Practice case study interview series: #1 - "The coffee shop"

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Erin Delaney, Content Director at GradAustralia
Erin Delaney
Team GradAustralia
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The first in our series is a real case given to students at Wharton Business School in the 2004-2005 recruiting season.

Dive into the first in our series of management consultancy practice case studies:

#1 - COFFEE SHOP

The problem

A friend asked me if I wanted to buy his coffee shop for $100,000. Do you think I should do it?

Information gathering

Read this information well before you give the case. Share this information in each bullet only if the candidate asks for it in a clear and deliberate way.

Location:

The coffee shop is in Vail, Colorado

Products/Prices:

Cup of coffee, $4.00

Pastries, $3.00

Bottled Water, $2.00

Variable cost:

All products have a 50% margin

Customers:

The shop serves mostly locals, not tourists, so demand is consistent throughout the year

Other costs:

Rent was $500 per month

Utilities and insurance = $1,500 per year

Wages (for 2 employees) were $8.00 per hour.

The shop is open 12 hours a day, six days a week

Tell the candidate that he can assume that the coffee shop will bring in consistent profits.

Analysis

This is a valuation question. So to get the value of the coffee shop we need first to get the profitability.

Revenues

Estimate market size.

Assume that the coffee shop gets 10 customers per hour in slow hour and 20 customers per hour in a busy hour. The first and last 2 hours of the day are busy hours. So the coffee shop gets 20x4 + 10x8 = 160 customers/day.

If we assume all the hours as busy hours on Saturday, then we have 20x12=240 customers on Saturday.

Number of customers / week = 160 x 5 + 240 x 1 = 1,040

Number of customers / year = 1040 x 50 = 50,200 (round to 50,000 customers per year)

Assume 60% of customers order coffee, 30% order pastry, and 10% order a bottle of water, then the spend is:

50,000 x 60% x 4 + 50,000 x 30% x 3 + 50,000 x 10% x 2 = $175,000

Fixed costs

Rent = 500 x 12 = $6,000

Wages = $8 x 12 x 6 x 50 = $30,000

Utilities and insurance = $1,500

Profits

Profits = 175,000 x 50% - 30,000 - 6,000 - 1,500 = $50,000

Assume a 40% tax rate:

Profits after tax = 50,000 x (1-40%) = $30,000

Valuation

If we assume that the coffee shop is in operation for 5 years and we use a 10% WACC, then its value would be:

Value = 30,000 + 30,000/ 1.1 + 30,000/1.1^2 + 30,000/1.1^3 + 30,000/1.1^4 = $125,096

Conclusion 

As long as the sales would be consistent for the rest of the 5 years, it would be profitable to buy the coffee shop. Further analysis could be done on the management experience and the competition to ensure that sales would be consistent.