Abstract
Establishing a business requires considering the opportunities and risks that it could face given the industry trends and prospects. That is because the industry trends determine competitiveness as well as the ability to meet the business goals. With that, this analysis presents a financial analysis of a business proposal for a coffee and bakery café based in New York City. The café caters to the youthful segment and serves products that consider the increasing health concerns over the effect of beverages and bakery products’ ingredients. Further, the analysis, involve an analysis of the most suitable approach regarding the space acquisition given that there are three alternatives of buying, renting and leasing. In the analysis, it is identified that although the busying option provides the owner with much control, it requires much capital that has implications on the projects feasibility. On the other hand, although renting results in low cost, it is identified to subject the business to rent fluctuations. In that view, the leasing option has been identified as the most suitable given that it also provides an option for buying the property when the business is well established. The choice is supported by the financial analysis that identifies the leasing as having a high IRR compared to the renting option while the buying option has a negative IRR.
Report word count = 2,256 words excluding abstract, spreadsheets and the references.
Introduction
Starting a new business requires a comprehensive analysis regarding its feasibility in view of the owner’s position in terms of funds and returns needs. With that, considering various alternatives in various business aspects is necessary as it provides an opportunity to identify the most suitable option that aligns with the owner’s needs and resources. In that respect, this analysis seeks to analyze a business idea of a corner based coffee and bakery café. In the analysis, it is considered that the owner seeks an evaluation of the most suitable approach in acquiring the place where the café will be based. With that, there is consideration of the option to buy, rent or lease. With the three alternatives, the owner seeks a feasibility study regarding the most suitable approach that would ensure that there are adequate funds to operate the business after acquiring the café place. In that view, this report presents a comprehensive financial analysis of the proposed business idea considering the alternatives available to the new owner. With that, the report begins with industry overviews whose findings act as the basis of the financial analysis assumptions and risk assessment. Then the report presents an overview of the proposed business idea and the three alternative considerations. Finally, the report presents a comprehensive financial analysis of the business idea considering the alternatives and related risks.
Industry analysis
The most committed and typical drinkers of coffee are those aged between 25 years to 45 years old, educated, affluent adults. While the baby boomers did drive the coffee shops success, appeal of specialty coffee is diverse demographic of adults, including students in colleges as well as young adults.
Profitability Factors
Personal income and consumer taste drive’s the demand. Individual company profitability depend on securing a location that are prime, drive traffic to the store as well as delivering products of high quality. Small companies effectively compete with large companies by offering products that are specialized, a local market serving, or providing customer services at personal level. Further, the industry is highly labor-intensive with a worker’s average revenue per year being $40,000.
It is also notable that coffee shops are dependent on customers’ traffic and are mostly located in the areas that the access is convenient for drivers or pedestrians. Locations which are typical include retail centers in suburban or downtown, office buildings, university campuses and shopping malls. The size and format of the store vary by the site as a number of locations can offer more space compared to the others. The cafes have different sizes in square feet ranging from 200 to 3,000, with average size being between1, 200 to 1,600 sf. With small spaces such as in airports as well as in grocery stores, a number of chains stores offer their shop in format of a kiosk, without seating.
Further, the retail prices of beverages in different coffee shops vary. Retail price of the drinks which are espresso-based can exceed 4 dollar. Due to volatility of the cost of dairy and green coffee, there is often fluctuation of the retail prices. A pound of coffee beans that is roasted may retail at between 10 and 20 dollar while a pound of reserve or high-end coffee, such as some of Peet’s coffees, may retail at between 50 and 80 dollar per pound.
The industry is also highly dependent on employees who mainly work on part-time basis and most of the workers require minimal skills. The pay is also considered to be just above minimum wage, hence being significantly below the U.S. workers average. Fr instance, the Starbucks’ employees starting wage is approximately $8/hour. However, a number of employees are forming a union for negotiation of better benefits, wages as well as working hours.
A coffee and bakery restaurant chain may have a single manager and between 10 and 15 workers; with independents having between 6 and 7. Training courses may be offered to new employees as well as being offered in-store training which would ensure superior services to the customers as well as product consistency. Coffee roasting is overseen by the master roasters to develop a trademark flavors and blends. Training is received by Baristas as a means of enhancing the employees’ ability to operate the espresso machines that are mainly used for making specialty drinks.
The sales are different depending on different seasons, with peak being during the fourth quarter which is driven by winter holiday. Additionally, poor weather may have effect on the sales with traffic to the stores decreasing. For companies that are large, inventories can amount to sales of between 40 to 80 days, mainly as a result of commercial customers. The account payable may run to sales of between 30 to 60 days. Contracts may be used by companies to buy dairy products and green coffee. Further, the gross margins may range to between 40% and 60%.
Most of these companies store location are leased for terms that are fixed. Coffee shops rent in malls sometimes may include fee for maintenance of areas that are shared. Prime locations are competed for by companies, sometimes with the other retailers, and there may be negotiation power limitation. Periodically, chains close stores that are underperforming and set a reserve aside for remaining payments for the lease.
The US market can be summarized as follows
About 20,000 stores having annual revenue of close to 11 billion dollar.
Highly fragmented at the bottom and concentrated at the top with Starbucks accounting for close to 75 percent of all sales
Competitors also can be in other industries such as gas station, convenience stores, restaurants for fast food, quick services, donut shops, gourmet food shops, specialty coffee home use machine. Such include Dunkin’ Donuts as well as the McDonalds.
Major companies in the market include Caribou Coffee, Starbucks, Tea Leaf and Coffee Bean, Peet’s Coffee, Diedrich.
Competition is through outstanding environment/services such as music, short waiting time, comfortable areas for seating and internet, special offers such as for new tastes, loyalty programs such as bonus card for ensuring for frequency visits by the customers, as well as premium locations such as university campuses and retail centers (Kauffrau, 2007).
Proposed Business idea
Business overview
The proposed business Corner Coffee and Pastry Café is a model specializing in coffee and bakery in New York City. The business would take the form of a limited liability company, hence limiting the owner’s liability to their equity.
Target market and positioning
In view of the industry trends and status, the café would be targeting the youthful population aged 25 to 45 and mainly those in the urban centre. Further, the segment features a busy lifestyle that would be catered for by the cafe’s fast service. Finally, the cafe’s offer of healthy bakery products and coffee would address the rising concerns over the health effects of the restaurants food and beverages.
Strategies
In view of the market status and the new business model, the business will apply suitable strategies to attract the targets segment. That will involve promotion strategies such as use of the social media given that the segment is considered technologically savvy.
Financial analysis
In a view to maximize on the value of the shareholders funds, the business seeks to consider the most suitable approach regarding the acquiring of space. With that, the options of buying, renting and leasing are considered.
Alternatives evaluation: Buy, rent or lease
A lease refers to a contract which specifies all legal obligations that exist between a resident and a landlord for a certain period of duration-mainly one year-and hinders the landlord from increasing rent or even modifying any other lease terms till when it expires or it allows for the changes. When still under the lease terms, a landlord cannot evacuate a resident unless if the resident does not pay rent as required or violates some or even one of the agreements in the contract. When the lease term ends, the landlord can end that tenancy, make a new lease using the same terms or different terms, or may allow a tenant to continue under a monthly rental agreement.
On the other hand, the rental agreement is a set of contract between a landlord and a resident for just a short duration of time, normally a single month. The monthly rental agreement normally is renewed automatically every month unless the resident or the landlord gives another proper notice-normally 30 days.
Finally, one has many advantages when owning a property, but in several cases, it can be very strategic and practical to enter to a lease that is well structured.
The merits of Buying
The overheads: There are lower operating expenses per month from the loans repayments to banks in comparison to the rental expenses.
The Rental Increase: There are no sudden raise of rent when renewing a lease.
The Lease Renewal: There is no unexpected requirement of moving out in case a landlord decides to renew a lease contract.
The Sunk Costs: There is lower risk for wasted renovation expenses as premises improvement shall contribute to enhancement of a property value. Advantages of Leasing
The Required Capital: The is lower capital investment needed for a property to give more funds for a business
The Maintenance: It lowers the maintenance cost whereby the landlord has to incur some expenses for the repairs
The Flexible: there is flexibility of movement as well as change locations easily if any unforeseen issues arises with the very first property
In case of a first time investor, it’s advisable to lease the property first while focusing the limited resources of the company on the building of a business that is operating like a café where there is no actual estate investment. However, for the café owners who are experienced, who would prefer to expand their ventures after beginning in a minor way, it would be worth to consider making a purchase as it provides huge benefits from medium to the long term
Alternatives’ financial analysis implications including risks consideration
In view of the market value of the coffee and pastry business that is values at $11 B, the following is an estimation of the cafe’s first year revenue with use of the A*T*A*R model. The assumption is that the café services will be available to 2% of the market with a trial rate of 30% and an accessibility rate of 3%. Finally, the repeat rate for the customers is assumed to be 60% given the suitable product and service positioning for the target segment.
In view of the above calculation, it is estimated that the business will earn a 0.009% of the total market value given that it will only have a single cafe. That translates to 990,000 in the first year of the operations.
Considering the three options of buying, leasing and renting the space, the following are evaluations to determine the most suitable approach.
Buying
Source: (Mindful, 2016; New York, 2016).
The buying approach will require a total capital budget of $7460000 considering that it will involve acquiring the land and buildings on which the café will be established.
Considering the first year revenues, the following are the forecasted income and balance sheet statements for the business.
Source: (Revenue, 2016; Mindful Consulting, 2011).
The income statement indicates the business to be profitable from the first year of operations.
With the above income and balance sheet forecasts, the café’s cash flows are forecasted as follows
The above cash flow forecasts show that the café will have positive net flows that are suitable.
Using the following information on the US market, the business WACC is estimated for purpose of estimating its future value and the investments viability.
Source: (Forecast, 2016; Treasury, 2016; Yahoo finance, 2016).
In view of the above evaluation, the buying option has a negative NPV after five years of operations as well as a negative IRR. That is an indication that the approach would not be viable given the initial cost and the expected cash-flows.
Renting
The second evaluation considers the renting option where an annual rent of 72,000 is expected to be paid.
Source: (Forecast, 2016; Treasury, 2016; Yahoo finance, 2016).
Lease
The last option is the lease approach that would involve an expense of $60,000 per year. The related income, balance sheet and cash-flow statements are as follows.
Source: (Forecast, 2016; Treasury, 2016; Yahoo finance, 2016).
Considering the lease approach, the café would have a positive NPV for the four years although less than that of the renting option. However, the option would have a substantially higher IRR that means it would be more suitable considering that the owner would have an option of buying and owning the space. Further, the value of the café in the lease approach is relatively
Conclusion
In view of the analysis, it is clear that the US market presents an opportunity for establishing a coffee and bakery café that would cater to the youthful segment. However, that requires consideration of the most suitable approach regarding the acquiring of space and the leasing has been identified as being the most suitable. That is given that the business is new and the approach providers a higher IRR in addition to the opportunity for the owner to buy the place when the business is established.
References
Forecast chart. (2016). Starbucks Beta. Retrieved 07 April 2016 from, http://www.forecast-chart.com/historical-sp-100.html
Kauffrau, D. (2007). Coffee Shop Industry: A Strategic Analysis. Retrieved 07 April 2016 from, http://www.grin.com/en/e-book/111348/coffee-shop-industry-a-strategic-analysis
Mindful Consulting. (2011). Start up Estimates. Retrieved 07 April 2016 from, http://mindfuldesignconsulting.com/cafe-design/Coffee-Shop-Start-Up-Free-Estimate.pdf
New York. (2016). Real Estate. Retrieved 07 April 2016 from, http://www.newyork.com/articles/real-estate/the-most-expensive-neighborhoods-in-new-york-city-75971/
Revenue. (2016). General Taxation Information. Retrieved 07 April 2016 from, http://www.revenue.pa.gov/GeneralTaxInformation/Current%20Tax%20Rates/Pages/default.aspx#.VwXHiPl97Dc
Treasury. (2016). Treasury rates. Retrieved 07 April 2016 from,://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
Yahoo finance. (2016). S&P 100 returns. Retrieved 07 April 2016 from, https://finance.yahoo.com/q/ks?s=SBUX https
World Bank. (2016). US economic Indicators. Retrieved 07 April 2016 from, http://data.worldbank.org/indicator/FR.INR.LEND
