CAF XARAGUA: THE CALGARY OPPORTUNITY

It was early May 2012, and Robert Lehnert was pondering a decision that would change the scope and direction of Caf Xaragua, a Canadian online retail store that sold fair-trade coffee beans from Haiti. Having just completed the first full year of operations, Lehnert had developed a plan to offer Xaragua's products to the Calgary Farmers Market in the city of Calgary, Alberta. With his partners Jordan Peckham and Scott Schneider, Lehnert had to decide whether this plan represented an appropriate way to grow the business. If he did decide to proceed with the Calgary opportunity, Caf Xaragua products would appear at the market on June 1, 2012.

Business Objectives

The three partners had several goals for their business. They hoped to earn $75,000 profit by the end of Xaragua's second year, and they wanted to expand their retail line or move into wholesale distribution by the end of its third year. Key to the business was the goal to help support the economy of a country struggling to emerge from one of its most devastating natural disasters in recent history. Finally, Lehnert was hopeful that the business would provide a full-time salary for him so he would not have to acquire a corporate position.

THE FIRST YEAR

During its start-up year, Xaragua experienced outstanding online retail sales. Consumers visited the company website,' ordered as many bags as they wished, indicated whether the coffee was to be ground or not, and then paid through PayPal service. In its first year of operations, Xaragua generated $200,000 in sales, the majority of which were made in Canada. (See Exhibits 1 and 2 for financial statements.)

Several promotions offered at specific times periods only) throughout the year were used to boost sales. First, as a show of commitment to helping Haiti, Lehnert started The Tree Initiative. Under this project, for every one-pound bag of coffee purchased online, Lehnert planted a tree in the customer's name the next time he returned to Haiti. The customer owned the tree through Xaragua, and received regular updates on its growth. Lehnert believed that by showing their positive impact on the country, customers would be happy to pay premium prices for their coffee.

The second promotion occurred during December's Christmas holiday season. Every one-pound bag of coffee purchased online in December was delivered by Xaragua with a specialized thank-you note and a beautiful Christmas tree ornament. These made ideal gifts for coworkers, friends, and family members who enjoyed a good cup of coffee. See Exhibit 3 for the company logo and its Christmas promotion material.

Regardless of the company's success in its first year, Lehnert knew there were a multitude of expansion options available, and he had to work hard to decide which ones would be best suited for Xaragua. One opportunity researched by the partners was to launch the business into a farmers' market in Calgary, Alberta.

THE FARMERS' MARKET OPPORTUNITY

Alberta

With over 3.7 million residents, Alberta was the most populous of Canada's three Prairie provinces. Alberta had been a large tourist destination for many years, attracting tourists from around the world. Most popular among the various tourist attractions were the impressive Rocky Mountains, where two of the world's most famous resorts, Banff and Jasper, were located. Alberta was also home to the globally recognized Calgary Stampede and the impressive West Edmonton Mall.

Alberta's economy, one of the strongest in Canada, was supported by the petroleum industry and, to a lesser extent, the agriculture industry. Year after year, Alberta's GDP per capita' was consistently highest among all provinces in Canada, most recently exceeding $70,000. This figure was 61 per cent higher than the national Canadian average, proving to be the highest deviation from the national average in Canadian history

The Calgary-Edmonton Corridor was considered the most urbanized region in Alberta and one of the most densely populated in Canada. It is one of the fastest growing regions in the country, lending credence to the thought that Alberta was the ideal place to start a business.

Calgary

Historically, the city of Calgary had possessed a strong economy and was often referred to as Canada's economic powerhouse. Calgary's economy had been the strongest performing in the nation for the past 10 years and was projected to continue to lead the way for the foreseeable future. Of the six biggest cities in Canada, Calgary boasted the most productive and best-paid workforce, the highest personal income, the second-lowest unemployment rate and the second-highest retail sales growth over the past 10 years."

As the capital of Canada's energy industry, Calgary was home to many of Canada's oil and gas producers and had a strong representation of coal companies, alternative energy companies, green power companies and environmental technology companies. As a result of the needs and services of the booming energy industry, Calgary had seen strong growth and diversification of other sectors of Calgary's economy. Some of these sectors included financial services, transportation, film, communications, manufacturing and tourism. With the most favourable tax structure in Canada, Calgary attracted many new and existing businesses.

Calgary's population was young, well educated, and well paid. As a strong business hub, Calgary employed a large number of business professionals aged 20 to 35. This demographic would constitute Xaragua's target market, since its members possessed above-average incomes and an interest in the product. These young professionals would most readily accept Xaragua's higher prices in the market because they already purchased coffee at the various higher priced coffee shops in the city. Among the various coffee shops in the area, Starbucks was by far Xaragua's biggest competitor.

Calgary Farmers' Market

The Calgary Farmers Market opened at its current location in April 2011. The market had over 80 vendors, supplying customers with fresh produce, art, meat, poultry, organic foods, jewelry and much more. Beyond the product offerings, the Farmers' Market was stunning to behold. It contained a large, glass atrium; a large, dynamic food court, free-standing fireplaces, a children's play area, and free parking all around the building. On average, 20,000 people visited the market every week.

In 2007, a delegation from the North America Farm Direct Marketing Association declared the Calgary Farmers' Market the best-planned farmers' market on the continent. The market also scored top honours at the 2005 Growing Alberta Leadership Gala, winning the Economic Development Award; furthermore, Fast Forward Weekly had named the Calgary Farmers' Market Best Farmers Market for the past four consecutive years. In addition, readers of the Calgary Herald voted the market as the best farmers' market in 2010.

PROJECTED SALES

Xaragua would open for business every weekend (Friday, Saturday and Sunday). Customers would be able to purchase their coffee in four formats: (1) a 12-ounce cup of brewed coffee for $2.50; (2) a 16-ounce cup of brewed coffee for $2.75; (3) a half-pound bag of roasted coffee for $12, or (4) a one-pound bag of roasted coffee for $20. All purchases would be paid for with cash, debit or credit card, so Lehnert expected no accounts receivables or bad debts for the proposed venture.

While talking to a previous owner of a coffee kiosk at the Farmers Market, on a monthly basis, Lehnert believed the company would sell 700, 12-ounce cups of coffee; 340, 16-ounce cups of coffee; 80 half- pound bags of coffee; and 65 one-pound bags of coffee. In addition to these kiosk sales, Lehnert predicted that Xaragua's online retail sales would also grow by 50 per cent over the second full year of operations (fiscal 2012).

Projected Costs

Xaragua purchased its coffee beans from its Haitian supplier on account, and the supplier extended credit terms of net 60 days. The cost of the coffee depended on its state when sold. The variable cost of a 12- ounce cup of coffee was $0.38, while a 16-ounce cup of coffee had a variable cost of $0.46. The variable cost of a half-pound bag of coffee was $3.61, while a one-pound bag of coffee had a variable cost of $6.56. Lehnert planned to earn the same gross margins on his online sales as were earned in fiscal 2011. He also planned to maintain a 200-day inventory of coffee beans at all times.

Lehnert planned to rent a kiosk from the Farmers Market to sell Xaragua coffee, beginning June 1, 2012. Rent for the year would total $4,080, with first and last months' rent due immediately. The space would need $7,415 in furnishings and fixtures. These items would be depreciated using the straight-line method over 10 years and would assume no residual value. A truck would also be required and would cost $17,000. This truck would be depreciated using the straight-line method over seven years and would assume a residual value of $1,000. All other anticipated annual costs are given in Exhibit 4. Lehnert planned to pay all costs in full by fiscal year-end. Any income taxes owing on this business would have to be paid six months after the fiscal year ended. Lehnert would work the kiosk each weekend and pay himself a salary of $2,840 each month, payable on the last day of the month. Before any payouts would be made to the three partners, Lehnert thought he would wait until the business was well established in the Calgary market and proved to be sustainable enough to support dividends.

CONCLUSION

The partners were very excited about the upcoming fiscal year and could not wait to see what the second full year of operations would bring for Xaragua. Lehnert thought it essential to examine the direction of the coffee industry and the overall feasibility of operating in the Calgary area before he made a final decision on the Calgary Farmers' Market option. Was it too soon to expand? Might it be more feasible to grow internally before making a major decision to grow externally?

For the year ending April 30, 2013, Lehnert wanted to project an income statement and a statement of financial position that included the Calgary Farmers' Market option. Lehnert hoped to make a decision soon on whether to go ahead with the Calgary opportunity or delay looking at other opportunities and simply concentrate on Xaragua's current business model.

Exhibit 4

PROJECTED ANNUAL COSTS -- FARMERS' MARKET

Gas $ 960

Internet and phone 960

Miscellaneous 2,400

Marketing 2.000

Total $ 6,320

Question

1. What are the options/alternatives presented in the case?
2. Evaluate the options by considering the following:
   1. What are the advantages and disadvantages of selling the product in Calgary, Alberta?
   2. Prepare a projected income statement and statement of financial position for the year ending April 30, 2013 if the Calgary Farmers Market alternative is accepted. Put your calculations/financial statements in the appendix but reference/explain them in your report.
   3. Prepare a projected income statement and statement of financial position for the year ending April 30, 2013 if the company focuses on growing internally and does not sell at the Calgary Farmers Market. Put your calculations/financial statements in the appendix but reference/explain them in your report