Drill: Interactive Cases: Case 1

 

Our client is a regional fast food restaurant. They’re thinking about opening up a restaurant in Metropolis Airport. Metropolis is a hub

airport like Pittsburgh, Charlotte or Cincinnati. They want to know if they should open up a restaurant in the airport, and if so, where

in the airport. Their choices are Concourses A, B, C, D or the Core. They’re not interested in Concourse E. They also want to know

which site would be more profitable. 

Their objectives are profits first and then exposure, because they are thinking about expanding nationally. 

Q1: What are the 4 main things you need to know when deciding to open this restaurant?

Suggested Answer

Some possible answers are given below.

Information on our client company

Client’s products 

The strength of client’s brand recognition 

Number of current restaurants in the chain 

Client’s financial stability 

Traffic flow within the airport 

Number of flights per concourse 

Number of pedestrians per concourse and in the Core

Seasonality of scheduled flights 

Existing market 

Competition — current and future competition 

How many restaurants, fast food and others are on each concourse and in the Core?

Are any other competitors planning to come in and, if so, where?

Types of food currently available and how it compares to what we’re going to serve 

Demographics of people coming through the airport and how many of them typically purchase food 

Costs and Revenues

Rent, labor, COGS, building costs, special airport fees 

Expected guest check size 

Below is a chart that gives you the number of daily flights on a typical day in October, which airlines serve which concourses, how

many arriving, departing and in-transit passengers eat food and, in particular, fast food. It also describes what your costs would be in

each concourse and the Core, and general information on our client.

Concourse and flight information

Concourses A B C D E Core

No. of Daily Flights in October

 

45 30 15 35 25 8 million passengers

a year

    Airlines  

US Airways US Airways Air Tran Delta Puddle HopperAirlines

 

  

Southwest   USA 300 Northwest    

  

    United Continental    

  

    Air Canada American    

Competition 2 FF,6 rest.

 

5 FF,5 rest.

1 rest. 1 FF,2 rest.

1FF,1 rest

5 FF,3 rest.

Monthly Rents 65K 40K 30K 50K 20K 72K

Assumptions

60% of passengers passing through are business people

Planes hold 300 passengers and the average occupancy rate is 65%

40% of the passengers are arriving passengers 

20% of these passengers buy food 

40% of the passengers are departing passengers 

60% of these passengers buy food 

20% of passengers are waiting between flights 

80% of these passengers buy food 

2/3 of the eaters eat in fast food restaurants

Our restaurant

Regional player — 39 restaurants in Metropolis area

Average $ spent on meals is $5 pp

18 hours of operation

Labor costs are 15% of rev / raw materials are 25% of rev.

Q2: What is the average number of passengers per plane? Q3: What is the total percentage of “eaters” for all three categories? 

Suggested Answer

The answer is 195 (300*.65). We can round it up to 200 passengers per flight.

The answer is 48%. Big points if you did a weighted average.

40% of the passengers are arriving passengers 

20% of these passengers buy food 

40% of the passengers are departing passengers 

60% of these passengers buy food 

20% of passengers are waiting between flights 

80% of these passengers buy food

.40*.20 = .08 

.40*.60 = .24 

.20*.80 = .16 

.48, or round it up to 50%

So, now we know that 50% of the people that pass through Metropolis Airport eat food.

Based on the information below, I’d like you to eliminate 3 of the 6 concourses (this includes the Core.) Additional information: if you

open a restaurant in concourses A, B, C, D or E you will be adding a restaurant to the totals, thus the number of fast food restaurants

in Concourse A will go from 2 to 3. However, if we place one in the Core, the number will remain the same as if we are replacing one,

not building a new one. 

Q4: What three concourses would you eliminate?Concourses A B C D E Core

No. of Daily Flights in October

 

45 30 15 35 25 8 million passengers

a year

    Airlines  

US Airways US Airways Air Tran Delta Puddle HopperAirlines

 

  

Southwest   USA 300 Northwest    

  

    United Continental    

  

    Air Canada American    

Competition 2 FF,6 rest.

 

5 FF,5 rest.

1 rest. 1 FF,2 rest.

1FF,1 rest

5 FF,3 rest.

Monthly Rents 65K 40K 30K 50K 20K 72K

Suggested Answer

Eliminate concourse A, because there are already 2 fast food restaurants, and the rent is higher than any other concourse. Concourse B is also out because there are already 5 fast food restaurants. Eliminate concourse E because I told you that we weren’t interested in E. That leaves concourses C, D and the Core for further analysis

Q5: What would be the profit for Concourse C? Q6: What would be the profit for Concourse D? Q7: What would be the profit for the Core? 

Remember — (i) there are an average of 200 passengers per plane, (ii) 50% of all travelers are eaters, (iii) we would be adding a restaurant in Concourses C and D (the Core would remain at 5 fast food restaurants), (iv) 2/3 of all eaters eat fast food, (v) labor costs are 15% of revenue and raw materials are 25% of revenues, (vi) the average person will spend $5 and (vii) you can assume that sales are evenly divided between the fast food restaurants.

Suggested Answer

Concourses A B C D E Core

Passengers 9000 6000 3000 7000 5000 8MM/yr

Eaters 4500 3000 1500 3500 2500 4MM/yr

Monthly 135,000 90,000 45,000 105,000 75,000 333,333

Competition 2 FF,6 rest.

5 FF,5 rest.

    1 rest. 1 FF,2 rest.

1FF,1 rest

5 FF,3 rest.

Monthly Rents 65K 40K 30K 50K 20K 72K

A5: Concourse C - 3,000 passengers, 50% of which are eaters which equals 1500 eaters. Multiply that by

30 days in a month comes to 45,000 eaters in Concourse C. We know that 2/3 eat fast food and we get

30,000. And we are the only fast food restaurant in C. So 30,000 customers spending $5 a head gives us

revenues of $150,000. We know that rent is $30,000 and that labor and COGS are a combined 40 percent

of revenues.Revenues $ 150,000  - Rent   $ 30,000- Labor and COGS   $ 60,000Total Costs   $ 90,000Total Profit $ 60,000  

A6: Concourse D - 7,000 passengers, 50% of which are eaters which equals 3500 eaters. Multiply that by

30 days in a month equals 105,000 eaters in Concourse D. We know that 2/3 eat fast food and we get

70,000. There would be 2 fast food restaurants in D, 70,000/2 equals 35,000 customers spending $5 a

head gives us revenues of $175,000. We know that rent is $50,000 and that labor and COGS are a

combined 40 percent of revenues.Revenues $ 175,000  - Rent   $ 50,000- Labor and COGS   $ 70,000Total Costs   $ 120,000Total Profit $ 55,000  

A7: The Core - 8 million passengers, 4 million eaters. I want to put this on a monthly basis so I'll divide 4

million by 12 and get 333,333 eaters. Two-thirds of them eat fast food, which means that around 220,000

people eat fast food. Divide that by 5 fast food restaurants and you get approximately 44,000 customers

spending $5 on a meal, which equals $220,000 in revenues.Revenues $ 220,000  - Rent   $ 72,000- Labor and COGS   $ 88,000Total Costs   $ 160,000Total Profit $ 60,000  

Q8: The profits for C and the Core come out exactly the same. So where would you put your restaurant? What other factors might lead to your decision? Make a list of pros for each.

Suggested Answer

The Core: 

We would be replacing an existing restaurant, so we wouldn’t be facing any new competition in the near future.

If people are snowed in or flights are delayed, they are more likely to hang out in the Core than in a Concourse.

If the number of flights increases on any concourse, the Core will benefit. 

If an airline goes under in C, concourse traffic will suffer and it won’t affect the Core as much as in C. 

It will give us greater exposure and if one of our objectives is to build our brand then the Core makes the most sense. 

Concourse C 

 The core numbers are yearly numbers and include a spike in holiday travel, but the numbers from concourse C didn’t. Those

numbers were taken from a typical travel day in October. I would estimate that the October travel numbers are near the low end

of the scale, thus not really representative of the customer stream. I would argue that the Concourse C numbers, and thus the

profits, would be higher in C than in the Core.