Power House Ltd. (PHL) is an indoor cycling studio in Ottawa. It was founded two years ago in 2016 by Mike Powers, a professional cyclist who wanted to share his passion for the sport of cycling with others.

When Mike founded PHL, he knew that there were a number of indoor cycling or "spin" studios opening across the city. However, Mike didn't want PHL to be like the others. He thought he could differentiate it from the trendier studios by focusing on the sport of road racing and developing the athleticism of his customers. Mike has commented, "I wouldn't be caught dead in one of those fad spin studios where you cycle in the dark and aerobics on your bike while listening to loud, obnoxious music."

Instead, Mike used the expertise he gained as a professional athlete to enhance the experience of his customers, introducing them to the best and most advanced training techniques. PHL's efforts to differentiate itself have been somewhat successful, as it has attracted a loyal group of core customers who refuse to visit other studios in the city. However, Mike's assistant, a former cycling instructor, recently read some online reviews of PHL and noted that a few customers had commented that it was "not as cool as other studios," "boring," and "too old school."

With the popularity of indoor cycling, Mike currently has two studios. Recent market research reports indicate that cycling studios generated 55% more revenue than other types of fitness studios in 2018. It has also attracted attention from some celebrities who credit indoor cycling as an important part of their fitness regimen, and there is potential for this popularity to grow further.

Unfortunately, Ottawa has started to become saturated with a high number of fitness studios, and differentiation from the competition is becoming more and more important. In addition, some fitness experts have said that indoor cycling is just a trend and will likely soon be replaced with something new.

You, CPA, have been hired by Mike as an external consultant to give advice on the future of the business. Mike is worried about the direction of the company and is considering incorporating new technology (CycleScape) into the PHL cycling experience.

Task #1

SWOT analysis of PHL.

Your response should be no longer than two pages, excluding any Excel files.

Task #2

As you are preparing the memo for Mike, you decide to visit the first PHL location in person to get a better sense of the business. When you arrive, you are greeted by the front desk attendant, and you ask if you can pop in to see Mike. He indicates that Mike is not around and has not been in for the last several days. Instead, he offers to introduce you to Mike's assistant, Romeo Cruz.

On your way to Romeo's office, you walk past one of the studios and notice the lights are dimmed and the music is blasting a popular hit.

Romeo looks surprised to see you and says he only has five minutes to talk. He tells you the following:

"With Mike away all the time, I've been really busy trying to bring some life back into this business. Mike appreciates my help because he's always away at cycling competitions and doesn't have time to deal with the business. I've been taking a lot more ownership of the operations at our two locations, and I've been making it my goal to bring this business in line with our competitors.

"I'm not sure if you've heard, but rumours have been going around that PHL just isn't keeping up with the latest trends. Riders want to have the same experience that their celebrity idols get, and that includes the latest beats, with more of a chic, nightclub vibe. No one wants to hear about endurance and fat-burning zones and whatever else Mike talks about."

You decide to change the subject and ask Romeo about the day-to-day operations. He says:

"I used to be one of the cycling instructors, but since Mike asked me to be his assistant a couple of months ago, I've basically been running the show. I do everything from maintaining our social media accounts to hiring instructors to bookkeeping you name it. We always have a front desk attendant at each location to take payment and greet riders, but everything else administrative is left up to me. Anyway, as you can see, I'm really busy and I've got to go."

Following your conversation with Romeo, consider whether there are any other operational issues you would like to address in your memo to Mike.

Your response should be no longer than one page, excluding any Excel files.

Task #3

In late 2018, Mike was approached by a representative of a company called Cycle Tech Inc. (CTI) and asked if he would be interested in incorporating its proprietary technology, CycleScape, into PHL's operations.

CycleScape is revolutionizing indoor cycling with a "4D" cycling experience that requires the installation of a curved, floor-to-ceiling screen that plays video footage from exciting, real-life, outdoor cycling experiences. Special stationary bikes are installed that vibrate to simulate the experience of riding over the terrain shown on the screen, and customers are provided with patented CycleScape 3D glasses, designed to be worn while cycling. Finally, the studio itself is customized for the 4D experience, with large vents installed to mimic wind, mist, rain, and even snow.

The costs to outfit a studio with all of the required CycleScape technology are as follows:

CycleScape stationary bikes $2,400/bike

CycleScape 3D glasses $139/pair

Floor-to-ceiling curved screen $11,000

4D experience all-weather vents $25,000

Installation costs $60/labour hour

Mike wants to convert one of the studios using the CycleScape technology. Each studio currently houses 24 bikes, and the representative from CTI indicated that a typical installation requires about 10 hours of labour from a trained electrician. In addition, PHL studio employees will require training on the safe use of the system, which CTI can provide for a flat fee of $4,000.

CTI indicated that it has installed the system in only a limited number of cycling studios across Canada. According to CTI, on average, the studios experience an increase in annual revenue of $21,000, resulting from improved customer attendance and the higher class fees charged for the CycleScape experience. Annual service and maintenance fees for inspection by a trained CycleScape attendant are expected to be $1,200 per year.

Mike would like you to calculate how long it would take PHL to generate enough additional income to pay back the upfront investment required to install the CycleScape technology (ignoring any tax implications).

In addition, Mike would like you to discuss any qualitative factors relating to the CycleScape experience and the fit with PHL's current operations.

Provide Mike with an overall recommendation for the business, including whether to pursue the installation of CycleScape.