Tactics

FinancialForecast

Background

Current Situation

Balanced Scorecard

Conclusion

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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.

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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.

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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

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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

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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

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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

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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

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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.

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Thank you !