The Pudong

-----analysis
coffee
shop report

Li Hao
Wang Hui
Wang Xuejuan
Qin Xinren
Wei Yingying
1

Better to be deprived of food for three days, than tea for one.
Ancient Chinese Proverb
Make every ones coffee dream come true.
New mission of Pudong coffee shop
2

Outline
Background
Case analysis
Strategy and actions
Budget
Risk response and valuation

Background
Industry life
cycle

Global:
China:
A big potential market

Coffee consumption is
of coffee in China.
growing at a slightly
double-digit
over
two
rate percent
per yearper year
A
Each
typical
Chinese
American
person
person
drinks about
drinks3between
cups of 500
to
coffee
700 a
cups
yeara year

Embryonic Growing

Mature

Decline

Operating analysis
Pudong coffee shop

Insufficient
training
Such as
unskilled parttime
staffs like
No
facilities
Wi-Fi what
customers often
need
Large amount of
customers in
lunch-time may
lead to a crowd
space
Short operating
time limits the
number of
5
customers in

Structure of product
Comparison

Gap
7.85%

Pudong coffee
shop
Limited product
range
Inflexible time
supply

Customer analysis
As for Pudong coffee shop:
With office and schools nearby,
students and white-collars can be
targeted customers. People in park
can also be welcome.
Whitecollars

21-30 ranked 1st who are easier

to accept coffee culture.
31-50 focus on the quality,
service and surroundings, which
in all take up 70% of customers.
7

Employee analysis
Pudong coffee shop:
Employees attitude is not
good towards customers.
To some extent, they are
not satisfied with the work.

Gap: 6%

Low wages and stimulation

may make employees feel
upset and it affects service
quality.

14%=Wages/Revenue

Cost structure analysis

Average

Pudong coffee

As
As
This
As
for
forfor
graph
AD
wages,
cost
depreciation,
expenditure,
of
shows
sales,
the lower
the
Pudong
Pudong
cost
Pudong
wages
discrepancy
coffee
coffee
coffee
saveshop
money,
shop
shop
between
ishas
is
much
and
lower
a higher
itthe
higher
also
than
average
shows
number,
the
thanaverage,
and
the
a which
room
average,
Pudong
and
to
makes
goitcoffee
which
up
refers
ain
that
shop.
more
It AD
is referred
is needed,
means
that
order
material
which
bigtodifference
improve
also
huge
cost
comply
tax
control
exists
employees
shield.
with
did
which
the
notloyalty.
measures
can
work
lead
well.
totaken
a cost-saving.
to improve.
9

CVP analysis
Assumption cost of sales as variable,and all the operating expenses are supposed
to be fixed.
CVP analysis
Total revenue
Fixed cost
Variable cost
Sales per customer
Variable cost per customer
Fixed cost per customer
Operating profit per customer

2009
930,000
500,000
420,000
50
22.59
26.88
0.54

2009 financial data analysis:

Revenue =930,000
The average spend per customer =50
Total number of
customers=930,000/50=18,600

The fixed cost per customer will go down

as the number of customers increasing,
which is the key to improve the revenue.

The Pudong coffee shop has to attract as many customers

as possible.
10

SWOT analysis

threats
weakness
opportunities
strengths

Students and office staffs

Good location
nearby
Low
Fierce
market
competition
share
from
sales
an
Customers
loyaltyand
International
activities
and
Negligible
Italian
restaurant
take-away
and an
Generous
rent
terms
expats coffee
Insufficient
Ice-cream
food nearby
supply

11

Structure of Strategy

Target customers: students, whitecollars, expats who emphasis quality

Strategy: market focus strategy
Vision: to be popular with
every one in region
Mission: make every ones
coffee dream come true

Mission

Vision

Strategy

Target customers
12
12

Actions---target customers
Purchasing
power

Above 50

Below 20

31-50

21-30

Customers
bargain

13

Translating strategy into action

--- on the basis of BSC
Customer
Employees
Text
Internal
response
&activities
Facilities

in here

Financial
impact

14

Actions --- Facilities & Employees

Action:

Provide Wi-Fi

Fashion magazines&
newspapers

Peaceful environment with

soft music and piano
performance in the evening

Improve employees'
satisfaction

Financial impact:
Cost 1500 Yuan and without depreciation

No obvious impact

Piano cost: 5000 Yuan, net salvage value: 500

Yuan, 5 years depreciation
Employ a part-time pianist to play piano from
19:30-21:30 with a payment of 200 Yuan

Sharing the profit with employees by 3% of

revenue as a bonus
Measures such as employees birthday
15
present are also needed.

Actions --- Internal activities

Cleanliness and
overall hygiene

Develop takeaway service

Action:
Extend the
opening time
to 10 P.M.

Update the menu

according to
customers need

Financial
impact:

No obvious
impact

Lead to an
increment
in sales

Increases
the AD and
promotion
expenses,
with
revenue
improved

More
operating
cost needed
more sales
generated

16

Actions --- Customer response

Action:

VIP card and

Student card
at 20%
discount.

Sponsor
students
activity

Financial impact:

5% discount
above 10
people.

Questionnaire
to
communicate
with customers

Measures above can improve

the satisfaction of customers
and as a result increase the
sales.

Grow rate of revenue in

Chinese catering industry
is about 17% in 2010,
especially for Shanghai.
We suppose the grow rate
of Pudong coffee shop
reaches 30% on the basis
that our new strategy is
effective.
17

KPI based on strategy to

measure performance
Employees
& facilities

Internal
activities
Utilizing rate of Wi-Fi
Frequency of
cleaning
Updated magazines
and newspapers cost
Turnover of
employees

Sales of new and

existing customers
Time for queuing
Times of complain
from customers

Customers

Fake percentage of
materials
Sales of take-away
Food sales in total
revenue

Gross profit margin

Growth of sales
Net profit margin
Growth of net profit
Sales per Square Feet

Financial
impact 18

Budget after actions---Income Statement

Income Statement
Total revenue
Cost of sales

2009
930,00
0
420,000

2010(before)

2010 (after)

1,005,795 1,307,534
454,230

523,013

510,000

551,565

784,520

82,000

82,000

82,900

Wages and remuneration

130,000

140,595

252,821

Rental

200,000

200,000

200,000

Utilities

48,000

51,912

67,486

Garbage collection

10,000

10,815

14,060

Advertising and promotions

30,000

32,445

65,377

500,000

517,767

682,643

Operating profit

10,000

33,798

101,877

Interest payable on loans

23,710

18,369

18,369

-13,710

15,429

83,508

Gross profit
Operating expense
Depreciation of tangible assets

others
Total operating expense

Profit(loss) for the year

Thanks for these

measures we have
taken, the revenue
will increase by
30%
Depreciation
Wages go up since
increases
900 a
we implement
Yuan
because
3% bonus
and of
hire
the
purchase
of a
a part-time
pianist
second-hand piano
More AD and
promotion are
used for
development of
student market

The profit has risen from 15,429 to 83,508,

and it is obvious that the measures are effective.

19

Budget after actions---Balance Sheet

Balance sheet

2009

2010(before)

2010(after)

400,000

400,000

400,000

246,000

164,000

168,100

44,000

47,586

61,851

Cash at bank

198,000

227,083

343,958

Total assets

888,000

838,669

973,909

Owners equity

418,590

434,019

502,098

Bank loan payable

262,410

180,779

180,779

Trade payables

207,000

223,871

291,032

888,000

838,669

973,909

Goodwill
Furniture and fittings (net)
Inventories

Total liabilities and owners equity

According
Piano
purchased
to the assumptions
with 5,000 Yuan,
givenand
in the
net case:
salvage value of 500 Yuan, 5 years
depreciation.
Deprecation
Inventory
turnover
= (asset
of 2010
price is
net
the salvage
same with
value)
2009/ years of depreciation
Trade payables
=(5,000-500)/5=900
turnover of 2010 is the same with 2009
Furniture and fittings(after) = 164,000 + 5,000 900 = 168,100
20
We calculate the financial statement following these assumptions.

Budget after actions---Cash Flow Statement

Cash flow statement

2009

2010(before)

2010(after)

Operating cash flow

Operating profit (loss) for year
Add: depreciation

10,000

33,798

101,877

82,000

82,000

82,900

92,000

115,798

184,777

6,000

3,586

17,851

16,000

16,871

84,032

102,000

129,083

250,958

Nil

Nil

-5,000

-100,000

-100,000

-100,000

2,000

29,083

145,958

196,000

198,000

198,000

198,000

227,083

343,958

Changes in working capital:

Less: Increase in inventories
Add: Increase in trade payables
Investing activities
Capital expenditure

Cash flow goes down

since we suggest
purchasing a secondhand piano

Financing activities:
Repayment of loan including
interest
Overall cash flow
Add: Opening bank balance
Equals: Closing bank balance

After actions, the cash

flow of Pudong coffee
shop has greatly
improved

Since depreciation does not need to pay, that is why the profit shows a negative21
with a cash flow positive

Risk analysis--Operating and Financial Risk

Break-even analysis

2009

Fixed cost

2010(before)

2010(after)

500,000

517,767

682,643

Variable cost

420,000

454,230

523,013

Total revenue

930,000

1,005,795

1,307,534

911,765

944,163

1,137,738

EBIT

10,000

33,798

101,877

DOL

51

16.32

7.70

DFL

-0.73

2.19

1.22

DTL

-37

35.75

9.40

Break-even point

DOL: degree of
operating leverage
DFL: degree of
financial leverage
DTL: degree of total
leverage
DTL = DOLDFL

represents
the
We assume the whole of period expenditure is fixed cost, cost ofDTL
sales
as
total risk of a
variable cost.
Break-even point(in revenue)= fixed cost / (1- rate of cost of goodcompany,
sold in the figure
decreases, which
revenue)
35,75
9.4
reflects a low risk in
all.

22

Handle risk---if the strategy fails

If the strategy we suggest fails, then what can we do
Operating risk
If the increase rate of sales could not
reach 30% then
We should analysis the discrepancy
between the sales of students and whitecollars, and the variation of sales after
new strategy, and then adjust the strategy
of promotion and the structure of products
we could offer.

We have to keep an eye on the

actions and situation. If the
strategy we suggest could fail, we
should adjust our strategy at once.

Financial risk
If the cash flow breaks then
Li Wang could discuss with the suppliers
about the delay of payment and get more
loans even turn to his father for help
23
about the re-finance.

Overall valuation---FCFF method

Assumptions:
According
to inflation of 4%,and 7% interest rate of long-term loan, we assume the WACC as 15%
1.The
with
annual
risks revenue
taken into
grows
consideration.
at 10% in the first 3 year(2011-2013), from 2014, the rate is keeping
5%.
Valuation=discount
2.Renew
the Furniture
of every
and fittings
years at
cash
2012
flow
forat40,000
15% Yuan.
2
3.There is =no145,958
bank loan
+268,965/(1+15%)+399,654/(1+15%)
after 2012.
+761,550/(1+15%)3+780,242/(15%- 5%)/
4
Income
(1+15%)
statement
and balance sheet prepared for the forecast of the valuation is omitted.
=1,695,790
Forecast cash Flow statement
Operating cash flow
Operating profit (loss) for year
Add: depreciation

Changes in working capital:

Less: Increase in inventories
Add: Increase in trade payables

Investing activities

Financing activities:
Repayment of loan including interest
Overall cash flow (deficit) for year

2011

2012

2013

2014

217,311
82,900
300,211

367,374
82,900
450,274

634,456
10,900
645,356

718,991
10,900
729,891

18,555
87,309
368,965

24,122
113,502
539,654

31,359
147,553
761,550

13,589
63,940
780,242

-40,000

-100,000
268,965

-100,000
399,654

0
761,550

0
780,242

24

The end
thank you all

25