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Role and Issue: the fast food restaurant was unprofitable
" r- J, ^1 V9 m; k, w* GOptions: close the restaurant or operate it* p# o$ W2 V! I& d) o* R) |
3 o- G! U; E% O E. {% Z
Corporate Management: mystery shoppers- in order to test customer service;
# _/ H: R% m$ P9 d6 ^0 M future-focused marketing approach in a remarkable restoration 2 U' X1 E& c' M) n- q# n
of the franchisees’ confidence in the management abilities of the 3 S$ q3 H8 e6 b6 h$ ^% e! K6 J
parent company. ( J" |2 J+ }" {+ S6 k8 D) y! b
& K+ M+ b8 j0 [9 j$ |! UImplication / KSFs: Word of mouth is important in this small town
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* X3 s8 Z! I$ A# P' dPEST
2 }8 O$ c( i- l8 V8 gPolitical:4 w6 g1 `$ Q% a% U+ ]* M
Economic: during the recessionary time people spend more money on fast food and
$ p9 C3 c8 m7 X* l7 q# D spend less money on fine dining. United States has experienced recession " F0 d, E8 `2 d- q0 M _8 D/ P% h
since 2001. % j7 W. L2 K1 I& b# z- t* c
Social: - 50% of people spend their money in fast food industry, which has a growing
' \* k$ ?! F3 M6 d trend* X) f' U7 T! f7 v
- Even in recession, people still spend money on fast food, cheap.
1 D% A/ J8 A. K - “value pricing” and discounting popular menu items , s6 G- ?/ ?7 u; U' p
- “partnering their brands”, whereby two or more fast food chains operated out : k* V* Q; n; B w
of the same location in order to share the costs such as shared rent, employees, 0 R R4 Q' z: A& C$ L
and storage and production space. 9 h" b. C: y7 A: u8 Q% v" l; O
- Social trend towards a fresh, healthy, tasty and different product, and the pace ( c- Y% _' N3 E1 c& p/ G3 z
of the fast food industry
6 w$ A+ d) f s* y( Q# LTechnological:7 P! P+ ~4 w& T% P' q2 R5 t
$ ^% V$ w/ Y. W/ d, J) ICustomer analysis
3 D6 m* }3 e6 [Target market: historically, age 18-34, tasty meal, good services, good services, good employees, a good smile, and expand their menu, a healthy style. " J' k5 y! S, H1 R7 Q$ a* ~
+ N+ G: N4 m, U6 K' ]" t
Competitive analysis
. \9 t1 _% ^( Q2 ODirect: other fast food chains
* v, K K, D) W Strength: new ideas,
0 i0 }. H9 }9 O* w, g Weaknesses:
3 [2 x1 y Q' L, G+ x
4 `' e1 M$ q! B5 x0 C: ]' XIndirect analysis/ D) f0 {! q4 m0 L5 [
Strength:/ T8 _% X% x" x: @+ b. A
Weakness: improve service; make their contribution to the community in order to 4 @& L* i' i6 n* i' {4 X) O j; w
Attract more local customer, put more signs on the highway
, H! V3 h/ u6 D! x0 j& L( }
- F0 z: I% S# S$ m, b4 p; P3 d5 qCANs
3 I: ^3 f6 b U9 x Strengths-KSFs Weaknesses- KSFs
% F: k% ~; z2 ?: f! }! h* H& hFinance Poor finance situation; disappointed, 7% decrease in sale when the industry is growing at 3.5% (2000)* E ~9 o8 @2 Z* Y0 E& K; Q# h5 n% F
Marketing Have done a lot of promotion Ineffective and insufficient national advertisement, less on discounting its feature products in advertising.
7 b* r. w9 V3 ]# t" U/ vOperations Drive through sales; Similar to other competitor; no differentiation
: L3 `: `) g; }1 h OHR ( _8 |4 L& L4 C5 C; H7 j: e* j
% K# Q1 I/ @7 ]# ^5 l$ O hCompetitive advantages9 U' Z& ]4 _1 t6 Z# U
- location; highway; brand recognition; they are the only big fast food company in the small town; located between three towns& T; e" j( d8 f2 y' N0 W3 E
- this small town (population 3000) was part of Portage Country (population 148,000)
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1 K2 c6 O1 ?( T' d8 l' u' A2 @0 }Sustainability/ Barriers to entry7 F1 N" D: S6 P/ c' x# D- ?+ p6 w
- good brand backed up with good service, good and healthy food
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6 D- K* C9 t) C7 f3 ]: L8 O; j1. Close restaurant and sell7 D3 q6 `- {- `
- pro/cons: too many closure in this company; they still have fixed cost no matter the restaurant is open or not; close now may be not pre-mature; summer will be the peak of the year; if they close the store now, they cannot experience any benefit from this summer and the growth in the industry/ a& S0 B% t! d5 V
/ i% }3 z6 d3 x$ ?* o5 w- Valuation - which methods are applicable?# D; c6 _& D" ]( j3 z) d% l# x
Net book value = Asset – Liability (Regular value- $881,000)
, O) C Y1 N) n- h(If they close the restaurant, they will not have any sales-----not sale no projected income statement)????????????????????????????????* n2 R; |5 [9 X9 b
- We can not the economic appraisal??????????????? U4 P1 f3 w6 X3 x7 P; D
/ [. t a1 s. C; C
Asset Cost Factor Appraisal Value
% r$ t% l9 u# nLand $99,000 Given $150,000
, T+ f% A4 d$ FSite Work $114,000 -------- ----no future value
2 h, c* Q1 {/ x9 p; W6 v0 E, PBuilding $349,000 Given $250,000
# n, U+ R* `, ^" tKitchen Equip. $154,000 50% $77,0009 C' K, a, W% c B
Décor $25,000 25% $6,2507 z4 F! v" d" J# x# s7 Q
Franchise fee $65,000 No value- ------intangible cost7 p7 m# ~' Z& D& E8 }
Signage $20,000 10% $2,000
- F4 U/ ^: {% q) w7 A" [& RLegal fee $15,000 No value ------; g3 q7 Q/ m& o6 \9 ]4 J
Pre-opening $30,000 No value ------& ^# X; G- i% ~. m+ F: B1 ~
Real estate fee $10,000 No value ------- C: l9 N# Z/ k7 p/ B+ P( w& ]+ g
Total cost $881,000 $485,250! s/ i& i7 C6 X1 e2 B( }
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Liability March 30, 2000 Now. ^; C! F) k- f8 U, F
Loan (land) $562, 000 $562,000-($3122,22/month * 33months)=$458,967 / |1 V& w" ]$ p& d2 z Q8 o
Loan (equipment) $319,000 $819,000-(3797.62/month * 33months)= $193,679 ; N" e9 O5 N( \8 x9 @9 D. e/ {$ B, }
Total Liability $881,000 $652, 645% L# _8 t5 k% b5 Z: H
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Total Economic Appraisal $485,250-$652,645= ($167,395). e% r3 C7 R! S9 z
Implication: ……Current Net Book Value= Current Asset Value- Original Liability * g/ e- Z4 W' u, [- a: B6 Z
7 e0 A% G9 R8 N+ ~1 _2 y2. Continue the operations and sell# q8 }0 L( Y2 k. L1 k0 o
- Pros /cons: they will have cash in-flow; summer is coming; summer-peak time;
: ?: I& q! J# ]7 } Continue to lose money
' A# ^. Q" H k- R/ @* j: y- Valuation7 j2 b; R) ~- W* I
“Want” $50,000 profit target…is this possible?6 l6 a1 g3 w. o7 g- o8 I; X
1. Currently, each $1 in revenue has $.70 variable cost and therefore $.30 Y4 k# n5 i6 M% W7 c
2. What is our breakeven revenue? (Breakeven=Total Fixed cost / UC)
# O- |; X9 p. W7 H5 J( x5 zUnit Contribution= Price- Viable cost
8 P5 ?" J$ C/ q- g, ]Total Fixed Cost in 2000= $233,121/ $.30= $777,070" p8 O1 `8 n8 I& T
Total Fixed Cost in 2001= $255,684/ $.30= $852,280
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) K! p3 v% B1 y/ n6 r3. What is our breakeven revenue with $50,000 profit target?????????????
& M- `( g Z( N3 ~8 U8 ~' ?Year= (total fixed cost + profit target / unit contribution)1 O; g9 X0 C$ J9 s
2000= ($233,121 + $50,000) / $.30= $777,070
' j, n/ j2 R( k2 S; V/ }2001= ($255,684 + $50,000) / $.30= $850,280 / R0 q$ w+ [8 K
% @$ Q" z' |1 f8 v$ ]; p o 5 N' P" h4 C/ f. q
- Projected income statement for the 8monthe period May1 – December 31, 20022 y( H' I- o; Q" ~, X3 @$ O' y
Assumption 2002 projected 2003 projected May - Dec
\! A8 N: t A' ISales Inc 5% from2001 $373,720 (footnotes15) $548,442 $588,609 $392,4063 {5 x( c0 C2 Y5 E- {* J" I( d
COGS Same sale% as 2001-30.3% $165,552 $178,349 $118,899
! k: t4 H2 s$ l5 j( KGross Profit $383,280 $410,260 $237,507
+ r5 d5 s' ~* y. y ! h/ m* U p( h6 F- _
Controllable Op. expense Same %2001-38.7%virable $218,098 $227,792 $151,861! ^( J- o( s1 u& M6 m @2 u. ^
Other Op. expense Same%:147,461/12*8(fixed) $144,408 $147,461 $98,307- j0 V; ]6 g( N8 Q* O- V# l, g
Op. Profit $20,774 $35,008 $23,339
& v4 N" s! U- @# _' n
( e7 R" S6 c3 x& C2 F* Y6 OOther income Same $ as (2001/12)*8 $2,290 $2,748 $1,832
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Administrative expense
% Q I h9 m" a$ K0 @Group Insurance Same $ as (May)/ 8*12 $7,487 $7,811 $5,207
. I7 N" c% i# Q6 R6 q) ?Interest expense $52,526 $39,723 $30,612, O( l* t7 G/ K+ U. P6 {: C
Mgnt services $43,264 $43,878 $29,252
# _; [" F3 C; C3 b7 R, g# IEmployees $4,489 $3,331 $2,221
- ]- O( M1 |# o1 L$ FTotal Admin Exp. $107,766 $94,743 $67,292) ?* t( A1 ~: B
! w) a* l- D+ G1 j: C' h% ^2 D1 nNet Profit (loss) before tax $-56,987 $-42,121
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Earning before income tax: capital intensive; multiple revenue in order to determine the value of this firm like pharmaritial industry
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# P3 Z9 e& d7 U% b+ p vValuation-with negative earnings
8 [, I$ N1 y7 j! ~! t( ~; R7 n- Multiple can be based on revenue- see www.bizbuysell.com
5 G# N1 s) E" E) Z" N/ v! B& t- Classic fast food restaurant) R8 c% k) Z2 B6 v! L* U% N
Price / Sales = $400,000/ $550,000= .73
0 K5 |6 C4 ^6 N6 e; S% z, dValuation= $548,442 * $.73= $400,362
# E2 R' b z' E
0 h6 y/ M% w# L: @' [4 wWhat is our breakeven revenue with $50,000 profit target
" [ J8 H% |2 D% N7 G* K2000= (total fixed cost + profit target / unit contribution)1 \9 b# b c0 U6 P0 I& e
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4 i/ D/ t( u# r, r/ H0 Z: w' v
9 ~3 q+ ?8 L% A- h$ oStart new marketing efforts. U7 z6 ^. Z/ D1 Q3 ^6 V
Pros: join community service and involvement; motivation; reward employees in order to re-store employees’ enthusiasm; baseball team; unique conditions: highway6 O% x; ]) e) U& l
Cons:2 h* t5 Z1 [2 s% t8 O
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Decision and Action Plan
9 \/ g6 Y) w% i- U% d- no matter what, it appeared to McCormich that the restaurant would be unprofitable8 k/ W7 n& q# U6 ~/ ?6 E
- However, he recommended that operations continue because it was the “lesser of two evils”# r5 s- F9 ^! b3 w( U* H: m8 i7 `6 ~
- He was optimistic about HHC’s new product and marketing initiatives
3 F! \0 f8 p! A( `0 k6 d, a; j- McCormick and Patterson agreed to monitor the restaurant for the next few months for the next few months, and if sales didn’t improve, they would sell as soon as they could find a buyer |
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