Coffee Shop Co. Case Study (Part-2)
A Bain & company practice case sample
After you show her the potential options for estimating market size, she wants you to approximate the market size using your framework. Assume that Cambridge has a population of 100,000 people and, on average, each drinks 1 cup of coffee per day.
Now, as we had already determined our approach to the reply, we’ll apply them taking some simple arithmetic assumptions. (Making sure to not make the calculation hefty for self)
In part-1, I had followed a top-down approach with a strategic breakdown for the same. So continuing on that,
Step 1: Now, we are been give that Cambridge has a population of 100,000 people.
From that assuming, 80% are adults.
Adult Population of Cambridge= 80,000
Step-2 : Assuming only 60% are coffee drinkers to ascertain our specific target group.
Total Coffee Drinkers= 48,000
1 cup of coffee per day is consumed, per person, which makes
Total cups of coffee= 48,000 cups of coffee per day
Step 3 : Also, keeping a margin for for coffee being made at home. As the client wants us to focus on Cambridge residents alone, we assume that the 50% of coffee drinkers make and consume coffee at home.
So, Total cups of coffee bought at coffee shop= 24,000 cups of coffee per day.
Step 4: At this step, we will calculate total cups of coffee being sold at coffee shop in a year. For that, first, removing days of holiday when the coffee shop will be shut. Assuming, there are 365 days in a year and keeping margin of a minimum of 5 days. Thus, total days coffee shop will remain open are 360 days in a year.
Total cups of coffee per year= 8,640,000 cups of coffee per year.
Now that you have the market size, your friend wants to gain a better understanding of how much coffee she would need to sell to break even in her first year.
How much coffee does she need to sell to break even in the first year?
Here is some additional information:
- Price per coffee = £3
- Cost to open shop = £245,610
- Cost to run shop each year = £163,740
- Cost per cup of coffee = £1
The break-even point means neither profit nor loss. It is the point at which total cost and total revenue are equal, i.e. “even”. There is no net loss or gain, and one has “broken even”.
So, in Part- 1 we discussed about the setup, wherein
1. Revenue: Each coffee sold* Price
2. Cost: Fixed Cost+ Variable Costs
To break even, our client has to sell as many cups of coffee so that has neither profit, nor loss. From this we can say,
(Revenue)- (Cost) = £0 (Profit)
(Quantity* Price)- (Fixed Cost + Variable Cost + Cost on cups of coffee) =£0
(Q*3)- (163,740 + 245,610 + [1*Q]) = 0
2Q - (409,350) = 0
Q= 204,675 cups
Hence, she needs to sell total 204,675 cups of coffee to break even in the first year.
After running through the calculations, do you think it’s reasonable for her to open up a coffee shop?
As, total 8,640,000 cups sold and the break-even point is 204,675 cups, which is approximately 2.3% of the market share, thus, breaking even is achievable for her. The idea and the estimations seems reasonable.
But we’d want to understand more about our friend’s investment timeline and also the Coffee Co’s go-to-market strategy which will help the company differentiate itself among its competitors. Depending on how many years she plans to run the store and her competitors, it might give us more insights if it’s a feasible option for her in the long-term as well if she can make up for the cost of opening it.
