This is business writing: clear and to the point. Literary and dramatic embellishments are unwelcome. Use terminology, grammar and punctuation correctly. Treat this as if you are working for the company. that the information is current and as if you are writing to the CEO. Lead each section with the appropriate heading in Bold Type Use at least six sources. Two must be mainstream sources such as Wall Street Journal, Forbes, or Fortune. Another needs to be from a reliable financial source so that the action plan can be financially justified. Make sure to list references at end in a way that another person can find them easily if they need to. Not necessary for the first two cases. Use financial facts to back up your arguments. Only the first case is excluded from this requirement. FORMAT (Use these headings for each section): Situation: From the case, summarize the situation and use points. Use this section to provide information supporting your other areas like establishing the problem, causes and solutions. (around a quarter page or less) General issues facing the company that relates to your problem. Some people use a SWOT analysis. Facts and information that would you want to know for the problem and solutions. Strategic Problem or Potential Problem: (around a quarter page+) Narrow down to ONE specific strategic problem that you will resolve later in the analysis. Start the section with "The problem is...." Problems and causes look alike so consider whether yours may really be a cause of some other problem. Ex: "high oil prices" is not a "problem" but a cause of high fuel costs - unless you are proposing to lower the price of oil on the oil market). Low market share, profits, revenues, high costs are important, but they aren't strategic. Strategic problems are specific barriers or ideas that affect these. Don't make the problem something that has already happened, since this can't be resolved. A consequence of something that has happened may be a better problem (problems can also be opportunities).Specify if it is urgent. Consequences of not examining this issue: "This is important because....."-do not discuss the causes here. Causes: Causes of problems. (around a quarter page+) Understand the systems and get to the root of the problems (causes must relate to the problem). . Need at least three causes. Avoid solutions Alternative Solutions (3 of them): Generate alternative solutions. (around a half page+ ) *The first solution will always be "do what we've been doing". Make sure to describe either what the company's current treatment of the issue, or likely current actions with respect to the issue are. It's rare that we've discovered an issue that the top executives haven't already pondered.For each of the three Solutions: First sentence: "The first (second... third) solution is....." Solutions need to offer enough detail to be real alternatives. If problem is targeting younger coffee drinkers, "Investing in RAD for new flavors" and "spending more on marketing" are abstract to the point of being a waste of time reading for an executive. Don't merely offer a solution of delegating someone else to find a solution. Solutions need to match the scope of the problem. If you proposed a problem for Wal-Mart such as high labor expense, suggesting a solution such as buying more comfortable chairs would need some explanation as to why this is sufficient as a stand-alone solution over something like converting to part time staffing- Points of leverage for the decision makers Stakeholders-Specify who will be affected and how. What will their reaction be? Costs and benefits. Every solution has cost(s) as well as benefit(s). . Explain how each solution solves your problem as you stated it in the problem section. Decision: Choose one of your three solutions. Discuss why it is better than the other solutions. (6-12 sentences) . Explain more distinctly why your chosen decision works and why the others don't. . How is it consistent with the reality you established in the Situation section? What is sacrificed? Action Plan: Implementation of your decision-How are you going to make it happen in the firm? (around a half page or more) . What resistance will there be from which stakeholders, why are they resisting and how will you address it? What are the ramifications for other stakeholders? What would have to be done? (make a "To Do List") o This do list always begin with "assembling a team" describe who will be on it and why. o Establish objectives and budget (how much does your plan cost?) To do list will conclude with elements that measure progress and establish when project is finished. What is the Return on Investment of your plan (not necessary for first Analysis). Does this investment pay for itself? (Often times ethical choices don't have a positive ROI, but the costs still need to be outlined, and some idea of how much we can recapturefrom the move is helpful) o Explain what specifically constitutes success. "more" or "profitable" is meaningless. Define your target and explain the logic with specific financial facts and targets. Since analysis 3, 4 and Sare built from current events and articles rather than a written case, use at minimum six references. Make sure that at least four of these sources are from legitimate information providers. Legitimate includes Wall Street Journal, Business Week, Forbes, Bloomberg, Google Finance, company Annual Reports and even USA Today. Wikepedia, Yahoo Answers don't work for this. List the references at the end of the analysis.Richard Ivey School of Business The University of Western Ontario IVEY W12020 BEANZ VERSUS STARBUCKS: PERSONALITY IN A CUP! Haley Beer wrote this case under the supervision of Professors Edward Gamble, Peter W. Moroz and Stewart Thornhill solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright @ 2012, Richard Ivey School of Business Foundation Version: 2012-05-14 I don't have a problem with caffeine. I have a problem without caffeine! Caffeine isn't a drug, it's a vitamin. - Authors unknownOn one side of the espresso bar, employee banter emanated as lively debate. The topic of discussion was the year's odd winter weather in Canada and the potential causes. On the other side of the bar was a full cafe; loyal customers were chatting, laughing and sipping Beanz signature drinks. For Lori Kays and Doug Hurry, co-owners of Beanz in Charlottetown, Canada (see Exhibit 1), it felt like yesterday when they had entered a wide-open cafe market by recognizing, evaluating and exploiting the idea of a coffee shop that made food in-house from scratch. In their 16th year of business operations, Doug and Lori had seen 11 coffee shops sprout up within a two-block radius. To the amazement of Lori and Doug, several diners and breakfast restaurants in this same radius of downtown Charlottetown had closed their doors or changed ownership in the past year. Compounding these mixed messages, the international coffee corporation, Starbucks, had recently entered the Charlottetown market just a block away, right beside a new Running Room store. Oddly enough, it did not appear as though Beanz' sales figures had been affected by Starbucks; rather, Lori and Doug thought that sales had increased. Perhaps Starbucks had been educating local customers about coffee? Lori and Doug wondered whether or not they should be considering Starbucks as a competitor. Starbucks and Beanz represented the corporate and community coffee shops, respectively. As Lori and Doug went about their bustling day-to-day business, they realized that some tough decisions were ahead of them - the main one being the direction that Beanz should go in the following five to 10 years. As Lori and Doug saw it, there were four viable alternatives, each with associated tactics. Lori and Doug could retain ownership of the business by maintaining the status quo or pursuing new growth opportunities. Alternatively, Lori and Doug could exit by finding an insider purchaser or taking an offer from an outside buyer.Page 2 9312M'51 Time was running thin for the coowners of Beanz: the market was changing quickly. Underpinning these options were the inherent conicts that Lori and Doug faced of trying to balance the decision with their love for business ownership, the need for more free time in their lives, their continued dedication to their loyal employees and their sense of admiration and commitment to the community. THE BRAINS BEHIND THE BEANZ If we don't take care of our customers, someone else will. Author unknown Prior to Beanz, Lori studied at the University of 1iir'esten'i Ontario where she earned a sociology degree. During her time in university, and for some years following her degree, Lori gravitated to the service industry, working at several of the more popular bars and restaurants in London, Ontario. Lori spoke most affectionately about her time at Barneys, a bar and restaurant, where she referred to her coworkers as family. After some time in London, Lori moved back to Prince Edward Island to set up a clothing business with her sister. Sadly, their business lasted only three years before a fire bumt the building and inventory. This event prompted a change in business direction, motivating Lori to close the doors of her retail business permanently and move into another line of enterprise. Before becoming coowner of Beanz, Doug developed venture experience with over two decades of business ownership. During his high school years, Doug recognized a protable opportunity to provide window cleaning and ofce janitorial services to local businesses and government buildings. After 20 years, Doug continued to manage this rather protable business at an arm'slength, with several employees doing the daytoday work. Doug believed that people focused so much on the glamorous business ideas that they passed up the highmargin, lowrisk business opportunities with steady cash flow just to "look good." In 1996, Lori and Doug opened Bean: Espresso Bar in the downtown city centre of Charlottetown. Charlottetown was popularized as the birthplace of Canadian Confederation and the capital of the province of Prince Edward Island. Prince Edward Island was recognized as the home of Anne of Green Gables, the best golf courses in Canada and hundreds of miles of white sand beaches. Typically, the population of Charlottetown hovered around 50,000, peaking at 65,000 during the summer \"tourist months." Lori and Doug recognized the opportunity to establish a cafe that focused on wholesome food and an array of coffee-based beverages. Since its inception, Beanz had been about making food from scratch in its own kitchen. The motives for taking on the difcult task of making all the breads, soups and baked goods was control. consistency and commitment to healthy eating in a warm and welcoming atmosphere. The light yellow walls, large square tables, chandeliers and product display and preparation areas had changed very little over the previous l years. Lori and Doug embraced the mantra that people wanted wellmade and consistent beverages and food. The challenge was to nd the balance between the consistency of beverageifood delivery and the unique employeecustomer ordering experience. Each member of the Beanz staff had a few general guidelines, but for the most part the Bean: ethos was, "Go out of your way to treat customers like they are your family using your true personality." Walking into Beanz Espresso Bar, one could feel the bubbly and fun atmosphere: local artisan paintings for sale lined the walls; employees made efforts to know customers' names and loved to flitter around the cafe and infuse a little humour into the experience. In years past, Beanz hosted coffee houses and music Page 3 931251051 nights. From a community perspective1 these events were very successful; on the other hand, they did little to affect the bottom line of Beanz' nancial statements. Lori and Doug continued to hold a variety of fundraising events at Bean: out of a sense of duty to the community. Bean: opened its doors every year to provide the underage participants of Pride Week a space to recite their poetry, play music and mingle. Doug and Lori's daughter Lauren, a certied yoga instructor, was considering starting a yoga business using the empty upstairs room that used to be sectioned off for smokers in the 1980s. In the summer months, Beanz boasted a large outdoor courtyard that seated 40 people customers could sit to eat their lunches while their children played on a slide. In the past1 Bean: had a liquor license and stayed open until midnight, offering live music. The couple was interested in experimenting with further ideas for creatively and protably utilizing the cafe space1 but they did not have the time to put into the development of these strategies. Both Lori and Doug worked long hours as the owners of Eeanz. A typical work day for Lori went from I? am. to 4 p.m. half of which was spent taking orders and for the other half she helped in the kitchen. During her downtime, Lori took on the responsibility for the accounting and bookkeeping. Doug worked similar hours but dedicated his time to the maintenance of the premises and the catering side of the Beanz business taking orders and making deliveries. Doug was occasionally balancing the responsibilities of his window cleaning and ofce janitorial business with those of Beanz. During the catering downtime, Doug enjoyed interacting with the customers in the cafe. Both in their Ss, Lori and Doug maintained that they were filled with the energy and excitement of their young staff. In spite of all the business and community success, Lori and Doug were nding that the business owned them, not the other way around. The time pressures associated with the day-today activities pulled both Lori and Doug's attention away from strategic or operational issues, so much so that business matters often entered into conversations at home. Lori and Doug concurred that a fourday holiday would be nice every few months, but as things stood, there was no way that this would happen. ANYBODY FOR A COFFEE? Way too much coffee. But if it weren't for the coffee, I'd have no identifiable personality whatsoever. - David Letterman In Canada, the coffee and tea market exceeded Cdn$1.5 billion annually. The compound annual growth rate of the coffee and tea industry from 2009 to 2011 was 18 to 22 per cent. The average Canadian per capita consumption of coffee was approximately 90 litres annually." One of the biggest segments of coffee drinkers was those over the age of 40, as were approximately 50 per cent of Prince Edward Island's 150,000 citizens. Not unlike other capital cities in Canada, a high concentration of coffee houses existed within the city core of Charlottetown - 11 coffee businesses were situated within a two block radius. These coffee enterprises included the well-known national corporate coffee shops such as Tim Hortons, Starbucks, 'All dollar amounts in Canadian dollars, unless otherwise specified. ""The Canadian Coffee Industry, " Agriculture and Agri-Food Canada, October 2010, www4.agr.gc.ca/AAFC-AAC/display- afficher.do?id=1172237152079&lang=eng, accessed on January 11, 2012 "PEI Population Demographics and Labour Force Statistics, " PEI Public Service Commission, November 2010, www.gov.pe.ca/photos/original/PEDLF.pdf *"Coffee Franchise Industry Report, " Franchise Direct, www.franchisedirect. com/coffeefranchises/coffeefranchiseindustryresearchbusinessreporti/74/220.Page 4 9312M51 Timothy's and Robin's Donuts, as well as distinctive1 local cafes like Beanz. Since the establishment of Starbucks in Charlottetown, Doug and Lori noticed an increase in demand for specialty coffees such as americanos and lattes1 which were espresso-based coffee drinks [see Exhibit 2}. Considering that the median income was $23,34lfll'capita5 on the Island, one could consider the increase in higherpriced speciality coffees somewhat paradoxical. Typical Beanz customers ranged from artsy young clientele to employees from Beanz' big neighbour. the Department of Veteran's Affairs [DVA]. Over \"00 people worked at the DVA many went to Bean: on a daily basis looking for freshly baked goods and a cup of java. Recent reductions in the federal budget had put the DVA {a governmental organization] at risk of signicantjob losses IDne of the reasons that Bean: was popular with different groups of customers was its efforts to cater to a variety of dietary needs, such as celiac and conscious eaters. by offering a wide selection of products that were glutenfree and low in fat. Even though Bean: did not have signage concerning the variety and dietary nature of its food offerings. locals seemed to already know and value this part of the Beanz business. A further reason that locals were drawn into Bean: was the certainty that they would be greeted with a genuine smile and lively personality from one of the hipster staff members, not someone who had been trained to follow a detailed company protocol. THE BEANZ EXPERIENCE Over the years1 Beanz scaled back its operating hours to Monday to Friday from 6:30 am. to ti p.m., Saturdays from 3 ant. to 6 pm. and Sundays from 9 a.rn. to 4 pm. At one point, Bean: operated late into the evening and served alcohol. but eventually Lori and Doug decided that it was not working for them. THE BEANE EXPERIENCE Over the years, Eeanz scaled back its operating hours to Monday to Friday from 15:30 am. to 6 pm, Saturdays from 8 am. to 45 pm. and Sundays from 9 em. to 4 pm. At one point, Beanz operated late into the evening and served alcohol, but eventually Lori and Doug decided that it was not working for them. During the day, sun streamed in through the full front window, illuminating the espresso bar. The background music ranged from classic 1990s to modern alternative music. Customers visiting Bean: for the first time may have been caught off guard because there was no traditional lineup to order or pick up food and beverages. Beanz employees took orders on sticky notes and punched the order into an antiquated til]. People generally waited randomly but patiently around the till to order and all over the restaurant to pick up. The signage for lunch specials, sandwich varieties, soup selections and drink offerings were presented on scattered boards beside, on top of and behind the counter. The unmarked two- forone baked goodies basket waited behind the ordering area for the aware customer. The menus boasted numerous options for vegetarians, celiac and those on a diet regime: glutenfree soups and sandwiches, low and lower-fat muffins and a melody of salads. The majority of the product offerings at Bean: were lower in fat1 sodium and trans-fat than other restaurants in the city. It was easier to accomplish this as the food was made from scratch in the Bean: kitchen. The menu did not give customers the nutritional information of the products. It was quite possible that many visiting Bean: customers were unaware of the extent of the food quality. Bean: also offered an array of non-food items for sale, including Island handmade pottery mugs, bobble water bottles1 artwork and tshirts. Lori and Doug truly enjoyed being able to help out their conununity. For example, Lori and Doug took only ll] per cent of the sale from artwork that local artists hung on their walls. By comparison, art galleries usually took 30 to 50 per cent of the sale price for displaying work in their galleries. Lori and Doug used to carry more outside merchandise to support local entrepreneurs: however1 they were cheated once by a woman who took their deposit and never delivered the products. 5 'lno'ivio'uals by hotel income level. by province and territory. " Statistics Canada, 2m 1', Motorcangceamwcstmemma-engm Page 5 SB 1 251051 Since that point. they changed their practices to he on consignment only: they did not pay up front for products and were in agreement that the merchandise could be returned to the vendor if not sold. Upon placing their orders, customers could choose one of the oversized square tables or the front window bar to sit. There was plenty of free reading material strewn about for customers to browse while they enjoyed their Beanz products from the local Guardian newspaper and the Globe and Matt to fashion, business, technology and gossip magazines. Daydreamers could choose to simply gaze into one of the local art pieces adorning the walls. Students and local business people alike utilized Beanz' free WiFi to accomplish their work or surf the Internet. Beanz also had an old payasyougo Internet computer terminal: "$.25 for limins\" read the sign. Bean: was always there to offer its customers a warm and unique experience, making it a far cry from its franchise competitors. Customers seeking Beanz food for meetings1 parties or other social events could take advantage of the catering services. Doug spent increasing amounts of time satisfying The clientele on this side of the business, taking orders and making deliveries. Over EDI 1, Doug noticed a steady rise in orders. Beanz' frequent catering customers were law firms, Holland College, the University of Prince Edward Island, the Confederation Center of the Arts, the DVA, pharmaceutical companies and the Department of Health. Bean: charged a premium price for its catering products, as well as at $6.100 delivery charge. Lori and Doug felt that there was room for expansion in the catering marketplace. but their facilities did not support this expansion. Dn some days the couple was forced to turn away catering orders as they do not have the time or space to fulfill The order. Doug and Lori believed that a few thousand dollars would be sufficient to renovate the unused space downstairs into a second kitchen to he used solely for catering: this would also give Lori and Doug the option to expand into a premade healthy food products line that could be displayed in an upright fridge near the ordering area. ADVERTISING: YOU DON'T KNOW UNTIL YDU KNDW YOU DDN'T KNOW Starbucks says they are going to start putting religious quotes on cups. The very rst one will say, 'Jesus! This cup is expensive!' Conan O'Brien Although Beanz offered meals for special dietary needs and comprehensive catering services, Lori and Doug relied mostly on word-of-mouth advertising to reach their customers. The Bean: experience required "in the know" knowledge to have the full effect. The ordering could sometimes be a bit erratic1 working on the honour system, and it was not entirelyr clear where to pick up instore orders. Recently. a local nutritionist had been making posts to social media sites about the quality of the food at Bean: and its suitability for those who had special dietary needs. As far as other methods of advertising, Beanz had a listing in the Yellow Pages under "catering." it submitted an advertisement to a local magazine The Buzz at Christmas time, it distributed "free coffee" cards to local fundraising initiatives and had a website on which its daily lunch specials could be found. Lori and Doug were interested in expanding upon Beanz' marketing strategies. THE UHIPCD RELATIONSHIP A signicant business relationship. fostered by Lori and Doug in IWT, proved to be a cornerstone in the negotiation and cost control of input materials-\"supplies at Beanz. As a member of the United Independent Purchasing Company {UNIFIED}, Bean: belonged to a Canadian purchasing network that negotiated Page 5 9312l651 product pricing and rebates for a large group of Canadian restaurateurs, distributors and processors. This pseudo-hedging relationship minimized many of the typical business model problems experienced along the value chain including pressures on product margins, distribution planning and supplier bargaining. Members paid a one-time membership fee of $4,500 and a yearly administration fee the yearly administration fees were often covered by rebates earned on high volume product purchases. The rebate cheques entitled Lori and Doug to approximately E- to 3 per cent savings on personal and group food purchases yearly, over and above the yearly administrative costs. [WIPCD proved itself a reliable partner in terms of supplier negotiation and input price arrangements. Prices for commodities such as beverages, bakery products1 condiments, meats and coffee were locked in for one year at a time. If input prices increased during the annual period, members received the difference back in a yearly bonus. Besides its keen ability to negotiate pricing, UNIPC'D offered its members the use of a test kitchen and conducted market research. This market research enabled the company to distribute purchasing reports on a monthtomonth basis. These purchasing reports provided detailed comparables on items in each product category and highlighted substitute items on which members could have saved additional money: this aided future purchasing decisions. This relationship was benecial for Lori and Doug because neither of them had the time or interest in spending energy to get a better input price deal. In addition to negotiation and delivery practices, UNIPCD acted as a lending agency. allowing members to purchase items such as an industrial coffee machine with a payback schedule of an additional $0.25 added to each pound of coffee bought. In 2D\"), UNIPCO reached its maximum shareholder base, which meant that businesses could still become members of the buying group but would not receive the rebates. Bean: purchased all of its fresh produce locally as needed. Most UNIFIED deliveries arrived at Bean: on Tuesdays and Thursdays. Products such as milk and bread were acquired daily, and specialty baking items were retrieved once every few weeks. This UNIPCD relationship brought a certain level of guilt to Lori and Doug when nonlocal companies won tenders to supply specic product groups. They had always preferred to support their local economy. but due to contract obligations they were forced to receive products solely from the organization that won the tender. THE ORDER PRDCESS As patrons flowed into Beanz. employees took customer orders on an older-style cash register. The limited amount of button choices on the till required that employees manually input the various lunch menu options. The specics of each order, whether food or drink. were recorded on sticky notes. During the busiest parts of the day, the sticky note orders were passed along to another employee who was responsible for a certain station; for example, the sandwich station or coffee station. Lori and Doug wondered if a new till that utilized a computer touch screen for order input would smooth out the process, be more accurate and help with the training of new employees. EQUIPMENT When it came to espresso-based coffee, the equipment at Beanz was topoftheline. which allowed for noticeably superior coffee-based drinks. This new espresso machine cost more than 58,000. The dessert fridge that displayed baked goods near the order till was tightly packed and getting close to the end of its useful life. A new display fridge would cost approximately $5.. Lori and Doug foresaw the need for a new industrial toaster, costing approximately 51,500. The couple also discussed the idea of including a E 'Abouf Us. "UMPCD 200?. mUNIF'CGcw'aboumasp Page T 9312M051 stand-up refrigerator to display frozen lunches from which hurried customers could purchase togo meals. There could also be some appetite for the implementation of a large blender to add smoothies to the menu selection. BEANZ PEOPLE Recruitment and hiring at Beanz was a reection of the fun and unique workers that it usually attracted. Instead of having a standardized and rigid recruitment process. possible recruits typically come from current employees' recommendations. Suitable candidates were then brought in for an interview with Lori and the store manager. The interviews were composed of typical human resource hiring questions such as1 "What would you do in situation X?" or "What is the most important quality of a barista in this industry?\" However. the biggest factor for prospective employees securing a job was Lori's overall gut feeling about how well the individual would t in with the Bean: culture. Lori and Doug felt that they had been very fortunate over the years in recruiting and retaining loyal and hard-working employees. In fact, at one point when Lori asked a few of her employees why they had worked at Bean: for so long1 they replied1 "We don't really care about getting paid a few dollars extra every hour. we are here because it feels like family." For the past year1 Lori struggled to ll the store manager position with an exceptional person to lead the charge. The past two store managers quickly caught on to store norms and regulations: it seemed to be second nature for them to operate the cafe. These two store managers contributed a combined total of ll] years of their lives to Beanz. They had such a high calibre of leadership that they would jump behind the counter to help serve customers even on their days off. Lori and Doug had never been required to establish a formal training process for the store manager role, and it was only in lling the position this time around that they realized the difficulty in communicating exactly what the expectations of new hires were. The training process for all employees consisted of a preliminary tour of the coffee shop and an introduction to the cafe's equipment and supplies. Each new hire was then paired with a longerterm employee for the first five or six shifts. These paired shifts were spent learning how to prepare the fresh soups1 sandwiches, and set up the product display areas. Employees were encouraged to be \"themselves" with customers, with the implicit expectation of being polite and courteous. In addition to the mentoring1 new hires received two versions of the \"Bean: Training Manual:" one ofcial version written by store employees in early 2000 and another humorous version titled the "Bean: Bible." The latter was most reective of Beanz' eccentric culture and included verses such as, "Sanitation Simon says wash your hands, wash your hands, wash your hands!!! Don't just use sanitizer, wash your damn hands!" [see Exhibit 3}. After a few weeks, Lori evaluated new employees' progress by randomly testing their ability to prepare one of Beanz' homemade products. The goal was to offer consistency and freshness; therefore, Lori and Doug believed that it was important that all employees prepared the products in the same manner. Changes to the employee structure at Bean: included the addition of a pastry chef. The chef was hired straight out of graduation from Holland College's Culinary Institute of Canada in Charlottetown, with a specialization in pastry. The new position was charged with increasing the selection of baked goods at Beanz, which had remained largely the same since the cafe's inception. Proposed ideas included apple strudels, lemon tarts and clairs. The tried and true recipes that had always satised Bean: customers would remain the same, with the new additions hopefully generating increased interest. The secondary goal for hiring the pastry chef was to expand Beanz' list of lunch specials. 1i-'tihen the pastry chef was not Page 3 9312M51 baking, Lori and Doug hoped that she would help in determining prot margins on the homemade goodies1 a task that had not yet been attempted. Overall, Lori and Doug felt blessed to have had the opportunity to interact with such fun and dedicated employees "It keeps us feeling young,\" said Lori; though there had been several challenges typical of having a largely teenaged employee base depression1 substance abuse and anger outbursts. Doug and Lori felt a sense of parenthood toward their workers and were known to adopt counsellor, psychiatrist and mediator roles to overcome the issues. Their kind demeanors lead them to give staff experiencing difculties a second chance, as they truly believed in their employees. Bean: always had more employees than it needed on the payroll, as students were constantly looking to pick up extra shifts. Most students who gained employment at Bean: keep their jobs for the entire time that they were studying, which exemplies the loyalty that was common amongst workers at the cafe. STRATEGIC ALTERHETIVES Considering Beanz' current nancial position [Exhibit 4), Lori and Doug were pressed to make some tough decisions. They truly enjoyed business ownership and working with their wonderful staff. They had a desire for more free time, though they wanted to stay committed to the community. As the coowners saw it1 there were ve viable options as they moved into the future. Looking for New Opportunities Within the Existing Bean: Business The large size of the Dean: building offered Lori and Doug several options for renovating their operations to increase profits and grow Beanz. l[line idea was to create a larger kitchen in the big basement: this would enable them to increase their product output capacity and pursue irther catering opportunities, as well as offer a new product line frozen dinners. The frozen dinners would be prepared in the basement kitchen and frozen to be offered to customers as a self-serve meal option. They would be sold out of a refrigerator near the ordering area. This option would require at least two additional bakers to be hired. Moving the kitchen would enable a new "cozy corner\" to be created at the back of the cafe, increasing the restaurant's total customer capacity and adding a new atmosphere. Lori and Doug envisioned a relaxed space with comfy couches and chairs. The building also had a large upstairs area that was leased as ofce space by an accountant, a nutritionist and a tailor. In the long term, if the upstairs tenants ever moved, the couple would consider renovating this space into an additional seating area. Lori and Doug knew that if they chose to pursue growth strategies for Dean: they would need to increase their marketing practices and have a solid strategic plan of action. Stratlord Waterfront Development Stratford, a city adjoined to Charlottetown, was experiencing exponential growth of mid to highincome family homes. Even though there was one familyowned eatery, a Subway restaurant, a Robbins Donuts and a Tim Horton's in the area, residents complained that food services were lacking in Stratford. The Stratford City Council approved a multimillion dollar waterfront investment project aimed at developing the waterfront into an exemplary place for exercise, retail and residential space. Lori and Doug were approached to gauge their interest in opening a new Bean: location in Stratford. This option would require some type of nancing, the addition of a new manager and a similar set of expenses as seen in the existing income statements {see Exhibit 4). The concern was that this option would expire shortly as the developer was aggressively seeking new tenants in the Stratford waterfront retail spaces. Page 9 9312M'51 Sell Bean: to the Highest Bidder Lori and Doug had given considerable thought to selling Beanz. It was not entirely clear what the potential sale price would be; however, for this option to be viable the couple would need assurances that the sale price would be high enough to ensure a stable retirement lnd. This option was attractive because Lori and Doug would have plenty more free time to spend with their family and friends. On average, cafes such as Bean: sell for $0.5IJ per dollar of annual sales [see Exhibit 4). However, it would be reasonable to assume that Dean: was an above-average entrepreneurial venture. At times, the pair had hoped that one of their children would eventually take over the business to keep it in the family. Two of their children, Duran [who was 20 years old} and Eliza (26), had considered acquiring the business when they nished their school and work - each sharing the responsibility of the shop for half a year at a time. This option would most likely not occur for another ve years. Lori and Doug were hesitant for their children to take over the business because they believed that the shared ownership setup would invite more issues that their children could not foresee. Focus on a Management Buyout Over a discussion with a business professor, Lori and Doug were introduced to the idea of a management buyout. This gradual ownership transfer method would follow the path of offering their employees continued employment at Beanz while grooming successors who could buy the business. The advantages of this style of selling were that the existing managers who had extensive knowledge of the daytoday operations of the espresso bar would be most capable of maintaining the "Dean: experience\". The warm coffee bar would be able to remain a staple of downtown Charlottetown and continue to be known for its special characteristics and community atmosphere. Lori and Doug could continue to visit the coffee shop, albeit in a new role. A few of the existing employees had expressed interest in taking over the coffee shop, including the creative new pastry chef. Work With an Angel Investor An angel inyestor from the United States named John Caviller had approached Lori and Doug with a proposal for investing in Beanz. IC'a'riller offered $50,000 to Lori and Doug in exchange for 50 per cent of business ownership and equity. This option offered Lori and Doug a decent amount of capital to use in expanding their business operations, renovating the cafe, updating their equipment and growing the product lines. However. they would have to keep in mind that the new business partner might have different expectations for the direction of Beanz. The decisionmaking power would be split between the existing business owners and the angel investor. lC'a'riller believed that Bean: was a very promising coffee shop, and said that he could not get the charming little cafe out of his mind. DECISION TIME Considering their commitment to producing fresh and consistent homemade food, their loyal staff base and a strong sense of community. what was the best direction in which Doug and Lori could take Beanz to ensure its continued growth and presence in downtown Charlottetown? Page 10 98 12M051 Exhibit 1 BEANZ EXTERIOR BEANZ espresso bar & cafe Source: Chan writer photo, January 20 10Exhibit 2 THE COFFEE INDUSTRY At a rudimentary level, coffee is "a beverage made by percolation, infusion, or decoction from the roasted and ground seeds of a coffee plant."" It has a history and character that dates back multiple centuries. The first records of coffee cultivation date back to the 1500s in Abyssinia, where the ceremonial process of communication and sharing of percolated beans began. On a global scale, coffee beans have largely been produced in countries such as Brazil, Vietnam, Indonesia, Columbia and Kenya." Each coffee bean is cultivated from the coffea bush, which produces seeds dubbed "coffee cherries" from which the beans that make coffee are picked." Dependent on the specific industry demands, coffee producers utilize different styles of coffee crops to produce beans with particular characteristics. For example, specialty coffee beans that have gourmet flavours are grown in ideal climates (within 23 degrees of the equator ) and special soils. This segment of coffee production has grown from I per cent of the market in the 1970s to 20 per cent in carly 2000s." From beans to cup, coffee is a process of transformation through roasting (drying and parching by exposure to heat) and brewing (infusing in hot water) the beans.' The degree to which the beans are roasted (light, medium or dark) affects the flavour of the beverage; lighter roasts will have maintained more of the beans' natural aromatic oils and acids to add to the taste." The roasted coffee beans undergo one of several methods of brewing (boiling, steeping or pressurization) to enhance and refine the flavours. For example, espresso is the result of pressurizing the coffee beans, while percolation (slowly dripping hot water over the beans to filter out the beverage) is used to produce the typical cups of coffee that consumers buy at Tim Hortons or MacDonalds. However, in 2012, Tim Hortons and MacDonalds have made concerted efforts to market more espresso-based products such as lattes and cappuccinos. The coffee industry. like most growing segments of the world market, has been evolving and undergoing large transformations in all areas of its value chain from cultivation to delivery of beverage Fair Trade: A relatively new coffee segment, Fair Trade is a tier in which the goal is to help coffee producers get a fair price for their products so as to reduce poverty, provide for the ethical treatment of workers and farmers and promote environmentally sustainable practices. Organic: Organic style farming is another trend of recent years - the aim is to reduce the impact on the environment through disallowing potentially harmful chemicals or pesticides in the cultivation of the beans. The extent to which beans are considered fair trade or organic varies, depending on multiple political and economical factors. AeroShot: A Harvard biomedical engineer created a new product sure to challenge the coffee industry called the AcroShot. This new innovation could be a flash fad or could seriously threaten the industry structure for traditional cafes. The AcroShot is a lipstick-sized canister that allows users to inhale a powder through the nose that delivers an equivalent amount of caffeine as a large cup of coffee. There are some concerns that it did not need FDA approval as it is sold as a supplement due to traces of B vitamins. Provocative coffee: It is not unheard of for companies to sell food and beverages from scantily clad employees as a mechanism to increase patronage and sales figures, as seen in companies like Hooters Restaurants and Tilted Kilt. Growing numbers of cafes in the United States are taking a similar approach to this business model. In the city of Vassalboro, Maine, The Grand View Topless Coffee Shop has an age restriction (18+). Similar practices occur at Bodacious Baristias in Seattle and Sexxpresso Shop in Las Vegas.""Coffee, "Merriam-Webster, www.memam-webster.com/, accessed January 2012. 2 Ibid "Coffee: World Markets and Trade, " United States Department of Agriculture, December 2009. "William, H. Ukers, AN About Coffee, www.web-books.com/Classics/ON/BO/B701/000Title.html, accessed on January 25, 2012 " "Where Does Coffee Grow Best?, "Gourmet Coffee Lovers, www.gourmetcoffeelovers. com/where-does-coffee-grow-best/ " T. Lingle, "The State of the Specialty Coffee Industry, " Tea and Coffee Trade Journal, Lockwood Trade Publications, Volume 179 Issue 7, July 2007. "Coffee, " Merriam-Webster, www.merriam-webster.com/, accessed February 2012 "C. Kummer, "The Joy of Coffee: The essential guide to buying, brewing, and enjoying, " Houghton Mifflin Harcourt, August 2003. Page 12 9B12M051 Exhibit 3 EXCERPTS FROM THE 'BEANZ BIBLE' Example 1: Lunchtime Shenanigans "There is nothing more frustrating when you are on the sandwich board and the orders on the sticky notes do not make sense. If four people take down orders, all four should be written in the same way (neatly please) - no ifs, ands, or butt cracks!!" Example 2: The art of dealing with the difficult customer "Remember, you can't win with all the disgruntles, but as long as you are as sweet as pie to them, polite, understanding, and apologetic (or at least pretending to be) most will be pleased with the service. I'm a super sensitive person and it is easy to let that one grumpy customer ruin your day. Try not to let the grumpies get the best of you. Let it go. Customer service is extremely important, especially when you are dealing with hungry people."Example 3: Remember "There is a lot to learn at Beanz and I'm still learning and making mistakes too. The quicker we can all be on the same page the better we can be as a team and the happier the customers will be. Take your work seriously but at the same time try to relax, this is a coffee shop, not parliament."Exhibit 4 BALANCE SHEET (as of September 2011) 2011 2010 ASSETS Current Cash 757 785 Accounts receivable, trade & other 23.308 20 828 Inventory 20.094 18.050 Income taxes receivable 6.170 6.457 Notes receivable 50,329 46,100 Property & equipment 190,000 190,000 Other assets 41,077 42,305 Security deposit 37,778 61,457 2.459 2.459 321.643 342.321 LIABILITIES Current Bank indebtedness 64.373 68.725 Accounts payable & accrued liabilities 58 640 52,517 Current portion of obligations under capital lease 6.284 3.736 129.297 122,978 Fixed-term preferred shares 190.000 190,000 Obligations under capital lease 6.314 5.077 Payable to shareholders 2,020 2,010 (non-interest bearing, no set terms of repayment) 327.631 320.065 SHAREHOLDER'S EQUITY Share capital $ 210.100 210.100 Deficit 216.088 -187.844 -5.988 22.256 321.643 342.321 Source: Case writer estimates.Exhibit 4 (continued) STATEMENT OF INCOME AND DEFICIT 2008-2011 of % of 2011 sales 2010 Sales $ 628,302 100% $624.624 100% Cost of sales Inventory, beginning of year 18,050 16.786 Purchases 212,674 207.105 230,724 223.893 Inventory, end of year 20.094 18.050 210,630 33 205.843 33% Direct labour 221.379 35%% 227.023 36% 432.008 432 868 Gross margin $187,293 31% $181.758 31% Expenses Advertising & promotion 6,124 7.818 Amortization 34,987 33,730 Insurance 1,200 1,332 Interest & bank charges 9.164 8,052 Interest on capital lease 1,195 2,225 Licenses & fees 3,751 3.030 Management salaries 46,257 52,143 Office 3,751 4,398 Professional fees 4,748 5.083 Rent 40,100 39,050 Repairs & maintenance 16,309 16.433 Severance pay 6.037 Supplies 31,734 37.714 Utilities 24.217 22.867 225,537 239.913 Net loss $28,244 -$48,155 Deficit, beginning of year $187,844 $139.689 Deficit, end of year -$216,086 $187 844 Source: Case writer estimates