The Healthy Potion shop has been trading profitably over the last few years. Sally, the owner of HP, has paid off the $300,000 bank loan and the revenue stream emanating from the business continues to impress. Accordingly, she is interested in developing the business in other ways, whilst still maintaining a focus on supplying beverages to customers who come to the store in person.
Part A. (40%)
Fortuitously, Sally has recently overheard a conversation between the lessee of the shop next door to her and the shopping centre management. She reports from that conversation that the current tenant does not wish to renew their lease. Accordingly, as a friend, she has asked you to write a report on the desirability of taking over the lease of the shop next door, at the same rates as your current lease. Her vision is to offer coffee from that new shop, but she would like the two ‘shops’ to be integrated into one. At present, the shop next door sells men’s clothing – so there would be some shop outfitting costs associated with the venture (estimated to be $100,000). Assume that Sally will have to borrow any money needed to establish the business (estimated to comprise the outfitting and equipment costs, as per below) at the same interest rates as for the Business Exercises.
Write a report for Sally that details the financial considerations that need to be considered. In this section you should consider:
• Outfitting costs (estimated to be $100,000)
• Equipment costs (estimated to be $40,000)
• Operating costs (cup, coffee, milk – see below)
• Forecasts of coffee sales for the next 2 years (see notes below).
• Synergies derived from having both a cold and a hot beverage available for sale in the expanded store. (Whilst it may not be possible to accurately determine the value-added from the synergies, you should attempt to quantify it in some way, with an appropriate argument.)
a. You should assume that the coffee equipment can only ‘produce’ a maximum of 1440 cups per day.
b. Initially, the volume of sales will be half the maximum for the first two quarters, but will be at the (seasonally adjusted) maximum after that.
c. The seasonal pattern of sales will be the inverse of the Healthy Potion drink (because it is considered to be a winter beverage). You will need to apply the principles of forecasting that are presented in the lecture in week 5, especially those principles that outline the application of seasonality to forecasting. (Hint: you will need to use the historical data from Healthy Potion provided in the handout for BE1 to determine seasonality for the coffee shop)
d. You have decided to only sell long black coffees and lattes (with 200 mls of regular milk only). This means that there are only two coffee products on offer. The selling price of the long blacks is $3, and the lattes is $4.
e. The paper cup costs $0.01 each. The coffee in each cup costs $0.50 (it is premium coffee!) and the milk costs $0.15 for each latte.
f. There will need to be one staff member in the coffee section. But the maximum volume any one person can achieve in any day is 700 cups. Anything beyond that will require additional staff members.
g. If there are any other costs that you wish to include other than those listed, you will need to justify them, with appropriate referencing and reasoning.
h. The coffee equipment is estimated to last for 5 years.
i. Water costs are to be ignored. They are included in the rental.
In essence, since Sally is risk averse, she asks that you include in your report how long it will take to repay the loan from the bank that would be used to acquire the coffee equipment etc. Your report should be addressed to Sally and address the financial issues involved in the venture. It will, of necessity, include a spreadsheet where a 2 year (Quarter 1, 2014 to Quarter 4, 2015) financial model of the proposed venture is presented. (You should use the template provided on Blackboard for the structure of your report)
Part B. (60%)
Whilst the opportunity to establish a coffee shop in conjunction with the existing shop excites Sally, she is also interested in expanding the Healthy Potion business product. She has observed that most of her customers return every few days to her store. They invariably report that they feel so much better, both physically and mentally, since they have been consuming the Healthy Potion drink. Whilst there appears to be no scientific evidence for this, Sally wonders whether there might be some truth to it. Accordingly, she has engaged the services of some noted academics from a prominent university to provide evidence that the Healthy Potion drink significantly improves physical and mental health. With this evidence in hand, Sally envisages the product available being more widely available within Australia. She has (fortuitously!) heard of a bottling plant that will become available soon. This plant is currently set up for bottling small (300ml and 600ml) products and would be ideal for the Healthy Potion drink. Sally believes that the farm in China will initially be able to supply the ingredient – but if the demand increases dramatically the ingredients can be sourced from India and Canada. The bottles can be sourced readily within Sydney.
Write a report to Sally that details the steps involved in creating a marketing strategy (based on the 4Ps) for this new venture. Outline your recommendations that emanate from that marketing strategy. (Please ensure that you include all relevant arguments and research to support your recommendations.)
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