2 " Page The Coffee Shop
Coffee Shop
Feasibility Study Report
Anas Mamoun Kouki (13) - 50645450Hamad Saleh Al-Qadhi (09) - 99073339Hussein Fouad Nassrallah (10) - 97983183
Anas Mamoun Kouki (13) - 50645450
Hamad Saleh Al-Qadhi (09) - 99073339
Hussein Fouad Nassrallah (10) - 97983183
Small Business 428
Executive Summery
The coffee shop is a simple familiar idea where you can enjoy your time with a nice and unique taste of coffee from the marvelous farms in Colombia in South America. The shop is a cozy relaxing place where people will differentiate the kind of high quality of coffee beans. Coffee shop business is so familiar everywhere and specially the Kuwaiti market and our project will be as one of these shops.
The Project will be different from what is available in the market due to the unique type of coffee that will be supplied from the franchiser. The franchiser will supply us with the inventory the whole year period. The cafe will have a menu similar to what is available in the competitors' menus, hot and cold drinks. Also, the cafe will offer some desserts like cup cakes, muffins, cookies, etc and some light food like sandwiches and salads that are suitable for snack.
Starting the project, we surveyed 180 people from both genders and different occupations. The survey was held using a questionnaire consists of 17 questions. Our respondents were mainly university students and employees. We mainly focused our questions on how much people are willing to pay and visit the shop and what is their favorite coffee shop they used to buy from. In the process of calculating the number of visitors and the market share we used the annual report of the Ministry of Planning.
We used the numbers and figures we obtained from the survey to estimate the sales by estimating price, number of visitors and the expected market share. For the coming years, our sales is expected to increase by the inflation rate.
Moving to numbers and analysis, we used capital budgeting tools with some other tools that help in making the decision. The figures we got is encouraging, starting with a promising positive NPV with IRR and MIRR higher than the cost of capital (WACC) we used. Moreover, the discounted payback period is less than the project life we assumed as well as the profitability index is more than one. All these indicators lead us to one decision that is to go ahead with the project.
*Note: All figures and numbers are calculated based on assumptions and inputs that will be discussed later in the report.
Table of Contents
Introduction4
Survey4
Sales Forecast 7
Assumption (Inputs)8
Weighted Average Cost of Capital (WACC)9
Operational Cash Flows & Capital budgeting tools 9
Risk Analysis 10
Sensitivity analysis 10
Scenario analysis 12
Basic simulation 12
NPV Profiles 13
Break- Even Analysis 14
Real Options 15
Delay option 15
Abandonment option 16
Shutdown option16
Recommendation17
Appendix 118
Appendix 223
Appendix 324
Appendix 425
Survey4
Survey4
Introduction:
As we all know, the economy of any country is based on small businesses. It's the best way to seek success at the beginning of your business life, moreover, it's the way to fulfill aspiration as well as wants.
As we are young business students, we always approach to undertake attractive opportunities that represent the corner stone of shinning life. We get the chance to meet one of the inspiring investors who used to encourage youth people in business field. He trusted us to start a feasibility study for a project that he is really concerning about.
The idea of the project is not new in the local market, the idea of the project is a traditional coffee shop like some well known coffee shops Star Bucks, Caribou, Coffee Republic and more. The thing that will differentiate the project from what are in the market is the new franchise that will be imported to Kuwait for the first time from Colombia. What makes this franchise so special is the type of the coffee beans they use.
The cafe will have a menu similar to what is available in the competitors' menus, hot drinks and cold drinks. Also, the cafe will offer some desserts like cup cakes, muffins, cookies, etc and some light food like sandwiches and salads that are suitable for snack.
The idea of the project came from a real investor who want to open such a kind of project. We have been asked by him to evaluate the feasibility of project in the local market to decide whether to accept or reject.
Survey:
A survey was conducted with 180 people of different ages, gender and occupations mainly students and employees. The survey was held through a questionnaire consists of 17 questions (Appendix 1).
Based on the survey, we concluded some information as following:
Gender:
The surveyed sample was consisting of 66% females and 34% males.
Age:
The respondents were aimed to be chosen from the age group between 20-40 years and the reason behind this is that we believe that this age group is the main customer of our product.
Income:
The income of our surveyed sample is mostly ranged between (200-400)KD by approximately 63% of the sample. The reason is derived from the fact that a large number of the respondents are college students.
Visiting and Spending:
Part of the questionnaire aimed to estimate the average number of visiting per week and to know the amount each customer is willing to spend in each visit. we noticed that the most frequent answer ( about 50% of the respondents)that the respondents chose is 2-3 times per week with 2-4 KD to be spent per visit ( 63% of the respondents).
Sales Forecast:
The results derived from the survey were used in the estimation of the Sales and the final results are summarized in following table:
Price:
The price that we forecasted was calculated from the survey figures. We had 3 price categories in the survey 1-2KD, 2-4KD and 4-5KD, and as the first step we calculated the average price of each of this categories' ranges. Then we multiplied each of the price averages of each of the categories with its weights that we have obtained from the survey and the result was rounded up to 3 KD.
Visiting:
We followed the same manner of price calculations to get the number of visiting weekly. We got the number of 2 visits weekly per customer.
Number of customers:
Before calculating the number of customers, we had to estimate our market share if we entered the local market. The market shares of each of the competitors of this business were estimated through our questionnaire. We decided as one of the assumptions to determine our market share as the average of the lowest three competitors we have (Gloria, Coffee Beans, Columbus). The number we got was 1.34% of the market.
Moving on to calculate the number of customers and based on the fact that we want to establish our shop in Hawalli governorate, we took the number of the population in three main areas Hawalli, Salmiya and Jabriya - from the annual report of Ministry of Planning - where we focused on the age groups between 20-30 and 31-40 years that fit our assumption. We multiplied the total number of each of this age groups by its weight from the age table we have from the survey. As a final step, we multiplied the total by the calculated market share and end up with around 601 customers per week.
After getting all the required numbers, the forecasted yearly sales was calculated as follows:
Yearly sales = Price × No. of customers per week × No. of visiting per week × market share × 52week.
= 3 × 601 × 2 × 1.34% × 52 = 187,512 KD
Assumptions (Inputs):
Regarding the inputs, we gathered our information from the franchiser and from a managers of one of the competitors. While for the rest of the inputs, the numbers were estimated based on the current market situations and some consultants from different fields.
The Location of the shop is intended to be in Al-Salmiya - Salem Al-Mubarak St. The intangible asset and the rent are estimated based on this location.
The project uses MACRS 5 as the method to estimate the depreciation.
Decoration and Advertising expenses are estimated on average by The Lobby Design Co. and XL Graphics Co.
Variable costs are estimated as 35% of the sales. (20% as franchise cost)
Required rate of return 30%. (Based on competitors)
Tax rate is 5%. ( Theoretically)
Interest rate is 5% from National Bank of Kuwait.
The inflation rate is 4.16%. (IMF website)
All the rest of the expenses are estimated from one of the competitor's manager and some are modified according to the project needs.
Weighted Average Cost of Capital (WACC):
The initial cost of the project is 158,000KD as estimated. We decided to fund the project by 65,000KD as a debt and the rest will be funded by own. As a result, the weight of debt will be around 41% and the weight of equity will be around 59%.This capital structure is based on our assumptions and needs.
Our cost of debt as previously mentioned is 5% as well as the tax rate is 5% and the cost of equity is 30%, we come up with 19.61% weighted average cost of capital.
We have to mention here that we didn't calculate the required rate of return using CAPM because as mentioned the required rate of return in provided by one of the competitors.
Operational Cash Flows & Capital budgeting tools:
After the estimation of the yearly sales, it's the time to estimate the operational cash flows. The estimation was done for 5 years. At year 1, we took the calculated yearly sales (187,512KD) and subtracted 35% of this amount as cost of goods sold to get a profit margin of 121,883KD. After this, the sum of the expenses we have for the first year (Salaries, Rent, Supplies Expense, Supplies Expense, Miscellaneous expense, Depreciation) were subtracted from the profit margin to come up with the operating income and then to calculate the net income after deducting the tax (5%) from the operating income. Of course we have to add back the depreciation to the net income to get the operational cash flow since depreciation requires no cash payments.
In the next years, the growth rate that is applied on the yearly sales is the inflation rate (4.16%). Before we calculate the remaining operational cash flows, we had to increase the sales by this rate. Following the same manner we calculated the cash flows for the coming five years.
2012
2013
2014
2015
2016
2017
- 158,000
54,126
59,423
63,928
68,847
127,190
Getting the cash flows is considered the hardest step because what comes after this is the analysis of these cash flows to see how feasible the project is using several tools and methodologies.
Starting with the capital budgeting tools, we can summarize what we calculated in this table:
We can notice that the project is acceptable according to the NPV method (positive figure) and according to IRR and MIRR it's also acceptable since both are higher than the WACC.
Profitability index (PI) is also another factor that encourages to accept the project since it higher than one (1.327). It means that we are expecting to get 1.327KD for each 1KD we put as initial cost taking in consideration time value of money. Profitability Index is calculated as NPV of future cash flows divided by initial cost.
Risk Analysis:
Three techniques were used to assess project risk: sensitivity analysis, scenario analysis, and basic simulation.
Sensitivity analysis:
We did the sensitivity analysis following two methods:
Normal sensitivity analysis:
By changing the WACC. We chose this factor to be changed because part of the WACC ,that is the required rate of return, is not calculated, instead it's taken from one of the competitors as it's known to be in this type of business.
Sensitivity analysis using Gordon Model.
Performed through two dimensions analysis by changing the WACC and the growth rate (3.92%) of the GPD of Kuwait.
The idea here to use Gordon Model formula to calculate the terminal value at year 5 then to add it to the cash flow at year 5. The sensitivity under this approach is dependent on the changing of two factors WACC and the growth rate.
Scenario analysis:
We assumed three different cases under each, we changed more than one assumption to create worse, base and best scenarios. The worse and base case was given the probability of 25% to occur while the base case was given 50% chance. Factors that was changed are shown in the table:
Using these assumptions to calculate the cash flows under each of these three scenarios, we used them to get the NPVs, IRRs and MIRRs for the three scenarios as shown:
As a final step we calculated the expected NPV and the result was promising since we got a positive number of 167,519KD.
Basic simulation:
The purpose behind the simulation is to examine the reality by changing the most sensitive factor to get the ranges that the NPV will change in between. We focused on the market share as the most sensitive factor we have since there are lots of competitors and we can consider that the market is saturated or in mature phase.
The decision was to change the market share between 0.5% and 2.5%. a model in the excel was created to calculate the NPV according to random market shares that ranges between 0.5% and 2.5%. We calculated 100 outcomes of NPVs and then we found descriptive statistics like mean, median, mode, standard deviation and more. Also, we performed confidence interval test using confidence level of 95%.
NPV Profiles:
In doing the profiles for the project and since we have only one project, we assumed a best case scenario different than the case used in the scenario analysis. This new best case is being used as a project B. Of course by using different WACCs, we did found different NPVs for each of the "projects" to draw the profiles. The crossover rate is 58%.
Project A is the project under the base case.
Break- Even Analysis:
We did the break-even analysis following two methods:
Accounting Break-even point:
The idea is simple and known. It's done to find the point at which the costs will equal the revenue. We assumed different number of customers and we calculated the revenue and the fixed and variable costs belonging each. Of course the fixed cost won't differ at any point.
The break-even number of customers is 33,718.
Financial Break-even point:
This approach of calculating the break-even point uses this formula:
where:
The break-even number of customers is 53,483.
Real Options:
In this part we will discuss our rights to take some future actions that can take several types. we will focus on three options delay option, abandonment option and shutdown option.
Delay option:
To examine whether to delay the project due to extensive advertising campaign. We assumed that we want to delay the option for 1 year from now to expand our advertising campaign and to extend the period of the advertisement. The idea is to increase the number of customers. As we supposed the number will increase to 700 customers per week. We also assumed that the variable cost will decrease to 30% instead of 35%. The logic behind this reduction is that we will spend more time is studying the market and this will help in finding better suppliers with less cost.
In the process, we give 50% chance for the base case and 50% for the delay option and the estimated cash flows for both cases is as shown in (appendix 2). The NPV with option is about 55,000 KD more than the NPV without the option by approximately 3,500KD (Option value).
Abandonment option:
The assumption we took for to apply this option is that if the sales don't reach 102,000 K.D we will abandon and sell the equipments for its book value. We chose this amount is because it's the break-even point that makes the total sales equal to total costs.
We used the worst case scenario to estimate the sales in order to take this option. The sales was around 52,000KD at the first year which is less than 102,000KD so we decided to abandon the project.
With this option, we saved a loss of about 61,000KD (option value) because the losses decreased from about 91,000KD to 30,000KD. (Appendix 3)
Shutdown option:
To examine the best year to sell the project at the best NPV. At the beginning and before determining the shutdown year, we used the best case scenario then we calculated the NPVs for each year including the terminal value and we found the best year to sell is the third year.
We took two scenarios 50% probability for the base case and 50% for the best case. The first scenario without option while the second with. We noticed that we will gain more with the option by approximately 6,000KD, although we get high positive NPV in the first scenario.
(Appendix 4)
Recommendation:
According to the results we obtained from:
Tools of Capital Budgeting.
Scenario Analysis.
Basic simulation.
The decision is DEFINITELY accepted with the promising numbers we got from all previous analysis.
Appendix 1
استبيان - كوفي شوب
1. النوع: ذكر أنثى
2. الفئة العمرية: أقل من 20 20-30 30-40 40 سنة و أكثر
3. المهنه: ..............................
4. الدخل الشهري : اقل من 200 د.ك 200 - 400 د.ك أكثر من 400 د.ك
5. ما هو السبب الذي يدفعك لزيارة المقهى (يمكن اختيار أكثر من إجابة):
معتاد على شرب القهوة للقراءة وقت الفراغ للدراسة مصاحبة الأصدقاء مصاحبة اهل
6. ما هو المقهى المفضل إليك:
ستاربكس (Starbucks) جلوريا جينز Gloria Jean's)) ريببلك ) ( COFFEE REPUBLIC
كوستا (Costa Coffee) سكند كاب Second Cup)) كاريبو ((Caribou
كوفي بينز The Coffee beans)) كولمبوس ( ( COLUMBUS Cafe' أخرى
7. ما هو المبلغ الذي تنفقه عادتا عند ذهابك الى احدى تلك المقاهي:
1 : 2 دينار 2 : 4 دينار 4 : 5 دينار أكثر
8. آين تفضل آن يكون مكان المقهى:
المجمعات الاماكن المفتوحة المكاتب التجارية أخرى .........
9. كم عدد الممرات التى تقوم فيها بشرب القهوة :
مره 1 :3 مرات 3 :5 مرات اكثرمن 5 مرات ( اذكر العدد .............. )
10. ما هو متوسط عدد المرات التي تذهب في الأسبوع:
1 3 - 2 5 - 4 7 - 6
11. ما نوع المشروبات التي تفضلها عند زيارتك للمقهى :
الباردة الساخنة الاثنان معا
12. هل تستخدم الإضافات (النكهات الإضافية) عند طلبك أيا من المشروبات:
نعم لا أحيانا
13.في حال زيارتك للمقهى لتناول وجبة ما هي الوجبة التي ستتناولها ؟ (يمكن اختيار أكثر من إجابة):
وجبة الفطور وجبة الغداء وجبة العشاء وجبة خفيفة
14. إذا تم زيادة قائمة أسعار المشروبات في المقهى الذي ترتاده دائما هل تمتنع عن الذهاب للمقهى المفضل إليك:
نعم لا
15. ما هي المشروبات التي تفضلها عند ذهابك للمقهى (يرجى وضع علامة أمام الاختيار المناسب):
النكهات (الإضافات الجانبية)
نعم
لا
1
كافيه لاتيه
2
شوكولات
3
اسبريسو
4
موكا
5
ماكتشينو
6
كراميل كوريتو
7
شيك
8
شاي (اسود)
9
شاي (اخضر)
10
شاي (بالإعشاب)
11
قهوة مثلجة
12
شاي مثلج
13
عصائر
16.قيم مصدر معلوماتك عن المقاهي في الكويت (ضع علامة آمام المربع المناسب)
ممتاز
متوسط
ضعيف
المستوى
المصادر
١.الآهل و الآصدقاء
٢.مواقع الانترت والتواصل الاجتماعي
٣.المجلات والصحف
٤.محطات الاذاعه والتلفزيون
17. ما هي العوامل التي تدفعك لاختيار المقهى المفضل إليك (يرجى اختيار الرقم المناسب لدرجة الدافع)
الر قم
العامل
غير دافع بتاتا دافع إلى حدا ما دافع جيد
1
قائمة الأسعار
109876654321
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الخدمة
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تنوع الاختيارات
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انتشار المقهى في الكويت
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أوقات عمل المقهى (الساعات التي يفتح بها المقهى)
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تنوع الحلويات
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العروض الترويجية
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سمعة المقهى
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جودة القهوة
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توفر خدمة السيارة
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أجواء المقهى (الموسيقى، الأثاث، الديكورات .....)
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الوجبات الخفيفة
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موقع المقهى
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شكرا على المشاركة,,,
Appendix 2
Real Options:
Delay Option
Appendix 3
Real Options:
Abandonment Option
Appendix 4
Real Options:
Shutdown Option
NPV Profile
NPV - Sensitivity analysis
Break-Even Analysis
No. of Customers
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