Business PlanCafé - HutKhalid Alshurayhi, Hao (Henry) Chen

Executive SummaryThis report presents a comprehensive business plan for a Café Hut Cup to be established in Saskatoon, Saskatchewan. The Café Hut Cup will be located in the Willow Grove area near the intersection of Attridge Drive and Heal Avenue. This location is also home to one of Saskatoon’s newest and fastest growing areas in the city, with an estimated population of 7,600 and expected to double to 15,000 by 2017. The average value of a dwelling is between $300,000 and $450,000; average family income of $81,774. The Village Square includes a strip mall with street-front one coffee shop (Tim Horton’s), boutiques, restaurants and other retail and community services. This location is adjacent to the world class SaskTel Indoor and Outdoor Artificial Turf Soccer Centre. The SaskTel Soccer Centre is a great magnet for ancillary business development in this area. Café Hut will provide high quality specialty product lines in five categories: coffee, specialty tea, specialty beverages (hot and cold), sandwiches buffet and soups, Shisha (fruit flavors water pipe smoke).

The operating and marketing strategy is backed by a sound financial analysis that demonstrates the viability of this plan. Key financial projections are as follows:

Total revenue for 2012 is projected to reach $393,900 with slightly increase in the next five years.

The gross margin from total revenue is estimated at 74%, this margin is expected to be remain consistent year over year.

Net income, after taxes, in the first year of operations is expected to be $35,500 however it is going to increase in the second year and then start to decrease due to the increase of the managers’ salaries (owners) from $26,000 in the first year to $60,000 in the fifth year.

The ROI 20%, for every $1 invested there is an earning of $0.20. The Net Present Value is $12,625. The expected internal rate of return on this investment is 23.8%. These are very positive returns given an initial equity investment of $200,000

Table of Contents

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1. Introduction............................................................................................................................31.1. Description & Purpose of the business concept...........................................................31.2. Vision & Mission.........................................................................................................31.3. Value Statement...........................................................................................................31.4. Major Goals..................................................................................................................4

2. Operating plan........................................................................................................................42.1. Economic Environment...............................................................................................42.2. Industry analysis..........................................................................................................52.3. Place............................................................................................................................52.4. Operating time.............................................................................................................62.5. Business activities.......................................................................................................62.6. Organization Structure................................................................................................82.7. Main suppliers and Service Provider..........................................................................8

3. Human Resource Plan............................................................................................................93.1. Schedule and Wages...................................................................................................93.2. Recruiting....................................................................................................................93.3. Training.....................................................................................................................103.4. Health and Safety......................................................................................................10

4. Marketing Plan.....................................................................................................................114.1. Positioning.................................................................................................................114.2. Customers & Target Market......................................................................................114.3. Products and Services...............................................................................................124.4. Competition...............................................................................................................12

4.4.1. Weekdays’ Morning.......................................................................................134.4.2. Weekdays’ evening and Weekends................................................................13

4.5. Pricing Strategy.........................................................................................................134.6. Promotion Strategy....................................................................................................14

5. Financial Plan.......................................................................................................................145.1. Sales Revenue and Net Income:................................................................................145.2. Total Operating Expenses.........................................................................................155.3. Working Capital Estimates.......................................................................................155.4. Cost of Capital...........................................................................................................165.5. Risk analysis..............................................................................................................165.6. Financing Budget......................................................................................................175.7. Dividend Policy.........................................................................................................175.8. Financial and Investment Analysis...........................................................................17

6. Critical variables..................................................................................................................176.1. Quantity of Sales.......................................................................................................176.2. Competition...............................................................................................................186.3. Word-of-Mouth.........................................................................................................18

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1. Introduction

1.1. Description & Purpose of the business concept

Café Hut is an incorporated specialty coffee shop whose owners are Khalid and Henry. This

name will give customers a cozy and relax feeling when they stay in our coffee shop. The

location of our coffee shop will be near the intersection of Attridge Drive and Heal Avenue.

Café Hut will service two different sets of customers in different time periods. In the

weekday morning time, Café Hut offers coffee, tea, hot and cold drinks and, sandwich buffet

and soups to residents and workers in Willow Grove area; in the weekday evening time and

weekend, Café Hut provides coffee, tea, hot and cold drinks and Shisha in exotic

environment to customers who are looking for a sociable place.

1.2. Vision & Mission

Our vision is to become an outstanding café for residents and workers in Willow Grove area

in the weekdays’ morning time; and to become an outstanding third place for youthful

customers in the weekday evening time and weekends.

Our mission is to provide our clienteles with reasonable-priced daily fresh buffet and drinks

in a sociable environment.

1.3. Value Statement

We provide drinks and foods:

On one hand, we provide special and customized food for regular workers in the morning

time of weekdays. Residents and workers in the Willow Grove area can come to Café Hut to

purchase drinks and customized sandwiches for their breakfast and lunch with relative relax

environment. On the other hand, we offer exotic environment and premium service in the

evening time and weekends to youthful customers who are looking for a place to meet

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together can come to Café Hut to have coffee, tea, hot and cold drinks and Shisha in a

pleasant atmosphere.

We offer relaxing feeling

In the workdays’ morning, customers can choose Café Hut to purchase their breakfast and

lunch while avoiding the crowded places and relax in the comfortable and exotic

environment. In the evenings and weekends, customers who want to meet together in a

fascinating lounge with trendy music background can choose Café Hut to hang around.

1.4. Major Goals

1. To supply clients an alternative café shop with much less stressful and crowded

atmosphere

2. To remain competitive in Willow Grove area for the first five years and expend in near

future

3. To increase our net profit each year over the course of the first 5 years as we are going to

increase our salaries as well.

2. Operating plan

2.1. Economic Environment

In recent decades, there is a dramatic personal disposable income change around the world,

especially western countries such as Canada. This increase in personal disposable income

strengthens people’s purchasing power. Moreover, as the economy grows increasingly fast,

people are more and more willing to purchase their breakfast and lunch in coffee shops rather

than prepare themselves.

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2.2. Industry analysis

As modern society develops and average income increases, Saskatoon citizens are having

breakfast; lunch and dinner in restaurants are more often than before. In the meantime, there

is a significant increase in the food industry and more different restaurants and cafés are

operating in Saskatoon. As a result, we should evaluate the café industry as a thriving and

competitive industry in Saskatoon.

2.3. Place

We will locate in Willow Grove area, which is a thriving place

in Saskatoon. In this location, there is a new-built strip mall in

the village square, which has only one Tim Horton’s. In addition

to the shopping mall, a high-class residential area is always

around this location. People who live within this region typically

have higher income than average, which makes the purchase

power, matches our prices. The floor plan will accommodate 12

tables and 40 chairs in different shapes; the layout includes an

office, washroom, and kitchen area for minimal food preparation and

inventory storage and a cooler room. In addition, we are going to provide a sectional table for

our buffet.

Floor Plan

Store Map

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2.4. Operating time

Days Open Hours Total Hours

Monday - Thursday 7:00 – 21:00 14 Hours

Friday & Saturday 7:00 – 23:00 15 Hours

Sunday 9:00 – 20:00 11 Hours

Our operation hours are demonstrated as above. To be specific, from Monday to Thursday,

we open from 7 o’clock in the morning until 9 o’clock in the evening because in these week

Mondays people need to go to work next morning which will makes our business really slow

in late night. Friday and Saturday are our busy days, we assume that people can stay a little

late than weekdays. On Sunday, we will open late and close early so our employees can take

a rest.

2.5. Business activities

Daily Work Schedule

Opening of the store front

Administration and float

Prepare fresh buffet

Make fresh coffee Two staff works counter on

4 part time shifts

Manager assist close

Cash drop by Manager

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The above components are explained further below as follows:

The full time employee will open the store along with the manager.

The manager will attend to any administration duties including staff schedule,

inventory, and prepare the day’s cash float.

Fresh buffet items will be placed into the display unit for the customers.

The full time employee will get the fresh coffee brewing and ready to open for 7:00

am. The first part time employee starts their shift at 7:00 am, so until this time the

manager and the fulltime employee work the counter.

Throughout the day two more part time shifts will start with at least one employee at

any given time. See the schedule for a breakdown of the shift schedule, including

start and end times. The schedule has been formatted to ensure safety and a smooth

running operation.

At 8:00 pm the Manager returns assist with the closing the storefront and deal with

any issues that may arise during the day. Inventory is assessed and orders are place as

soon as possible the following day.

The cash drop occurs after closing at the Bank located next door.

In terms of activities, we divided our regular activities into four categories, which are daily

activities, weekly activities, monthly activities and yearly activities. In each day, Henry will

be in charge of business activities such as market research, record business volume and so

forth while Khalid is helping serving customers. Weekly, Henry will reschedule employees’

shifts and Khalid will account weekly business. Monthly, Yearly, Henry and Khalid will use

one week to discuss the business achievement from last year and if the Café-Hut should be

expanded.

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2.6. Organization Structure

In our Café shop, the two owners will also be two managers. Henry will mainly be in charge

of business activities such as market research, record business volume while Khalid is

helping serve customers with another full-time employee. Alex Chu will be hired as our full

time employee other than Henry and Khalid because Alex has worked as a McDonald’s wing

manager for two years so he has the experience to lead employees. In addition, six part-time

employees will be hired to help serve customers in peak time such as weekdays’ mornings.

2.7. Main suppliers and Service Provider

Suppliers:

Coffee: Maduro Coffee Company SaskatoonTea: T&T Calgary

Buffet & other Supplies: Costco and Whole Seller Saskatoon

Shisha: World Shisha Montreal

Service Providers:

Machines Maintenance: Diversified Electric Ltd

Plumbing: Mr. Rooter Plumber

Accounting/Taxes: Marlet Accounting & tax service

Managers

2 Part Time Employees

2 Part Time Employees

2 Part Time Employees

Full Time Employee

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3. Human Resource Plan

3.1. Schedule and Wages

Manager Full Time Staff Part Time Staff

Monday

To

Thursday

6:00 – 14:00 (H)

14:00 – 22:00(K)

6:00 – 14:00 7:00 – 14:00 (1)

14:00 – 21:10 (1)

Friday

&

Saturday

6:00 – 14:00 (H)

14:00 – 24:00(K)

7:00 – 14:00 7:00 – 14:00 (1)

14:00 – 21:00 (1)

17:00 – 24:00 (2)

Sunday 8:00 – 14:00 (H)

14:00 – 21:00(K)

Off 8:00 – 14:00 (1)

14:00 – 21:00 (1)

Wages: are going to be $ 26,000 for each manager for the first year and then start to increase

substantially every year to reach $60,000 in the fifth year. Also, staring for year two we are

going to increase our wages for full employee and part time ones by constant $0.50 each year.

3.2. Recruiting

As mentioned in the organization structure section, for the first five years, due to the capacity,

Café Hut will have two managers which are also the two owners, one full time employee and

six part-time employees. Before Café Hut started, the two owners have met Alex Chu who

was a wing manager for McDonald’s for last three years. Alex Chu and the two managers had

a contract agreement that Alex will be the full time manager for the first five years. He will

mainly in charge of the training program and daily operations because he has sufficient

experiences. Café Hut will also recruit six part time staff. The six part time staff will mainly

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be high school/university students for two reasons. First, they will not have too much

expectation on their wages so that Café Hut will offer them with minimum required wage

which is $9.50/ hour. The second reason is that students are potential customers for Café Hut

in the evening period. Recruiting high school/university students will accelerate the word of

mouth advertising.

3.3. Training

In terms of training program, the two managers will be trained first. In particular, since the

full time employee, Alex, was a wing manager in McDonalds’ for three years, we plan to

create our own training program. In particular, the two managers will be trained with Alex.

The most important sections are brewing coffee, making specialty beverages, sandwiches

buffet preparation and cleaning. The whole training program is schedule for one week. After

that, each part time employee will be trained with one full time staff in the work. This process

will take advantages of the slow sale in the first week. Part time employees will service

customers with a full time staff in the first week. Also, we plan to implement a work skill

evaluation every half-year. Each employee and employer will be evaluated 360 degree by

other workers and customer complaints.

3.4. Health and Safety

The occupational Health and Safety Regulations from the government of Saskatchewan will

be adhered to. All employees and managers will be clearly informed during the training

program and will have access to this file in Café Hut. Moreover, we will request a regular

equipment check from our service provider in order to increase safety.

4. Marketing Plan

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4.1. Positioning

Café hut is an independent business, which provides variety products (coffee, tea, soups and

sandwiches buffet, specialty drinks) in premium quality and convenient prices in the daytime.

Moreover, provides eastern cultural climate (shisha, eastern music) in the evening period for

our youthful-spirit clienteles. Although Tim Horton’s is opened in the same area, we are

offering more convenient and more choice of sandwiches in the daytime; also, we differ from

Tim Horton’s as a friendly place that customers can socialized in the evening.

4.2. Customers & Target Market

Café Hut’s main target market will be different between daytime and evening time. In

specific, in the daytime, which includes the breakfast and lunch period, Café Hut is primarily

target people who live or work in Willow Grove area, with relatively high-income level. For

evening period, as we are going to continue serving drinks, we will target those customers

who are looking for sociable environment to meet and young people who want to smoke

Shisha.

Since Café Hut is located in the Willow Grove, which has a relatively higher income and a

steady population and business growth, we are expecting our primary target markets for

daytime will involve:

Condo residents

Business white-collar

And for the evening time, we are excited to serve our youthful-spirit customers (includes

university students); our different fruit flavors shisha smoke as well as enjoying our specialty

drinks menu.

4.3. Products and Services

Café Hut serves two distinct categories of products and services in daytime and evening-

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period. In the daytime, which includes breakfast and lunch period, Café – Hut provides

coffee, tea, specialty drinks and soups and sandwiches buffet. Customers can come into the

story order the coffee or teas they want and while waiting; they can go to the sandwich buffet

to make up their favorite sandwiches. After they finish the sandwiches making, their drinks

will be ready so that they can go to the counter pay for their sandwiches and drinks together.

The customers can choose to stay in or take the food and drinks with them so this will be very

convenient and suitable for all kinds of customers. The soups & sandwiches buffet will be

closed after four o’clock in the afternoon, instead, Café Hut will start to offer Shisha in the

evening period.

Not only the products themselves are attracting, but also the environment in Café Hut will

provide customers a distinct, comfortable, relaxing and exotic feeling during their stay. In

specific, in the morning time, instead having a crowded and noisy atmosphere, Café Hut will

play some relaxing music so that customers can feel release from the busyness, but still the

drinks will be ready in short time. During the evening, customers will enjoy their spare time

in an environment full with exotic eastern music.

4.4. Competition

Café - Hut will have two sets of competitors. In the morning time, our competitors will be

Tim Horton’s and McDonald’s in Willow Grove area. They also offer sandwiches and coffee,

but with a relatively crowded and noisy environment. In the evening period, we will have

only two competitors in Saskatoon for Shisha so far which are “306 Lounge” and “Turkish

restaurant”. In terms of coffee and drinks, Tim Horton’s, McDonald’s and Starbucks in the

entire Saskatoon will be viewed as our competitors because people are more willing to travel

further for a nice place in the evening.

4.4.1. Weekdays’ Morning

In the morning time, Café Hut is offering the sandwiches buffet and drinks to customers.

Hence, our near competitors will be Tim Horton’s and McDonald’s, which are already open

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in Willow Grove area. Those two competitors are also offering sandwiches and coffee, but

since they are large franchise stores, it is always crowded and customers need to spend

approximately ten to fifteen minutes in that noisy circumstance for their food and drinks.

Some customers who are not in a rush will also be reluctant to stay in Tim Horton’s or

McDonald’s due to the environment. Café Hut also has some far competitors who include all

other restaurants that offer breakfast and drinks in daytime.

4.4.2. Weekdays’ evening and Weekends

In the evening period, Café Hut will start to offer Shisha instead of sandwich buffet. This is

a very rare product in Saskatoon, which leads to very limited number of competitors.

Currently, there are only two stores, which offer Shisha in Saskatoon, 306 Lounge that

located in airport area and Turkish restaurant that is located in downtown. In terms of drinks,

Café Hut’s near competitors are Tim Horton’s, McDonald’s and Starbucks. Since Tim

Horton’s, McDonald’s do not offer the staying in environment in the store, Café Hut’s true

competitor is Starbuck which is currently not open in Willow Grove area.

4.5. Pricing Strategy

Café Hut will be using penetration price strategy for the first year. In particular, to compete

with direct near competitors, Café Hut is willing to make the amount of money just to cover

the expenses. By doing this, Café Hut can use some time to gain market share and reputation

in Willow Grove area first and then eastern and north eastern of Saskatoon. From the second

year, Café Hut will be using competitive pricing strategy so that more and more customers

from eastern Saskatoon will be attracted to our Café.

4.6. Promotion Strategy

Café Hut will be implementing some low cost but efficient method of promotions. The focus

of the promotion will be in Willogrove area, but will also extend to other popular places such

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as University of Saskatchewan. There will be three core promotions: first, flyers of Café Hut

will be sent to those popular places. The flyers will contain products information, location,

hours and so forth. Second is “discount season”. Along with the flyers, the first three

months, each flyer will have a discount coupon on the right bottom corner. Every customer

who holds a flyer with that coupon can have a 20% on discount rate on each sandwich or

30% on each drink. This promotion is intended to drive as much as people’s attention and

motive them to come to Café Hut to try products, services, and environment with little cost,

in other word, little risk. The third promotion will be a Facebook Ad. In recent decades,

Internet is a very popular media, especially Facebook. Different from other coffee shops,

Café Hut will not create its own website in first five years, instead, a Facebook Ad will be

available to show necessary information. Everyone in Saskatoon can have a clear view of our

Ad.

5. Financial Plan

This section reports detailed financial projections for the next 5 years.

5.1. Sales Revenue and Net Income:

All products and services are furnished in five categories: coffee, tea, specialty beverages

(hot and cold), sandwiches buffet and soups, and Shisha.

Sales Revenue 2012 2013 2014 2015 2016Coffee 117,000 128,700 128,700 141,570 141,570

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Tea 19,500 21,450 21,450 23,595 23,595Hot beverages 23,400 25,740 25,740 28,314 28,314Cold Beverages 15,600 17,160 17,160 18,876 18,876Soups 15,600 17,160 17,160 18,876 18,876Sandwiches 124,800 137,280 137,280 151,008 151,008Shisha 78,000 85,800 85,800 94,380 94,380Total $393,900 $433,290 $433,290 $476,619 $476,619

Total revenue for 2012 is projected to reach $393,900. It is also projected to increase every

two years by 10%. The gross margin from the total revenue is estimated to be 74% in 2008

meaning that 26% is accounted for cost of goods sold in this year.

As expected, net income after tax is very low, at $35,500 in the first year of operations.

However, it is going to increase in the second year and then start to decrease due to the

increase of the managers’ salaries (owners) from $26,000 in the first year to $60,000 in the

fifth year.

5.2. Total Operating Expenses

Total operating expenses are estimated to be approximately $253,569 in 2012 followed by a

slightly increase in 2013 to a just over $267,864 given that expected cash on hand will be

greater than $200,000 dividends will not be paid instead we are going to increase our salaries.

5.3. Working Capital Estimates

As far as inventories are concerned, the store will carry a 7-day inventory of all the products.

All sales are on cash basis. Therefore, there are no account receivables. Accounts payable are

also paid within 7-days.

The store’s net working capital for year 2012 is as follows:

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Cash + inventories + accounts receivable – accounts payable

= $15,000 + $2,222 + 0 – $2,222=$19,444 this amount is not enough to run the store for one

year. Therefore, an Operating Line of Credit is required.

5.4. Cost of Capital

Capital budget, the total capital cost in 2012 is a major expenditure ($102,588) on equipment

and related items in the year of establishment, subsequent years have little additional capital

spending. As shown in Schedule 10 of the Financial Plan in the average capital cost

allowance (C.C.A.) or depreciation is 20% on all equipment. The items will be depreciated to

two-thirds of their original prices in five years.

5.5. Risk analysis

The risk analysis provides a list of critical success variables, which determine the success of

the Café in both short and long run. The critical variables are: units of sales, selling prices,

supply and/or cost of direct material inputs. Units of sales and selling prices of the products

are the most critical success factors, while the cost of direct materials is important for

financial performance.

Both units of sales and selling price will determine if the shop will be financially feasible in

the long run. In addition, several intangible factors such as quality and the environment are

also equally important for success, as the Café will compete with other competing shops such

as Starbucks and Tim Horton’s.

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5.6. Financing Budget

The financial commitment will come entirely from an equity investment of $200,000 from

the owners Henry and Khalid.

5.7. Dividend Policy

Dividends will not be paid to equity investors as the managers are the owners of the business

and they get paid every month. However, we are going to increase our cash account and leave

it for potential expansion in the future.

5.8. Financial and Investment Analysis

Café Hut’s financial analysis is positive (schedule 12 in financial plan). The NPV shows a

value of $12,624 in future cash flows and net payback of $115,834. These are very positive

returns given an initial investment of $200,000. The expected return on this investment is

20%. And the internal rate of return is 23.8%.

6. Critical variables

In our business, there are three main critical variables.

6.1. Quantity of Sales

The first one is the quantity of sales. As a Café, we consider the quantity of sale as the most

important variable because basically all of our revenue is coming from our sales. As long as

Café Hut can hit certain level of quantity of sales, we will be profitable over time.

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6.2. Competition

The second critical variable is competition. Willow Grove area is thriving place in Saskatoon;

Café Hut will be under great pressure if big coffee shops such as Starbucks start stores in that

area before we become well known. In that case, people who purchase drinks to go may

choose them instead of us.

6.3. Word-of-Mouth

Last, the word-of-mouth is also very important for Café Hut. As we mentioned in marketing

section, Café Hut will focus on its in-store environment and premium service in order to take

advantages of word-of-mouth advertisement.

7. Conclusion

Taking into account all the factors we have analyzed above, we strongly believe that Café –

Hut has a great potential to become a successful specialty coffee shop in Willow Grove area

of Saskatoon. In particular, we deem that it is important to start up this business as soon as we

are ready because gaining sufficient market share in Willow Grove area before large coffee

shop chain open is very critical for Café – Hut.

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