This business plan shows the available trajectories that Ken and Mary Hatch, referred to as principal co-founders, could use to establish a coffee outlet in the Markham area under the Second Cup franchise. The purpose of this plan is to demonstrate the market, competitive and industry forces that will undoubtedly influence the start-up business, and also to detail available alternatives, recommendation and action plan implementation.
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A SWOT analysis demonstrates that the start-up business is likely to benefit from market share leadership and strong brand equity enjoyed by Second Cup in the Canadian Market; however, the co-owners must come up with ways to guard against stiff competition from other Second Cup outlets, Starbucks coffee houses, and low-priced independent coffee shops operating in the area.
This view is reinforced by the Porters Five Forces analysis, which demonstrates strong competition for customers and intense rivalry among the mentioned businesses.
Among the alternatives given, it is recommended that the two principal co-owners come up with a market entry approach that will bring together three partners – the co-owners as the benefactor custodians of the business, Second Cup as the owners of the franchise and principal guarantors of the loan facility, and three other investors/shareholders to contribute to the much needed capital as well share in the absorption of perceived and real risks
The business plan concludes by demonstrating how the action plan will be implemented. Owing to the fact that the principal co-owners only have $20,000 as startup capital (franchise fee), it is strongly suggested that Second Cup guarantees a loan of $140,000 to be repaid in equal monthly installments for a period of up to six years, and the three investors to contribute the remaining $40, 000 capital for a stake of 20% percent ownership of the company (6.6% ownership each).
The case study demonstrates how a couple, Ken and Mary Hatch, go about preparing to own a coffee business under the Canadian successful and nationally known franchise Second Cup. Established in 1975 in Toronto, Second Cup has grown to more than 400 retail outlets that offer a unique coffee experience to customers across the country and beyond.
The coffee company is currently looking for franchisees in the Markham area, and Ken and Mary see this as their opportune time to make it big in the business world. The case then proceeds by showing the total investments needed for the project and how the couple could be funded by a bank to raise the money required to commence the project.
It is important to note that Second Cup takes up the responsibility of building the facility and then renting it back to franchiser, implying that it places much emphasis on the ambience of their shops and also pays a great attention to detail.
The case study elicits a scenario where a couple is about to make life-changing decision to leave their current employment and start up a business under the Second Cup franchise.
Although the opportunity presents a good promise on profits, the couple must effectively know how the market and industry forces will team up to affect their start-up business. It is therefore important for the couple to come up with a marketing plan with a detailed SWOT analysis and Industry analysis to project the chances of their business succeeding in the competitive market.
In many business environments, a SWOT analysis is a marketing tool used to summarize the current state of the firm, with the view to devising a strategic plan for future engagements.
In the context of the case study, a SWOT analysis will essentially look into the critical areas of strength and weakness related to starting up a franchise business under the Second Cup brand, as well as the opportunities and threats that may be experienced by the startup franchise once in operation. The analysis is demonstrated in the table below
SWOT Analysis for the Startup Business
|Strengths ||Weaknesses |
|Opportunities ||Threats |
Here, the Michael Porter’s Five Forces approach is employed to measure and analyze the competitiveness and attractiveness of coffee industry, with the view to determining the risks that both Ken and Mary Hatch face as they plan to start the coffee shop business. The analysis is as follows
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Threat of New Entrants
Entry barriers are relatively low for the coffee industry as witnessed by the number of competitors (e.g., Starbucks coffee shops, independent coffee houses and hotels providing coffee) already doing business in the area.
This implies that the couple must come up with strategies to retain and satisfy customers once in business as there are no customer switching costs. However, Second Cup is already perceived as a brand in Canada and, therefore, loyal customers are not very likely to try a new brand from competitors.
Threat of Substitute Products
Independent coffee houses and hotels offering coffee may provide low-priced substitute coffee products, hence destabilizing the market. However, Second Cup is already known for its unique coffee products, thus customers will differentiate between the substitutes and authentic Second Cup’s coffee products.
The Bargaining Power of Buyers
The co-owners are planning to enter into retail franchise business, implying that it is highly unlikely that individual buyers/customers will have any pressure on the establishment.
The Bargaining Power of Suppliers
Second Cup will be the main supplier of the ingredients used to make coffee products to the franchised coffee shop, implying that there won’t be any pressure from suppliers.
Rivalry among Existing Competitors
currently, the main competitors are other franchised Second Cup coffee houses doing business in the area as well as Starbucks coffee shops. Starbucks, in particular, has unique coffee products that are likely to offer stiff competition to the proposed business, not mentioning that its products are heavily advertised. Competition will also be felt from low-priced coffee products provided by hotels and independent coffee houses.
The first option is to make use of funding of $200,000 transacted by the bank in Second Cup’s favor to set up the coffee shop business. One of the major issues for the co-owners is funding as they only have $20,000 to pay for franchise fee yet the total investment for the coffee outlet is estimated at $200,000.
By agreeing to take the loan, the co-owners will start doing business early enough to ensure they establish a market niche before the market becomes overcrowded. Additionally, they will be able to incubate their business from vagrancies occurring within the external environment.
However, the backside to accepting funding is that the money will be paid back to the bank at a premium. Another disadvantage of accepting external funding is that the business may fail to take off as many start-up businesses do, prompting Second Cup (loan guarantor) to move in and seize assets with the view to recovering the loan.
The second alternative is for the co-owners to seek funding from other sources but still enter into a franchise business with Second Cup once funding becomes available. Indeed, Kerry and Mary Hatch may bring in more shareholders to raise the needed capital and thereafter share the profits according to one’s contribution once the coffee outlet becomes fully operational.
The major advantage to this alternative lies in the fact that all risks are absorbed by shareholders relative to their equity contribution.
Another advantage is that the startup company is likely to become more creative and innovative as shareholders with diverse skills and expertise come together to drive the firm’s business and strategic agenda forward. However, relying on shareholders to raise capital implies that Kerry and Mary Hatch will have to share profits commensurate with shareholder equity contribution once the coffee outlet becomes fully operational.
The third alternative is for the co-owners to use the available resources and enter the market as an independent coffee outlet which provides specialized and unique experiences to customers. This alternative depends to a large extent on personal experience as well as sheer luck to succeed in the market.
The major advantage is that the co-owners will have leverage to operate freely in the competitive coffee market without being cajoled to follow any dictates from a parent company.
However, the disadvantages are obvious in terms of lack of market leadership associated with huge brands such as Second Cup, lack of strong brand equity, and lack of stable supply lines that management could rely on to satisfy and possibly surpass customer needs and demands.
The total startup costs and franchise fee are estimated at $220,000. John and Mary Hatch, as co-owners to the start-up coffee outlet, will definitely succeed in the competitive market if they ensure
- excellent coffee products and services that will build customer satisfaction as well as maintain customer loyalty and repeat intentions,
- a business location and facility that will guarantee high company visibility and high flow of customers,
- proven management capacity to successfully and efficiently run the business,
- commitment to continuous improvement and total quality services.
All the above attributes are effectively provided for under the first alternative. Second Cup not only supplies its franchises with unique products to keep with its traditions, but also participates in the actual choice of location and building of facility as it places much emphasis on the ambience of their shops. Additionally, the firm boasts of a well-organized operating and monitoring system for its franchises.
However, the co-owners need to take precautionary measures to guard against possible risks associated with business start-ups, including the risk of going under within the first two years of operation. Consequently, they should be free to welcome an investor/shareholder that will participate in the company’s capital and also share in its risks upon starting operations.
In this light, it is recommended for John and Mary Hatch to consider teaming up options one and two to come up with an all inclusive market entry approach that will involve Second Cup, external investors/shareholders, and themselves as principal core-owners.
Action Plan Implementation
As already mentioned, the total startup costs and franchise fee are estimated at $220,000. John and Mary Hatch, as principal co-owners, will provide franchise fee in the amount of $20,000. An estimated $200,000 additional funding is needed for the business to take off.
The principal co-owners should then liaise with Second Cup to guarantee a six-year term commercial loan facility of $140,000 from the bank to cater for major start-up expenses such as the building of the facility, salaries and advertisement costs.
Additionally, to ensure that possible risks are absorbed by a large number of people, the principal co-owners should invite three investors/shareholders to participate in the company’s capital for the amount of $40,000 ($13,333.3 each), and could be presented with a portion of 20 percent ownership of the $200,000 company capital. This in effect implies that each investor will have a portion of 6.6 percent of the total company’s capital.
The loan taken from the bank is to be repaid in equal monthly installments over a six-year time-frame as the sample financial analysis provided by Second Cup to John and Mary Hatch demonstrates the company’s capacity to operate efficiently and still maintain a net income of $75,000.