CIC

CARIBBEAN INTERNET CAFÉ I. Executive Summary David Grant, an MBA student from a London business school, wanted to establish a cyberspace café in his hometown in Kingston, Jamaica. Jamaica Telecommunications Limited saw its business potential and proposed to invest $500,000 in the venture as well as provide for further loan. David Grant, faced with the decision on whether to proceed with the Caribbean Internet Café venture with JTL, considered many factors before actually making a choice. The cybercafé industry was taken into account as well as other political, social, economic and technological factors which could greatly affect David Grant’s business in Jamaica. Based on a study of these aspects, it was

evident that there was an unmet need for Internet access on the island. To further evaluate the feasibility and profitability of the alternatives available to David Grant, cash flows were projected across three different scenarios - optimistic, realistic and pessimistic. The resulting estimates and constructed pro forma financial statements indicated a profitable outcome for CIC. Thus, David’s decision should be to pursue the CIC venture with JTL.

II. Case Background In 1996, while on vacation from business school, David Grant was contemplating on opening an internet cafe in his hometown - Kingston, Jamaica. Jamaica Telecommunications Limited (JTL), a local telephone company offering Internet services on the island, expressed some interest in the business plan by proposing to invest an approximately equal amount as David’s and provide an additional loan as well. Considering the feasibility and profitability of such a business for him and JTL, David is evaluating his decision to proceed with his Caribbean Internet Café venture.

III. Problem Considering the current market situation of Jamaica, the cybercafé industry, and David’s plans for CIC, should he and JTL pursue the business?

IV. Decision After evaluating the industry and other factors surrounding the cybercafé industry, as well as forecasting the profitability of the business model, it is believed that David should partner with JTL and pursue Caribbean Internet Cafe.

V. Industry Analysis The Internet was still starting to gain some serious momentum in 1996. It was during this year when Internet Service Providers, such as Jamaica Telecommunications Limited, began emerging in the industry. However, Internet accessibility was still a problem for some people due to high costs associated with private usage. Such was the case in Jamaica, where where the Internet had low penetration rates due to high costs of computers, the lack of telephone lines, and the high rates charged by Internet Service Providers. Using Porter’s Five Forces framework, we have identified five key points to use in analyzing David Grant’s busine ss strategy development as

well as the cybercafé industry in the context of Jamaica’s economic conditions in 1996: (1) threat of new entrants, (2) threat of substitutes, (3) bargaining power of customers, (4) bargaining power of suppliers, and (5) intensity of competitive rivalry. Starting an internet cafe business from scratch would require a large amount of capital and that already creates a barrier to new entrants. However, despite that, it is important to note that there is a large number of restaurants and cafés present in Kingston, albeit, without Internet services being offered. Social outlets such as these are already quite popular in Kingston, Jamaica. Caribbean Internet Cafe will have the first mover advantage

of opening a cyberspace café in Kingston. The threat of substitutes is still low considering that Internet services provided by Internet Service Providers are quite expensive. However in the long run, the threat of substitutes will become high because of the constantly evolving nature of technology and current trends. Customers have low bargaining power due to their perceived need of such services and the limitedness of cybercafés in the area. Telephone companies are the primary providers of Internet services and they have low bargaining power due to the abundance of telecommunications companies companies in the Jamaican Jamaican island. Lastly, the internet cafe business is yet to be characterized by intense competition which will largely depend on the growth rate of Internet use.

VI. Company Analysis A.

The Internet in 1996 Back in 1996, the Internet did not have the power it has now. Google was inexistent and Yahoo only

came to life a year before. However, the Internet was starting to gain momentum. More and more people began to recognize the potential of the Internet – the possibility of acquiring information and even conducting economic transactions online. Unfortunately, it was very expensive to buy and install a personal computer and other equipment necessary to connect to the Internet. To understand the contrast between the Internet in 1996 and today, here are a few data about 1

Internet usage in the United States :

1996 American Internet Users Average Web Usage Average Page Load Time Most Popular Website

20,000,000 ½ hour per month 30 seconds AOL.com

2011 245,000,000 27 hours per month 6 seconds Google Sites

Though there are no specific numbers available available for Jamaica in 1996, it is possible to assume that, in contrast to the US numbers, the average users and usage were even lower for Jamaica. In 2000, only 60,000 people used 2 the Internet in Jamaica – 2.3% of their population. This rose to 55.5% (1,581,100) in 2010 . B.

Environmental Environmental Analysis If Mr. David Grant decides to push through with it, The Caribbean Internet Café environment will will be full of potential but also full of risk. The following analysis will help us further understand CIC’s environment in

Jamaica.

FACTORS Political

Economic

Social

1 2

CONDITION

IMPACT

Jamaica attained full independence in 1962. Politics was relatively calm during the 90s. Negative economic growth in 1996 until 1999. Double digit inflation (25% in 1995) High mark-up in stores in Jamaica. High awareness of the Internet but low private usage

These factors make it even more difficult to purchase the necessary equipment to access the Internet (private usage). There is unmet demand for internet access.

http://mashable.com/2011/09/09/inter http://mashable.com/2011/09/09/internet-yesterday-today/ net-yesterday-today/ http://www.internetworldstats.com/car/jm.htm

Large number of restaurants and café (no Internet) in Kingston

Competition for CIC in terms of food and hospitality for those who will not use their Internet service. Because of the climate, coffee may not suit the tastes of CIC’s

target market. This may, however, be an opportunity to package coffee as a desirable drink.

Cafes did not serve coffee

Technological

Low accessibility to the Internet because of cost and availability Lack of telephone lines in some areas of Kingston

There is unmet demand for internet access.

The following may be inferred from the table above: 1. There is available demand for access to Internet. 2. There are virtually no competitors “renting” out Internet hours in a café setting. 3. The foreign menu of the café may be risky given the tastes of CIC’s target market. These factors, in addition to the results of the market study provided in the case, tell us that CIC has a good chance of thriving. C.

SWOT Analysis To better analyze if David should execute his business concept, a summary of the business venture’s

qualitative aspects is presented below in a SWOT framework.

STRENGTHS ●

● ●

The café will be located in an urban area where companies and other businesses are situated CIC will uniquely offer Internet services at an hourly rate for students and workers alike Employees will be highly skilled in computer technology

WEAKNESSES ● ●

OPPORTUNITIES ●

●

Partnership with and investment proposition of $500,000 from Jamaica Telecommunications Limited (JTL), one of the seven Internet service providers in Kingston Long-term loan from JTL of $1,250,000

Relatively high start-up costs Brewed coffee, which will be served in the café, is not very popular in Jamaica

THREATS ● ●

Interest rates for the loan might be high Outsourcing baked products means they will have no control over the quality of food

VII. Quantitative Analysis A.

Profitability and Return on Investment To assess the profitability of Caribbean Internet Cafe, we compute for its projected cash flows for the

first year across three scenarios: optimistic, realistic, and pessimistic. Each scenario varies in the annual

number of customers and number of visits, as assessed by the independent market research firm. To aid in our computations, we have established the following set of assumptions:

1.

Time value of money is negligible. The value of assets at the end of the year will still be the same as the value at the inception of the business.

2. 3.

All expenditures and revenues will be for cash. Caribbean Internet Cafe will operate at 12-month or 52-week year. This was used to compute the annual value of expenses.

4. The pricing estimates established by David are on a per customer, per computer basis. 5. Tax rate is 30%. 6. Assets have a useful life of 5 years and are depreciated using the straight-line method. 7. Revenues and costs will remain the same for future years. Relevant financial data can be found in Appendix I. These were used to construct a simple income statement and statement of cash flows fl ows for CIC across the different scenarios (Appendix II). Taking into account David estimates, as well as market research by an i ndependent firm, all scenarios indicate profitable results for CIC. Under an optimistic situation, wherein 10,000 people under the target market will visit the café five times annually, the net income will be $3.2 million. Adding non-cash charges to this amount will yield net cash flows will be $3.5 million. The profitability index (PI), which measures the payoff of the investment of David and JTL, of CIC under this situation is 3.52, indicating that CIC is a financially attractive investment. Alternatively, we computed the return on investment to both David and JTL on their initial investments of $500,000 each. Each party will have an ROI of 604%, meaning that they will be able to recoup their cash out more a little more than six times – in the first year alone. Under a realistic situation, wherein only 8,000 people will visit the café thrice annually, the net income will be $2 million and net cash flows will be $2.2 million. Its PI will still indicate financial attractiveness, attractiveness, with a value of 2.24. However, the ROI is cut in half compared to the previous situation; David and JTL will give returns equal to 349%. Nonetheless, Caribbean Internet Café is still a very attractive investment. For a pessimistic situation of 6,000 customers returning only twice, net income will be $914 thousand and net cash flow will be $1.2 million. The PI under this situation will still be attractive despite the lower figures, yielding a value of 1.20. ROI will be at 141%. B.

Sensitivity Analysis Taking into account adverse business conditions and uncontrollable factors, we created a sensitivity

analysis table (Appendix 3). Under this, we have identified the percentage of the segment or the number of customers as the most volatile variable. We projected ten different situations under which the number of customers decreases in increments of 5%. Under the optimistic situation, CIC will remain profitable even if customers decrease to 5,000 people (a 50% decrease on the number of people targeted in the segment). However, it will operate almost on the breakeven point in terms of cash flows. Under the realistic situation and at a 50% decrease level, the PI of the business will decrease to 0.36 and ROI will be at -27%. However, net income and cash flows will still be positive; the low PI and ROI just indicate that the investments of the partners will not be recouped. Considering our assumption that the pattern of cash flow will not change in future years or will be very

minimal, values under a 50% decrease level are dismal. Under the pessimistic situation, CIC starts being unprofitable at around 5,400 customers, which is at a 10% decrease level. PI and ROI will be 0.93 and 86%, respectively. Note that the unprofitability mentioned above relates to the recoupment of the initial investments of David and JTL, and not to the net income and net cash flows of CIC. While those may be positive, it might not be enough to cover the initial investments of both owners.

VIII. Operationalization/Recom Operationalization/Recommendations mendations To ensure that Caribbean Internet Café will be profitable in the actual operations of the business, David should focus on his customers, as they are the most volatile variable in the above computations. He should ensure that a healthy relationship is built between the café and his customers by focusing on the needs and preferences of the l atter. It would also help to have intensive marketing and advertising efforts, especially especially at the business’ first

year. This would ensure that CIC is a top-of-mind choice for internet usage and simple get-togethers. Moreover, David should address the current weaknesses and threats of the business – such as building a good relationship with his supplier of food and drinks to lower variable costs and avoid stock-outs. In the long-run, he should invest in CIC’s own kitchen for better management of his supplies, as the restaurant aspect provides a

great amount of revenues. In addition, he must maintain a good working relationship with JTL. As his partner in the business and co-investor, JTL must constantly be satisfied with the café’s performance as it also affects JTL’s brand equity. All in all, David must continually set the proper strategies and measures to address adverse conditions in the market and capitalize on various opportunities. opportunities. With this, CIC will develop into a very profitable internet café in the long-run.

IX. Appendices Appendix I: Relevant Financial Data Initial Outlay

Cost

General Equipment Telephone Teleph one System

$

5,250

Counter Fixtures

350,000

Espresso Machines

140,000

Cash Register

50,000

Photocopier

28,000

Total

573,250

Hardware Computers

350,000

Ink-jet Ink-je t Printer

14,000

Laser Printer

28,000

Total

392,000

Software Windows 95

3,500

Microsoft Office Total

12,250 15,750

Furniture Tables or booths

105,000

Chairs or stools

175,000

Sofas

50,000

Total

330,000

Others (PPE) Artwork/sculptures China, cutlery, glassware Flowers/plants Total

10,000 100,000 5,000 115,000

Others (Misc) Legal fees, etc. Marketing Marketin g and advertising advertisi ng Utilities Initial Deposit Total

GRAND TOTAL

120,000 20,000 7,000 147,000

1,573,000

Appendix II: Income Statements and Statements of Cash Flows

Optimistic

50% of segment, 5 times per year

Percentage of Segment No. of visits per customer customer

10,000 5

No. of customers who will use a computer

20,000

Simplified Income Statement/SCF Revenues Internet Usage Food Sales Drinks Sales Total Revenues

$

2,400,000 3,000,000 7,000,000 12,400,000

Expenses - variable Food Drinks Internet Service Cost

1,500,000 2,500,000 1,200,000

Total Variable Variabl e Expenses

5,200,000

Net Contribution Contributio n

7,200,000

Expenses - fixed Student-employee Student-employ ee Wages Manager Salary Lease on Premises Utilities Internet Link Insurance Premium

187,200 480,000 360,000 180,000 120,000 120,000

Advertising, Marketing, and Promotion

120,000

Interest Expense Miscellaneous Depreciation Total Fixed Expenses

125,000 600,000 285,200 2,577,400

Earnings Before Tax Tax

4,622,600 1,386,780

Net Income

3,235,820

Add: Depreciation

Net Cash Flow

285,200

$

3,521,020

Profitability Index Return on Investment

3.52

David JTL

604% 604%

Other Information Breakeven Point No. of Customers Revenues Contribution Contributio n

$

3,014 4,438,856

$

3,737,173

Percentage of Segment No. of visits per customer customer

40% of segment, 3 times per year 8,000 3


9,600

Realistic


$

1,152,000 2,400,000 5,600,000 9,152,000

Expenses - variable Food Drinks Internet Service Cost Total Variable Variabl e Expenses Net Contribution Contributi on

1,200,000 2,000,000 576,000 3,776,000 5,376,000


187,200 480,000 360,000 180,000 120,000 120,000


120,000

Interest Expense Miscellaneous Depreciation

125,000 600,000 285,200

Total Fixed Expenses

2,577,400


2,798,600 839,580

Net Income

1,959,020

Add: Depreciation

Net Cash Flow

285,200

$

2,244,220


2.24

David JTL

349% 349%


Pessimistic Percentage of Segment No. of visits per customer customer

$

3,299 3,694,118

$

2,169,971 30% of segment, 2 times per year 6,000 2


4,800


Expenses - variable

$

576,000 1,800,000 4,200,000 6,576,000

Food Drinks Internet Service Cost

900,000 1,500,000 288,000

Total Variable Variabl e Expenses

2,688,000

Net Contribution Contributio n

3,888,000


187,200 480,000 360,000 180,000 120,000 120,000


120,000 125,000

Interest Expense Miscellaneous Depreciation Total Fixed Expenses

600,000 285,200 2,577,400


1,310,600 393,180

Net Income

917,420

Add: Depreciation

285,200

Net Cash Flow

$


1,202,620 1.20

David JTL

141% 141%


$

3,349 3,670,199

$

2,169,971

Appendix III: Sensitivity Analysis

CIC

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