Monday, March 2, 2009

Local Coffee House Profit Conundrum


A local coffee house was looking at its books and noticed that it's profit margin for the last quarter were down. This was a seemingly large contradiction and interestingly confusing to the management, who decided to investigate further as growth had been fairly steady. In fact, their intuition told them that they had more customers these last few months than usual. Let's use the Rotman School's Integrative Thinking model to break down the problem.


In breaking down the their profit model, they were certain that their cost model was the same: Despite the fact that there was more traffic coming to the store, they had not changed their hours or personnel per shift. Standard supply side items such as rent and food and beverage suppliers had not changed and there were not any large capital outlays for new equipment nor maintenance.

In investigating the revenue side of the profit function, very little had changed as well. The product prices had remained the same and volume had even gone up recently.


However, upon inspecting the volumes of each types of products purchased, it became apparent to the management that there was less people dropping in for snacks. There was a steady strong demand for lunch products such as sandwiches, but a decline in the demand for coffee, a high margin product.

As a result there was also a shift in the peak periods from the 10 am to the noon hour, when a local university's students were let out of their morning classes for lunch.


To identify how to build a framework around the issue, the management team looked at the causes of the drop in profit margin and looked for opportunities and strategies to capitalize on this new dynamic.

By identifying this shift in consumer behaviour, there is an opportunity to better align their services with their new client base to serve them better.


Based on this demographic shift, there was a higher demand for their lunch products and potential to develop a more robust menu beyond the limited offering they were currently providing.

There also exists the possibility to shuffle the shifts to meet the change in demand from the shift in the clientele and to adjust their inventory sizes accordingly to minimize inventory carrying costs and spoilage.

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