Case Study I People of a certain demographic, especially the young and upwardly mobile, have a distinct need for a place other than their home or workplace, to relax, unwind and socialize. While there are businesses, like starbucks, that offer patrons such an alternative, your team and you have decided that the time is ripe for some competition in that market place. But rather than just open another coffee chain, you have decided to model your business on the European Caf where beer and wine are served in addition to other drinks like coffee, tea and carbonated beverages. The essence of the European Caf environment is to romance the customer in a casual setting while serving good quality beverages without any pressure to turn tables. The cafe will also serve some light food like sandwiches, fruit and cheese platters, pastries etc. that can be sourced from suppliers or does not need extensive prep or a skilled chef to prepare in the kitchen to avoid the operational complexity of a full scale restaurant. Startup costs include $168,000 for architectural and interior changes to the space you are leasing; $110,000 for signage, furnishings, bar equipment, security, computer systems and other equipment; $85,000 for training, advertising, incorporation, legal fees, printing and other pre-opening expenses; and finally $60,000 towards operating capital. The labor cost for your caf will be a minimum of $140,000 per annum. And every additional 30,000 customers (per annum) over 120,000 customers that you have per annum will need an additional $25,000 labor per annum. Rent will be $85,000, Manager salaries will be $120,000, entertainment will be $10,000, utilities will amount to $5,000 per annum and other miscellaneous expenses will add up to $2,500. There will be breakages which will cost you $125 for every 1000 customers; cleanup and other consumables will amount to $320 for every 1000 customers. Word-of-mouth will be the primary form of advertising you will depend on, but you will still incur a cost of $28,500 per year on advertising and other promotions. The cafe will need to remain open from early in the morning (to meet the early risers who need their cup of coffee) and also stay open late for the evening crowd. The average check amount also varies depending of the time of the day. Based on the current proposed pricing strategy, the average check during the morning will be $6.54. In the afternoons, the average check will be $5.12 and in the evenings, the average check will be $16.52. You will also sell $450 worth of other merchandizing items per 1000 customers. Research indicates that 35% of the customers will visit the caf during morning, 25% of them will visit during the afternoon and the remaining will enjoy their evening in the cafe. We will assume that each check means one customer. You plan on selling food with a limited menu that does not involve intensive preparation. The cost for food and drinks (per 1000 customers) will be $780.00 for food, $420.00 for non-alcoholic drinks and $1100.00 for alcohol. Cost of other sales (like merchandising) will amount to $190 per 1000 customers. In addition to selling food and drink and providing regular entertainment, you also plan on hosting some special events if your customer base is large enough. Such special events will be offered only if the caf has a minimum of 70,000 customers per year and will cost $0.07 per customer after that. It will also create a new revenue stream for the caf that amounts to $0.18 per customer. As the customer base for the caf grows, there is an additional cost in routine maintenance and wear and tear of all the equipment and interior fitting. This additional maintenance cost applies only if there are more than 150,000 customers and costs $2000 for every 30,000 customers. Your job Find out the breakeven point for the business model under the proposed pricing plan and compute profits at different levels of customers. If the business model is not profitable (cannot breakeven) with the current levels of costs, you may recommend different values for some of the costs in order to make the business profitable. But make sure that you justify those changes in a detailed manner. You also need to analyze the pricing model to recommend whether the current plan maximizes profit or not. Perhaps it would be better to set prices at a different level to generate more profit! 1. Create a spreadsheet file with (at least) two worksheets: a. In the first, analyze the Revenues, Costs, and Profit for various levels of possible sales, based on all the data given above. The spreadsheet must be neat, easy to read, and well designed (do not embed numbers in formulas - list the basic inputs at the top, with proper labels). Find the breakeven point (in number of customers) from your spreadsheet analysis. b. In the second worksheet, assume that the sales depends on the price you charge, according to the following equation: Demand = 435000-23500p; where p represents the average check amount. What would the impact to your profits be if your price structure is changed so that the average check value either increases or decreases from the proposed strategy? Try a range of average check values from $1 to $20, compute the corresponding demand, and find the revenues, costs, profits various prices. What is the best price to charge? What will the breakeven be at the optimal price structure? Case Study I People of a certain demographic, especially the young and upwardly mobile, have a distinct need for a place other than their home or workplace, to relax, unwind and socialize. While there are businesses, like starbucks, that offer patrons such an alternative, your team and you have decided that the time is ripe for some competition in that market place. But rather than just open another coffee chain, you have decided to model your business on the European Caf where beer and wine are served in addition to other drinks like coffee, tea and carbonated beverages. The essence of the European Caf environment is to romance the customer in a casual setting while serving good quality beverages without any pressure to turn tables. The cafe will also serve some light food like sandwiches, fruit and cheese platters, pastries etc. that can be sourced from suppliers or does not need extensive prep or a skilled chef to prepare in the kitchen to avoid the operational complexity of a full scale restaurant. Startup costs include $168,000 for architectural and interior changes to the space you are leasing; $110,000 for signage, furnishings, bar equipment, security, computer systems and other equipment; $85,000 for training, advertising, incorporation, legal fees, printing and other pre-opening expenses; and finally $60,000 towards operating capital. The labor cost for your caf will be a minimum of $140,000 per annum. And every additional 30,000 customers (per annum) over 120,000 customers that you have per annum will need an additional $25,000 labor per annum. Rent will be $85,000, Manager salaries will be $120,000, entertainment will be $10,000, utilities will amount to $5,000 per annum and other miscellaneous expenses will add up to $2,500. There will be breakages which will cost you $125 for every 1000 customers; cleanup and other consumables will amount to $320 for every 1000 customers. Word-of-mouth will be the primary form of advertising you will depend on, but you will still incur a cost of $28,500 per year on advertising and other promotions. The cafe will need to remain open from early in the morning (to meet the early risers who need their cup of coffee) and also stay open late for the evening crowd. The average check amount also varies depending of the time of the day. Based on the current proposed pricing strategy, the average check during the morning will be $6.54. In the afternoons, the average check will be $5.12 and in the evenings, the average check will be $16.52. You will also sell $450 worth of other merchandizing items per 1000 customers. Research indicates that 35% of the customers will visit the caf during morning, 25% of them will visit during the afternoon and the remaining will enjoy their evening in the cafe. We will assume that each check means one customer. You plan on selling food with a limited menu that does not involve intensive preparation. The cost for food and drinks (per 1000 customers) will be $780.00 for food, $420.00 for non-alcoholic drinks and $1100.00 for alcohol. Cost of other sales (like merchandising) will amount to $190 per 1000 customers. In addition to selling food and drink and providing regular entertainment, you also plan on hosting some special events if your customer base is large enough. Such special events will be offered only if the caf has a minimum of 70,000 customers per year and will cost $0.07 per customer after that. It will also create a new revenue stream for the caf that amounts to $0.18 per customer. As the customer base for the caf grows, there is an additional cost in routine maintenance and wear and tear of all the equipment and interior fitting. This additional maintenance cost applies only if there are more than 150,000 customers and costs $2000 for every 30,000 customers. Your job Find out the breakeven point for the business model under the proposed pricing plan and compute profits at different levels of customers. If the business model is not profitable (cannot breakeven) with the current levels of costs, you may recommend different values for some of the costs in order to make the business profitable. But make sure that you justify those changes in a detailed manner. You also need to analyze the pricing model to recommend whether the current plan maximizes profit or not. Perhaps it would be better to set prices at a different level to generate more profit! 1. Create a spreadsheet file with (at least) two worksheets: a. In the first, analyze the Revenues, Costs, and Profit for various levels of possible sales, based on all the data given above. The spreadsheet must be neat, easy to read, and well designed (do not embed numbers in formulas - list the basic inputs at the top, with proper labels). Find the breakeven point (in number of customers) from your spreadsheet analysis. b. In the second worksheet, assume that the sales depends on the price you charge, according to the following equation: Demand = 435000-23500p; where p represents the average check amount. What would the impact to your profits be if your price structure is changed so that the average check value either increases or decreases from the proposed strategy? Try a range of average check values from $1 to $20, compute the corresponding demand, and find the revenues, costs, profits various prices. What is the best price to charge? What will the breakeven be at the optimal price structure