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THE PUDONG COFFEE SHOP

THE PUDONG COFFEE SHOP. Content. II. Environment Analysis & Internal resources to seek the PCS ’ s strategy. When. Case Overview. Where. Coffee culture emerged in China Coffee consumption growth in China >10% Potential. Who. Products. Problems. ↑¥15,000 by 2%.

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THE PUDONG COFFEE SHOP

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  1. THE PUDONG COFFEE SHOP

  2. Content II. Environment Analysis & Internal resources to seek the PCS’s strategy

  3. When Case Overview Where • Coffee culture emerged in China • Coffee consumption growth in China >10% • Potential Who Products Problems ↑¥15,000 by 2% • Many competitors: Starbucks Coffee, U.B.C. Coffee Year 2008 Shanghai Pudong —— China’s financial and commercial hub ↓¥46,010 by 142% Li Wang —— has limited business experience Beverages and Food • Low sales growth Rate • At a loss in prior year

  4. II-1. External environment • A • Macro Environment (PEST） • Economical factors • Social factors • B • Industry Environment • Five forces model • C Business environment • SWOT

  5. A. Macro environment (PEST） Economical factors Social factors Huge population Rapid economic growth Changes in the concept of drinking Shanghai Pudong —China’s financial and commercial hub Coffee culture has emerged in China More foreigners and culture blending ☆ As we can see the economic and social environment is favorable

  6. B. Five forces model • · Low switching costs • · Low capital investment • · Lack of marketing • channel control • Barriers to entry the market • -Comparatively high • customer loyalty • -The technology needed · Many competitors · High growth rate of industry · Low conversion cost · Barrier to exit is not so high · Low switching costs · Alternative suppliers · High demands in the market · similar products · Similar prices Not mentioned in the case ☆Competition situation is serious

  7. C.SWOT Analysis • Weakness • Limited business experience • Similar products • Unskilled staff • Take-away sales • Online sales • High cost of sales • Strength • Superior geographical position • Steady source of customers • Opportunity • Coffee consumption in China is growing fast • market share is potential • new market segmentation • Potential customers • Threat • Newcomers • price war

  8. II-2. Internal resources Tangible resources • Fixed assets：Furniture and fittings • A very good reputation • The manager has a deep understanding of the European culture Intangible assets Financial status —Year 2009

  9. Summary:Through the above analysis we suggest that the shop take the following strategy Overall strategy Competitivestrategy Intensive growth strategy focused-differentiation strategy In the next page we use Balanced Scorecard to expatiate it

  10. Customer -How do customer see us? Financial -How do we look to our shareholders? Learning and Growth -Can we continue to improve and create value? III. Balanced Scorecard Internal Business Processes -What must we excel at? A strategic planning and management system Vision and strategy

  11. i. Learning and Growth Perspective Most of the coffee shops have staff training programs such as Starbucks etc • Hold training programs regularly and set the least training hours per year It’s glad that Li Wang has already take this action. Suggestions • Hold group activities regularly • Manager/executive attend to executive education course irregularly • Decision made by one person should be replaced with Brain Storm

  12. ii.Internal Business Processes Perspective • Replace some PTE with FTE Less than the Average by 6% Suggestions • Refurbish the outlets to create a more comfortable environment • Introduce new products with Chinese Feature About 35% of other coffee shops provide wider product range to improve their business.

  13. iii. Customer Perspective Nearly half of the customers are between 21-30 years old, which is consistent with the age of office workers Besides, about 30% of other coffee shops increase advertising to improve their business. • Set a suggestion box for customers’ complaints and encourage the adviser by coupon Suggestions • Develop membership programs - discounts. Vouchers.little gifts for special days… While, the customer base of the PCS —— local professionals and expats • Carry through questionnaire survey • Attract the office workers nearby by developing “take-away” & network business, which fulfill their needs • Attract new customers by advertising and promotion such as distributing booklet and providing coupon

  14. iv. Financial Perspective • Categorize the cost of sales by kind Suggestions • Enhance the bargain capacity with suppliers • Consider the rationality of the assets depreciation policy • Make investment in facilities and innovations etc. which can create future value The revenue structure of the Pudong Coffee Shop is quite different from others. To verify the specific reason for low GM, suggest to categorize the cost of sales by kind.

  15. Strategy map— A tool for BSC A logical, step-by-step connection between strategic objectives

  16. IV-1. Financial statements &Value evaluation Price ↑3% Volume ↑5% Volume ↑5% General inflation ↑4% General inflation ↑4% Fixed Fixed Under the assumptions, the PCS will have a profit.

  17. IV-1. Financial statements - continued Assumptions: Inventory turnover rate Trade credit terms Same as Year 2009

  18. IV-1. Financial statements - continued Loss ↓ Cash flow ??? Assumptions: No investing or additional financing activities As the depreciation cost is prepaid when fixed assets were purchased.

  19. IV-2. Break-even point Analysis Cost Variable cost Depreciation of tangible assets Mixed cost Wages and remuneration Rental Analysis Utilities (lighting and heating etc.) Garbage collection Advertising and promotions Fixed cost Assumptions： （1）Average spend per person is 50. （2）consider the mixed cost as fixed cost • BEP=(420,000+500,000+23,710)/50=18,875 • BEP=(458,640+508,720+20,066)/50=17,715

  20. IV-3.The overall valuation of the coffee shop Assumptions: • As the consumption market in China was expanding at a rate excess of 10 percent per annum, we assume that the sales growth rate is 10%. • Because the growth rate is 10% which is really high for a business, we divide the life span of the coffee shop into two related periods, within which, one is of high growth rate and the other is called the follow-up. • In the follow-up period, according to the competitive equilibrium theory, the growth rate of sales roughly equal to the nominal growth rate of macroeconomic, which is between 2%~6%. As China is highly developing, we assume that rate is 6%. • We assume that Li be able to borrow the loan with the same interest rate . • We assume that the growth of sales is smooth. • Then we use the EVA method to value the shop. • Let the cost of equity equals the rate of net profit to equity.

  21. IV-3.The overall valuation of the coffee shop =net operation profit after tax/ Equity =38,435/438,656=8.76% =7%×180,779 /( 180,779 +438,656)+ 8.76% ×438,656/( 180,779 +438,656） =8.25% EVA (Economic Value Added )=net operation profit after tax-total capital cost =38,435-438,656×8.25%=2,245.88 The value of the coffee shop =Investment Capital +The Present Value of EVA =681,000+ 2,245.88 /(1+8.25%)+ 2,245.88 ×1.1/(1+8.25%) ^2+ 2,245.88 ×1.1^2/(1+8.25%)^3+ 2,245.88 ×1.1 ^3/(1+8.25%)^4+ 2,245.88 ×1.1^4/(1+8.25%)^5+ 2,245.88 × 1.1^5/[(8.25%-6%) ×(1+8.25%)^5] = 799,864.8

  22. V. Overall Summary Survival Action NOW! Urgent Task Take the suggestions to obtain a profit & look forward to the future!

  23. THANK YOU

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