Sun Yat-sen University Sun after storm A Case Study on Pudong Coffee Shop Dream Chasers Sun Yat-sen University Manager: LIU Mengning Consultants: ZHANG Wei HUANG Peilong PENG Weijian

Outline B S C Goal: To help Pudong Coffee Shop weather the STORM. A1 Storm before Sun A. Case Overview B1 A STORM Framework B. Current Situation Analysis C1 Strategy Positioning C2 Strategy Map C. Strategy Analysis D1 Learning & Growth B S C D2 Internal Process Perspective D. Utilization & Implementation D3 Customer Perspective D4 Financial Perspective E1 Income and Cash Flow Forecast E. Net Cash Flow Forecast E2 Break-even Point E3 Overall Valuation Goal: To help Pudong Coffee Shop weather the STORM.

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast A1 Case overview Social Conditions Technical Conditions Organizational Conditions Revenue Conditions Market Conditions A STORM Framework Analysis Strategy Analysis Utilization &Implementation Net Income Forecast A SUN Solution

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Social Conditions Industry Retrospect: Growing Coffee Consuming in China Broad Prospect: Coffee: A symbol of fashion, elegance and noble Huge gap in the market: Chinese: 3 cups per year American: 500 to 700 cups per year Coffee has a blooming future in China.

B1 Technical Conditions Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Technical Conditions Positive feelings 11.Relax and watch the world go by Joyful 11 5.Little waiting time 1.Wonderful environment 12.magazines Comfortable 5 10 12 7 1 10.Taste and appearance Satisfied 3 2 7. A variety of coffee 3.Decoration 2.Warm welcome Common 9 13 6 4 Higher price 9.Long time waiting for coffee Invalid 8 4.Less flavor and background music Bad 8. Employees, who are friendly , familiar with coffee and professional in service Awful Negative feelings Customer Experience Flow- Process of Pudong Coffee Shop

B1 Organizational Conditions Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Organizational Conditions Company Structure Current situation Owned the coffee shop Father Son Managed the shop without salary and bonus from it Full-time Employees Part-time Employees No training for the employees. No adequate performance evaluation. 2 Persons Training and development of employee are urgent.

B1 Market Conditions – Customer Characters Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Market Conditions – Customer Characters Occupations Age Time of Consumption 1.Professionals 2.International students 3.Residents Accessible Young customers are the majority Lunch-time is the busiest period. Target Market Average expense of each customer RMB 50 Average quantity of customers every day About 50

GE Matrix of Judging Criteria Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Market Conditions – Service Evaluation Judging Criteria for Coffee Shops (not listed in order of importance) 1. Beverages/food provided must be of good quality 2. Décor, temperature and noise levels 3. Free WiFi 4. Friendly staff 5. Excellent customer service 6. Presentation of food and food offering 7. Cleanliness and overall hygiene 8. Availability of space 9. Overall value for money GE Matrix of Judging Criteria Sustained advantages Region high low Customers’ satisfaction Of Pudong Coffee Shop Importance of the criteria Needed improvement Region 1 4 5 3 9 8 2 7 6 Certain attention should be paid to Free Wifi, Cleanliness and overall hygiene, & Presentation of food offering.

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Market Conditions – Competitors Wages , Advertising and Food sales is weak compared with average of Local Region Wages and remuneration LOW Depreciation of tangible assets HIGH Advertising and promotions LOW Beverage/drinks HIGH Food sales LOW

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast STORM Framework B1 Revenue Conditions Ratio Year 2008 Year 2009 Analysis Liquidity Good Current ration and quick ratio are near 1 Has adequate net working capital 1.225 1.026 43000 1.169 0.957 35000 Current ratio Quick ratio Net working capital Activity Good Inventory turns over at fairly high rate Inventory turnover Asset turnover 20.464 0.951 10.244 1.047 Made small profit in 2008, but net loss in 2009 Decreased profitability Profitability 0.035 0.575 0.034 0.075 Net profit margin Gross margin ROA ROE -0.015 0.548 -0.033 Poor Solvency Poor Interest payment was quite large compared with net income Times interest earned Debt service coverage 2.125 0.61 0.422 0.1 Financial Situation: Poor profitability but good liquidity.

C1 Strategy Positioning Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast C1 Strategy Positioning Intertype Starbucks UCC Intratype Pudong Coffee Italian-style restaurant Ice-cream Café Others In the intertype, Pudong Coffee Shop has to compete with various coffee shop. Thus, Pudong Coffee Shop should cut down its cost to jostle for the similar demanders. In the intratype, Pudong Coffee Shop has to satisfy the local customers. Thus, to compete with other local family-owned cafes, Pudong must find its own features FOCUS STRATEGY Cost Leadership Differentiation Enhance Profitability

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast C2 Strategy Map Use Balance Scorecard to Implement the strategy Enhance Profitability Differentiation Cost Leadership Financial Perspective Balance Gross Margin Rate Boost Sales Growth Enhance Asset Utilization Customer Perspective Boost Market Shares Enhance Customer Satisfaction Retain Customer Loyalty Enhance Service Level Wider Product Range Budgeting Control Internal Perspective Continuous Improvement of Internal Process Increase Labor Productivity Learning & Growth Perspective Adjust Employee Structure Improve Employee Competence Enhance Employee Satisfaction

Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast Utilization & Implementation Measure Level KSF Indicators Actual Average in Industry Target* Finance Gross Margin Rate Beverages/Drinks 28.5% 21.9% 22% Food sales 26.3% 32.9% 33% Sales Growth Sales Change from Prior Year 1.6% 5% Adverting Intensity 3.2% 4.8% Customer Customer Value Revenue Per Customer 5- 43.2 50 Satisfaction Satisfaction Survey >90% 87.2% 95% Market Shares Revenue/Total Consumption in the Local 33.3% 43% Operation Budgeting control Utilities as % of Total Revenue 5.2% Utilities change from prior year 23.1% 15% Service Required Revenue of take-away/total >1% N/A 10% Learning &Development Employee Structure Part-time staff/full-time 4 Employee Competence Revenue/per employee 232,500 320,000 Employee Satisfaction >80% 90% To transfer KSF into targets using Benchmarking Approach

D1 Learning and Growth Perspective – Action Plan Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast D1 Learning and Growth Perspective – Action Plan Enhance Employee Satisfaction Improve Employee Competence 1.Salary Basic Wage:2700 Use the Proportionate Commission related to every customer serviced (3%) 2.Work Hours Full-time employees: 8h is required. Arrange them to 2 shifts: Part-time employees: 6.5h is required. Arrange them to 4 shifts: Employee training plan Train employees for at least 10 hours per month and invest ￥300 per month. Performances recording Rank the performance results and give the best one 10% bonus 8:00---16:00 14:00---21:00 Adjust Employee Structure To employ one more full-time employee Keep the current structure Morning 8:00---12:30 Noon 12:30---14:30 Afternoon 14:30----18:30 Evening 18:30----21:00

D2 Internal Process Perspective - Action Plan Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast D2 Internal Process Perspective - Action Plan Purpose Targets Action Redesign layouts additional expense of ￥3000 Bio-material and lower-wattage bulbs Utilities as % of Total Revenue: Utilities change from prior year: 5.2% Service required Save Utility 5.0% Energy-saving idea Personal responsibility system 23.1% 15% Encourage Take-away Service Reduce Customers’ Waiting Time Check the waiting time though observing Provide Take-away Service to Passers-by Set an employee particularly In the morning (8:00-9:00) Boost Take- away Rates Take-away Rate: Budgeting Control >10% <1%

D3 Customer Perspective - Action Plan Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast D3 Customer Perspective - Action Plan Enhance Customer Satisfaction Customer retention and absorption Boost Market Shares Enhance Profitability Provide light music Do customer satisfaction survey of 200 samples every 3 month Decorate the walls and bar counter with ￥2000 to￥3000 Found a member club Develop campus agent at the cost of ￥300 per month Set ￥1000 to hold coffee culture competition once a year 5% off for old patrons’ bringing new customer. Develop 3 new types of coffee flavor every 6 month Provide 3 special offers every week

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast D4 Financial Perspective Enhance Profitability Balance Gross Margin Rate Beverages /Drinks Decrease the drinks’ price lightly to 3% to expend its sales. Pay attention to the invest, develop 5-7 different types of blend coffee Encourage take-away service with the budget of ￥2000 for packaging Food sales Increase the price to 5% Develop 3 types of coffee every 6 months Enhance the variety of breakfast, add 3-4 kinds of food Boost Sales Growth Sales Change from Prior Year Consider all aspects when starting a renovation Advertisement and promotions as % of Total Revenue Increase invest in marketing promotion and advertising to 4.8% Irregular preferential price with 20% off Enhance Asset Utilization Depreciation of tangible assets Keep the depreciation rate

E1 Forecast Income Statement for year ended: Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E1 Forecast Income Statement for year ended: E1 Forecast Cash Flow statement for year ended: E1 Forecast Balance Sheet 31st December 2010 31st December 2009 31st December 2008 ¥ Revenue (beverages/drinks) 427,800 485,000 465,000 Revenue (food sales ) 641,700 445,000 450,000 Total revenue (food and beverages) 1,069,500 930,000 915,000 Cost of sales (441,000) (420,000) (389,000) Gross profit 628,500 510,000 526,000 Less Operating expenses: Depreciation of tangible assets (82,000) Wages and remuneration (155,520) (130,000) (110,000) Rental (200,000) Utilities (lighting and heating etc.) (53,475) (48,000) (39,000) Garbage collection (11,100) (10,000) (9,000) Advertising and promotions (51,336) (30,000) (25,000) General and administrative expense(training and development) (14,400) Total operating expenses (567,831) (500,000) (465,000) Operating profit for year 60,669 10,000 61,000 Interest payable on loans (18,368.7) (23,710) (28,700) Profit (loss) for year 42,300.3 (13,710) 32,300 31st December 2010 2009 2008 ¥ Goodwill 400000.00 Furniture and fittings (net) 164000.00 246000.00 328000.00 Inventories 42100.00 44000.00 38000.00 Cash at bank 227700.00 198000.00 196000.00 Total assets 833800.00 888000.00 962000.00 Owner’s equity 460890.30 418590.00 432300.00 Bank loan payable 180778.70 262410.00 338700.00 Trade payables 192131.00 207000.00 191000.00 Total liabilities and owner’s equity 31st December 2010 2009 2008 ¥ Operating cash flow Operating profit (loss) for year 60669.0 10,000 61,000 Add: depreciation 82,000.0 82,000 142,669.0 92,000 143,000 Changes in working capital: Less: Increase in inventories 1,900.0 (6,000) (38,000) Add: Increase in trade payables (14,869.0) 16,000 191,000 111,331.3 102,000 296,000 Investing activities Nil Financing activities: Repayment of loan including interest (100,000.0) (100,000) =Overall cash flow (deficit) for year 29,700.0 2,000 196,000 Add: Opening bank balance 198,000.0 Equals: Closing bank balance 227,700.0 198,000 The forecast of these accounts is based on the forecast income statement and forecast balance sheet. The forecast of these accounts is based on the assumption Li has made for 2010, and other accounts are predicted based on the set targets mentioned before. The forecast of these accounts is based on the assumption Li has made for 2010. Keeping positive net working capital is of importance, which guarantees the healthy operation of the company With all the implementation mentioned above, Pudong Coffee Shop will have promising net income in 2010 With the increasing profitability, total assets and owners’ equity will enlarge fast, especially after 2012 when depreciation of tangible asserts finished

E2 Break-even Point Analysis Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E2 Break-even Point Analysis Cost Behavior Analysis Fixed cost: Depreciation, Rental, Utilities and Ad & Promotions Variable cost: Cost of sales, Garbage collection Mix cost: Wages and remuneration, BEx= TFC/(p-VC) Based on the assumption and the analysis above ,we can calculate: Total Fix cost(TFC)=82,000+65,000+200,000+48,000+30,000=￥425,000 Break-even Sales Volume(BEx)=425,000.00/(50-35)= ￥ 28,333 Total Fix Cost(TFC)= 82,000+65,000×1.2+20,000+53,475+51,336+14,400=￥479,211 Break-even Sales Volume(BEx)=479,211/(50×1.05-35)=27,383 Year 2009 Year 2010 Assumption: Labor Equivalent : 1 part-time = 0.5 full-time In the year 2009, half of the sales volume comes from part-time employees, and the other half comes from part-time ones. Half of the wages and remuneration is fixed cost. The graph of cost behavior of wages and remuneration is shown below: The formula of wages and remuneration : Assumption: Unit cost 35 yuan (According to the case, The average cost of a cup of coffee in these international chains amounts to between Yuan 30 and 40.) Thus, sales volume should be counted as : The Year 2008: Sales Volume=￥915,000÷35=￥11,114.27 The Year 2009: Sales Volume=￥930,000÷35=￥12,000.00

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E3 Overall Valuation of Pudong Coffee Shop Period Net Cash Flow Discounted Rate Choose the interest rate of long-term bank loan 7% as the discounted rate. n=5 Make forecast cash flow statement in the next five years. Assumption: 1. Free from going concern; 2. Run at the same growth rate of 2010 in the next five years.

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E3 Forecast Income Statement for the Next Five Years E3 Forecast Cash Flow Statement for the Next Five Years E3 Forecast Balance Sheet for the Next Five Years Year 2010 2011 2012 2013 2014 ¥ Revenue (beverages/drinks) 427800 491970 565766 650630 748225 Revenue (food sales ) 641700 737955 848648 975945 1122337 Total revenue (food and beverages) 1069500 1229925 1414414 1626576 1870562 Cost of sales (441000) (463050) (486203) (510513) (536038) Gross profit 628500 766875 928211 1116063 1334524 Less Operating expenses: Depreciation of tangible assets (82000) Wages and remuneration (155520) (189734) (235271) (296441) (374112) Rental (200000) Utilities (lighting and heating etc.) (53475) (61496) (70721) (81329) (93528) Garbage collection (11100) (12321) (13676) (15181) (16851) Advertising and promotions (51336) General and adminstrative expense (14400) (16560) (19044) (21901) (25186) Total operating expenses (567831) (623608) (691432) (696180) (803205) Operating profit for year 60669 143267 236779 419883 531319 Interest payable on loans (18369) (12655) (6557) Profit (loss) for year 42300 130613 230222 Year 2010 2011 2012 2013 2014 ¥ Goodwill 400000 Furniture and fittings (net) 164000 82000 Inventories 42100 48339 50756 58370 70044 Cash at bank 227700 368978 565449 1012969 1544100 Total assets 833800 899317 1016206 1471339 2014144 Owner’s equity 460890 591503 821725 1241608 1772927 Bank loan payable 180779 93433 Trade payables 192131 214381 194481 229731 241217 Total liabilities and owner’s equity 2010 2011 2012 2013 2014 ¥ Operating cash flow Operating profit (loss) for year 60,669 143,267 236,779 419,883 531,319 Add: depreciation 82,000 142,669 225,267 Changes in working capital: Less: Increase in inventories 1,900 (6,239) (2,417) (7,613) (11,674) Add: Increase in trade payables (14,869) 22,250 (19,900) 35,250 11,487 129,700 241,277 214,462 447,519 531,132 Investing activities Nil Financing activities: Repayment of loan including interest (100,000) =Overall cash flow (deficit) for year 29,700 141,277 114,462 Increasing total revenue and profit. Satisfying cash flow for the next five years. Total assets rapidly increase as well as the owner’s equity.

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast E3 Overall Valuation of Pudong Coffee Shop 2009 ￥ 2010 ￥29700 2011 ￥134298 2012 ￥243277 2013 ￥476569 2014 ￥612014 1/(1+7%)-1 ￥27,757 1/(1+7%)-2 ￥117,301 1/(1+7%)-3 ￥198,586 1/(1+7%)-4 ￥363,572 1/(1+7%)-5 ￥436,357 Total PV: ￥1,143,574 NPV=￥1143574 Though the shop experience a financial storm this year, it has a profitable future.

Current Situation Analysis Utilization & Implementation Case Overview Current Situation Analysis Strategy Analysis Utilization & Implementation Net Cash Flow Forecast Uncertainty New Entrants in the local region Mitigation: Use CRM system to enhance customer loyalty Increasing Price of the Materials Mitigation: Develop new non-coco products Rapid Inflation Mitigation: Increase the price

A STORM framework Analysis Summary A STORM framework Analysis Social Conditions Technical Conditions Organizational Conditions Revenue Conditions Market Conditions A. Case Overview B. Current Situation Analysis C. Strategy Analysis Learning &Growth Perspective Internal Process Perspective Customer Perspective Financial Perspective D. Utilization & Implementation A SUN Solution E. Net Cash Flow Forecast Management Accounting Approaches such as Benchmarking and Balance Scorecard are applied to help Pudong Coffee Shop go from storm to sun.

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