1. The Pudong coffee shop -----analysis report brilliant Li Hao Wang Hui
Wang Xuejuan
Qin Xinren
Wei Yingying

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

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

4. ? Background Industry life cycle Global: China:
Coffee consumption is growing at a slightly over two percent per year
A typical American person drinks between 500 to 700 cups a year
China:
Coffee consumption is growing at a double-digit rate per year
Each Chinese person drinks about 3 cups of coffee a year
A big potential market of coffee in China.
Embryonic Growing Mature Decline

5. Operating analysis Insufficient training：
Pudong coffee shop：
Insufficient training：
Such as unskilled part-time staffs
No facilities like 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 customers in evening

6. Structure of product Pudong coffee shop： Limited product range
Comparison
Gap：7.85%
Pudong coffee shop：
Limited product range
Inflexible time supply

7. 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.
students
White-collars
Pudong
Coffee
Office
Private
school
Park
International
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.
students

8. Dissatisfied customers rarely complain A rude or incompetent barista
Employee analysis
Dissatisfied customers rarely complain
A rude or incompetent barista
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

9. Cost structure analysis
Average
Pudong coffee
As for AD expenditure, Pudong coffee shop is lower than the average, and it refers that more AD is needed, which also comply with the measures taken to improve.
As for depreciation, Pudong coffee shop has a higher number, which makes a huge tax shield.
This graph shows the cost discrepancy between the average and Pudong coffee shop. It is referred that big difference exists which can lead to a cost-saving.
As for cost of sales, Pudong coffee shop is much higher than the average, which means material cost control did not work well.
As for wages, the lower wages save money, and it also shows a room to go up in order to improve employees’ loyalty.

10. CVP analysis
Assumption：cost of sales as variable,and all the operating expenses are supposed to be fixed.
2009 financial data analysis:
Revenue =930,000
The average spend per customer =50
Total number of customers=930,000/50=18,600
CVP analysis 
2009
Total revenue
930,000
Fixed cost
500,000
Variable cost
420,000
Sales per customer 50
Variable cost per customer
22.59
Fixed cost per customer
26.88
Operating profit per customer
0.54
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.

11. SWOT analysis Students and office staffs nearby
strengths
weakness
opportunities
threats
Students and office staffs nearby
International activities and
expats
Good location
Customers’ loyalty
Generous rent terms
Low market share and sales
Negligible “take-away”
Insufficient food supply
Fierce competition from an Italian restaurant and an Ice-cream coffee nearby

12. Structure of Strategy
Target customers: students, white-collars, expats who emphasis quality
Strategy: market focus strategy
Vision: to be popular with every one in region
Mission: make every one’s coffee dream come true
Mission
Vision
Strategy
Target customers 12

13. Actions---target customers
Purchasing power
31-50：high consumption and purchasing power, insensitive to price.
Keep strategy, maintain high quality
Below 20: low consumption and purchasing power, sensitive to price.
Promote strategy using discount activities
21-30 and are set to be target customers of Pudong coffee shop
21-30:high consumption but low purchasing power, sensitive to price.
Promote strategy by adjusting price and keeping loyalty
Above 50：high purchasing power but low consumption, insensitive to price.
Develop this market by quality and culture
Above 50
31-50
Below 20
21-30
Customers’ bargain

14. Translating strategy into action --- on the basis of BSC
Internal
activities
Text
in here
Employees
& Facilities
Customer
response
Financial impact

15. Fashion magazines& newspapers Improve employees' satisfaction
Actions --- Facilities & Employees
Action:
Financial impact:
Cost 1500 Yuan and without depreciation
Provide Wi-Fi
Fashion magazines& newspapers
No obvious impact
Peaceful environment with soft music and piano performance in the evening
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
Improve employees' satisfaction
Sharing the profit with employees by 3% of revenue as a bonus
Measures such as employees birthday present are also needed.

16. Actions --- Internal activities
Develop “take-away” service
Cleanliness and overall hygiene
Action:
Update the menu according to customers’ need
Extend the opening time to 10 P.M.
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
Financial impact:

17. Actions --- Customer response
Financial impact:
VIP card and Student card at 20% discount.
5% discount above 10 people.
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.
Sponsor students’ activity
Questionnaire to communicate with customers

18. KPI based on strategy to measure performance
Internal activities
Employees & facilities
Fake percentage of materials
Sales of “take-away”
Food sales in total revenue
Utilizing rate of Wi-Fi
Frequency of cleaning
Updated magazines and newspapers cost
Turnover of employees
Gross profit margin
Growth of sales
Net profit margin
Growth of net profit
Sales per Square Feet
Sales of new and existing customers
Time for queuing
Times of complain from customers
Customers
Financial impact

19. Budget after actions---Income Statement
2009
2010(before)
2010 (after)
Total revenue
￥930,000
￥1,005,795
￥1,307,534
Cost of sales
420,000
454,230
523,013
Gross profit
510,000
551,565
784,520
Operating expense 
Depreciation of tangible assets
82,000
82,900
Wages and remuneration
130,000
140,595
252,821
Rental
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
others -
Total operating expense
500,000
517,767
682,643
Operating profit
33,798
101,877
Interest payable on loans
23,710
18,369
Profit(loss) for the year
￥-13,710
￥15,429
￥83,508
Thanks for these measures we have taken, the revenue will increase by 30%
Depreciation increases 900 Yuan because of the purchase of a second-hand piano
Wages go up since we implement a 3% bonus and hire a part-time pianist
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.

20. Budget after actions---Balance Sheet
2009
2010(before)
2010(after)
Goodwill
￥400,000
Furniture and fittings (net)
246,000
164,000
168,100
Inventories
44,000
47,586
61,851
Cash at bank
198,000
227,083
343,958
Total assets
888,000
838,669
973,909
Owner’s equity
418,590
434,019
502,098
Bank loan payable
262,410
180,779
Trade payables
207,000
223,871
291,032
Total liabilities and owner’s equity
￥888,000
￥838,669
￥973,909
According to the assumptions given in the case:
Inventory turnover of 2010 is the same with 2009
Trade payables turnover of 2010 is the same with 2009
We calculate the financial statement following these assumptions.
Piano purchased with 5,000 Yuan, and net salvage value of 500 Yuan, 5 years depreciation.
Deprecation = (asset price – net salvage value) / years of depreciation
=(5, )/5=900
Furniture and fittings(after) = 164, ,000 – 900 = 168,100

21. Budget after actions---Cash Flow Statement
2009
2010(before)
2010(after)
Operating cash flow：
Operating profit (loss) for year
￥10,000
￥33,798
￥101,877
Add: depreciation
82,000
82,900
92,000
115,798
184,777
Changes in working capital:
Less: Increase in inventories
6,000
3,586
17,851
Add: Increase in trade payables
16,000
16,871
84,032
102,000
129,083
250,958
Investing activities
Capital expenditure
Nil
-5,000
Financing activities:
Repayment of loan including interest
-100,000
Overall cash flow
2,000
29,083
145,958
Add: Opening bank balance
196,000
198,000
Equals: Closing bank balance
￥198,000
￥227,083
￥343,958
Cash flow goes down since we suggest purchasing a second-hand piano
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 negative with a cash flow positive

22. Risk analysis--Operating and Financial Risk
Break-even analysis 
2009
2010(before)
2010(after)
Fixed cost
500,000
517,767
682,643
Variable cost
420,000
454,230
523,013
Total revenue
930,000
1,005,795
1,307,534
Break-even point
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
DOL: degree of operating leverage
DFL: degree of financial leverage
DTL: degree of total leverage
DTL = DOL×DFL
DTL represents the total risk of a company, the figure decreases, which reflects a low risk in all.
We assume the whole of period expenditure is fixed cost, cost of sales as variable cost.
Break-even point(in revenue)= fixed cost / (1- rate of cost of good sold in revenue)
35,75
9.4

23. 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 white-collars, and the variation of sales after new strategy, and then adjust the strategy of promotion and the structure of products we could offer.
Action
Risk response
Analysis
Strategy
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 about the re-finance.
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.

24. Overall valuation---FCFF method
Assumptions:
The annual revenue grows at 10% in the first 3 year( ), from 2014, the rate is keeping 5%.
Renew the Furniture and fittings at 2012 for 40,000 Yuan.
There is no bank loan after 2012.
Income statement and balance sheet prepared for the forecast of the valuation is omitted.
According to inflation of 4%,and 7% interest rate of long-term loan, we assume the WACC as 15% with risks taken into consideration.
Valuation=discount of every year’s cash flow at 15%
= 145, ,965/(1+15%)+399,654/(1+15%)2+761,550/(1+15%)3+780,242/(15%- 5%)/(1+15%)4
=1,695,790
Forecast cash Flow statement
2011
2012
2013
2014
Operating cash flow
Operating profit (loss) for year
217,311
367,374
634,456
718,991
Add: depreciation
82,900
10,900
300,211
450,274
645,356
729,891
Changes in working capital:
Less: Increase in inventories
18,555
24,122
31,359
13,589
Add: Increase in trade payables
87,309
113,502
147,553
63,940
368,965
539,654
761,550
780,242
Investing activities
-40,000
Financing activities:
Repayment of loan including interest
-100,000
Overall cash flow (deficit) for year
268,965
399,654

25. The end
thank you all
brilliant