This summary gives general information about a new coffee shop to be opened in Markham, Ontario. The shop owners plan to become franchisees of Second Cup, a Canadian coffee shop network.
The cafe’s target audience is mainly middle-class people who live or work nearby.
The shop has competition in Markham in general (five other Second Cup shops and three Starbucks shops). But if it is built far enough from them, there will be little competition, as people usually prefer to get coffee somewhere nearby. Besides, Markham is a growing city, and this may also lower competition.
There is not enough information to decide what exact risks or opportunities there are, and we recommend getting more information before opening the shop. In our report, we think about what information is needed.
This paper discusses the issue of the Hatches family who plans to open their own business under the franchise of Second Cup. We will describe the issue, analyze its possible pros and cons, think about alternatives to some of their decisions, and will try to offer recommendations about the problem and how to implement them.
The Hatches family, Ken, and Mary (decision-makers), are tired of getting orders, want to be their bosses, and need more money. So they have to decide if they can become effective business people and make more money this way (this is why the issue has arisen). It seems the decision is not urgent (urgency), and they can take some time to think. So, the first decision to make is if they are ready to risk (an immediate issue), but it seems they are.
Next, the most important decision to make is if they want to open their cafe with Second Cup (the main opportunity). The company has given them a sample financial statement, and they need to think if it is good enough for them (a basic issue). They need to think about how exact and trustworthy it is. They can also consider options other than Second Cup. Chronologically, this is the second decision to make. But they need to make it only when they are sure they have counted everything well.
Analysis of Issues
There are a few problems in this case.
The sample financial statement (which, as we suppose, describes one year) given by Second Cup isn’t clear enough. This constraint means that conclusions made from it may be not very exact. (So, for items 1a-1c, the causes of problems are methodological, qualitative in origin, but have quantitative results.)
- The financial statement only gives information about gross sales (GS), nothing about net sales (NS). (Because Sales=$600,000 and Promotional royalty=$54,000, and because we know that promotional royalty=9% of gross sales, the word “sales” in the statement should mean gross sales.) NS=GS – (Sales allowances + Sales discounts + Sales returns). Maybe for this kind of business, the difference between GS and NS is not big. But it needs to be checked, because it may sum up with other problems.
Further, Gross profit (GP)=NS-Cost of goods sold. Because we don’t know NS, we cannot calculate GP. So suppose that here GS=NS, then GP=$280,000. The financial statement doesn’t give this number; it gives the number $300,000 which is GP+Opening cash balance (OCB, $20,000). But OCB is Hatches own money, and not part of GP.
Further, we know that Expenses=$225,000. So we can calculate operating profit: OP=GP-Expenses=$55,000. The financial statement does not give this number, but it is said that the Hatches know they will make $55,000 (they subtracted OCB from the given total of $75,000). It is still not exact, because they need to subtract taxes and interest.
To sum up, we should note that we don’t have three things here: 1) the difference between GS and NS, 2) taxes, 3) possible interest.
- Another quantitative issue is calculating the possible deviation from the given numbers. For example, the Hatches might get a bad situation where Sales=$590,000, which makes OP=$45,000. So we need to calculate the error and know how possible and probable such situations are.
- It is also not clear if the expenses described in the financial statement are the same money (start-up costs of $200,000) that is mentioned in the case description. If yes, we can use the financial statement to count profit. If not, let us see what happens. It is known that the business will get an income of $55,000 and that the Hatches will also get “half the salary total as their wage for working in the business”, which is $50,000. So they will get $105,000, and now they get nearly two times less, which is about $52,500. So, if the Hatches need to pay this debt, and they pay, for example, $52,500 every year, they will only pay their debts and start making more money than they do now in four years:
|Year||Debt, Beginning of Year||Debt, End of Year (+5% Interest)||Debt, End of Year, after $52,500 was paid|
This is another quantitative issue.
A qualitative constraint that is connected with people is that the Hatches are not experienced, business people. They only have some distant experience.
The Hatches family thinks the “well-organized operating and monitoring system” of Second Cup “will ensure that they operate at peak efficiency”. It is not explained what this system includes. We suppose it means the Hatches don’t need to worry about the location of the shop and possible competitors. It is an opportunity, not a constraint because Second Cup should have experienced staff to find answers to these questions. This can be a qualitative opportunity, as it gives the family a competitive advantage.
Another point is: should the Hatches buy supplies from Second Cup? They think they will save much by doing it, and it is an opportunity for them at the moment. But they should think about this quantitative issue connected with materials again in the future when they have more experience so that this opportunity doesn’t become a constraint.
Items 1-3 speak about getting more information before starting the business. A global alternative might be to get information about Starbucks and think about buying their franchise. But it doesn’t cancel the need to get more information about the plans they have now, because they need to compare. The main pros of this are realizing their risks and the ability to manage them better, and maybe some additional knowledge about the specifics of the business. Cons are losing time and the risk to get worse offers than they have now. In any case, getting information (85%) outranks some loss of time (15%).
The Hatches are not experienced business people (item 2). Second Cup offers a course that gives basic knowledge about the business, so they should start with it (qualitative opportunity). One more solution: they can hire a manager for some time. The main advantages are that they can learn from the manager and that they are riskless. The disadvantages are additional expenses, and there is also some risk of getting a bad manager. Getting a manager or adviser (65%) outranks economizing money (35%), not only because of less risk but because they can hire them for a short period.
The family plans to buy supplies from Second Cup and hopes to save money by doing it. They might consider buying supplies from other places (at least some of the supplies). Pros are chances to find cheaper supplies, possibly supplies of better quality, and maybe less dependence on Second Cup. Cons are having to manage the supply chain, and maybe having to deal with additional controls from Second Cup. Decisions based on information that will be gained in the future will need to be made.
Recommendations and Implementation
We recommend getting more information (item A in the previous section). It is always better to know what you are doing and what risks you have. This decision is very serious. So, spending some additional time soon is worth it. To do that, the family needs to ask for more information from Second Cup, then get information similar to what they have from Starbucks by asking about their conditions.
About item B, we think it is a good idea to hire a manager or an advisor for a short period until the Hatches get more experience (unless they are completely sure they can do without help). Maybe their franchiser can offer something like this. It means additional expenses, but possibly much less risk.
As for C, the Hatches might think about other sources of supplies when they already have some experience and more or less stable business. They can use some third-party logistics. Before that, they need to calculate possible profits and losses. They also don’t have to completely stop buying from Second Cup; they may only buy some kinds of supplies from other sources.